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SEMI-ANNUAL TESTIMONY ON THE 

FEDERAL RESERVE’S SUPERVISION AND 

REGULATION OF THE FINANCIAL SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 4, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–59 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

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 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

November 4, 2015 ............................................................................................. 1 

Appendix: 

November 4, 2015 ............................................................................................. 55 

WITNESSES 

WEDNESDAY, NOVEMBER 4, 2015 

Yellen, Hon. Janet L., Chair, Board of Governors of the Federal Reserve 

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

APPENDIX 

Prepared statements: 

Yellen, Hon. Janet L. ....................................................................................... 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Barr, Hon. Andy: 

Letter to Federal Reserve Chair Yellen, SEC Chair White, FDIC Director 

Gruenberg, and Comptroller of the Currency Curry from undersigned 

Members of Congress, dated July 31, 2014 ................................................ 70 

Yellen, Hon. Janet L.: 

Written responses to questions for the record submitted by Representatives Barr, Emmer, Hultgren, and Luetkemeyer ....................................... 73 

(1) 

SEMI-ANNUAL TESTIMONY ON THE 

FEDERAL RESERVE’S SUPERVISION AND 

REGULATION OF THE FINANCIAL SYSTEM 

Wednesday, November 4, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Lucas, Garrett, 

Neugebauer, Pearce, Posey, Luetkemeyer, Huizenga, Duffy, Hurt, 

Stivers, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, 

Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, Williams, 

Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez, Sherman, Capuano, Hinojosa, Clay, Lynch, Scott, Green, Cleaver, Ellison, Himes, Carney, Sewell, Foster, Kildee, Murphy, Sinema, Heck, 

and Vargas. 

Chairman HENSARLING. The Financial Services Committee will 

come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

Today’s hearing is entitled, ‘‘Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System.’’ 

I now recognize myself for 3 minutes to give an opening statement. 

The Dodd-Frank Act requires the Federal Reserve’s Vice Chair of 

Supervision to testify before our committee twice a year regarding 

the Fed’s supervision and regulation of financial institutions. Regrettably, 5 years after the passage of Dodd-Frank, no such person 

exists. President Obama has been either unwilling or unable to follow the law and appoint a Vice Chair. We can no longer wait for 

the President to do his job so that we can be allowed to do ours. 

Thus, Chair Yellen appears before us today in substitution. 

As we know, Dodd-Frank rewarded the Federal Reserve with 

vast, new, sweeping regulatory powers despite its contributions to 

the last financial crisis. Under Dodd-Frank, the Fed can now functionally control virtually every major corner of the financial services sector of our economy, separate and apart from its traditional 

monetary policy authority. 

Disturbingly, the Fed does so as part of a shadow regulatory system that is neither transparent nor accountable to the American 

2 

people. Simply put, the Fed must not be allowed to shield its vast 

regulatory activities from the American people and congressional 

oversight by improperly cloaking them behind its traditional monetary policy independence. This is a vitally important point. 

What is clear is that despite the largest monetary stimulus in 

our Nation’s history and 7 years of near-zero real interest rates, 

middle-income families aren’t getting ahead, and the poor and 

working class are falling further behind. Preliminary third-quarter 

GDP growth is coming in at an anemic 1.5 percent. 

Our economy, for 7 years, has limped along at about half of the 

post-war average. That means every man, woman, and child is 

thousands of dollars poorer than they should be, and millions could 

be fully employed who are not. Trillions of dollars in capital that 

could fuel robust economic growth instead remains sidelined due to 

a regulatory tsunami, much of it dictated by Dodd-Frank and promulgated by the Federal Reserve. 

Thus, serious questions must be asked. Why isn’t the Fed subject 

to statutory cost-benefit analysis? Why has the Fed yet to find any 

connection between its Volcker Rule or any other rule in the precipitous drop in bond market liquidity? Why does the Fed’s stress 

test resemble, in the words of Columbia University Professor 

Charles Calomiris, ‘‘a Kafkaesque Kabuki drama’’ in which regulators punish banks for failing to meet standards that are never 

stated, either in advance or after the fact. 

Combining the Fed’s lack of transparency with its all-encompassing new regulatory authority under Dodd-Frank is a dangerous 

mix. It is a threat to economic growth, not to mention the principles of due process, checks and balances, and the rule of law. If 

we are not careful, our central bankers will soon become our central planners. 

Fortunately, the House will soon have the opportunity to reform 

the Fed and make it more transparent with the Federal Oversight 

Reform and Modernization Act, offered by our colleague, Mr. 

Huizenga, and approved by this committee. 

I now yield 5 minutes to the ranking member for an opening 

statement. 

Ms. WATERS. Thank you, Mr. Chairman, for holding this hearing. 

And thanks to Federal Reserve Chair Yellen for making herself 

available to testify. 

The 2008 financial crisis inflicted staggering damage to our economy within the months before President Obama took office, with 

employers shedding more than 800,000 jobs a month, unemployment topping 10 percent, home foreclosures displacing millions of 

families, and entire industries on the brink of collapse. 

Congress responded to this devastation by passing the most comprehensive overhaul of our financial system since the Great Depression, the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act entrusted significant responsibility to the Federal Reserve and directed the Fed to improve its supervisory program so that another crisis of such scope and depth would never 

happen again. 

Recognizing that the Federal Reserve failed to apply appropriate 

prudential standards to large banks, Congress directed the Fed to 

impose enhanced requirements for capital liquidity, resolution 

3 

planning, and other factors to ensure that no large bank or group 

of banks could again endanger our economy. 

I am eager to hear from Chair Yellen on the progress of these 

reforms, along with a description of how the Fed is using the flexibility embedded in Dodd-Frank to tailor regulations appropriate to 

the sizes and risk of different types of banks. 

Congress specifically permitted the Fed to differentiate among 

companies on an individual basis or by category, considering their 

capital structure, riskiness, complexity, financial activities, size, 

and other factors. The Fed should use this authority. 

Likewise, Dodd-Frank provided the Fed with new responsibility 

to collectively regulate the activities of systemically risky non-bank 

entities, such as the insurance company AIG, whose near failure 

imposed dire systemic consequences on our economy just 7 years 

ago. I very much would like to hear from Chair Yellen about how 

the Fed has bolstered its expertise to take on these new responsibilities. 

And let me also express my deep concern about legislation this 

committee considered during a markup this week that would severely undermine efforts by the Fed to regulate both banks and 

non-banks. With regard to banks, the legislation would hamstring 

the Fed’s ability to regulate all but the largest globally active 

banks, ignoring how the failure of many large, interconnected regional banks could have dire consequences for our economy. Similarly, other legislation would undermine the Financial Stability 

Oversight Council’s (FSOC’s) ability to identify supervisory gaps, 

designate non-bank firms for enhanced prudential regulation, and 

ensure that the Fed is regulating them on a comprehensive, consolidated basis. 

Finally, as we just have passed the 5-year anniversary of DoddFrank, I think it is important to remind the committee and the 

public of the need to be ever-vigilant of the threat of another crisis. 

Among our supervisors, we must guard against complacency and 

regulatory capture. Among our law enforcement, we must hold institutions and individuals accountable, something that former Fed 

Chairman Ben Bernanke, in his recent book, said that we did not 

adequately do. 

And here in Congress, we must be mindful of attempts to defund 

and defame Dodd-Frank. The American economy has made substantial progress since the depths of the crisis, but that progress 

will be threatened if we do not protect these reforms, both in statute and in practice. 

So thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee, for 2 

minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

And good morning, Chair Yellen. 

Today marks the first time since the passage of Dodd-Frank that 

someone from the Federal Reserve has testified under the authorities bestowed upon the statutorily created Vice Chair of SuperVerDate Nov 24 2008 14:06 Dec 01, 2016 Jkt 099778 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\99778.TXT TERI
4 

vision. Yet today, the person testifying was not appointed or confirmed for that position. 

I remain baffled that the President has failed to put forth a single name to serve in this important role. I fear it is largely because 

Federal Reserve Governor Dan Tarullo, who serves as Chairman of 

the internal Committee on Bank Supervision, can already exercise 

many of the authorities in a de facto capacity, free from any meaningful checks and balances. 

As you know, the Federal Reserve, in addition to its monetary 

policy operation, regulates and supervises financial institutions. 

Many of them are some of the largest in the world. Over the past 

few years, we have seen significant rulemakings, driven in large 

part by the Federal Reserve, that have significantly altered the 

bank capital structures and artificially manipulated liquidity. 

Annual stress-testing under the CCAR process, arguably the 

most important exercise a bank must do each year, remains completely opaque and free from any meaningful oversight. Further, 

the Federal Reserve plays an integral role in the forums where 

international banking supervision and regulation standards are advocated and implemented. 

Together, these important regulatory operations of the Federal 

Reserve deserve much of our needed attention and oversight. 

Today, I hope Chair Yellen will address some of the more intricate points of bank regulation and supervision. Specifically, I look 

forward to getting a better understanding of how she sees each 

major capital and liquidity rulemaking working together. 

Additionally, I look forward to learning how the Federal Reserve 

analyzes the market implications of institutional regulations. We 

have already seen unintended consequences in the bond market, 

where liquidity and volatility concerns have been raised as a result 

of institutional regulations like the liquidity coverage ratio. 

Finally, I look forward to her thoughts on how to make CCAR 

more transparent. She also must address how major regulation factors into and is prioritized under the CCAR stress environment. 

Thank you, Mr. Chairman, and I look forward to this important 

hearing. 

Chairman HENSARLING. Today, we welcome the testimony of the 

Honorable Janet Yellen. Chair Yellen has previously testified before our committee, as all of you know, so I believe she needs no 

further introduction. 

Without objection, Chair Yellen, your written statement will be 

made a part of the record. You are now recognized for 5 minutes 

to give an oral presentation of your testimony. Thank you for being 

here. 

STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mrs. YELLEN. Thank you. 

Chairman Hensarling, Ranking Member Waters, and other members of the committee, I appreciate the opportunity to testify on the 

Federal Reserve’s regulation and supervision of financial institutions. 

One of our most fundamental goals is to promote a financial system that is strong, resilient, and able to serve a healthy and growVerDate Nov 24 2008 14:06 Dec 01, 2016 Jkt 099778 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\99778.TXT TERI
5 

ing economy. We work to ensure the safety and soundness of the 

firms we supervise and also to ensure that they comply with applicable consumer protection laws so that they may, even when faced 

with stressful financial conditions, continue serving customers, 

businesses, and communities. 

This morning, I would like to discuss how we have transformed 

our regulatory and supervisory approach in the wake of the financial crisis. 

Before the crisis, our primary goal was to ensure the safety and 

soundness of individual financial institutions. A key shortcoming of 

that approach was that we did not focus sufficiently on shared 

vulnerabilities across firms or on the systemic consequences of the 

distress or failure of the largest, most complex firms. 

In the fall of 2008, the failure or near failure of several of these 

firms, many of which we did not supervise at the time, sparked a 

panic that engulfed the financial system and much of the economy. 

Today, we aim to regulate and supervise financial firms in a manner that promotes the stability of the financial system as a whole. 

This has led to a comprehensive change in our oversight of large 

financial institutions. As my written testimony describes in more 

detail, we have introduced a series of requirements for the largest 

and most complex banking organizations that reduce the risks to 

the system and our economy that could result from their failure or 

distress. In addition, we now supervise financial institutions on a 

more coordinated, forward-looking basis. 

At the same time, we have been careful to make more measured 

changes in our approach to regulating and supervising firms at the 

other end of the spectrum. We are committed to ensuring that the 

supervision of smaller institutions is tailored to the business model 

and activities of individual institutions. 

In supervising community banks, we are refining our risk-focused approach, which aims to target examination resources to 

higher-risk areas of each bank’s operations and to ensure that 

banks maintain risk management capabilities appropriate to their 

size and complexity. Given the important role that community 

banks play in their communities, and the economic support they 

provide across the country, we recognize that supervision of community banks must be balanced and measured. 

The regulatory reforms we have adopted since the crisis address 

the risks posed by large financial institutions in two ways. First, 

our reforms reduce the probability that large financial institutions 

will fail by requiring those institutions to make themselves more 

resilient to stress. However, we recognize we cannot eliminate the 

possibility of a large institution’s failure. Therefore, a second aim 

of our post-crisis reforms has been to limit the systemic damage 

that would result if a large financial institution were to fail. 

Again, my written testimony provides more detail, but I wish to 

highlight for you two examples of how we are addressing this ‘‘toobig-to-fail’’ challenge. 

First, to limit the systemic effect of a large institutions’s failure, 

the Board and the Federal Deposit Insurance Corporation have 

adopted a resolution plan rule that requires large banking organizations to show how they could be resolved in an orderly manner 

under the Bankruptcy Code. 

6 

Second, the Board just last week proposed a rule setting longterm debt and total loss-absorbing capacity requirements for the 

very largest banks in the United States. With the new requirements, if losses were to wipe out a firm’s capital and push a firm 

into resolution, a sufficient amount of long-term unsecured debt 

would provide a mechanism for absorbing losses and recapitalizing 

the firm without generating contagion across the financial system 

and damaging the economy. 

In addition to strengthening the regulation of the largest, most 

complex financial institutions, we have also transformed our supervision of these firms. Our work is now more forward-looking and 

multidisciplinary, drawing on a wide range of staff expertise. 

We put this new approach into operation with the creation of the 

Large Institution Supervision Coordinating Committee, or LISCC, 

which is charged with the supervision of the firms that pose elevated risk to U.S. financial stability. 

The LISCC program complements traditional firm-specific supervisory work with annual horizontal programs that examine the 

same firms at the same time on the same set of issues in order to 

promote better monitoring of trends and consistency of assessments 

across firms. 

For example, our Comprehensive Capital Analysis and Review, 

or CCAR, ensures that large U.S. bank holding companies, including the LISCC firms, have rigorous, forward-looking capital planning processes and have sufficient levels of capital to operate 

through times of stress. 

I would note that capital at the eight largest U.S. banks alone has more than doubled since 2008, an increase of almost $500 billion. Our new regulatory and supervisory approaches are aimed at 

helping ensure these firms remain strong. 

While more work remains to be done, I hope you will take away 

from my testimony just how much has changed. Our supervisory 

approach is more comprehensive and forward-looking while also 

tailored to fit the level of oversight to the scope of the institution 

and the risks it poses. The Federal Reserve is committed to remaining vigilant as a regulator and supervisor of the financial institutions that serve our economy. 

Thank you. I would be pleased to respond to your questions. 

[The prepared statement of Chair Yellen can be found on page 

56 of the appendix.] 

Chairman HENSARLING. The Chair now yields himself 5 minutes 

for questions. 

Chair Yellen, the first couple of questions I have deal with the 

concern, has the Fed crossed the line from being a regulator to 

being a manager? 

We have had a number of individuals come to our committee and 

tell us that Fed officials have regularly attended corporate board 

meetings of the systemically important financial institutions 

(SIFIs) under the Fed’s purview. Is that true? 

Mrs. YELLEN. I am not sure if that is true. It is not— 

Chairman HENSARLING. So you are unaware of any Fed officials 

attending board meetings? 

Mrs. YELLEN. It is conceivable that might have occurred. I am 

not saying that it did not occur. I would have to get back to you. 

7 

Chairman HENSARLING. If it did occur, what legal authority 

would you cite for having employees of the Fed invite themselves 

into corporate boardrooms? 

Mrs. YELLEN. I don’t know what the circumstances are in question, but I can, for example, tell you that when I was president of 

the San Francisco Fed, I occasionally would attend a portion of a 

board meeting of one of the firms that we supervised to make a 

presentation to the board about our supervisory findings and the 

emphasis on— 

Chairman HENSARLING. But you are unaware of any Fed officials 

attending these board meetings, you have no personal knowledge 

of this, and this is not a policy of the Fed? 

Mrs. YELLEN. I really don’t have details about what officials— 

Chairman HENSARLING. We would appreciate it if you could look 

into this, Chair Yellen, and get back to the committee on this matter. 

We have also heard from individuals with respect to the stress 

test, about which we have had both public dialogue and private 

conversation. Many of us on this committee consider that to be, 

again, a rather opaque process, and so this committee has a number of questions. 

We have also questioned employees of the financial institutions 

who have been on the receiving end of these stress tests, and we 

have been informed by numerous individuals that they have been 

told by the Fed not to speak to Members of Congress about the 

stress tests. 

Do you have any knowledge of this matter? 

Mrs. YELLEN. I have no knowledge of that. 

Chairman HENSARLING. Okay. Is it the policy of the Federal Reserve to instruct members of banks subject to the stress tests not 

to speak to Members of Congress? 

Mrs. YELLEN. I strongly doubt that is our policy. 

Chairman HENSARLING. Okay. You are unaware of that being a 

policy. 

Would you object to these people speaking to Members of Congress? Can you let it be known to your employees that they should 

not be telling private citizens not to speak to Members of Congress 

about the stress tests? 

Mrs. YELLEN. Private citizens can interact with Members of Congress— 

Chairman HENSARLING. So you are willing to direct your employees to ensure that dialogue can take place? 

Mrs. YELLEN. I will certainly look into that. 

Chairman HENSARLING. With respect to the stress tests—and 

again, I have great concerns about how opaque and nontransparent 

they are—I guess my first question is: We don’t doubt that you 

have many serious employees, very smart regulatory staff who handle these matters, but we still don’t know much about this. How 

are market participants supposed to be convinced that we have less 

systemic risk when they have no insight into these tests, since 

Members of Congress have little to no insight into these tests? How 

are we supposed to reaffirm market confidence? 

Mrs. YELLEN. We do a great deal, in my opinion, to explain the 

methodologies that we employ. We have published overviews of the 

8 

methodologies that we use, and we update those every year. They 

include detailed information about the scenarios, the analytic 

framework we use, and information on the models that we employ— 

Chairman HENSARLING. I guess, Chair Yellen, detail may be in 

the eye of the beholder, because Members of Congress still don’t 

understand this, and in our dialogue with banking organizations, 

they still don’t understand the tests either. 

In my remaining time, I have one last question, again with respect to these tests. The stress tests really have become, in many 

respects, your main tool, your main supervisory tool for the large 

banks. But my concern is, if you have one centralized view of risk 

and you are imposing that view on our large banking organizations, to some extent, isn’t that exactly what Basel II did in telling 

banks that they essentially had to reserve little to no capital 

against sovereign debt and mortgage-backed securities? Think 

Greek bonds and Fannie Mae and Freddie Mac. 

How can that lower systemic risk, if we only have one centralized 

view of risk and it may be wrong? 

Mrs. YELLEN. I guess I would dispute the idea that we have one 

centralized view of risk. The purpose of this exercise is to help the 

firms develop their own analytic capability to model the impact of 

various stresses on their organizations and to develop a robust capital planning process, which is what we evaluate in our CCAR exercise— 

Chairman HENSARLING. Well, Chair Yellen, I wish we could conclude the same thing, but we have insufficient information about 

your stress tests to be able to come to the same conclusion that you 

make. 

I am over my time. The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much. 

I am pleased to see you, Chair Yellen. 

And, unlike the chairman, along with many of my colleagues, we 

have heard from regional banks about the Comprehensive Capital 

Analysis and Review, or CCAR, stress test, and they have complained that they are not sufficiently calibrated to the unique profile of large bank holding companies that focus on traditional banking activities. We have also heard that the new filing of living wills 

is cumbersome for the banks and not particularly helpful to the 

Fed’s supervisory process. 

So I have no indication that they have been told not to talk to 

us. They talk to us plenty. And we are listening. 

At the same time, Congress is considering legislation that would 

do severe damage to the new standards the Fed has implemented 

and their ability to identify and respond to risk in the future. 

So can you discuss why H.R. 1309, a bill debated by this committee yesterday which addresses this topic, would be severely 

damaging to the Fed’s ability to respond to systemic risk on an 

agile and comprehensive basis? 

Secondly, will the Federal Reserve commit to doing further tailoring using the existing authority provided by Section 165 of the 

Dodd-Frank Act specifically on the two issues I cited earlier, the 

CCAR stress test and living wills? 

9 

Mrs. YELLEN. Congresswoman Waters, I am very much concerned about a process that would require, as I understand H.R. 

1309 would require, the Board to use a statutorily defined set of 

factors or make findings based on factors to decide whether or not 

to subject firms to higher prudential standards. I would see such 

a process as inhibiting our ability to take timely and necessary supervisory actions to address a firm’s risk. 

We do a great deal of tailoring of our supervisory approach to 

make sure that it is appropriate to the size, complexity, and systemic risks posed by a particular firm. We are committed to doing 

that. And we are looking at further ways in which we can tailor 

our supervisory approach. In particular, the CCAR process that we 

were discussing, we have some ideas about how we might tailor it, 

particularly to apply to smaller firms. 

We have indicated that there are some constraints on our ability 

to tailor our supervisory approach for the smaller firms subject to 

the 165 requirements. In particular, the Dodd-Frank Act requires 

that we administer stress tests and receive resolution plans. Our 

experience thus far is that the safety and soundness value of those 

requirements for the smaller of those firms probably is not sufficient to justify the costs imposed on them. And so we would value, 

for the firms on the smaller end of the spectrum, being able to relieve them of those requirements. 

But I do want to make clear that we do tailor our supervisory 

approach according to the complexity of the firm and are committed to doing that. 

Ms. WATERS. I am so pleased to hear that, because what we 

heard constantly yesterday was that you do not. They kept talking 

about ‘‘one-size-fits-all’’ and that you are not using your tailoring 

authority. So thank you for explaining that to us. 

And we are absolutely supportive of your being able to do that. 

We think it makes good sense. And perhaps what we need to do 

is work with your staff a little bit more to understand whatever restraints there are involved in tailoring and whatever authority that 

you have and flexibility that you have. 

But thank you for clearing that up. That is very important. You 

know you have the authority. You understand that Dodd-Frank 

gives it to you. You use it. And you welcome any questions from 

this committee about how you use it and how you can’t use it. So 

thank you very much. 

Mrs. YELLEN. Thank you. 

Ms. WATERS. I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee, for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Chair Yellen, it seems like there are many different new regulations, and they are all kind of trying to drive at the same thing. 

And as an outsider, it is hard to see how they actually are coordinated. 

For example, just in one broad area, capital, we now have TLAC, 

we have the GSIB surcharge, the supplemental leverage ratio, the 

normal Basel risk-weighted capital regime, as well as the annual 

stress test known as CCAR. 

10 

Can you walk me through how all of these capital rules fit together and what each are trying to address? 

Mrs. YELLEN. Certainly. We do see these rules as fitting together. Most of the requirements that you just mentioned are imposed only on U.S. GSIBs, the eight largest U.S. firms. We think, 

given the risks that the failure of one of these firms would pose to 

the financial system, that it is important that they be subject to 

more stringent capital requirements, liquidity requirements, and 

ability to survive a very stressed event. And we think the various 

things that you mentioned coordinate with one another. 

In particular, we have put in place so-called GSIB surcharges 

that impose additional high-quality capital standards on the eight 

U.S. GSIBs. And it is based on our estimate of the impact that the 

failure of one of those firms would have on the overall financial 

system. 

The supplementary leverage ratio is a backup tool that works in 

a coordinated way—this has long been the case—with the riskbased capital charges. And so we see those as working together. 

Now, the stress tests that we impose on these institutions are a 

very robust, forward-looking approach to assessing whether or not 

firms could survive a very adverse stress scenario and continue to 

serve the credit needs of the U.S. economy. 

And so, these are coordinated approaches. The so-called TLAC 

requirement that you mentioned is a requirement that we think is 

necessary so that if one of these firms were to fail in spite of all 

of the resilience that we expect of it, it would be possible, as the 

Dodd-Frank Act requires, to resolve that firm under the Bankruptcy Code or, alternatively, under orderly liquidation. 

Mr. NEUGEBAUER. So what kind of comes to mind here is, at 

what point does the CCAR process kind of override all of the other 

requirements? Literally, they could be in compliance with these 

other requirements, but they could fail their CCAR. 

So is CCAR driving the regulatory process, or are these standards that you are putting in place driving the regulatory process? 

Mrs. YELLEN. I believe they are complementary. 

And I think that CCAR is a particularly valuable process because 

what we expect these firms to do is not simply to be able to meet 

some standard, a minimum capital standard, but what we want 

them to have in place is the internal ability to analyze the risks 

that face that unique organization and to have a rigorous capital 

planning process that that firm is using to make sure—whatever 

our rules may say, we want that firm to make sure that they have 

adequate capital to survive a severe stress. 

And the stress tests and the CCAR process are looking to make 

sure that they have governance and risk management standards in 

place that are designed for that organization and for its unique risk 

profiles, that they are managing their risk in the way we would expect a systemic firm to be able to do. 

Mr. NEUGEBAUER. But each entity is different. And so, you are 

imposing many of these standards on all of them, I assume, somewhat on a consistent basis, but the CCAR for one entity—that that 

entity may go under because of their business model is going to be 

differently. 

11 

Do you need all of these others if the final test—is the big test 

here the CCAR? 

Mrs. YELLEN. We believe it is a belt-and-suspenders approach 

and that they work together in a coordinated fashion. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, ranking member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Chair Yellen, I will get to questions about regulation in a moment, but, first, I would like to ask one question on 

monetary policy. 

When you testified in July, you said in response to one of my 

questions that one of the advantages to raising rates a little bit 

earlier is that, ‘‘We might have a more gradual path of rate increases.’’ 

Of course, one of the downsides to starting to raise rates while 

inflation is still below target is that it could end up hurting the 

fragile economic recovery. Fed Governor Brainard recently said 

that raising rates too early could end up ‘‘prematurely taking away 

the support that has been so critical to the economy’s vitality.’’ 

So my question is, do you think the risks of raising rates in December, which will very likely be before inflation reaches the Fed’s 

2-percent target, outweigh the benefits? 

Mrs. YELLEN. Thank you for that question. 

Let me say that at this point, I see the U.S. economy as performing well. Domestic spending has been growing at a solid pace. 

Net exports are soft, but the Committee judged in October that 

some of the downside risks relating to global economic and financial developments had diminished. I see underutilization of labor 

resources as having diminished significantly since earlier in the 

year, although recently we have seen some slowdown in the pace 

of job gains. 

Inflation is, as you mentioned, running considerably below our 2 

percent objective. Nevertheless, the Committee judges that an important reason for that relates to declines in energy prices and the 

prices of non-energy imports, and that, as those prices stabilize, inflation will move back up to our 2 percent target. 

With that sort of economic backdrop in mind, the Committee indicated in our most recent statement that we thought it could be 

appropriate to adjust rates at our next meeting. Now, no decision 

at all has been made on that. That decision will depend on the 

Committee’s assessment of the economic outlook at that time, and 

that assessment will be informed by all of the data that we receive 

between now and then. What the Committee has been expecting is 

that the economy will continue to grow at a pace that is sufficient 

to generate further improvements in the labor market and to return inflation to our 2 percent objective over the medium term. And 

if the incoming information supports that expectation, our statement indicates that December would be a live possibility, but importantly, that we have made no decision about it. 

You asked about the timing of such a move. The Committee does 

feel that moving in a timely fashion, if the data and the outlook 

justify such a move, is a prudent thing to do, because we will be 

able to raise the Federal funds rate at a more gradual and measured pace. We fully expect that the economy will evolve in such a 

12 

way that we can move at a very gradual pace. And, of course, after 

we begin to raise the Federal funds rate, we will be watching very 

carefully whether our expectations are realized. 

As my colleague, Governor Brainard, noted, inflation is currently 

low. If we were to move, say, in December, it would be based on 

an expectation, which I believe is justified, that with an improving 

labor market and transitory factors fading, inflation will move up 

to 2 percent over the medium term. Of course, if we were to move, 

we would need to verify over time that our expectation was being 

realized, and if not, to just adjust policy appropriately. 

I think I would also like to emphasize that I know there is a 

great deal of focus on the initial move. Interest rates have been at 

zero for a long time. Markets and the public should be thinking 

about the entire path of policy rates over time, and the Committee’s expectation is that they will be on a very gradual path. But 

of course, the path will depend very much on the actual performance of the economy. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, chairman of our Capital Markets Subcommittee. 

Mr. GARRETT. I thank the chairman. And I thank Chair Yellen. 

So we heard the other day about all the benefits that came out 

of Dodd-Frank and all the work that the Fed is doing overall. I 

want to go back and look a little bit deeper at that, both individually and cumulatively. 

Back in 1994, Congress passed, and now it is the law, something 

called the Riegle Community Development and Regulatory Improvement Act. As you are probably aware, it applies to all Federal 

agencies, including the Fed, and it says that you shall consider the 

cost and burdens that any regulations would place on depository 

institutions, and for small depositories, especially, you have to look 

at the costs of regulations and also the benefits. 

Now, we do hear about the benefits. I asked Governor Tarullo 

this question, have you done those individual cost-benefit economic 

analyses, and I didn’t get a really clear answer from him whatsoever. 

So very briefly, in a sentence, do you believe that the Riegle 

Community Development Act applies to the Fed, and then, as such, 

you are required to do a basic cost-benefit analysis each time you 

do a regulation? That is a yes or no, I guess. 

Mrs. YELLEN. We follow rules of the Administrative Procedure 

Act and always request public comment on costs of our rules. 

Mr. GARRETT. Did you do an actual cost-benefit analysis, for example, on TLAC? 

Mrs. YELLEN. We did do an actual cost-benefit on TLAC. 

Mr. GARRETT. Do we have a copy of that? 

Mrs. YELLEN. It is described in the proposal that we issued last 

week. So in some cases, we have done a cost-benefit analysis. In 

other cases— 

Mr. GARRETT. In some cases? In other cases, you do not? 

Mrs. YELLEN. Very often what we are doing is putting into effect 

a rule that Congress has directed us to write to implement changes 

that in Congress’ view will be beneficial. 

13 

Mr. GARRETT. Right. But you are doing the rule, and under Riegle— 

Mrs. YELLEN. And the question becomes, when Congress has directed us to write a rule, that it is judged to be beneficial. 

Mr. GARRETT. That is not— 

Mrs. YELLEN. What is the least costly way to proceed. 

Mr. GARRETT. Let me just stop you there, if I may. The Riegle 

Act doesn’t say that you can pick and choose as to when you do a 

cost-benefit analysis, it says you shall—not ‘‘may’’ but ‘‘shall’’—consider, and then it lays out those parameters. So it sounds as 

though you are doing it in some cases, but you are not dong it in 

other cases, which may explain why Governor Tarullo couldn’t give 

me a clear answer. 

Let me just move on to the broader issue then, since you are apparently not doing it in all cases. The broader issue is—and I asked 

this of your predecessor, Chairman Bernanke, has anyone done an 

analysis of all the costs and the burdens to everything cumulative 

of Dodd-Frank, and his answer was the famous, ‘‘no.’’ And Treasury 

Secretary Lew, we asked the same question, and his answer was 

basically, no, but if Congress wants to do it, we can do it. 

So I will throw that question out to you as well, since everyone 

else says that you haven’t done it. Have you done a cumulative 

cost-benefit analysis on the regulations as they go through and the 

burdens? Is your answer— 

Mrs. YELLEN. I think the answer for the kind of analysis that 

you have in mind is probably no. 

Mr. GARRETT. Okay. 

Mrs. YELLEN. But we are carefully monitoring what the effects 

of these rules are. 

Mr. GARRETT. So let me ask you this. If you have not done—and 

I appreciate your candor on that—a cost-benefit analysis cumulatively—yesterday, Mr. Himes from Connecticut said FSOC came 

out with a report, and there is nothing in this report which shows 

that regulatory burdens are a cause of the negative effect on the 

economy. 

I just went through the executive summary. There are about a 

dozen different factors that the FSOC came up with, and he is 

right that regulatory burdens is not listed as a factor. But now I 

understand exactly why, because you just told us that FSOC and 

the Fed never even did a cost-benefit analysis cumulatively. 

If you haven’t looked at it, then of course it is not going to be 

in your summary as one of the impacts, because you are not even 

studying it. So I guess this report is a little bit useless, isn’t it, because if you are not going to study the problem, then you really 

don’t know what the problem is, do you? 

Mrs. YELLEN. I think it is important to take a step back here and 

to recognize that we lived through a devastating— 

Mr. GARRETT. I will give you that. 

Mrs. YELLEN. —financial crisis. 

Mr. GARRETT. I will give you that. 

Mrs. YELLEN. And the cost of that crisis to households, to businesses— 

Mr. GARRETT. I get that, but— 

Mrs. YELLEN. —the U.S. economy was enormous. 

14 

Mr. GARRETT. Is this summary of any benefit to us at all if you 

are not going to do the— 

Mrs. YELLEN. When we have— 

Mr. GARRETT. —basic analysis? 

Mrs. YELLEN. We have done basic analysis. When we put in effect the capital rules and liquidity requirements— 

Mr. GARRETT. You just told me that you did not— 

Mrs. YELLEN. —we have looked— 

Mr. GARRETT. Excuse me. 

Mrs. YELLEN. —at the costs and— 

Mr. GARRETT. I appreciate that, but you just told us what everyone else has told us, that you have not done an individual analysis 

and you have not done a cumulative analysis. If you haven’t done 

this study, if you haven’t dug into the records, then your analysis 

of what is affecting the economy is basically useless. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Let me give you some advice in the other direction. There are a host of titles and provisions in Dodd-Frank and 

there are a host of other laws that you carry out. The fact that they 

come to you in a political package called Dodd-Frank or they come 

in some other package is of great interest to politicians. 

But those are different titles. Just because a provision was in 

Dodd-Frank doesn’t link it with another provision of Dodd-Frank or 

delink it from provisions of laws that were passed earlier or later. 

So I would hope in carrying out your responsibilities, you would 

look functionally, since the purpose is to give us advice on how to 

improve derivatives regulation, how to improve depository institution regulation, and leave it to the politicians to second-guess bills 

named for politicians. 

We do get one benefit from the fact that the Vice Chair for Supervision has yet to take office, and that is we get to spend another 

day with you. This is a great personal joy to me. And from your 

standpoint, we get to spend another day with our chairman, who 

is the most prominent American named Jeb who does not use an 

exclamation point to spell his name. So there are some real benefits from that. 

I want to focus on interest rates. You came here in July, and I 

spent my 5 minutes laying out reasons why you should not then 

increase interest rates. My most gullible friends believe that I was 

successful in persuading you, and hence that is the reason why interest rates have not gone up. I have some gullible friends. But I 

want to keep doing it. 

As I argued then back in the summer, God’s plan is not for 

things to rise in the autumn. As a matter of fact, that is why we 

call it ‘‘fall.’’ Nor is it God’s plan for things to rise in the winter 

through the snow. God’s plan is that things rise in the spring, and 

so if you want to be good with the Almighty, you might want to 

delay until May. 

And I know there are a bunch of things you are aware of. Many 

economists say we shouldn’t move forward now; the managing director of the IMF has been fairly candid. We have deflationary risk. 

We just had a bad growth report. And you are aware of it, but you 

15 

probably won’t estimate it as highly as I will, because of my occupation, but don’t underestimate the ability of politicians in both 

Europe and the United States to screw things up. 

I mentioned last time you were here the psychological advantage 

to retirees of nominal interest rates of 4 to 5 percent so they can 

live on their retirement savings without a nominal invasion of principal. That psychological benefit is not in the GDP statistics. As a 

matter of fact, you reduced the GDP statistics, because they are not 

going to psychologists and spending money, which would be part of 

the GDP, but it does enhance. 

And then finally, as I pointed out to you, and I do want to talk 

to you privately about this, how FASB is coming up with this new 

$2 trillion change that will hurt construction, depress the economy. 

The other thing is that if you act too soon and you decide, oops, 

we acted too soon, you put yourself in a position first where you 

have a zigzag policy, and you will face criticism from that by some 

people I know, and second, if you then want to go in the other direction, you only have a quarter point to play with. So if you hit 

the brake too soon and to say, oops, I have to hit the accelerator, 

you don’t have any gas. 

With that in mind, I am concerned about the effect raising interest rates now would have on the real estate recovery, and I would 

ask you what you would think the impact would be of raising interest rates on the housing recovery, and would we squeeze creditworthy borrowers out of the housing market and create a negative 

feedback loop with prices going down? 

Mrs. YELLEN. You have made a large number of very good points 

and referred to many relevant considerations that the Committee 

is trying to weigh and has been taking into account. 

With respect to the housing market, the level of mortgage rates 

is of course relevant to housing, and we are very aware that, for 

example, a sharp rise in mortgage rates could have a very negative 

effect on housing. We do, however, have a recovering economy in 

which employment and income are rising, and individuals are in 

better shape to form households. To be sure, some are moving into 

rental properties; the millenials seem to have a strong preference 

for later house purchases. But we do envision gradual recovery in 

the economy and the housing sector. 

Let me come back to the point that I made earlier, which is the 

Committee anticipates a very gradual increase in interest rates. 

We are not envisioning that when we begin to raise rates we are 

going to be looking at a very steep path of interest rates that would 

cause the kind of harm that you are worried about for the housing 

sector. The whole path matters, and we expect it to be a gradual 

path— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, chairman of our Housing and Insurance Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

It is always interesting to listen to the gentleman from California. He is a very bright guy with lots of interesting correlations. 

But I have never heard God’s plan for the seasons correlated to the 

16 

Fed’s plan to raise interest rates. I enjoyed the discussion this 

morning, gentlemen. 

Welcome, Chair Yellen. This morning I want to talk a little about 

a SIFI designation of insurers. I am very concerned that FSOC and 

the Fed have become a rubber stamp for the Financial Stability 

Board (FSB). It is my understanding that the FSB made the designations for global systemically important insurers without extensive analysis or information from the companies other than what 

was publicly available. 

So my question is, is that the case? And if you did not receive 

information from the companies, how did you reach the conclusion 

that they posed a risk to the global system? 

Mrs. YELLEN. Congressman, in the case of the companies that 

were designated, in every case there was an extremely detailed 

evaluation that was done, and a summary of the evaluation is publicly available, that did involve interaction with the company. 

Mr. LUETKEMEYER. Excuse me. Did the analysis, though, come 

from the FSB or was it your own analysis? 

Mrs. YELLEN. This was the analysis of the FSOC. 

Mr. LUETKEMEYER. The FSOC. 

Mrs. YELLEN. The FSOC and its staff prepared very detailed assessments of what the consequences would be for the U.S. financial 

system of the failure of one of these firms. 

Mr. LUETKEMEYER. It is interesting. That is not the answer that 

we get from the insurance side of this, from the company side of 

this. Did you solicit any of this information, anything from them, 

or did you just take FSB’s information and take that and try and 

analyze that? 

Mrs. YELLEN. We have detailed interactions with the companies. 

Mr. LUETKEMEYER. You got information from them outside of 

what is publicly available? 

Mrs. YELLEN. Absolutely. Part of the designation process, in 

stage 3 of the designation process, there have been detailed interactions with the companies. They have provided information, they 

have had every opportunity to weigh in and to offer their views 

of— 

Mr. LUETKEMEYER. If I can interrupt just a second here, it is 

kind of interesting, though, that the one individual on FSOC who 

has an insurance background is the one who said, no, we don’t 

need to designate them as systemically important, yet FSOC went 

ahead and did it. Can you enlighten us as to why that would occur? 

Why did the other folks who are not experts think that they need 

to be designated, where the expert said, no, we don’t? 

Mrs. YELLEN. We have a great deal of expertise in insurance on 

the FSOC and among the staff who look at this. And what I can 

assure you of is that very detailed analysis was done, firm-specific 

analysis of what the consequences of a failure would be, and the 

firms had ample opportunity to weigh in, and they very well understand what the logic was of why they were designated. 

Mr. LUETKEMEYER. With all due respect, Chair Yellen, I am not 

sure they had plenty of time to respond, because now they are 

going to court to try and resolve the situation. So I think if they 

could have responded to this, surely there would have been an ongoing discussion that could have minimized this and they wouldn’t 

17 

be going to court. They would have agreed with your analysis or 

agreed with your designation. But let me— 

Mrs. YELLEN. They may disagree, but they have had a detailed 

opportunity to weigh in. And in the case of one firm—I was only 

involved myself in the designation of one firm, and that firm had 

an opportunity to meet with the entire FSOC. 

Mr. LUETKEMEYER. Okay. I recently have had the opportunity to 

meet with some of the international folks who designate the GSIFIs, and it was very concerning the way they went about it. And 

I think to take their analysis without our own analysis is very concerning. 

Mrs. YELLEN. We have absolutely not taken international analysis to substitute for our own. We have done our own analysis in 

FSOC. 

Mr. LUETKEMEYER. I will take you at your word. 

With regard to one other issue here, yesterday we passed out of 

this committee a bill to deal with the SIFI designation for banks. 

And in the bill, we have guidelines that actually you use, the Fed 

uses in their own analysis, just recently, in the BB&T and Susquehanna merger. And I was kind of concerned at the way that the 

questioning went and the discussion went with the ranking member with regards to the guidelines that are provided in our bill as 

being the only ones that are considered. I am sure that you take 

those into consideration as well as other ones whenever you make 

that sort of decision. Do you not? 

Mrs. YELLEN. We try to tailor a supervisory program that we 

think is appropriate given our full understanding of the risk— 

Mr. LUETKEMEYER. The ones that I detail in my bill are significant ones that you believe that need to be used to provide the 

guidelines to make the designation. 

Mrs. YELLEN. We look at those factors, but we tailor an entire 

program that is specific— 

Mr. LUETKEMEYER. In your previous testimony before this committee, you have agreed that those are important criteria and you 

supported the bill. So I thank you for that. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, for the record, I want to clarify that some of us 

do use an exclamation point after your name. And as a matter of 

fact, some of us use hash tags, star marks, and a few other things 

are in there too. So I just want to be clear. Some may not, but some 

do. 

Chairman HENSARLING. As long as you spell it right. 

Mr. CAPUANO. Madam Chair, first of all, thank you for being 

here again. And as always, it is a pleasure to see you. 

I have a few questions, and we are going to start on one that 

kind of has been a bit concerning to me, and I think for the most 

part most of us have been pretty quiet about it, and that the requirements of Section 956(b) of the Dodd-Frank Act that requires 

the Fed and others to take action relative to executive pay at 

banks. 

18 

And I want to be clear. I for one do not care how much anyone 

in this country makes. The ‘‘how much’’ is not my concern. The 

‘‘how’’ is a concern. It is a concern in law, because of the incentives 

that may be involved. Some of us think that those incentives had 

a lot to do with the 2008 problem. And yet the law says 90 days. 

Fine, okay, 90 days, 180 days, 360 days. It is now 2015, 7 years— 

7 years—and we do not have a regulation on this issue. And I am 

just wondering, could you tell me when you think we might have 

one? 

Mrs. YELLEN. If I might start by saying that from a supervisory 

perspective, many years ago we put into effect guidelines pertaining to incentive compensation, and our supervision is very attentive to aspects of incentive compensation that could lead to excessive risk-taking. It is not focused on the total overall level of 

pay, but on the potential adverse incentives that could be embodied 

in that pay. 

Mr. CAPUANO. But that is not the regulation that is called for by 

law. 

Mrs. YELLEN. It has been very challenging. There are many 

agencies involved in trying to come up with this compensation— 

Mr. CAPUANO. So what is the holdup? How do we help? Who do 

I have to kick to get this done? 

Mrs. YELLEN. I can’t give you a good answer to that question. 

Mr. CAPUANO. Have you done your job? 

Mrs. YELLEN. As I said, we have been working with the institutions now for many years to ensure— 

Mr. CAPUANO. Yes, I know, and the law says 90 days. At some 

point, regulators have to regulate. I am not complaining that it is 

91 days; I am complaining that it is 365 days. And if it is not you, 

tell me who it is. If it is my friends at the SEC, first of all, I 

wouldn’t be shocked, and second of all, maybe that is a pretty fair 

thing. 

Have you done what you need to do to get this regulation, required by law, simply to allow us to know the incentives that are 

involved and to prohibit inappropriate incentives that did help lead 

to the 2008 debacle? Have you done your job? 

Mrs. YELLEN. We have tried to work constructively with the 

other agencies and we have— 

Mr. CAPUANO. I love when Fed Chairs never give answers. 

Mrs. YELLEN. We have done— 

Mr. CAPUANO. I think the Fed has done a pretty good job. I am 

not complaining about the Fed. But this one is long overdue, and 

each and every regulator that comes before me, I am going to start 

asking. Again, I am not suggesting you do a specific item. I don’t 

care how much they make. I care that the incentives are appropriately placed so that the American taxpayer doesn’t get put on 

the hook again on an item that we have already identified as a 

problem, that everybody agrees was a problem, and that should be 

relatively easy to fix. 

Mrs. YELLEN. I agree with your assessment that it is an important problem, that it is essential to address it. And as I said, in 

our supervision we have addressed it and we do feel we have seen 

very meaningful changes. 

19 

Mr. CAPUANO. And I trust you do that, but I want the regulation 

that was required by law. 

Mrs. YELLEN. I understand that. 

Mr. CAPUANO. That is what I want. I want the regulation done 

so that the American people will feel comfortable. 

Two other items, since my time is running out. One, I want to 

talk just basically, I am not pushing yet, but I am looking forward 

to the results of the current—the next iteration of living wills. Back 

a few years ago when we had them, they were all called—all of 

them were called not credible. And the living will provision in 

Dodd-Frank, as you know, was pretty important to many of us. We 

think it is a way to avoid too-big-to-fail. We think it is a way to 

allow these institutions to say, hey, we are this big, but don’t 

worry, we can take care of ourselves, we don’t need any more help. 

And when they are all called not credible, that is a problem. 

I know that you are in the process now. Do you have any idea 

what the timeframe might be when you are into the second chance? 

Mrs. YELLEN. Last year the Board, working jointly with the 

FDIC, sent very detailed evaluations of the living wills to the firms 

and directed the firms to take action to improve their resolvability 

that were quite specific, are quite specific. 

Mr. CAPUANO. Timeframe? 

Mrs. YELLEN. We have received those plans. We are evaluating 

them jointly with the FDIC. 

Mr. CAPUANO. Thank you. 

Mrs. YELLEN. And we will be making decisions in the coming 

months— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

I am happy, Chair Yellen, to rescue you from the hostile questioning of my Democrat friend over there. Don’t take it personally. 

He is like that with everybody. 

But I do actually want to kind of follow on on something that he 

had, which is a point of interest and frustration for a number of 

us, having to do with the speed or lack thereof where there have 

been some very specific things that were laid out for the Fed to do, 

and specifically I want to talk about Section 13(3). Dodd-Frank required the Fed to adopt regulations ‘‘as soon as practicable,’’ and 

that was 5 years ago. There have not been final rules implemented 

to what Federal Reserve restrictions and guidelines you, yourself, 

were going to put as far as far as utilizing 13(3). And so I am very 

concerned that it has taken that long. 

When is the Fed is going to issue those final rules? 

Mrs. YELLEN. We expect to issue the final rule by the end of this 

month. 

Mr. HUIZENGA. By the end of this month. 

I will point out to my friend from Massachusetts, just talk nicely 

and she will give you a great answer. 

My next follow-up question on that is, will the rules address the 

concerns that Senator Warren, Chairman Hensarling, and others 

20 

have put forward regarding whether your earlier proposal leaves 

the door open to future Wall Street bailouts? 

Mrs. YELLEN. Let me just say that we regard our emergency 

lending powers as very crucial powers. It is very important if, God 

forbid, there should be a future financial crisis. We hope that won’t 

occur. But if there is, that is why the Federal Reserve was created, 

to provide liquidity when there is a financial panic and lenders are 

worried about the state of financial institutions and markets generally, those powers we used during the crisis to keep credit flowing to the economy. 

Mr. HUIZENGA. Sure. 

Mrs. YELLEN. So we want to be very careful about what we do. 

Mr. HUIZENGA. Sure. And the words used for that are ‘‘unusual 

and exigent circumstances,’’ correct? 

Mrs. YELLEN. Correct. 

Mr. HUIZENGA. Okay. 

Mrs. YELLEN. That is right. 

Mr. HUIZENGA. In my format, we take that and we say—we add 

upon it, raise the bar marginally, I would argue, and we use the 

language, ‘‘Unusual and exigent circumstances exist that pose a 

threat to the financial stability of the United States.’’ 

You have come out, and some of the other Fed Governors have 

come out, opposed to that language. Why? 

Mrs. YELLEN. I am not sure that we have been opposed to it. 

That is when we would use those powers, when there are unusual 

and exigent— 

Mr. HUIZENGA. I understand— 

Mrs. YELLEN. —it is understood to mean pose a risk to the financial system. 

Mr. HUIZENGA. We have kind of added two things as a belt and 

suspenders, that it is a phrase you used earlier. One was to include 

the language, ‘‘that pose a threat to the financial stability of the 

United States.’’ And certainly informally, that is the pushback we 

have gotten. I have met with some of the other Fed Governors, and 

they have pushed back saying we should not address 13(3). 

The other one that we have is, in my bill, Section 11, we also 

mandate, in addition to the current requirement of 5 of the 7 Fed 

Board Governors to approve a 13(3) usage, that 9 of the 12 district 

Federal bank presidents must also approve. Any concern with the 

belt-and-suspenders approach that way? 

Mrs. YELLEN. I think the approach that we have currently that 

is in Dodd-Frank is quite adequate. 

Mr. HUIZENGA. So you do have a concern with adding the district 

Fed Bank presidents? 

Mrs. YELLEN. I might have some concern with that. 

Mr. HUIZENGA. What concern? 

Mrs. YELLEN. This has always been a Board power to decide 

when to authorize particular Reserve Banks to engage in programs 

through the discount window, emergency lending programs through 

the discount window. 

Mr. HUIZENGA. But you understand there is a bipartisan concern 

and bicameral concern about how that has been used in the past, 

and that there is too big of a door open yet for these massive Wall 

Street bailouts to happen, and that what we are trying to address 

21 

is, in addition to adequate collateral and solvent borrower definitions, we are trying to make sure that there is not just a check and 

there is just not a rush to find a solution here, but that we also 

have the Fed Bank presidents in there. 

Mrs. YELLEN. Dodd-Frank clearly restricts the way in which this 

power can be used. And the rule that we finalize will address concerns about the definition of broad-based eligibility, insolvent borrowers, and penalty rates. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Chairman Hensarling and Ranking 

Member Waters. 

And welcome, Madam Chair Yellen. Thank you for your appearance here today. Please accept my sincere gratitude for your steadfast leadership at the Federal Reserve. 

The Dodd-Frank Act reforms paved the way for solid and steady 

economic growth by restoring confidence in our markets. It is one 

of the pillars of reform supporting the creating of 13 million private 

sector jobs for 67 consecutive months, extending the longest running growth streak in our history, and reducing the unemployment 

rate to 5.1 percent, the lowest since 2008. 

My first question is as follows. You indicated in your testimony 

that the Fed has tailored its regulatory and supervisory requirements for regional and community banks. However, I continue to 

hear from banks of all sizes in Texas and in my congressional district that they are burdened by the regulation and the costly stress 

tests required. In fact, one regional bank, Amegy Bank of Texas, 

okay, one of the facilities that is in Houston, spent $20 million in 

its stress tests alone. 

In your opinion, do our financial regulators currently have the 

discretion they need to correctly tailor regulatory and supervisory 

standards or should we in Congress take action? 

Mrs. YELLEN. Congressman, my understanding is that stress 

tests are required of banks that are $10 billion and above, and the 

requirements for the smaller banking organizations are very different than those for the larger, above $50 billion organizations, 

that they are only required to do company-run stress tests. For the 

smallest organizations, there is no such requirement. 

Now, I did say earlier that we don’t have as much ability with 

respect to stress tests to tailor as I think would be ideal. There are 

smaller banking organizations where we do see costs of having to 

participate in the stress tests and benefits that are probably not 

commensurate. So that is an area that we are focused on where we 

are tailoring as best we can, but some legislative change to reduce 

the burden on the smaller institutions subject to it could be useful. 

Mr. HINOJOSA. My next question: Last week the Fed finalized its 

Total Loss Absorbing Capacity Rule for the largest eight banks. 

Yesterday, I read in Bloomberg where they reported that Standard 

& Poor’s, as well as the other credit rating agencies, may cut the 

rating of these banks based on the prospect that the United States 

Government is less likely to provide aid in the case of a financial 

crisis. 

22 

Can you elaborate for us how TLAC works and how it makes it 

less likely that a government bailout will be needed in case of a 

future failure of one of these very large banks? 

Mrs. YELLEN. Thank you for that question. It is an important 

regulation that is intended precisely as you say, to mitigate too-bigto-fail. And to the extent that the ratings agencies recognize that, 

that a firm is more likely to be able to—allowed to fail, and they 

reduce— 

Mr. HINOJOSA. It is my understanding that here in Congress 

there is no willingness to repeat what we did back in 2008 to save 

the banking system. So let me go to the next question. Yesterday, we debated replacing the $50 billion threshold from 

mandated enhanced prudential standards with a Financial Stability Oversight Council designation process. What is your opinion 

on what the SIFI threshold should be? 

Mrs. YELLEN. We would not like to see an FSOC process that 

tells us exactly how to tailor our supervision to firms of different 

sizes. We already have an elaborate program in which we do tailor 

the requirements within the confines of law to match the footprint 

and complexity of the firms, and there are only a few areas where 

we have concerns that we may be limited in our ability to do that. 

Stress tests and resolution planning are two areas where I would 

say the smaller of the firms above that $50 billion threshold, we 

would like to be able to reduce the burden on them, but generally 

we have been able to tailor a different threshold. 

Mr. HINOJOSA. Thank you for answering my questions. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, chairman of our Oversight and Investigations Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. 

And good morning, Mrs. Yellen. 

When you were here in October, we had an exchange about a 

lawful subpoena that we made to the Fed. You were unwilling to 

comply with that subpoena. However, 2 weeks ago you did comply 

with that lawful House subpoena, and we are grateful for your cooperation with the Oversight Subcommittee. 

In your cover letter, when you provided those documents, you 

stated that, ‘‘As Chair, I have implemented the practice of immediately referring to the Inspector General all suspected material security breaches involving FOMC information.’’ Why is that your 

personal practice and why isn’t that the policy of the Fed? 

Mrs. YELLEN. The policy of the Fed that was adopted back in 

2011, I believe, stated that if the Chair was alerted to a breach, 

that the procedure would involve asking the FOMC’s General 

Counsel and Secretary to review the matter and to decide whether 

or not it should be referred to the Inspector General. 

Mr. DUFFY. No, no, I am aware of that, but every January don’t 

you meet in regard to the leak policy on the program for security 

of FOMC information? And you set the policy every year. And since 

you have been Chair, you haven’t made that the new policy, you 

have only made that your personal practice. You could this January change that rule and make it policy, not practice, right? 

Mrs. YELLEN. If it seems appropriate to look at it, it is something 

that we could do. 

23 

Mr. DUFFY. So let’s go— 

Mrs. YELLEN. My understanding of that, of the existing policy, I 

am simply trying to say my understanding of the existing policy is 

that if there is a material breach, it should be referred to the Inspector General. And I have done that, that has been my practice, 

and I think that ought to be the understanding. 

Mr. DUFFY. And you can change the policy, I think, this coming 

January. And I think with all that has happened, you should actually change it from personal practice to policy. But it brings me to 

a question about the policy. The way it currently is written, if there 

is a leak, you will have the FOMC Secretary and the General 

Counsel perform a review and then make a request potentially to 

the Inspector General. 

But it is fair to say that the General Counsel, who would make 

the recommendation for referral, also is privy to sensitive information, which would mean that there could be a conflict of interest, 

that the General Counsel could actually be the leaker and he is 

also or she is also the one who is responsible for referring the matter to the IG. 

Do you see the conflict there? And I think that this is ripe for 

some internal policy review at the Fed. I would encourage you to 

take that under consideration. 

Mrs. YELLEN. Let me simply say that I think maintaining the 

confidentiality of sensitive information is to me a very high priority. 

Mr. DUFFY. I know, but that is not my point. I think that you 

can see that there is an issue here on how the policy works internally and I think you could work on changing it. I only have a couple of minutes left. 

The Wall Street Journal recently reported that the White House 

and Treasury were made aware of the 2012 leak. Is that true, before Congress was made aware in December of 2014? 

Mrs. YELLEN. Not to the best of my knowledge. 

Mr. DUFFY. But you are aware that they were doing a background check on Mr. Carpenter for a potential nomination from the 

Fed to Treasury, correct? You are aware of that process? You are 

not aware of that? 

Mrs. YELLEN. I am—I know that he was—has been nominated to 

be assistant Secretary. 

Mr. DUFFY. And as part of a background review, are you telling 

me that they did not reach out to the Fed and ask about his access 

to this information that was involved in the leak and you did not 

provide that to the White House? 

Mrs. YELLEN. I don’t have direct knowledge of that. 

Mr. DUFFY. Do you have any indirect knowledge of that? 

Mrs. YELLEN. That is a particular matter pertaining to an employee. 

Mr. DUFFY. No, no, no, no. 

Mrs. YELLEN. It has to do with the Treasury— 

Mr. DUFFY. Listen, come on. 

Mrs. YELLEN. —and I would— 

Mr. DUFFY. Madam Chair, here is my concern: That we find out 

in Congress, who have the oversight over the Fed, and we find out 

in December of 2014. However, before the nomination, the White 

24 

House has this information about the leak. The White House and 

Treasury, that don’t have any oversight over the Fed, are made 

privy to not just the internal investigation at the Fed, but also they 

received the IG investigation. And so it brings— 

Mrs. YELLEN. I am not aware that that is correct. I think it 

would be maybe standard practice for an agency that is considering 

a nomination to do a background check, and that might involve 

asking— 

Mr. DUFFY. For compliance. 

Mrs. YELLEN. —asking the previous employer as part of the government about an individual. 

Mr. DUFFY. I would agree with that. And also it is common practice for the Oversight Subcommittee to send subpoenas that are 

lawful to the agencies in which they oversee and that that agency 

actually comply with those subpoenas in a timely manner. 

Mrs. YELLEN. I have done my best to do that— 

Mr. DUFFY. Thank you. 

Mrs. YELLEN. —and I believe we have now fully complied. 

Mr. DUFFY. You have. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay, ranking member of our Financial Institutions Subcommittee. 

Mr. CLAY. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for your return visit. 

H.R. 1309 would remove the Fed’s ability to make safety and 

soundness decisions and place them with the FSOC. What impact 

would this dilution of your authority have on your ability to work 

with international regulators? 

Mrs. YELLEN. It is important to the Fed to be able to put in place 

the supervision program that we regard as appropriate for a particular institution, and we would not like to see FSOC involved in 

determining exactly what that appropriate program would be once 

a firm is under our supervision. There is no real relationship. I am 

not sure when you say international negotiations, I am not sure 

what is involved there. Is there something— 

Mr. CLAY. Let me elaborate for you. Under H.R. 1309, designation of banks for enhanced prudential standards can only be undertaken if the FSOC follows standards developed by the international 

Basel Committee made up of banking regulators from over two 

dozen countries. 

Mrs. YELLEN. I see. 

Mr. CLAY. Do you know of any major nation that defers their domestic bank safety and soundness regulations to a board of international regulators? 

Mrs. YELLEN. No, I do not. That is a very useful committee. We 

participate actively. We want to make sure that other countries put 

in place tough safety and soundness regulations that will be good 

for our firms and for financial stability. But nothing is law in the 

United States or is adopted as a regulation unless we deem it to 

be appropriate for our firms, and I believe all countries behave in 

the same manner. These international bodies are coordinating bodies where consultation takes place, but that doesn’t substitute for 

domestic rule-writing efforts here in the United States. 

25 

Mr. CLAY. Sure. And that would be a highly unusual arrangement. 

Mrs. YELLEN. It would be extremely unusual. 

Mr. CLAY. Let’s shift, Chair Yellen, to insurance capital standards. Now that the Insurance Capital Standards Clarification Act, 

which gives the Federal Reserve flexibility in implementing capital 

standards for insurance companies subject to enhanced supervisor, 

has been signed into law, can you please provide an update on the 

Federal Reserve’s implementation? 

Mrs. YELLEN. We appreciated the flexibility that law provides to 

us to design an appropriate capital regime for insurance-centric 

companies that we supervise. We are taking our time to really understand the business models of these firms so that we can tailor 

the regulations in a way that is genuinely appropriate to their 

business models. 

We are working on that. In the process, we are closely consulting 

with the National Association of Insurance Commissioners, with 

the Federal Insurance Office, with representatives of the industry 

and the firms. Again, to be clear, we really understand their business models. We want to get this right and we want to take the 

time we need to understand what will be appropriate. 

Mr. CLAY. Right. And it sounds to me as though you are on the 

path to getting it correct. 

Mrs. YELLEN. We are definitely on the path to implementing 

that. 

Mr. CLAY. This week, the Federal Reserve Bank of New York is 

for the second year in a row hosting a conference to promote the 

importance of a strong culture of compliance within the banking industry. In light of the seemingly endless series of bank violations 

on everything from sanctions and mortgage fraud to LIBOR manipulation, the focus on improving bank culture certainly seems appropriate. Can you discuss what the Board’s role has been in the effort 

to improve bank culture? 

Mrs. YELLEN. We have been extremely disturbed by the pattern 

we have seen of violations in a whole variety of areas, such as 

LIBOR and foreign exchange. We have imposed exceptionally large 

fines and in a number of cases barred individuals from continuing 

to work at the supervised institutions or in the industry. And we 

do fully expect as part of our supervision that the boards of directors of these firms will put in place rules and attend to the culture 

so that we do not see a continued pattern of flagrant violations. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And thanks, Madam Chair, for being here. 

Kind of as a continuation of the questions that Mr. Capuano had, 

do you all ever sit around as a team and assess the things that 

were within your control leading up to 2008 that you all were doing 

sort of a bad job of regulating and say, ‘‘Hey, we had internal failures here. We were sitting in the room, we were allowing this. We 

saw long-term capital collapse, we saw the instability.’’ I think 

Chairman Greenspan actually forced the banks to come in and buy 

the bad assets just because he could and because of trying to save 

26 

a system. Have you all sat around and kind of had that discussion 

internally as a team, that we need to do better? 

Mrs. YELLEN. That is a set of discussions we have had over many 

years and lessons-learned exercises about how did this happen and 

what do we need to do differently so that it doesn’t happen again. 

And I have tried to describe in some detail in the testimony how 

we have changed the process of supervision, as well as more broadly our monitoring of financial stability risks in the system outside, 

just the portion that we regulate, in order to avoid the problems 

that occurred. 

Mr. PEARCE. Right. And if I could then follow that with you are 

saying the things in the system that provide a risk. So I understand that—I am kind of getting mixed signals whether or not you 

have released the standards on which you evaluate firms, so I am 

not quite sure. 

But my question is, do you really look at the systems themselves? Your comments say that, ‘‘We aim to regulate and supervise 

financial firms in a manner that promotes the stability of the financial system as a whole.’’ And it is that financial system as a 

whole that I think provides maybe the greatest risk to the largest 

firms, or all of us. 

So are you really discussing that? Are you discussing the fact 

that the BRIC nations are forming the NDB or whatever they are 

forming, that other nations are trying to figure out how to avoid 

the U.S. currency because of our actions internally? Are you having 

that discussion? 

Mrs. YELLEN. We are bringing together a diverse group of people 

to consider what the significant threats are that could affect not 

only individual firms, but a set of firms that are large and interconnected. 

Mr. PEARCE. With respect, I don’t— 

Mrs. YELLEN. It could involve foreign threats. For example, when 

there were stresses pertaining to the euro area, a focus would have 

been how could those— 

Mr. PEARCE. Could you share with me then the parts of the discussion that deal with China selling down its debt? With them selling their treasuries, they have decreased the percentage from 74 to 

54 percent, which to me indicates a very strong reaction against 

our policies and against our dollar. And it is maybe the biggest 

threat. Forget the internal stresses of corporations. Think about 

the fact that the ground we are standing on literally is going to get 

insolvent and very quickly. 

So can you share with me the concerns that have been expressed 

internally about China selling its treasuries? 

Mrs. YELLEN. China has been selling Treasuries because its currency has been under downward pressure. And in the market, 

there is a demand— 

Mr. PEARCE. I understand that. And I only have a little bit of 

time. I don’t mean to interrupt. 

So then, let’s step aside from that if that says there is no concern 

there. Look at the fact that we are putting out $1.1 trillion of debt 

and you have $300 billion being purchased, and so that leaves a 

gap of $800 billion. Forget the Chinese, forget everybody else. You, 

the Fed, are going to have to fill the gap with printed money for 

27 

the $800 billion. $800 billion out of &1.1 trillion, you all should be 

saying, this is really outside the scope of what the stress tests are 

showing us on the banks. So tell me a little bit about that conversation. 

Mrs. YELLEN. Congressman, we have no intention, given the economic outlook, of expanding. We are maintaining our holdings of 

securities that we acquired during the period that we use— 

Mr. PEARCE. Let me just wrap up. 

Mrs. YELLEN. —but we have no— 

Mr. PEARCE. I only have 17— 

Mrs. YELLEN. —intention of adding to those holdings. 

Mr. PEARCE. This morning in Barron’s, they compared the situation to Zimbabwe. This morning in Barron’s, they said that the 

Federal Reserve is making itself the lender of last resort. These are 

huge warning signs to us, and we are sitting here talking about 

some relatively small stress tests inside different banks. 

I appreciate the work you are doing, but I really think we ought 

to be looking at it a bit deeper. 

Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mrs. Yellen, let me ask you first about Basel capital. How is it 

that the Basel capital requirements do not recognize the exposureoffsetting nature of segregated customer margins that are posted 

from a derivatives client? And then that goes to a bank. And at the 

bank, they then guarantee the client’s transaction with the clearinghouse. And this is particularly when just 5 years ago we here 

in Congress through the Dodd-Frank Act actually encouraged more 

derivatives clearing as a means of reducing clients’ counterparty 

risk. 

So my question is, what sort of message are we sending these clients who post margin to offset this guarantee by not recognizing 

it as such? 

Mrs. YELLEN. Congressman, I am not sure that I can respond 

properly to your question. I may need to get back to you on that. 

We certainly have required higher margin requirements, both initial and variation, on noncleared derivatives. Is your question 

about capital requirements on the assets that are being held? Is 

that— 

Mr. SCOTT. Yes. And I think it is sending a conflicting message 

to the public, particularly when we on one hand are encouraging 

more derivatives action for risk management, but yet the Basel 

capital requirements do not recognize the exposure-offsetting nature of the segregated customers’ margins. 

So my point is that we need to send a clearer message to the 

public as to how Basel capital is interreacting with this margin requirement of posting. 

Mrs. YELLEN. The important message we want to send is we 

have taken key steps to make the derivatives markets and transactions safer and less a source of risk. And I promise to get back 

to you with details about how that interacts with Basel. 

28 

Mr. SCOTT. Yes, this is very important, Madam Chair, because, 

as you well know, derivatives and swaps now, as far as using for 

risk management, is now an $822 trillion piece of the world’s economy, and we need to take a little bit better care of making sure 

we send out nonconflicting information. 

I want to go back to another question about the designated company. And as a member of FSOC, you are responsible for determining when a designated company no longer presents a risk to 

our financial system. So it would be important if you could tell us 

in a nutshell exactly when does a designated company no longer 

present a risk to the financial system and therefor should be dedesignated? 

And in your opinion, is it not important for FSOC to communicate clearly and publicly with designated companies as to what 

are those specific risks that they present so that we can have 

transparency in the process so that designated companies and the 

public will know exactly what a designated company is and what 

those issues are? 

Mrs. YELLEN. FSOC explains very clearly to the company and to 

the public what the basis was for designation. So it is no mystery 

at all to the companies what aspects of their business model caused 

them to be designated. The firms have that information. 

Every year, FSOC reconsiders whether or not designation is appropriate, and looks at the changes that have occurred in the business of those designated firms since it last reviewed them. If there 

are significant changes, then a firm can be de-designated. Now— 

Mr. SCOTT. I want to get to this last bit of a question, because 

I want to know, if we here in Congress made a move to improve 

the transparency and due process designated companies received in 

the de-designation process, what would you recommend we do? 

Mrs. YELLEN. I don’t really think it is necessary to do anything, 

because these companies have every opportunity to provide information to FSOC, to tell us that their business model has changed, 

to ask the Council to consider de-designation. You probably know, 

for example, that GE Capital has significantly changed its business 

model. It has decided that it is in their interest to do that. They 

have not come to FSOC yet, to the best of my knowledge, to ask 

to be de-designated, but a company like GE Capital, of course, 

could present information to FSOC and when they ask, there would 

be an active discussion of whether that is appropriate. 

Mr. SCOTT. Thank you, Chair Yellen. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Virginia, Mr. 

Hurt. 

Mr. HURT. Thank you, Mr. Chairman. I want to thank Chair 

Yellen for appearing before us today, and I want to thank the 

chairman for holding this important hearing. 

Madam Chair, we have discussed before sort of the dynamic. In 

my rural congressional district, the rural Fifth District of Virginia, 

where access to capital is absolutely critical for job growth across 

all those Main Streets, across all that farmland that I represent, 

it is important to our small businesses, it is important to our farmers, and it is important to families. And I think that those of us 

29 

who live in rural areas depend disproportionately on community 

banks. 

I appreciate your testimony up front talking about the efforts 

that you have made to try to tailor the rulemaking, tailor the regulation and supervision to try to accommodate the difference in size 

and complexity of these institutions. But I think you—I hope you 

would agree that despite these efforts, community banks have been 

disproportionately affected. 

UVA Law School Professor Dean Mahoney, who testified before 

our committee previously, testified that Dodd-Frank in significant 

part is designed to enhance the regulatory reach of bank regulators. Inevitably, that will mean increasing the size, market share, 

and political clout of the largest banks. 

I think if you looked at the trend over the last 3 decades, you 

see that it has been brutal for community banks. Just in the 5 

years since Dodd-Frank has been enacted, we have seen a drop in 

the number of community banks, from 7,700 to 6,300, a whopping 

20-percent loss. The rate of consolidation has doubled. 

This regulatory regime and the supervision has clearly impacted 

our smallest institutions. I hear from institutions across our district who say, you now, all I have time to do is do paperwork. I 

don’t have any time to serve my customers or to go out and look 

for new business. In one instance, I have recently talked to a bank 

president who said, I realized I had a problem when we were up 

for an examination and we had more examiners, bank examiners, 

in our boardroom than we had bank employees.’’ Those are the 

kind of stories that we hear as we travel across the district. 

So I guess my first question really deals with why you are here. 

We know that the Dodd-Frank Act included one provision that 

would create a Vice Chair for Supervision. And I guess my question 

is—or let me just tell you what Paul Volcker said—you know what 

he said—after it was included. He said, ‘‘This new post might turn 

out to be one of the most important things in there. It focuses the 

responsibility on one person.’’ And we know this is a Senate-confirmed position. 

So I guess my first question is, would you agree that effective 

and balanced supervision is an important part of the role of the 

Federal Reserve? 

Mrs. YELLEN. Absolutely. It is one of our most important responsibilities. And I spend a great deal of time on it, take it very seriously. There is— 

Mr. HURT. I guess my next question would be, then, if there was, 

in fact, a Senate-confirmed person in that spot, how would that affect your ability to focus on what your other responsibilities are in 

the larger picture? Wouldn’t it be good—in fact, as former Fed 

Chair Volcker said, wouldn’t it be good to have that position filled? 

Mrs. YELLEN. Congress created that position, and I would welcome having it filled. 

I have to say that we now have a division of labor among the 

Governors on the Board. We operate through a committee system. 

We do have a committee— 

Mr. HURT. But the Senate-confirmed position remains after 5 

years unfilled. 

30 

Mrs. YELLEN. Yes. Governor Tarullo heads our Bank Supervision— 

Mr. HURT. But he has not been confirmed for that position by the 

Senate. 

Mrs. YELLEN. That is correct. But I would say that he has done 

an outstanding job of leading our work in this area. And all of us 

do need, including me, to be involved with that work. 

Mr. HURT. Do you believe that the fact that this important role 

and Congress’ important role in the appointment of that, does that 

reflect, do you think, the President’s view of whether having a balanced and effective supervision, having somebody, as Chairman 

Volcker said, who is dedicated to this, striking this balance, does 

that reflect the President’s priorities? 

Mrs. YELLEN. You would really have to ask the White House why 

they have not yet— 

Mr. HURT. Considering that this is the law, Dodd-Frank is the 

law of the land at this point, at this time, is it appropriate for you, 

as Chair of the Fed, to press the President to fill this position? Is 

it appropriate for you to do that? 

Mrs. YELLEN. As I said, I think that we are carrying out our supervisory work in a very thorough and thoughtful fashion but 

would welcome a nomination to the position. 

Mr. HURT. Great. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

ranking member of our Oversight and Investigations Subcommittee. 

Mr. GREEN. Thank you, Mr. Chairman. 

And thank you, Madam Chair, for your appearance today. 

Madam Chair, Dr. King, MLK, reminded us that life is an inescapable network of mutuality tied to a single garment of destiny; 

whatever impacts one directly impacts all indirectly. We found this 

to be eminently true with Lehman and Bear Stearns. The failure 

of these mega-institutions had a direct impact on us, but indirectly 

they impacted the global economy, which is integrated to an extent 

that many of us can’t even imagine. 

I mention this to you, Madam Chair, because it is not just a failure of a bank in the United States that we have to concern ourselves with but the failure of one of these mega-banks in a foreign 

country because of the indirect impact that it can have on the 

United States and other banking institutions around the world. 

I see some value in this living will for these mega-institutions 

and the lesser institutions, as well, simply because, when we had 

the failure in 2008, we had a crisis such that banks were reluctant 

to lend to each other. And when banks won’t lend to each other, 

you don’t have a lot of options left. 

I mention all of this to you because I am getting to the $50 billion threshold. You have indicated a willingness to see that threshold lifted, but I believe you have also indicated that you would still 

prefer to have the opportunity, if necessary, to revisit those that 

are below the $50 billion threshold so as to ascertain whether or 

not they may become SIFIs by virtue of their activities. 

31 

So you have mentioned lifting it. I am not going to ask you to 

tell me at what point you would go to, in terms of lifting. But are 

you saying to us that you still prefer a trigger of some dollar 

amount? Currently, we have the $50 billion trigger. If you lift it, 

do you still want a trigger in there of a dollar amount, or are you 

amenable to going to a means by which only the activities will determine the SIFI designation? 

Mrs. YELLEN. I certainly remain amenable to having a dollar 

threshold. And to the extent that I have discussed the possibility 

of raising the threshold, I would really only support a very modest 

increase in the threshold. 

Once we get to a slightly higher threshold, we are dealing with 

institutions, even when we are looking at the large regional banking organizations, that are very important suppliers of credit to the 

country. Collectively, even the regional organizations have probably 

a trillion dollars or more of lending throughout the country. And 

while, conceivably, the failure of one of these organizations would 

not bring about the downfall of the financial system, it could impact a significant portion of the country and the borrowers who depend on these institutions for access to credit. 

So I think a threshold is appropriate, especially in which banks 

over that threshold are designated for more intense supervision, especially if we have the ability to tailor our supervision. 

And the only reason that I have said I would be supportive of 

some modest increase in the threshold is because Dodd-Frank does 

impose some requirements on the smaller institutions in the area 

of stress-testing and resolution plans where we have limited, insufficient flexibility to remove those requirements, and we really think 

the costs exceed the benefits. 

Mr. GREEN. Thank you. 

Moving quickly to the interest rates, you have a global economy 

that is weak and, by some standards, continuing to weaken. How 

much emphasis do you have to place on the global economy when 

setting the interest rates within our economy, given what I said 

about the inescapable network of mutuality? 

Mrs. YELLEN. We are mutual and interconnected. We take global 

performance into account. And, at the moment, what we see is a 

domestic economy that is pretty strong and growing at a solid pace, 

offset by some weakening spilling over to us from the global economy. 

On balance, as we have said, we still see risks to economic 

growth and the labor market as balanced, but the global economy 

has been a drag. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers. 

Mr. STIVERS. Thank you, Mr. Chairman. 

Chair Yellen, thank you for being here today. 

The gentleman to my left, Mr. Hurt from Virginia, already talked 

about the fact that the reason for this hearing is statutorily mandated around your supervisory roles. Normally, it would be the 

Vice Chair of Supervision here, who is supposed to be Presidentially-appointed, and Senate-confirmed. That position is still 

only filled by an acting person. 

32 

Governor Tarullo is acting in that capacity. When was he appointed by you into that acting position? 

Mrs. YELLEN. I guess I wouldn’t call it an acting position. We 

have a committee system in which up to three Governors oversee 

particular functions that we carry out. Supervision is one of those 

functions. There are other areas—oversight of reserve banks and so 

forth. 

This is a longstanding practice. And the Chair of the Committee 

on Banking Supervision, who is Governor Tarullo— 

Mr. STIVERS. So— 

Mrs. YELLEN. —that individual has long been the person. 

Mr. STIVERS. —how long has he been doing that? 

Mrs. YELLEN. He has been doing that— 

Mr. STIVERS. Three years? 

Mrs. YELLEN. —I think he did that under Chairman Bernanke— 

Mr. STIVERS. Okay. 

Mrs. YELLEN. —since he joined the Fed. I think that was 2009, 

if I am not mistaken. 

Mr. STIVERS. Okay. So 5 years. 

And so, not having him here, even though he is acting in that 

role, reduces the accountability. It reduces the interaction that the 

person in that supervisory role should have. 

So my question for you is, will you commit to allowing him to accompany you to these hearings in the future, these semiannual 

hearings? 

Mrs. YELLEN. Governor Tarullo has testified on many occasions 

to our oversight committees and usually stands ready to do so. I 

certainly have no concerns about having him come up and answer 

questions. And I am— 

Mr. STIVERS. I hope you will bring him— 

Mrs. YELLEN. —happy to do so, as well. 

Mr. STIVERS. —with you next time because he is the one making 

a lot of the decisions. I know you are his boss and you are engaged, 

but we really need him here, because these are important. 

The next area I would like to quickly talk about is the impact 

of regulation. 

So, as you know, we don’t live in a static world; we live in a dynamic world. And every time we take an action, there are responses to that action. And regulation has increased the compliance costs for many financial institutions, created barriers to entry. 

And, actually, the result has been a consolidation of assets in the 

too-big-to-fail banks. It has almost been the opposite of what we, 

as policymakers, would have liked to have seen. 

And, on the Volcker Rule, the result has been a reduction in the 

number of market makers, which is a market utility function that 

provides important liquidity during a crisis. 

And I guess I would just ask you, are you trying to look at these 

unintended consequences? Because in both of these cases, we are 

actually creating problems through unintended consequences. 

Mrs. YELLEN. We certainly are looking at consequences. And, in 

particular, in the case of market liquidity that you mentioned, that 

is something we are looking into very carefully. We— 

Mr. STIVERS. And I have asked the OFR to do a report. I hope 

you guys will do a report on it. 

33 

I think there are a lot of driving forces to it. There is basic business simplification; there is the Volcker Rule; there is the coming 

DOL standard. There are a lot of things driving it. 

But I would like you to do an important analysis of it, because 

liquidity is so important to anybody, whether they are a small 

401(k) person or a large corporate entity, because we all enter and 

exit through the capital markets. If there is no liquidity, the marketplace doesn’t work. 

Mrs. YELLEN. I completely agree. 

Mr. STIVERS. Okay. 

Mrs. YELLEN. And that is why we are looking at it. We— 

Mr. STIVERS. And quick— 

Mrs. YELLEN. —issued a report on October 15th— 

Mr. STIVERS. Yes. 

Mrs. YELLEN. —episode— 

Mr. STIVERS. And I have one more thing— 

Mrs. YELLEN. —and individual reports on— 

Mr. STIVERS. —I want to get to, so— 

Mrs. YELLEN. —corporate bond markets— 

Mr. STIVERS. —please keep looking at it. And I hope you will look 

at the Volcker Rule as potentially—another way to look at Volcker 

is separately capitalize those activities. It takes away the whole argument and doesn’t make it as complicated. 

Yesterday, your IG issued a report that showed, with regard to 

stress tests, there were six problems that were found in the Fed’s 

own stress test, and, if it had been a member bank, they would 

have required immediate attention. 

I have only seen media records on this. I look forward to reading 

the report on it. But, in light of these highly critical things in the 

report, do you plan to undertake any changes that would create 

more transparency and accountability in the stress-testing and 

CCAR process with regard to the Fed? 

Mrs. YELLEN. As I understand it, the IG’s findings had to do with 

our model validation procedures. And those are matters that we 

certainly will look into and attempt to strengthen. 

Mr. STIVERS. And I think we should probably request a more 

complete review by the IG on all of that. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, ranking member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

And thank you, Chair Yellen. 

Chair Yellen, I think it has been a little over a year ago since 

Congress gave you the authority to tailor standards for insurance 

companies, those who would qualify for enhanced supervision. 

There is, as you know, a great deal of angst, there is maybe even 

panic on the part of many of the insurance companies over the fact 

that they don’t know what is going on and fear of what may come. 

To the degree that you can speak about this publicly, I would 

present you with that opportunity, because it would also help us— 

34 

or help me, as I am asked questions over and over and over again 

from that industry. 

Mrs. YELLEN. We know that this is a very important matter. We 

understand that insurance companies are different from banks in 

important ways. In particular, the nature of their liabilities is, in 

many cases, quite different from that of banking organizations. 

We appreciate the flexibility that we were given to tailor appropriate rules, and we are working very hard to get it right, to understand the nature of the business, to consult with the firms, with 

the State insurance commissioners, with our colleagues in the Federal Insurance Office. We are consulting widely and thinking very 

carefully about what the appropriate regime is. 

When we have made a set of initial decisions, we will go out with 

a notice of proposed rulemaking, likely, and ask for comments. And 

so we will go through an open and transparent process in deciding 

on what the appropriate supervision is and allow for comments 

that we will carefully respond to. 

Mr. CLEAVER. I don’t want to ask you to give me a date certain, 

but is the process moving along? 

Mrs. YELLEN. Yes. People are working very hard. And I am sorry, 

I can’t give you a date certain, but this is something that our staff 

is working on very hard. It is a high priority. 

Mr. CLEAVER. Kind of similarly, the Fed is a member of the 

International Association of Insurance Supervisors (IAIS). 

We have to do something about that with the Federal Government, especially this committee, Mr. Chairman. We need to do 

something. 

But your mission is to promote effective, global, consistent supervision of the insurance industry. 

And we are, I think, at a point now where—and maybe it is because of the 2008 collapse—everybody is nervous about everything, 

and everybody is afraid that there is a new regulation that is going 

to come in to cause the world to collapse and allow the Mets to win 

the World Series. 

But there is no need for this hysteria, is there? 

Mrs. YELLEN. There is no need for hysteria at all. We are, as I 

said, looking very carefully at our own firms to design an appropriate regime. 

And, by participating in the IAIS, we are trying to make sure 

that we weigh in on how other countries set up their own regimes 

in a manner that will be good for U.S. firms and the U.S. market. 

It is an attempt to influence what other countries do and, thereby, 

to ensure a level playing field that is in our best interest. 

Mr. CLEAVER. Their angst is based on the fact that they believe 

we might end up accepting standards from the international community that might create problems for them here at home. 

Mrs. YELLEN. Nothing that is adopted internationally has any 

binding force in the United States. We go through our own rulemaking process and decisionmaking. It is our internal decision. 

Now, of course, given our thoughts on what is appropriate, we 

are using that and collaborating, doing this collaboratively with 

other U.S. insurance regulators. We are presenting positions in 

Basel attempting to influence the international decisions. But we 

decide here what is the appropriate regime. 

35 

Mr. CLEAVER. Thank you, Madam Chair. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

Chair Yellen, thank you so much for being here. 

I have been closely following the work of the Fed and other regulators during the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) process. In fact, I sent a letter to you just 

a couple of weeks ago when a public outreach meeting was held at 

the Chicago Fed. I am very supportive of the EGRPRA process, and 

I imagine you are hearing many of the same concerns that I am 

hearing from banks in my district. 

In addition to the report that is mandated to be provided to Congress, what tangible regulatory relief can we expect as a result 

from this process? 

Mrs. YELLEN. We are listening very carefully to the concerns that 

are raised in the hearings and in the course of taking comments 

in this process. And I am very hopeful that there will be things 

that we can address and look to change that will reduce regulatory 

burden. 

An example of the kind of thing we are hearing, for example, has 

to do with appraisal requirements, that many community banks 

think the cutoffs are too low and make lending difficult, particularly in rural areas. I am sure that is something we will take a look 

at. 

Mr. HULTGREN. Can I— 

Mrs. YELLEN. Reporting and so forth. 

Mr. HULTGREN. Can I jump in on that? Your written testimony 

notes the banking regulators have taken steps to reform the CAR 

report. As you are probably aware, it has grown from 18 pages 

back in 1986 to 29 pages in 2003 to nearly 80 pages today. 

I wondered, would you support legislation requiring the banking 

agencies to issue regulations allowing for a reduced reporting requirement for the first and third quarter, assuming they are highly 

rated, specifically if they have a CAMELS composite rating of 1 or 

2? 

Mrs. YELLEN. I believe that this is a matter that the FFIEC is 

studying carefully. And I think there is a mutual desire among the 

supervisors to reduce burden on smaller institutions. I would suggest that you let that process play out, and we are all trying to do 

what we can to reduce burden. 

Mr. HULTGREN. Good. We appreciate that. And we continue to 

hear, especially from our small and medium-sized institutions, of 

feeling the weight of this and growing burden. 

As you know, the supplementary leverage ratio requires a banking organization to hold a minimum amount of capital against onbalance-sheet assets and off-balance-sheet exposures regardless of 

the riskiness of the individual exposures. These capital requirements yield an economic cost to financial institutions and are a 

major driver of what assets they are able to hold. 

Why is the supplementary leverage ratio applicable to funds 

banks deposit at the Federal Reserve despite the low risk of these 

funds? 

36 

Mrs. YELLEN. The supplementary leverage ratio is meant as a 

kind of backup ratio that works as a backup to risk-based capital 

standards to make sure that the minimum amounts of capital held 

by banks are sufficient. And it is a requirement that is based on 

the size of the entire balance sheet of the organization, including 

low-risk assets, such as accounts held at the Federal Reserve. It is 

reflective of the overall scale and size of a firm’s balance sheet. 

For many organizations, that supplementary leverage ratio is unlikely to be the binding ratio. Particularly for the larger organizations that face SIFI surcharges, the risk-based capital requirements are likely to be what is binding going forward. 

Mr. HULTGREN. Chair Yellen, do you share the concern that the 

minimum interest rate paid by the Fed on these deposits is far 

below the yield some banks would need to generate in order to offset the economic cost of the capital requirements and the supplementary leverage ratio? 

And, along with that, with just less than a minute left, I wonder 

what advice you would give to banks which, as a core function of 

their business model, hold large cash deposits for their institutional 

customer base? And, also, what advice would you give to their customers? 

Mrs. YELLEN. I am not positive I really understood the question. 

You were asking about the level of interest that we pay on reserve 

balances? 

Mr. HULTGREN. Right. That was the first part of it, and then I 

was trying to sneak in the last question of advice, again, where 

banks have a core function of holding large cash deposits for their 

institutional customer base, and yet, because there is a cost with 

that and it impacts, again, the ratios that they need to hold, we 

are hearing concern from some important institutions, Northern 

Trust, and others, that are feeling pressure from this. 

Mrs. YELLEN. I would say with respect to interest we pay on reserves, that is our key monetary policy tool. And we set that not 

to cover particular costs of banks but to establish a level of interest 

rates that is appropriate for the economy. 

Mr. HULTGREN. My time has expired. 

Mrs. YELLEN. Sorry. 

Mr. HULTGREN. I yield back. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, ranking member of our Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Madam Chair, thank you so much for appearing. It 

is always good to see you. 

I was wondering—and I hope that you haven’t been asked this 

question over and over and over again, but I am curious about how 

going through another round of living wills has informed you and 

other regulators on implementing the orderly liquidation facility 

and the cross-border liquidation of large systemic banks and, of 

course, non-bank SIFIs. 

Mrs. YELLEN. We have learned a lot from looking at and evaluating the living wills of the firms that we have reviewed. We have 

recognized that cross-border issues are among the most challenging. 

37 

We have made progress in working with those firms to encourage 

them or even require them to adopt changes in a set of financial 

contracts that would, under the existing rules, make it difficult to 

resolve a firm by triggering early-termination rights to derivatives 

contracts. So one of the things that we asked the firms to do in 

their most recent submissions is to work on that and to change the 

nature of those contracts. 

But, more generally, over several years of reviewing living wills, 

we have been able to give very detailed guidance to the firms about 

what the shortcomings of those living wills are and what we wanted to see in the submissions this year. 

We are working closely with the FDIC to evaluate this latest 

round of submissions. We are prepared to ask the firms for significant changes or, if need be, to determine that a living will is not 

credible. 

Ms. MOORE. Thank you for that, Madam Chair. 

Just as kind of a followup, there have been a lot of critics of the 

stress tests. And I was wondering, how has this criticism informed 

your regulation, and has it contributed to a better focus in your 

oversight? 

Mrs. YELLEN. It has been 5 years now that we have conducted 

the stress tests. We have learned things in every round and worked 

with the institutions to try to improve what we do and their understanding and the public understanding of these stress tests. 

I really want to say that this is one of the most significant innovations in how we conduct supervision. It is a truly forward-looking 

and comprehensive evaluation of how firms would fare under very 

stressful conditions of the type that we experienced in 2008 and 

2009. 

The firms themselves, I think, if you were to talk to their executives, they would tell you that they have learned a lot about the 

risks in their organizations and how to manage those risks because 

they have been required to engage in such rigorous analysis. And 

we see some marked improvement in the capital planning processes that are going on in these firms. They are asking themselves 

hard questions about what capital do they need to make sure they 

are sufficiently resilient. 

So this is a very important exercise. It is a core, key part of our 

supervision of the largest firms. And we are reviewing our experience to see if there are some changes we can make to make this 

more effective and, where possible, to reduce burden, but this is a 

major innovation that I believe has resulted in much sounder supervision, especially of systemic firms. 

Ms. MOORE. Thank you so much. 

And, Mr. Chairman, I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Thank you, Mr. Chairman. 

And thank you, Madam Chair, for being here this morning. 

Madam Chair, I am going to go a different route. I don’t think 

anybody has asked you about this today. Will the Federal Open 

Market Committee ever rule out going to negative interest rates? 

Mrs. YELLEN. Rule out is something we tend not to do. 

38 

I don’t, at the moment, see a need for negative interest rates. 

The Committee is seeing a domestic economy that has been proceeding on a steady path of improvement. Our focus has been on 

the possibility that it will be appropriate to begin— 

Mr. EMMER. To raise. 

Mrs. YELLEN. —to raise interest rates. This is something we are 

actively considering, although no decisions have been made. 

Of course if circumstances were to change, and the economic outlook were to deteriorate in a significant way so that we thought we 

needed to provide more support to the economy, then potentially 

anything, including negative interest rates, would be on the table. 

But I don’t expect that to happen. 

Mr. EMMER. Thank you. 

Mrs. YELLEN. I should say that we would have to study carefully 

how negative interest rates would work here in the U.S. context. 

Mr. EMMER. And let me ask you, because we have seen it in 

other countries when they have— 

Mrs. YELLEN. That is what is new, yes. 

Mr. EMMER. Yes. When they have had economic difficulties— 

Mrs. YELLEN. Yes. 

Mr. EMMER. —we have seen other countries use negative interest 

rates or go to negative interest rates. 

Mrs. YELLEN. Right. 

Mr. EMMER. What impact, Madam Chair, would negative interest 

rates have on lending and economic activity? What impact do you 

believe it would have? 

Mrs. YELLEN. Most loans would not have negative interest rates. 

Even if a central bank pays negative interest rates the bank deposits with the Fed. 

Mr. EMMER. I understand, but what impact would it have on 

lending? 

Mrs. YELLEN. It would be intended to spur lending and, I believe, 

would have some at least modest favorable effect on banks’ incentives to lend. And it would be undertaken as a measure to support 

the economy, to encourage additional lending, and to move down 

the yields on interest-bearing assets to stimulate risk-taking and 

investment spending. 

Mr. EMMER. I want to change just a little bit. I would like to talk 

about this proposal, if you could clarify it for me, the TLAC proposal that was discussed last week. Was that finalized last week? 

Mrs. YELLEN. No. It is a notice of proposed rulemaking. It is out 

for comment. 

Mr. EMMER. Because it has been around for a while. You have 

been discussing it for a while. 

Mrs. YELLEN. Members of the Fed, Governor Tarullo and others, 

have given speeches on this. It is something that is being discussed 

internationally in the FSB. In fact, the United States has been contemplating this. We are working jointly with the FDIC. It is an important step in ensuring that the FDIC’s single-point-of-entry strategy would be workable in a Title II resolution or in a bankruptcy 

resolution. 

We see it as very important. It has been under discussion for 

quite a long time— 

39 

Mr. EMMER. If I can interrupt you, because in the short time left, 

I have some specific things I would like to ask you about this TLAC 

proposal. 

In fact, some of the analysis that I have been provided regarding 

the draft proposal suggests that it penalizes firms for what is 

broadly understood to be a desirable business model: gathering deposits and making loans. In fact, some have even suggested the effect of the new rule could be interpreted as a tax on deposit funding. 

Would the Federal Reserve benefit? And have you done—because 

I know this question has been asked before—from a quantitative 

impact study being conducted by the FSB prior to implementing 

the new TLAC proposal? 

Mrs. YELLEN. So I think that is, frankly, a mischaracterization 

of this proposal. The purpose of this proposal is to ensure that if 

a firm becomes insolvent that there is sufficient— 

Mr. EMMER. Would you benefit—forgive me. I have 20 seconds 

left. Would you benefit from a quantitative impact study being 

done prior to implementation? 

Mrs. YELLEN. We have carefully analyzed this proposal for cost 

and benefit. 

Mr. EMMER. Have you done a quantitative impact study? 

Mrs. YELLEN. We have done the quantitative analysis, and— 

Mr. EMMER. Would you share that with us? 

Mrs. YELLEN. There is information contained in the proposal that 

we published. 

Mr. EMMER. All right. The analysts say—well, it looks like my 

time has expired. 

Mrs. YELLEN. The point is the deposits are not a liability that is 

capable of absorbing losses when a firm is in trouble. We have seen 

that in financial crises. And the point of this— 

Mr. EMMER. Thank you. My time has expired. 

Mrs. YELLEN. —is to make sure there are enough assets at risk. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney. 

Mr. CARNEY. Thank you, Mr. Chairman. 

Over here, Chair Yellen. And thank you for coming in today for 

a hearing that you wouldn’t normally do. And thank you for filling 

in for that vacant position and for listening and responding to all 

of our questions. 

There has been a lot of debate here on both sides of the aisle in 

the committee over the last several days about regulatory relief, 

mainly for midsized banks and smaller community banks. You addressed it a little bit in the answer to some of your questions from 

my colleagues. And I would like to ask some questions about that. 

Mr. Hurt talked about these banks, particularly the community 

banks, as being the lifeblood of our local communities in most of 

our districts across the country, particularly rural districts. Not so 

much my State, the State of Delaware. We have fairly sophisticated 

financial services institutions, some of the biggest, and we are not 

talking about regulatory relief for those firms. 

But there has been a lot of debate about what is the best way 

to do it. And one side of the argument is, well, the FSOC and the 

40 

regulators have the flexibility under Dodd-Frank to tailor these enhanced prudential regulations for the size of the bank. 

I have a list of the bank holding companies that are $10 billion 

and above, and so subject to that CCAR process, which is the Comprehensive Capital Analysis and Review process that we have been 

talking about. This is what we hear from our banks, in terms of 

the expense that is involved in all of that. 

Governor Tarullo said the $50 billion cutoff—these are $10 billion and above—$50 billion and above is a SIFI designation, and 

you have even additional regulations that you are subject to if you 

are at $50 billion or above. Mr. Tarullo has said publicly that that 

number is way too low. I talked to him directly in my office, and 

he said something very far north of $100 billion. 

We considered a bill today in committee—I did not vote for it— 

that would have used a different approach, wouldn’t have a size 

cutoff but would apply an activities-based approach. What is your 

view of that? Is there a better way to do it? 

And part of that question is, do you have the authority? I heard 

you say earlier that you do not have the authority to appropriately 

tailor the CCAR process for some of these smaller and community 

banks. 

Mrs. YELLEN. So, by and large, we have considerable ability to 

tailor what we do to fit the complexity and systemic footprint of an 

institution. 

Mr. CARNEY. What did you mean when you said, we don’t have 

the ability to tailor for smaller banks as necessary? I don’t know 

if that is a direct quote, but I tried to write down the words that 

you said. 

Mrs. YELLEN. So banks $50 billion and above are, under DoddFrank, subject to stress-testing requirements and resolution plan 

requirements that, while we can tailor to some extent, we can’t 

completely remove. And what we found is that, for some of the 

smaller institutions, we think— 

Mr. CARNEY. My time is running out. So I— 

Mrs. YELLEN. —the costs exceed the benefits. And that is why— 

Mr. CARNEY. —would certainly be interested in having a conversation about what is a better way to do that and to give you the 

flexibility and authority to enable you to provide the appropriate 

tailoring that is necessary. 

If you look at this list of banks, JPMorgan Chase, which is a $2.5 

billion-— 

Mrs. YELLEN. Trillion. 

Mr. CARNEY. —trillion-dollar bank—excuse me—is a lot different 

than the Bank of Hawaii and some of these other—Nordstrom, Inc., 

which I didn’t even know was a bank. And I suspect that some of 

those that are much smaller than the top five or six don’t have any 

systemic risk associated with them and shouldn’t be, then, subject 

to some of these more expensive—they could do what they do, 

right, is lend money so that people can build businesses and buy 

homes and the like. 

Mrs. YELLEN. We have eight banks that have been designated as 

U.S. GSIBs. And those eight banks are subject to a heightened set 

of requirements with risk-based capital surcharges, an enhanced leVerDate Nov 24 2008 14:06 Dec 01, 2016 Jkt 099778 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\99778.TXT TERI
41 

verage ratio, and TLAC requirements that the banks below that, 

those eight, are not subject to. So, even among the largest banks— 

Mr. CARNEY. Right. 

Mrs. YELLEN. —we have been able to tailor our rules. 

Mr. CARNEY. I would be interested in hearing more about how 

we would tailor for some of the smaller banks. 

My time has run out. Thank you very much for being here. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Indiana, Mr. 

Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for joining us today. 

I would like to talk a little bit about a comment that you make 

in your written testimony regarding the lessons of the financial crisis that we have learned. You state, ‘‘... to supervise financial firms 

in a manner that promotes the stability of the financial system as 

a whole and limit the systemic damage that would result if a large 

financial institution does fail.’’ 

Obviously, we always want to learn lessons from different situations that we have experienced. Prior to the collapse in 2008, the 

Fed was focused on financial stability, but we still see about once 

per generation some support of collapse. How do you believe that 

what the Fed is doing now prevents us from another experience 

like we had in 2008? 

Mrs. YELLEN. As I tried to describe in my testimony, I think the 

focus of supervision has changed and is now far more focused on 

financial stability than it ever was prior to the crisis. 

We are trying to diminish the risks of another financial crisis in 

a number of ways. Most important, I would say, is to improve the 

resilience of all of those systemically important firms so that they 

have much a greater ability to survive adverse conditions and continue to meet the credit needs of the economy. 

We have much more and higher-quality capital, higher liquidity 

requirements. Our stress-testing procedures, which I have discussed earlier this morning, are providing a much more robust way 

of attempting to detect weaknesses in these organizations. 

Mr. STUTZMAN. Okay. Thank you. 

Mrs. YELLEN. So we are doing that. 

And, also, we are working very hard to address ‘‘too-big-to- fail’’ 

by making sure that if one of these firms was faced with insolvency, we could resolve that firm in a manner that would not create systemic risk, would guard the remainder of the financial system from systemic risk. 

Mr. STUTZMAN. Thank you. 

So can I ask you, what portion of your time each week is typically spent on regulatory matters relative to monetary policy? 

Mrs. YELLEN. A good share of my time is spent on regulatory 

matters. I am not sure I can tell you exactly, and it certainly varies 

from week to week, but a substantial share of my time is devoted 

to regulatory matters. 

Mr. STUTZMAN. Do you have any concern that if the focus is on 

regulatory matters that it becomes a politicized regulatory—the 

42 

focus becomes more political, at some point, when you are focused 

on the regulatory side rather than the monetary side? 

Mrs. YELLEN. I have never seen the focus in regulation to be politicized at all. 

Mr. STUTZMAN. All right. 

As far as the frequency of financial crises, would you say that 

any of them were successful as far as the regulations that were in 

place that kept us from some other greater collapse? 

Mrs. YELLEN. And you are talking about earlier crises? 

Mr. STUTZMAN. Correct. Prior to 2008, the Fed was focused on— 

Mrs. YELLEN. We were— 

Mr. STUTZMAN. Go ahead. 

Mrs. YELLEN. I think the United States was very fortunate that 

from the Great Depression until 2008 we never suffered a major financial crisis. And I think conditions developed prior to the crisis. 

It was a variety of things that came together that provoked a very, 

very serious crisis. 

Mr. STUTZMAN. Let me ask you this quickly: Why do you expect 

Basel III to be more successful than Basel I or Basel II? 

Mrs. YELLEN. I think that we have improved capital standards 

by raising the quantity and quality of capital we demand particularly of the most systemic organizations. And we have designed, 

kind of, backup leverage requirements that also serve to enhance 

safety and soundness. 

Mr. STUTZMAN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you, Mr. Chairman. 

And thank you, Chair Yellen. 

As you may be aware, there is a shared enthusiasm on the part 

of both the chairman and myself for contingent capital instruments 

as a way of stabilizing the banking system. 

I have a copy of a staff memo describing the actions taken last 

week, the preliminary rule. And it seems to me—I haven’t completely digested this, but it seems to me that you are implementing 

contingent capital requirements for the U.S. subsidiaries of foreignowned IHCs. Is that correct? 

Mrs. YELLEN. What we have put in place or what we are proposing is a long-term debt requirement. I don’t think I would use— 

I am not sure precisely how you define ‘‘contingent capital.’’ 

Mr. FOSTER. It is defined in this memo as eligible internal LTD 

of foreign GSIBs. 

Mrs. YELLEN. Oh, this is for foreign. 

Mr. FOSTER. Foreign. Right. 

Mrs. YELLEN. We do have— 

Mr. FOSTER. But it is my reading of this that the Federal Reserve Board will be operating the trigger for the conversion of 

these. Is that correct? 

Mrs. YELLEN. You are talking about for the foreign banking organizations? 

Mr. FOSTER. For the foreign banks, yes. 

Mrs. YELLEN. We are making sure that the U.S. subsidiaries of 

foreign banking organizations that will be required to set up an inVerDate Nov 24 2008 14:06 Dec 01, 2016 Jkt 099778 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\99778.TXT TERI
43 

termediate holding company have enough, essentially, debt that 

has been issued to them by their parents that it will make it easier 

for— 

Mr. FOSTER. I understand. 

Mrs. YELLEN. —them to be resolved— 

Mr. FOSTER. Right. They accomplish very similar things. But the 

difference— 

Mrs. YELLEN. They do. 

Mr. FOSTER. —that I see between CoCos and just unsecured debt 

is that one triggers an insolvency so that there has to be a determination by the regulator that you are not a growing concern and 

you are going into resolution. Am— 

Mrs. YELLEN. That is correct. 

Mr. FOSTER. —I right? And that is the solution that appears to 

have been chosen for U.S. companies, whereas you appear to have 

allowed or chosen the CoCo mechanism, where the Federal Reserve 

Board would say, you are in violation of your capital requirements, 

you are not insolvent, you are in violation of capital requirements, 

therefore triggering the conversion to equity. 

And so it seems like you have—my question is, do you have in 

place and will the Federal Reserve Board be operating that trigger 

mechanism, in the case of the foreign-owned subsidiaries? 

Mrs. YELLEN. Clearly, in the case of the U.S. subsidiaries, what 

we want is in a Title II resolution with enough loss absorbency for 

the FDIC to be able to recapitalize— 

Mr. FOSTER. What I am fishing for is, why didn’t— 

Mrs. YELLEN. —holding company. 

Mr. FOSTER. Right. I view the European solution, the CoCo 

mechanism, as superior because it warns the banks when they are 

in danger of being—there is a market-based signal that warns the 

banks when they are likely to be in violation of their capital requirements, not that they are likely to become insolvent. Do you 

understand? 

And that I view as a major difference. I think that the political 

nature of that decision will be much easier and less fraught if you 

are talking about triggering the conversion to equity rather than 

just sending the firm into resolution. And so, for that reason, I 

think it is likely to be less politicized, and, moreover, it is much 

more likely to yield a going firm at this end of this. 

And so I was wondering why you had decided, then, to allow for 

foreign subsidiaries the mechanism of CoCos and yet not include 

it in the capital stack of U.S. firms and what the thinking was behind that? 

Mrs. YELLEN. I am not sure if I am going to be able to explain 

this to your satisfaction. But we think, in the case of a foreign firm, 

many foreign regulators, if a firm got in trouble, would want to essentially engage in a single-point-of-entry type of recapitalization. 

And the structure that we have proposed, I think, would make that 

possible. We would end up cooperating with a foreign supervisor 

who was trying to resolve a firm. 

Now, there will be problems— 

Mr. FOSTER. The CoCos don’t trigger when the firm needs resolution, right? As I understand it, the CoCos trigger when the firm 

44 

violates its capital requirements but is not yet insolvent. Is that 

correct? 

Mrs. YELLEN. If a firm were, under our supervision in the United 

States, to violate that requirement, we would demand, I guess, that 

it be refilled so that, if the firm were to be in trouble and we needed to resolve it, it wouldn’t operate in the manner you suggested. 

Mr. FOSTER. All right. So it sounds like you have in place the 

trigger. When I have brought this up before, the response that I 

have gotten was, ‘‘Well, the trigger is really too complicated for us 

to set up,’’ whereas, in fact, it seems like you plan to set up such 

a trigger. 

Anyway, would it be possible to get me a briefing on this whole— 

Mrs. YELLEN. Yes, certainly. We would be glad to do it. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Madam Chair, I know it is a relatively minor issue in the greater 

scheme of things, but since this is an oversight hearing more than 

it is a monetary policy hearing, I want to go back to Congressman 

Duffy from Wisconsin’s line of questioning regarding the 2012 leak, 

generally, your policies on those sorts of things when we are dealing with what we call information security rules. 

Mr. Duffy asked you a question; I don’t know if we are able to 

get to the bottom of it. You said in your cover letter to him of about 

2 weeks ago producing the documents, you wrote the following: ‘‘As 

Chair, I have implemented the practice of immediately referring to 

the Inspector General all suspected material security breaches involving FOMC information.’’ 

I believe that is from your letter. If it is not, please let me know, 

but I think that is a fairly accurate representation. 

And his question was, why—and my question still is—you say 

you have implemented the practice. Why hasn’t that become part 

of the formal policy of the Fed since you have been the Chair? Because a policy is different. A formal policy is very different from 

that, as a matter of fact. So help me reconcile your practice and 

the formal Fed policy. 

Mrs. YELLEN. The formal Fed policy says that, in the case of a 

purported information security breach, there should be a review by 

the FOMC Secretary— 

Mr. MULVANEY. Correct. 

Mrs. YELLEN. —and General Counsel to determine what the next 

steps should be, including whether it should be referred to the Inspector General. 

Now, my understanding of that policy, the way I understand 

that, is that if there is a material breach, it is appropriate to refer 

it to the Inspector General, and I have done so. If these rules need 

clarification, that is how the FOMC Chair is tasked with handling 

these investigations, and that is my understanding of the rules— 

Mr. MULVANEY. Right. 

Mrs. YELLEN. —and how I intend to proceed. 

Mr. MULVANEY. Let me see if I can cut to the chase on this. I 

think what you are saying is that you believe that your practice is 

entirely consistent with the policy and that what your letter really 

45 

said was, after—without saying this—after the General Counsel 

did their investigation, I would immediately refer it to the Inspector General. 

Mrs. YELLEN. I have taken the view of, as soon as we have determined that there is a material breach, I have asked the Inspector 

General to look at it right away. 

Mr. MULVANEY. Right. And you wouldn’t determine there is a 

material breach until after the General Counsel and the Secretary 

had done their— 

Mrs. YELLEN. They need to do a review. 

Mr. MULVANEY. Correct. 

Mrs. YELLEN. Let me just give you a sense of the kind of thing 

that— 

Mr. MULVANEY. I know this is a bit stunning, Mrs. Yellen, given 

our history, but I am actually agreeing with you. So if you want 

to just take ‘‘yes’’ for an answer, we can move on if you would like. 

Mrs. YELLEN. The kind of thing that happens is sometimes somebody has a USB with a draft of something on it and it drops out 

of their pocket in a taxi or they lose their BlackBerry. Now, there 

are security procedures both in USBs and in BlackBerrys that just 

basically should disable them and protect the information. But— 

Mr. MULVANEY. Right. 

Mrs. YELLEN. —the FOMC Secretary receives reports of such 

things. In general, I wouldn’t refer such things to the Inspector 

General. But something that is a material breach, I would do so, 

and have done so routinely. 

Mr. MULVANEY. Fair enough. 

Mrs. YELLEN. There have not been a lot of things, but I have— 

Mr. MULVANEY. Before going back briefly to the 2012 leak, let me 

just simply ask you the question, have you ever actually activated 

this practice since you have been the Chair at the Fed? 

Mrs. YELLEN. The practice of referring to the—yes, I have. 

Mr. MULVANEY. Okay. And have you disclosed all of those referrals to Congress? 

Mrs. YELLEN. I am not certain. For example, I think we did disclose publicly that a portion of the Fed staff’s forecast was accidentally disclosed on a website or was included on a website, and— 

Mr. MULVANEY. That is fine. And, again, I am— 

Mrs. YELLEN. —that was referred. 

Mr. MULVANEY. I am familiar with that example. I am asking if 

there are ones that we don’t know about. Have there been referrals 

to the Inspector General that you have not notified Congress of, 

publicly or privately, since you have been the Chair? 

Mrs. YELLEN. That we have not told Congress about it? 

Mr. MULVANEY. Yes, ma’am. 

Mrs. YELLEN. I need to check on that. 

Mr. MULVANEY. Fair enough. 

Let’s go back—oh, by the way, one final change. And I know this 

is splitting hairs, but I used to be a lawyer in the real world a long 

time ago, so this is the type of stuff that catches my eye every now 

and then. 

You all switched the policy on the security breaches somewhere 

about 2014–2015. You are shaking your head ‘‘no,’’ but you did, 

right? 

46 

Mrs. YELLEN. We made a small change. 

Mr. MULVANEY. Yes. 

Mrs. YELLEN. And I know it has been alleged that that was a 

weakening of the requirements. It absolutely was not in any way 

a weakening of our requirements. 

Mr. MULVANEY. So if I may, Mr. Chairman, very briefly, it is 

your testimony, ma’am, that the small changes in language, changing ‘‘an investigation’’ from ‘‘a full investigation,’’ was not intended 

to change the scope of the rule at all? 

Mrs. YELLEN. Absolutely not. And there was nothing, as far as 

I know, about ‘‘full investigation.’’ 

Mr. MULVANEY. Thank you, Madam Chair. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair wishes to inform Members that Chair Yellen will be 

departing at 1 o’clock. Presently, I think we can clear the queue in 

the room. Members who may be monitoring from their offices, you 

are out of luck. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

Mr. HECK. Thank you, Mr. Chairman. 

And, Madam Chair, thank you for being here. Indeed, thank you 

for your outstanding public service. 

Mrs. YELLEN. Thank you. I appreciate that. 

Mr. HECK. I think you have probably heard something closely resembling consensus here today from both sides of the aisle about 

concerns regarding regulatory relief. Many of us share your commitment to providing for both prudential protections as well as consumer protections, as well as enabling the free flow of credit, but 

with a belief on our part that could be done with a bit of a lighter 

touch. 

I am hearing that somewhat from you today. Indeed, my perception is that the regulatory structure is, in fact, moving from what 

I would characterize as actively resistant to receptive. 

Mrs. YELLEN. Very receptive. We are actively looking for ways 

that we can safely diminish burden, particularly on community 

banks but also smaller institutions that are, for example, subject 

to the 165 rules in Dodd-Frank, those over $50 billion. So we are 

very receptive and actively engaged. 

Mr. HECK. So my encouragement would be that you would move 

it from receptive to being proactive. And in the spirit of that recommendation, I want to—and if this has been asked, I apologize— 

follow up with your testimony where on page 11 you indicate that 

the Reserve ‘‘is giving all of these suggestions careful consideration 

and will be working closely with other banking agencies in developing a report to Congress at the conclusion of the EGRPRA review,’’ which is a deregulation exercise. 

Mrs. YELLEN. Yes. 

Mr. HECK. Approximately when can we expect the report? 

Mrs. YELLEN. I am not sure. By the end of next year for sure. 

Mr. HECK. By the end of? 

Mrs. YELLEN. By the end of next year for sure. 

Mr. HECK. By the end of 2016. Then I would encourage you to 

see if there is any distance between the pedal and the medal on 

the velocity of that effort, because I think it would play a very reVerDate Nov 24 2008 14:06 Dec 01, 2016 Jkt 099778 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\99778.TXT TERI
47 

constructive part to move from receptive to proactive. I think it is 

important that you all be a part of this. Because, frankly, otherwise 

what I observe here is you have those who legitimately believe that 

we can do a whole lot less, but that which many of us believe 

would compromise prudential considerations and consumer safety 

considerations, and so we react accordingly. 

Mrs. YELLEN. Yes. 

Mr. HECK. And the positive, constructive advancement on your 

part, I think, would be very helpful to— 

Mrs. YELLEN. I think that is completely fair, and I pledge that 

we will try to be proactive in looking for—actively looking for ways 

that we can reduce burden. 

Mr. HECK. I have another question. We tend to think about the 

Fed’s monetary policy as its big lever to deal with the issue of price 

stability and the Fed funds rate that you set, but if I understand 

this thing correctly, and I may not, you also have the ability to set 

the interest rate that you pay on excess reserves that member institutions have with you, which seems to me to have potentially the 

same benefit as hiking the Fed funds rate, because if they are 

incentivized to leave more money with you, it is less money that 

they lend out, which is tapping the brakes on inflationary pressures. 

Why would you do one over the other? What are the comparative 

benefits of doing just Fed funds rates versus looking at excess reserve rates? 

Mrs. YELLEN. The interest we pay on excess reserves will be the 

key tool that we use in order to raise the Federal funds rate. The 

Federal funds rate is not something we can decree; it is a marketdetermined rate. And when we decide it is appropriate to raise that 

rate, we will accomplish it by raising what we pay on excess reserves. They are intimately connected, not two separate tools. 

Interest on excess reserves is critical, and we expect by raising 

it that short-term interest rates generally, or money market instruments, will all rise across-the-board. And— 

Mr. HECK. Can I see if I can get one more in, in 14 seconds? 

Mrs. YELLEN. Yes. 

Mr. HECK. One of the rating agencies recently indicated that the 

exercise of living wills is actually working, and they put it in writing. We are about to go through another round, I think, this winter. What is your forecast for what the impact will be? 

Mrs. YELLEN. We have very detailed living wills. They are much 

more detailed than previous versions. They have responded to instructions that we carefully gave out. We are carefully evaluating 

them and we will be making decisions in the coming months. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And thank you, Chair Yellen. Chair Yellen, we will see if we can 

set some kind of record together and answer 5 questions in 5 minutes. 

I am following up on Chairman Hensarling’s questions regarding 

the role of the Fed in the boardroom. And I am going to read a 

quote from the Financial Times in August of 2014 that said, ‘‘Fed 

48 

officials are also involving themselves in the kinds of decisions that 

company management or board directors usually make, including 

whether employees should be fired or disciplined, which has been 

surprising.’’ 

Mrs. Yellen, do you support this type of activity? Notwithstanding that you said it is not the policy, but do you support this 

type of invasive participation by the Fed? Would you approve of it? 

Mrs. YELLEN. When there is wrongdoing, as we have seen, for example, in the LIBOR ethics scandals, it is appropriate for us, in addition to leveling fines, to try to identify individuals who are guilty 

of wrongdoing. 

Mr. PITTENGER. As an ongoing process, do you think it should be 

a matter that the Fed, for example, should be opining on human 

resource decisions and so forth inside the boardroom, as was 

quoted here in the Financial Times? 

Mrs. YELLEN. I’m sorry. What exactly did they quote? 

Mr. PITTENGER. They just said that they were including whether 

employees should be fired or disciplined. That was one of the comments that was made. 

Mrs. YELLEN. I am not aware that we— 

Mr. PITTENGER. But would you approve of that? Would you approve of them opining out on whether or not this should be done? 

Mrs. YELLEN. We should not be managing firms. We should be 

making sure that firms have— 

Mr. Pittenger. So do you all believe the Fed should— 

Mrs. YELLEN. —the most appropriate systems. 

Mr. PITTENGER. Should the Fed, then, be micromanaging these 

boardrooms and trying to dictate policy inside of the boardroom? 

Mrs. YELLEN. We are not managing the firm, we shouldn’t be 

managing the firm, but we need to make sure that the firm is managing itself properly. 

Mr. PITTENGER. Chair Yellen, following up on Mr. Hurt and Mr. 

Hinojosa regarding community banks, what reforms, if you can give 

some clarity on this further, would you say that the Fed could do 

to reduce regulatory burdens on community banks? And, also, what 

would you recommend that we as a committee could recommend to 

do to provide some type of regulatory relief for community banks 

and to ensure that they can provide the best services and products 

for their consumers? 

Mrs. YELLEN. There is a lot that we can do on our own and we 

have been doing it. We are trying to do more work offsite so that 

we have fewer examiners spending less time in actual banks doing 

exams. We are trying to tailor our exams to the areas that are really high risk, either in terms of consumer compliance or safety and 

soundness. 

Mr. PITTENGER. Chair Yellen, pardon me. Have you had occasion 

to go out and visit some small community banks? 

Mrs. YELLEN. Absolutely. 

Mr. PITTENGER. How many have you seen? 

Mrs. YELLEN. Many over the years that I have been involved 

with the Federal Reserve. 

Mr. PITTENGER. In the last 2 years, have you been out to see any 

community banks? 

49 

Mrs. YELLEN. Since I have been at the Board, I haven’t made 

trips to see community banks, but I meet with many community 

bankers. We have the so-called—the CDIAC, and, in fact, we are 

meeting with the CDIAC on Friday. 

Mr. PITTENGER. If I could interrupt—I think the more in-depth 

awareness and understanding— I was on a community bank board 

for 10 years. And just to go visit these banks yourself, it would 

make a major statement of your own, the importance that you see 

for community banks. And I think you would get a sense from the 

staffing of what they are addressing, and you can hear from the 

CEO, the bank chairman. I would really encourage you to do that. 

As you look at the imposition of the regulations on the financial 

industry, it is had really indirectly a major impact on industry that 

has left our country to move offshore. We have seen that occur too 

many times. 

What do you think can be done to make sure that we can provide 

the financial resources available and not have the regulatory impediments on financial institutions that, frankly, impact our business growth and their environment? They are leaving here, and 

that is part of the problem. 

Mrs. YELLEN. This is partly why we participate in international 

groups like the IAIS or the Basel Committee or the Financial Stability Board, to work with— 

Mr. PITTENGER. And how do measure success in this approach? 

Do you think what you are doing is working now? Because we 

haven’t seen the measured success that we would like to see in 

terms of being able to attract companies who want to stay onshore. 

Mrs. YELLEN. I think we have seen success in that we have a 

much safer and sounder financial system. And other countries are 

also raising the standards that they apply to their large banking 

organizations. 

Mr. PITTENGER. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. I thank the ranking member and the chairman. 

Thank you for being here, Chair Yellen. I really appreciate it. 

We had this big debate yesterday and the votes today on whether or not the $50 billion designation is the right metric for SIFI designation. And I have to tell you, I am sympathetic to changing it, 

but I didn’t vote for either one of those proposals, because I feel 

that after there is a big crash, then we regulate, and then before 

the ink is dry, we are all trying to change it suddenly, and is it 

good or is it bad? 

And so what I want to see when a proposal comes back to change 

it from—and so people may—there may be a growing consensus 

that $50 billion could be different, but we don’t have a consensus 

on what it should be. 

And I guess my point to you is, knowing that our constituents 

lean on us to do things that they want, our constituents aren’t 

thinking about the system, they are thinking about their business, 

and that is a generalization, but I think it is generally true, I am 

looking for good guidance from people like you as to if it is not $50 

billion, what should it be and why. 

50 

I am sure that this issue is not going away. And so I just want to make that point clear, because I definitely believe that the $50 

billion designation, the truth is that it is an imprecise metric, I will 

agree with that, but there were some regional banks that caused 

some major damage in the last go-round. So I am not willing to just 

walk away without a really clear plan on what is going on forward. 

Do you have any reaction to that? 

Mrs. YELLEN. I agree with that. And we have said modest increase, not a large increase, a modest increase. And while I think 

there would be some benefits to the smaller banking organizations 

that are over that $50 billion threshold and would save us some 

supervisory resources, this isn’t a must have. 

Mr. ELLISON. Okay. On living wills, the very largest banks in the 

country are even larger today than they were during the financial 

crisis. The living wills provision of Dodd-Frank was created to 

make sure these banks never threaten the economy again by giving 

regulators additional powers if banks’ living wills are found to be 

not credible. 

The last time the Fed and the FDIC evaluated these banks’ living wills, only the FDIC took the official position that the wills 

were not credible. The Fed’s decision not to join the FDIC has 

slowed both regulators’ ability to take additional action. 

Why would the Fed voluntarily give up additional authorities to 

force changes at problem banks? 

Mrs. YELLEN. We took the position that this was a completely 

new process, and we stated this when we put out guidance on the 

living will process, that we expected to have to work with firms for 

a few rounds in order to understand what we needed to see in the 

plan and to give firms reasonable guidance on our expectations. 

That is why we declined to join the FDIC last summer and did not 

vote to find the plans noncredible. 

But we have worked closely and jointly with the FDIC over the 

last year to give very clear, very detailed, and we are asking for 

very substantial changes on the part of these firms. They have submitted a new round of living wills, we are evaluating them with 

the FDIC, and in the coming months we will make important decisions. 

Mr. ELLISON. Thank you. With my last minute, I just want to 

know if you would be willing to offer your perspective on one of the 

observations of Ben Bernanke, whom, as you know, he came out 

with a memoir recently, and in there he said something like this: 

It would have been his preference to have more investigations of 

individuals’ actions, as obviously everything that went wrong or 

was illegal was done by some individual, not by an abstract firm, 

and so in that respect, there should have been more accountability 

at the individual level. 

And then, of course, Loretta Lynch and the DOJ just said about 

a month ago that they are going to look into white collar prosecution a little bit more. 

Do you have any observation on Mr. Bernanke’s observation? 

What about prosecuting some of these folks who engage in fraud? 

Mrs. YELLEN. I completely agree with his assessment. Now, we 

can’t engage in criminal prosecutions, but I would say, to the extent that we can identify individuals who have been responsible for 

51 

wrongdoing and significant breaches, we have leveled big civil 

money fines. We are trying to take action against individuals as 

well, and that means barring them from working for those organizations or potentially for the banking industry. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr. 

Mr. BARR. Thank you, Mr. Chairman. 

Chair Yellen, welcome back to the committee. 

We routinely hear from President Obama and Senator Warren 

and others that an absence of regulation was the principal cause 

of the financial crisis. I would like to explore with you today the 

threats to financial stability posed by too much regulation. 

Let me take as an example the CLO market, collateralized loan obligations. This market provides more than $400 billion in financing for hundreds of American companies that employ more than 5 

million people. They are a crucial source of funds for many companies that cannot issue bonds. CLOs also performed extraordinarily 

well during the last 20 years, with a negligible default rate, they 

performed better than high-grade corporate bonds over that same 

period of time. 

Unfortunately, we are hearing from market participants that the 

risk retention rules promulgated by the Fed will cause a contraction in the CLO market and a credit crunch for American companies. Alternative sources of funds are available through hedge 

funds and the like, but they are not a stable source of funds and 

they will certainly demand a much higher interest rate. 

Do you believe that American businesses are better served with 

expensive short-term financing from hedge funds as opposed to stable long-term financing options? 

Mrs. YELLEN. We want to make sure that businesses have stable 

long-term financing sources, but we also want to make sure that 

when securitizations take place that the originators do have skin 

in the game so that we avoid the kinds of problems that happened 

previously, and that is what those QRM rules are designed to accomplish. 

Mr. BARR. I appreciate it. I would make a distinction between 

securitized mortgages, which were at the epicenter of the financial 

crisis, as opposed to highly rated senior secured commercial and industrial loans that never defaulted in 20 years. 

But I do appreciate the point about skin in the game, and I 

wanted to just ask you about a letter that we sent to regulators. 

I joined a bipartisan group of Members of Congress who wrote to 

you recommending that you support the concept of a qualified CLO, 

much like a qualified mortgage, a structure that would ensure the 

safety of these vehicles, but also ensure a continuation of financing 

to hundreds of companies that rely upon them. 

Is that something that you would be open to? 

Mrs. YELLEN. I think it is something we could have a look at. I 

would have to get back to you on it. 

Mr. BARR. I appreciate that. I would love to have that discussion 

with you. 

Let me move on to the issue of illiquidity in the market generally. Secretary Lew has denied that there is a liquidity issue or 

52 

that some of the post-crisis regulations are contributing to 

illiquidity in the market. 

In your previous testimony before this committee, you said that 

you would not rule out the possibility that regulations are playing 

a role in decreased fixed-income liquidity. Certainly your colleague 

Lael Brainard acknowledged that regulations may be a factor in diminished fixed-income liquidity, and there has been a lot of research on this. 

And I am quoting from one often cited piece of research: ‘‘Almost 

every institutional investor, in almost every market, seems worried 

about liquidity. Even if it is here today, they fear it will be gone 

tomorrow.’’ They say that e-trading is contributing to volume, but 

little depth for these who need to trade in size. ‘‘The growing frequency of ‘flash crashes’ and ‘air pockets,’ often without cause, adds 

weight to the fears and the most frequently cited explanation is 

that increased regulation has driven up the cost of balance sheet 

and reduced the street’s appetite for risk and hence their ability to 

act as a warehouser between buyers and sellers.’’ 

What would lead you to doubt that increased regulation is actually creating a destabilizing impact in terms of liquidity? 

Mrs. YELLEN. There are just a bunch of different things going on 

in these markets, and we are trying to carefully study them. The 

Treasury market and the corporate bond market aren’t the same. 

The conditions are quite different and the role of the broker-dealers 

is different. High frequency trading has become very prevalent in 

the Treasury market, and— 

Mr. BARR. Let me—and I hear that explanation—just jump to 

one other potential theory here, and, again, the same piece of research. The more liquidity central banks add, the less there is in 

markets. In addition to regulation, central banks’ distortion of the 

markets has reduced the heterogeneity of the investor base. 

And so the question is, is central bank liquidity forcing investors 

to view fixed income and equities as expensive, making markets 

more prone to sudden corrections? 

Mrs. YELLEN. We hold significantly more assets, the Federal Reserve and other central banks, than we did prior to the crisis, but 

we have very deep and liquid markets in the Treasury securities 

and mortgage-backed securities that we hold. So I am not aware 

that our behavior is significantly influencing market functioning. I 

am not aware of any evidence suggesting that. 

Mr. BARR. Thank you for your testimony. 

Chairman HENSARLING. The time of the gentleman has expired. 

To accommodate the Chair’s schedule, the gentleman from Maine 

will be the last Member recognized. The gentleman from Maine, 

Mr. Poliquin, is recognized for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here. They always save 

the best for last here, that is what they say up in Maine, anyway. 

But I was thrilled to have a discussion with you in the lobby before 

we came into the hearing, Chair Yellen, where I had asked you 

specifically what your thought process is now, going forward, about 

FSOC and your involvement in FSOC as designating asset managers, pension fund managers, mutual funds as systemically important financial institutions. And if that happens, of course, they 

53 

have to succumb to smothering regulations with respect to DoddFrank, and that can stifle rates of return for small savers. 

You mentioned something that was very interesting. You said 

that right now the Fed is not focused on designating asset managers as— 

Mrs. YELLEN. The FSOC. I have said that—what I said was that 

the FSOC— 

Mr. POLIQUIN. I stand corrected. 

Mrs. YELLEN. —was focusing on— 

Mr. POLIQUIN. I stand corrected. 

Mrs. YELLEN. —activities and studying a set of activities involved in asset management, liquidity risks, redemption risks, potential risks that have— 

Mr. POLIQUIN. Thank you. I stand corrected. And you, of course, 

sit on FSOC. 

Mrs. YELLEN. That is right, but that is FSOC’s focus at the moment, it is studying these areas. The SEC is actively involved in 

rulemaking in these areas. 

Mr. POLIQUIN. Thank you. 

Mrs. YELLEN. And that has been the focus recently in FSOC. 

Mr. POLIQUIN. Thank you. 

You know what would be really helpful, Chair Yellen, if I can 

make a suggestion, is if we had a written set of criteria that the 

industry, those folks who are in this space, can look at something 

on paper to say, if I had these various business practices that revolved around my business model, or I managed these sort of assets, then I know the probability of me being designated a SIFI is 

very high or low. 

Does that make sense to do something like that, instead of saying, well, our focus on FSOC is not to look at asset managers as 

designated as SIFIs, but maybe down the road we will? Do you 

have a written set of guidelines so folks in this space can see— 

Mrs. YELLEN. There were a set of criteria that FSOC initially 

issued to indicate firms— 

Mr. POLIQUIN. And has that been updated? 

Mrs. YELLEN. —that we might look at. 

Mr. POLIQUIN. And has that been updated, Chair Yellen? 

Mrs. YELLEN. I am not certain it has been, but there was— 

Mr. POLIQUIN. Great. If you don’t mind, we will reach out to your 

staff to see if there is any updated criteria on that. And do you 

also, Chair Yellen, have a set of criteria that deals with an offramp, such that if an institution, a nonbank financial institution 

is designated as a SIFI, and they know if they go down this path 

and derisk, in your eyes and the eyes of FSOC, there will be an 

off-ramp for them? Do you have that set of criteria? 

Mrs. YELLEN. We evaluate each of these firms every single year 

to decide if it is no longer appropriate for them to be designated— 

Mr. POLIQUIN. But do you have a set of written criteria, Chair 

Yellen? Because if you are running a business, it is really helpful 

if you have those guidelines. 

Mrs. YELLEN. We are not trying to run these businesses, and we 

are not going to—I don’t think it would be appropriate for us to 

say, you need to do X, Y, and Z, to be de-designated. These firms 

understand very well why they have been designated and they unVerDate Nov 24 2008 14:06 Dec 01, 2016 Jkt 099778 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\99778.TXT TERI
54 

derstand what kinds of changes in their business model would 

change that assessment. 

Mr. POLIQUIN. As a Member, if I may— 

Mrs. YELLEN. And these are firms that have decided they want 

to do this kind of business. And if they change that decision, of 

course it is possible— 

Mr. POLIQUIN. Here is what I worry about, Chair Yellen. And I 

don’t mean to be rude, but we have a little over a minute left. Here 

is what I worry about. You have probably seen the study that was 

conducted by Mr. Holtz-Eakin, who is the former Director of the 

nonpartisan CBO. 

Mrs. YELLEN. Yes. 

Mr. POLIQUIN. And when you have pension fund managers and 

mutual fund managers that are designated as SIFIs, he concludes 

that the long-term rate of return of these retirement nest eggs is 

likely to go down by up to 25 percent if they have to succumb to 

these Dodd-Frank regulations. 

So it is my contention that when you have a trucker in Bangor, 

Maine, or a teacher in Lewiston, Maine, in the greatest district, in 

the greatest State in the country, and they are doing their best to 

put aside $50 or $100 a month to make sure they plan for retirement, but because of these Dodd-Frank regulations over an industry that poses no systemic risk to the economy, if that happens and 

these regulations prevail, then these folks will have to work longer, 

and will have less money in their nest egg, and that is not fair, and 

it is not compassionate. 

So all I am asking of you is—as a Member of Congress, I represent 650,000 of the most honest, hard-working people you can 

find in this country. I just would like to see what written criteria 

you have such that these pension fund managers, these asset managers know how to be de-designated as a SIFI. 

Mrs. YELLEN. None of them have been designated. 

Mr. POLIQUIN. I know, but wouldn’t it be great if they knew what 

would cause them to be designated and how they could get out of 

it? 

Mrs. YELLEN. FSOC has not designated any asset manager. 

Mr. POLIQUIN. And thank you for doing that, but it would be 

wonderful if we have criteria so going forward, we know what that 

will look like. 

Chairman HENSARLING. The time of the gentleman— 

Mr. POLIQUIN. Thank you, Chair Yellen. 

Chairman HENSARLING. The time of the gentleman has expired. 

And I want to thank Chair Yellen for her testimony today. 

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 5 legislative days for Members to submit written questions to this witness 

and to place her responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:05 p.m., the hearing was adjourned.] 

(55) 

A P P E N D I X 

November 4, 2015 

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