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S. HRG. 111–382 

INTERNATIONAL COOPERATION TO MODERNIZE 

FINANCIAL REGULATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITY AND INTERNATIONAL TRADE 

AND FINANCE 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

COLLABORATIVE INTERNATIONAL EFFORTS TO PROMOTE FINANCIAL 

REGULATORY REFORM 

SEPTEMBER 30, 2009 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

DEAN SHAHINIAN, Senior Counsel 

JULIE CHON, Senior Policy Adviser 

MARK OESTERLE, Republican Chief Counsel 

HESTER PEIRCE, Republican Senior Counsel 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITY AND INTERNATIONAL TRADE AND FINANCE

EVAN BAYH, Indiana, Chairman 

BOB CORKER, Tennessee, Ranking Republican Member 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

MICHAEL F. BENNET, Colorado 

CHRISTOPHER J. DODD, Connecticut 

ROBERT F. BENNETT, Utah 

ELLEN CHUBE, Staff Director 

COURTNEY GEDULDIG, Republican Staff Director 

(II)
C O N T E N T S 

WEDNESDAY, SEPTEMBER, 2009 

Page 

Opening statement of Chairman Bayh .................................................................. 1 

Opening statements, comments, or prepared statement of: 

Senator Shelby .................................................................................................. 4 

Senator Corker .................................................................................................. 4 

WITNESSES 

Mark Sobel, Acting Assistant Secretary for International Affairs, Department 

of The Treasury .................................................................................................... 5 

Prepared statement .......................................................................................... 26 

Responses to written questions of: 

Senator Corker .......................................................................................... 40 

Kathleen L. Casey, Commissioner, Securities and Exchange Commission ........ 7 

Prepared statement .......................................................................................... 30 

Responses to written questions of: 

Senator Corker .......................................................................................... 43 

Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve 

System ................................................................................................................... 9 

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

Responses to written questions of: 

Senator Corker .......................................................................................... 45 

(III)

(1) 

INTERNATIONAL COOPERATION TO 

MODERNIZE FINANCIAL REGULATION 

WEDNESDAY, SEPTEMBER 30, 2009 

U.S. SENATE, SUBCOMMITTEE ON SECURITY AND

INTERNATIONAL TRADE AND FINANCE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 2:39 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Evan Bayh, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF SENATOR EVAN BAYH 

Senator BAYH. I would like to call the Subcommittee to order and 

thank our witnesses for being with us today. I am well aware of 

how busy you are, and so in the midst of all the other things you 

have to deal with, I am very grateful for your insights. I apologize 

for being a little bit late. I was waylaid by some well-intended 

members of the fourth estate who, for some reason, wanted to talk 

about health care. But the matter that we are here today to discuss 

is very important. We will be turning to that very shortly, and so 

I am grateful for your presence. 

I am pleased to call the Subcommittee to order for our hearing 

entitled ‘‘The International Cooperation to Modernize Financial 

Regulation.’’ I want to begin by thanking Chairman Dodd of the 

Banking Committee as a whole and his hard-working staff for their 

cooperation and assistance in arranging this hearing and for the 

Chairman’s support in looking into these important matters. 

I would also like to welcome my friend and colleague, Ranking 

Member Corker—I am grateful for his leadership on these and 

other matters—and my other colleagues on the Committee who are 

with us. Some will be with us later in person. Others will be reading the testimony. I want to thank them for their interest in this 

matter. 

To our three witnesses, I want to welcome you and thank you for 

appearing before the Subcommittee to give an outline on the efforts 

underway to harmonize our collective financial regulations. I understand these few weeks have been very busy for all three of you, 

with the G–20 summit and upcoming meetings abroad. I appreciate 

your rearranging your schedules and your overseas travel to be 

with us here today. Once again, thank you for your consideration. 

Our panel today consists of our country’s leading representatives 

and experts on international economic and financial affairs, so I 

look forward to our upcoming dialog. But first I would like to go 
2 

over why we are here today and why the international element of 

our financial regulatory overhaul is critical to our global economic 

recovery. 

One year ago, our country experienced a financial crisis fueled by 

home foreclosures and institutional failure. The markets dropped 

drastically and credit began to freeze as banks refused to lend to 

families, businesses, and even to one another. 

It soon became apparent that no one was immune. Our financial 

crisis quickly became a full-blown economic crisis, complete with a 

housing decline and our Nation shedding, on average, 700,000 jobs 

each month. My home State of Indiana was hit particularly hard. 

It was clear Congress needed to intervene with massive Government assistance to help stabilize our financial markets and prevent 

complete economic collapse. As I said at the time, it was a ‘‘distasteful but necessary step to protect millions of innocent people.’’ 

Now, 1 year later we are on the path to recovery. It will take 

some time for our financial system to completely heal, but in the 

meantime, it is our responsibility and the duty of lawmakers to be 

willing to take the steps necessary toward long-term reform to 

make sure this situation does not happen again. 

The Senate Banking Committee has already held approximately 

30 hearings since this January on the issue of financial regulatory 

modernization. It would be challenging enough to reform our regulatory scheme here in the United States and ignore the efforts 

internationally. But that would neglect our economic reality. We 

live in an interconnected global economy, and as we have seen, that 

means interconnected global problems. 

Vulnerabilities and gaps in financial markets abroad can impact 

us here substantially at home. Any reform or rules we enact here 

at some level should be matched or harmonized abroad to ensure 

capital does not gravitate to the lowest common denominator. We 

sometimes refer to that as regulatory arbitrage. 

Two weeks ago, in a speech before Wall Street, President Obama 

reaffirmed his commitment to financial regulatory modernization 

and the need to close the gaps and harmonize our collective rules. 

He stressed that the United States needs to play a leadership role 

in lifting our global regulatory standards to ensure there is a global 

race to the top. This is necessary to, number one, prevent the regulatory arbitrage I just mentioned that puts our entire financial system at risk; and, number two, make sure we remain competitive 

with other nations. 

In light of that commitment, we are moving forward with today’s 

hearing to show our support for this critical component of regulatory reform. Today we will hear from our three witnesses on the 

work that is underway to coordinate our regulatory structures. 

We have already laid the foundation to begin this process. In an 

effort to coordinate financial regulatory reforms, world leaders 

began working together at a series of international meetings to address changes in policy, regulations, oversight, and enforcement. 

The first was in November of 2008 here in Washington, D.C. 

At that meeting, the leaders approved an action plan that included instructing their Finance Ministers to make specific recommendations in a number of areas. Some of the most important 

included: avoiding regulatory policies that exacerbate ups and 
3 

downs of the business cycle, reviewing incentives for risk taking 

and innovation reflected in executive compensation practices, and 

strengthening the regulatory scheme for credit derivatives and reducing their systemic risk. 

The G–20’s next meeting was in April 2009 in London. There the 

leaders focused on the issues of coordination and oversight of an 

international financial system with the creation of the Financial 

Stability Board. The Financial Stability Board is an extension of a 

previous international organization, the Financial Stability Forum, 

with an expanded membership to include all G–20 countries, 

Spain, and the European Commission. 

Our three witnesses today are the United States’ representatives 

to the Financial Stability Board, and I look forward to hearing 

their thoughts on this reinvented organization and how effective it 

will be in enacting change. Leaders of the London Summit also 

agreed to work on cross-border cooperation, closer regulation of 

banks, hedge funds, and credit rating agencies, and a crackdown on 

tax havens—all important issues. 

Last, the United States asserted our leadership in these international economic issues by hosting the Pittsburgh Summit just 

last week. I am particularly interested in hearing from our witnesses on what was accomplished at the G–20 Summit in Pittsburgh on the international harmonization aspects of regulatory reform. Specifically, we would like to know the U.S. goals of the summit, if the objectives were accomplished, the roles played by the respective governmental witnesses, and the status of any proposals 

presented by the Financial Stability Board. 

The conventional wisdom on international coordination is that at 

summits countries talk globally but afterwards act only locally. 

This hearing and the oversight our Subcommittee will conduct on 

this issue throughout this lengthy process is one way to ensure 

that the momentum is not lost. However, the work is not completely laid at the feet of the administration and our international 

standard-setting entities. Congress has some responsibility in this 

debate as well. 

The biggest question for Congress is how much our regulatory 

modernization should be harmonized with international norms and 

standards and what we should do when there are conflicts on proposals that may not be consistent with U.S. interests or what Congress prefers. These are difficult questions. But I trust that my colleagues here in the Senate and the witnesses sitting before us 

today are willing to put in the work to make sure that we make 

the right decisions and get something done. 

Let me close by reiterating how critical these efforts are to our 

global economic recovery and future success. 

Last year, as Congress passed the Emergency Economic Stabilization Act, popularly known as TARP, I said: 

I am not a cynic, but I am a skeptic about the way Washington can work 

in times like these. Congress will act in a moment of crisis, but once it is 

abated, the sense of urgency will dissipate. The forces of reform will not 

have the energy that they have today. All the interests will circle this place 

like hungry birds looking for carrion in order to prevent us from taking the 

steps that are necessary. We must not let that happen. 
4 

Here we are a year later, and we must remain committed to seeing through long-term reform. We need to bring the same sense of 

urgency that was so palpable during the crisis. 

And now before we hear from our witnesses, I would like to turn 

to my distinguished colleagues, and I would like to acknowledge 

the presence of our Ranking Member of the entire Banking Committee, my friend Senator Shelby. Senator, thank you for your 

presence. 

Senator SHELBY. Thank you. 

Senator BAYH. And I am not sure what the appropriate protocol 

is here, gentlemen. Robert, I had intended to turn to you, and it 

looks as if the Ranking Member agrees with that, so I will turn to 

my colleague Senator Corker for any opening remarks that he 

might like to make, although, Bob, I have been informed of something we call the Corker rule, which has to do with your unusual 

habit for a Senator of being very brief. So I do not know if you intend to invoke the Corker rule today or not, but you are not obligated to. 

OPENING STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Listen, Mr. Chairman, I am looking forward to 

serving with you on this Committee, and I like working with you 

on numbers of issues. I am not fond of opening statements and not 

known for them, and I do not plan on changing that today. So 

thank you for coming as witnesses. We look forward to your testimony, and I do think our distinguished Ranking Member has someone in particular he wants to embellish, but certainly wisdom he 

wants to share with all of us. 

So, Mr. Ranking Member. 

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. I believe I will stay with the Corker rule. By osmosis, you know, we are picking it up day by day. 

But, Mr. Chairman, this is, I think, a very timely hearing and 

a very needed hearing dealing with international cooperation, dealing with our financial regulation, our accounting system, and everything that goes with it. So I look forward to today’s witnesses. 

Thank you very much. 

Senator BAYH. Thank you, Senator Shelby, very much. 

It is now my privilege to introduce our witnesses. Why don’t I 

start moving from the panel’s right to the panel’s left, and I have 

very lengthy and detailed synopses of your very distinguished careers. I am going to dispense with that and just give your titles, 

and I will have the entire introductions entered into the record for 

those who are interested in the entire resume. 

Senator BAYH. First, Mark Sobel. Mark is the Deputy Assistant 

Secretary for International Monetary and Financial policy in the 

United States Treasury Department. Mark, thank you for your 

presence, and we are well aware of how busy things are in the Department these days. And please thank the Secretary for his cooperation in making your presence possible here today. 

Second, Commissioner Kathleen Casey. Ms. Casey is an SEC 

Commissioner and the SEC representative to the Financial Sta-
5 

bility Board. Kathleen, thank you for your good work at the Commission, and I am grateful for your time here today. 

Finally, we have the Honorable Daniel Tarullo who has been 

kind enough to appear before our Subcommittee before. Daniel, it 

is good to see you once again. He took office as a member of the 

Board of Governors of the Federal Reserve on January 28, 2009. 

You have had no lack of things to do since that time as well, Dan, 

so I am grateful for your insights and your testimony here today. 

Thank you and, Mark, let us begin with you, Mr. Sobel. You 

might want to push the microphone—there you go. 

STATEMENT OF MARK SOBEL, ACTING ASSISTANT SECRETARY 

FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF THE 

TREASURY 

Mr. SOBEL. It has been pushed for me. OK. Thank you. 

Thank you for this opportunity to testify on international efforts 

to promote regulatory reform, especially following the Pittsburgh 

Summit. 

Immediately after the start of the crisis, policymakers and regulators worldwide redoubled efforts to repair financial systems and 

put in place a stronger regulatory and supervisory framework so 

that a crisis of the magnitude we have witnessed does not occur 

again. 

Good progress is being made, and much was achieved already 

through the Washington and London G–20 Summits. We strengthened prudential oversight, reached agreement to extend the scope 

of regulation, strengthened international cooperation, and have 

taken action to deal with jurisdictions that failed to commit to 

high-quality standards. 

A fundamental objective of the Pittsburgh Summit was to build 

on these accomplishments. Leaders agreed on four priorities: 

Capital. They agreed to develop rules to improve the quantity 

and quality of capital and to discourage excessive leverage by end 

2010. This agreement tracks closely with Secretary Geithner’s principles issued earlier this month. 

On compensation, leaders endorsed the implementation of standards to help financial institutions and regulators better align compensation with long-term value and risk management. National supervisors will impose corrective measures on firms with unsound 

practices. 

On OTC derivatives, they agreed that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by end 

2012. Non-centrally cleared contracts will be subject to higher capital requirements. 

On cross-border resolution, they agreed to strengthen domestic 

resolution frameworks and that prudential standards for the largest, most interconnected firms should be commensurate with the 

costs of their failure. 

Leaders also called on international accounting bodies to redouble efforts to achieve a single set of high-quality, global accounting 

standards. 

Firms are now global in scope, as you noted, Mr. Chairman, and 

we derive benefits from open, interconnected markets. But the cri-
6 

sis highlighted that financial duress can spread quickly across national boundaries. And while the responsibility for sound regulation 

begins at home, different national standards open the possibility 

for regulatory arbitrage, gaps in oversight, and a race to the bottom. International cooperation is essential to avoid these pitfalls. 

Throughout the crisis, standard setters and other bodies, in addition to the G–20, have helped in this effort. But one body, the Financial Stability Board, has played a critical role in promoting 

international financial stability. Founded as the Financial Stability 

Forum in the aftermath of the Asia crisis with strong U.S. support, 

it brought G–7 officials together with key standard-setting bodies. 

At the outset of the crisis, the G–7 asked the forum to analyze the 

causes of the crisis and provide recommendations to increase the 

resilience of markets and institutions. 

Those recommendations have been at the center of the international consensus on how to overhaul the world’s financial regulatory system. In April, with strong U.S. backing, the Financial 

Stability Forum was reconstituted as the Financial Stability Board, 

with an enhanced mandate and membership now encompassing all 

G–20 countries. 

The FSB has been a key venue to prepare for G–20 leaders summits. I have provided greater detail in my written testimony on the 

FSB’s purposes and functioning. 

In the United States, we have set out a proposal for comprehensive regulatory reform, but to promote a global race to the top, we 

need our G–20 partners to be equally ambitious. 

The three institutions we represent have worked closely together 

in preparing for FSB meetings. In addition, U.S. regulatory officials 

are heavily involved in setting the agenda for international standard setters. This strong cooperation between U.S. and international 

officials is reflected in the closely aligned agendas pursued by the 

FSB in the United States and has allowed us to forge more consistent global standards in line with the U.S. agenda. 

As part of our work to help ensure a cohesive national vision at 

the international level, U.S. officials also coordinate through the 

President’s Working Group on Financial Markets and at a working 

level conference calls hosted by Treasury with U.S. regulators to 

discuss implementation of the G–20 leaders and FSB work. 

Looking forward, consistent national implementation throughout 

the G–20 will increasingly be our focus. The FSB will be an important forum to assess progress. 

Despite our achievements, much more remains to be done. Some 

of the flaws in the U.S. financial system and regulatory framework 

that allowed this crisis to occur are still in place. 

In conclusion, the United States has led the effort to create the 

FSB, shape its agenda, expand its membership, and involve it 

closely in the G–20’s work. In turn, the Financial Stability Board 

has been a key instrument for policy development. We can be confident knowing that the machinery to strengthen the international 

financial system is in place and has set forth principles for reform 

that are consistent with the administration’s own plan. 

Again, thank you for having me here today. 

Senator BAYH. Thank you, Mr. Sobel. 

Ms. Casey. 
7 

STATEMENT OF KATHLEEN L. CASEY, COMMISSIONER, 

SECURITIES AND EXCHANGE COMMISSION 

Ms. CASEY. Chairman Bayh, Ranking Member Corker, and members of the Committee, thank you for inviting me to testify about 

the international cooperation to modernize financial regulation. 

I am very pleased to have the opportunity to testify on behalf of 

the Securities and Exchange Commission on this very important 

topic. International cooperation is critical to the effectiveness of financial regulatory reform efforts. In reaffirming their commitment 

to strengthening the global financial system, the G–20 Finance 

Ministers and Bank Governors recently set forth a number of actions to ‘‘maintain momentum [and] make the system more resilient.’’ 

The G–20 banking statement correctly recognizes that, due to the 

mobility of capital in today’s world of interconnected financial markets, activity can easily shift from one market to another. Only collective regulatory action can be effective in fully addressing crossborder activity in our global financial system. 

As an SEC Commissioner and Chairman of the Technical Committee of the International Organization of Securities Commissions, 

I bring the perspective of both a national securities market regulator and a member of the international organization charged with 

developing a global response to the challenges posed to securities 

markets by the financial crisis. I also represent the SEC and 

IOSCO in the Financial Stability Board, where the U.S. representation is led by the Department of Treasury, with the Securities 

and Exchange Commission and the Federal Reserve Board both 

serving as members. 

The financial crisis has made it clear that there are regulatory 

gaps that we must address. The Commission has recently proposed 

action to this end in a number of different areas, recognizing, however, that some regulatory gaps and market issues cannot be fully 

addressed without legislative action. The SEC already is working 

to achieve consistency on the domestic and international levels, including through IOSCO and the FSB, with banking, insurance, futures, and other financial market regulators. The Commission also 

is working to ensure respect for the integrity of independent accounting and auditing standard-setting processes in the global regulatory environment. This is essential for the benefit and protection of investors. 

The Commission has worked actively to achieve consistency in 

regulatory policy and implementation on an international basis 

through multilateral, regional, and bilateral mechanisms for many 

years. The SEC was a founding member of IOSCO and has maintained a leading role in the organization. The Commission’s commitment to international cooperation has become increasingly important to its mission in recent years in response to the increasingly global nature of financial markets. 

In addition to my chairmanship of IOSCO’s Technical Committee, Commission staff leads or is very active in IOSCO’s standing committees and task forces, as well as many other multilateral 

organizations. 

While IOSCO represents the primary vehicle for development of 

common international approaches to securities market regulation, 
8 

the Financial Stability Board is another key mechanism for the 

Commission to engage internationally on broader financial market 

issues. The Financial Stability Board has a broader scope, with 

membership comprised of national regulatory and supervisory authorities, standard-setting bodies, and international financial institutions, central bankers, and Finance Ministers. Its mission is to 

address vulnerabilities and to encourage the development of strong 

regulatory, supervisory, and other policies in the interest of financial stability. 

In addition to multilateral global engagement, the Commission 

participates in regional and bilateral mechanisms for discussion 

and promotion of common approaches to regulation, such as our engagement in a number of Treasury-led regulatory dialogues, including with the European Commission, Japan, China, and India, as 

well as with Australia and our North American partners, Canada 

and Mexico. 

Securities-regulatory-focused dialogues between the Commission 

and our counterpart securities regulators in these and other jurisdictions also complement these broader financial sector dialogues. 

Recently, the Commission and a number of other securities regulators have also entered into bilateral ‘‘supervisory’’ memoranda of 

understanding that go well beyond sharing information on enforcement investigations. These supervisory MOUs represent groundbreaking efforts by national securities regulators to work together 

to cooperate in the oversight of financial firms that increasingly operate across borders. 

As these efforts suggest, the infrastructure for international cooperation on securities regulatory policy is well developed, and the 

Commission plays a key role in promoting rising levels of cooperation and building on our successes in raising standards of crossborder enforcement cooperation. Today the SEC has broad authority to share supervisory information as well as to assist foreign securities authorities in their investigations through various tools, including exercising the SEC’s compulsory powers to obtain documents and testimony. In order to facilitate international cooperation, the SEC supports legislation providing authority to the Public 

Company Accounting Oversight Board, which the SEC oversees, to 

share confidential supervisory information with foreign counterparts. The Commission believes that granting this authority to the 

PCAOB would enhance auditor oversight, audit quality, and, ultimately, investor protection. 

In closing, the Commission looks forward to continuing the ongoing constructive dialogue with our colleagues at the Fed, Treasury, 

and other agencies, in developing common U.S. position on international cooperation in the future. 

While the Commission’s particular focus—and that of IOSCO on 

investor protection and efficient and fair markets has remained 

constant and somewhat distinct from that of banking supervisors 

and regulators of other market segments, our recent collaborative 

work, both at home and internationally, continues to enhance our 

ability to identify and address systemic risks across the world’s financial markets and will be central to efforts to strengthen the 

global financial regulatory system. 
9 

Thank you again for the opportunity to testify, and I look forward to taking your questions. 

Senator BAYH. Thank you, Ms. Casey. 

Mr. Tarullo. 

STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. TARULLO. Thank you, Mr. Chairman, Ranking Member Corker, and Ranking Member Shelby. As Chairman Bayh noted, in less 

than a year we have had three G–20 leaders meetings at which financial stability was either the sole subject or, as in Pittsburgh 

last week, one of the most important subjects. 

During this period, the Financial Stability Board has emerged as 

an important forum for identifying, analyzing, and setting in motion coordinated responses to the financial crisis and to regulatory 

gaps and shortcomings. 

There is much promise in what is now a lengthy agenda for the 

Financial Stability Board and the many other important groups intended to foster international regulatory cooperation. But there is 

also some risk that progress will get bogged down or that the negotiation of standards or recommendations in a particular area will 

become an end in itself. 

Needless to say, it is essential to ensure that well-devised standards are implemented effectively by all participating countries and 

that problems revealed during this implementation are cooperatively addressed and changes made. 

As we look ahead from Pittsburgh and all the international meetings that preceded it, I would offer a few thoughts on how we 

should proceed from here. 

First, it is important for the U.S. representatives to the FSB and 

other groups to focus on the topics and initiatives that we believe 

are most significant for promoting global financial stability and 

that are also susceptible to practical international cooperative action. 

My prepared testimony covers a number of these areas, but I 

would like to draw particular attention to the emphasis of the G– 

20 leaders on improvements to capital requirements, which is both 

an appropriate and critical emphasis. 

Second, we will need to work with our counterparts from other 

countries to rationalize the activities of the many international organizations and groups whose mandates involve financial stability. 

While overlap among these various institutions can sometimes be 

useful in fostering alternative ideas and approaches, uncoordinated 

duplication of effort can be inefficient and sometimes even counterproductive. 

A third and related point is that the expansion of both membership and mandate in certain of these international groups will require changes in operating procedures in order to maintain some 

of the advantages these groups have had. 

Fourth, while the financial crisis has understandably, and appropriately, concentrated international energies and attentions on the 

new standards that will be necessary to protect financial stability, 

we must guard against these fora being transformed into exclusively negotiating entities. One of the virtues of the original Finan-
10 

cial Stability Forum was that is provided a venue for participating 

officials to exchange views on current developments and problems 

in a relatively unstructured fashion that provided at least the potential for new ideas to emerge. 

Similarly, a number of the international standard-setting bodies, 

such as the Basel Committee on Banking Supervision, traditionally 

provided a venue for senior supervisors to understand the perspectives of their foreign counterparts and at times to develop shared 

views of common supervisory challenges, quite apart from the negotiation of new international standards. 

These other purposes of international financial regulatory groups 

are, in my view, useful both as ends in themselves and as mechanisms to reinforce the implementations of the standards previously 

promulgated by these groups. 

Thank you, Mr. Chairman. I would be pleased to answer any 

questions you or your colleagues may have. 

Senator BAYH. Thank you, Mr. Tarullo, and thank you to the 

other panelists. Why don’t I work in reverse order and start with 

you. 

On the issue of systemic risk, experts point out that the regulatory reform discussion during the summit meetings has still been 

fairly vague on critical and complex issues, like systemic risk, 

cross-border resolution authority, and what to do about derivatives. 

However, the political hot button issue of executive compensation 

seems to have been more on a fast track. 

My question is: What do you think we can end up doing on the 

issue of systemic risk, which gets to the heart of the problem that 

we face? And will we have more than just—and I understand there 

is a lot going on. It is a full plate. These things take time. But do 

you think we will end up with something more than unenforceable, 

you know, vague standards this time? Or can we look forward to 

something more specific with some real enforceability to it? 

Mr. TARULLO. Well, Mr. Chairman, I think the agenda responding to systemic risk is in some sense the biggest part of both the 

FSB’s agenda and much of what the G–20 said. So it is not any 

one initiative. I would say that the elements of that agenda, internationally as domestically, are mutually reinforcing. So with respect to higher capital standards, for example, I think both higher 

capital standards applied to existing international agreements and 

new ideas about how to take steps that contain systemic risk are 

going to be equally important. The agenda for strengthening capital standards is well underway. There has been some progress already. I think the G–20 Summit is going to catalyze some more 

progress. 

Senator BAYH. Is this difficult for the Europeans, given the condition of several of their financial institutions? 

Mr. TARULLO. Well, I think it is going to be a challenge for most 

countries because we are talking about significant increases in capital over time. I think you probably noted that the G–20 leaders 

want to move forward with the agreement on tighter, stricter, more 

robust capital standards now, but the implementation of those 

standards is presumably going to take place as the financial institutions themselves strengthen. 
11 

I think that with respect to some of these newer ideas, one I 

would draw your attention to is that of contingent capital requirements for large institutions. I think that is an example of where 

we in the United States have an opportunity to exercise some leadership to produce some good, innovative ideas that will bring market discipline and some protection for taxpayers to each of these 

very large financial institutions. And so I think that is one of the 

reasons why we and our colleagues have been promoting those 

ideas internationally and hope we see some progress on it. 

Senator BAYH. Mr. Sobel, or any of the three of you, the topic of 

derivatives came up several years ago and you mentioned that 

there have been some general statements in the Pittsburgh gathering about the importance of moving forward on this. The response that we always got previously to this was, well, if you regulate these instruments more closely in the United States, we will 

just take the business offshore and the risks will be run. It is just 

that there won’t be the employment in the United States. So it is 

kind of a lose-lose situation. Do you think we will come up with 

something more specific and enforceable this time to prevent that 

kind of forum shopping? 

Mr. SOBEL. I think one of the main points I wanted to emphasize 

today is that I think that there is real solid agreement in the G– 

20, in the FSB, certainly among the main players, certainly in the 

standard-setting bodies, such as the Committee on Payments and 

Settlement Systems, to really tackle these issues to make significant progress on them. So I think that the agreements that we 

have reached, for example, in Pittsburgh, there is a good paragraph 

there about our agreement on over-the-counter derivatives markets. I think it is a very firmly rooted and earnest agreement. 

There was no debate about it on the table, and the CPPs are beginning to get up and running. There is business happening on those 

exchanges. 

So I am confident that we are going to push forward. Secretary 

Geithner has had a personal and strong interest in this area dating 

back several years to when he was President of the New York Fed 

to bring transparency and greater data collection to this effort. So 

I am confident that we are going to push forward in this area. 

Senator BAYH. Well, I am confident of the Secretary’s interest in 

this issue, as well, and his good faith efforts. I am a little more concerned about some of the other global players and would ask you, 

particularly in the area of derivatives, is there an enforcement 

mechanism for the standards that are going to be hopefully a consensus formed around? What will the role of the IMF be? The IMF 

is a wonderful institution. I have great respect for them. But historically, in some areas, they don’t really have much of a way to 

enforce some of their authorities. 

Mr. SOBEL. The way I see the answer to that question, Mr. 

Chairman, we are going to work together really hard with—— 

Senator BAYH. And I had currency manipulation in mind, not— 

when they have loaned money to countries, they do have leverage 

there. But in some other areas—and they can make pronouncements, but moral suasion doesn’t seem to be enough in some cases. 

Mr. SOBEL. In terms of making progress on OTC and this enforcement question that you have raised, the way I see the answer 
12 

to that question—and it is not just the OTC area, it pertains to 

other areas—is that we are going to work together really hard. We 

are going to work through the standards-setting bodies. We are 

going to work through the FSB to raise standards, to seek agreements. And then taking the standards, it is a question for national 

supervisors to implement while continuing the cooperative efforts 

that we are building. 

So ultimately, I see enforcement as having to happen at the national level, but we need to use the FSB to make sure that everybody is on the same page and that we are marching forward together. 

Senator BAYH. We will have multilateral standards but national 

enforcement. That may be the best we can come up with, but that 

does raise the prospect of different jurisdictions taking different 

levels of zeal in enforcing these things, which gets us back to the 

problem of forum shopping and regulatory arbitrage and all that 

kind of thing. Is this just a dilemma that we can only hope to limit 

but never completely eradicate? 

Mr. SOBEL. In my view, we live in a world in which regulation 

is a national-based activity, but we do have global markets, as you 

were outlining in your opening statements. I think the question is, 

how do we bring these forces together? 

My answer is, one, I think the United States, and the Secretary 

in particular, are exercising a great deal of leadership. The FSB 

agenda, I think, is aligned very much with our principles for regulatory reform. You see that very clearly in the agreements reached 

in Pittsburgh on capital. 

Second, I have talked about the effort to raise standards. Again, 

I think this is a strong international commitment. I think leadership committed to it. I think that is going to put extra backbone 

to the effort. This is definitely the case with respect to the systemically significant firms, to make sure that they operate under a 

tougher regime. 

You know, one area where we are always—the subject of gaps 

comes up relates to, for example, the non-cooperative jurisdictions. 

And here, I think the Secretary in March, just after assuming office, put forward a three-pronged approach to basically raise standards in the prudential tax information exchange and anti-money 

laundering effort, and this was a major aspect of the April summit. 

Since then, you have seen substantial progress. You have seen 

many tax information exchanges signed around the world. 

We have put in place a process through a global forum, an OECD 

body, to develop carrots and sticks, which will be announced in 

March 2010. And similarly, we are working through the FATF 

processes and a new FSB process to raise adherence to standard 

by all jurisdictions. So I think that when you raise this question 

about gaps and arbitrage, you are putting your finger on a definite 

issue, a totally legitimate issue, and as you said, it is not an easy 

one to deal with, but we are bound and determined to do our best 

and we have our eye on the ball. 

Senator BAYH. Thank you. I am going to turn to my colleagues 

now. They have been most patient. I just observe, I very much appreciate the focus of the Secretary, the hard work that is being 

done in the Department. I know this is a very difficult diplomatic 
13 

issue. We have made some progress here and in some other tangentially related areas. The Swiss are beginning to perhaps change 

some of their practices with regard to tax avoidance and that sort 

of thing, but it is a challenge we face when nation states enforce 

the rules but the consequences of their lack of diligence and enforcement go way beyond the border of those nation states. And 

given the experience we have just come through, heaven help us 

if we permit a repetition. But I understand it is a very difficult 

issue. 

Senator Corker? 

Senator CORKER. Mr. Chairman, thank you, and thank you for 

your testimony. I think it is great that the G–20 is working together on so many of these issues. I think it will be interesting to 

see whether, as time moves on, this solidifies or sort of fragments, 

which I think could be a challenge as you move ahead. 

One of the issues that has been mentioned is just the whole 

procyclical nature of the way that we deal with our financial markets. I think it is interesting, Mr. Sobel, that you shared that as 

one of the issues that you all are working on, obviously, at the G– 

20. Here in our country, I think as history records what is happening right now, it will say, as it has in the past, that the herd 

mentality took over and that our regulators helped create, in many 

ways, a self-fulfilling prophecy. I think that is happening right now 

as really insane things are being asked at the local markets by regulators because of their concern about various types of credits. Obviously, when the market is rising, everybody levers up against appreciating assets. 

What is it that is being looked at—I would say the first thing we 

need to do is look at home. I think the OCC is in many ways creating far greater problems in our country than would otherwise 

exist. I don’t think it, I would bet on that in major ways. But what 

are we doing at the G–20 level to focus on the whole procyclical nature of the way regulators work? They exacerbate bubbles and exacerbate problems. 

Mr. SOBEL. Let me lead off, and if any of my colleagues, on the 

basis of their work, would like to amplify, I will turn the floor to 

them. 

I would say in the G–20 context, the main area of discussion relates to capital, the capital area. So, in essence, there is a feeling, 

obviously, that we didn’t have enough capital in the system, but 

there is also a belief that banks should have more capital, that 

they should be able to draw down their capital in bad times. So 

there is a lot of work that is being now undertaken in the Basel 

Committee which has been referenced in the Pittsburgh Summit 

communique about establishing countercyclical buffers of capital. 

There are obviously broader macroeconomic questions you raise 

that lie more in the domain of other institutions than the Treasury. 

But again, the main focus has been on the countercyclical cushions. 

I don’t know if any of my colleagues would like to—— 

Senator CORKER. So as the markets are rising, more capital is required, and as the markets are declining, less capital—— 

Mr. SOBEL. Yes, sir. 

Senator CORKER.——the opposite of what we are doing right now 

in our country. 
14 

Mr. SOBEL. Yes, sir. 

Senator CORKER. Well, let me ask you this, just out of curiosity. 

Why would we talk about this theory to save the world and yet not 

put it in practice today in our country? I am just curious. And 

maybe others might want to jump in. 

Mr. TARULLO. Senator, a couple of things. First, I think your 

identification of procyclicality is right on target. In my observation, 

problems of procyclicality pervade the financial regulatory system, 

and indeed they pervade financial practice. At some level, Senator, 

financial regulatory capital requirements of any sort are themselves procyclical, because when you think about it, if you have a 

capital requirement and a bank is taking losses because of a downturn in the economy, then all of a sudden, their capacity to lend 

has been reduced. 

I think what we saw in the run-up to the financial crisis was excessive procyclicality in financial regulation more generally. As Mr. 

Sobel has said, we definitely saw it in capital requirements. And 

one of the concerns that I had long before I arrived at the Federal 

Reserve was that some of the new kinds of capital requirements 

that were being thought about would increase procyclicality. 

Second, and Commissioner Casey may want to address this, accounting standards can be procyclical, and that is why her committee and the activities of the FSB on accounting have focused on 

that, as well. 

Third, even things as widely accepted and necessary as deposit 

insurance premium structures can be procyclical. If you are allowing lesser or no payments during good times, that puts you in a situation in which in bad times, the FDIC is in a very difficult position as the deposit insurance fund declines. So I think this is something we have got to think about across the board. 

Now, to your question of, well, if it is such a good idea, how come 

we are not already doing it? Let me give a two-part answer to that. 

First, it is a really attractive concept. In good times, banks have 

to buildup more capital, and as times aren’t so good, they have to 

draw it down. But as you know, there is often a considerable distance between a really attractive concept and something which is 

technically feasible and which we know is not going to produce unintended consequences. 

So a lot of the activity right now, both in the Basel Committee 

and among the bank regulatory agencies here at home, has been 

an effort to come up with the right kind of calibration so that we 

do have the effects that we want to have in countering the traditional procyclicality while not doing more harm along the way. And 

this is really an integrated effort at this point because I think we 

would want to see major financial institutions in other countries do 

it at the same time that our institutions do. 

Ms. CASEY. To just follow up on Dan and Mark’s points with respect to the procyclicality focus of the G–20 and the FSB, as Dan 

mentioned, there is no question that, I think, accounting standards 

have been a key focus of concern with respect to how they might 

contribute to procyclical effects on the system, and I think that 

much of the work that was done in the FSB was largely focused 

on valuation and leverage questions, as well as looking at existing 
15 

accounting standards and practices with respect to loan loss provisioning. 

And just as a more fundamental matter, if I could just step back 

with respect to accounting, I think from a securities market regulator perspective, one of the key issues that has been raised in this 

debate about procyclicality is also appreciating the role of accounting standard setting and the purpose of financial reporting, and I 

think that what we have found is that while there may be legitimate concerns about what the intersection is between accounting 

standards and capital, capital adequacy issues, at the same time, 

it is quite important from an independent standard-setting perspective, and again, the purpose and focus of financial reporting remain 

focused on the interest of investors. So that has been a key interest 

that we have brought to the table. 

But that being said, I would say that with respect to our work 

on provisioning, myself and John Dugan, the head of the—the 

Comptroller of the Currency, headed up a working group within 

the Financial Stability Board aimed at looking at existing provisioning practices and standards, which currently rely on an incurred loss model, to give consideration to whether or not—what 

impact they do have on procyclicality, whether or not within existing standards there are ways to mitigate that, and then, alternatively, whether or not more forward-looking or alternative models might address procyclicality while also ensuring that an investor interest in terms of getting timely, relevant, decision-useful information could be met. 

And what we found through our work was that you actually had 

an interest of both investors as well as prudential regulators in 

perhaps looking at alternative models that were more forward-looking in terms of identifying credit losses more early in the cycle. 

And so some of the recommendations that came out of that work 

stream was intended to encourage the standard setters to look at 

a variety of different models that would be more forward-looking, 

including expected loss, dynamic provisioning, and fair value, and 

that is part of the effort that the standard setters are currently engaged in. 

But again, just to reinforce, I think that that is an instance perhaps where you have an intersection of interests, where both investors and the interested prudential regulators and broader interested financial stability could potentially be met. 

Senator CORKER. Thank you. 

Mr. TARULLO. Senator, excuse me. I think the Commissioner is 

excessively modest here. Her role in trying to move some of these 

questions forward—— 

Senator BAYH. That is unusual in Washington, D.C. 

[Laughter.] 

Mr. TARULLO. Her role in trying to move some of these questions 

forward productively in the FSB, I think has really been critical to 

getting more of a convergence around some of the very troublesome 

problems in accounting. 

Senator CORKER. Thank you. 

Senator BAYH. Senator Shelby? 

Senator SHELBY. Thank you, Mr. Chairman. 
16 

Commissioner Casey, the Commission has proposed what you 

call the road map for the potential use of financial statements that 

were prepared in accordance with the International Financial Reporting Standards as issued by the IASB, the standard-setting body 

that you well know exists in London. Given the tremendous impact 

of accounting standards in our financial system, are you or any of 

your Commissioners at the SEC concerned that IASB’s independence and objectivity could be compromised? Has that been discussed? 

Ms. CASEY. Thank you, Senator. Sort of to step back to one of the 

key objectives or goals of G–20 leaders is convergence of accounting 

standards and the development of a single set of high-quality international accounting standards, and as part of that effort to achieve 

that goal, you have efforts by both the IASB, the International Accounting Standards Board, and the FASB to try to reconcile where 

it would improve the standard, reconcile differences between U.S. 

GAAP and IFRS, and where either standard is lacking, trying to 

come up with a better converge standard. 

They have been engaged in this effort for the past several years 

and I think that much progress has been made. I think over the 

course of the past year, however, there has been a tremendous 

amount of pressure placed on standard setters with respect to certainly issues of the appropriate use of fair value, mark-to-market 

concerns, and I think that what we found as a result of that is that 

it has placed some question about political pressure brought to 

bear on these standard setters. 

That being said, I think that despite that, I think both standard 

setters remain committed to their best efforts to achieve convergence on key projects, such as the Financial Instruments Project, 

and I think that as part of that effort, there is no question that the 

credibility of that process is going to be vital, and I think particularly for here in the United States, where the United States is giving consideration to whether or not we should allow U.S. issuers 

to use IFRS. And I think central to that will again be confidence 

in the independence and the credibility of the standard setting 

process. 

Again, I think that from the SEC’s perspective, we remain committed to supporting both standard setting bodies in their efforts. 

We remain committed to achieving a single set of high-quality 

international accounting standards. And I expect in the coming 

months that the Commission will speak more clearly about the 

next steps for contemplating potential user adoption of IFRS in the 

United States for U.S. issuers. 

Senator SHELBY. Has the SEC staff considered, to your knowledge, or seen a particular financial statement prepared under the 

rules of the international standards as opposed to FASB, and how 

do they work? You are looking for equivalence, aren’t you? 

Ms. CASEY. You know—— 

Senator SHELBY. How do they work together? 

Ms. CASEY. There have been a couple of mechanisms we have to 

take confidence in the application of IFRS and the rigor with which 

IFRS is being adopted. Certainly, our staff looks at filings of foreign private issuers who currently are allowed to file in IFRS, and 
17 

so that gives us a very good sense of the quality of their reporting 

in IFRS. 

We also have an important workstream underway with the European securities regulators which was undertaken—I think it is actually one of the good examples of bilateral cooperation that we 

have had, where both the SEC and the CESR have undertaken to 

look at both the quality and the application of both U.S. GAAP as 

well as IFRS for large financial institutions that are registered 

with the SEC and also file in IFRS. And I think that those efforts 

are going to give us the opportunity to take greater confidence with 

respect to the state of IFRS and its application in a very companyspecific way, and I think, ultimately, that will also assist us in taking judgment as we look to roadmap questions about implementation of IFRS more generally. 

Senator SHELBY. Governor Tarullo, you noted that the Basel 

Committee, and this was referenced already in a sense, has been 

working on recommendations to improve the resolution of international banking organizations. As banking becomes increasingly 

global, the U.S. financial regulatory structure, I believe, needs to 

make sure it can adequately handle the failure of banks operating 

globally. 

What are some of the problems with resolving large international 

banking organizations? And other than the Obama administration’s 

proposal for a new resolution authority, what changes should be 

made to make it easier for the United States and other countries 

to resolve large international bank failures, for example? 

Mr. TARULLO. Thank you, Senator. Let me reemphasize the 

premise of your question, which is that resolution is very much of 

a challenge. Let me step back for a second and suggest why it is 

such a challenge, even more than a lot of the other areas we are 

talking about. 

If we want to make changes in capital standards and the FSB 

gets together and we converge around a set of changes, we all have 

ample domestic legal authority under our own constitutional structures to go back and make those changes. In the area of resolution, 

of course, we are talking about bankruptcy law. We are talking 

about bank insolvency law under the FDI Act, things that the Congress and parliaments around the world have put into legislation. 

So here, each country has its own set of legal rights and priorities 

for creditors. We have our own set of laws on what constitutes a 

fraudulent conveyance, for example. We have our own set of practices as to what kinds of creditor adjustments can be made during 

a bankruptcy or resolution procedure. 

So, from some people’s point of view, the first best or at least the 

cleanest solution would be one that would have to harmonize the 

bankruptcy and resolution mechanisms and laws all around the 

world—— 

Senator SHELBY. And that is no easy task. 

Mr. TARULLO. I think even to state it, Senator, suggests the difficulty, and when I talked in my opening statement about practical, 

this is one of the things I had in mind. Let us be practical when 

we are trying to move resolution forward. 

So here is what I think we can do. First, I think it is important 

that each country that has major financial institutions have at 
18 

least a legal structure that creates the possibility for cooperative 

action for a failed or failing large financial institution. So here at 

home, that would mean a resolution mechanism for non-bank large 

financial institutions. And obviously, you are already thinking 

about that. 

Second, there are some things that can be done short of a binding international treaty or harmonization of insolvency regimes to 

get us closer to the point where we can handle these things better, 

at least, than they have been in the past, and here are the three 

things that I think have been the most promising. 

First, the contingency plans. Now, some people have referred to 

these as living wills or death plans for the company. You know, the 

basic idea is that each of the big firms would have to spell out how 

it could be wound down in the event of a crisis. 

Senator BAYH. I think we need to ensure that the record shows, 

Governor, that the death plans have nothing to do with the health 

care debate. 

[Laughter.] 

Mr. TARULLO. I am not going there, Senator. 

Senator BAYH. Thank you. 

Mr. TARULLO. That is a different committee—— 

Senator BAYH. I just wanted to be clear. 

Mr. TARULLO. That is right. 

Senator SHELBY. Not yet, anyway. 

[Laughter.] 

Mr. TARULLO. I prefer to think of them somewhat more broadly. 

I think that a contingency plan required of each major financial institution can do three things: One, it can be a very good supervisory tool, because when Lehman Brothers failed, Senator, it had 

almost 3,000 legal entities under it. So when people thought about 

resolution, the challenges were enormous to even figure out where 

are the vulnerabilities—— 

Senator SHELBY. Were they too big to regulate? 

Mr. TARULLO. Well, I do not know. If they had been subject to 

mandatory prudential regulation, one hopes that this would have 

been brought into mind. 

Senator SHELBY. OK. 

Mr. TARULLO. So one thing you can do, you try to use their planning to get a rational, well-understood relationship among their 

subsidiaries and, indeed, make sure that you have legal entities 

aligned with business lines. 

Second, I think that the plan itself can be one that helps save 

the firm. If they know where their vulnerabilities and exposures lie 

and where the cross exposures lie, then as things begin to deteriorate, they are in a better position to act. And one thing we all 

learned during the crisis was that many firms really did not have 

a good handle on their own exposures, their own vulnerabilities. 

Third, if ultimately the firm is not able to survive, the planning 

may indeed have the salutary effect of helping the supervisors do 

a more rational job of resolving. 

Very quickly, the other couple of things I think are probably 

worth doing internationally are, first, expanding the scope of the 

so-called supervisory colleges to do some planning for bad things 
19 

happening, the kind of information flows that different countries 

would need to know where the capital problems may lie. 

And, finally, I do think it would be worth the effort to try to get 

some standardization of a lot of the big contracts that go back and 

forth internationally. So, for example, termination clauses in various forms of financial contracts, if they were standardized so that 

each country was looking at the same contractual terms, it would 

be easier for officials in one nation to think about how they are 

going to deal with those problems. 

So I will not for a moment promise you that that solves the problem, but I think it is a practical agenda for moving us forward. 

Senator SHELBY. Chairman, could I ask one more question? 

Senator BAYH. Of course. 

Senator SHELBY. Credit rating agencies. Commissioner Casey, 

you mentioned in your testimony—is IOSCO how you say it? Is 

that right? IOSCO has refined its code of conduct with respect to 

credit rating agencies in response to the financial crisis. You have 

been a strong advocate for removing the Government’s stamp of approval from the NRSRO ratings. 

My question is: Do you believe that if the SEC took meaningful 

steps to address reliance on ratings in its rules, this would help 

other countries to seriously consider doing the same thing? Because 

we are talking in an international context. 

Ms. CASEY. Thank you, Senator. I believe that there is no question that many other jurisdictions, including the United States— 

and I would even note that the administration’s plan notes regulators should look to reduce reliance on ratings wherever possible. 

But other jurisdictions as well have highlighted this as something 

that deserves particular attention in light of what we saw through 

the crisis that came from an undue reliance on the part of investors 

and markets on ratings. And I think for the SEC in particular, it 

is an opportunity for us to—and the Commission is currently considering removing—in fact, we have just removed several references in our last rulemaking, recognizing that we still have some 

daunting challenges with the tough ones, particularly with respect 

to money funds and then capital references. 

With that being said, I think that there is no question that I 

think for the markets and for investors, if we are going to promote 

the kind of necessary credit analysis that does not necessarily rely 

on ratings judgments, that I think removing the regulatory imprimatur would be an important step in that respect. 

I think also that as a result of the ratings references that we 

have had in our rules, we have played an important role in creating essentially the oligopolistic structure that has dominated and 

exacerbated the weaknesses and—— 

Senator SHELBY. In other words, no competition. 

Ms. CASEY. No competition. And so I think that what you see is 

that with the removal of references, it removes that imprimatur 

and that franchise. It encourages hopefully the right incentives in 

the market. And I think it complements any kind of regulatory 

oversight that certainly the SEC has already undertaken pursuant 

to the law that was drafted in this Committee and passed by the 

Congress. And I think that there is a recognition that if we were 

to take those formative steps, longer term we would have prob-
20 

ably—we would have much better quality and integrity in ratings 

than if we were to continue to rely on the regulatory uses that we 

see in our rules right now. 

Senator SHELBY. Thank you, Mr. Chairman. 

Senator BAYH. Thank you, Senator Shelby. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. You are most generous today. 

Before the G–20 summit, Chairman Bernanke came out with a 

principles-based compensation process where, instead of looking at 

firm caps, nominal numbers like French and other governments 

were doing, he did that, I think, because you all are in a political 

sphere as it relates to this G–20, and you each need to influence 

each other. But, Mr. Tarullo, was he successful in sort of getting 

that mantra going, a principles-based focus? Or as you all left 

Pittsburgh the other day, were there still countries looking at an 

actual amount, a nominal cap on compensation? 

Mr. TARULLO. Senator, a little bit of history here may be useful. 

In the spring, the Financial Stability Board came out with its set 

of principles on incentive compensation, and we, meaning the 

United States, but specifically the staff from the Federal Reserve, 

have been very closely involved in the articulation of those principles. 

At that time, we began internally our process of thinking about 

how we would want to give guidance to the institutions we supervise to implement those principles. And the press reports which 

people saw a couple of weeks ago reflected, more or less accurately, 

the direction in which we are headed. The Board has not actually 

voted on the guidance yet, but it reflected accurately the direction 

in which we are headed. And that direction is one which, as you 

say, emphasizes that there is not a single formula that is sensible 

for all kinds of employees who have the capacity to assume a lot 

of risk for their enterprises in a variety of different companies. 

So our approach, I think, has been to want a rigorous internal 

process in firms in which the onus is on them to develop the right 

kinds of compensation contracts and provisions, taking into account 

their particular business and the kinds of responsibilities their employees have, but that those specific policies and practices need to 

be consistent with the overall goals of risk-appropriate incentivebased compensation. 

We worked on that and continue to work on it, but we worked 

on it through the spring and the summer, knowing what kinds of 

discussions were going on internationally as well. I think that our 

view has been that the direction in which we are going is completely consistent with the FSB principles of last spring, and I 

think if you look at the final FSB report which was referenced by 

the leaders this fall, that there was not a mandating of particular 

formulas applicable to all employees. It is, once again, an emphasis 

on the goals to be served, and I think you will see that our guidance, when it does come out, will be consistent with those principles. 

Senator CORKER. The resolution mechanism—I know that our 

distinguished Ranking Member brought it up a minute ago—many 

of us—and, thankfully, Paul Volcker has been vocal lately and 
21 

talked about the ‘‘too big to fail’’ category just should not exist. And 

I know that, you know, there have been discussions about whether 

there was or was not a mechanism in place when we started all 

of the things with did with TARP because maybe there was not an 

orderly way to resolve a highly complex bank holding company. 

So I know the administration has put forth a proposal that I 

think is exactly the wrong direction to go, but the fact is there is 

gaining momentum, I think, around actually having a resolution 

mechanism that says when an institution fails, it actually fails, and 

there is a process through which they go. They are not conserved 

and new life breathed into them with taxpayer money. 

If that type of solution prevails—and I hope that it does—what 

does that do as it relates to the international systems and the fact 

that there are different laws in different countries? You know, we 

may have a large entity here that obviously has subsidiaries all 

around the world. Talk to us about some of the complexities that 

might exist if that type of mechanism were put in place. 

Mr. TARULLO. Senator, I think that you will have complexities 

with or without the mechanism, but they will be of a somewhat different sort, and my instinct would be that the complexities with the 

mechanism in place here will be more manageable than under the 

status quo. 

Senator CORKER. Where they actually go out of business? 

Mr. TARULLO. No, it is not that so much. It is just that the way 

I have thought about this is we really need a third alternative, 

somewhere between bailout and bankruptcy—or an uncontrolled 

bankruptcy, I should put it, a ‘‘disorderly bankruptcy,’’ as it is 

called. And that, it seems to me, should be the starting point for 

thinking about a resolution mechanism. 

Now, with respect to the complexities, for the reasons I indicated 

earlier, there is not going to be—and Senator Shelby’s intermediate 

question I think emphasized that—an international treaty that 

says everybody has the same resolution mechanism, certainly not 

anytime in the foreseeable future. So there will be some potential 

discontinuities between the systems in each country. 

But I think a resolution mechanism can provide tools to each national government that could allow a more orderly or less disorderly resolution of a failed institution. For example, it may permit the creation of a bridge bank. It may create the possibility for 

dividing into a good bank or a bad bank, where right now you do 

not really have the legal capacity to do that. 

In your words, there will be complications and complexities because the rules may still be somewhat different elsewhere, and 

there may be assets located in other countries that you are not 

sure can be subject to the same legal treatment. But I think it gets 

you at least a step down the road. 

And, again, keeping in mind that the domestic or overarching 

purpose, this ought to be as an element of a broad-based response 

to the problems of moral hazard and too big to fail. So we need 

multiple instruments, I think, to contain moral hazard, and that 

means that a resolution mechanism should be moving us toward 

more market discipline, not less market discipline. 

Senator CORKER. Any comments by the other witnesses? 

[No response.] 
22 

Senator CORKER. A very complete answer. I will say—and I know 

this is the end of my time here. I can tell by the body language 

of our Chairman. 

Senator BAYH. Take your time. 

Senator CORKER. But the procyclical issue, it sounded to me that 

the answers, which I very much appreciate were thoughtful, really 

do not come to a conclusion; that as you try to avoid, you know, 

an unnecessary steaming up of the economy, there are issues there 

as to what is happening right now. I mean, I think we are unnecessarily driving it into the ground. We talk about Main Street all the 

time. I do not even like that kind of terminology, and I cannot believe I let it come out of my mouth, where you separate the two 

because it is all intertwined. But the fact is that at local levels 

around our country today, there is no question that banks are 

doing things that are not in their best interest, and they are being 

driven there by regulators and a herd mentality. I mean, they are 

doing things that happen every time these cycles occur. There are 

absolutely ignorant things that are being done. They are hurting 

shareholder value. They are hurting their communities. And it is 

being driven by regulators who—you know, it is kind of like you 

yell ‘‘Fire’’ and everybody leaves. You yell ‘‘commercial real estate’’ 

or you yell some kind of—and everybody—it is the same exact 

thing that happens in every cycle. And yet I have not heard a response—I am not criticizing you. I have not heard a response as 

to how to deal with that other than maybe the regulators acting 

sensibly. But I do not know how you put that in a formula, if you 

will, and then try to cause that to occur. 

And that is just one example. There are all kinds of procyclical 

issues, I understand. But I think that is going to be maybe the 

most important thing that occurs. I mean, the whole issue is to 

keep us from having a systemic failure, and so you have to sort of 

work on those procyclical things, which are tough to do when times 

are good. 

But, anyway, I have taken too long. I thank each of you for your 

testimony. And when you figure that out, if you would send us a 

memo, we would appreciate it. 

Senator BAYH. Thank you very much, Senator Corker. 

Senator Shelby. 

Senator SHELBY. I would like to ask the Governor a question, 

picking up on what Senator Corker is talking about, and that is, 

resolution authority. We have got this ‘‘too big to fail’’ mentality, 

and maybe it is more than that, which a lot of people disagree 

with, and the majority of the American people definitely disagree 

with. But we have got it in Europe, too, and so forth. 

But there has to be an end to something sooner or later, and if 

we do not have some type of legislation with something definite for 

the regulators, whoever the systemic regulator comes up to be, 

where if something does get so bad you need to close it up, you 

need to sell it off, that you do it. 

What is bothering me is Citicorp has had all this money pumped 

into it. We have 36 percent of the stock, more or less, I guess. 

There is no resolution to that a year later. 

AIG, I do not know if we are getting our arms around—I hear 

we are getting our arms around them. There are going to have to 
23 

be some long arms, some big arms to get your arms around that. 

But what is going to be the ultimate resolution of that? How long 

is it going to take, too, all of these things? Because as I look at a 

regulator that is going to wind down something, I think—and oftentimes, FDIC, you have got to give them credit for one thing. 

They can wind down an institution, sometimes faster than a lot of 

people would want. But they can wind it down. But can the Fed 

wind them down? Questionable. 

Mr. TARULLO. Well, Senator, the Federal Reserve is certainly not 

interested in being a receiver or conservator of any institutions. Let 

me say a couple of things. 

One, the complexity of the larger institutions is going to be a 

challenge, and I think we all just have to acknowledge that. The 

FDIC does a terrific job of winding down institutions, but if we look 

at the profile of those institutions, they are overwhelmingly fairly 

straightforward banking institutions. 

Second, I think that as we approach the resolution issue, as I 

said to Senator Corker a moment ago, we do have to make sure 

that we are increasing market discipline, and usually what that 

means is—forgive me for the vernacular—but guys are going to 

take some losses. And unless that is pretty clear, then you are 

going to lose the advantages of market discipline along the way. 

But the third thing I will say is—and I have said this before in 

this hearing and other hearings—I am not sanguine that any one 

tool is going to be adequate to contain systemic risk and, more importantly, in a direct regulatory sense to deal with the moral hazard and too big to fail problems. That is why I think that we should 

regard a resolution mechanism as one element, necessarily imperfect but I hope positive, along that road. 

Senator SHELBY. We are always going to have in a market system winners and losers, failures and success, and that is the genius 

of the market in a sense. And you are going to have failures in 

banks ahead down the road. But do you believe as a regulator that 

you would have some responsibility to make sure that these banks 

are well capitalized and that are not into something that you—in 

other words, you do not let the banks run ahead of you and jeopardize themselves and ultimately the taxpayers in some way? 

Mr. TARULLO. Absolutely, Senator. I think capital is one of the 

key instruments to which I was referring earlier. 

Senator SHELBY. OK. Thank you, Mr. Chairman. 

Senator BAYH. Thank you, Senator Shelby. 

I just had two quick questions, Governor Tarullo, for you, following up on my colleagues’ very good questions. You outlined a 

number of sensible steps—you referred to them as ‘‘practical 

steps’’—that could be taken with regard to the whole resolution 

issue. Are any of those being pursued by the FSB or by other entities or in other forums? What is the prospect of some of those actually being implemented? 

Mr. TARULLO. A couple of things, Senator. This is one of those 

areas where there are a couple of different committees internationally at work on these issues. The Basel Committee on Banking Supervision, I think yesterday, but certainly very recently, released a 

set of recommendations on cross-border resolution which included 

some recommendations I would say are congruent with what I just 
24 

stated a moment ago, and now there is going to be a follow-up process to see if we can move internationally along that path. 

I am quite certain that with respect to the supervisory colleges 

and information issue that I mentioned, I think that will move forward. With respect to the contingency planning, I think that will 

move forward, too. 

The issue of an appropriate resolution mechanism is something— 

by the way we operate in democracies—our congresses and parliaments are ultimately going to decide. 

The standardization of contracts—— 

Senator BAYH. If I could interrupt for just a second, Governor, so 

these recommendations were made to whom? 

Mr. TARULLO. To members of the Basel Committee—— 

Senator BAYH. These are just best practices basically made to the 

different countries that comprise the—— 

Mr. TARULLO. And that really launches the process by which people then go home and say, OK, now how are we going to—— 

Senator BAYH. So now it is up to all of us, basically, to act on 

these recommendations. 

Mr. TARULLO. Correct, Senator. Correct. 

Senator BAYH. Very good. My last question is for you, Mr. Sobel, 

and Ms. Casey, I hope you are not insulted I didn’t have a question 

for you today. I found your testimony to be quite excellent, however. 

I briefly mentioned, then we got off into a different aspect of a 

question earlier, the role of the IMF, Mr. Sobel. What is the status 

of thinking on that, the FSB or—— 

Mr. SOBEL. The role of the IMF with the FSB? 

Senator BAYH. Well, what role they might play ultimately in 

overseeing the recommendations that are—the FSB and the other 

recommendations that are made. 

Mr. SOBEL. So the—— 

Senator BAYH. I know they were searching for a mission. With 

the recent crisis, they have been resuscitated. God willing, that is 

a temporary state of affairs. So I am just wondering what role they 

might play in all this at the end of the day. 

Mr. SOBEL. Well, I think the IMF has a very important role to 

play in promoting global financial stability. The FSB brings together national regulators, supervisors, Treasury officials with 

standard setters. The IMF attends the meetings. Sometimes the 

way I think about it is a bit simplistic, but there is kind of a micro 

focus on what are you doing in any given institution. 

But I think one of the things we have learned from the crisis is 

we need a macro focus to understand what are the macroeconomic 

phenomena and dimensions that interact with the performance of 

the institutions. If you just look at one individual firm, but you 

don’t see what is happening across firms, you can miss some—— 

Senator BAYH. Well, that is a role the IMF could—— 

Mr. SOBEL. Yes, and that is where I see—I think the Fund can 

play an important role in providing kind of a macro approach to 

vulnerabilities and building up in the system early warning, perhaps. The Global Financial Stability Report is, I think, a high-quality product. It provides a lot of insights into what is happening in 

financial markets. And, of course, the IMF also works with coun-
25 

tries, first of all, through the Financial Sector Assessment Programs, but also through technical assistance to strengthen banking 

systems. 

Senator BAYH. Very well. Well, again, thank you all for your 

time. A lot of good progress has been made. A lot of good work has 

been done, but this is still very much a work in progress. And so 

perhaps a year from now, I think it might be appropriate to reconvene and to see how much of a consensus has actually been 

achieved, what continuing disparities exist with regard to individual countries following up on that consensus, and where any opportunities for—where any leaks in the system might continue. 

So again, I want to thank all of you. I realize how busy you are. 

I really appreciate it. Keep up the good work. Thank you. 

The Subcommittee hearing is adjourned. 

[Whereupon, at 4 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions follow:] 
26 

PREPARED STATEMENT OF MARK SOBEL 

ACTING ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS

DEPARTMENT OF THE TREASURY

SEPTEMBER 30, 2009 

Chairman Bayh, Ranking Member Corker, members of the Senate Subcommittee 

on Security and International Trade and Finance, thank you for this opportunity to 

testify on the subject of international efforts to promote regulatory reform. I commend the Subcommittee for bringing greater public attention to this critical issue 

and for choosing such a propitious time, coming on the heels of the G–20 Pittsburgh 

Summit, to hold this hearing. It is also a personal privilege to testify alongside Dan 

Tarullo and Kathy Casey. 

G–20 Cooperation and Progress Made 

The Pittsburgh Summit marks another milestone in the effort to promote a more 

integrated approach between national and international regulation and supervision. 

In the wake of the onset of the crisis, and particularly over the last year, policymakers and regulators from across the globe have redoubled their efforts to repair 

financial systems and put in place a stronger regulatory and supervisory framework 

to help ensure that a crisis of the magnitude we have witnessed does not occur 

again, to strengthen our financial systems so they are more robust in the face of 

duress, and to create a culture of greater integrity and responsibility in financial 

markets that guards against reckless behavior and excessive risk-taking. 

Good progress is being made. Last year’s Washington G–20 Summit produced a 

47-point Action Plan to strengthen regulation. The London Summit in April advanced that work. Already, before we went to Pittsburgh, the international community working through the G–20 had achieved much. For example: 

• Prudential oversight has been strengthened. Capital requirements had been increased for risky trading activities, some off-balance sheet items, and 

securitized products. Principles had been developed for sound compensation 

practices to better align compensation with long-term performance. Banks were 

acting to put in place strengthened liquidity risk management principles. 

• Agreement had been reached to extend the scope of regulation to all systemically significant institutions, markets and products. Non-bank financial institutions, credit rating agencies, and hedge funds are being subjected to greater 

scrutiny, while the transparency and oversight of securitization and credit default swap (CDS) markets are being improved. 

• International cooperation is being reinforced. More than thirty colleges of supervisors have met to discuss supervision of large, globally active firms. The Financial Stability Board (FSB, previously the Financial Stability Forum—FSF) has 

been strengthened, including by expanding its membership to include all G–20 

countries, promoting financial policy coordination and regulatory cooperation 

throughout the world. 

• Market integrity has been strengthened. The G–20 has acted to improve adherence to international standards in the areas of prudential supervision, antimoney laundering and counter financing of terrorism, and tax information exchange as part of a U.S. initiative to deal with jurisdictions that fail to commit 

to high-quality standards in these areas. 

• Core Principles for Effective Deposit Insurance Systems have been developed to 

protect depositors around the world in a more consistent fashion. On a personal 

note, I would commend Martin Gruenberg, a former staff member of this Committee and now Vice-Chair at the FDIC and chair of the International Association of Deposit Insurers, for his leadership on this front. 

Pittsburgh Summit 

A fundamental objective of the Pittsburgh Summit was to build on these accomplishments and the critical work underway and to identify and gain agreement on 

the necessary financial supervisory and regulatory reforms to prepare financial institutions to better withstand shocks in the future. G–20 Leaders agreed on timetables to take action in four key priority areas: capital, compensation, over-thecounter (OTC) derivatives and cross-border resolution. 

• Capital. The crisis demonstrated that capital and liquidity requirements were 

simply too low and that firms were not required to hold increased capital during 

good times to prepare for bad. Thus, G–20 Leaders agreed to develop rules to 

improve the quantity and quality of bank capital and to discourage excessive 

leverage by end-2010. The Leaders’ agreement recognizes that strengthening 
27 

capital standards is at the core of the reform effort and it tracks closely with 

the Principles for Reforming the United States and International Regulatory 

Capital Framework for Banking Firms, which Secretary Geithner set forth just 

before the G–20 Ministerial meeting in London earlier this month. 

• Compensation. Compensation practices at some firms created a misalignment 

of incentives that amplified a culture of risk-taking. Building on the principles 

developed by the FSB earlier this year, G–20 Leaders endorsed the implementation of standards to help significant financial institutions and regulators better 

align compensation with long-term value and risk management. National supervisors will review firms’ policies and structures and impose corrective measures 

on those that fail to implement sound practices. 

• Cross-border banking resolution. The global financial system is more interconnected than it has ever been and the crisis affected financial firms without 

regard to their legal structure, domicile or location of customers. G–20 Leaders 

agreed to establish crisis management groups for the major cross-border firms 

and to strengthen their domestic frameworks for resolution of financial firms. 

Further, it was agreed that prudential standards for the largest, most interconnected firms should be commensurate with the costs of their failure. 

• Over-the-counter (OTC) derivatives. The OTC derivatives markets, which 

were mainly used to disperse risk to those most able to bear it, also allowed 

hidden concentrations of risk to buildup. G–20 Leaders built on the work already undertaken in this area, agreeing that all standardized OTC derivative 

contracts should be traded on exchanges or electronic trading platforms and 

cleared through central counterparties by end-2012. Further, they affirmed that 

non-centrally cleared contracts should be subject to higher capital requirements. 

In addition, the Leaders called on international accounting bodies to redouble 

their efforts to achieve a single set of high quality, global accounting standards. 

Leaders also reaffirmed their commitment to maintain the momentum to raise 

standards to deal with tax havens, money laundering, and terrorist finance. 

These are important achievements. But by no means can we be complacent. Not 

only must the international community act to make sure that all G–20 commitments 

are put in place at the international level, each G–20 country must now intensify 

its effort to help ensure that these commitments are implemented at the national 

level. 

The National and International Spheres 

The financial crisis has highlighted the global sweep of financial markets. As Secretary Geithner has said, we may not all be in the same boat, but we are in the 

same storm. 

Firms and markets are now global in scope. We derive benefits from open, interconnected capital markets. However, traditionally, the scope of financial regulation 

was nationally oriented, stopping at the water’s edge. Further, different national 

standards open the possibility for regulatory arbitrage, gaps in oversight, and a race 

to the bottom. 

These pitfalls must be avoided. The recent crisis also highlighted that financial 

duress can spread quickly across national boundaries. 

Thus while financial regulation continues to be essentially a national activity— 

grounded in domestic laws, cultures, and history—and the responsibility for sound 

regulation begins at home, we must seek to improve international cooperation in the 

regulatory and supervisory sphere. In particular, the major international financial 

centers must work together to make national laws and practices more consistent 

and convergent with high quality regulation. 

The Machinery for International Supervisory and Regulatory Cooperation 

Throughout the crisis, a number of bodies, in addition to the G–20, have helped 

the international community advance its work in strengthening the international financial system. 

Let me be clear—international cooperation is not new. For many years, independent standard setting bodies—such as the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors—have brought together regulators 

from key countries with the aim of fostering cooperation and forging more consistent 

global standards. 

But one body, the Financial Stability Board (FSB), has played a critical role and 

I would like to highlight it as its history provides meaningful insights into why it 

is such a useful tool for us today. It was founded in 1999 as the Financial Stability 

Forum (FSF), in the aftermath of the Asia financial crisis, by the G–7 Finance Min-
28 

isters and Central Bank Governors. Secretary Geithner, then the Under Secretary 

of the Treasury for International Affairs, played a seminal role in its establishment. 

It was charged to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and 

surveillance. The unique feature of the FSF was that it brought together G–7 central bank, finance and regulatory officials, plus officials from a number of other financial centers, with the heads of the key standard setting bodies. The focus was 

not so much on the global macroeconomic situation but on financial sector developments and vulnerabilities as well the work of the standard setting bodies. 

At the outset of the crisis in September 2007, the G–7 Finance Ministers and Central Bank Governors asked the FSF to analyze the causes and weaknesses producing the crisis and provide recommendations to increase the resilience of markets 

and institutions. The FSF issued its first report in April 2008 and an update in October of that year. The report set forth recommendations on: strengthened prudential oversight of capital, liquidity and risk management; enhancing transparency 

and valuation; changes in the role and uses of credit ratings; strengthening the authorities’ responsiveness to risks; and robust arrangements for dealing with stress 

in the financial system. 

These recommendations have been at the center of the international consensus on 

the necessary steps to overhaul the global financial regulatory system and tackle 

the root causes of the crisis and were reflected in the November 2008 and April 

2009 G–20 Leaders Declarations. 

Reconstituted as the Financial Stability Board in April 2009, with an enhanced 

mandate and membership now encompassing all G–20 countries, the FSB has been 

a key venue for preparation for both the London and Pittsburgh Leaders Summits. 

Further, the expansion of the FSB to include all G–20 members has meant that officials around the world are working together to put in place best practices, that are 

designed to help reduce the potential scope for future regulatory arbitrage. 

Mr. Chairman, while my testimony today focuses on the role of the G–20, FSB 

and international standard setting process, the Treasury participates in many other 

bodies with a view to fostering international financial market cooperation. In particular, we have strong and ongoing dialogues with the European Commission 

through the U.S./EU Financial Markets Regulatory Dialogue, Japan, China, India, 

our NAFTA partners and many more countries. These fora offer us the opportunity 

to delve deeper on a bilateral basis into financial market issues and share our views 

on the international agenda. 

The FSB’s Role in Promoting International Coordination 

The FSB is an informal grouping. Working with national policy and regulatory officials and standard setting bodies, it promotes greater consistency and coordination 

in order to foster more effective regulatory, supervisory and other financial sector 

policies across the world. Since the onset of the current financial crisis, the FSB has 

been a critical mechanism for setting forth a comprehensive agenda for reform, reflecting an international consensus, and monitoring the implementation of G–20 

Leaders’ action points. Its role has been highly valued, and reflecting this, its mandate has been enhanced and its membership expanded, strengthening the network 

for global financial supervisory and regulatory cooperation. 

• The FSB’s Plenary is its decisionmaking body, which meets at least two times 

per year. Representation is at the level of central bank Governor or deputy; 

head or deputy of the main supervisory/regulatory agency; and deputy finance 

minister. The number of seats in the Plenary assigned to member jurisdictions 

reflects the size of the national economy and financial market activity of the 

member jurisdiction. Plenary representatives also include the chairs of the main 

standard setting bodies and committees of central bank experts, and high-level 

representatives of the IMF, the World Bank, the Bank for International Settlements, and the Organisation for Economic Co-operation and Development. Decisions are taken by consensus. 

• Its Steering Committee provides operational guidance between Plenary Meetings to carry forward the directions of the FSB. The Steering Committee may 

establish working groups as needed which may include representatives of nonFSB members. 

• Currently, three Standing Committees have been established to support FSB 

workstreams. These committees are for the Assessment of Vulnerability; Standards Implementation; and Supervisory and Regulatory Cooperation. In addition, 

there is an Expert Group on Non-Cooperative Jurisdictions and working groups 

on Cross-border Crisis Management and on Compensation. 
29 

• The Secretariat, located in Basel at the Bank for International Settlements, 

supports the activities of the FSB, including its Standing Committees and working groups. It also facilitates efficient communication among members. 

• The Chair is the principal spokesperson for the FSB and represents the FSB 

externally. The Chair is appointed by the Plenary from members for a term of 

3 years renewable once. The Chair has recognized expertise and standing in the 

international financial policy arena but when acting as Chair, owes duty entirely to the FSB and to no other authorities or institutions. The FSB’s current 

Chair is Mario Draghi, who is also the Governor of the central bank of Italy. 

• Given the FSB’s vital role, its stature was recently enhanced through its Charter, which was set forth by its members and welcomed by the G–20 Leaders at 

the Pittsburgh Summit. Under this new Charter, the FSB will assess financial 

system vulnerabilities, promote coordination and information exchange among 

authorities, advise and monitor best practices to meet regulatory standards, set 

guidelines for and support the establishment of international supervisory colleges, and support cross-border crisis management and contingency planning. 

Alignment of Domestic and International Reforms 

In the United States, we have set out a proposal for comprehensive regulatory reform. But to promote a global race to the top, we need our G–20 partners to pursue 

equally ambitious reforms. 

The agendas pursued by the FSB and United States have been and are closely 

aligned. This is a function of the close cooperation between U.S. and international 

officials through the FSB, especially through its Steering Group and Plenary, as 

well as standard setting bodies. 

Effective coordination at the international level is only possible by ensuring a cohesive national vision. The President’s Working Group on Financial Markets is a 

key coordinating vehicle. At a working level, Treasury has taken the lead in facilitating coordination among U.S. regulators, hosting weekly calls to share information 

and discuss work underway within the FSB, standard setting bodies, and other 

international organizations to implement the vision of G–20 Leaders. This dialog 

has allowed us to reconcile our perspectives and speak with one voice, positioning 

the United States as a leader on the global stage as we set the course for a stronger 

and more stable international financial system. 

The FSB and standard setting bodies have allowed us to align our vision for the 

future of financial markets with that of the largest economies across the globe. Our 

proposed reforms have been informed by the international dialog, and international 

agreement on the path forward has been shaped by our own swift action domestically to prevent a return to banking as usual. The meaningful progress to emerge 

from the G–20 dialog on financial regulatory reform over the last eleven months is 

testament to the success of this strategy. 

Looking forward, consistent national implementation will increasingly be our 

point of focus in the G–20. The FSB will be an important forum via which we will 

assess progress, and thematic peer reviews of members are planned on the implementation of many of the G–20 action items. Already, the FSB is poised to be a critical partner in implementing our strategy for dealing with non cooperative jurisdictions, particularly with respect to compliance with international standards for cooperation and sharing of prudential information. Further, in Pittsburgh, G–20 Leaders explicitly tasked the FSB to monitor implementation of commitments on compensation and OTC derivatives. 

Conclusion 

We have made substantial progress in strengthening the international financial 

system, but much more remains to be done. Strong national and international regulatory coordination and convergence have been driving forces behind our swift and 

effective response to this global crisis. But some of the flaws in our financial system 

and regulatory framework that allowed this crisis to occur, and in many ways 

helped cause it, are still in place. Importantly, our proposals for regulatory reform 

of our domestic financial markets are firmly entrenched in a shared vision for the 

future of the international financial system. 

The United States has been a leader in the effort to create the FSB, shape its 

agenda, expand its membership and involve it closely in the work of the G–20. In 

turn, the FSB has been a key instrument for international policy development in 

response to the global financial crisis. Identifying a global response has been essential to avert regulatory gaps, arbitrage and spillovers and to safeguard market dynamism. In the wake of the most recent G–20 Leaders Summit in Pittsburgh, we can 

be confident knowing that the international machinery to strengthen the international financial system is in place, has set forth principles and standards for re-
30 

form that are consistent with the Administration’s plans for reform, and is working 

to bring global standards up. These efforts must continue, but building on the agreements made in the G–20, now is the time for national implementation of reforms. 

PREPARED STATEMENT OF KATHLEEN L. CASEY 

COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION

SEPTEMBER 30, 2009 

Chairman Bayh, Ranking Member Corker, and distinguished members of the 

Committee, thank you for inviting me to testify about the international cooperation 

to modernize financial regulation. 

Why International Cooperation is Necessary 

I am pleased to have the opportunity to testify on behalf of the Securities and 

Exchange Commission on this very important topic. International cooperation is 

critical for the effectiveness of financial regulatory reform efforts. In reaffirming 

their commitment to strengthening the global financial system, the G–20 Finance 

Ministers and Bank Governors recently set forth a number of actions to ‘‘maintain 

momentum [and] make the system more resilient.’’ The G–20 banking statement 

correctly recognizes that due to the mobility of capital in today’s world of interconnected financial markets, activity can easily shift from one market to another. 

Only collective regulatory action can be effective in fully addressing cross-border activity in our global financial system. 

As an SEC Commissioner and Chairman of the Technical Committee of the International Organization of Securities Commissions (IOSCO), I bring the perspective 

of both a national securities market regulator and a member of the international 

organization charged with developing the global response to the challenges posed to 

securities markets by the financial crisis. I also represent the SEC and IOSCO in 

the Financial Stability Board (FSB), where the U.S. financial regulatory policy representation is led by the Department of Treasury, with the SEC and the Federal 

Reserve Board both serving as members. 

The financial crisis has made it clear that we must address regulatory gaps and 

overlaps. The Commission has recently proposed action to this end in a number of 

different areas, recognizing, however, that some regulatory gaps and market issues 

cannot be fully addressed without legislative action. The Commission already is 

working to achieve consistency on the domestic and international levels, including 

through IOSCO and the FSB, with banking, insurance, futures, and other financial 

market regulators. In this vein, the Commission also is working to ensure respect 

in the global regulatory environment for the integrity of independent accounting and 

auditing standard-setting processes for the benefit of investors. The Commission 

looks forward to continuing and improving on this cooperation as part of a reformed 

regulatory landscape. 

Mechanisms for International Cooperation in Securities Market Regulation 

The Commission has actively worked to achieve consistency in regulatory policy 

and implementation on an international basis through multilateral, regional, and bilateral mechanisms for many years. The SEC was a founding member of IOSCO, 

and has maintained a leading role in the organization. The Commission’s commitment to international cooperation has become increasingly important to its mission 

in recent years in response to the increasingly global nature of financial markets. 

In addition to my chairmanship of IOSCO’s Technical Committee, Commission 

staff leads or is very active in IOSCO’s standing committees and taskforces. Commission staff also represents IOSCO in the Joint Forum on Financial Conglomerates, which was established by the Basel Committee on Banking Supervision, 

IOSCO and the International Association of Insurance Supervisors (IAIS) to deal 

with issues that cut across the banking, securities and insurance sectors. For example, SEC staff participates in the Joint Forum’s Working Group on Risk Assessment 

and Capital, which has undertaken a number of cross-sectoral initiatives that have 

arisen out of the financial crisis. 

While IOSCO represents the primary vehicle for development of common international approaches to securities market regulation, the FSB is a key mechanism 

for the Commission to engage internationally on broader financial market issues. 

The FSB has a broader scope, with membership comprised of national regulatory 

and supervisory authorities, standard setting bodies and international financial institutions. In addition, its mission is to address vulnerabilities and to encourage the 

development of strong regulatory, supervisory and other policies in the interest of 

financial stability. 
31 

The Commission also is represented in oversight bodies charged with maintaining 

the public accountability of international accounting and auditing standard-setters. 

SEC Chairman Schapiro is a member of the Monitoring Board of the International 

Accounting Standards Committee Foundation. Through this Board, the SEC and 

other capital market authorities that permit, have proposed to permit, or require 

the use of International Financial Reporting Standards in their jurisdictions have 

a means to carry out more effectively their mandates regarding investor protection, 

market integrity, and capital formation. The Commission also is represented 

through IOSCO in the Monitoring Group for the Public Interest Oversight Board, 

which serves as a mechanism for promoting the public interest in the development 

of international standards for auditing by the International Federation of Accountants. 

In addition to multilateral, global engagement, the Commission participates in regional and bilateral mechanisms for discussion and promotion of common approaches to regulation. SEC Commissioner Aguilar is the Commission’s liaison to 

the Council of Securities Regulators of the Americas, or COSRA, which aims to develop high quality and compatible regulatory structures among authorities in the 

Western hemisphere. Commission staff, alongside staff of the Federal Reserve 

Board, the Commodity Futures Trading Commission, and other U.S. Government 

agencies, also participates in a number of Treasury-led financial regulatory dialogues, including with the European Commission, Japan, China and India, as well 

as Australia and our North American partners, Canada and Mexico. 

Securities-regulatory-focused bilateral dialogues between Commission staff and 

our counterpart securities regulators in these and other jurisdictions also complement the broader financial sector dialogues; we are engaged in such bilateral efforts with, among others, the U.K. Financial Services Authority and the Japan Financial Services Agency, the Committee of European Securities Regulators (CESR), 

and the China Securities Regulatory Commission, Securities and Exchange Board 

of India, and Korea Financial Supervisory Commission. Furthermore, the Commission and a number of other securities regulators have recently entered into bilateral 

‘‘supervisory’’ memoranda of understanding that go well beyond sharing information 

on enforcement investigations. These supervisory MOUs, such as those the SEC has 

signed with the U.K.’s Financial Services Authority and the German consolidated 

financial services regulator (known as the ‘‘BaFin’’), represent groundbreaking efforts by national securities regulators to work together to cooperate in their oversight of financial firms that increasingly operate across borders. 

Thus, the infrastructure for international cooperation on securities regulatory policy is well-developed, and the Commission plays a key role in promoting rising levels 

of cooperation. These efforts build on the success the Commission has achieved in 

raising standards of cross-border enforcement cooperation. Over two decades ago, 

the Commission entered into its first bilateral memoranda of understanding for the 

sharing of information in securities enforcement matters. To date, the Commission 

has concluded bilateral agreements with 20 jurisdictions that remain in force today. 

These bilateral agreements were the impetus for the creation of the IOSCO Multilateral Memorandum of Understanding (MMoU) in 2002. Since then, authorities in 

55 jurisdictions, including the SEC, have already implemented the principles for 

cross-border enforcement cooperation contained in the MMoU and another 27 jurisdictions have committed to do so. With each additional MMoU signatory, the scope 

and ability of the SEC to pursue wrongdoers across borders significantly increases. 

This ability is increasingly important as more and more SEC investigations involve 

some international component. 

In addition to continuing to work to increase the number of jurisdictions that 

share information pursuant to the MMoU, the Commission also is continually working to increase the level of enforcement cooperation that it provides foreign counterparts as well as the level of cooperation provided by our global counterparts. The 

SEC was among the first securities regulators to receive the legal authority to assist 

foreign counterparts in investigations of securities fraud. Today, the SEC has broad 

authority to share supervisory information as well as assist foreign securities authorities in their investigations using a variety of tools, including exercising the 

SEC’s compulsory powers to obtain documents and testimony. To further facilitate 

international cooperation, the SEC supports the passage of H.R. 3346 that would 

give authority to the Public Company Accounting Oversight Board, which the SEC 

oversees, to share confidential supervisory information with foreign auditor oversight bodies. The Commission believes that granting this authority to the PCAOB 

would enhance auditor oversight, audit quality and, ultimately, investor protection. 
32 

Key Securities Regulatory Reform Issues and International Cooperation 

The Commission has led or supported the development of a number of international securities market regulatory initiatives to support the strengthening of the 

global financial system in the wake of the financial crisis. These initiatives, developed through IOSCO, its joint working group with the Committee on Payment and 

Settlement Systems (CPSS), and the Joint Forum, have been developed in conjunction with calls from the G–20 and FSB to ensure that all systemically important 

financial institutions, markets, and instruments are subject to an appropriate degree of regulation and oversight. 

IOSCO 

IOSCO’s Subprime Task Force issued its report in 2008, examining the underlying 

causes of the financial crisis and the implications for international capital markets. 

IOSCO launched a number of ongoing projects in response to recommendations in 

this report, including in key areas such as issuer transparency and investor due diligence; firm risk management and prudential supervision; valuation and accounting 

issues. Last fall, following on concerns highlighted by the G–20 Leaders, IOSCO also 

established task forces on unregulated entities, unregulated financial markets and 

products, and supervisory cooperation, each of which is discussed in greater depth 

below. The Commission has contributed significantly to these projects with a view 

to ensuring that global capital markets address issues relating to the current turmoil in a sound and aligned way. 

Credit Rating Agencies 

With regard to credit rating agencies, in February of this year, IOSCO established 

a permanent standing committee to continually evaluate and seek cross-border consensus for CRA regulation. IOSCO has built on the early work in this area that resulted in the IOSCO CRA Principles and Code of Conduct Fundamentals first adopted in 2003 and 2004. The Code Fundamentals, as amended in 2008 as a consequence of ‘‘lessons learned’’ during the early ‘‘subprime crisis,’’ has already been 

substantially adopted by at least seven rating agencies, including the largest ones. 

Staff of the SEC chair this committee. 

Unregulated Entities 

With regard to unregulated entities, following extensive consultation, IOSCO 

agreed to a set of high-level principles for hedge fund regulation in June of this 

year. The six principles include requirements on mandatory registration for funds 

or their advisers, ongoing regulation and provision of information for systemic risk 

assessment purposes. 

They also state that regulators should cooperate and share information to facilitate efficient and effective oversight of globally active hedge fund managers and 

hedge funds. Work continues in IOSCO on defining what type of information should 

be provided by the hedge fund sector (and their counterparties) to allow regulators 

to assess the systemic importance of individual actors and identify possible financial 

stability risks. 

Unregulated Markets and Products 

Earlier this month, IOSCO’s Task Force on Unregulated Financial Markets and 

Products issued a number of recommendations concerning regulatory approaches 

that may be implemented with respect to the securitization and credit default swap 

(CDS) markets, as these two markets were key elements of the global financial crisis. The Task Force continues to consider whether additional work should be undertaken regarding implementation of the recommendations. 

In addition, the Commission has worked closely over the past year with international regulators and central banks in gaining first-hand experience in applying 

the Recommendations for Central Counterparties (RCCPs) to proposed arrangements for OTC credit derivatives transactions. This has highlighted some challenges 

regarding the application of RCCPs to credit default swaps (CDSs), particularly with 

respect to valuation models. The CPSS, under the leadership of New York Federal 

Reserve Bank President William Dudley, and IOSCO have created a joint working 

group (co-chaired by the European Central Bank) to propose guidance on how central counterparties for OTC derivatives may meet the standards set out by the 

RCCP and will identify any areas in which the RCCP might be strengthened or expanded to better address risks associated with the central clearing of OTC derivatives. This working group will complete its report by the middle of 2010. 

Supervisory Cooperation 

As operations globalize, oversight and supervision require increased cross border 

cooperation. Supervisory cooperation is a critical tool in gathering information about 
33 

risks and trends within institutions and across markets. To this end, IOSCO established a Task Force on Supervisory Cooperation this spring to develop principles on 

regulatory cooperation in the supervision and oversight of market participants, such 

as exchanges, funds, brokers, and advisers, whose operations cross international 

borders. Final principles are expected to be published in February 2010. 

Commodity Futures Markets 

IOSCO’s Task Force on Commodity Futures Markets, which was formed following 

concerns relating to price and volatility increases in agricultural and energy commodities in 2008, focused on whether futures market regulators’ supervisory approaches were appropriate in light of market developments. The Task Force issued 

its report in March 2009 with recommendations aimed at ensuring that regulators 

have the appropriate information and tools available to them to monitor futures 

markets effectively and act against any market manipulation. The Task Force was 

recently revived, with CFTC Chairman Gary Gensler and U.K. Financial Services 

Authority Chairman Adair Turner as co-chairs, to continue to address concerns 

about access to relevant information for effective market surveillance and to promote improvements to regulatory frameworks that may inhibit the ability to detect 

and enforce market manipulation cases. 

Joint Forum Cross-Sectoral Projects 

The Commission, participating through IOSCO in the Joint Forum, which is led 

by Comptroller of the Currency John Dugan, is taking part in a review of the scope 

of financial regulation, with a special emphasis on institutions, instruments, and 

markets that are currently unregulated. The group’s focus is on the differentiated 

nature of regulation in the banking, securities and insurance sectors; current consolidated supervision and unregulated entities or unregulated activities within a 

conglomerate structure; and the regulation of hedge funds; among other issues. The 

main deliverable of this workstream will be a report to the FSB and G–20 Finance 

Ministers and Governors, and is expected by the end of this year. 

In addition, the Joint Forum’s Working Group on Risk Assessment and Capital 

(JFRAC) recently finalized its report examining the range of various Special Purpose Entities (SPEs) used by financial firms to transfer risk for capital and liquidity 

management purposes as well as derivatives vehicles and transformer vehicles. Finally, in recognition of the reality that prudential supervision is becoming increasingly risk-sensitive in the different sectors, JFRAC has also undertaken a project 

to consider methods for risk aggregation that incorporate a characterization and 

quantification of diversification effects within financial firms. The primary focus of 

this work will be on aggregation across different types of risk—such as credit, market, insurance, and operational risk—and on similarities and differences between 

the commercial banking, investment banking, and insurance sectors. A preliminary 

draft paper will be discussed at the October Joint Forum meeting. 

FSB / G–20 Participation and U.S. Government Coordination 

With regard to my role at the FSB, I represent both the Commission and the 

IOSCO Technical Committee alongside the other U.S. Government participants, 

namely Governor Tarullo of the Federal Reserve Board and the Under Secretary for 

International Affairs of the Department of Treasury. The Commission places a high 

priority on coordinating the U.S. position with its fellow agencies and presenting a 

strong and unified position in policy discussions at the FSB level. This is accomplished through extensive and informal communication between the staffs of our 

agencies, including the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC) and the National Association of Insurance Commissioners (NAIC), 

among others, and has been highly effective. In this regard, the work that Comptroller of Currency Dugan and I jointly led, under theauspices of the Financial Stability Forum’s efforts to reduce procyclicality of regulation, to explore possible improvements to the accounting for loan loss provisioning is particularly noteworthy. 

Importance of the Role of Technical Experts and Independent, Consultative 

Rulemaking 

The international financial regulatory architecture that I have just outlined has 

proven its robustness in the level of cooperation since the outbreak of the financial 

crisis. The G–20 leaders’ focus on financial regulation has provided more high-level 

and political attention to these ongoing efforts. With the conversion of the Financial 

Stability Forum into the FSB and expansion of its membership to the G–20, the architecture is evolving to reflect the growing importance of emerging markets and 

international cooperation in light of the interconnectedness of the global financial 

system. While the Commission supports and participates in the work of all of these 
34 

international organizations, I would like to take this opportunity to highlight the 

different roles that these international organizations should play as nations increasingly seek to cooperate with regard to international financial regulatory policy. 

The FSB, for example, comprises officials from across the spectrum of financial 

regulation, and so is very useful as a discussion forum to determine broad trends 

in the financial system. Through FSB discussions, gaps in regulation can be more 

readily identified and prioritized. The G–20 focus on these results also is helpful in 

ensuring that the pace of reform is maintained and that a clear international framework emerges. 

Given the complexity of the financial markets, however, it is critical that technical 

regulatory bodies such as those represented in IOSCO, as well as statutorily mandated independent regulators, such as the Commission, have control over their 

agendas and the ultimate outcomes of their regulatory and standard-setting work. 

The regulators and supervisors of each financial sector have specific goals for regulation, which may differ slightly from sector to sector, but are all important. For example, a key goal of securities regulators is investor protection; this goal is not the 

focus of bank or insurance supervisors, who have other priorities. Only by allowing 

the technical experts to develop regulatory approaches to address areas of concern 

in their sector can we ensure that all regulatory goals are being met. Moreover, implementation and enforcement depend on legal mechanisms and processes that vary 

jurisdiction by jurisdiction, and sector by sector. 

One example where this approach has been successful is raising standards for 

international securities law enforcement cooperation. The development of the 

IOSCO MMoU, and the push to further expand the number of jurisdictions providing cooperation as well as deepen the level of cooperation they provide, has significantly raised standards of cooperation in the securities sector over the past decade. The FSB’s effort to promote standards in non-cooperative jurisdictions will provide opportunities to raise the level of cooperation across a broad range of financial 

regulatory enforcement concerns. 

The Commission looks forward to continuing the constructive dialog with our colleagues at the Fed, Treasury, and other agencies, in continuing to develop the common U.S. position in the future. For more specifics on the outcome of the recent G– 

20 meeting, I defer to Mark Sobel of the Treasury Department, as the Commission 

did not directly participate in the Summit or the G–20 process leading to Pittsburgh. 

Conclusion 

While the Commission’s particular focus—and that of IOSCO—on investor protection and efficient and fair markets has remained constant and somewhat distinct 

from that of banking supervisors and regulators of other market segments, our recent collaborative work—both at home and internationally—has shown significant 

progress in strengthening the global financial regulatory system. It remains the case 

that investor protection and a focus on efforts to enhance investor confidence are 

vital to interests of financial stability on national and global levels. 

In its June White Paper, the Administration named as one of its five key objectives of financial regulatory reform the raising of international regulatory standards 

and improvement of international cooperation. The Commission, through IOSCO, 

the FSB, other cross-border mechanisms, and coordinating domestically with fellow 

financial regulators, stands ready to continue its collaborative work with the aim 

of enhancing our ability to identify and address systemic risks early across the 

world’s financial markets. International cooperation is essential to the success of 

any financial regulatory reform that we undertake. 

Thank you for this opportunity to address such timely and relevant global regulatory issues. 

PREPARED STATEMENT OF DANIEL K. TARULLO 

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

SEPTEMBER 30, 2009 

Chairman Bayh, Ranking Member Corker, and other members of the Subcommittee, I appreciate the opportunity to testify today on the role of international 

cooperation in modernizing financial regulation. International cooperation is important for the interests of the United States because, as has been graphically illustrated in the past 2 years, financial instability can spread rapidly across national 

boundaries. Well-devised international financial regulatory standards can help encourage all nations to maintain effective domestic regulatory systems. Coordinated 

international supervisory arrangements can help ensure that every large, inter-
35 

1The Basel Committee’s members come from Argentina, Australia, Belgium, Brazil, Canada, 

China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, 

Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. 2 International standard-setting bodies participating in the FSB are the Basel Committee, the 

Committee on the Global Financial System, the Committee on Payment and Settlement Systems, the International Association of Insurance Supervisors, the International Accounting 

Standards Board, and the International Organization of Securities Commissions. 

Continued 

nationally active financial institution is effectively supervised. Both these forms of 

international cooperation can, at the same time, promote at least a roughly equivalent competitive environment for U.S. financial institutions with those from other 

nations. 

In my testimony this afternoon, I will review the responses of key international 

regulatory groups to the financial crisis, including both substantive policy responses 

and the organizational changes in membership and working methods in some of 

those groups. Next I will describe specifically the role of the Federal Reserve’s participation and priorities in these international regulatory groups. I will conclude 

with some thoughts on the challenges for international regulatory cooperation as we 

move forward from the G–20 Pittsburgh Summit and the exceptionally active international coordination process that has preceded it. 

The Response of International Regulatory Groups to the Crisis 

Over the past few decades, international cooperation in financial regulation has 

generally been pursued in a number of groups that bring together national authorities with responsibility for regulating or supervising in a particular area, or that 

served as venues for informal discussion. Several of the functional regulatory groups 

have undertaken initiatives in response to the recent financial crisis. During this 

period, the Financial Stability Board (FSB) shifted from being more of a discussion 

forum to serving as a coordinator of these initiatives. The FSB was also the direct 

line of communication between these groups and the G–20. 

The Federal Reserve actively participates in the FSB as well as in the following 

international groups: 

• In the Committee on Payment and Settlement Systems, we work with other 

central banks to promote sound and efficient payment and settlement systems. 

• In the Committee on the Global Financial System, we work with other central 

banks to monitor developments in global financial markets, reporting to the 

central bank Governors of the G–10 countries. 

• In the Basel Committee on Banking Supervision (Basel Committee), we and the 

other U.S. bank supervisors work with other central banks and bank supervisory agencies to promote sound banking supervision by developing standards 

for bank capital requirements and bank risk management, and by promulgating 

principles for effective bank supervision. The Basel Committee, which doubled 

its membership earlier this year, now includes supervisors from 27 jurisdictions, 

including both advanced and emerging markets.1

• In the Joint Forum, we and other U.S. financial regulators—including bank, securities, and insurance regulators—work with financial regulators from other 

countries to enhance financial regulation that spans different financial sectors. 

• In the Senior Supervisors Group, we and other U.S. supervisors have worked 

over the past few years with the supervisors of other major financial firms to 

share information and sponsor joint reviews of risk management and disclosure. 

• In bilateral and regional supervisory groups, we have discussed regulatory 

issues with Europe, China, India, Japan and other supervisors from the Western Hemisphere. Some of these groups have quite a long history. Both the Committee on the Global Financial System and the Basel Committee date back to 

the 1970s. These groups are not formal international organizations. They have 

operated with only a modest support staff—often provided, along with a location 

for meetings, by the Bank for International Settlements (BIS). The bulk of their 

activity is conducted by officials from the national regulators themselves. 

The FSB is a relatively new group, established in the wake of the Asian financial 

crisis in 1999 as the Financial Stability Forum, with a broad mandate to promote 

global financial stability. The FSB is an unusual combination of international standard-setting bodies (including those mentioned above) and a range of national authorities responsible for financial stability: treasury departments and ministries of 

finance, central banks, and financial supervisory agencies.2 Major international or-
36 

The jurisdictions represented on the FSB are: Argentina, Australia, Brazil, Canada, China, 

France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Mexico, the Netherlands, 

Russia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Switzerland, Turkey, the 

United Kingdom, and the United States. 3 International organizations in the FSB are the BIS, the European Central Bank, the European Commission, the IMF, the Organisation for Economic Co-operation and Development, and 

The World Bank. 4See Senior Supervisors Group (2008), Observations on Risk Management Practices during the 

Recent Market Turbulence (Basel: SSG, March 6), available at Federal Reserve Bank of New 

York (2008), ‘‘Senior Supervisors Group Issues Report on Risk Management Practices,’’ press release, March 6, www.newyorkfed.org/newsevents/news/banking/2008/rp080306.html. 

ganizations such as the BIS and the International Monetary Fund (IMF) also participate.3 At the request of the G–20 in April 2009, the Financial Stability Forum’s 

name was changed to the Financial Stability Board, its membership was expanded 

to add the emerging market countries from the G–20, and its mandate was 

strengthened. 

The financial crisis has underscored the importance of the original motivation for 

creating what is now the FSB. The connections among financial market sectors, and 

between macroeconomic policy and financial markets, mean that efforts to ensure 

international financial stability must incorporate a breadth of perspectives and include communication among the various international groups in which regulatory 

cooperation takes place. In its work to increase international financial stability and 

to promote financial regulatory reform, the FSB has tried to identify priorities and 

agree upon high-level principles. It has then requested that the relevant standardsetting bodies formulate detailed proposals and report back to the FSB. 

All these international groups, including the FSB, operate by consensus. Although 

this institutional feature can create significant challenges in reaching agreement on 

complex topics, it also serves as a check on potentially undesirable policy directions. 

The process of developing proposals in the standard-setting bodies allows a variety 

of ideas to be explored and exposed to critical examination by expert staff. Like any 

other process, alternative viewpoints emerge and dissenting opinions are voiced. 

Once a consensus is reached, it is then up to individual members to implement any 

statutory changes, administrative rules, or guidance under local law. 

As already noted, the FSB has played a leading role in guiding the official response to the crisis. In April 2008, it made a range of recommendations to increase 

the resiliency of financial markets and institutions. These recommendations are 

broadly consistent with similar principles articulated by the President’s Working 

Group on Financial Markets here in the United States. The FSB has acted upon 

priorities identified by the G–20 leaders and has delivered to those leaders a series 

of proposals that have been adopted by them, most recently at the Pittsburgh summit last week. With its role now expanded and in the process of being formalized 

in a charter, the FSB will have the ongoing mandate of identifying and addressing 

emerging vulnerabilities in the financial system. 

The activities of some other groups have also broadened in response to the crisis. 

The Basel Committee was formed in 1974 in an effort by national authorities to fill 

supervisory gaps exposed by problems in a number of internationally active banks. 

Beginning in the late 1980s, its focus shifted to setting capital standards for internationally active banks. That emphasis continues today, notably with respect to 

strengthening capital requirements for securitization exposures and trading book exposures as well as disclosure requirements related to these areas. The Basel Committee has now begun to address a wider range of issues aimed at improving standards for capital, liquidity, cross-border bank resolution, leverage, and 

macroprudential supervision. 

In March 2008, the Senior Supervisors Group released its first report on riskmanagement practices.4 The report, based on extensive discussions with large financial institutions, provided near-real-time analysis of the major failures in risk management and internal controls that led to outsized losses at a number of firms, and 

highlighted distinctions in practices that may have enabled some other institutions 

to better withstand the crisis. The group is now in the final phases of preparing a 

second report that will focus on the challenges that emerged as particularly critical 

last year, notably related to management of liquidity risk, and present the results 

of the self-assessments by the largest financial institutions regarding their responses to the riskmanagement and internal control issues highlighted by the crisis. 

International regulatory and supervisory bodies have been actively engaged in addressing a wide range of issues, many of which have been highlighted by the recent 

financial crisis. Let me now discuss in more detail a few of the areas that are most 

important from the perspective of the Federal Reserve. 
37 

5See Basel Committee on Banking Supervision, Cross-Border Bank Resolution Group (2009), 

Report and Recommendations of the Cross-Border Resolution Group (Basel: Basel Committee, 

September), available at www.bis.org/publ/bcbs162.htm. 

Capital 

The financial crisis has left little doubt that capital levels of many financial firms, 

including many in the United States, were insufficient to protect them and the financial system as a whole. The FSB has called for significantly stronger capital 

standards, to be agreed upon now and phased in as financial and economic conditions improve. The communiquE issued Friday by the G–20 leaders echoed and amplified the need for improvements in both the quantity and quality of capital. 

One critical area for improvement is that of increasing capital requirements for 

many forms of traded securities, including some securitized assets. Some work has 

already been completed. We place a high priority on undertaking a comprehensive 

review and reform of these requirements. The Basel Committee is also working on 

proposals for an international leverage ratio to act as a supplement to risk-based 

capital ratios. The FSB has also devoted considerable energies to exploring sources 

of procyclicality in the financial system, which are those practices and structures 

that tend to amplify rather than dampen the cycles characteristic of financial markets, and to identifying possible strategies to reduce their effects, which were often 

quite visible during the recent crisis. One such strategy is to include a countercyclical capital buffer in the capital requirements for financial firms. Work on such 

a buffer is under way, though the technical challenges of devising an effective 

buffering mechanism are significant. 

It will be important for the international regulatory community to carefully calibrate the aggregate effect of these initiatives to ensure that they protect against future crises while not raising capital requirements to such a degree that the availability of credit to support economic growth is unduly constrained. The Basel Committee plans a study of the overall calibration of these changes for early next year. 

Liquidity 

Liquidity risk is another key international agenda item. Although the Basel Committee had historically focused on capital standards, the crisis clearly demonstrated 

that adequate capital was a necessary but not always sufficient condition to ensure 

the ability of a financial institution to withstand market stress. We were reminded 

that the liquidity of a firm’s assets is critical to its ability to meet its obligations 

in times of market dislocation. In particular, access to wholesale financing very 

quickly became severely constrained for many institutions that had grown quite dependent on it. The Basel Committee promulgated general guidance on liquidity risk 

management in June 2008 and is now in the process of incorporating those broad 

principles into specific quantitative requirements. 

Cross-Border Bank Resolution 

In the area of cross-border resolution authority, there is broad international 

agreement that existing frameworks simply do not allow for the orderly resolution 

of cross-border failures of large complex banking organizations and that changes are 

needed. Current frameworks focus on individual institutions rather than financial 

groups or the financial systems at large. These frameworks have proven problematic 

even at the national level. Policy differences and legal obstacles can magnify these 

shortcomings at the international level. 

The Basel Committee’s Cross-Border Bank Resolution Group has developed 10 

recommendations for national authorities.5 The recommendations, which aim at 

greater convergence of national resolution frameworks, should help strengthen 

cross-border crisis management. One key recommendation requires systemically important firms to have contingency plans that will allow for an orderly resolution 

should that prove necessary. Implementation of these recommendations is likely to 

require heightened cooperation throughout the international community. 

Accounting Standards for Financial Institutions 

The FSB and the Basel Committee have an important role in supporting improved 

accounting standards for financial institutions. For example, the FSB has developed 

recommendations for improving the accounting for loan loss provisions. The Basel 

Committee consults frequently with those who set international accounting standards on these and other topics and provides comments on important accounting proposals affecting financial institutions. 
38 

6The FSB prepared three documents that were presented to G–20 leaders at the summit: 

‘‘FSB Principles for Sound Compensation Practices,’’ ‘‘Improving Financial Regulation,’’ and 

‘‘Overview of Progress in Implementing the London Summit Recommendations for Strengthening Financial Stability.’’ 

Future Initiatives 

A number of other initiatives are at an earlier stage of policy development. A good 

deal of attention right now is focused on mitigating the risks of systemically important financial firms. Two of the more promising ideas are particularly worth mentioning. One is for a requirement for contingent capital that converts from debt to 

equity in times of stress or for comparable arrangements that require firms themselves to provide for back-up sources of capital. The other is for a special capital 

or other charge to be applied on firms based on their degree of systemic importance. 

Many of these initiatives still require much work at the technical level before policy 

proposals will be ready for a thorough vetting in the national and international regulatory community. 

How the Federal Reserve Pursues Our Objectives in International Groups 

The Federal Reserve promotes U.S. interests in these international groups by actively participating and by coordinating with other U.S. participants. 

The international groups that I mentioned earlier all hold regular meetings. The 

FSB meets at least twice a year, and the Basel Committee typically meets four 

times a year. Between meetings of the main groups, subgroups of technical experts 

meet to discuss proposals and lay the groundwork for issues to be discussed at the 

main groups. The Federal Reserve actively participates in both the main groups and 

the subgroups. For practical purposes, not all members of a group can sit on each 

subgroup, although the United States is well represented on all major topics and 

chairs important subgroups. 

We have found that success in pursuing our objectives in these groups depends 

upon having well-developed ideas. One important basis for leadership in international groups is the quality of the intellectual and policy contributions that an 

organization can offer. To this end, we have tried to use the extensive economic and 

research resources of the Federal Reserve, as well as our regulatory experience, to 

produce well-considered proposals and useful feedback on the proposals of others. 

International groups operate on the basis of consensus. Policies are endorsed only 

when all members voice their support. This approach can make it challenging to 

come to agreement on complex topics. But international groups are made up of regulatory agencies or central banks, and they have particular responsibilities based on 

their own national laws. International groups are not empowered to create enforceable law, and agreements need to be implemented by member countries in the form 

of statutory changes, administrative rules, or supervisory guidance. Thus, the consensus orientation of the international policy development process is necessary to 

respect the domestic legal structures within which the various regulatory agencies 

operate. 

The President’s Working Group on Financial Markets is the primary forum in 

which regulatory issues are discussed among the principals of the U.S. financial regulatory agencies. These discussions often cover the same issues being discussed in 

international groups. We strive to maintain a degree of intellectual rigor and 

collegiality in these discussions where consensus is again the norm, despite the 

sometimes different perspectives of the various agencies. In the past, there were 

some notable instances of significant disagreement among the U.S. agencies, but my 

observation since being appointed to the Federal Reserve is that the coordination 

process is working quite well. Indeed, it can sometimes be an advantage to have 

multiple U.S. agencies involved in international processes because of the complementary expertise we each bring to bear. In addition, at the international level, 

having multiple U.S. agencies at the table provides an appropriate counterweight 

to our European counterparts, who for historical reasons are usually overrepresented in international groups relative to their weight in the global financial system. 

Like other central banks, the Federal Reserve did not participate in the G–20 

summit, which is attended by heads of state and finance ministers. However, we are 

involved in a significant part of the relevant preparatory and follow-up work, both 

through the FSB and in joint meetings of the G–20 finance ministers and central 

banks.6 In preparation for the Pittsburgh summit, as well as for the previous G– 

20 summits in London and Washington, the Federal Reserve has also collaborated 

with other U.S. financial regulatory agencies in considering the financial regulatory 

issues on the agendas for these meetings. 
39 

Challenges for International Financial Cooperation 

The testimony that my colleagues and I have offered this afternoon reflects the 

breadth and depth of the tasks associated with improved regulation and supervision 

of financial markets, activities, and firms. An ambitious agenda has been developed 

through the interactions of the G–20, the FSB, and international standard-setting 

bodies, and much work toward completing that agenda is already under way. At the 

same time, there will inevitably be challenges as we all intensify and reorient the 

work of these groups. I will now discuss four of those challenges. 

First, for all the virtues of the consensus-based approach involving the relevant 

national authorities, some subjects will simply be very difficult to handle fully in 

this fashion. Crossborder resolution may prove to be one such issue. Although there 

is undoubtedly potential for achieving improvement in the current situation through 

the international processes I have described, the complexities involved because of 

the existence of differing national bankruptcy and bank resolution laws may limit 

what can be achieved. 

Second, there will likely be a period of working out the relationships among the 

various international bodies, particularly in light of the increased role of the FSB. 

We will need to determine how extensively the FSB and its newly constituted committees should themselves develop standards, particularly where an existing international standards-setting body has the expertise and mandate to address the topic. 

Similarly, while simultaneous consideration of the same issue in multiple international bodies can sometimes be a useful way to develop alternative proposals, 

there may also be potential for initiatives that are at odds with one another. 

Third, the significant expansion in membership of many of the more important 

of these bodies may require some innovation in organizational approaches in order 

to maintain the combination of flexibility and effectiveness that the FSB and some 

of the other groups have, at their best, possessed in the past. The substitution of 

the G–20 for the G–8 at the level of heads of government is the most visible manifestation of the salutary trend toward involving a number of emerging market 

economies in key international financial regulatory arrangements. As I mentioned 

earlier, the FSB and the Basel Committee have recently expanded their membership 

to the entire G–20. Important as this expansion is for the goal of global financial 

stability, the greater number of participants does have an impact upon the operation of those groups, and we will need to adapt accordingly. I hasten to add that 

this is not at all a comment on the capacities of the new members. On the contrary, 

I have been impressed with the quality of the participation from the new emerging 

market members. 

Finally, the financial crisis has understandably concentrated the attention and energies of many of these international regulatory groups on the new standards that 

will be necessary to protect financial stability in the future. Combined with the enlarged memberships of these groups, however, this focus on negotiating standards 

may unintentionally displace some of the traditional attention to fostering cooperative supervisory practices by the national regulators who participate in these international bodies. It is important that, even as we represent our national interests 

in these bodies, we also promote the shared interests we have in effective financial 

supervision. 

Conclusion 

Participating in international regulatory groups has helped the Federal Reserve 

and other U.S. agencies begin to shape an effective global regulatory response to the 

financial crisis. We look forward to continuing our collaboration in pursuit of effective, efficient financial regulation. 

Thank you for inviting me to present the Board’s views on this very important 

subject. I look forward to continuing dialog with the Subcommittee on these issues. 

I would be pleased to answer any questions you may have. 
40 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM MARK SOBEL 

On Resolution Authority 

Q.1. The Administration’s proposal asks for significant and broad 

resolution authority that is, in effect, TARP on steroids. While 

some will still advance the theory that the bankruptcy courts with 

a few tweaks would be enough of a solution, the challenges we 

have seen with Lehman’s resolution abroad question the theory 

that with no globally astute and integrated resolution regime, the 

court systems will not function cohesively and instead will be inclined to ring fence and protect for their own taxpayers. 

Explain to me how would the Administration’s proposed resolution process work overseas? Do you think that is the optimal 

model? Propping up failed institutions around the globe at taxpayer’s expense into perpetuity? Is the Treasury Department conducting any economic analysis so the impact of any proposal is 

fully understood before it is uniformly agreed to and adopted? And 

if so, when will you be willing to share this information to help us 

inform our policymaking? 

A.1. The United States, led by the Federal Depository Insurance 

Corporation (FDIC), is working closely with international counterparts within the Basel Committee, to study the important issue of 

resolutions at the international level. The Cross Border Bank Resolution Working Group has conducted serious analysis and published two reports with ten proposals to strengthen international 

and national frameworks for cross-border resolution of international institutions and, importantly, used the recent crisis as 

‘‘lessons learned.’’ (Available at: http://www.bis.org/publ/ 

bcbs162.htm) Recognizing that strictly national approaches are inefficient and global approaches may not be viable, the Group has 

recommended that major financial centers adopt comparable, consistent domestic resolution regimes similar to the FDIC approach. 

These proposals were issued for comment, with a deadline of December 31, 2009. The United States supports countries having 

strong and effective national resolution frameworks and an orderly 

resolution process, all of which will minimize the damage to the financial system and reduce cost to the taxpayer. 

As Secretary Geithner noted in his testimony before the House 

Financial Services Committee, the proposed resolution authority 

would not authorize the government to provide open-bank assistance to any failing firm. That is, the government would not be permitted to put money into a failing firm unless that firm is in FDIC 

receivership and on the path to being unwound, dismantled, sold, 

or liquidated. The receivership authority would facilitate the orderly demise of a failing firm, not ensure its survival, and would 

strengthen market discipline and reduce moral hazard risks, while 

protecting the financial system and taxpayers. It also is important 

that there are appropriate checks and balances and that the special 

resolution regime may be used only with the agreement of the Secretary of the Treasury and two-thirds of the boards of the Federal 

Reserve and the FDIC. In addition, any losses from a special resolution must be recouped with assessments on the largest non-bank 

financial firms. 
41 

On Insurance Issues 

Q.2. I want to ask you a couple of questions regarding the G–20 

and the Financial Stability Board’s cooperative efforts on regulatory reform. I am curious if insurance issues fall under this effort 

and how so? I ask because it has been a challenge for European 

regulators’ to not having a counterpart in the U.S. Executive 

branch on insurance issues. They complain that our current system 

not only represents inefficiency, but is also a barrier to global coordination on regulatory reform efforts. They also fear this is a potential problem in any future crisis and in resolving failed firms 

that have insurance subsidiaries. 

Can you tell me specifically if cooperation on insurance regulation falls under the G–20 and FSB mandates, and if yes, does the 

U.S. Executive branch have adequate authority to take necessary 

actions under this mandate, or is the United States lacking the 

proper tools to address insurance issues as part of a comprehensive 

effort to address crises such as that which we have just lived 

through? 

A.2. The Treasury Department’s International Affairs Office coordinates the USG position and participation in the Financial Stability 

Board (FSB), which is mandated to: deepen the resiliency of domestic financial systems; identify and address potential vulnerabilities 

in international financial systems; and enhance international crisis 

management. Senior-level officials from the Federal Reserve, Securities Exchange Commission, and the Treasury Department represent the United States in FSB meetings. Other Federal financial 

regulatory agencies (the Federal Deposit Insurance Corporation, 

the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission), as well as the National Association of 

Insurance Commissioners participate in USG preparation for the 

FSB meetings and provide input. Treasury Secretary Geithner and 

Federal Reserve Chairman Bernanke represent the United States 

at meetings of the G–20 Finance Ministers and Central Bank Governors. At the Pittsburgh Summit in late September, Leaders designated the G–20 as the premier forum for our international economic cooperation. 

To date, neither the FSB nor the G–20 has offered regulatory 

guidance solely directed at the insurance sector. Certain cross-cutting issues, however, affect insurance, such as supervisory colleges, 

heightened prudential regulation for large, interconnected financial 

institutions, and cross-border resolution. The regulatory reform 

agenda in these fora largely reflects effective U.S. leadership and 

is consistent with the approach taken in the Administration’s proposals, which are pending action by the Congress. 

As you have noted, some Europeans suggest that the absence of 

a Federal regulatory representative complicates their international 

dealings on insurance supervision, for example on issues of reinsurance collateral or Europe’s evolving supervisory regime. The Administration’s proposals would give the Treasury Department the 

authority to represent American interests in international fora regarding prudential measures for insurance. While the Office of National Insurance is not a regulator, it would provide a single coordinated USG voice on prudential matters related to insurance. It 
42 

would serve as a Federal authority to represent U.S. interests to 

work with other nations within the International Association of Insurance Supervisors (IAIS) on prudential regulatory issues, cooperation and agreements. 

Transparency of the FSB 

Q.3. As it builds out to handle its new mandate, how will it be held 

accountable, to whom, how will input flow into the process? 

A.3. The FSB membership consists of national and regional authorities responsible for maintaining financial stability (ministries 

of finance, central banks, and regulatory authorities), international 

financial institutions, and international standard setting, regulatory, supervisory and central bank bodies. All members are entitled to attend and participate in the Plenary, which is the decisionmaking body of the FSB. Representation on the Plenary is at the 

level of: central bank Governor or immediate deputy, head or immediate deputy of the main regulatory agency, and deputy finance 

minister or deputy head of finance ministry. Representation by the 

international financial institutions and the international standard 

setting bodies is at a similar level. 

The U.S. delegation to the FSB, represented here today by Treasury, the Federal Reserve and the SEC, supports and encourages 

the publication of FSB reports on its work. Many reports on the 

FSB’s work and the work of member organizations are available to 

the public on its website at www.financialstabilityboard.org. We 

are also pleased to make Treasury staff available to brief your 

Committee, Members, and staff at your convenience on any issue 

relating to the FSB. 

Q.4. I think it’s important to talk about how our interactions with 

the FSB and Basel Committee will go with regard to the new regulations that they will recommend. We don’t possess a treaty with 

these bodies, so in order for enactment to take place Congress will 

have to legislate and/or the independent regulatory agencies will 

have to adopt and adapt. The question that many are left with is 

if this will happen? How quickly? Will Congress end up leading the 

effort or lag? How is it all going to work? I think that the FSB/ 

Basel agreements actually carry the force of law—or for conforming 

efforts—within the EU (hence the adoption of Basel II). Of course 

the United States did not adopt because small banks believed they 

were at a disadvantage. If this is indeed the case, won’t a Basel 

III present a similar situation where the Europeans adopt the findings and we either do not adopt at all or adopt at a much slower 

pace. Quite frankly, the Europeans do not trust us to implement 

what we might agree to do, and they do not want to be put in a 

weakened position vis-a-vis the United States. All that said, I’d be 

interested in your thoughts on the role that the G–20 will play in 

the regulation writing process? Will it guide with specifics or simply bless proposals put forward? 

A.4. The U.S. banking regulators are members of the Basel Committee on Banking Supervision (Basel Committee), as are banking 

authorities of all of the other G–20 countries. The U.S. banking 

regulators have adopted the Advanced Approaches of Basel II by 

issuing regulations after notice and comment. The Basel Com-
43 

mittee is currently considering changes to Basel II in light of the 

weaknesses in it exposed by the financial crisis. The Basel Committee normally issues international standards following a notice 

and comment process and we expect this to continue for changes 

to Basel II. The Basel Committee does not currently have plans for 

a Basel III. Neither the G–20 nor the FSB has any legally binding 

rulemaking authority. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM KATHLEEN L. CASEY 

Credit Rating Agencies 

Q.1. It’s clear that the Credit Rating Agencies have not been quite 

up to snuff over the last few years but it seems that the Basel accords and the regulatory regimes rely a lot on them. I know that 

you have discussed the idea of moving to simple leverage ratios, 

but how do you square the problem of continuing to rely on a system that has failed us in the past? Should we reform the agencies, 

reduce regulatory reliance or encourage a new system to evolve? 

A.1. In my view, the Securities and Exchange Commission (‘‘SEC’’ 

or ‘‘Commission’’) should continue its efforts to both reform the 

credit rating industry and reduce the regulatory reliance on credit 

ratings issued by Nationally Recognized Statistical Rating Organizations (‘‘NRSROs’’). Over the past 2 years, pursuant to authority 

granted by Congress under the Credit Rating Agency Reform Act 

of 2006 (‘‘Rating Agency Act’’), the SEC has adopted some significant reforms relating to credit rating agencies. These reforms are 

intended to further the Rating Agency Act’s explicit goals of enhancing the transparency, accountability, and level of competition 

in the rating industry. 

But, in my view, the SEC needs to do more in this area. It is 

essential that the Commission finish its work with respect to the 

regulatory use of credit ratings. The Commission should adopt the 

remainder of its pending proposals to address overreliance on 

NRSRO ratings by removing the regulatory requirements embedded in numerous SEC rules. 

The considerable unintended consequences of the regulatory use 

of ratings—preserving a valuable franchise for the incumbent and 

dominant rating agencies, inoculating these government-preferred 

rating agencies from competition, promoting undue reliance and inadequate investor due diligence, and uneven ratings quality—have 

been evident for some time. 

It is vital that the Commission remove the government imprimatur from all SEC rules, particularly those relating to money 

market funds. The market, not the government, should decide 

which credit ratings have value. 

On Regulation 

Q.2. Other countries look to the United States for leadership in financial services regulation. I am especially, and increasingly, concerned about the potential for overregulation in the United States, 

not only for the effect on U.S. companies and the U.S. economy, but 
44 

also for the example that it would set for regulators and policymakers in Europe and elsewhere. 

The financial crisis was not caused by deregulation. If anything, 

it was caused by too much government intervention with respect to 

entities such as Fannie Mae and Freddie Mac, artificially low interest rates by a hyperactive Federal Reserve, and so on. 

Now for my question: What would, in your view, be the dangers 

of overregulation in the United States? Let’s take two issues that 

are mentioned in your testimony, hedge funds and credit rating 

agencies. What would be the practical impact on those two industries? 

A.2. I share your concerns relating to excessive regulation. Overregulation would not protect or benefit investors. Instead, it would 

only serve to harm the competitiveness of the U.S. capital markets. 

Such a result hurts every American who is looking for a job, investing his money, or paying taxes. 

In my view, too much regulation of hedge funds would have the 

predictable effect of moving fund assets to jurisdictions with a more 

favorable regulatory approach. Regulators and policymakers cannot 

lose sight of the fact that capital is highly mobile. We can protect 

investors and oversee hedge funds in a responsible way that does 

not harm the competitiveness of U.S. markets. Those goals are not 

necessarily mutually exclusive. 

With respect to too much regulation of credit rating agencies, it 

is my view that before adopting additional regulations that are not 

market-based, the Commission needs to step back and take stock 

of all the new rules it has adopted over the past 2 years. The simple fact is that rating agencies are highly regulated today. That is 

not to say that they will always issue accurate ratings for investors. Government regulation could never deliver such results. And 

it does not mean that we can second-guess their rating judgments 

or seek to regulate their rating methodologies. The Rating Agency 

Act precludes the Commission from such actions, and properly so, 

in my view. But what it does mean is that we have adopted comprehensive regulations in many key areas. We should seek to establish regulatory certainty. At some point, we need to be able to 

see if the rules we have on the books are having their intended effect. 

Too much regulation of rating agencies would not protect investors by improving ratings quality. In fact, it would only increase 

the regulatory costs and burdens associated with being or becoming 

an NRSRO, and lead to predictably anticompetitive results. Ironically, these costs are manageable for the incumbent rating agencies, but serve as a competitive barrier to those contemplating entering the NRSRO space. 

Avoiding too much regulation and enhancing competition would 

have another important effect: As the Commission noted recently, 

‘‘[R]educing the barriers to entry in the market for providing 

NRSRO ratings and, hence increasing competition, may, in fact, reduce conflicts of interest in substantive ways.’’ 
45 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM DANIEL K. TARULLO 

On the Financial Stability Board 

Q.1. At the G–20, there was general agreement to match up the 

membership of the Financial Stability Board with that of the G– 

20 and a focus on the ‘‘monitoring of the international economy’’ for 

new points of weakness and instability, I am skeptical that the 

FSB would be able to actually enforce actions by its member nations in response to any emerging risk it perceives. In April, the 

Economist magazine even said that domestic political pressures 

would trump any FSB call to action. The article said ‘‘But if it 

warns, who will listen? Imagine the scene in Congress in 2015. The 

economy is booming but Americans cannot get mortgages because 

some pen pusher in Basel says the banks are taking too much risk. 

The banks would be freed faster than you can say ‘‘swing voter’’.’’ 

Governor, what can we do to ensure that these moments of pro-cyclicality and crisis response are measured and consistent from the 

top down, end to end across the globe if the crisis is global and systemic? 

A.1. Did not respond by printing deadline. 

On Trade Finance 

Q.2. U.S. manufacturers continue to struggle in these credit markets to get trade finance and this is yet another example of regulatory treatment creating a self fulfilling prophecy that will slow 

down the economy. 

The rules of Basel II discourage banks from extending trade finance by forcing them to assign to it unreasonably high risk 

weighting and too long a maturity. The G–20 in April promised to 

ask their regulators to use discretion when applying the rules. 

There has been some limited flexibility from the U.K.’s Financial 

Services Authority, banks say that capital restrictions continue to 

hinder the market and that there is a disconnect between what the 

G–20 is saying and the effect of banking regulation on trade finance. 

Because of the nature of the trade finance market would you see 

the necessity of a program of this nature to be kept in place past 

the 2 years it is authorized for? 

A.2. Did not respond by printing deadline. 

Q.3. Is Basel II hindering the recovery of the trade finance market? 

A.3. Did not respond by printing deadline. 

Q.4. Is the G–20 asking regulators to ‘‘use discretion’’ enough to alleviate regulations that may make extending trade finance difficult? Or will the G–20 have to address this in a more formal manner? Is that something you would support? 

A.4. Did not respond by printing deadline. 

Q.5. Is there anything else that can be done in the international 

finance community to mitigate the risk of these markets seizing 

and to ensure liquidity? Is the use of the Export Import Bank and 

its guarantees appropriate here? 

A.5. Did not respond by printing deadline. 
46 

Q.6. Is there anything more that can be done to assist developing 

countries, like Africa, in assisting with the current high cost of 

trade? 

A.6. Did not respond by printing deadline. 

On Bank Regulation 

Q.7. As we work on our regulatory structure and debate the merits 

of more or less regulators and the value or lack of value in friction 

and different sets of eyes and opinions looking at our regulated entities, I wonder if this plays out even more aggressively on the 

world stage. We worry about regulatory arbitrage . . . and should 

. . . but how do you avoid a rush for all regulators agreeing to the 

most draconian standards and then that be the way the contagion 

spreads? In other words, does the least common denominator 

equate to squeezing good risk and entrepreneurship out of the system. 

A.7. Did not respond by printing deadline. 

Transparency of the FSB 

Q.8. As it builds out to handle its new mandate, how will it be held 

accountable, to whom, how will input flow into the process? 

A.8. Did not respond by printing deadline. 

Q.9. I think it’s important to talk about how our interactions with 

the FSB and Basel Committee will go with regard to the new regulations that they will recommend. We don’t possess a treaty with 

these bodies, so in order for enactment to take place Congress will 

have to legislate and/or the independent regulatory agencies will 

have to adopt and adapt. The question that many are left with is 

if this will happen? How quickly? Will Congress end up leading the 

effort or lag? How is it all going to work? I think that the FSB/ 

Basel agreements actually carry the force of law—or for conforming 

efforts—within the EU (hence the adoption of Basel II). Of course 

the United States did not adopt because small banks believed they 

were at a disadvantage. If this is indeed the case, won’t a Basel 

III present a similar situation where the Europeans adopt the findings and we either do not adopt at all or adopt at a much slower 

pace. Quite frankly, the Europeans do not trust us to implement 

what we might agree to do, and they do not want to be put in a 

weakened position vis-a-vis the United States. All that said, I’d be 

interested in your thoughts on the role that the G–20 will play in 

the regulation writing process? Will it guide with specifics or simply bless proposals put forward? 

A.9. Did not respond by printing deadline.