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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 

SECOND SESSION 

SEPTEMBER 28, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–107 

( 

(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: 

September 28, 2016 .......................................................................................... 1 

Appendix: 

September 28, 2016 .......................................................................................... 57 

WITNESSES 

WEDNESDAY, SEPTEMBER 28, 2016 

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

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

APPENDIX 

Prepared statements: 

Yellen, Hon. Janet L. ....................................................................................... 58 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Yellen, Hon. Janet L.: 

Written responses to questions for the record submitted by Representative Hultgren ................................................................................................. 72 

Written responses to questions for the record submitted by Representative Love ........................................................................................................ 75 

Written responses to questions for the record submitted by Representative Luetkemeyer .......................................................................................... 79 

Written responses to questions for the record submitted by Representative Mulvaney ................................................................................................ 90 

Written responses to questions for the record submitted by Representative Pittenger ................................................................................................. 94 

Written responses to questions for the record submitted by Representative Waters .................................................................................................... 95 

(1) 

SEMI-ANNUAL TESTIMONY ON THE FEDERAL 

RESERVE’S SUPERVISION AND REGULATION 

OF THE FINANCIAL SYSTEM 

Wednesday, September 28, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Jeb Hensarling [chairman of 

the committee] presiding. 

Members present: Representatives Hensarling, Royce, Lucas, 

Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer, 

Huizenga, Duffy, Stivers, Mulvaney, Hultgren, Ross, Pittenger, 

Wagner, Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez, 

Sherman, Meeks, Capuano, Hinojosa, Lynch, Scott, Green, Cleaver, 

Moore, Ellison, Perlmutter, Himes, Carney, Foster, Murphy, 

Delaney, Sinema, Beatty, 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. As we all know, the Dodd-Frank Act vastly increased the 

powers of the Fed way beyond its traditional monetary policy responsibilities. The Act has made the Fed omnipotent, but it cannot 

make it omniscient. No act can. Through the exercise of so-called 

heightened prudential standards, the Fed can now functionally control the largest financial institutions in our economy. 

Former Fed Governor Kevin Warsh recently wrote, ‘‘Central 

bank power is permissible in a democracy only when its scope is 

limited, its track record strong, and its accountability assured.’’ 

None of that do we observe today. 

Where has the Fed omnipotence taken us? The big banks are 

now bigger. The small banks are fewer. Economic growth lags. And 

there is scant evidence that our economy is more stable. 

Two new Fed expanded authorities granted under Dodd-Frank, 

living wills and stress tests, have been particularly controversial 

and problematic. The secrecy surrounding the stress test makes it 

almost impossible to measure the effectiveness of the Fed’s reguVerDate Nov 24 2008 14:44 Mar 09, 2018 Jkt 025967 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\25967.TXT TERI
2 

latory oversight or the integrity of the test findings. As Columbia 

University professor Charles Calomiris has testified, ‘‘It is hard to 

believe that the current structure of stress test could occur in a 

country like the United States, which prizes the rule of law, the 

protection of property rights, and the adherence to due process.’’ 

Dodd-Frank’s living wills grant the FDIC and the Fed unbridled 

and unreviewable discretion to fundamentally restructure private 

businesses under a standardless process that relies entirely upon 

the personal discretion of Washington regulators. 

Indeed, the Fed stands at the center of Dodd-Frank’s codification 

of too-big-to-fail. It functionally occupies the boardrooms of the 

largest financial institutions in our Nation and decides how they 

can deploy their capital, sending a clear signal that Washington 

will bail them out if they get in trouble. 

And despite claims by the Fed that it tailors regulations to fit the 

size of financial institutions, we know small banks are suffering 

disproportionally under Washington’s thumb. As we lose, on average, one community financial institution per day, consumers lose 

options to help them achieve financial independence, small businesses lose opportunities to grow jobs, and the big banks just keep 

getting bigger. There is a better way. 

Former Fed Chair Alan Greenspan has said, ‘‘Lawmakers and 

regulators, given elevated capital buffers, need to be far less concerned about the quality of the banks’ loans and security portfolios 

since any losses would be absorbed by shareholders, not taxpayers. 

This would enable the Dodd-Frank Act on financial regulation of 

2010 to be shelved, ending its potential to distort the markets—a 

potential scene in the recent decline in market liquidity and flexibility.’’ 

Tom Hoenig, current FDIC Vice Chair has said, ‘‘U.S. banks engaged in core banking activities and operating with reasonable levels of capital should not incur the same regulatory burden as those 

that do not.’’ 

Former FDIC Chair Sheila Bair has also expressed support for 

the use of higher capital levels in place of regulatory riskweighting. She has said, ‘‘The Fed doesn’t know what’s risky. The 

FDIC doesn’t know what’s risky. Didn’t we learn anything from the 

crisis?’’ 

The Financial CHOICE Act approved by this committee offers a 

better way. It has been endorsed by renowned economists nationwide, including three Nobel Prize winners, by promoting substantially higher loss-absorbing bank capital in exchange for relief from 

job-killing regulations. The Financial CHOICE Act fosters economic 

growth for all, bank bailouts for none, and ensures that the Fed is 

accountable and remains focused on good monetary policy. 

The Chair now recognizes the ranking member for 5 minutes. 

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

And thank you, Chair Yellen, for making yourself available to 

testify today. Just a few weeks ago, we passed the ninth anniversary of the Lehman Brothers’ failure. Leading up to 2008, much of 

the risk in our banking system went entirely unchecked by regulators. Failure to quickly address fraud and mismanagement resulted in the loss of more than 8 million jobs as unemployment 

topped 10 percent. Millions of families lost their homes, and entire 

3 

industries were 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 Dodd-Frank Act greatly increased the Fed’s responsibility 

and authority for safeguarding the financial system but also set 

minimum standards to ensure that regulators didn’t lose sight of 

emerging risk again. 

The Dodd-Frank Act has required regulators to increase capital 

and liquidity standards, reduce interconnection in the financial 

markets and more closely scrutinize large financial firms’ risk management. However, there is much work left to be done. 

As we have seen from the enormous failure of risk management 

at Wells Fargo, it is important to remind the committee and the 

public why these reforms were necessary in the first place. Fraudulent retail banking practices may not in and of themselves pose 

systemic risk, but they surely indicate mismanagement that could 

be catastrophic in riskier and more complex divisions of a bank 

holding company. Supervisors and law enforcement must continue 

to hold both institutions and individuals accountable. 

Chair Yellen, I know you will keep that in mind over the next 

several weeks as you review living wills from the five banks that 

failed their submissions in April, and that includes Wells Fargo. 

Chair Yellen, I am eager to hear about the Fed’s progress in implementing Wall Street reform and how the Board’s supervision practices have evolved over the last several years. Specifically, I am interested to hear more about 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. 

Dodd-Frank also provided the Fed, in consultation with the Financial Stability Oversight Council, with new responsibility to regulate the activities of systemically risky nonbanks, entities such as 

the insurance company AIG, whose near failure imposed dire systemic consequences on our economy just 8 years ago. Since the passage of Dodd-Frank, Congress has given the Federal Reserve additional authority in setting capital standards for insurance firms 

subject to enhanced supervision. I look forward to hearing about 

the Board’s progress on regulating insurers. 

Yet, just a few weeks ago in this committee, the Republicans 

pushed a bill that would severely undermine efforts by the Fed to 

regulate the financial system. The chairman’s misguided legislation 

would repeal the Financial Stability Oversight Council’s ability to 

designate nonbanks for enhanced supervision by the Fed, creating 

a huge swath of unmonitored risk in our financial system. The legislation would also replace carefully considered limits on banking 

activities with nothing but an insufficient 10 percent equity cushion, encouraging the reckless and risky behavior that nearly destroyed our economy in 2008. 

Moreover, as we in Congress consider another funding resolution, 

we must be mindful of continued attempts to defund regulators’ 

work implementing Dodd-Frank. For the first time in recent memory, economic data indicates that the middle class is benefiting 

from the recovery. Failure to heed the lessons of the past will put 

that progress in jeopardy. 

4 

Thank you, Mr. Chairman, and 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 2 minutes. 

Mr. NEUGEBAUER. I thank you, Mr. Chairman. Today’s hearing 

is fundamental to understanding developments in the prudential 

supervision and regulation of our Nation’s financial institutions. 

The role of Vice Chair of Supervision serves as the statutorily designated official within the Federal Reserve to oversee supervision 

and regulation. In 2010, former Fed Chairman Paul Volcker, champion of the Volcker Rule, noted that the creation of this spot might 

turn out to be one of the most important things in here, meaning 

the Dodd-Frank. It focuses the responsibility on one person. 

Yet President Obama has failed to nominate anyone to fill this 

important position, a position that sets prudential regulatory policy 

and represents the United States in international banking forums 

like the Financial Stability Board. I remain concerned that Governor Dan Tarullo continues to exercise these authorities outside 

the statutory construct in mandated oversight of Congress. 

Today, I hope to understand better many of the recent regulatory 

actions taken by the Federal Reserve. For example, how does the 

Federal Reserve’s posture on reducing bank leverage interact with 

its recent recommendations to repeal the merchant banking authority? On what type of risk that the Fed is trying to mitigate in 

a recent capital proposal for commodities activity? Similarly, what 

would the impact be on end users if physical commodity activity decreases or stops? And, finally, does the Federal Reserve recognize 

the exposure-reducing characteristics of segregated margin, and 

does it plan to reevaluate its position in the leverage ratio rule 

given recent Basel Committee discussions? 

While Chair Yellen may not be in the best position to answer 

these questions, it is incumbent upon her to do so, given the Presidential inaction. 

With that, Mr. Chairman, I want to say this is my last time to 

be in this committee with Chair Yellen, and I would like to thank 

the Chair for her making herself available to us. And thanks again 

for her service in her capacity. 

And, with that, I yield back. 

Chairman HENSARLING. The gentleman yields back. 

Today, we welcome the testimony of the Honorable Janet Yellen. 

Chair Yellen has previously testified before our committee on a 

number of occasions, so I believe she needs no further introduction. 

Without objection, Chair Yellen, your written statement will be 

made a part of the record, and you are now recognized for 5 minutes to give an oral presentation of your testimony. 

Thank you. 

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 this morning on the Federal Reserve’s regulation and supervision of financial institutions. 

5 

One of the Federal Reserve’s fundamental goals is to make sure 

that our regulatory and supervisory program is tailored to the risk 

that different financial institutions pose to the system as a whole. 

As we saw in 2007 and 2008, the failure of systemically important 

financial institutions can destabilize the financial system and undermine the real economy. The largest, most complicated firms 

must therefore be subject to prudential standards that are more 

stringent than the standards that apply to other firms. Small- and 

medium-sized banking organizations, whose failure would generally 

pose much less risk to the system, should be subject to standards 

that are materially less stringent. 

The Federal Reserve has made substantial progress in building 

a regulatory and supervisory program that is consistent with these 

principles. We have implemented key standards designed to limit 

the financial stability risks posed by the largest, most complex 

banking firms. We continue to work on some remaining standards 

and to assess the adequacy of this package of measures. 

With respect to small- and medium-sized banks, we must build 

on the steps we have already taken to ensure that they do not face 

undue regulatory burdens. Looking forward, we must continue to 

monitor for the emergence of new risks since another key lesson 

from the crisis is that financial stability threats change over time. 

The Federal Reserve’s post-crisis efforts to strengthen its regulation and supervision of large banks have focused on promoting the 

safety and soundness of these firms and on limiting the adverse effects that their distress or failure could have on the financial system in the broader economy. 

We have aimed to increase the resiliency of the largest banking 

organizations by establishing a broad set of enhanced prudential 

standards, including capital liquidity requirements for large domestic and foreign banking organizations. And we have aimed to make 

large financial institutions more resolvable through, for example, 

the living will process and our proposed long-term debt requirements. 

The introduction of capital stress testing for large banking organizations has been one of our signature regulatory and supervisory 

innovations since the financial crisis. As events during the financial crisis demonstrated, capital buffers that seem adequate in a 

benign environment may turn out to be far less than adequate during periods of stress. For this reason, the Federal Reserve conducts 

supervisory stress tests each year on banking organizations with 

$50 billion or more in total assets to determine whether they have 

sufficient capital to continue operations through periods of economic stress and market turbulence and whether the capital planning frameworks are adequate to their risk profiles. The expectation embodied in our stress testing program that large banking organizations should maintain sufficient capital buffers to withstand 

a period of significant stress promotes the resilience of those firms 

and of the financial system more generally. 

While our stress testing program has been successful since it was 

first introduced in 2009, the crisis reinforced the need for regulators and supervisors to continually revisit the effectiveness of 

their tools and adjust as needed over time. As my written testimony indicates in more detail and as my colleague Governor 

6 

Tarullo discussed in his speech earlier this week, we are now considering making several changes to our stress testing methodology 

and process. 

A leading idea that has emerged from a substantive review of our 

Comprehensive Capital Analysis Review, or CCAR, program is to 

integrate CCAR with our regulatory capital framework, thus effectively including GSIB surcharges in the stress test. We are also 

considering making certain changes to the stress test assumptions 

used in CCAR. In addition, we are considering exempting from the 

qualitative portions of CCAR any bank holding company that has 

less than $250 billion in total assets and that does not have significant international or nonbank activity as well as reducing the 

amount of data that these firms are required to submit for stress 

testing purposes. 

On this and other changes to CCAR that we are considering, we 

will, of course, seek public input before moving to adopt them. 

I know that community banks play a vital role in many of your 

districts. Among the lessons of my years of experience at the Federal Reserve have reinforced is that when it comes to bank regulation and supervision, one size does not fit all. To effectively promote safety and soundness and to ensure that institutions comply 

with applicable consumer protection laws without creating undue 

regulatory burden, rules and supervisory approaches should be tailored to different types of institutions such as community banks. 

The Federal Reserve has already done a considerable amount to 

reduce regulatory burden on community banking organizations, but 

we are looking for additional opportunities, including potential simplifications of the regulatory capital framework for community 

banks. 

In conclusion, our post-crisis approach to regulation and supervision is both forward-looking and tailored to the level of risk that 

firms pose to financial stability in the broader economy. Standards 

for the largest, most complex banking organizations are now significantly more stringent than the standards for small- and medium-sized banks, which is appropriate, given the impact that the 

failure or distress of those firms could have on the economy. 

As I have discussed, we anticipate taking additional actions in 

the near term to further tailor our regulatory and supervisory 

framework. Yet, even as we finalize the major elements of post-crisis reform, our work is not complete. We must carefully monitor 

the impact of the regulatory changes we have made and remain 

vigilant regarding the potential emergence of new risks to financial 

stability. We must stand ready to adjust our regulatory approach 

where changes are warranted. The work we do to ensure the financial system remains strong and stable is designed to protect and 

support the real economy that sustains the businesses and jobs on 

which American households rely. 

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

58 of the appendix.] 

Chairman HENSARLING. Thank you, Chair Yellen. 

The Chair now recognizes himself for 5 minutes for questions. 

First, Chair Yellen, please know that I was encouraged by many 

aspects of your testimony. I believe that there is, hopefully, growing bipartisan consensus that we need more tailoring of regulaVerDate Nov 24 2008 14:44 Mar 09, 2018 Jkt 025967 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\25967.TXT TERI
7 

tions, and particularly on page 13 of your testimony, your recommendation that Congress consider carving out community banks 

from the Volcker Rule and incentive compensation limits in Section 

956. I was also encouraged by your announcement today and what 

we heard from Governor Tarullo a couple of days ago concerning 

CCAR’s qualitative review exemption. I think that is wise and a 

very small step in the right direction. 

Chair Yellen, before we get to the application of heightened prudential standards, I want to take a step back to how we do the 

SIFI selection process in the first place. As a member of FSOC, as 

you probably know, Dodd-Frank demands that there are 11 different factors that must be considered in the SIFI selection process, 

such items as leverage, and off-balance-sheet exposures. 

In the SIFI designation process, do you weigh each of these 11 

factors equally? 

Mrs. YELLEN. Are you talking about the nonfinancial firms— 

Chairman HENSARLING. Yes. 

Mrs. YELLEN. —the FSOC has designated? 

Chairman HENSARLING. Yes. 

Mrs. YELLEN. In the case of those firms, as required, the FSOC 

prepares an analysis taking— 

Chairman HENSARLING. I know, but my question is, of the 11 

statutory factors you must consider, do you consider each one 

equally? Or, for example, is leverage more important to systemic 

risk than factor four, importance of source of credit liquidity? 

Mrs. YELLEN. When it comes down to looking at an actual firm, 

the question that FSOC has to consider, taking those factors into 

account, is special to that firm and— 

Chairman HENSARLING. So it is individual to the firm? 

Mrs. YELLEN. It is individual. The question is what— 

Chairman HENSARLING. I guess where I am going with this is— 

Mrs. YELLEN. What would be the systemic impact on the U.S. financial system of the distress of that particular firm? 

Chairman HENSARLING. Well, with 11 different factors that are 

considered, combined, that leads to 2,048 different ways in which 

these 11 criteria can be combined. The statute says you, ‘‘shall consider,’’ these, but can I safely assume that you and other members 

cannot process 2,048 different combinations of this, these 11 criteria? 

Mrs. YELLEN. What the analysis presented to FSOC does is look 

at the specifics of the balance sheet and exposures of an individual 

firm under consideration and analyzes how those factors would 

come into play and impact financial stability. 

Chairman HENSARLING. I guess my point, Chair Yellen, is it is 

hard not to conclude that ultimately this becomes a very discretionary process among members of FSOC. 

Let’s now move to the living wills and CCAR process. So 11 

banking organizations submitted rather voluminous living wills in 

2014 and the GAO found that the Fed and the FDIC had not reviewed those submissions. I understand many of these submissions 

are thousands of pages long with respect to living wills. I have had 

at least one testimony that the CCAR reports are tens of thousands 

of pages long; I have heard of one that is 42,000 pages long. So I 

8 

guess my first question is, does anybody at the Fed actually read 

these reports, and can I safely assume you don’t? 

Mrs. YELLEN. You can safely assume that many people at the 

Fed read these reports. And— 

Chairman HENSARLING. Does somebody really read a 42,000-page 

report cover to cover and know what to do with it? 

Mrs. YELLEN. Our staff and the FDIC staff do. And I think it is 

fair to say that all of the Governors reviewed— 

Chairman HENSARLING. I find that very difficult to believe, but the GAO has said that these living wills can cost up to $105 million. The SBA estimates the average small business is capitalized 

with $30,000. So, de facto, you are taking away the opportunity to 

capitalize 3,500 small businesses with a living will that may or 

may not be read, that may or may not be useful. 

Do you consider the cost of this process as you impose it upon 

the financial institutions? 

Mrs. YELLEN. We consider eliminating too-big-to-fail to be a key 

objective of Dodd-Frank so that the American taxpayers will not be 

forced to bear the burden of a failure of a large firm. And I will 

tell you that the full Board of Governors met on the order of 12 

times. We had around 12 Board meetings to consider in great detail all of the key aspects of the living wills of each of these firms. 

Chairman HENSARLING. I see my time has expired. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

As you know, the reforms we have passed to make the financial 

system are constantly under attack, and many accuse us of onesize-fits-all regulations. As you know, the Dodd-Frank Act has provided the Federal Reserve with broad discretion to adjust the rules 

based on your evaluations of bank risk. I cannot count the number 

of Republican deregulatory bills that have passed the House Floor 

which were not serious enough to even be considered in the Republican-controlled Senate. 

However, I know that I, as well as other Democrats on this committee, have worked very constructively with you to identify areas 

of improvement and use your discretion to tailor regulations when 

necessary. 

Governor Tarullo’s announcement regarding reforms to the stress 

testing process is a recent example of that cooperation. And I think 

you just said in your testimony that you were taking a look at 

banks with less than $250 billion in assets and that you were considering some changes, provided they were not involved in a lot of 

trading and international trading in particular. 

Would you tell us what that is all about again? 

Mrs. YELLEN. Yes. There are two portions to the stress testing 

program for the institutions over $50 billion. One is a quantitative 

stress test to see what the impact in a severely adverse scenario 

would be on the firm’s capital position. And we expect to continue 

subjecting all of the firms over $50 billion to that quantitative part 

of the stress test. But there is also a qualitative part relating to 

a firm’s capital planning process. And that is something that currently all of the firms above $50 billion are subject to, and we are 

proposing eliminating that and reducing some of the reporting requirements associated with stress testing for the banks under $250 

9 

billion, as you said, that don’t have a lot of international activity 

or nonbanking—nonbanking business. 

And we think that our normal supervisory process where we 

would look at the capital planning processes of these firms is adequate and that many of these firms are meeting our expectations, 

and this is a significant burden that we think we can relieve these 

firms of. 

Ms. WATERS. I would like to thank you for paying attention to 

the concerns that have been addressed by members of this committee, and I would like to thank you for recognizing that not only 

do we have concerns, but these are concerns that can be addressed 

if we would but work with you, rather than coming up with all of 

this legislation that really interferes with your ability to exercise 

the authority that you have. I am very appreciative for that. Let 

me go on to the next question. 

Chair Yellen, I have been closely following the progress on the 

living wills at the largest banks over the last 5 years. And I must 

say that I have not been encouraged by that progress. In April of 

this year, you and the FDIC finally took the important step of officially declaring five living wills as noncredible: JPMorgan Chase, 

Bank of America, Bank of New York Mellon, State Street, and 

Wells Fargo. These banks are required to submit their wills to you 

in the next week. These banks have had 5 years to identify and address problems within their organizations. If any of their living 

wills are still insufficient in October, will you use your additional 

authority under the Dodd-Frank Act to quickly and severely reduce 

the risk these banks present to our economy? 

Mrs. YELLEN. We certainly do stand ready to use the authority 

that we have to impose higher capital and other standards on these 

firms if they have not corrected the deficiencies that we have identified. We have been very specific with the five firms in indicating 

what the deficiencies are. We have released to the public the letters 

that detail those deficiencies. We will carefully and quickly review 

the submissions that are due by October 1 to see if those deficiencies have been remedied. 

But I would say more broadly, for all of the firms, the FDIC and 

the Board identified a range of shortcomings, things that we did 

not think rose to the level of deficiencies but nevertheless are 

things that we want to see corrected. And we will be reviewing the 

next round of submissions due in 2017 to see if they have been corrected or not. And it is conceivable that if there has been no 

progress, those things could later rise to the level of deficiencies. 

Ms. WATERS. Thank you very much. 

I yield back. 

Chairman HENSARLING. The time of the gentlelady has expired. 

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

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Chair Yellen, this month the Fed along with the OCC and the 

FDIC put out its required report on bank investment activities required under section 620 of the Dodd-Frank. The Fed raised several concerns with physical commodity activity of financial holding 

companies under both the complementary authority and section 40 

authority. 

10 

Last week, the Fed issued a Notice of Proposed Rulemaking 

whereby it would impose significant capital requirements on covered physical commodity activities that would effectively prohibit 

many of these activities. In both of the documents, the Fed relies 

on the term, ‘‘environmental catastrophic risk’’ or ‘‘catastrophic 

risk.’’ 

How does the Fed define that risk and how does the Fed measure it? 

Mrs. YELLEN. Well, the Fed has been motivated in this rulemaking by looking at the enormous environmental consequences of 

things like oil spills, the BP disaster, and other things, and the 

kinds of consequences that those can cause financially for firms 

and also reputationally. And we are concerned and have done a 

rulemaking on physical commodity activities, as you indicated, that 

attempt to address the risks that we think exist in that area and 

have recommended to Congress repeal of the merchant banking authority for essentially the same set of reasons. 

Mr. NEUGEBAUER. So, but I guess the question is, when you are 

analyzing risk, you go back and you look at past activities to determine, do I hedge my risk against that? I guess the question is, 

what past environmental catastrophes have posed a problem for financial holding companies? Can you point to something that said, 

‘‘Gosh, if that happens again, there is a problem?’’ I can’t think of 

an event that happened that impacted those financial holding companies. 

Mrs. YELLEN. Well, under the merchant banking authority— 

Mr. NEUGEBAUER. Yes, but this is a different—there are two different authorities here, the merchant banking and them being able 

to hold the commodities. I want to specifically talk about the commodities. 

Mrs. YELLEN. We look at what is permissible and see that there 

could be environmental risks associated with it. It is not a question 

of just going back through history to see what has happened in the 

past. It is a forward-looking concern that the permissible activities 

could pose risks. 

Mr. NEUGEBAUER. Yes, I am a little afraid that we are just trying 

to think of things that could happen, and then trying to make all 

of these financial institutions somehow pay a punitive penalty in 

either capital or regulation for events that may not have happened 

and may never happen again. 

I want to then turn to the GSIB surcharge and stress test. Some 

commentators have stated that the GSIB surcharge effectively 

works as a tax on capital market activities. 

Can you kind of name the components that make up the surcharge and what activities tend to increase the score? 

Mrs. YELLEN. There are a set of factors that are considered in 

determining the GSIB surcharge, including things like interconnectedness and reliance on short-term wholesale funding factors 

that would increase the likely systemic repercussions of the failure 

of the firm. And as you said, the GSIB surcharges can be thought 

of as taxes imposed on these firms that serve two purposes. First, 

by insisting that firms hold more capital to address the risks that 

their failure could impose on society on the broader economy, they 

ought to be less liable to fail, and holding more capital accomVerDate Nov 24 2008 14:44 Mar 09, 2018 Jkt 025967 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\25967.TXT TERI
11 

plishes that. And it may create an incentive for these firms to restructure their activities in a way to— 

Mr. NEUGEBAUER. So, when you look at that, for example, complexity is one of those. And that, I think talks about the size of the 

bank’s asset that is involved in market making. And then interconnectedness components are primarily dealer-to-dealer trading 

assets used for hedging and market-making activity and then 

cross-jurisdiction components of dealer-to-dealer trading similar to 

the interconnectedness factor. And when you start to look at all of 

those things that you are penalizing those entities for, it is making 

markets in the capital markets. And I think what many of us are 

concerned about is the message to the banks right now is: just get 

out of the capital markets area because the regulators are making 

it very punitive to be in those activities. 

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. Thank you. Thank you, Mr. Chairman. 

I believe that Chair Yellen’s performance so far has been nonpartisan, admirable, and has proven that she is more than capable 

of navigating these difficult waters and guiding the U.S. economy 

back to robust economic growth. So I am disturbed by anyone in 

a recent debate or anywhere who suggests that Chair Yellen is 

somehow acting politically. Nothing could be further from the 

truth. 

And I would like to thank you for the service to our country over 

your long career in government. 

Mrs. YELLEN. Thank you, Congresswoman. 

Mrs. MALONEY. And I would like to begin with a question on 

monetary policy before we get to regulation. You said last week at 

the FOMC meeting that one of the reasons the Fed didn’t raise 

rates was because more people had come back into the labor force 

without the unemployment rate going down, which suggested to 

you that the economy ‘‘had a little more room to run.’’ 

But you also said that if things stay on the current course, you 

expect one increase in interest rates before the end of this year. So 

what does that mean? Does that mean that you expect the unemployment rate to start falling again soon? So, in other words, does 

this mean that you think that the economy has a little more room 

to run but not that much room to run? Exactly what did you mean? 

Mrs. YELLEN. Let me try to clarify. For this entire year, job creation has been running at a pace of about 180,000 jobs per month. 

And that is a pace—it is a little bit less than we saw in 2015, but 

nevertheless, well above the pace of job creation that is sustainable 

over the longer run given trends in the labor force. 

Now, I have been pleasantly surprised to see that the unemployment rate actually, as I mentioned, hasn’t fallen over that time because people have been drawn back into the labor force and that 

really means—and with inflation running below 2 percent—we are 

really not seeing meaningful upward pressure on inflation, and we 

haven’t seen the unemployment rate fall. 

But monetary policy is accommodative. Eventually, continued job 

creation at that pace would cause the economy to overheat and 

would push the unemployment rate down to lower levels than now. 

12 

So monetary policy is accommodative. We want to make sure that 

the expansion is won and the good performance of the job market 

is sustainable over the medium term. If we allow the economy to 

overheat, we could be faced with having to raise interest rates 

more rapidly than we would want, which could conceivably jeopardize that good state of affairs that we have come close to achieving. 

So we expect to see the unemployment rate fall farther. We expect to see solid job growth continue, but we do need, if things continue on their current course, to gradually remove the accommodation that is there. 

Now, it is probably not that much. Our estimate of how much accommodation there is has come down over time as economists have 

reconsidered what is a neutral stance of policy, but nevertheless, 

there is accommodation. And while there is no fixed timetable for 

removing it, many of my colleagues indicated in their recent projections, the majority, that they would see it as appropriate to make 

a move to take a step in that direction this year if things continue 

on the current path and no significant new risks arise. 

Mrs. MALONEY. Okay. Thank you. Now, I would like to ask you 

about the stress test also. Some people have argued recently that 

the Fed should put the economic scenarios it develops for the stress 

test out for formal notice and comment for the public and for interested parties in order to let industry and others weigh in on the 

assumptions that you use. And of course, the fact that the Fed can 

tweak these scenarios every year to account for new market developments is one of the main reasons why I would say they are useful. So could you respond to that quickly? My time is up. 

Chairman HENSARLING. Very briefly, please. 

Mrs. YELLEN. Just very briefly, we want to make sure that those 

scenarios are based on timely information and address the most 

significant risks we see. We have put out for comment both the 

principles underlying our stress tests and information about how 

we construct the scenarios so firms have quite a good idea of what 

they can expect in terms of a scenario that they will face. But all 

of the details, we don’t put out for comment. It would cause large 

delays. 

Chairman HENSARLING. The time of the gentlelady from New 

York has expired. 

Mrs. MALONEY. Thank you very much. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, Mr. Garrett, chairman of our Capital Markets 

Subcommittee. 

Mr. GARRETT. I thank the chairman. 

Thanks, Chair Yellen. 

As you know, last week, there was the big FOMC meeting and 

surprise—to no surprise, the Fed decided to do what? To continue 

the extraordinary accommodative monetary policy. Now, I know 

you have taken the position that the Fed’s position are all purely 

data-driven and that is where some of the questions were before 

and that it has absolutely nothing to do with politics. But fewer 

and fewer people really do believe that. Let me just give you two 

or three headlines out of last week regarding the FOMC meeting. 

From Politico, right around here: ‘‘Yellen helps Clinton dodge a bulVerDate Nov 24 2008 14:44 Mar 09, 2018 Jkt 025967 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\25967.TXT TERI
13 

let.’’ From the LA Times: ‘‘Is the Fed politically biased? Look at its 

interest-rate decisions as elections near.’’ From MarketWatch: ‘‘A 

Fed rate hike and other important decisions again being put off 

until after the election.’’ 

See, Chair Yellen, you have told our committee and the public on 

countless occasions that the Fed is not subject to undue political 

pressure. But as the saying goes, perception is reality. And whether you like it or not, the public increasingly believes that the Fed 

independence is nothing more than a myth. And the Fed has an 

unacceptable cozy relationship both with the Obama Administration and with higher-ups in the Democratic Party. 

Now, I brought this up a year ago, and let me run through some 

of those points that I raised then. You personally have weekly 

lunches with political and partisan heads over at the Department 

of Treasury. There is, in fact, a revolving door between the Treasury appointees and the Board of Governors. Your predecessor, 

Chairman Bernanke, had made a decision literally just weeks before the President had to go before the voters in 2012. And looking 

at your record, your speech on income inequality, something you 

never talked about before but which became a major political 

theme for the Administration, and you gave it just weeks before 

that last election. 

Now, let me give you one most recent one, and maybe you can 

just comment on this with a couple of yes and noes. There is little 

doubt about last week’s FOMC meetings have potential implications for the markets and therefore the election, but it was reported earlier this year that Fed Governor Lael Brainard contributed the maximum amount to the Hillary Clinton campaign, and 

she did so while she was a sitting member of the Fed Board. And 

there were numerous reports that have come out, media reports, 

stating that the Governor is angling for a top job with the Clinton 

Administration if Hillary wins. 

So some basic questions. Knowing that is all out there on the 

table, because of the appearance of conflict and impropriety there, 

has Governor Brainard ever offered to recuse herself from voting 

at the FOMC? Has she? 

Mrs. YELLEN. Governor Brainard, like all of us, is subject to the 

restrictions of the Hatch Act. 

Mr. GARRETT. Right. And so has she offered to recuse herself because of her political involvement? 

Mrs. YELLEN. No. 

Mr. GARRETT. The answer is no. Have you ever asked the Governor— 

Mrs. YELLEN. No. 

Mr. GARRETT. I am sorry. 

Mrs. YELLEN. The Hatch Act does not prohibit political contributions. 

Mr. GARRETT. I get that, and so but we see the appearance of the 

conflict, and so it is a basic question. Has Governor Brainard ever 

offered to recuse herself? And the answer is no. 

Have you ever asked Governor Brainard to recuse herself because of her close involvement with the campaign in making contributions? Have you ever asked? 

14 

Mrs. YELLEN. She is acting in a way that is permitted by the 

rules we are subject to— 

Mr. GARRETT. So your answer is—right. 

Mrs. YELLEN. And each one of us has to decide— 

Mr. GARRETT. I understand that, so the answer is— 

Mrs. YELLEN. —for ourselves— 

Mr. GARRETT. The answer is she has never offered to recuse herself. The answer is you have never asked her to recuse herself. 

To your knowledge, has Governor Brainard been in contact with 

the Clinton campaign regarding a potential job in a potential future Administration? Are you aware of that at all? 

Mrs. YELLEN. I have absolutely no awareness of that. 

Mr. GARRETT. There have been published media reports talking 

about that. So you are not familiar with those media reports? 

Mrs. YELLEN. I have—what is important to me is whether or not 

in our decisionmaking, our collective decisionmaking, I see politics 

being brought to bear in reasoning about our decisions, and I have 

never seen that on the part of any of my colleagues. 

Mr. GARRETT. So, if you learned that she has had communications with Clinton as far as trying to get a job, would that change 

your opinion as to whether she should be asked to recuse herself? 

Mrs. YELLEN. I don’t think that there is a conflict of interest 

there. 

Mr. GARRETT. So someone can—a Federal Governor can be in direct negotiations with a political campaign looking for a future job, 

and that is not a conflict, as far as you are concerned? 

Mrs. YELLEN. You know, we do have— 

Mr. GARRETT. No. Is that a conflict or not, if they are having direct negotiations with either political party to ask for a job next 

year while they are a sitting Governor? Do you see that as a conflict? 

Ms. WATERS. Will the gentleman yield? 

Chairman HENSARLING. There is no time. 

Mr. GARRETT. I would like to have an answer. Is that a conflict? 

Ms. WATERS. Will the gentleman yield? 

Mr. GARRETT. If it is a conflict, will you be asking the Governors 

whether they are engaged in such activity? 

Ms. WATERS. Will the gentleman yield? 

Chairman HENSARLING. The time of—the gentleman is apparently not yielding. The time of the gentleman has expired. 

Can the witness give a brief answer? 

Mrs. YELLEN. I would have to consult my counsel. I am not 

aware that that is a conflict, but I would— 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chair Yellen, Puerto Rico is currently facing a historic crisis: 46 

percent of the population is below the poverty line, which is 3 times 

that of the U.S. mainland. Employment in Puerto Rico stands at 

roughly 1 million, down nearly 300,000 from 2007. In the meantime, the U.S. economy has gained almost 10 million jobs in the 

same timeframe. On top of this challenge, the island is struggling 

with Zika virus, and last week, a blackout swept the island. 

15 

When the U.S. mainland faced severe challenges from 2007 to 

2009, Congress passed and the President signed sweeping stimulus 

legislation, the American Recovery and Reinvestment Act. Do you 

believe that this legislation was helpful in fostering an economic recovery for the U.S.? 

Mrs. YELLEN. Well, I do think Puerto Rico faces very serious economic and fiscal problems, as you have described. They have been 

building for a long time, and the Commonwealth faces very significant challenges. I think the framework that Congress passed provides tools that maybe enable the Commonwealth to avert some 

worst-case scenarios. The ability to restructure debt should make 

it possible to put in place a fiscal adjustment that will be one that 

is less uncertain and hopefully entails smaller cuts to government 

spending. 

Ms. VELAZQUEZ. I understand all that, Chair Yellen. It will take 

time for the Fiscal Control Board to do its work. And the situation 

in Puerto Rico is really very difficult at this time. My question to 

you is, how can we spur investment in Puerto Rico? How can we 

foster economic growth and not wait for the Fiscal Control Board, 

because the reality is people are leaving the island? The most productive workforce is leaving the island. They are facing serious 

problems with a healthcare system that is broken. And my question to you is, do you believe that a Puerto Rico-focused stimulus 

plan will have a similar effect on the island’s economy like we did 

here in 2008-2009? 

Mrs. YELLEN. So this is really something I am not an expert on, 

what the appropriate programs are for Puerto Rico to deal with its 

longstanding problems, and I think that is squarely a matter for 

Congress and the Administration to consider. 

Ms. VELAZQUEZ. Okay. Thank you for that answer. 

We cannot forget that Puerto Rico is part of the United States, 

that we have a responsibility and moral obligation. After all, we 

don’t provide parity in some of the important issues that they are 

facing, such as Medicaid and Medicare. 

Chair Yellen, last Friday, the Federal Bank of Philadelphia 

launched a research and advocacy initiative to examine the interaction between economic inequality in the United States. And its 

implication for macroeconomic prosperity and growth. What is the 

Fed hoping to learn from this initiative, and how is the Fed hoping 

its findings will further the economic inequality discussion? 

Mrs. YELLEN. So— 

Ms. VELAZQUEZ. I don’t see it as a political plot. I see it as a contribution in terms of promoting economic growth among those who 

have been left behind. 

Mrs. YELLEN. Yes. I think the high level of poverty and inequality in the United States is a concern, should be a concern to all 

Americans, and an important challenge that our Nation hopefully 

will address. And this initiative is really focused on trying to understand what some of the key factors are that are driving those 

outcomes and looking at practice to see, based on real-world experiences with programs that are attempting to address poverty, what 

works and what lessons can be learned that might be of use to 

communities trying to deal with entrenched poverty. 

Ms. VELAZQUEZ. Thank you. 

16 

Chairman HENSARLING. The time of the gentlelady 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. 

And Chair Yellen, welcome. 

We spoke a lot about the sheer volume of rules coming out of the 

Federal Reserve. It is rule after rule, layer of regulation after layer 

of regulation, and that is really impacting financial institutions 

across this country, whether they serve a small community in Missouri or customers across the globe. 

Now we have the merchant banking and physical commodities 

involvement by the Fed, as my colleague Mr. Neugebauer has indicated. And I hope that you work with this body with regards to 

those rules. Fed officials have made statements to the effect that 

the benefits of merchant banks outweigh the potential risks, yet we 

seem to be intent on trying to find a solution where there is no 

problem. That concerns me greatly, and I can assure you we intend 

to have a number of questions, written questions, for you to respond to with regards to that issue. 

Today, though, I want to discuss some the SIFI designation stuff 

that Mr. Tarullo announced this past week. I think it is important. 

We certainly now recognize that the SIFI should be designated 

based on risk, not just on size. That is an important thing. Secretary Lew was here last week, made that same comment, basically, that we need to look at other factors rather than size. And 

that seems to be your position as well now. 

With regards to that, can you tell me what administrative costs 

will be incurred by the Fed to remove the CCAR requirement? 

Mrs. YELLEN. I am sorry— 

Mr. LUETKEMEYER. Can you tell me what the costs by the Fed 

would be to remove the CCAR requirement of being a SIFI, the 

stress test? 

Mrs. YELLEN. Well, we believe that stress tests are a very important way— 

Mr. LUETKEMEYER. I am not asking— I am not talking about 

whether you do or do not do them. What is the cost that—what is 

the savings that you are going to have, or is there a cost to de-designate? Is there a cost to administratively remove the CCAR requirement? Is there a cost to do that? 

Mrs. YELLEN. Is there a cost in terms of dollars and cents that 

we spend on it? 

Mr. LUETKEMEYER. Yes. Does the Fed have to—does it cost you 

something to administratively remove the CCAR designation—requirement? 

Mrs. YELLEN. Does it cost us to implement it and to run the 

tests? And would we—are you asking me— 

Mr. LUETKEMEYER. I am asking you if you don’t—to remove the 

requirement, does it cost you money? 

Mrs. YELLEN. Does it cost us money to remove the requirement? 

It does not. 

Mr. LUETKEMEYER. Yes. The CCAR requirement, does it cost you 

money to do that? 

Mrs. YELLEN. Does it cost us money? No. 

17 

Mr. LUETKEMEYER. Okay. That is what I want to know. 

Mrs. YELLEN. But I think it would be a cost in terms of safety 

and soundness. I think that— 

Mr. LUETKEMEYER. No. I am not talking about that. I am talking 

about the Fed. Does it cost you money to remove the CCAR requirement? You said no. That is what—that is the answer to my 

question. 

Mrs. YELLEN. Well, any cost also that we incur in carrying out 

CCAR in the stress testing is passed on to those institutions who 

pay for the cost of their supervision. 

Mr. LUETKEMEYER. Okay. 

Last February, the Office of Financial Research conducted an 

analysis of the systemic importance of 33 U.S. bank holding companies based on basically the tenets of my bill, H.R. 1309, and given 

that all of this work has been done, can you tell me what you think 

the costs would be for FSOC to de-designate and redesignate a financial institution— 

Mrs. YELLEN. For FSOC to what? 

Mr. LUETKEMEYER. —for FSOC to de-designate or redesignate 

these institutions if they are no longer SIFIs, according to the bill? 

I have a bill that says you have to look at these things and if the 

bill—if it shows that the institutions are not SIFIs, you have to dedesignate them and then redesignate them if they are just in analyzing them. Is there a cost to that? 

Mrs. YELLEN. Well, yes, I think it is clear that these institutions— 

Mr. LUETKEMEYER. Can you give me a figure? 

Mrs. YELLEN. No, I cannot give you a figure. 

Mr. LUETKEMEYER. Okay. Can you give me a ballpark? Is it 100 

bucks, a thousand bucks, a million bucks, $10 million? 

Mrs. YELLEN. I can’t give you an estimate. 

Mr. LUETKEMEYER. Okay. Well, the problem is that the FSOC 

staff, which includes the Federal Reserve, informed the CBO that 

the de-designation and potential redesignation of banks where they 

are over $50 billion in assets would have an administrative cost of 

over $60 million. 

Do you think that is reasonable? 

Mrs. YELLEN. I honestly don’t know. I have not looked at it. 

Mr. LUETKEMEYER. Do you have any idea how your staff arrived 

at that figure? 

Mrs. YELLEN. This is the FSOC staff. 

Mr. LUETKEMEYER. Well, no, they did it in conjunction with the 

Federal Reserve staff, which is part of FSOC. Your staff came up 

with this figure. Do you have any— 

Mrs. YELLEN. I have not reviewed how they came up with that 

figure. 

Mr. LUETKEMEYER. Okay. So if we write you a letter, you will be 

able to give a response to that as well? 

Mrs. YELLEN. I can try to do that. 

Mr. LUETKEMEYER. Okay. Very quickly, you made the comment 

a minute ago with regards to what you have all done for community banks to help them with the regulatory problems with this inundation of rules and regulations. Can you give me several examples of that, please? 

18 

Mrs. YELLEN. Examples of what we have done? 

Mr. LUETKEMEYER. Yes. 

Mrs. YELLEN. We have changed the small bank holding company 

policy statement to raise the threshold for capital regulation. 

Mr. LUETKEMEYER. I think we did that in Congress, if I am not 

mistaken, though. 

Mrs. YELLEN. You did. But we put that into effect. We have— 

Mr. LUETKEMEYER. Well, I am glad to know that you implemented our law. Thank you very much. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Madam Chair, good move or nonmove earlier this 

month at the FMOC. 

Now, some in politics on Monday will say that our economy is in 

such terrible shape that those who make economic policies are obviously incompetent. Then they will come back on Wednesday and 

say it is urgent that we raise interest rates because our economy 

may overheat and economic growth could get out of hand. Only in 

this room can you juxtapose those two positions. 

We need to allow small-business loans. I have been told by many 

bankers if there is a 2 percent or 3 percent risk that a business 

will go under, they can’t make the loan. Jamie Dimon was sitting 

where you are now and said, well, he couldn’t find qualified smallbusiness borrowers under that standard. So he sent his money to 

London where it was eaten by a whale. 

It would do a lot for the security of our financial system and also 

hope the economy of this country if banks were able to make prime 

plus 3, prime plus 4 loans to businesses that had a little risk and, 

of course, provide a reasonable reserve. Instead, I am told if you 

don’t qualify for prime plus two, you leave the office. 

I join the Chair in saying that it is a good idea to tailor your regulations. And I would say that the more SIFIs you designate, the 

less significantly you will regulate SIFIs. And it is the hugest institutions that are really systemic risks. 

But Madam Chair, I want to address the elephant in the room, 

or maybe I should say the stagecoach. I will remind you that the 

FSOC has the authority to break up the biggest banks. And for 

that—I have said that before in this room and people said, you 

must have animus to the true global SIFIs. No, studied microbiology. The protozoa reaches a certain size and then it divides. That 

is healthy. That is normal. If a protozoa can divide in a healthy 

manner, you would think the smartest minds on Wall Street could 

as well. Too Big To Fail is too big to exist. Let’s look at the elements of that. 

Too big to fail is too big not to bail, that is why we bailed them 

out in 2008. Too big to fail is too big to jail, that is why Eric Holder 

said he can’t indict certain executives and institutions, because if 

he did, it would have too big an effect on the economy. Too big to 

fail is too big to compete with, that is why some studies say they 

get 80 basis points off their cost of capital—it might be less—because of the expectation of those providing the capital that if they 

get in trouble, we will bail them out. 

19 

But Wells Fargo has identified two additional reasons to break 

these institutions up. Because you—they created a system where 

they hired good Americans and turned 5,300 of them into felons. 

Two million felonies. They failed to monitor the system. When they 

saw that there was a—that some individuals had created phony accounts, they fired 1,000 of them and didn’t change the system and 

didn’t fire the executives that created the system that created the 

first thousand felons that led to 5,300 felons. 

Now, from a Democratic side, I say too-big-to-fail is too big to 

manage. From a Republican side, I have heard too-big-to-fail is too 

big to regulate. But whether the fault is the regulators who can’t 

regulate it or the managers who can’t manage it, too-big-to-fail is 

too big to exist. 

So my question for you is, will you seriously consider using your 

authority, as I think you are required to review and consider using 

your authority, will you at least seriously consider breaking up 

Wells Fargo? 

Mrs. YELLEN. We will hold the largest organizations to exceptionally high standards of risk management, internal controls, consumer protection. We expect the— 

Mr. SHERMAN. But if you broke Wells Fargo up, then instead of 

trying to hold them up to those really high standards, people could 

choose which financial institution to go with. They wouldn’t pose 

a systemic risk. By saying you are going to hold the giant institutions up to standard, something you have not been able to do, 2 

million times, 2 million phony accounts, so you are saying you are 

just going to do—you are going to continue to do a great job of regulating the too-big-to-fail because you are not going to break them 

up? 

Mrs. YELLEN. Well, we believe it is possible, even though it is extremely challenging for organizations to comply with the law. 

Mr. SHERMAN. Two million phony accounts not detected by the 

regulators. Break them up. 

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. 

And Madam Chair, I appreciate you being here, but quite honestly—no offense—I wish you weren’t. We need to have the Vice 

Chair of Supervision here. This is a position that the Administration has refused to appoint for 6 years now. 

You know, Governor Tarullo has essentially fulfilled the function 

as position of the—from his position as Chair of the Feds Board’s 

committee on supervision, but he is not in this position. And quite 

honestly, by refusing to fill this position, I believe that the President has deprived Congress and the American people an opportunity to hold the Fed accountable through these semiannual hearings. 

And this is a requirement of Dodd-Frank, the much vaunted 

Dodd-Frank, that some of my friends believe is somehow holy 

script that can’t be changed or altered in any way. But they conveniently refuse some of those other areas. 

20 

Do you believe that there should be a nomination to fill this position? 

Mrs. YELLEN. We would certainly welcome a nomination. 

Mr. HUIZENGA. Have you brought that up with Secretary Lew in 

your weekly lunches? 

Mrs. YELLEN. This is a matter for the Administration to decide. 

Mr. HUIZENGA. That is not my question. Have you brought it up? 

You are having to be here in somebody else’s stead. Have you 

brought it up with the Administration or specifically with Secretary 

Lew or anybody else? 

Mrs. YELLEN. I am not going to discuss what I have discussed 

or haven’t with the Secretary. 

Mr. HUIZENGA. Okay. Well— 

Mrs. YELLEN. As I say, it is an Administration responsibility, and 

we would certainly welcome a nomination. 

Mr. HUIZENGA. Well, I guess we will continue to hold you responsible for that obligation, which is something that you shouldn’t be 

held for. But that is your decision. 

Mrs. YELLEN. Well, I think— 

Mr. HUIZENGA. I am going to go on. But do you believe that any 

and all rulemaking regarding regulatory or supervisory—or supervision should be suspended until this Vice Chair is actually named? 

Mrs. YELLEN. No. Because I think the Board of Governors is 

charged with supervision and putting in place regulations. And we 

are carrying that out. 

Mr. HUIZENGA. And then who do we hold responsible for that? 

Who do we hold responsible for that then? 

Mrs. YELLEN. Well, I am responsible and my colleagues are responsible, and I am— 

Mr. HUIZENGA. Okay. Well, as long as you are willing to fulfill 

that obligation, that is an additional burden on you, but— 

Mrs. YELLEN. We are. Congress assigned the Board of Governors 

that responsibility, and I am certainly sharing that responsibility 

with my colleagues. 

Mr. HUIZENGA. Okay. This is going fast so I need to move on. I 

want to talk a little bit about monetary policy versus regulatory 

and supervision and supervisory roles. The fact is, is that in my 

Fed Oversight Reform and Modernization Act, the FORM Act, and 

by extension the CHOICE Act, we are trying to bring some separation to your function as monetary policymakers as well as your regulatory and supervisory roles. 

Former Senator and Banking Committee Chairman DoddFrank—or Chris Dodd as well as Chairman Frank at the time had 

advanced legislation or advanced the notion that those ought to be 

separate duties and that your regulatory and supervisory roles 

ought to be put on budget. And I am curious, were they wrong in 

that assessment? 

Mrs. YELLEN. Well, Congress decided to— 

Mr. HUIZENGA. So you would welcome, then—if Congress decided, you would welcome having that separation and putting your 

regulatory and supervisory roles under budget and with review just 

like everybody else, every other regulator versus the separation of 

your monetary policy duties? 

21 

Mrs. YELLEN. The banking agencies do not have their budgets 

mandated by Congress. They are covered by collections from the industry. I would very much worry that we would lack the flexibility 

under congressional appropriations to ramp up our supervision at 

times when it appears to be— 

Mr. HUIZENGA. But we have an alphabet soup of all these other 

regulators that are there as well. And so it seems to me you are 

wanting to have your cake and eat it too. You want to have this 

super-duper regulatory role where it is Fed uber alles on this stuff. 

But you are not willing to subject yourselves to what the other regulators go through, and that just seems that—rarely do I say that 

I agree with Barney Frank, but I believe that Chairman Frank at 

the time had this right and that there is that separate role. 

My last issue as we are quickly closing out here, some have believed that Dodd-Frank cannot be changed at all in any way, 

shape, or form. You said on page 14, page 4 a number of times that 

there ought to be these adjustments. Have you spoken to these 

Senators or other reps who disagree with you and say that we cannot touch Dodd-Frank? 

Chairman HENSARLING. A very brief answer, please. 

Mrs. YELLEN. Well, we have said that those would be desirable 

changes. 

Mr. HUIZENGA. I hope you are expressing that to the members. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

And it is a pleasure to welcome you back to this committee. And 

let me just say at the outset, I also thank you for staying with who 

you are, being nonpartisan and independent, despite there being 

some, especially in the presidential politics which we are currently 

engaged in, who is trying to say that your decisions are based upon 

a partisan way. In fact, I think that it is good when you are criticized from both the left and the right and from everyone. That 

probably means that you are doing the right job because you are 

not focused on either side. 

And we in this committee specifically reinforced the banking supervision’s powers of the Federal Reserve in Dodd-Frank because 

there was clearly a need to heighten our banking examinations and 

regulatory framework. I think that that is clear from what took 

place back in 2008. 

The good news is that we are seeing banks taking bolder steps 

to reduce risk, as you have indicated, and to exit out of certain 

risky activities. We do see some of that happening. Even if some 

would say that banks are bigger today than there were before the 

financial crisis, that probably may be true from a simplistic perspective, but it is not a complete and accurate picture because, not 

only have banks exited some of their riskier businesses, they have 

also boosted their capital and liquidity buffers, which surely increases the size of their balance sheets, but it makes them safer 

and sounder institutions. So this is the complicated stuff, which is 

true. And then yet we still have Wells Fargo, which causes us to 

have great concerns as to what and where we need to go next, as 

we will have questions with him. So there has been some progress. 

22 

But then there is also unintended consequences. And I want to 

shift to that now just because it is well-documented that one of 

those unintended consequences of banks derisking has been that 

banks are getting out of certain communities and countries, and 

they are also denying services to millions of lower income Americans, not because the risk is too high, but simply because the profit 

margins are not considered high enough. There have been serious 

consequences on vital correspondent banking relationships that are 

critical to international financial flows also. 

But another major problem happening in several communities 

here, including in a district like mine, is that banks are closing 

branches. In fact, economists from the Federal Reserve Bank of 

New York released a report last March entitled, ‘‘Banking Deserts, 

Branch Closings, and Soft Information,’’ showing that U.S. banks 

have shut nearly 5,000 branches since the financial crisis as a result. 

Residents of low-income neighborhoods have become somewhat 

more likely to live in a banking desert. That is why I have called 

for the revamp of the Community Reinvestment Act in a letter that 

was just mailed to a number of banking regulators and cosigned by 

40 of my colleagues. Some are still signing on. 

So Chair Yellen, it is obvious that CRA is not working as it was 

meant to work when it was passed 40 years ago. And I have had 

this discussion with OCC Comptroller Curry, and I strongly believe 

that part of the solution resides in enabling greater collaboration 

between large banks and CDFIs, including minority deposit institutions, so that these institutions can take over assets and branches 

before they close, and more importantly, so they can preserve banking services and relationships in low-income communities of color. 

So the comptroller and I are in constant dialogue on this, and I 

would love to get some of your thoughts on this matter. 

Mrs. YELLEN. Well, I am concerned about banking services in 

low-income communities. And we are working with minority depository institutions to provide support to them in enhancing the very 

important and valuable role that they play in ensuring the provision of services to these communities. 

Mr. MEEKS. So do you believe that we should—40 years ago 

there was one thought of you: Banking in CRA was put in so that 

we could make sure that you had institutions. Do you believe that 

there is ways that we can revitalize or revamp CRA to deal with 

the institutions and what is taking place today so that these communities are not neglected and then become part of banking 

deserts? 

Mrs. YELLEN. Well, we are having a look at CRA and the agencies who have put out additional guidance in recent years that is 

meant to address issues that have arisen, and we will continue to 

look at what further guidance might be appropriate. 

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. Madam Chair, welcome. Obviously, looking back to 

2008, the crisis had a huge impact, not just on the financial service 

sector, but had a huge impact across our country and on many of 

the families that we represent. And I would argue that this masVerDate Nov 24 2008 14:44 Mar 09, 2018 Jkt 025967 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\25967.TXT TERI
23 

sive Dodd-Frank bill was passed in a time of fear, where people 

were concerned about the future of our country and the future of 

their family. And a 2,300-page bill was passed before the dust had 

even settled and we had a full analysis on what caused the crisis. 

And we were told by our friends across the aisle, who I would 

argue opened up their cabinets, their file cabinets and dumped in 

every wish bag issue that they had for probably a decade, but they 

made a promise to the American people that when they passed that 

bill, they would be ending too-big-to-fail. Because people were concerned not just about the economy but the fact that the taxpayer, 

their money was going to bail out large financial institutions. 

Do you agree now, almost a decade on, that we have ended toobig-to-fail? 

Mrs. YELLEN. Well, I think we have taken very significant steps 

toward— 

Mr. DUFFY. No, no, no, no, Madam Chair, that is not my question. We were promised that we would end too-big-to-fail—I wasn’t 

here—that they would end too-big-to-fail. So I think the American 

people have a right to know what you think. Have we ended toobig-to-fail? Yes or no. 

Mrs. YELLEN. So as I said, I think too-big-to-fail is a less significant problem now than it was before. I don’t— 

Mr. DUFFY. So you are saying it is a still a problem. We haven’t 

eradicated the threat, have we? Too big to fail still exists. Yes? 

Mrs. YELLEN. I think we have made very, very important and 

meaningful strides toward ending it. 

Mr. DUFFY. Madam Chair, these are simple questions. 

Mrs. YELLEN. I am sorry, I don’t think it is a black or white 

thing, yes or no. 

Mr. DUFFY. You can say, I can tell you, Congressman Duffy, we 

have ended too-big-to-fail. America is better off for Dodd-Frank and 

the fact that I am the Chair of the Fed. Or frankly, no, we haven’t. 

We haven’t ended too-big-to-fail. We have made progress, but we 

haven’t ended it. 

Mrs. YELLEN. We have done a great deal to make it possible for 

a systemic institution to be resolved successfully. 

Mr. DUFFY. So I am going to take that— 

Mrs. YELLEN. The odds of accomplishing that are much better. 

Mr. DUFFY. You are not answering my question. I think what 

you are—if I am going to clear the smoke, you are saying, we have 

made progress but we haven’t ended too-big-to-fail, and I think you 

are in a safe zone because Elizabeth Warren even admits we 

haven’t ended too-big-to-fail. The ranking member and my friends 

across the aisle will admit, clearly in hearings here, we haven’t 

ended too-big-to-fail. 

So my question for you is a 2,300-page bill giving you and other 

prudential regulators significant authority that had a huge impact 

on the financial sector and on our economy, if we haven’t ended 

too-big-to-fail, is it a failure of Dodd-Frank or is it a failure of the 

Fed? 

Mrs. YELLEN. I am sorry, I am not willing to describe it as a failure, because, number one— 

Mr. DUFFY. We haven’t ended too-big-to-fail. 

24 

Mrs. YELLEN. I am sorry, we have made great progress in trying 

to achieve that, and it is not a black or white issue. 

Mr. DUFFY. Does that answer work for my constituents? When 

I go home and said, this was a devastating crisis, it had a huge 

impact on your family, we are 10 years on, we had a 2,300-page 

bill, you can’t get a loan from your credit union or your community 

bank—I am not done—or from your community bank, and Chair 

Yellen came in and she said we have made progress. 

Mrs. YELLEN. So we have a system that is much safer and sounder. It is much more resilient. It has much more capital, much more 

liquidity, and better, although certainly not perfect, risk management. 

Mr. DUFFY. I wholeheartedly disagree on many issues with Elizabeth Warren, but at least she is truthful on that. 

Larry Summers recently—I am sure you read his piece—said 

that, to our surprise, capital information is at least superficially inconsistent with the view that banks are far safer today than they 

were before the crisis and some support for the notion that risks 

have actually increased. Larry Summers. Do you disagree with Mr. 

Summers as well? 

Mrs. YELLEN. Yes, I do, I disagree significantly with that conclusion because it is based on the notion that markets properly evaluated the risks in banking organizations before the crisis, and nothing could be further from the truth. 

Mr. DUFFY. I am going to give you one quote. In 1788, James 

Madison worried that laws may become so voluminous that they 

cannot be read or so incoherent that they cannot be understood. 

2,300 pages in Dodd-Frank, 30,000 new regulatory restrictions, a 

900-page Volcker Rule, 600 pages of Basel III, and you can’t tell 

me with all that rule and regulation that you haven’t eradicated 

the threat of too-big-to-fail. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chair. 

Thank you, Madam Chair, for being here again. I just want to 

clarify a few things I think some of my colleagues made. I am not 

aware of anybody who doesn’t want to amend Dodd-Frank, including me. I want to amend it; I just don’t want to gut it. Good 

amendments, thoughtful amendments, all for them. Gutting it, totally against. And that is pretty much the only bills we have been 

offered is the offered bills that would gut— 

Mr. HUIZENGA. Will the gentleman yield? 

Mr. CAPUANO. Not right now, no, but thank you. 

Mr. HUIZENGA. Hold my request. 

Mr. CAPUANO. Too big to fail? I agree. We should do more on it. 

That is why I offered the bill to bring back Glass-Steagall. All my 

colleagues are welcome to join that bill. That is why I offered H.R. 

888 that the community bankers support. All my colleagues are 

welcome to join that bill. And that is why I joined my colleague on 

the other side, Mr. Garrett. 

Now, my God, if you are not paying attention, when Garrett and 

I can agree on H.R. 2625 that directly relates to the Fed’s ability 

to bail out banks. All my colleagues are welcome to join that bill 

25 

as well. I know Mrs. Yellen wouldn’t like that bill, and I appreciate 

that, but it doesn’t kill you. It just kind of squeezes a little harder. 

There are bills that are out there to do more. All you have to do 

is read them and join us. If Garrett and I can do it, you sure as 

hell can find a way to do it. Don’t get used to me and Garrett working together either, but that is a different issue. 

Mrs. Yellen, let’s assume for the sake of discussion that we had 

a large bank, a big SIFI, one you are keeping a very close eye on, 

that over the last 5 years has had 16 enforcements actions against 

them, including one from the Fed. Let’s assume the bank had a 

Fed fine of $85 million, and in that agreement, the consent agreement that they signed with you, they said—well, you said, ‘‘Internal controls are not adequate to detect and prevent instances when 

certain of its sales personnel, in order to meet sales performance 

standards and receive incentive compensation, altered or falsified 

income documents and inflated perspective borrower’s incomes to 

qualify those borrowers for loans that they would not otherwise 

have been qualified to receive.’’ That was 2011. Obviously, hypothetical, of course. 

And since that time, we have had 15 other violations across the 

Board with pretty much every alphabet agency you can find—DOJ, 

CFPB, OCC, FinCEN, FHA, SEC, NCUA, and pretty much every 

State in the Nation—totaling $10 billion, almost $11 billion in 

fines. Those actions included defrauding student loans, mortgage 

holders, credit unions, identity protection, kickbacks, insider trading, defrauding Freddie, defrauding Fannie, worker health issues, 

discriminating against African Americans and Hispanics, defrauding investors, foreclosure abuses, and on and on and on. 

And then just this year, earlier, when you rejected their living 

will, your letter cited concerns about quality control, senior management oversight, accuracy, the consistency of financial and other 

information reported, even though the firm’s leadership steering 

committee had input to the plan. 

And now we have a—same bank, same bank, just defrauded 2.5 

million of its own customers. Its own customers. I am sorry, 1.5 

million. Don’t you think it is time the Fed does something? How 

long does this stuff go on before you get outraged and take action? 

Mrs. YELLEN. As you pointed out, we have done something. The 

action that you described in 2011— 

Mr. CAPUANO. You know that an $85 million fine to this bank is 

laughable. You know that. I know you know that. It is a lot of 

money to me and everybody I know, but to this bank, they made 

$23 billion last year. God bless them. They are a very successful 

bank. An $85 million bank is barely a footnote in their annual report, and you know that. 

Mrs. YELLEN. Well, as you pointed out, many regulators have 

been involved in— 

Mr. CAPUANO. Oh, I am going to have my fun with them too. It 

is just your turn today. 

Mrs. YELLEN. So we are—in the case of this institution, we are 

the supervisor of the holding company. We have already instituted 

a review of all of the largest banking organizations because we are 

very concerned with all of the compliance problems and violations 

of laws that have occurred. 

26 

Mr. CAPUANO. You know they are laughing at you, right? You 

know they are laughing at you. 

Mrs. YELLEN. Well, we will— 

Chairman HENSARLING. The time of the gentleman from Massachusetts has expired. 

The Chair now recognizes the gentleman from New Hampshire, 

Mr. Guinta. 

Mr. GUINTA. Thank you, Mr. Chairman. 

Chair Yellen, to your right. Thank you. Thank you for being here 

today. I want to talk a little bit about community banks. You and 

I know the importance and the role that they play in our financial 

ecosystem. My State of New Hampshire is a small State yet a resilient State, 1.3 million people, and we have very close relationships 

with our community banks. We have 10 Federally chartered banks, 

we have 16 State chartered banks, and we have 10 out-of-State 

chartered banks. So it is not a significant number, but they are 

very important and critical to consumers. 

But due to the severe regulations that community banks in my 

State are subject to, they are now limiting products and loans and 

services to their customers and my constituents. When community 

banks should be focused on providing access to credit for consumers, their focus and attention on meeting compliance with the 

burdensome regulatory requirements seems to take the priority of 

their time. 

I get reports from my community bankers on a regular basis that 

they can spend up to 25 percent of their time and resources on 

compliance, and this has been increasing as a result of the growth 

in the regulatory requirements that continue to be placed on them. 

So my first question would be, do you believe that there is a disproportionate impact of regulatory compliance on community financial institutions, institutions that are smaller that service customers in New Hampshire? 

Mrs. YELLEN. So we want to do everything we can to reduce burdens on community banks and recognize that they are laboring 

under a significant set of regulatory burdens. We are going through 

the EGRPRA process and looking at a number of concrete ways in 

which we can reduce that burden. And we have taken a number 

of steps on our own to reduce the frequency and intrusiveness of 

exams to make it more risk focused, to do more work not on the 

premises of the bank to try to reduce burden. 

You asked if the burdens had fallen disproportionately— 

Mr. GUINTA. Right. 

Mrs. YELLEN. —on community banks. The fact that they are 

smaller means that these burdens can be significant relative to 

their budgets. But the most restrictive requirements have been focused on the larger institutions, particularly the U.S. G-SIBs that 

are subject to a much more stringent set of— 

Mr. GUINTA. But you do think there is a disproportionate impact 

on smaller banks, community banks? 

Mrs. YELLEN. There is quite a bit of research that is taking 

place. In fact, we have a conference that is taking place at the moment that is looking at those burdens but— 

Mr. GUINTA. Well, the reason I ask— 

27 

Mrs. YELLEN. —they are significant burdens for a very small 

bank. There is a certain fixed cost involved in doing that. 

Mr. GUINTA. The reason I am asking is we have had two mergers 

in the last 6 months in the State of New Hampshire. And my fear 

is that that is going to continue. So I hope that you could identify 

very specifically and very quickly before the end of the year areas 

where we can reduce that regulatory burden. New Hampshire 

bankers are going to be coming to Washington tomorrow to meet 

on this very subject. They are very interested in it and—because 

our economy requires and relies on them. 

A different point I want to bring up, in your written testimony, 

you recommended that Congress consider carving out community 

banks from the Volcker Rule and the Dodd-Frank Act’s incentivebased compensation rules. Regarding your recommendation that 

community banks be carved out of the Volcker Rule, would you 

agree in concept that an approach worthy of consideration would 

be to exempt the Volcker Rule those banking institutions that do 

not engage in a material way in the activities that the Volcker Rule 

seeks to regulate, but keep those entities that engage in trading activities subject to the Volcker Rule? 

Mrs. YELLEN. So we have certainly said that we thought smaller 

institutions should be exempt, and the exact definition I would 

have to look at—I would have to look at more carefully. 

Mr. GUINTA. Okay. You also talked earlier about the 80,000 jobs 

per month that this economy is generating. Can you tell me—and 

you said the labor participation rate is changing. Can you tell me 

what percentage the labor participation rate is right now? Is it 

below 62 percent? 

Mrs. YELLEN. No, I don’t believe so. Let me just have a look. 

It is currently 62.8 percent. 

Mr. GUINTA. Okay. I am sorry, my time has expired, but I don’t 

think that that has changed over the last several months. 

Chairman HENSARLING. The time of the gentleman has expired. 

Mrs. YELLEN. It hasn’t changed over the last several months. 

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, for convening this hearing. 

Welcome, Chair Yellen, and please accept my sincere gratitude 

for your leadership at the Fed. I commend you for acting in the absence of a Vice Chair of supervision or regulation of bank holding 

companies and nonbank financial institutions. 

Confidence in the safety and stability of our financial system continues to strengthen, even in the face of global market unpredictability and other emerging threats. We can attribute continued 

growth in stronger and more resilient economy to your leadership 

and the protections afforded by Dodd-Frank Act. 

My first question, Chair Yellen, is, 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. Well, I think by and large, we do have the scope 

we need to tailor these regulations. We have pointed out a few 

28 

areas where we have limitations—the Volcker Rule is one and the 

incentive compensation rules are another—where we can do some 

tailoring, but not as much as we would like. 

Congress did act to address our—the restrictions we faced in the 

area of insurance in designing an appropriate set of capital standards for insurance-centered savings and loan holding companies. 

And we appreciate that and have used it to propose a set of capital 

standards for those companies that we think is appropriate. 

So there are some areas where we have needed Congress’ help, 

but by and large, we have a good deal of scope to tailor as we see 

appropriate. 

Mr. HINOJOSA. You need to know that I continue to hear from 

banks of all sizes in my congressional district that they are burdened by regulations and costly stress tests. Several changes to the 

yearly stress test, known as the Comprehensive Capital Analysis 

and Review, were announced on Monday. Can you tell us what 

changes are being made to this review process and how that is expected to help community banks that are not internationally active 

nor participating in risky nonbank activities? 

And also, there are regulatory relief—is rather—there was in the 

Wall Street Journal an article that talked about trying to have 

some regional bank systems given some—if they are from $200 billion in assets or less, being given some relief. 

Mrs. YELLEN. Yes. 

Mr. HINOJOSA. Talk about that for me. 

Mrs. YELLEN. So at the moment, banks—over $50 billion have 

been part of our so-called CCAR, comprehensive capital and stress 

testing regimes. And the proposal that we put out on Monday that 

Governor Tarullo described would exempt from the qualitative 

parts of that process bank holding companies under $250 billion 

that do not have significant foreign activities or significant nonbanking activities. 

So the list complex of those banking organizations, they would 

need to conduct the quantitative stress test, and we would conduct 

that, but the remainder of the capital evaluation, the qualitative 

part, they would no longer be subject to. 

Mr. HINOJOSA. I am also wanting to address the problems in 

Wall Street and some of the investors, especially working families 

investing in their 401(k)s. How are China’s economic troubles affecting the United States’ economy? And as the largest foreign 

holder of U.S. Treasuries with over $1 trillion in reserve, is the 

Federal Reserve concerned that recent selling of large quantities of 

treasuries by China could significantly and negatively affect the 

U.S. dollar? 

Mrs. YELLEN. Well, China’s economy has been slowing from decades of very rapid growth. That is something to be expected, given 

all the progress they have made and the desirability of transforming their economy to a more consumer-based economy. By and 

large, that process is proceeding and it is a good one from the 

standpoint of the United States, but it is very challenging. 

And earlier in the year and last year, there were disruptions in 

markets related to their currency, their approach to managing 

their exchange rate. They sold treasuries mainly to support their 

29 

currency, which was under downward pressure. And in recent 

months, I think markets have been much calmer, I think, as the— 

Chairman HENSARLING. The time of the gentleman from Texas 

has expired. 

Mr. HINOJOSA. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Oklahoma, Mr. Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here. I share, along with 

my colleagues, Mr. Neugebauer and Mr. Luetkemeyer, concern over 

a proposed rule that the Fed released on Friday increasing the cost 

for financial companies to engage with their clients in physical 

commodity markets. 

As a member of this committee and a former chairman of the 

House Agriculture Committee, I have worked with a number of end 

users on issues associated with reform and regulation within the 

derivatives markets. And you and I have discussed on various occasions the nature of my district, or district of Oklahoma, and the importance of stable commodity markets to my district. Over the past 

few years, I have heard from a number of commodity end users 

about their concerns on this issue. And I too am concerned about 

the impact this will have on our businesses and municipalities and 

their ability to participate in commodity markets. 

While we should, of course, continue to address risk to safety and 

soundness within our financial system, it appears that this rule 

simply seeks to discourage a company’s participation in these activities through capital requirements rather than through an actual 

effort to target and mitigate risk within the system. 

In crafting this proposal—I guess my questions would be the following: In crafting this proposal, did the Fed examine historic loss 

data for banks engaged in physical commodity activities as well as 

how losses in this business related to losses in other parts of the 

bank’s business? 

Mrs. YELLEN. We did take a very careful look at the nature of 

banks’ involvement in these areas and considered the risks that 

that activity entails. And it is important to recognize that financial 

holding companies would still, under these proposals, be permitted 

to engage in physical commodities trading with end users. That is 

not something that would change. 

What this proposal does is put in place additional risk-based capital requirements for activities that involve commodities for which 

Federal or State law would impose liabilities if the commodity were 

released into the environment. So we are worried about environmental risk. 

Mr. LUCAS. Well, Chair Yellen, if you could provide us with the 

information on how you made those determinations, what the historic perspective was, how it has actually affected businesses, I 

think I and the rest of the committee would appreciate what the 

historic foundation was. 

It also appears that you are raising risk weighing to 300 percent 

for companies that engage in this business, which will, of course, 

make it much more expensive for all of these companies. Could you 

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30 

rive at this 300 percent as an appropriate amount? How did you 

get there? 

Mrs. YELLEN. We will get back to you on some details. 

Mr. LUCAS. And I would simply note again, Chair Yellen, I commented earlier, you and I have discussed this on many occasions, 

my district is agriculture and energy. We are wheat and cattle, we 

are pork, we are cotton, we are oil and gas, we are electricity, more 

and more every day generated by wind power. 

Having the tools to be able to hedge our products, having more 

participants in the markets, give us, we believe, a much better 

price situation. If we restrict our tools to protect ourselves, if we 

restrict access to the markets by others, there is a great concern 

we will suffer and, of course, ultimately, the consumer who benefits 

from that supply will suffer too. 

One last thought or maybe a comment. And I would like to reinforce one more time with you, Chair, of my interest and concerns 

regarding how Basel III treats derivative customers and their margin. I understand that the Basel Committee negotiations continue, 

but recent reports are not encouraging for the end users in my district and the clearing infrastructure that has long supported their 

hedging needs. 

In this complicated world we live in, I guess what I am saying 

is, we need more tools, not fewer. We need more cost-effective tools, 

not more expensive tools, as in the case with Basel III, help protect 

us from those kind of consequences if it gets out of hand. 

And with that, Mr. Chairman, I guess I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

And, Madam Chair, thank you for being here. Really appreciate 

it. I want to go back to Mr. Capuano’s questions around the Wells 

Fargo scandal. Now, I do understand that there has been a small 

fine paid by Wells Fargo. But in light of what they did here—2 million fraudulent accounts, I know they fired 5,000 lower-level employees, there has been a little bit of claw back by the bank itself— 

but in terms of your role, you are the primary regulator for the 

Wells Fargo holding company, right? 

Mrs. YELLEN. We are the primary regulator for the holding company, but these abuses occurred in the bank. 

Mr. LYNCH. I understand. 

Mrs. YELLEN. And the Comptroller of the Currency and the 

CFPB have authority, and they are the ones who brought these actions. We weren’t involved in it. 

Mr. LYNCH. And I give them great credit for that, as well as, I 

think the L.A., Los Angeles authority was involved as well. 

Is there anything that you can do, looking at what happened 

here? This was widespread. This is a disgrace, really, what happened. Two million fraudulent accounts. And the low-level employees who were fired didn’t just think this up themselves. They obviously had incentives that were put in place. 

Any ideas from your standpoint as what might be done as a regulation or as legislation to prevent this from happening again? 

31 

Mrs. YELLEN. Well, the Comptroller of the Currency and the 

CFPB have demanded in their actions that remedies be put in 

place. We now have initiated a broad-based review for all the largest banking organizations of their compliance regimes and 

governances— 

Mr. LYNCH. Okay. Well, let me just ask you, this is a huge, huge 

thing here, again, 2 million fraudulent accounts. Can you think of 

any circumstances where a bank might be required to admit guilt? 

There was no admission of guilt here at all by the CEO or the bank 

itself. There was no admission of guilt. If it didn’t happen here, 

how can we even imagine ever that a bank might be required to 

take responsibility for what they are doing? 

And I think by doing this, by continually letting the banks off the 

hook and nobody has to admit guilt, you actually build a perverse 

incentive for this stuff to happen. And I just—it blows my mind 

that they are getting away with this and they are paying a little 

slap-on-the-wrist fine that is not bothersome. 

And the CEO the other day said, well, it was only 5,000 employees. We have 100,000 employees and 5,000 did this, and sort of just 

blowing it off. It just— 

Mrs. YELLEN. I think it is very important that senior management be held accountable and that when there are individuals, 

identifiable individuals who have been involved in wrongdoing, 

that— 

Mr. LYNCH. Yes. I know they are all lawyered up, but I think 

there is value in just getting after them, just getting—I don’t care 

if you get a conviction or not, just get after them and make their 

life hell. That is—and we have to create a disincentive in this system at some point for these CEOs to do the wrong thing. They completely—they completely ignored any of the safety and soundness 

and just basic responsibilities here. And I would like to see somebody held accountable for that at some point. 

Let me ask you, it is a very clubby environment, the banks. And 

I would be amazed if this practice were just limited to Wells Fargo. 

I think it is probably the practice at a lot of banks. There is a lot 

of cross-pollinization going on, people work for one bank, go to another bank. Are we looking at any other big banks doing this type 

of thing? 

Mrs. YELLEN. Well, as I said, yes, we are. The CFPB is in all the 

largest banks. And we have undertaken—we are undertaking a 

look comprehensively, not only in the consumer area, but compliance generally, because there have been a very disturbing pattern 

of violations. They occurred in the mortgage area, in foreign exchange trading, in many different areas, sanctions violations, 

LIBOR, and we are taking a comprehensive look at the biggest 

banks at their control— 

Mr. LYNCH. All right. Thank you. I have 17 seconds. 

I just want to say, in closing, what a wonderful job the OCC and 

especially CFPB did on this. This is why they are there. And I very 

seldom hear great things about the CFPB. They did an amazing job 

here. This is a huge, huge win for the CFPB, and it redoubles my 

faith in that agency. 

Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

32 

The Chair now recognizes the gentleman from California, Mr. 

Royce, chairman of the House Foreign Affairs Committee. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Thank you, Chair Yellen. It’s good to see you today. I had a question—maybe it is a bit to follow up on Mr. Guinta’s point—about 

the unprecedented consolidation that we have seen in community 

financial institutions, where there are fewer and fewer of them. 

And these smaller institutions have fewer assets over which to 

spread their ever-growing compliance costs. So they often seek 

those economies then through mergers, and that is what leads to 

this conundrum now of a situation where we have fewer banks 

today than we did during the Great Depression. 

And are you worried about the consequences of consolidation in 

for communities and for our economies, and eventually for 

overleverages you end up with just a few big institutions having so 

much weight in them? 

Mrs. YELLEN. Well, I do think it is essential that we have a vibrant set of community banks serving America’s communities. 

They play a very special role in our financial system, and it is important that they remain healthy. Reducing regulatory burden, it 

is important. It is something that we will seek to foster using every 

available tool that we have. 

Community banks face a challenging environment, though, for 

reasons that go beyond regulation. The low level of interest rates 

and flat yield curve and slow pace of growth in the economy are 

also factors that are making it difficult for them to thrive. But they 

are tremendously important in the role they play for American 

households and businesses, and we will certainly do everything 

that we can to relieve burdens on them. 

Mr. ROYCE. Yes. And some of that is true by monetary policy, 

some of that is true by fiscal policy. So that is another way in 

which they are adversely impacted by decisions made in Washington. 

So it seems to me at the heart of the consolidation, as you say, 

are these—well, it is really an avalanche of rules that have forced 

small institutions to hire extra staff. That is the situation, the 

economy is a scale for them but— 

And with that in mind, you said earlier that you are looking for 

concrete ways to reduce regulatory burdens on community banks, 

and you gave us some very specific recommendations on merchant 

banking and commodities activities in the section 620 report that 

you released. 

Can you promise to send up specific legislative ideas that relate—as it relates to regulatory relief for community banks, if we 

could ask that of you? 

And then, for now, I have some questions on the report we received because it is part of the section 620 report. Did you study 

the effect that a repeal of merchant banking authorities and the 

loss of $27 billion in capital would have on small and mid-capped 

companies? And are you confident that if we act on those recommendations that are in that report, there will be alternative 

sources of capital for portfolio companies? That is one question I 

wanted to ask. 

33 

And another is, based on your answer to my colleague earlier, is 

it correct to conclude that the recommendations for legislation in 

the report are based not on historical risks, they are based on, I 

guess, a projection of the possibility of potential future risks? And 

the reason I ask those questions is because, as we look back at the 

financial crisis, there is no evidence that merchant banking and 

commodity activities were part of the crisis. What was at the heart 

of the crisis was a concentration of risk in bad home loans and securities tied to those loans. 

So as you limit activities of these community banks, are you concerned that you are limiting the diversification of risk and thus 

adding to the concentration? The harder we make it on these 

banks, the more concentrated the risk in the big investment banks 

or the larger institutions. And that could have a very negative impact on safety and soundness. And that was what I was going to 

ask you. 

Mrs. YELLEN. Our valuation was with respect to alternative 

sources of equity financing, that private equity venture capital 

would be alternative sources, and that the merchant banking 

ontribution here is not very large, that it would not have a significant negative affect. Of course, banks would still be able to provide 

a wide range of lending, advisory, and other financial services to 

customers, that would include startup firms, technology firms, and 

others. And they would have the ability to continue making investments in financial firms. So— 

Chairman HENSARLING. The time of the gentleman from California has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you, Mrs. Yellen. It is wonderful having you 

back again. You know, each time you come, we talk about an issue 

that is dear to my heart and that is the overwhelming unemployment rate facing young African American men. 

Last time we talked, you said your monetary policy was a blunt 

instrument, and you urged Congress to introduce legislation to target this. Well, I took your direction, and I and my cosponsors have 

introduced two pieces of legislation that I certainly hope you will 

say a kind word for. Because if you—and knowing your dual duty 

as both inflation as well as unemployment, if you say a word of 

support here, you can help us pass these two pieces of legislation. 

Now, the first one is the deal with our crumbling infrastructure. 

That is coming. That is a big, big, big issue. What we want to do 

on this first bill is to address and develop jobs and on-the-job training apprenticeship program, targeting African American young 

men, ages 18 to 39. Eighteen to 39, they are the hardest hit for unemployment nationally at 38 percent, and in some of our inner cities at over 50 percent, as you well know—it is in the news every 

day—of the condition that many of our African American communities are facing. 

And so we want to set that up. It will come under the Secretary 

of Labor, who will coordinate these programs. It will work with the 

labor unions, like the IBEW, the plumbers and pipe fitters, the 

ironworkers, steel workers, all of those unions who will be helping 

to build our crumbling infrastructure. And we will bring these 

34 

training programs and job programs. And let me just say, they will 

be in high technology areas, because you can’t do all this without 

computer coding, computer systems, the technical aspects that are 

so desperately needed. Very important for us to get those in there 

and get that program started. 

The second one has to do with the education component. As you 

know, every year, every 5 years we have to reinvest in our what 

we call land grant universities. Those 1890s and 1860s that were 

set up after the Civil War, schools like Tuskegee University in Alabama, Prairie View in Texas, Florida A&M, all of those. While we 

want to create a new area, now they can only spend the money in 

education research and extension. We want scholarships to get 

these young kids in there. 

The big jobs are opening in agriculture business. It is the food 

we eat, the clothes we wear, now energy, high finance with derivatives and all of that. So we want to do that, give each of these 

schools $1 million, which they can spread over that 5-year period 

for scholarships. 

Now, these bills are bipartisan. We have some excellent cosponsors, folks like Kevin Cramer of North Dakota, Marcia Fudge of 

Ohio, Brad Ashford of Nebraska, Mia Love of Utah, Alma Adams 

of North Carolina, Gwen Graham of Florida, now Pete Sessions, 

who is our House Rules Committee chairman, all are on this bill. 

So a fine word from you would be very, very helpful. And I am 

going to ask my assistant if he may give you—would you take those 

to them right now, Tanner—so you could have those. 

All I am asking—now, I am not asking you to use a blunt instrument. I am asking to use your golden voice. And if you speak and 

say a kind word, it will help us get these bills passed. And not only 

will the African American community thank you, but all of America, white people, everybody. We all know that these young black 

men with this highest unemployment rate of 18 to 39 are also the 

child-producing ages. This goes directly at helping us deal with 

that family breakdown structure, so we thank you for that. 

Now, Madam Secretary, I want to ask you one other thing. You 

have an opportunity to do something very significant because I understand that your Fed regional bank president in my hometown 

of Atlanta, Dennis Lockhart, is retiring. We have never had an African American regional Fed president. I am asking you, take this 

opportunity to make history. We have many excellently qualified 

African Americans who could do this. 

And finally, I want to applaud you and Frank Tarullo for what 

you are doing with the CCAR stress test and committing to working with this continuing flexibility. Thank you. 

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 thank you, Chair Yellen, for being here. I just want to kind 

of catch up now that the gentlelady from New York has mentioned 

the problems in Puerto Rico. If you were to just summarize those 

in a phrase, basically, what is the root of the problem there? 

35 

Mrs. YELLEN. I think deep-seated structural problems pertaining 

to Puerto Rico’s fundamental economic situation that have given 

rise and exacerbated fiscal problems— 

Mr. PEARCE. Okay. All right, thanks. Now, when I am looking 

back through the 2008 crisis, I notice that your balance sheet 

jumped from about $900 billion to $2.2 or something like that. 

What was the reason your balance sheet jumped during that period 

of time? 

Mrs. YELLEN. Primarily because we engaged in a program of purchasing long-term assets, both U.S. Treasury securities and— 

Mr. PEARCE. So you got assets from the banks who were having 

problems and kind of stabilized the banks so you— 

Mrs. YELLEN. Well, no, we didn’t buy assets from the banks. 

Mr. PEARCE. Bought assets from maybe Fannie or somebody. You 

bought MBS, right? You had mortgage-backed securities that you 

were purchasing that might have been toxic? 

Mrs. YELLEN. Well, I don’t know that they were toxic. They were 

put in receivership by the U.S. Government and— 

Mr. PEARCE. The general perception is that they were toxic. 

Okay. All right. That is fine. 

Now, we were treated to Mr. Lew testifying to us a couple of day 

ago, and he identified in his testimony that he is required as head 

of the FSOC committee to identify and respond to emerging threats 

to U.S. financial stability. Now, I pointed out to him that one of 

the doves on low interest rates, Mr. Rosengren, came out with a 

statement on the 21st in The Wall Street Journal saying: I think 

we need to rethink that there is a cost—there is a cost to full employment, basically. So and he is talking about bubbling prices that 

might be caused by easy money. And so my question to Mr. Lew 

is, have the two of you ever talked that maybe one of the emerging 

threats to financial stability might be the easy-money policy? You 

all haven’t had a discussion, or you have? 

Mrs. YELLEN. We do discuss threats to financial stability. We 

monitor them closely. 

Mr. PEARCE. About your easy-money policy. Have you specifically 

talked about that? If he is going to identify it, he ought to identify 

the easy-money policy. That is not coming from me. That is coming 

from the guy that is most often on the side of easy money. 

Mrs. YELLEN. President Rosengren has singled out commercial 

real estate as an area that he is concerned with and— 

Mr. PEARCE. He says that easy-money policies could be letting 

markets get out of hand. That sounds a little bit broader than 

REITs. Easy-money policies could be letting markets get out of 

hand. 

Mrs. YELLEN. Well, there is the possibility that, in a world of 

very low interest rates, that investors will search for yield and take 

on additional risks. And we are very much aware of that. And— 

Mr. PEARCE. Okay. So we got a difference of opinion among 

Board members. But then you get something like Virtu, says we 

are going to stay out of the bond market completely because it is 

hard to price the assets. 

Mrs. YELLEN. Because of what? 

Mr. PEARCE. Virtu, the largest e-trader signaling that his company is going to stay away from many securities because the unVerDate Nov 24 2008 14:44 Mar 09, 2018 Jkt 025967 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\25967.TXT TERI
36 

derlying assets are hard to trade, setting the volatility of the 

trades, the inability to sell or trade heads of positions. 

Mrs. YELLEN. What is he talking about? Corporate bonds, or 

what? 

Mr. PEARCE. In my opinion, maybe the bond market overall. And 

so it just looks like that things aren’t quite as stable. Maybe there 

are underlying problems. Maybe there are bubble prices, and remember that the housing market began as a bubble problem stimulated by government policy. And so to have everybody sort of looking the other way and saying everything is good, and then I look 

at your—I look at your asset, you typically increase—I just look at 

the fact that your balance sheet is now up to $4 trillion, so you 

have almost doubled in the last 4 or 5 years. So you are continuing 

to buy something, and generally if the market—and then I look at 

the debt. So Puerto Rico has a 76—roughly 76 percent debt-to-GDP 

ratio, and ours is 1 to 1. 

I am sorry, but I think somebody ought to be talking about stability of the financial market in the United States because it looks 

desperately unstable. 

Thank you, Mr. Chairman. I appreciate your indulgence. 

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. 

Thank you also, ranking member. 

Madam Chair, thank you for being here today. I believe history 

will be kind to you as well as to Chairman Bernanke. What you 

did was extraordinary in a time of great crisis. And I just don’t believe those who look back, those who look through the vista of time, 

I don’t believe that they will see these as unkind, unfair, unwanted, or imprudent things. I think that they will judge you well 

and you will be treated very well by history. 

Now, just a few things. I am going to do my best to stay away 

from Wells Fargo. But I must tell you that it is difficult simply because for one reason, if I may just mention this one: the $185 million in penalties is, according to some standards, about 3 days of 

profits. So this becomes a line item under the cost of doing business. So it is hard. 

I have some other things, but first let me do this. Let me just 

discuss with you the whole notion of too-big-to-fail. Madam Chair, 

there is a bit of double speak taking place because a good many 

people, when they speak of too-big-to-fail, they mean that there will 

never be another bank that will fail as opposed to what I believe 

most people understand the case to be, not have a bank that is so 

big that when it fails, it creates misery throughout the economic 

order. That is what we are talking about. It can fail. We will put 

it out of its misery without it creating economic misery. That is 

what too-big-to-fail is all about. That is what Dodd-Frank does. 

Mrs. YELLEN. Yes. 

Mr. GREEN. We haven’t finished Dodd-Frank yet. We are still implementing aspects of it. But too-big-to-fail is addressed in DoddFrank, and it is addressed in a very profound way: the living wills. 

That helps us to understand how to put these big institutions out 

37 

of their misery. Dodd-Frank allows us to separate them if we need 

to and eviscerate them, if necessary. So too-big-to-fail is all about 

winding down these big AIGs of the world without them taking the 

economic order with them. 

I would like to make a point if I may before your respond to the 

question of community banks. Madam Chair, the big banks have 

hijacked the term ‘‘community bank.’’ They have hijacked this 

term. You and I understand that most banks in this country are 

under a billion dollars. Most of them. Probably 89 percent or thereabout. 

Mrs. YELLEN. That is right. 

Mr. GREEN. Under $1 billion. Well, the big banks have concluded 

that you can be a $50 billion bank, a $100 billion bank, and still 

be a community bank. Therein lies the problem because when we 

make efforts to help the community banks, which are smaller 

banks, the big banks step in and they want all of the benefits that 

we would accord the smaller banks, the real community banks—a 

bit more double speak—the real community banks. They want 

those benefits. I applaud you for what you are looking at. I have 

looked—I have read your statement and you want to do something 

about this: an 18-month examination cycle. 

Look, there are people in Congress who would like to help community banks, but we cannot do it at the risk of bringing in the 

big institutions who would benefit from it to the detriment of what 

we have been trying to do in Dodd-Frank. So I am sharing these 

thoughts with you because I honestly believe that you have some 

great insight into these things. But my question has to do with 

something else. 

Here is my question. Given what we have done with the QE and 

all of the tools that you have utilized, how important is it for us 

to have some investment in infrastructure? Both Presidential candidates have talked about it. Interest rates are exceedingly low at 

this time. How important is it for us to invest in infrastructure? 

Or maybe I should put it another way. Would infrastructure investments be helpful in promoting sound economic growth? I welcome 

your answer. 

Mrs. YELLEN. Well, I guess my perspective is that we have had 

a very disappointing pace of growth in the U.S. economy and productivity growth. The growth in output per worker has been exceptionally slow. A half percent per year for the last 5 years, maybe 

twice that over the last decade, but low in historical terms. And 

that is critical to living standards, and investments of all sorts I 

think are essential to raise growth and promote improved living 

standards for Americans in the years to come. 

Chairman HENSARLING. The time of the gentleman has expired. 

Mr. GREEN. Thank you, Madam Chair. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from South Carolina, Mr. Mulvaney. 

Mr. MULVANEY. Chair Yellen, I have a couple of questions consistent with the hearing. Almost all of them are regulatory. But 

Mr. Neugebauer just actually handed me one that is monetary policy, so I want to ask one very brief question about that, which is: 

There has been some attention the last few months about the recent decision by the Bank of Japan to start purchasing equities. 

38 

And my question to you is fairly simple. Is the United States Federal Reserve looking at the possibility of adding the purchase of equities to its toolbox as it looks at monetary policy? 

Mrs. YELLEN. Well, the Federal Reserve is not permitted to purchase equities. We can only purchase U.S. Treasuries and agency 

securities. I did mention in a speech in Jackson Hole, though, 

where I discussed longer term issues and difficulties we could have 

in providing adequate monetary policy, accommodation maybe 

somewhere in the future down the line, that this is the kind of 

thing that Congress might consider. But if you were to do so, it is 

not something— 

Mr. MULVANEY. It would take— 

Mrs. YELLEN. —that the Federal Reserve is asking for, and there 

are— 

Mr. MULVANEY. It would take a change in the law to do that is 

what you are saying? 

Mrs. YELLEN. It would take a change in the law, and there would 

certainly be costs to take into account. 

Mr. MULVANEY. That is one part of the regulatory question, and 

I appreciate that. Thank you for straightening that out. 

Earlier, Mr. Neugebauer and Mr. Lucas both asked you about 

the proposed changes in the ways that you want to regulate commodities trading. And I guess my question then is fairly simple. 

Why are you doing this? 

Mrs. YELLEN. Because we are worried about the risks that some 

forms of commodity activities pose to banking organizations. 

Mr. MULVANEY. I heard that, and I heard you give examples 

about environmental hazards and so forth. But the truth is that 

has never happened yet. Has it? That risk has never actually been 

incurred. No one trading in the commodities markets has ever been 

sued for an environmental—Exxon Valdez didn’t end up in the 

commodities trader getting sued. The BP oil spill didn’t end up 

with a commodities trader being sued. So there has never actually 

been that occurrence of that risk being incurred. 

Mrs. YELLEN. Well, it doesn’t broadly prohibit commodities trading. It is focused on activities where there are significant environmental hazards. 

Mr. MULVANEY. And we can save for another day whether or not 

1,200 percent ratios prohibit. But the fact of the matter is you are 

trying to regulate a risk that has never actually in the real world 

been incurred by a commodities trader. Is that correct? 

Mrs. YELLEN. Well, we have had huge environmental accidents 

that have created enormous liability, and we do have a couple of 

banking organizations that Congress has grandfathered broad 

rights to engage in commodities storage and distribution, and those 

risks certainly exist. 

Mr. MULVANEY. You could make the argument that there are 

other risks that banks incur that are actually more tangible and 

perhaps more likely than an environmental disaster leading to a 

claim against them based upon commodities trading. It is—and no 

offense intended to any of my colleagues who are from the New 

York City area—it is risky for banks to be in New York, right? It 

is a target for terrorism. They have actually incurred that particular risk in the past. 

39 

Could the Federal Reserve decide, in order to make banks safer, 

that they couldn’t do business in New York City? 

Mrs. YELLEN. No. We have certainly not decided that. 

Mr. MULVANEY. Could you, in theory? 

Mrs. YELLEN. I don’t know. I am not sure. 

Mr. MULVANEY. I would suggest that you probably could. If you 

could do this, if you could say, ‘‘Look, we are going to require you 

to change your rules because of this risk that we perceive you 

might incur, even though you have never incurred this risk before,’’ 

that that same line of reasoning could be applied to something as 

esoteric as terrorism. 

Mrs. YELLEN. What we do require is that banks have robust 

business continuity plans and that they have backup authorities. 

So, for example, when we had Hurricane Sandy—that greatly affected New York—that there are backup sites— 

Mr. MULVANEY. Backup systems. Thank you for that. 

My last line of questioning has to do with something entirely different, which is cryptocurrencies and the blockchain technology. 

You a spoke at an international conference in June. I think there 

were 90 central bankers in the IMF, and you talked specifically 

about blockchain. And I wonder if you want to take this opportunity to talk about the Fed’s commitment to a light regulatory 

touch and then also speak to whether or not you yourself at the 

Fed are looking at implementing blockchain technology in your operations? 

Mrs. YELLEN. We are not looking ourselves at implementing it, 

but we are studying a whole set of FINTECH innovations and the 

ways in which blockchain is being considered for use by banks and 

nonbanks. It could have very significant implications for the payment system and for the conduct of business. We want to foster innovation. I think innovation using these technologies could be extremely helpful and bring benefits to society. At this point, we are 

simply trying to understand the nature of these innovations. At the 

same time, consumer protection will also be something that is important. But we are not doing rule writing in the setting where we 

are trying to understand the ways in which these innovations are 

shaping the financial— 

Chairman HENSARLING. The time of the gentleman from South 

Carolina has expired. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney. 

Mr. CARNEY. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for coming in today to answer some 

of our questions. I have just a couple myself. Hopefully, I will be 

able to get to them. The first, under the Volcker Rule, Dodd-Frank 

allowed an additional period of time for groups to divest of illiquid 

assets, and the Fed has acknowledged that they will need to make 

adjustments to the timeline, which currently ends July 2016. 

These investments—I think there was a question earlier about 

the commodities—are largely commodities, physical investments 

which are difficult to sell, illiquid, by definition. I joined 11 other 

members, Democrats and Republicans, on the committee on a May 

letter to you asking you to refine your definition of illiquid asset 

and provide clarity on the timeline for institutions, so they are not 

40 

forced in a fire sale situation, which actually could help pension 

funds and others that are holders of these. 

So you have extended the time, I understand, to July of 2017, 

but further guidance and decision hasn’t been made. And we did 

get a letter yesterday where you said the Federal Reserve Board 

in July indicated it would consider applications by firms for extension of the period to conform with these illiquid fund investments. 

Could you expand on that? Is that a case-by-case basis? You will 

you come out with a more general rule to provide some greater certainty for these institutions? 

Mrs. YELLEN. Well, I think we are trying to establish some 

guidelines that would provide greater certainty. We are looking at 

that very carefully. I can’t give you details, but we recognize there 

is a significant issue there, and we will try to provide clarity. 

Mr. CARNEY. Yes, that would be great. Just to provide some guidance so that they are going to have to start otherwise selling these 

assets, unwinding them— 

Mrs. YELLEN. We understand. We understand that. 

Mr. CARNEY. That is great. 

So I read through your testimony, and I was pleased to see some 

of the things that were done—and we have had some discussion 

about this—with respect to modifying regulations, I guess CCAR in 

particular, for smaller banking institutions. 

Do you have a sense as to what—the complaint that we all hear 

from the smaller banks is that these regulations require and they 

incur additional costs, mostly with staff that they have to bring on. 

Do you have any sense as to whether this will enable the banks 

to reduce their costs of regulatory compliance? 

Mrs. YELLEN. I think that this change to CCAR should be quite 

meaningful for the banking organizations that will be affected and 

make it a significantly less onerous process for them. 

Mr. CARNEY. And I guess at the end of the day, the question is 

whether or not they will actually be able to reduce their staff that 

is dedicated to that function right now. I have talked to local banks 

in my area, in my State, and other places and asked them. When 

they said, ‘‘Look, this is additional cost,’’ I said, ‘‘Well, help me understand.’’ And they, obviously, went through individuals that were 

hired to address compliance. 

Mrs. YELLEN. So I can’t give you an estimate— 

Mr. CARNEY. Sure. 

Mrs. YELLEN. —of what the resource implications will be. They 

will still be required to conduct the quantitative portions of the 

stress test, but we are looking at ways for those smaller institutions to reduce data reporting burdens as well. 

Mr. CARNEY. That is great, and we appreciate your efforts in that 

respect. 

The last question is really kind of pretty general, but you have 

been through this and have provided in your testimony your supervisory activities. We all talk about what happened in 2008 the last 

time. Where are you going forward? Do you think about going forward with respect to the current institutional banking framework 

as well and there has been some discussion of that in terms of toobig-to-fail. But what are the concerns that you have looking ahead. 

41 

Mrs. YELLEN. So I do think we have made progress within the 

regulated banking sector. I think it is safer, and I think we have 

begun to deal with too-big-to-fail and made progress there. I think 

we have addressed some things in the shadow banking sector that 

are of concern as well. Money market fund reform is going forward. 

Areas of concern, like the tri-party repo market. I think that has 

become safer. But I do worry about the migration of activities into 

less regulated parts or unregulated parts— 

Mr. CARNEY. So outside of the banking— 

Mrs. YELLEN. —of the financial system. And new threats that 

may be different than the ones we have addressed in the past, like 

cyber threats, of course, are of tremendous concern. 

Mr. CARNEY. Thank you, Madam Chair. Keep up the good work. 

Mrs. YELLEN. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Mr. Chairman. 

Chair Yellen, thank you very much for being here. I want to talk 

to you specifically about SIFI designations and I know that FSOC 

has the opportunity to designate SIFIs and the Financial Stability 

Board does it with G-SIFIs. When the FSB does that, if they were 

to suggest that there was an institution that was globally significantly important, does that permeate or otherwise affect or influence the designation as a SIFI for FSOC? 

Mrs. YELLEN. No. FSOC has its own specific— 

Mr. ROSS. Guidelines? 

Mrs. YELLEN. —guidelines and does its own reviews. 

Mr. ROSS. Let’s talk about those guidelines because I know they 

were brought up earlier, and they are statutorily put in there. But, 

really, FSOC has had a tendency to deviate from those, haven’t 

they? 

Mrs. YELLEN. To do what? 

Mr. ROSS. To deviate with those guidelines. In other words, let’s 

look at the MetLife decision. The MetLife decision I think exposed 

something that we have been concerned about for quite some time, 

and that is the deviation from regulatory requirements that, for example, FSOC consider the actual losses of which, if a nonbank financial institution were to go under. And in the MetLife decision, 

I think the court found that that wasn’t done. In fact, I think the 

court in that particular decision said that one of the reasons they 

were overturning that designation is because there was no assessment of costs or losses—I am sorry; that is another part—no assessment of losses that would have been sustained had MetLife experienced the financial trouble. Is that correct? Is that your understanding? 

Mrs. YELLEN. Well, FSOC did a detailed study of what the potential consequences— 

Mr. ROSS. But they didn’t calculate the losses, and I think that’s 

one of the reasons—so they basically went at this very capriciously. 

And what concerns me about this—and I think that is probably 

pretty much what the court said too—what concerns me about 

this— 

Mrs. YELLEN. I was involved in the process, and I don’t think it 

was capricious at all. 

42 

Mr. ROSS. And I understand that, Chair Yellen, which is why you 

would look to those who have the expertise in a particular field to 

rely upon making these decisions. And Roy Woodall, who is the 

only member of FSOC who has an insurance background, is the 

only one who voted to not designate MetLife, and yet that was ignored. I think he is getting a little bit of recognition from the court 

there, but why did you ignore his recommendation with his background, insurance commissioner, understanding of the requirements, a different set of risk than bank and other financial institutions have to have? It just seems like it wasn’t— 

Mrs. YELLEN. Well, there was a very detailed analysis done of 

the risks that MetLife’s failure could pose to the U.S. financial system. Much of that analysis has been made available and is on the 

FSOC website. 

Mr. ROSS. There has never been a run on an insurance company. 

Let’s face it: they have a 30-year risk assessment there as opposed 

to a bank that has a day-to-day, minute-to-minute. And I guess 

that—and I think this is what we are finding out from the MetLife 

decision is that we have to address these nonbank financial institutions in a whole different way than we address the banking industry. For example, would you not agree that if we are trying to prevent too big-to-fail, that we keep these institutions solvent, that we 

have some kind of criteria where they can be assessed, corrected, 

and then be able to not be designated if they are following a process or procedure that prevents them from being assessed as a SIFI. 

Mrs. YELLEN. Well, only a few firms have been designated. 

Mr. ROSS. But they don’t know they are designated until they are 

in, what, stage 3? 

Mrs. YELLEN. They find out earlier than that that they are being 

designated. 

Mr. ROSS. But there is no off-ramp for them I guess is what I 

am suggesting. 

Mrs. YELLEN. Well, there is obviously an off-ramp. GE Capital 

is— 

Mr. ROSS. Well, they sold out. Now, GE Capital, that was an example—they basically said: We are just going to get rid of this because we don’t even want to have that regulatory control to interrupt our book of business. That wasn’t an off-ramp. That was a divestiture. 

Mrs. YELLEN. If they changed their business model in a way that 

significantly alters the risks that they pose to the U.S. financial 

system, that is an off-ramp. FSOC reconsiders every year whether 

or not designations remain appropriate. It is an annual review 

process, and if a firm wants to, understanding why they were designated, make significant changes that reduce the risk they pose to 

the U.S. financial system, they can be redesignated. 

Mr. ROSS. Thank you. And wouldn’t it be in the best of the U.S. 

financial system to put them on notice as soon as possible so the 

correction can be made to keep them from having to be even considered as a SIFI? 

Mrs. YELLEN. Well, I think that the firms understand what it is 

about their activities that causes them to be designated. 

Mr. ROSS. Thank you. And I appreciate your testimony. 

I yield back. 

43 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty. 

Mrs. BEATTY. Thank you, Mr. Chairman. 

Thank you, ranking member. 

And thank you, Chair Yellen, for being here today. I just have 

a few things. But, first, let me say thank you for clearing up what 

we can and can’t do under the Hatch Act, when my colleague from 

New Jersey was asking about Federal Reserve Governor Brainard 

and that. But, also, let me just say that I imagine, in your historic 

position, that you get a lot of people who want to have lunch with 

you or come and meet with you because of your scholarship and 

your brilliance. 

I can remember being over in the Rayburn room and could barely 

get in there when someone announced that you were there—highpowered people, more security in that room. And people just wanted to pick your brain and hear from you. So let me personally say 

to you: I am glad that people in high places want to come and learn 

about what we do. 

Also, I probably, and you can nod or not, can probably safely assume that no one has pressured you from the White House or with 

President Obama to hold interest steady to have some political influence. But it reminds me of 1972, during the Richard Nixon Administration, when Burns was in your position. And if you go back 

and you play those Nixon tapes, he succumbed to doing that because pressure was put on him by Republicans that he was meeting with to have an effect on that upcoming election. And I am 

pretty sure you have not been asked to do that by our President 

or Presidential candidate. 

Mrs. YELLEN. I have certainly never been pressured in any way 

by the Administration. The Administration, in my experience, 

greatly respects the Fed’s independence to make decisions in accord 

with our congressional mandate. 

Mrs. BEATTY. Thank you so much, Mr. Chairman. 

I just wanted to make sure we got that entered, that while 

maybe my colleague from New Jersey brought it up because he was 

thinking about what Republicans had done in the past. 

But let me move on and say: I too join that letter that hundreds 

of Members of Congress sent to you and let me just say thank you 

for that quick response. So often, people in your positions will come 

in and repeatedly we have to hear about the letters that were written and how typically Democrats don’t respond. Not only did you 

respond; it wasn’t a form letter. You actually acknowledged the 

concerns we had about minorities, specifically African Americans 

and women. 

And, Mr. Chairman, she actually gave us not one but three suggestions of what we could do to meet this challenge. So I wanted 

to personally thank you because I have been very hard on you and 

all of the other Federal organizations about working with minorities to improve the unemployment rate and to make sure that we 

have more women and minorities working in your organization. 

But let me just say this. I would like to discuss the diversity of 

the 12 Reserve regional banks around the country, especially as it 

relates to the presidents of those organizations. Recently, there was 

an article that points out that we have had no African American 

44 

presidents. We have had zero Latino presidents out of 134. So I 

want to make sure that we stay focused on that. I think we can 

do better than that. 

My staff and I were reminded of the Rooney rule, and I don’t 

know if you get that sports analogy or not. But let me just say to 

you and my colleagues: I am going to have something that is called 

the Beatty rule where we would like to start with Federal organizations like yours and simply say that, as you look at these positions, you actually identify and at least interview one person who 

is a minority. 

Mrs. YELLEN. Congresswoman, I am very focused on diversity in 

the Federal Reserve. And it is a key priority. We have made some 

progress, but we need to do better. And I have created a 

workstream at the Board to think about all of the different ways 

in which we can promote diversity in the work that we do. At the 

level of Presidential appointments, I very much hope that we can 

see greater diversity in the FOMC. And in the search process, we 

require the banks to seek public input. We make sure we at the 

Board ensure there is a broad national search, that every attempt 

is made to assemble a diversified pool, and that qualified candidates are considered. And I really do hope that— 

Chairman HENSARLING. The time of the gentlelady from Ohio 

has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman, Chair Yellen. 

Chair Yellen, in his speech on Monday, Governor Tarullo notes 

improvements in the resolvability of GSIBs in recent years. He 

states that adjustments in all aspects of the program should be 

made as conditions and practices evolve. Well, the Fed has passed 

several rules pointing to resolvability: for example, margin requirements, a rule prohibiting derivatives, closeouts, and therefore a 

Lehman-like run, and single counterparty credit limits. In light of 

that, will you be recalibrating the GSIB surcharge before you consider including it in GSIB’s post-stress minimums? 

Mrs. YELLEN. Well, we will put out a proposal. We are likely to 

approve a proposal that would affect the treatment of GSIB surcharges in our stress-testing regime. We are not reconsidering at 

this time the calculation of those surcharges, but as Governor 

Tarullo explained, we have created an integrated system for incorporating those surcharges in our risk-based capital requirements 

and integrating the losses we identify in the stress test as part of 

the risk-based capital regime. 

Mr. PITTENGER. To clarify, the GSIB surcharge, should it be recalibrated? I am sure that interacts with the other bank regulations. 

Mrs. YELLEN. Well, I don’t see a reason why it should be recalibrated at this time. 

Mr. PITTENGER. Okay. Following up on Chairman Hensarling’s 

questioning regarding the statutory factors, are you aware of any 

firmly grounded research that measured how each of the 11 statutory factors that require your consideration contributes to systemic 

risk? 

45 

Mrs. YELLEN. Those are a set of factors that generally do contribute to systemic risk. 

Mr. PITTENGER. Let me ask you this: What research did you have 

that measured how each of the 11 contributed? Did you have research that related to that? What helped you determine that? 

Mrs. YELLEN. I believe there is a wide body of research that looks 

at factors bearing on financial instability that identifies those factors as relevant. 

Mr. PITTENGER. The legislative authority demands that each factor be considered. So, yes or no, just please tell us, are you aware 

of any such research for each of these factors? 

Mrs. YELLEN. That quantifies its importance? 

Mr. PITTENGER. Yes. Yes, can you state with clarity the research, 

firmly grounded research that was attributed to establishing these 

factors? 

Mrs. YELLEN. Well, there are lots of research papers on this 

topic, but I would not say ones that quantify the impact of each factor. 

Mr. PITTENGER. Madam Chair, as you know there has been some 

controversy over the settlement of the longstanding dispute with 

Iran regarding the transfer of the $1.7 billion in currency to 

Tehran. I know the Fed helped facilitate this through the transfer 

pursuant to a comfort letter that was sent by Secretary Lew to Bill 

Dudley at the New York Fed. I don’t care to really get into that, 

but I would like to address the issue that the Administration told 

members of this committee yesterday that Iran needed those bank 

notes to help support the value of the Iranian rial. You are an expert in international monetary currency flows, so I would like to 

ask you if there is any reason you can imagine why Iran having 

several pallets of euros and Swiss francs in the Central Bank of 

Tehran would help support the rial better than having that value 

on an account in, say, the New York Fed or Central Bank of the 

Netherlands? 

Mrs. YELLEN. Sir, I don’t have an opinion about that. We acted 

as fiscal agent of the Treasury and have no involvement beyond following instructions that they give us with respect to payments. 

Mr. PITTENGER. You don’t have an opinion on that? 

Mrs. YELLEN. I don’t have an opinion. 

Mr. PITTENGER. It follows, then, wouldn’t it be actually more difficult and more expensive to try to support a country’s currency 

with pallets of cash, especially if they were inside a country still 

largely outside the normal financial system? 

Mrs. YELLEN. I am sorry. It is just something I haven’t looked 

at. 

Mr. PITTENGER. Well, I ask this because some people believe that 

the real reason Iran wanted the cash was so that it could be used 

to enable acts of terrorism. And the committee has had a difficult 

time getting the Administration to explain why they didn’t just 

wire the settlement money as they had made on previous other 

payments. 

Mrs. YELLEN. I am sorry. That is something you are going to 

have to address to Treasury. 

46 

Mr. PITTENGER. Chair Yellen, we have dealt with the insurance 

factor some. Will the Fed first consult with the insurers primarily—well, my time has passed. 

Chairman HENSARLING. The time of the gentleman from North 

Carolina has expired. 

Due to Chair Yellen’s departure time, the Chair anticipates 

clearing Ms. Moore, Mr. Ellison, and Mr. Heck on the Democrat 

side; and Mrs. Wagner, Mr. Barr, and Mr. Rothfus on the Republican side. 

The gentlelady from Wisconsin, Ms. Moore, ranking member of 

our Monetary Policy and Trade Subcommittee, is now recognized. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And thank you, Honorable Chair Yellen, for joining us here 

today. 

I have a lot of questions, so I am going to move through them 

very quickly. You have had a lot of questions and concerns here 

today about why you have maintained interest rates so low, when 

you are going to raise them, and the inevitability of having to do 

that, but there is a growing chorus of community folk and workers 

who have challenged the Fed and their toolkit. They say that you 

have spent so much time worrying about inflation and being less 

concerned about labor market participation of vulnerable populations. Like people like to brag about the recovery of our economy, 

but African American labor market participation is still fledgling. 

So I wanted to give you an opportunity to sort of explain to us 

what other tools you may have in your toolkit and how you are not 

ignoring that problem. 

Mrs. YELLEN. Well, the state of the economy and the labor market matters enormously to African Americans and disadvantaged 

groups. And it is very clear that, as the labor market improves, African Americans see outsized gains, and that is where we are right 

now, that they are seeing those gains, which is not to say they 

don’t have much higher unemployment rates and there remain, obviously, significant forms of disadvantage. But there clearly are 

gains taking place for African Americans as the labor market is— 

Ms. MOORE. How does that fit in with your decisions to raise interest rates? 

Mrs. YELLEN. So Congress has charged us with pursuing maximum employment and price stability, and we have been very focused on our employment mandate and remain so. We are pursuing 

a policy that will result in further strengthening of the labor market, and that is a very good thing. We also have to keep our eye 

on inflation, and inflation is running under our 2-percent objective. 

That gives us some headroom and some running room to remain 

focused on the employment side of our objective, but we have to 

keep both things in mind and are keeping both things in mind because we do have a 2-percent inflation objective. 

Ms. MOORE. Chairwoman Yellen, I want to ask you something 

that perhaps I haven’t asked you before. I was here when we put 

Dodd-Frank together, when we put in place the Volcker Rule, and 

I spent a lot of time studying the efficacy of that. And yet we continue to hear calls to reinstate Glass-Steagall. Could you just share 

with us briefly about the importance of the Volcker Rule and the 

47 

limitations—or the importance of reinstalling Glass-Steagall if you 

think that is the case? 

Mrs. YELLEN. Well, the Volcker Rule does prohibit proprietary 

training, and the agencies that are charged with enforcing it are 

supervising to make sure that market making can continue. We 

have discussed liquidity in markets. And making sure that these 

firms can continue to make markets is important, but it does preclude proprietary trading. 

Ms. MOORE. And Glass-Steagall, on the other hand, does not 

allow them to make markets. What would a Glass-Steagall look 

like in 2016? 

Mrs. YELLEN. I guess what a Glass-Steagall would require would 

be the separation of commercial banking and investment banking 

and require restructuring of companies that now have substantial 

investment bank subsidiaries. 

Ms. MOORE. Is that a practical thing that we should look at? 

Mrs. YELLEN. Well, people have different views on this. We are 

trying to make sure that these combinations can operate in a safe 

and sound manner. 

Ms. MOORE. Right. 

Mrs. YELLEN. I would say that that is not what was really responsible, at least in my opinion, for the financial crisis. In fact, 

some of the most serious problems took place in standalone investment banks— 

Ms. MOORE. Right. 

Mrs. YELLEN. —like Lehman and Bear Stearns, that weren’t part 

of bank holding companies at all. 

Ms. MOORE. That is right. 

Mrs. YELLEN. And now they are subject to consolidated supervision, which is arguably a safer system. 

Ms. MOORE. Okay. And I have 10 seconds left. I am wondering, 

these, you have a proposal to meet loss-absorbing capacity and 

long-term debt requirements for— 

Mrs. YELLEN. Yes. 

Ms. MOORE. Sorry about that. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

And welcome, Chair Yellen. As I know you are aware, the EU 

late last year issued a call for evidence to help provide data and 

feedback for a cumulative review of all of the post-financial crisis 

regulations that have been issued in the past 8 years. When asked 

whether the U.S. should implement a similar review, Governor 

Tarullo pushed back on the idea. Given that Governor Tarullo has 

not been appointed vice chairman for supervision, what are your 

thoughts on the U.S. doing such a review, Chair Yellen? 

Mrs. YELLEN. Well, I think we are continuing to finalize these 

regulations and want to come to the end of implementing them, 

and targeted reviews of different aspects of the work that we have 

done become appropriate over time. As Governor Tarullo mentioned, I mentioned in my testimony, we have undertaken a comprehensive review of our stress testing program. We have consulted 

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48 

demics. We have looked at its costs and burdens carefully, and we 

are going to be recommending and already have to some extent, 

changes that we think are appropriate in light of those reviews. 

And over time, my guess is that other areas will deserve reconsideration. But— 

Mrs. WAGNER. Ma’am, what is your timing on some of the recommendations you will be making regarding some of the reviews 

that you have already taken? 

Mrs. YELLEN. Well, we already put out earlier this week a pro- posal that would exempt the institutions that are under $250 billion and don’t engage in significant foreign or nonbanking activities 

to be exempt from the qualitative part of our CCAR review. So that 

is already out, and other aspects of the proposal should go out 

shortly. 

Mrs. WAGNER. If I can continue, given that many foreign bank 

regulators, such as those in Europe, in Japan, and others on the 

Basel Committee, are pushing back against some of the capital rule 

proposals from the U.S., wouldn’t it make sense for the U.S. to conduct such a kind of a comprehensive, I will say, review as they are 

doing in the EU, particularly since the U.S. regularly gold plates 

their regulations beyond what Basel calls for? 

Mrs. YELLEN. Well, we have carefully looked at what is appropriate as we have undertaken these capital regulations. Some costbenefit analysis has been done, and in the case of the GSIB surcharges, there was careful analysis done of the levels at which they 

should be set. And I don’t think it is time now for a comprehensive 

rethink. 

Mrs. WAGNER. Well, and you talked about the stress test—and 

let me get to that. Governor Tarullo specifically said a U.S. call for 

evidence would be difficult to conduct in that it would require a 

very big model that would require a lot of assumptions. 

How is this any different, Chair Yellen, from the Fed’s stress 

test, which also incorporates a lot of kind of macro assumptions? 

Mrs. YELLEN. Well, in the case of the capital regulations and 

other aspects, what we are mainly talking about is reducing the 

probability and severity of a financial crisis. And one of the reasons 

that it becomes difficult to do the type of analysis that you are discussing is that financial crises fortunately are few and far between, 

and there is no clear rigorous way to establish what is the probability and how does a particular regulation affect the probability 

of what is a tail risk. 

Mrs. WAGNER. In my remaining short time here, it has been 8 

years, 8 years, Chair Yellen, and certainly, the EU is calling vigorously, as are other countries, for a call for evidence and a review. 

Shouldn’t the Fed at least attempt to understand the cumulative 

effects its rules are having on the economy? What are the other 

ways the Fed monitoring—monitors the impact its regulations are 

having on growth? 

Mrs. YELLEN. Well, we are carefully monitoring how our regulations are working, and by and large, my conclusion is that we have 

a safer and sounder banking system. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

49 

Mr. ELLISON. I want to thank the Chair and the ranking member. 

Chair Yellen, thank you for your great service. I definitely appreciate it. And I am of the opinion that some of the criticism that you 

have to endure from certain quarters is really shortsighted, considering that the Congress has certain responsibilities to provide fiscal 

stimulus as well, and I think we have not done it. I think we have 

really kind of failed on it. In fact, all we really ever talk about 

around here is how we can cut budgets as opposed to do things 

that I think really grow the economy. 

Anyway, that is just my opinion. I will leave that on the side. 

It is quite clear that Wells Fargo misused employment incentives, setting up an unattainable cross-selling goal, Eight is Great. 

I think it is a terrible corporate practice. Section 956 of DoddFrank directed the Federal Reserve, as well as other regulators, to 

finalize incentive-based compensation rules for financial institutions, such that those rules don’t encourage ‘‘material losses’’ or ‘‘inappropriate risks.’’ Those rules were supposed to be completed 9 

months after the passage of the Act. Can you give us a status update on when we can expect to see those rules? 

Mrs. YELLEN. The regulation went out for comment. Comments 

have been received, and I believe the staffs of the agencies are 

working through those now. I very much hope that we can finalize 

this rule. It has been a very long time, and I will do everything 

that I can for the Federal Reserve to be ready to act on this as soon 

as possible. 

Mr. ELLISON. And recognizing the sensitivity of this whole situation, one of the things that has occurred to me is that the CEO, 

the Chair of Wells Fargo, is pretty well-compensated. The number 

I found was like $19 million. He is not losing his job—apparently 

not yet. And yet we still see about 5,300 people who were let go. 

I make no comment on whether they should have been let go or 

whether they deserve to be, but when you set up a situation where 

you are incentivizing them moving accounts the way that they were 

and some of the demands that were put on them, you can kind of 

see how it could happen. 

I guess my question to you is, how can line level workers be held 

accountable to the degree that they clearly have been and yet nobody in middle or upper management seems to be taking responsibility for it? They haven’t lost their jobs. Can you give us some insight as to how some of our banking management practices are 

being practiced so that only the people at the bottom end of the 

food chain end up bearing all of the responsibility? 

Mrs. YELLEN. Senior management has a responsibility, and it is 

essential that they be held accountable. Compensation schemes 

that, for example, are based solely on volume are prohibited under 

the rule that the six agencies have proposed, but even prior to the 

adoption of that, the banking agencies have put out, back in I think 

2010 or 2011, supervisory guidance on compensation that had the 

same expectation. The Board of directors should be reviewing compensation schemes and performance plans throughout the organization at all levels to make sure that they don’t result in compliance 

failures, in ill treatment, that they have to be consistent with fair 

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tion. And it will be formalized in a rule hopefully when the six 

agencies are able to finalize that. But senior executives are responsible, and they are responsible for setting up risk-management 

schemes in their organization that would be detecting such problems, that they have a strong internal audit function that would be 

reviewing and detecting compliance problems, and that these problems would not only be acted on by senior management but escalated to the Board of directors that has an important responsibility 

here. 

Mr. ELLISON. Thank you, and I really appreciate your answer, 

because I agree with it. 

Now, my good friend from Wisconsin, Congressman Duffy, was 

asking you to respond about an opinion piece by Larry Summers. 

I got the sense that you might want to elaborate a little bit more 

on what he asked you. Would you like to take the last 20 or so seconds just to sort of stretch out on your answer a little bit? 

Mrs. YELLEN. Yes, so thank you for that. So Summers finds that 

measures of riskiness of bank debt haven’t diminished since the financial crisis. Two reasons. He finds that one is that, prior to the 

crisis, clearly market participants underestimated risk, and, second, we are dealing with too-big-to-fail, and investors can no longer 

expect that they will be shielded from risks if things go wrong in 

their firm. 

Chairman HENSARLING. The time of the gentleman from Minnesota has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr. 

Mr. BARR. Thank you, Mr. Chairman. 

Chair Yellen, I want to touch first on monetary policy and then 

shift over to the Federal Reserve supervision and regulation of the 

financial system. Briefly, on monetary policy, in your press conference last week, you stated that the recent pickup in economic 

growth and continued progress in the labor market have strengthened the case for an increase in the Federal funds rate, and then 

you went on to say conditions in the labor market are strengthening, and we expect that to continue. And the headline on 

Bloomberg’s website covering this hearing, this very hearing, is 

that, ‘‘Yellen Sees Solid Job Growth.’’ But in response to my colleague, Mr. Guinta, I think I heard you say that the labor force 

participation rate has not moved, and of course, we all know that 

economic growth is weak. The Bureau of Economic Analysis reports 

the GDP output in the first quarter of this year was only .8 percent; and the second quarter of this year, only 1.1 percent. And productivity, which is a real important indicator of economic growth, 

is in retreat. It has been decreasing by almost a half a percent over 

the last four quarters. So the question is, on monetary policy, how 

does your comments about economic growth and progress in the 

labor market square with these stubborn facts? 

Mrs. YELLEN. Well, economic growth has been very slow, and 

that is extremely disappointing. Productivity growth in particular 

has been really very, very low, and as you mentioned, in recent 

years, negative, which is a very depressing finding. And in that 

sense, the economy is not doing well. But we are creating a lot of 

jobs. The unemployment rate has declined to the neighborhood of 

51 

what most of us would consider to be full employment. And there 

is a very significant downward pressure on labor force participation 

that is coming from the aging of the population. 

Mr. BARR. Well, let’s just say—okay, if I can just interject 

there—aging of the population may be one factor. The other factor 

is that unemployment is coming down, not for a good reason but 

for the wrong reason, namely that there is a frustrated workforce 

out there that has completely given up looking for work. Let me 

talk about maybe some of the causes of the drag on the economy. 

Obviously, you all have a role in conducting monetary policy, and 

one of the dual mandate functions is maximum employment. That 

is an objective of the Federal Reserve. But also supervision and 

regulating of banking institutions to ensure safety and soundness 

is another important mission. But what I am worried about, and 

maybe what might explain some of the drag in our economy, is that 

a regulatory overreach can be at cross purposes with your interest 

rate policies, and the left hand may not know what the right is 

doing. Let me give you an example of what I am talking about. In 

the post-Dodd-Frank world, financial firms are supervised by multiple agencies. More than ever before, the Federal Reserve, the 

FDIC, the OCC, the NCUA, the SEC, the CFTC, the CFPB, the 

FSOC, these agencies are promulgating regulations. They are performing examinations. With respect to rulemakings, the approach 

of market regulators sometimes conflicts with the safety and 

soundness regulators, which in turn can conflict with the consumer 

protection regulator. And on supervision, often the substance of examinations overlap, but the timetables don’t, and so data collection 

among financial regulators can be duplicative and uncoordinated. 

So this is not only a burden on financial firms, an undue burden 

on financial firms, that may be a drag on our economy, but it also 

may lead to gaps in supervision, and so when you look at Wells 

Fargo and the scandal that we have seen there and the consumer 

fraud that went unpunished for 5 years, based on the timeline we 

have seen, and the primary consumer protection agency is coming 

in on the tail end of that, again, according to the timeline we have 

seen, do you acknowledge that maybe the lack of regulatory coordination and inefficiency may be a problem? 

And, secondly, what do you think about proposals to consolidate 

or at least reduce the number of financial regulators to reduce regulatory incompetence, to reduce regulatory duplication or conflict, 

or at least consolidate examinations and data collection efforts between and among regulators? 

Mrs. YELLEN. Well, we have a complicated regulatory system. 

There is no doubt about it. And we recognize that the issues you 

are discussing can create a great deal of burden. For our part, we 

work very closely with the controller, with the FDIC, and also with 

the CFPB. 

Mr. BARR. Yes. In my remaining time, and I don’t have much 

time, but on the merchant banking activities rule, will you commit 

to the committee that before the rule is finalized, you will provide 

us with an analysis of the type of costs that this could impose on 

companies? 

Mrs. YELLEN. It was a recommendation to Congress and not a 

rule. 

52 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair wishes to remind all members that the Chair intends 

to recognize the gentleman from Washington and the gentleman 

from Pennsylvania, and then adjourn the hearing. 

The gentleman from Washington, Mr. Heck, is now recognized. 

Mr. HECK. Thank you, Mr. Chairman. 

Chair Yellen, thank you so very much for being here. 

We are obviously moving toward a healthier economy. We are not 

quite there yet. But that notwithstanding, I think it is kind of useful to look even further ahead to the next economic cycle. And that 

is why I read with interest that the committee projected last week 

that the Fed funds rate will top out at two and three-quarters to 

3 percent. That didn’t give you a lot of room to deal with the next 

recession, and as I am fond of saying, neither God nor anyone else 

has outlawed the business cycle. We will have another recession. 

So my question is, why don’t you consider raising the inflation 

rate so that you have more bullets in your most powerful weapon 

to combat the next recession? 

Mrs. YELLEN. Well, this is something that researchers are looking at and are talking about. And for the reasons that you gave, 

I think it is an appropriate subject for research and for consideration if we remain in a low interest rate environment for a very 

long period of time. It is not something that the FOMC is actively 

considering, not at this time. 

Mr. HECK. Are you open to it? 

Mrs. YELLEN. At the moment, I think it is not a priority for us 

to consider that right now, but I would not say ‘‘never.’’ I think it 

is appropriate for researchers to consider the cost and benefits of 

it carefully. It is not something we are actively looking at, but I 

wouldn’t say that it is something that we could never look at. 

But we are focused on trying to achieve our 2 percent objective. 

We want to emphasize the 2 percent is not a ceiling on the inflation rate. It is the target where we would like to be that inflation 

can be above and below 2 percent at different times. We don’t expect to always be there. 

I think we have realized— 

Mr. HECK. Are you not concerned? The basis of my question is 

you don’t have enough bullets in your most powerful weapon. Are 

you not concerned at all? 

Mrs. YELLEN. I am concerned, and I gave a speech at Jackson 

Hole that addresses this issue. First of all, I think that we may be 

required to use the same kinds of tools we used during the crisis 

in the event of a future downturn. And I emphasized that, that 

those probably need to be permanent parts of our arsenal. 

And beyond that, yes, further things, it is important to do research on other things. And I emphasize that Congress should also 

consider what its role should be, if you are in this— 

Mr. HECK. Thank you. I actually read the speech. Thank you. 

Last time you were here, I asked you, when does America get a 

raise? 

Mrs. YELLEN. When does what? 

Mr. HECK. When does America get a raise. I want to go down 

this road with you a little bit again briefly. Obviously, the economy 

is moving, although not there in a healthy direction. Car sales are 

53 

up. Home sales are up. Median household income was up fairly materially. But wage growth still stuck, I think, at about 2.5 percent. 

Even in the last—last—weak recovery, wage growth was 4 percent. 

Chair Yellen, when does America get a raise? 

Mrs. YELLEN. So wage growth has increased a little bit, and I 

think, as the recovery progresses, we will see some more pickup in 

wages. But productivity growth is a very important determination 

of real wage growth or inflation-adjusted wage growth. If nominal 

wage growth were to pick up and inflation picked up in tandem, 

that wouldn’t be a real wage increase. 

So what we want to see is wages going up without its involving 

inflation going up. And, ultimately, the size of those paycheck increases in the long run are driven by productivity growth, and productivity growth has been very low. 

And I think that is one of the things that is holding down the 

improvement in living standards. So we are seeing some signs of 

a pickup, but ultimately, if productivity growth doesn’t pick up, 

then faster nominal wage growth would just prove to be inflationary. So that is a fundamental driver. 

Mr. HECK. So, quickly, what would you define as full employment 

as measured by U6, currently stuck at about 9.7? 

Mrs. YELLEN. So I don’t have a definition. It is not—it is higher 

than it was before the crisis, even though U3 is down to normal 

levels. And I think that does signify some remaining underutilization. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Chair Yellen, I just want to touch on one thing following up on 

Mr. Mulvaney’s question. I think you testified with respect to needing legal authority in the event that the Fed wanted to purchase 

corporate equities. Is that right? 

Mrs. YELLEN. Yes. I said we do not have legal— 

Mr. ROTHFUS. You do not have. So you would need additional 

legal before you did something. 

Mrs. YELLEN. Right. 

Mr. ROTHFUS. Does that same hold true for corporate bonds? 

Mrs. YELLEN. Yes. We cannot purchase corporate bonds. 

Mr. ROTHFUS. I want to take a few minutes to address some of 

the issues that I raised in my letter to you earlier this week. I am 

concerned about the level of influence that the FSB has on the 

FSOC SIFI designation process. 

In a letter in February 2015 to the G20 Finance Ministers and 

Central Bank Governors, Mark Carney, the FSB Chair, made clear 

that member Governors had ‘‘ongoing commitment’’ to implement 

FSB’s policies, and that, ‘‘full, consistent, and prompt implementation’’ was essential. Though some may dismiss this as inconsequential prose, evidence suggests that FSOC operates in the spirit of 

Mr. Carney’s words. 

Three U.S.-based insurers that the FSB identified as GSIIs have 

also been designated by FSOC for Fed supervision. With that in 

mind, I wanted to ask you a few specific questions about the relationship between FSB and FSOC decisionmaking. What is the role 

54 

of the U.S. members of the FSB in considering whether to designate U.S. insurance companies under the GSII process? 

Mrs. YELLEN. Well, a number of agencies take part in the FSB. 

The Federal Reserve, the Treasury, and the SEC are all members 

of the FSB and engage in their work. 

Mr. ROTHFUS. Under the FSB charter, member countries commit 

to implement international financial standards. What steps has the 

U.S. taken to implement FSB’s designation of U.S. insurance companies—AIG, Prudential, and MetLife—as systemically important? 

Mrs. YELLEN. Well, none, because the FSB designations have no 

impact in the United States, and the United States has to go 

through its own rulemaking process. The FSOC analysis is completely separate and focused on slightly different things than the 

FSB analysis. And they are entirely separate processes. 

Mr. ROTHFUS. Did the Federal Reserve support the FSB’s designation of Prudential and MetLife as GSIIs before FSOC had designated them? 

Mrs. YELLEN. The Federal Reserve only joined the IAIS that 

played a role here in 2013. And to the best of my knowledge, we 

didn’t participate in their analysis that were the basis for some of 

the original designations. 

Mr. ROTHFUS. But the Federal Reserve does participate with the 

FSB, yes? 

Mrs. YELLEN. We may—we do participate in the FSB. 

Mr. ROTHFUS. And in the process of the FSB designating these 

as GSIIs, what would the Federal Reserve’s position have been? 

Mrs. YELLEN. I believe that the—I have to check this out, but I 

believe that the FSOC designations of these firms occurred before 

the final—the designations by the FSB, but I have to look at that 

more carefully. 

Mr. ROTHFUS. Yes, we want to follow up on that, because my understanding is that it happened—the FSB designated them and 

then FSOC went and designated them. Because it seems that if you 

agree to designate a U.S. company as globally significant under the 

FSB regime, that that would end up influencing that the company 

is going to be designated as systemically important within the 

United States. Wouldn’t you agree with that? 

Mrs. YELLEN. Well, as I said, the FSOC process is separate, and 

I believe that the FSOC designations took place before the list of 

GSIIs was put out. 

Mr. ROTHFUS. Could an FSB GSII designation be considered an 

‘‘other risk-related factor’’ under section 113 of the Dodd-Frank 

Act? 

Mrs. YELLEN. I am sorry. I didn’t get that. 

Mr. ROTHFUS. Could an FSB GSII designation, if the FSB designates an insurance company as a GSII, could that designation be 

considered an other risk-related factor under section 113 of the 

Dodd-Frank Act? 

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

Mr. ROTHFUS. I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

I would like to thank our witness 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. 

55 

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. I would ask our witness 

to please respond as promptly as you are able. 

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 1:11 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

September 28, 2016 

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