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S. HRG. 114–6 

EXAMINING THE REGULATORY REGIME FOR 

REGIONAL BANKS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE IMPACT OF THE EXISTING REGULATORY FRAMEWORK 

ON REGIONAL BANKS 

MARCH 19, 2015 

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

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MICHAEL CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

DANA WADE, Deputy Staff Director 

BETH ZORC, Senior Counsel 

JACK DUNN III, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

PHIL RUDD, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, MARCH 19, 2015 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

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

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

Prepared statement .......................................................................................... 32 

Responses to written questions of: 

Senator Brown ........................................................................................... 44 

Senator Vitter ............................................................................................ 51 

Senator Toomey ......................................................................................... 53 

Thomas J. Curry, Comptroller, Office of the Comptroller of the Currency ........ 5 

Prepared statement .......................................................................................... 35 

Responses to written questions of: 

Senator Toomey ......................................................................................... 57 

Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation ......... 7 

Prepared statement .......................................................................................... 39 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An 

Overview of Recent Data, submitted by Chairman Shelby .............................. 61 

BCBS Systemic Importance Indicators, submitted by Chairman Shelby ........... 68 

Tailored Key Elements of Enhanced Prudential Regulation, submitted by 

Senator Brown ...................................................................................................... 69 

(III)

(1) 

EXAMINING THE REGULATORY REGIME FOR 

REGIONAL BANKS 

THURSDAY, MARCH 19, 2015 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard C. Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The hearing will come to order. 

This week and next, the Committee will examine the impact of 

the existing regulatory framework on regional banks. Today, we 

will hear from regulators on the current regulatory construct and 

whether it should be imposed on these institutions. 

Regional banks fulfill a critical role in their communities. They 

represent what we all recognize as traditional banking. They, for 

the most part, take deposits so that they can provide residential, 

small business, and commercial loans. This is the fuel that drives 

local and regional economic growth. 

Unfortunately, these banks have been placed in a regulatory 

framework designed for large institutions because of an arbitrary 

asset threshold established by the Dodd-Frank Wall Street Reform 

and Consumer Protection Act. The title of the Act says ‘‘Wall 

Street,’’ but today, we are talking about banks that call Birmingham, Alabama, and Cincinnati, Ohio, home. The Dodd-Frank 

framework subjects all banks with assets of $50 billion or more to 

enhanced prudential standards, which carry heightened capital requirements, leverage, liquidity, concentration limits, short-term 

debt limits, enhanced disclosures, risk management, and resolution 

planning. Five years after this new regulatory framework was conceived, I believe it is appropriate today to revisit its suitability for 

these particular institutions. Many experts have expressed concern about an arbitrary $50 billion threshold as an automatic cut-off for systemic risk. I share 

their concerns. It has been said that regulators should not apply 

macroprudential rules to those institutions that do not pose 

macroprudential risk. I could not agree more. 

I have also been a proponent of prudent regulation and strong 

capital requirements. I believe we must, however, consider the economic impact of subjecting banks that are not truly systemically 

risky to enhanced prudential regulation. I think we also must ask 

2 

whether the existing regulatory framework is the best use of the 

regulatory resources. Today, I would like to hear from the witnesses whether the $50 

billion threshold is the appropriate and most accurate way to determine systemic risk in our banking sector. For example, a recent 

paper by the Office of Financial Research examines broad indicators used by global bank regulators to determine when a bank is 

systemically important. In fact, global bank regulators do not focus 

strictly on asset size. Rather, they take a broader view of the 

bank’s total exposures that captures activities beyond assets. 

The Office of Financial Research report takes into account the 

bank’s size, interconnectedness, complexity, among other factors, 

and applies this criteria to regional banks in the U.S. The results 

of this analysis show that regional banks generally pose a small 

fraction of the risk to the financial system compared to the largest 

banks. The report states that the data set, quote, ‘‘is a significant 

step in quantifying specific aspects of systemic importance.’’ 

What this analysis reveals is in stark contrast with the in or out approach mandated by the $50 billion threshold. Some supporters 

of this automatic in or out approach to systemic risk argue that the 

regulators can tailor requirements based on the institution’s size. 

I believe what this argument fails to take into account is that the 

law that established this regulatory framework is very prescriptive 

on how the regulators can tailor their regulations. For example, under the current system, a $51 billion bank must receive disparate treatment from regulators compared to a $49 billion bank. This statute, I believe, effectively ties regulators’ hands 

from taking into account a holistic view similar to that employed 

by the Office of Financial Research in its analysis on systemic risk. 

A regulatory system that is too constrictive is not a system that 

will allow our banks to thrive or our consumers and businesses to 

have access to affordable credit. Moreover, a system that directs 

regulators’ resources away from issues of systemic importance 

raises questions of whether regulators are adequately focused on 

protecting the economy and American taxpayers from the next crisis. 

When the Ranking Member and I first met to discuss the agenda 

of the 114th Congress, I thought we shared a common interest that 

the SIFI threshold was one of a number of topics on which we 

should focus. Today, we will begin that effort. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Chairman Shelby, and thank you to 

the witnesses today and thank you all for your public service over 

the years. 

I appreciate the Chairman calling this hearing to examine the 

regulation of regional banks. It is an important topic. We held a 

hearing last July on a similar topic. Unfortunately, it seemed to 

raise more questions than it provided answers. I hope these next 

two hearings, this week with the regulators and next week with 

banks, will help us to advance the conversation as we work to ensure that prudential regulations for regional banks, for midsize 

banks, are crafted appropriately. 

3 

This is a topic that is important to me because I have seen the 

effects on a community when a regional bank takes excessive risks. 

National City Corporation was a super-regional bank founded in 

Cleveland in 1845. It weathered all the bank panics of the 19th 

century and the Great Depression of the 20th, but it no longer exists today. In 2007, National City was the ninth largest U.S. commercial bank, having $140 billion in assets. Less than a year later, 

it had been sold to PNC in Pittsburgh with the assistance of $7 billion in taxpayer dollars. 

National City’s downfall is a case study in management mistakes 

and regulatory failures. The OCC, for example, allowed the bank 

to buy back $3 billion of its own stock in early 2007, months before 

its failure. A Federal Reserve witness before my subcommittee in 

2011 called the events at National City, quote, ‘‘a collective failure 

of imagination by the banks and by the regulators.’’ 

Even near-failures have costs. Though National City did not 

technically fail, 4,000 people lost their jobs, many of them in my 

hometown in Cleveland. National City’s management and our regulators failed those workers and communities across my State and 

across a number of States. 

Congress responded to this and the failures of other institutions 

by passing Dodd-Frank and directing agencies to institute standards like capital and liquidity and risk management and stress 

testing to lower the likelihood and the costs of large bank holding 

company failures. 

In 2010, American Banker wrote that many of the powers in 

Title I of Dodd-Frank were not new. They were put there as a directive from Congress to the regulators to use their authorities in 

ways that have teeth. That is why one bank lobbyist said, ‘‘When 

the President signed the financial reform law, that was halftime. 

The legislators left the field. Now, it is time for the regulators to 

take over. We want to see that we do not over-regulate here,’’ unquote. 

I agree, we should not over-regulate. So did the authors of DoddFrank. We often hear that a $50 billion bank should not be treated 

the same way as JPMorgan Chase. I agree on that, too. DoddFrank did not go as far as I would have liked in some respects, but 

in other respects, it struck a pretty good balance. It called for 

heightened rules for large bank holding companies but directed 

regulators not to take a one-size-fits-all approach. These rules were 

not meant to cover just the too-big-to-fail banks nor just the systemically important banks. They were meant to cover institutions 

like National City. 

That is why enhanced prudential standards increase in stringency as institutions grow larger. Regulators have proposed or implemented different rules that apply to banks with $50 billion or 

more in assets, rules that apply to banks with 250 or more in assets, and rules that apply to banks with 700 or more in assets, the 

way it should be. Further, the law allows regulators—and this is 

key, I believe—the flexibility to lift the thresholds for some of these 

standards. 

I hope that in the process of these hearings and our discussions 

we explore the benefits and the burdens of specific regulations and 

whether issues are being caused by the law or its implementing 

4 

regulations. Enhanced prudential standards are important, not just 

to respond to the last crisis, but also to prevent the next one. The 

failure of a single large institution can create systemic risk, but so 

can multiple failures of similar small or medium-size institutions. The term ‘‘too big to fail’’ originated from the failure of the $40 

billion bank Continental Illinois in 1984. In today’s dollars, it 

would have been a $90 billion bank. 

I look forward to hearing our witnesses are using their authority 

to tailor their regulations to the institutions and activities that 

present the most risk while not becoming complacent and taking 

their eyes off of all potential sources of risk. Our imaginations have 

failed us more than once when it comes to anticipating problems. 

We should make sure we do not let it happen again. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

Without objection, I would like to enter into the record now the 

Office of Financial Research Brief 15-01 and the OFR Table of Systemic Importance Indicators. 

Our witnesses today include Governor Daniel Tarullo, a member 

of the Board of Governors of the Federal Reserve System, who is 

no stranger to this Committee; Comptroller Thomas Curry of the 

Office of the Comptroller of the Currency, who is no stranger, either; and also Martin Gruenberg of the Federal Deposit Insurance 

Corporation, who was a longtime staffer here. Welcome, gentlemen. 

Governor, we will start with you. 

STATEMENT OF DANIEL K. TARULLO, GOVERNOR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. TARULLO. Thank you very much, Mr. Chairman, Senator 

Brown, and other Members of the Committee. 

In response to your request for comments on possible adjustments to statutory thresholds for mandatory application of certain 

forms of prudential regulation, let me begin with three comments. 

First, Dodd-Frank’s creation of different tiers of prudential regulation was a very important step forward in dealing with the problem of too-big-to-fail and larger institutions. The approach of requiring enhanced prudential standards for larger, significant institutions is an important method of promoting financial stability, assuring the availability of credit for American businesses and households, and countering moral hazard, while taking into account the 

relative costs and benefits of different forms of regulation to banks 

of different sizes and scope of activities. 

Second, it is worth considering whether the threshold as applied 

to smaller institutions within this range might be adjusted in light 

of experience to date. As I have said before, it may be sensible to 

exempt community banks completely from certain regulatory requirements where this would reduce compliance costs with little or 

no cost to safety or soundness. It is also worth thinking about some 

adjustment to the $50 billion threshold in Section 165, a point to 

which I will return in a moment. 

Third, any possible change in these thresholds should be limited 

to specifying the universe of banks for which it is mandatory that 

certain regulations apply. It is critical that the three banking agencies in front of you today retain discretion to require prudential 

5 

measures, including things such as more capital or liquidity, for 

specific firms or groups of firms when necessary to ensure the safety and soundness of those institutions. Coming back now to the issue of the $50 billion threshold, let me 

first note that we have implemented the enhanced prudential 

standards requirements in accordance with the Section 165 criterion of increasing stringency depending on the systemic importance of the banks as determined through application of the relevant statutory factors. In essence, we have created three categories for firms in that group, that universe of banks of $50 billion 

or more. So, there is already a good bit of tiering as we have taken 

advantage of the flexibility granted to us. 

Now, one might debate whether even the less restrictive forms of those standards as applied to a $50 billion institution should be 

mandatory or just left to supervisory discretion. But, I would say, 

in trying to be responsive to the questions the Committee is asking, 

that the issue is most clearly joined with respect to supervisory 

stress testing. The incremental supervisory costs for us of doing 

this entire universe of banks are significant. The resource demands 

on the institutions are substantial. The marginal benefits for safety 

and soundness for that group of $50 to $100 billion institutions 

seem rather limited. And, finally, our ability to tailor to these 

smaller institutions is more constrained in the context of a supervisory stress test with the three required scenarios than in those 

other enhanced prudential standards areas I was referring to a moment ago. 

That is, even though we do vary some of the qualitative expectations we have for the smaller banks in the stress test, the basic application of supervisory scenarios, comparable loss functions, and 

other elements of the test create a baseline of a considerable 

amount of detail and resource expenditure for the affected banks. 

So, I think this is an example of where things are less susceptible 

to significant tiering and, thus, the decision at its root tends to be 

a bit more of a binary one, that is, the bank is either in or it is 

out. 

Thank you for your attention, and I would be pleased to answer 

any questions you might have. 

Chairman SHELBY. Thank you. 

Mr. Curry. 

STATEMENT OF THOMAS J. CURRY, COMPTROLLER, OFFICE 

OF THE COMPTROLLER OF THE CURRENCY 

Mr. CURRY. Chairman Shelby, Ranking Member Brown, and 

Members of the Committee, thank you for the opportunity to discuss the OCC’s experience with Section 165 of the Dodd-Frank Act 

and our approach to tailoring our regulatory and supervisory expectations to the size and complexity of the individual institutions we 

supervise. 

Because the focus of Section 165 as it applies to the banking sector is on bank holding companies, almost all of the authorities 

under this section are assigned to the Federal Reserve System. The 

only area in which the OCC has direct rulemaking authority involves the mandated company-run stress tests for banks with consolidated assets of more than $10 billion. 

6 

To the extent permitted by the statute, we tailored our requirements to distinguish between those that apply to banks with assets 

between $10 and $50 billion in assets and those with assets in excess of $50 billion. Otherwise, the OCC’s role in Section 165 is limited to a consultive one on matters affecting national banks. 

However, national banks typically comprise a substantial majority of the assets held by bank holding companies with consolidated 

assets of $50 billion or more, and the national bank is typically the 

dominant legal entity within each company. Consequently, I would 

like to focus my remarks on how we use our existing supervisory 

tools that are similar to the provisions of Section 165 in our prudential oversight of national banks and Federal savings associations. 

It is very important that the OCC retain the ability to tailor and 

apply our supervisory and regulatory requirements to reflect the 

complexity and risk of individual banks. As my written testimony 

describes, we have taken a number of initiatives to ensure that 

banks that pose heightened risk to the financial system are subject 

to much higher requirements than those with lower risk profiles. 

While a bank’s asset size is often a starting point in our assessment of appropriate standards, it is rarely, if ever, the sole determinant. 

For example, while most banks in our midsized portfolio fall into the $8 billion to $50 billion range, this portfolio also includes several banks that exceed $50 billion in assets. These banks have 

business models, corporate structures, and risk profiles that are 

very different from other institutions in our large bank portfolio, 

which typically have national or global operations, complex corporate structures, or extensive exposures in the wholesale funding 

and capital markets. This flexible approach, which considers both 

size and risk profiles, allows us to transition and adjust the intensity of our supervision and our supervisory expectations as a bank’s 

profile changes. 

Our approach of tailoring requirements to different types of institutions can also be seen in our implementation of capital, liquidity, 

and risk management standards for the banks we supervise. While 

our standards are separate from the enhanced prudential standards that the Federal Reserve issues under Section 165, we believe 

they are consistent with the statute’s intent and provisions. 

For example, the interagency capital requirements applicable to 

national banks, including those related to market and operational 

risks, and the enhanced leverage ratio requirements, generally only 

apply to the largest banks that have significant trading activities 

and complex operations. The capital rules, however, also allow the 

OCC to require additional capital based on an individual bank’s circumstances, regardless of its size. This ability to require an individual bank to maintain capital levels above regulatory minimums 

is especially important when we encounter banks that have significant concentrations in certain loan products or market segments, 

and we regularly exercise this discretion. 

For our largest banks, generally those over $50 billion in assets, 

we have also developed a set of heightened standards for risk management and corporate governance that reflect the greater size, 

complexity, and risk that these institutions represent. For example, 

7 

these standards focus on the need for an engaged board of directors 

that is capable of providing an independent perspective and a credible challenge to management. The standards also address the need 

for a robust audit function and a compensation structure that does 

not encourage excessive risk taking. 

Finally, let me reiterate that there are very considerable differences not just between community banks and large institutions, 

but among the large banks themselves. Our approach recognizes 

the differences in size, complexity, and risk among the large banks 

and thrifts we supervise and it ensures that the appropriate degree 

of supervisory rigor is targeted to each institution. 

Thank you, and I look forward to answering your questions. 

Chairman SHELBY. Thank you. 

Mr. Gruenberg. 

STATEMENT OF MARTIN J. GRUENBERG, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Chairman Shelby, Ranking Member Brown, 

and Members of the Committee, I appreciate the opportunity to 

testify on the regulatory regime for regional banks. 

Section 165 of the Dodd-Frank Act requires enhanced prudential 

standards for bank holding companies with total consolidated assets equal to or greater than $50 billion, while providing regulatory 

discretion to tailor standards to the size and complexity of the companies. The companies that meet the $50 billion threshold represent a significant portion of the U.S. banking industry and also 

represent a diverse set of business models. 

As part of its research on community banks, the FDIC developed 

criteria to identify community banks. Based on that criteria, 93 

percent of all FDIC-insured institutions with 13 percent of FDICinsured institution assets currently meet the criteria of a community bank. This includes over 6,000 institutions, of which nearly 

5,700 have assets under a billion dollars. By contrast, regional 

banks are much larger in asset size than a typical community bank 

and typically have expanded branch operations and lending products serving several metropolitan areas and may do business across 

several States. In addition, the Deposit Insurance Fund would face 

a substantial loss from the failure of even one of these institutions. 

Section 165 provides the FDIC with explicit responsibilities in 

two substantive areas related to prudential standards: resolution 

plans and stress testing. In both areas, the FDIC has tailored requirements to fit the complexity of the affected institutions. 

Resolution plans, or living wills, are an important tool for facilitating the orderly failure of these firms under the bankruptcy code. 

In 2011, the FDIC and the Federal Reserve jointly issued a final 

rule implementing the resolution plan requirements for bank holding companies with assets equal to or greater than $50 billion in 

consolidated assets. The agencies used their statutory discretion to 

develop a joint resolution planning rule which recognizes the differences among institutions and scales the regulatory requirements 

and potential burdens to the size and complexity of the institutions 

subject to the rule. 

For their initial submissions, bank holding companies with less 

than $100 billion in total nonbank assets and 85 percent or more 

8 

of their assets in an insured depository institution were generally 

permitted to submit tailored resolution plans that simplify the task 

of creating a living will. Nearly all the U.S. institutions in this category filed tailored plans. The joint rule also allows the agencies 

to modify the frequency and timing of required resolution plans, 

which we have done. 

The Dodd-Frank Act also requires the Federal banking agencies 

to issue regulations requiring financial companies with more than 

$10 billion in total consolidated assets to conduct annual stress 

tests. The FDIC’s stress testing rules, like those of the other agencies, are tailored to the size of the institutions, consistent with the 

expectations under Section 165 for progressive application of the 

requirements. Under the agencies’ implementing regulations, organizations in the $10 to $50 billion asset size range have more time 

to conduct the tests and are subject to less extensive information 

requirements as compared to larger institutions. 

Section 165 establishes the principle that regulatory standards 

should be more stringent for the largest institutions. Certainly, degrees of size, risk, and complexity exist among the banking organizations subject to 165, but all are large institutions. Some of the 

specializations and more extensive operations of regional banks require elevated risk controls, risk mitigation, corporate governance, 

and internal expertise than what is expected from community 

banks. 

That being said, it is appropriate to take into account the differences in the size and complexity of large banking organizations 

when forming regulatory standards. The agencies have made appropriate use of the flexibility built into section 165 thus far, and 

where issues have been raised by industry, we have tried to be responsive. 

However, we do recognize that more could be done. For example, 

the statutory language governing stress testing is more detailed 

and prescriptive than the statutory language on other prudential 

standards, leaving the regulators with less discretion to tailor the 

stress testing process. The FDIC would welcome the opportunity to 

work with the Committee on language that would permit greater 

flexibility in the stress testing process. 

The FDIC also remains open to further discussion on how best 

to tailor various enhanced prudential standards and other regulations and supervisory actions to best address risk profiles presented by large institutions, including regional banks. 

Mr. Chairman, thank you, and I would be happy to answer any 

questions. 

Chairman SHELBY. I thank all of you. 

I want to ask this question—a couple of questions to begin with 

to all of you, and I would like a yes or no answer to these questions. We are going to have a lot of questions. 

Should a bank that is systemically risky be regulated like a bank 

that is, one? 

Two, are there any nonsystemically risky banks currently being 

regulated as if they were systemically risky because of the statutory $50 billion threshold? 

Governor, we will start with you. 

9 

Mr. TARULLO. Senator, could I ask you to clarify just a bit the 

two questions. Is the systemic importance issue—— 

Chairman SHELBY. Let me just ask the question again. Should 

a bank that is not systemically risky be regulated like a bank that 

is? 

Mr. TARULLO. I know you want yes or no, and I am going to 

begin by saying no, but I just do want to point out that there are 

varieties of systemic riskiness or importance. 

Chairman SHELBY. I understand. You can elaborate. 

Mr. TARULLO. OK. 

Chairman SHELBY. What about are there any nonsystemically 

risky banks currently being regulated as if they were systemically 

risky because of the statutory $50 billion threshold? 

Mr. TARULLO. I would say, to a degree, yes, in the stress testing 

area. 

Chairman SHELBY. Yes, basically. 

Mr. Curry. 

Mr. CURRY. I would answer no to the first question, and potentially yes to the second. 

Chairman SHELBY. OK. 

Mr. Gruenberg. 

Mr. GRUENBERG. Can you repeat the question, because I want to 

be careful—— 

Chairman SHELBY. Yes, I will. Should a bank that is not systemically risky be regulated like a bank that is? That is question one. 

Yes or no? 

Mr. GRUENBERG. No. 

Chairman SHELBY. Are any nonsystemically risky banks currently, to your knowledge, being regulated as if they were systemically risky because of the $50 billion threshold? 

Mr. GRUENBERG. As a general matter, from my standpoint, no, 

Mr. Chairman. 

Chairman SHELBY. OK. Another question for all of you. We do 

not get this opportunity every day. I mentioned in my opening 

statement a recent report by the Office of Financial Research that 

examines broad indicators to determine whether a bank is systemically important. Do you have any concerns with the methodology 

described by the OFR report to measure systemic risk, and do you 

believe that the automatic $50 billion threshold is superior to analytic methodology described in the OFR report to measure systemic 

risk? Governor. 

Mr. TARULLO. Thank you, Mr. Chairman. Here is where this 

issue of systemic importance comes in—— 

Chairman SHELBY. Sure. 

Mr. TARULLO. ——and there are two ways you can think about 

it. One is systemic importance in the sense that high stress or failure of that particular firm might itself lead to a financial crisis. So, 

that is the sort of systemic risk, too-big-to-fail concern that we are 

thinking about—— 

Chairman SHELBY. Absolutely. 

Mr. TARULLO. ——from 6, 7 years ago. 

The second form of systemic importance is, if you just reverse the 

syntax, importance to the financial system, and that is where just 

the sheer size of an institution, the fact that it has a big footprint 

10 

across the country, the fact that its credit intermediation is important for American businesses and households, gives it an importance that, for example, does not attach to a community bank. So, 

that is where it is important to take account of those differences. 

Now, the OFR report is, to a considerable extent, focused on the 

institutions at the very top of the scale, what we have in our 

LISCC, Largest Institution Supervision Coordinating Committee 

portfolio at the Fed, and the institutions which internationally 

have been identified as of global systemic importance. 

Now, there, as I think you all know, we do distinguish, first off, 

by segregating that group of eight and have special requirements 

applicable to them, and second, even among those eight, we vary 

the requirements, for example, in our proposal on capital surcharges. So, depending on size, complexity, interconnectedness, and 

substitutability, the proposed surcharge may be greater or lesser 

even among those eight banks. 

So, although one will have a different set of views, maybe, on exactly what the right set of criteria are, and a lot of academics and 

people internationally, people at the Fed, OFR, have tried to give 

their own precise formulas, I think all of those people are engaged 

in the same exercise, which is to say, let us identify the systemic 

importance of those institutions whose failure would really put the 

whole system at risk. 

Chairman SHELBY. Governor, again, do you disagree with the 

methodology in the OFR report to measure systemic risk? 

Mr. TARULLO. We might have some questions about the methodology. I know you know this, Mr. Chairman, because you have 

heard me on this for 10 years now, but I am very focused on the 

vulnerabilities created by short-term wholesale funding at large 

capital market institutions, and I, at least my understanding of the 

OFR report is it does not weight that as heavily as I would. But, 

as I said earlier, I think we are engaged in the same broader exercise. 

Chairman SHELBY. Governor, as part of the Financial Stability 

Board and the Basel Committee for Banking Supervision, the Federal Reserve participated in devising what we call a multifactor approach for assessing the systemic risk for financial institutions. 

You are very familiar with this. Could you briefly explain here this 

multifactor approach, and do you believe that this approach is a 

valid way to determine systemic risk? 

Mr. TARULLO. Yes. I have already alluded to it, but let me be a 

bit more specific. 

Chairman SHELBY. Yes. 

Mr. TARULLO. What the Basel Committee did, and the Fed participated very heavily in this, was to try to construct a set of indicators, which, as I say, addressed issues like size, interconnectedness, the degree of cross-border activity—— 

Chairman SHELBY. Uh-huh. 

Mr. TARULLO. ——and then to assign some weights to those factors. Then we took a broad range of large internationally active 

banks and ran their characteristics through that template—— 

Chairman SHELBY. Uh-huh. 

11 

Mr. TARULLO. ——to come up with a ranking of institutions that 

might be considered of global systemic importance. That was the 

basic exercise. 

But, again, I just want to emphasize, that effort was oriented toward the institutions whose failure in and of themselves might create a domino effect and have a financial crisis as a result. So, we 

were trying to do that assessment for the very significant additional regulations that are associated with those very largest institutions. 

Chairman SHELBY. Governor, you are familiar with Secretary 

Lew’s testimony before the House Financial Services Committee, I 

assume, on Tuesday. He said that he is not convinced legislation, 

quote, ‘‘is required right now to raise the $50 billion threshold until 

we determine administrative flexibility is inadequate.’’ 

My question to you, does either the FSOC or the Federal Reserve currently have administrative flexibility to raise the $50 billion 

threshold with respect to prudential standards in Section 165? It 

is my understanding that is statutory. 

Mr. TARULLO. That is statutory, and the FSOC has authority to 

raise some but not others. 

Chairman SHELBY. Not that. 

Mr. TARULLO. And not stress testing, right. 

Chairman SHELBY. Thank you. 

Senator Brown. 

Senator BROWN. This chart to the witnesses’ right, and all my 

colleagues should have a copy at their desks, highlights significant 

tailoring of enhanced prudential standards by the regulators for 

bank holding companies above $50 billion in total assets. This is 

an easier yes or on question than the two directed from the Chair. 

Just to each of you, if you would just say yes or no, does this look 

accurate to you? 

Mr. TARULLO. No, it does not, Senator. 

Senator BROWN. Why is that? 

Mr. TARULLO. Well, there are at least two reasons I see, looking 

at it quickly. I do not quite know where the $700 billion category 

came from. We have breaks for statutory and supervisory reasons 

at 1, 10, 50, 250, and then the LISCC portfolio, but this other one, 

they may have inferred it from some other things, but it is not one 

of our categories. Also, I do not see single counterparty credit limits 

up there, either. There may be others. 

Senator BROWN. Mr. Curry. 

Mr. CURRY. I think, generally, it is correct, Senator. I believe the 

$700 billion figure may reflect the cut-off in the enhanced supplemental leverage ratio. 

Senator BROWN. Mr. Gruenberg. 

Mr. GRUENBERG. Senator, since the enhanced prudential standards are, in significant measure, a bank holding company set of 

standards under the Fed, I think I would probably defer to Governor Tarullo on the evaluation of this particular chart. 

Senator BROWN. OK. Let us get back to that. Let me go in a 

slightly different direction. 

Governor Tarullo and Chairman Gruenberg observed the statute 

allows for tailoring. You have said that. But, there are practical 

challenges to tailoring stress tests. Governor Tarullo said the suVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
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pervisory benefits of stress testing for banks around $50 or $60 or 

$70 billion are relatively modest. Chairman Gruenberg alluded to 

this when he discussed capital and liquidity, but Section 165 also 

includes some standards that are central to preserving safety and 

soundness and financial stability. 

And, questions for all of you, again, start with you, Governor 

Tarullo. How concerned should we be by proposals that would limit 

your agency’s longstanding authority to preserve safety and soundness and financial stability of all bank holding companies, regardless of size? And, let us go down, starting with you. 

Mr. TARULLO. Very concerned, Senator. That is why I included 

that as one of my introductory points, that it has been a longstanding practice of the three agencies in front of you, as validated 

by Congress, let me see, 32 years ago, that the Federal banking 

agencies have discretion to apply specifically stronger expectations 

for particularly banks or a group of banks that pose safety and 

soundness risk. Any constraint upon that would be highly problematic. 

Senator BROWN. Mr. Curry. 

Mr. CURRY. I would agree with Governor Tarullo. The items that 

are in Section 165 really are tools, longstanding tools, established 

tools that the supervisors have used. So, any direct or, by implication, limitation on our ability to use those tools on a selective basis 

would be problematic. 

Senator BROWN. Mr. Gruenberg. 

Mr. GRUENBERG. Senator, I agree with the points made by Governor Tarullo and Comptroller Curry, and it goes to, to me, an important issue, as to what the purpose of these enhanced prudential 

standards are. As I read them, they basically preserve the underlying prudential authorities that the agencies have had and are basically saying to the agencies, for institutions over a certain size, 

they may present particular risk to the financial system. They are 

basically telling the regulators to pay attention and, if necessary, 

impose more stringent standards. I think that is the purpose and 

that is, in significant measure, the value. But, I think the premise 

was that the underlying prudential authorities that we had would 

be preserved, and I think that is probably for us the threshold 

issue here. 

Senator BROWN. Thank you. 

One financial sector analyst’s note about this hearing said that raising the $50 billion threshold, and I quote, ‘‘would open the door 

to more freedom for banks to distribute capital to shareholders in 

the form of buy-backs and dividends and would pave the way to 

more M&A activity as banks worry less about crossing the $50 billion threshold designation.’’ 

Should we be giving a priority, then, to dividends and buy-backs 

and consolidation at the expense of financial stability? And, I will 

start with Mr. Gruenberg this time. 

Mr. GRUENBERG. No, Senator. 

Senator BROWN. Mr. Curry. 

Mr. CURRY. No. 

Mr. TARULLO. So, Senator, obviously not. I mean, that is not 

what motivates it. I think what should motivate it is the question 

of how much safety and soundness benefit do we get out of this 

13 

particular approach, which is the stress testing. I think that as you 

saw by looking at the stress test results this year, in fact the smaller regional banks are very well capitalized. So, it is really just a 

question of the expenditure of resources and how much safety and 

soundness benefit you get for that. 

Senator BROWN. Mr. Gruenberg, one more question, if I could. 

The failure of the $30 billion thrift IndyMac, a traditional lender 

under $50 billion in assets, cost the FDIC fund about $12 billion. 

What did their failure mean for the market and for the DIF and 

which enhanced prudential regulations would help mitigate those 

effects in the future for a bank that size? 

Mr. GRUENBERG. It is a good question, Senator. As you know, 

IndyMac was the most costly failure during this recent crisis to the 

Deposit Insurance Fund, and, I think, may have been the most 

costly failure the Fund has ever experienced for a single institution. And, it presented significant resolution challenges, because, 

frankly, the institution was in such bad shape that there was no 

available acquirer for it. We had to establish a bridge company to 

manage it over a period of several months to have an orderly winddown, which is one of the reasons for the cost of the failure. 

And, it certainly had consequences. It was a California institution, and it had consequences for the community and region in 

which it operated. It is fair to say, given the fragile financial environment generally at the time, it may have had broader impacts 

in terms of perceptions about the vulnerability of the mortgage 

market. 

The point is that an institution even of that size could have, certainly, significant consequences for the Deposit Insurance Fund 

and considerations for the financial system more broadly. Among 

the provisions of Dodd-Frank, of the enhanced prudential standards, the stress test is the one provision that would have applied, 

and in retrospect, had they had stress testing as well as a risk committee for the institution, I would argue that a stress test for that 

institution and a risk committee would not have had value for that 

institution. 

Senator BROWN. Thank you. 

Chairman SHELBY. Senator Heller. 

Senator HELLER. Mr. Chairman, thank you, and thanks for holding this hearing on regional banks. 

I also want to thank the banking agencies for being here, also, 

for taking time and listening to our concerns. 

Before I get started with my questions, I would like to find out 

where that chart came from. Maybe I would ask the Ranking Member—— 

Chairman SHELBY. The source of it. 

Senator HELLER. ——what is the source of this chart? 

Chairman SHELBY. Senator Brown, I think he is directing this 

question to you. 

Senator BROWN. I am sorry. Yes. It came from Better Markets. 

Chairman SHELBY. From what, now? 

Senator BROWN. Better Markets. 

Chairman SHELBY. It does not have where it came from. 

Senator BROWN. I apologize for it not showing that. 

14 

Senator HELLER. I mean, it is unusual to have a chart that is 

passed around that has no validity. 

Senator BROWN. Well, it has got lots of validity. I apologize 

for—— 

Senator HELLER. Well, the banking agencies themselves said it 

had no validity to it. 

Senator BROWN. Well, they had—we had talked to the Fed about 

this and we—— 

Senator HELLER. I just hope it is not the practice of this—— 

Senator BROWN. Well, I—— 

Senator HELLER. ——this Committee to pass around charts that 

have no validity—— 

Senator BROWN. ——do not think it has—— 

Senator HELLER. ——nor does it have any source connected to it. 

Chairman SHELBY. It is not the practice of the Committee. We 

generally—I have never known anything that did not have a source 

on it. 

Senator BROWN. OK. I apologize for not putting the source on it. 

It was—there were some slight problems with it, but not major 

problems with it. I apologize for that. 

Senator HELLER. All right. 

Governor, can you explain to me, based on current standards, the difference in the risk of a $49 billion bank and a $50 billion bank? 

Why is a $49 billion bank less risky than a $50 billion bank? 

Mr. TARULLO. Well, Senator, obviously, the risk of a particular 

institution is going to depend substantially on the underwriting 

practices and quality of capital of that particular institution. I 

think if you are getting at the question of why a threshold at $50 

billion, I mean, to a considerable extent lines do have to be drawn. 

And, so, with respect to, as Comptroller Curry was explaining, the 

supervisory portfolios that we all have, we do have these asset 

thresholds to make sure that we are not requiring community 

banks to do more than makes sense for them to do with their limited portfolios. 

And, so, you draw a line at some point that seems sensible, but 

there is not always in supervisory practice a radical difference. 

There is a gradation of differences in what the expectations are. 

There are some things that do vary when you cut across a line that 

has been established in the statutory sense, like $50 billion. But, 

let me just say—— 

Senator HELLER. Governor, let me ask you a question—— 

Mr. TARULLO. Yes. 

Senator HELLER. ——because I do not have a lot of time. You 

floated the idea of raising that to $100 billion. 

Mr. TARULLO. Mm-hmm. 

Senator HELLER. Do you endorse that? 

Mr. TARULLO. I endorse it in the sense that with stress testing, 

in particular, I think that is the one area where the administrative 

flexibility we have got seems not to allow us to do something that 

we think is a win-win on all sides. 

Senator HELLER. Do you think risk matters or size? Which matters more, measuring risk or the size of the capital—— 

Mr. TARULLO. Well, the two interact with one another, obviously, 

because the riskiness associated—the larger the institution, a given 

15 

quantum of riskiness associated with that institution’s portfolio 

will translate into a greater or lesser impact on the community and 

on the country. So, you really have to take the two things together. 

Senator HELLER. You mentioned in your testimony that there 

was a lot of cost in these stress tests, a lot of stress to the agencies, 

obviously, quite a bit for the banks themselves. Is there a better 

way? Is there a better way that the Feds could be more transparent, perhaps communicate better to these regional banks as to 

what your expectations are? 

Mr. TARULLO. Oh, I think we have got a substantial back and 

forth with the community banks—excuse me, the regional banks. 

We have frequent meetings at the supervisory level before, during, 

and after the stress tests. With respect to this group, the $50 to 

$100 billion group, we have met with them on several occasions 

and will again once the supervisory letters go out to try to, to the 

degree we can, to tailor things to make the expectations a little 

clearer. So, sure, there is always more that can be done. 

Senator HELLER. Just one more follow-up question, or just one 

last question. Do you think it is necessary to have a new living will 

every year if there are no material changes in a bank’s organization? 

Mr. TARULLO. Well, you do not necessarily have to have a new 

one every year, and as Chairman Gruenberg was noting, we do 

have a gradated set of requirements. I think for the largest institutions, it is almost inevitable that there are going to be changes that 

one wants to take into account on an annual basis, just the same 

way we update stress tests and we update other things. 

Senator HELLER. Governor, thank you. 

Mr. Chairman, thank you. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Thank you all for 

being here. 

I agree with Ranking Member Brown, that while certain regional 

banks may pose different risks than the too big to fail banks, that 

Dodd-Frank already gives the Fed a great deal of discretion to tailor its regulation and supervision to account for these differences. 

Where there is discretion, I do not think Congress should take 

away that discretion from the Fed and simply exempt certain large 

regional banks from increased Fed scrutiny. That is a recipe for 

missing the buildup of excessive risk in the financial system and 

it reflects the kind of ‘‘let the banks run free’’ mindset that created 

the last financial crisis. I just do not want to go there again. 

Now, we have heard a lot today about ways to roll back DoddFrank, but surely there are areas where we need to strengthen 

Dodd-Frank to address new concerns or to address old problems 

that were previously overlooked. 

Governor Tarullo, are there specific steps that you think Congress should take to strengthen or complement Dodd-Frank? 

Mr. TARULLO. Well, Senator, there are certainly discrete areas 

that would be worthy of consideration. Let me mention one, which 

probably many of you read about in connection with the commodities issues that have been looked at by this Committee. 

You know, there is a provision, Section 4(o), of the Bank Holding 

Company Act which exempts two institutions, essentially, from the 

16 

restrictions on commodities activities that are generally applicable 

to bank holding companies. This resulted from an anticipatory 

grandfathering clause in the Gramm-Leach-Bliley Act. It basically 

said, if any institution becomes a bank holding company at some 

point in the future, they can continue to engage in all the commodities activities they have been engaging in, and as all of you know, 

two such entities did become bank holding companies as a result 

of the crisis. 

So, right now, those two firms are, by statute, allowed to engage 

in the extraction and transportation of potentially highly combustible materials with substantial risks associated with them. I think 

it would be very much worth considering treating those two firms 

the way we treat all other bank holding companies. 

Another thing that certainly occurred to me when I was back 

teaching banking law was that the structure of civil money penalties that we have right now puts dollar limits on those civil 

money penalties that are basically on a daily basis, you know, for 

each day that you can find the violation, and there are two issues 

there. 

One, the caps had to be set by the Congress with smaller banks 

in mind, obviously. So, the caps, particularly that middle tier cap, 

is really quite low. I think it is $37,000 a day for certain forms of 

safety and soundness problems where there was a recklessness associated with it. And, as you can imagine, that does not allow for 

the kind of penalty that would have an impact on a much larger 

institution. So, that is one issue. 

A second related issue is it is not quite clear to me why a thing 

should be calibrated on the number of days that the violation was 

in place as opposed to the relative seriousness of it. 

So, Senator, if the Committee was thinking in terms of discrete 

changes on all sides, I think it would be worth revisiting that so 

that our civil money penalty authority is effective for very large institutions. 

Senator WARREN. Thank you very much, Governor Tarullo. I 

hope that the Chairman will be looking into concerns about the 

banks taking on more risks by speculating in commodities like aluminum and gold and oil, and also about increasing civil money penalty caps as two more ways to try to reduce risk in the system. 

Since the day Dodd-Frank was enacted, banks have been looking 

for ways to chip away at it, roll it back. But, if anything, the last 

5 years have shown that we need to strengthen our financial reforms. The too big to fail banks have grown bigger than ever and 

banks take on new kinds of risks every day. Just last summer, the 

Fed and the FDIC declared that if any one of 11 banks started to 

falter, they would require a taxpayer bailout to avoid bringing 

down the entire financial system. If Congress thinks enough time 

has passed to reopen Dodd-Frank, then we should consider ways to 

protect taxpayers and the economy, not grant give-aways that further tilt the playing field toward the bigger banks and make our 

financial system less safe. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

17 

I do not think there is a single community in the United States 

today that can consider themselves to have an opportunity to grow 

unless they have access to capital, to be able to borrow money, to 

be able to magnify what they could otherwise do with the resources 

at hand. We have got about 300 towns, small towns, in South Dakota. On a day-to-day basis, they are impacted by the availability 

of their small town banks to be able to loan money. 

If you look at what has happened since Dodd-Frank, there is a 

continued concern expressed in many rural communities about the 

additional cost of compliance, and that cost of compliance, while it 

has been laid out because of a failure, I am not so sure that the 

failure has occurred in the banks that serve many of our small and 

regional communities. And, yet, we still talk about the need to 

identify a particular $50 billion number as the right number. 

I am just curious, when you take a look at it, and in this particular case, Governor, I would like to start with you, there is clearly a need to consider the impact to the economy with the availability of credit versus the need to protect the financial system that 

we have in place today. What is the impact—and you see this, you 

have discussed it regularly—how is the growth in our economy 

going based upon the ability of communities throughout the United 

States to access credit, and is it being impacted by the reduction 

in the availability of credit based upon the need for more capital 

at the bank level? 

Mr. TARULLO. Senator, it is obviously always a difficult matter 

to disentangle all the causes of a particular phenomenon, but I 

would say that at this juncture, the areas in which credit intermediation has seemed a bit sluggish probably have as much to do 

with demand for credit, meaning the relative amount of growth in 

the economy, growth in wages, which produces consumer demand, 

and the lingering effects of the crisis and the Great Recession, 

which caused many households and businesses to have to repair 

their own balance sheets where they had a lot of debt. 

I think, actually, the efforts that the three agencies in front of 

you have made to boost the capital of all of our banks will, over 

time, provide a much sounder basis for providing that credit intermediation because they are going to be strong and stable institutions. 

Marty was referring earlier to an institution that got itself in so 

much trouble that it was not able to provide that credit intermediation long before the FDIC had to shut it down. They had already 

reduced their activities. So, I think in that sense, we are headed 

in the right direction. 

The compliance cost issue that you note is a real one, though, for 

the community banks, in particular. That is why I advocated that 

the Congress adjust some of the limits on us in raising our small 

bank holding company exception, and I was delighted that you 

acted as quickly as you did in doing so. And, we will continue to 

look for ways to reduce compliance burden on smaller institutions 

that, again, just is not worth it for the safety and soundness benefits. I think we are all looking to try to do that. 

Senator ROUNDS. Gentlemen. 

Mr. CURRY. Let me just elaborate on the cost and trying to eliminate some unnecessary burden on community banks. That has realVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
18 

ly been a focus of the three agencies, particularly in the EGRPRA 

context that we are currently engaged in, where we are actually reviewing rules and regulations and statutes to see whether there is 

an undue or unnecessary burden, particularly on the community 

bank sector. 

From a supervisory standpoint, we are constantly looking at our 

community bank division at the OCC, and how we can do a better 

job in supervising and being less intrusive and creating additional 

direct and indirect burden reductions for small community banks, 

particularly in rural areas. 

We are also looking at how can we offer a means of reducing the 

costs for necessary regulatory burden. The OCC issued a white 

paper on the opportunities for collaboration. We think that may be 

particularly helpful for smaller institutions that can share a compliance officer, share some of those costs that necessary regulation 

may be imposing upon them. 

Senator ROUNDS. Sir. 

Mr. GRUENBERG. Senator, briefly, two points. One, the FDIC 

issues a quarterly banking profile every 3 months on the condition 

of the industry. The industry has been gradually improving now for 

several years and community banks’ performance in particular has 

been improving. The banking industry, generally, and community 

banks in particular have made efforts over these last several years 

to strengthen their capital and liquidity. We actually believe that 

they are well-positioned to take advantage of expanding credit demand and credit opportunities. Hopefully, if we get some increased 

lift from the economy, our banks should be well-positioned to respond to that. 

On the community bank side, though, I think there is, as has 

been mentioned by my colleagues, particular reason to take a look 

at regulatory burden and ways we can simplify and reduce costs for 

community banks to better enable them to respond to the credit demands from their communities. We are undertaking this EGRPRA 

process, which is really a comprehensive review of this. I do think 

there are going to be a number of ways that we are going to be 

able to come forward to suggest reducing regulatory costs, particularly for smaller institutions. 

Senator ROUNDS. Thank you. 

Mr. Chairman, I know my time has expired. I would just make 

the point that as we talk about the regulations involved in these 

banks and where they go, the one thing that seems to be lacking 

is a discussion about the impact, the economic impact on the entire 

economy, the whole thing, with whether or not when these banks 

can provide the necessary capital to businesses and individuals 

across the entire program of rural and urban areas. I think that 

should be an integral part of any discussion that we have about the 

regulation on these institutions. 

Chairman SHELBY. The Senator is absolutely right. This is going 

to be part of the discussion and should be part of your concern, all 

three regulators, the impact on the economy, everything. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. 

19 

Good morning to the panel. Thank you for taking the time to 

have this conversation. Mr. Chairman, thank you for holding this 

hearing, very important hearing—— 

Chairman SHELBY. I apologize for skipping you, Senator Menendez. 

Senator SCOTT. ——about the adequacy of the current asset 

threshold for considering a bank to be a systemically important financial institution. 

For me, as I translate it into what I think is important for my 

constituents back at home in South Carolina, this is really about 

the cost and the availability of small loans and consumer credit at 

home in South Carolina. Many of my constituents are served by a 

number of regional banks because they can travel throughout the 

State or the region and have access to banking services and ATMs. 

So, it is really a simple process for most of my constituents. 

A regional bank, for my constituents, is a community bank with 

simple operations that simply expanded its footprint. We are not 

talking about the Wall Street banks. We are talking about banks 

that serve South Carolina that did not—did not—contribute to the 

financial crisis. 

We have heard a lot of conversation today already about the $50 

billion threshold, whether it is necessary and if it by itself is important for us to consider using that. I think Senator Heller asked a 

question about $49 billion versus $50 billion, what is the difference 

in the business operations, and your question had a lot to do with 

complexity and interconnectivity, it sounded like to me. 

I personally would consider no asset threshold and designation 

on a case by case basis in a process that uses objective risk data 

and gives a bank clear notice of what it can do to choose or not 

to choose to be a SIFI. If objective criteria were used, I think many 

banks would amend their behavior to avoid SIFI-land, so to speak. 

They would be able to choose whether to become less risky on their 

own or allow the regulators to make that decision. 

Governor Tarullo, I appreciate the Fed’s efforts to date to tailor 

supervision, but I think they are no substitute for raising the $50 

billion threshold. Some supervision stress testing, in particular, has 

certain fixed compliance costs at a bank. The big banks can weather these costs more easily than smaller regional banks that serve 

my constituents, as I have described earlier. So, these fixed compliance costs become like a regressive tax to my folks in South Carolina. You referred to the cost as considerable challenge in your testimony, and that regressive tax is passed right on to everyday 

South Carolinians. 

In light of this outcome, do you believe that the $50 billion asset 

threshold for prudential standards and stress testing is too low, 

and my second question is, has the Fed done any cost-benefit analysis on the stress test requirement for banks right around that $50 

billion bubble, as Senator Heller talked about earlier? 

Mr. TARULLO. Senator, what I have been trying to suggest is that 

with respect to those banks around that size, it is what I described 

as a win-win situation because this is not a case in which we have 

to tradeoff some safety and soundness benefits against compliance 

costs. I think this is a case in which, for a $50 or $60 or $70 billion 

bank, our normal supervisory processes, the capital requirements 

20 

that we have all put in place, the examinations that one of our 

three agencies does, will provide adequate protection for that kind 

of institution. So, that is where I think the nub of the issue is. 

I do want to say, I certainly agree with you on the issue of relative amount of burden for smaller and regional banks, and I 

would just supplement that by saying that, again, we do want all 

banks to be safe and sound, because when the economy turns down 

and the balance sheets of all banks look worse, as they always do, 

because they have to reserve more, some loans go into nonperforming status, we want to make sure that every one of those 

banks is in a position to continue to lend to the businesses and the 

households that are still going to need credit. And that is why we 

want them to have these buffers, to protect the Deposit Insurance 

Fund, but also to make sure that they are viable institutions. 

The bigger they get, just sheerly in asset terms—when you have a $300, $350, $400 billion bank, think how many States that bank’s 

operations cover, how many households and businesses are dependent on that bank being able to provide the credit. So, that is the 

other thing to keep in mind, but it does not detract from any of the 

points that you made. 

Senator SCOTT. I think you make a very good point there, sir. I 

will tell you, though, that having been in business for myself for 

a long time, about 15 years, the fact of the matter is that the market changes. The business cycles change. The threat and the challenges to a business changes. And, so, the business itself should go 

through the process of, as we call in this hearing, the living wills— 

should go through the process of understanding and appreciating 

it, the risk that they have to their consumers, as well. 

I think the question that we are really talking about has more 

to do with SIFIs. So, it is, in fact, economically on the Nation as 

a whole, and what those thresholds should be. 

I do appreciate the fact that you and I both see the fact that 

smaller banks that have very consistent profiles of risk—the question that I would have for you is, if those banks—should those 

banks go through an annual testing, or should they be every other 

year? Would you recommend it or suggest that if the banking business model does not change, that the costly annual reporting 

should be the same or not? 

Mr. TARULLO. Well, there may be a couple of different issues 

there. In terms of the stress testing, if one is going to be in the 

stress testing, it does make sense to do it annually. The systems 

have to be in place year-round no matter what. The cost is spread 

over the course of the year. Resolution plans, some other things, 

may be susceptible to going biannual rather than annual. But, I 

think on the stress testing itself, as I said, it is probably more of 

a binary decision. You are either in or you are out. 

Senator SCOTT. Thank you. 

Chairman SHELBY. Thank you. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

You know, from my perspective, regional and midsized banks are 

different from the smallest community banks and credit unions, 

and the largest, as well, most complex financial companies. During 

the crisis, we saw how institutions like Countrywide, Washington 

21 

Mutual, IndyMac, that were outside the largest view, but not considered small, could impose stress on the financial system and costs 

on taxpayers. At the same time, midsized and regional banks generally have different structures, activities, risk profiles from the 

largest institutions. 

So, I recognize, as someone who sat here during that whole period of time and was part of the Wall Street reform legislation, that 

no legislation is perfect, and the Wall Street Reform Act is no exception. As stockholders and our regulators gain experience with 

the rules, I think we can and should look for ways to improve the 

law. We should be open to calibration, however, in both directions, 

areas where protections may need to be strengthened and areas 

where the law may need careful tailoring to reduce costs of compliance and unintended consequences. 

As the Committee considers whether to make changes to the 

Wall Street reform law, a law that many on this Committee fought 

and bled for, I hope we can strike the right balance between reducing compliance costs without undermining regulatory objectives. 

That would give business sufficient freedom to operate, but at the 

same time ensure strong protections for taxpayers, consumers, and 

investors. 

And, as our economy continues to recover and parties get 

through the initial costs of complying with the new rules, I also 

hope we can distinguish between the impacts of new regulations as 

opposed to other external factors that may be affecting access to 

credit or business performance. For me, that is the framework in 

which I come to these hearings and these issues with. 

So, with that as my objectives in mind, I have a few questions 

for our witnesses, who I appreciate both your service and your testimony here today. 

Let me ask the three of you, you discussed in your testimony 

some of the steps your agencies have taken to tailor regulation and 

supervision for banks and bank holding companies within the enhanced prudential standards regime based on the different types of 

risks and challenges they present. And, while it is true that a bank 

does not have to engage in derivatives or complicated trading operations to create risk for taxpayers on the financial system—making 

bad loans can be enough, obviously—the appropriate supervisory 

tools may be different if a bank has a relatively simple organizational structure and transparent activities. 

Can you discuss how your agencies take into account factors such 

as organizational structure and activities when making decisions 

about how to tailor your regulatory and supervisory standards. 

Mr. CURRY. I think we do, and the particular area that I would 

like to focus on is what our expectations are for risk management. 

There, we are taking a very tailored approach to that individual institution. We are looking at their ability to identify the level of 

risks inherent in their business lines, what types of mechanisms do 

they have in place to detect and to address those issues and to basically have a strong, independent, credible risk management function that is buttressed by an equally strong audit function and 

strong corporate governance. That is a highly tailored view, basically focusing in on the structure of the institution, and by its very 

nature is tailored. 

22 

Mr. TARULLO. Yes, Senator. I would endorse what Tom just said, 

and let me just add that I think this is probably true for all three 

of our agencies. I know it is true in ours, which is to say when you 

think about what supervisory portfolio a bank belongs in, the asset 

amount is the starting point, but if you see a smaller institution 

that is engaged in derivatives activities to a substantial degree, we 

will change the kind of supervision that we do with that institution 

and hold them to different kinds of risk management standards. 

But, by the same token, we do not want to say, OK, so all banks at $50 billion have to meet these supervisory expectations, because, 

in many instances, the risk is just not present in any significant 

degree. 

The point all three of us were making in our testimony, is that 

in our regulation, by definition, something we do, we put in place, 

those are the rules people have to abide by. Our supervision, which 

is the important supplement to that regulation, is where I think we 

all exercise a lot of discretion in the kinds of expectations based on 

not just group but individual firm profiles, as well. 

Senator MENENDEZ. So, when we have a, well, I will call it private panel, I think it is next week, they would say that they feel 

that they are—— 

Mr. TARULLO. Oh, I suspect—— 

Senator MENENDEZ. ——supervised in a way that is tailored in 

accordance with their realities of their organization and their functions? 

Mr. TARULLO. I suspect a large number of bankers will think 

that we all pay a bit too much attention to them, but I think that 

is what you all want us to do, actually, is to be paying attention. 

I think when they can identify areas in which efficiencies can be 

gained through the supervisory process, not undermining our supervisory and regulatory ends of safety and soundness, I think we 

are certainly very receptive to those, and that is what we will continue to do. 

Senator MENENDEZ. Well, let me ask—— 

Mr. TARULLO. I cannot guarantee you that banks are going to 

come and say they think we are just fine. 

[Laughter.] 

Senator MENENDEZ. I did not expect that, either. 

Let me, if I may, Mr. Chairman, just follow up in a different— 

a follow-on question. As the Committee considers proposals to 

change financial stability measures, it is important, in my view, to 

distinguish between those that are aimed to reduce costs or prevent 

unintended consequences, which I would be inclined to support, 

and those that would create opportunities to evade or roll back fundamental protections. 

Very clearly, not every proposal, I think, will be pure in its motives, but there are areas where improvement is possible without 

undermining core regulatory objectives or effectiveness. For example, are there ways to harmonize reporting requirements or streamline reporting based on the type of activities an institution is engaged in? 

Mr. TARULLO. There are, and we are thinking about some of 

them, part of them through the FFIEC, the Council that all three 

of us belong to, some of them we are doing with bank holding comVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
23 

panies reporting to the Fed. The only thing I will point out there, 

Senator, is that there sometimes is a bit of a tradeoff, which is to 

say if we get more information, that sometimes allows us to have 

fewer examinations. And, if the bank is giving us regular information in a broad swath of areas, our supervisors can sit in a particular Reserve Bank and do an assessment which does not require 

them to go out, do the onsite, which takes up a lot more of the 

bank’s resources. So, sometimes the net supervisory burden can be 

reduced a little bit paradoxically through providing more information. 

Having said that, we are looking for ways to streamline all the 

reporting. 

Senator MENENDEZ. Mr. Gruenberg. 

Mr. GRUENBERG. Senator, there has been a particular focus 

through the FFIEC on the call reports and ways we may be able 

to identify to reduce reporting burden while still providing the information necessary to carry out supervision. I think there may be 

other opportunities. 

Just to come back to your previous question on the resolution 

plans or living wills, we have really made an effort, particularly for 

those institutions under $100 billion, are to focus 165 plans on the 

nonbank, the holding company operations. For those under $100 

billion, it is really the bank that is the principal activity of the institution. We have provided tailored plans for that universe of institutions that really simplifies the reporting and planning obligation, and almost all the institutions under $100 billion have taken 

advantage of that tailored plan opportunity. 

Senator MENENDEZ. Thank you, Mr. Chair. Thank you for your 

answers. I just hope you will remain open to looking at all of those 

possibilities, because I think there is a desire by many of us to see 

that happen. 

Thank you, Mr. Chairman. 

Chairman SHELBY. I am going to recognize Senator Cotton, and 

then Senator Cotton, I believe that Senator Scott would want you 

to yield to him for a quick question. 

Senator SCOTT. Just a quick question. 

Chairman SHELBY. I will recognize you, and then it is up to you 

to yield, if you so choose. 

Senator COTTON. I would be happy to yield to Senator Scott. 

Senator SCOTT. No pressure. Thank you, sir. 

Governor Tarullo, just one final thought and question for you. It 

is possible that a regional bank with $51 billion in assets could 

offer traditional simple banking services abroad as a service to its 

U.S. customers who travel. I would like your thoughts, please, as 

to whether the $10 billion in foreign exposure threshold for advance approaches regulation should remain a strict asset size test 

or whether it, too, should be based on factors that better predict 

systemic risk. 

Mr. TARULLO. If you have a $50 billion bank that has $10 billion 

in international activity, that does not look like an oversized community bank. That is going to be a different kind of banking institution. My sense is that the $10 billion in foreign activity has 

worked pretty well in identifying a relatively small number of institutions that do pose different kinds of risks than a bank with a 

24 

similar size balance sheet, almost all of whose activities are domestic. 

Senator SCOTT. Thank you. Thank you, sir. 

Chairman SHELBY. Senator Cotton. 

Senator COTTON. Thank you. 

I will note that since Senator Scott and I share an apartment 

building and my wife is due with our first child in 5 weeks, I am 

going to take that as a return favor for one night of babysitting. 

[Laughter.] 

Senator SCOTT. For the sake of your child, I would say no. 

Senator COTTON. That is a fair point. 

[Laughter.] 

Senator COTTON. So, thank you, Mr. Chairman, thank you, gentlemen, for appearing before us today. 

When you consider the automatic SIFI threshold as a somewhat 

arbitrary number, but we have to draw arbitrary numbers in the 

law all the time, at $50 billion, you could imagine that it is also 

going to be diminishing in a way that monetary thresholds do but 

nonmonetaries do not because of inflation or expanding economy. 

The same could also be the case for other Dodd-Frank thresholds. 

And, I would just like to go down the line, if we could, and ask if 

you would support indexing thresholds in Dodd-Frank to inflation, 

to real GDP growth, or to any other kind of economic measure. 

Mr. TARULLO. It is probably worth considering, Senator, but as 

the very last clause of your question suggested, it may not be as 

straightforward a matter to think what you would index it to. You 

know, would you index it to inflation, to GDP, to the total size of 

institutions, to concentration. So, I think it is worth thinking 

about, but my instinct is that inflation probably would not be the 

right thing to index it to. 

Senator COTTON. Do you have an instinct on what would be? 

Mr. TARULLO. If there were one, it would be GDP, but I would 

want to think about that a little bit more. 

Senator COTTON. OK. Mr. Curry. 

Mr. CURRY. I think indexing has some opportunities, as Governor 

Tarullo mentioned. But, again, I think the theme in our testimony 

is that we think that the asset threshold is one consideration in determining whether or not an institution is systemically significant 

or of heightened supervisory concern. There is a balance, I think, 

between the activities that the bank is engaged in and other factors 

that have to be considered, as well. 

Mr. GRUENBERG. Senator, I think, conceptually, it is worth thinking about, and in some sense is hard to argue against, although the 

methodology may raise issues. On the other side of that, the clarity 

of having a clear threshold without adjusting it, in particular if 

there are sensitivities—because when you have a threshold, there 

are always going to be institutions on both sides of it. Having a 

clear threshold is clear and transparent and understood and may 

have some value. 

I do think the key issue goes to providing some flexibility for the 

agencies, if you are going to set a threshold, to differentiate among 

firms that may be above the threshold, because wherever the 

threshold is, there are clearly going to be distinctions. Even if addiVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
25 

tional scrutiny is warranted, you want an ability to distinguish 

among the institutions to apply the appropriate standards. 

Senator COTTON. OK. Governor Tarullo, I was not here in September. I was in the House, on the Financial Services Committee. 

But, in your opening statement to this Committee last September, 

you had said, quote, ‘‘There could also be some benefit from some 

statutory changes. One would be to raise the current $50 billion 

asset threshold that determines which banks are in the systemic 

category,’’ end quote. Just 2 days ago, in front of my old colleagues 

on the House Financial Services Committee, Secretary Lew said 

that he opposes raising that threshold. 

Did Secretary Lew or any other administration official take issue 

with your statement in front of the Financial Services Committee 

last fall? 

Mr. TARULLO. Not directly to me, no, and I have not read the 

transcript of what Secretary Lew said. I read the press accounts of 

it. I think he was pointing to the discretion, the administrative 

flexibility that we do have. What I have been particularly focused 

on is the stress testing threshold. 

Senator COTTON. When he says, not directly to you, indirectly 

to—— 

Mr. TARULLO. Well, he is saying—— 

Senator COTTON. ——anyone on your team, or—— 

Mr. TARULLO. No. Whatever he may be saying publicly, yes. That 

is—— 

Senator COTTON. OK. Thank you. I will yield back the balance 

of my time. 

Chairman SHELBY. Governor Tarullo, conceptually, would you 

support the redrawing of the threshold lines, but with the discretion remaining with the regulator to decide whether a particular 

institution is systemic or not? In other words, you would keep that 

power. 

Mr. TARULLO. Again, Senator, so long as we have the understanding that systemic is broader than just the failure of that institution bringing down the financial system. 

Chairman SHELBY. Oh, yes. 

Mr. TARULLO. I think that is when the thinking of the threshold 

makes some sense. The two qualifications, again, are, one, and I 

think you just said this, that our discretion should under no circumstances be removed to do more, and second, this has not come 

up in the hearing today, but just so that we remind ourselves of 

what is important for the Congress to do. 

What the Congress has done following each financial crisis that 

we have had in the country, whether it was Latin American debt 

crisis in the early 1980s—— 

Chairman SHELBY. Sure. 

Mr. TARULLO. ——late 1980s, S&Ls, Congress has stepped in and 

tried to adjust the behavior of the regulators and, in some sense, 

made some things mandatory. Prompt corrective action—and you 

were there, Senator to help with that—prompt corrective action 

made sure that we all had to take action when capital fell below 

a certain standard because of what happened in the S&L crisis. 

In Dodd-Frank, what the Congress said was there are some 

areas where we think the regulators should be required to take acVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
26 

tion. That is, they want to take some discretion out of our hands 

and say, you must have this kind of regulation. I think that is a 

sound idea. The only issue, to me, is really around those midsized 

regionals with the stress testing. 

Chairman SHELBY. Mr. Curry, in September of last year, you 

were quoted in an American Banker article as saying, quote, and 

I am going to read it to you, ‘‘Fifty billion dollars was a demarcation at the time, but it does not necessarily mean you are engaged 

in that activity that the rules are trying to target. The better approach is to use an asset figure as a first screen and give discretion 

to the supervisors based on the risk in their business plan and operations. It is just too easy to say, this is the cut-off. I am a little 

leery of just a bright line.’’ Do you stand by your words? 

Mr. CURRY. Yes, Senator. 

Chairman SHELBY. Thank you. 

Mr. CURRY. I do think that is the approach that we have consistently applied at the OCC. Thank you. 

Chairman SHELBY. Well, I do not think anybody up here has 

even, I hope, not even alluded to weakening your power to regulate. You have got to do that. We are just trying to give some relief 

where we think maybe it is—you could still intervene in a dangerous situation. And, if you do your job, you will. You will know, 

would you not, Governor? If you do your job as a regulator, you are 

going to know what banks are doing. 

Mr. TARULLO. I hope so. 

Chairman SHELBY. Yes. Do you agree with that, Mr. Curry? 

Mr. CURRY. Yes. 

Chairman SHELBY. Senator Warren mentioned a minute ago that 

two banks were grandfathered in in the legislation. Of course, that 

is politics. We know that. And, they are still in the commodities 

business. Does that—could that pose a risk to the—systemic risk 

to the banking system? Governor. 

Mr. TARULLO. So, I think it is—— 

Chairman SHELBY. Could it? 

Mr. TARULLO. You need to understand what Section 4(o) permits. 

Chairman SHELBY. Uh-huh. 

Mr. TARULLO. What Section 4(o) permits is not just, for example, 

taking title to physical commodities, the part of trading—— 

Chairman SHELBY. Sure. 

Mr. TARULLO. It would allow the banks, for example, to own oil 

tankers, to own copper mines, to own extractive industries themselves. And, I think the issue here for you and for us is that with 

some of these activities, which certainly seem substantially to 

breach the wall between banking and commerce, they are the sort 

of things that are very hard to get a risk management handle 

on—— 

Chairman SHELBY. Oh, yes. 

Mr. TARULLO. ——as a banking regulator. When you are talking 

about oil spills or you are talking about collapses of mines, it is 

very different from—— 

Chairman SHELBY. You would have to regulate commerce, in a 

way. 

Mr. TARULLO. That has been my concern, Senator. 

27 

Chairman SHELBY. Uh-huh. But, you only have two banks that 

can do that. 

Mr. TARULLO. That is correct. 

Chairman SHELBY. And the others, no matter how big or how 

powerful or how well run, they could not do that. 

Mr. TARULLO. That is correct. 

Chairman SHELBY. OK. Senator Brown, do you have any more 

questions? 

Senator BROWN. Thank you. A couple more questions. Thank 

you, Mr. Chairman. 

Thank you for your comments about the commodities. We did a 

couple of hearings about that last year. I appreciate the Fed’s engagement in that, and those were done some years ago, and those 

two institutions became bank holding companies, which changed 

all that. But, the comment you made about risk, oil tankers and 

others, to the safety and soundness—I mean, to the financial stability of the system is really important, so thank you for that comment. 

Comptroller Curry, a question for you. We have talked both privately and publicly about the culture and environment of the banks 

and how banks pretty clearly over the years paid less attention to 

risk than they do now, partly because of regulators, partly because 

we maybe have a more independent OCC now, partly because of 

your insistence in discussions with them about a risk officer. We 

hear complaints, though, from banks about the time that their 

management and their board members dedicate to compliance 

issues and risk management. As we have discussed institutions 

tend not to like business lines that do not bring in revenue, understandably. 

Talk to us for a moment about the value to institutions and to 

the public of having more management and board time spent on 

risk management. 

Mr. CURRY. Thank you for raising the subject, Senator. We think 

it is critical in terms of having an internal framework that identifies risks and takes appropriate steps to mitigate those risks. We 

also think it implicates corporate governance. You need to have a 

board that is capable and willing to interject and to challenge management. So, we pay close attention to the dynamic between the 

board and operating management to make sure that there is a 

healthy risk culture. 

Another area that we have emphasized is improving the stature 

of the Chief Risk Officer of an organization and their ability to help 

guide the decision making at the organization. 

At the OCC, we have promulgated heightened standards that 

apply to the largest banks in our portfolio that mandates an appropriately robust risk management system for those institutions. 

And, it also has enforcement mechanisms tied into it so that it has 

teeth. 

In terms of culture, it is really important, and this is something 

we look at in the context of risk management, is making sure that 

management of the organization establishes and enforces standards 

of conduct, that the failure to do so can result in significant financial and reputational losses to the institution. 

28 

Senator BROWN. Thank you. And, stature, the risk officer’s stature, I assume, implies everything from compensation to seat at the 

table, the background with a company, to all the things that make 

that person one among equals in decision making at the highest 

levels of all kinds of banks, correct? 

Mr. CURRY. Exactly, and that is what we are looking at from a 

corporate governance standpoint. 

Senator BROWN. Thank you. 

Governor Tarullo, I have been concerned about banks’ ability to 

calculate their own internal risk weights and use that to game 

their capital ratios. It is a bit like a professor letting her students 

grade their own tests. Last week, you released the latest round of 

bank stress tests. Once again, the largest banks’ internal loss projections were significantly rosier than the Fed’s calculations. The 

industry complains this makes the tests a black box, of sorts. It 

seems they want the Fed to provide them with the answer key for 

the stress test. 

Talk about the value of the Fed’s projections. Why should we 

continue to rely on the independent evaluations? 

Mr. TARULLO. OK. So, a couple of things there, Senator. First, I 

like the conclusion, which is you should continue to rely on our 

evaluations, because the evaluations we do are, first off, consistent. 

Second, they include an appropriate conservativism, I think, which 

is thinking on behalf of the country about what could happen under 

unlikely but still plausible adverse scenarios. 

I think some of the reasons why you see those gaps between our 

assessment and some of the other banks vary, and some of those 

reasons are some cause for concern and others are less cause for 

concern. If you see the gap and it is because, for example, as you 

know, we do not allow the assumption in our stress test that banks 

would stop paying dividends and stop making share repurchases 

even during a stress period. That experience that we all went 

through in 2007 and 2008 was one that we all took to heart, and 

so when we do our very conservative assumptions, we assume that 

the banks will do what some of them did in 2007 and 2008, which 

is continue to distribute capital. 

In their own idiosyncratic stress testing, banks sometimes do not 

do that, and it would be, believe me, a sensible thing for the bank 

to do, to cut back on its capital distribution. So, if that is a reason 

for variance, that is not of great concern to us because we put it 

in the supervisory test, but they have got to test for other purposes. 

When we see problems that result from the inability of a bank 

to understand its own risks, to aggregate the data, that is when we 

are concerned and that is why we will come forth with supervisory 

action. 

So, the reason why you want to look at our tests is because, obviously, we do not have an interest in shifting the loss parameters 

to help a particular bank’s balance sheet, because we do it in a way 

that is comparable for everybody. We review it and we subject what 

we are doing to the review of outside experts. We try to improve 

it every year, and I believe it really has become a critical supervisory instrument for us, for the bank’s own self-assessment, for 

the ability of outside analysts and investors to understand banks, 

and ultimately for all of you to keep watch on us. 

29 

Senator BROWN. Thank you. 

If I could have one more question, Mr. Chairman. 

Chairman SHELBY. Go ahead. 

Senator BROWN. And, each of you give brief answers to this, if 

you would. Some have suggested the advanced approach regime is 

out of date and should only apply to the global, systemically important banks. Do you all continue to support the current advanced 

approaches regime? Mr. Gruenberg, start with you, a brief answer, 

and just go right to left. 

Mr. GRUENBERG. Yes, Senator. 

Senator BROWN. Yes. OK. 

Mr. Curry. 

Mr. CURRY. Yes. 

Mr. TARULLO. I do, Senator. 

Senator BROWN. OK. Thanks. Thank you. 

Chairman SHELBY. Senator Rounds. 

Senator ROUNDS. Mr. Chairman, thank you. 

I have got to go back into this a little bit. Very seldom do we 

have an opportunity to have a group like this in front of us and 

not at least delve a little bit into the causal effects that we see in 

the economy today. I think some of the numbers that I had seen 

over a period of years was that since 2009, there has been an increase in employment in the financial services area of about 

300,000 individuals throughout the United States, which would 

seem to be a positive thing, and which normally would suggest economic growth, and yet the vast majority of those 300,000, if my 

numbers are correct, were in the areas of compliance, which most 

individuals would suggest is not an indication of economic growth 

but one of costs directly back into the financial services sector. 

If my numbers are correct, and if I am wrong, I would have you 

correct me, but if those numbers are correct, it seems to me that 

we add a burden within the financial services industry, we add an 

additional cost to all of those businesses and individuals that would 

need those services, because they are going to get passed on. 

But, second of all, and there is a second part that it seems that 

we sometimes do not look at, and that is the regulatory impact on 

the economy itself. Governor, I am curious, because the Federal Reserve clearly has recognized that even after a time in which we had 

a significant slowdown in the economy, our expectation would be 

that there would be an increased period of economic activity, and 

yet over the last 4 or 5, 6 years, the Fed has continued to maintain 

a very inexpensive money policy, seemingly because there is the 

need to make this economy start to move. 

Any possibility that the cause and effect of this is the DoddFrank Act and the impact that it has had on the availability of capital because of the regulatory environment that financial institutions find themselves in today? 

Mr. TARULLO. So, Senator, let me just begin by saying that you 

did not really ask a question about monetary policy, but we are 

still in our blackout period, so I am not going to comment on the 

monetary policy. 

Senator ROUNDS. OK. 

Mr. TARULLO. Happy to comment on the regulatory issue, and let 

me begin with the compliance point. And, here again, I want to 

30 

really draw a distinction between compliance function at a community bank and compliance function at those largest institutions, 

and I am going to do it, if you will bear with me a bit, with an 

anecdote. 

Back in 2009 at the height of the crisis, when we were conducting the first set of stress tests, we sent out in February a request for data to, at that time, the 19 largest financial institutions 

in the country. Some of those institutions more or less immediately 

were able to get back to us and say, here is the data, and it proved 

to be pretty accurate. Most took a while and then eventually gave 

us something that was more or less accurate. And, some of them, 

after a number of days, were still unable to put together an accurate picture of what their risks actually were. 

The lesson I drew from that is that the inattention to risk management, which is the most important compliance function for the 

safety and soundness of institutions, had led to a situation in 

which the banks did not really know their own risks, much less 

allow us to do the job that Chairman Shelby just indicated we need 

to do, which is to go in and make sure we understand those risks. 

I understand that there has been a big run-up in the number of 

people devoted to compliance at these institutions, at the big institutions, and I do not know whether the precise numbers are what 

we need, but I do know we needed a lot more attention to that. 

Now, on the other end of the spectrum, I am concerned when I 

hear stories like the following, which is a community banker—I 

think he was about a $2 billion bank—and he said, ‘‘You know, we 

thought we would merge. We did merge with a bank just about our 

size. We thought that in doing so we would get some benefits of 

some modest economies of scale, serving a slightly bigger area 

while retaining the same business model.’’ And, then, he sort of 

shook his head and he said, ‘‘So, our examiner comes in and says 

to us, ‘Well, you are twice as big now. You should add a second 

compliance officer.’ ’’ That was what he was trying to avoid, and I 

have a lot of sympathy for that. I do have a lot of sympathy for 

that. 

Tom mentioned the EGRPRA process. I think that is where our 

efforts are really focused, because the size of the portfolios of those 

community banks are sufficiently small that they cannot amortize 

those costs very well. But, this is, again, where I really do want 

to draw a distinction between the most complex institutions with 

heavy capital market activities, on the one hand, and the small 

bank, as Senator Scott was saying, in Columbia or Charleston or 

Orangeburg, that has a very limited base of assets. 

Senator ROUNDS. I think in many cases, on the smaller banks, 

they feel as if their examiners are looking at them saying a lot of 

the things are coming downstream to them that are being applied 

to the larger banks. 

Mr. TARULLO. The trickle down? The supervisory trickle-down effect? 

Senator ROUNDS. I had a similar discussion with a small town 

banker who literally said, ‘‘Look, I cannot do home loans anymore. 

I just cannot do the compliance.’’ And, when you start to see that 

in small communities in places like South Dakota, these are not 

the folks that were involved in any of the problems to begin with, 

31 

and yet they are the ones that are feeling the impact of this regulatory activity. 

Thank you, sir. Thank you. 

Chairman SHELBY. I am looking at the systemic importance indi- cators reported by large U.S. bank holding companies, $5 billion or 

more, and if you look at the methodology in the OFR report—this 

is part of it, we have referred to it—to measure systemic risk, the 

table here shows those two banks that we were talking about that 

were grandfathered in as being significantly more systemically 

risky than the regional banks to our system. Do you think that the 

methodology that the OFR report works here? Do you have a comment? 

Mr. TARULLO. Senator, here, I would say the Basel Committee 

methodology, the Fed methodology for our SIFI surcharge, and the 

OFR methodology would all agree with that proposition. 

Chairman SHELBY. OK. Thank you. 

Do you disagree with that? 

Mr. CURRY. No. 

Mr. GRUENBERG. No, Mr. Chairman. 

Chairman SHELBY. Thank you. I think we all basically agree 

here, we want banks that are healthy, that are strong, capitalized, 

well regulated, well managed, because without that, the economy, 

as Senator Rounds alluded to, it is all tied into our economy, the 

ability to access capital. Everybody—you, as regulators, know this. 

So, let us hope we can work together and try to give some relief 

here. Although Dodd-Frank was legislation, no legislation is perfect. Even Senator Menendez referred to that. Maybe we can work 

together. I hope so. 

This concludes the hearing. 

[Whereupon, at 11:39 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

32 

PREPARED STATEMENT OF DANIEL K. TARULLO 

GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

MARCH 19, 2015 

Chairman Shelby, Ranking Member Brown, and other Members of the Committee, 

I appreciate the opportunity to testify on the threshold in section 165 of the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for application of enhanced prudential standards to bank holding companies. In my testimony this morning I will try to provide, from a regulator’s perspective, some context 

for the Committee’s consideration of this subject by explaining how the Federal Reserve has differentially implemented prudential regulations based on the size, scope, 

and range of activities of banking organizations, as well as how we have organized 

our supervisory portfolios. In both our supervisory and regulatory practices, we are 

pursuing a tiered approach to prudential oversight. 

Regulatory Differentiation in the Dodd-Frank Act 

Traditionally, statutes creating prudential regulatory requirements or authorities 

generally took what might be termed a unitary approach. That is, the statutes simply made a particular requirement or authority applicable to banks or banking organizations generally, with few clear distinctions based on the characteristics of the 

regulated entities. The Federal banking agencies did adopt some regulations with 

requirements that applied only to larger institutions. And, as I will describe a bit 

later, through supervisory practice they administered some statutory requirements 

differently based on the size of banks and the scope of their activities. But the starting point was a more or less similar set of statutory requirements. 

The Dodd-Frank Act explicitly broke with this traditional approach by creating 

prudential requirements that vary with the size or systemic importance of banking 

organizations. Of particular importance is the Dodd-Frank Act emphasis on financial stability, both in markets generally and with respect to the largest financial 

firms, which had been associated with market perceptions that they were too big 

to fail. The law created some new authorities for financial regulators and instructed 

regulators to use authorities they already had to put in place regulations to contain 

systemic risk. As to regulations applicable to individual firms, the Dodd-Frank Act 

creates thresholds for various prudential regulations at asset sizes of $1 billion, $10 

billion, and $50 billion. Of special note is that section 165 of the Dodd-Frank Act 

requires the Federal Reserve to establish enhanced prudential standards for bank 

holding companies with total assets of $50 billion or more and other financial firms 

designated as systemically important by the Financial Stability Oversight Council. 

Among other areas, these standards include capital, liquidity, risk management, 

resolution planning, and single-counterparty credit limits. Of particular significance 

is the section 165 requirement that these enhanced standards increase in stringency 

depending on the size, interconnectedness, role in credit intermediation, and other 

factors specified in the law. In addition to these enhanced, graduated standards, section 165 requires that firms with greater than $50 billion in assets be subject to 

annual supervisory stress tests. 

The Federal Reserve has implemented the section 165 requirement of graduated 

stringency for enhanced prudential standards by creating what are, in effect, three 

categories within the universe of banking organizations with $50 billion or more in 

assets. As required by statute, all firms within this universe are subject to basic enhanced standards. Firms with assets of between $50 billion and $250 billion are 

subject only to these basic enhanced standards. Firms with at least $250 billion in 

assets or $10 billion in on-balance-sheet foreign assets are also subject to more 

stringent requirements, including the advanced approaches risk-based capital requirements, the supplementary leverage ratio, the countercyclical capital buffer, and 

the fullscope liquidity coverage ratio. 

Finally, the eight U.S. bank holding companies that have been designated as global systemically important banking organizations will be subject to an additional set 

of regulatory requirements. An enhanced supplementary leverage ratio, equally applicable to all eight firms, has already been adopted. We are also working on two 

requirements that will vary in stringency even among these eight firms, based on 

their relative systemic importance. One is the set of risk-based capital surcharges 

for which we issued a notice of proposed rulemaking late last year. The other, on 

which we anticipate issuing a notice of proposed rulemaking in the coming months, 

is a long-term debt requirement designed to support effective orderly resolution 

processes. 

In sum, the stringency of the Federal Reserve’s prudential regulations increases 

in proportion to the systemic importance of the banking organizations. With this 

tiered approach to regulation, the Federal Reserve aims not only to achieve the 

33 

1For more information on the LISCC, see http://federalreserve.gov/bankinforeg/large-institution-supervision.htm. 

Dodd-Frank Act goal of mitigating risks to U.S. financial stability, but to do so in 

a manner that limits regulatory costs and the expenditure of supervisory resources 

where not needed to promote safety, soundness, and financial stability. 

Tiered Regulatory and Supervisory Experience 

The Federal Reserve also takes a tiered approach to supervision. We organize the 

firms we supervise into portfolios based predominately, although not exclusively, on 

asset size. We have four such groups: (1) community banking organizations, which 

are generally those with $10 billion or less in total assets; (2) regional banking organizations, which have total assets between $10 billion and $50 billion; (3) large 

banking organizations, which have total assets over $50 billion but are not among 

the largest and most complex banking organizations; and (4) firms overseen by the 

Large Institution Supervision Coordinating Committee (LISCC), which are the largest and most complex banking organizations. 1

As with tiered regulation, our tiered supervision is intended to take into account 

differences in business models, risks, relative regulatory burdens, and other salient 

considerations. Where specific regulatory goals for the different portfolios vary, the 

supervisory programs reflect those differences. And even where the goals are similar 

across portfolios, supervisory programs should nevertheless take account of the differences among the firms in the four portfolios. In general, we shape our supervisory 

expectations for each portfolio by considering the increase in safety and soundness 

that we are likely to achieve through a specific practice or requirement, in light of 

the regulatory costs for the banking organizations in the portfolio and the impact 

that the stress or failure of those institutions would likely have on credit intermediation, the deposit insurance fund, and financial stability. 

So, for example, there are heightened expectations with regard to corporate governance for large banking organizations that are not applied to regional or community banking organizations. Among other areas, the Federal Reserve expects the 

boards of directors of these larger firms to set direction and oversight for revenue 

and profit generation, risk management, and control functions; to ensure that senior 

management has the expertise and level of involvement required to manage core 

business lines, critical operations, banking offices, and other material entities; and 

to maintain a corporate culture that emphasizes the importance of compliance with 

laws, regulation, and consumer protection. While strong corporate governance is important at all banking organizations, it is vital at large banking organizations, given 

that their systems and operations are typically much broader and more complex 

than those of the smaller-scale and more localized regional and community banking 

organizations. 

While asset size is the principal determinant of the general supervisory program 

for a banking organization, other factors are taken into account as appropriate. For 

example, if a regional banking organization were to become involved in activities 

typically undertaken only by larger banking organizations, we might add to that 

firm’s supervision an expectation or practice drawn from the large banking organization portfolio. Moreover, in determining which banking organizations belong in 

the LISCC portfolio, the Federal Reserve has focused on the risks to the financial 

system posed by individual firms—size has not been the dispositive factor. For example, three large banking organizations are not in that portfolio, even though they 

have larger balance sheets than the processing- and custody-focused bank holding 

companies that are in the LISCC portfolio. The stress or failure of these large, essentially regional banking organizations could have a serious effect on credit intermediation across a significant part of the country and, in some situations of generalized stress, might have consequences for the financial system as a whole. However, 

we judge that the functions of the two processing- and custody-focused LISCC firms 

implicate systemic concerns to a greater extent than the substantial balance sheets 

of the larger regionals. 

The Role of Statutory Thresholds 

As I hope by now is apparent, the Federal Reserve has done considerable work 

to tailor our supervision of banking organizations by reference to their size, business 

model, and systemic importance. Similarly, using the statutory discretion granted 

us, and frequently in cooperation with other regulatory agencies, we have also tailored the application of certain statutory requirements to different groups of banks. 

The question of statutory thresholds is thus a fairly narrow one: Does a threshold 

specify a cut-off point that is appropriate for mandatory application of a particular 

34 

regulatory requirement, taking into account whatever discretion is given to the implementing regulatory agencies? 

In answering this question, it is first worth noting the case for establishing such 

statutory thresholds. In the past, Congress has at times not simply given the banking agencies authority to engage in a particular form of prudential regulation, but 

has required that they do so. Capital regulation and prompt correction action are 

two examples. Not coincidentally, I think, congressional action followed banking crises that revealed possible shortcomings in the regulatory and supervisory structures 

that had existed preceding the crisis. In requiring certain kinds of prudential regulation, Congress was in effect protecting against memories of those problems fading 

and the consequent possibility of supervisory relaxation, which might allow for a recurrence of similar banking problems in the future. 

The creation of mandatory thresholds for certain enhanced prudential standards 

is an important advance in the traditional congressional role of specifying a set of 

mandatory regulations. This statutory structure recognizes the substantially divergent risks presented to the economy and the financial system by the potential stress 

or failure of banking organizations of different sizes and with different activities, 

while preserving considerable discretion for the banking agencies in implementing 

those regulations. Here again, statutory enactment of mandatory measures for 

banking organizations of a certain size or systemic importance serves as a form of 

safeguard against the erosion of prudential oversight that could occur were predominant reliance to be placed on the details of firm-specific supervision, which are 

sometimes hard for the public to discern. Removal or change of such thresholds, as 

with generally applicable prudential requirements, will thus require congressional 

action and an occasion for considered public debate on the merits of such change. 

Experience to date, however, suggests that there are some statutory thresholds 

that might bear reexamination. One pertains to the applicability of some DoddFrank Act provisions to community banks. For example, the Volcker rule and the 

incentive compensation requirements of section 956 of the Dodd-Frank Act are directed at concerns generally present only with larger institutions, but the Volcker 

rule by its terms applies to all banking organizations, and the incentive compensation provisions apply by their terms to all banking organizations with $1 billion or 

more in assets. The banking agencies have done their best to tailor the application 

of these rules to smaller banks and, indeed, to make clear the limited extent to 

which they should affect those banks. However, some compliance effort on these 

rules is still needed at community banks. Raising the asset threshold for these two 

requirements to $10 billion would eliminate this compliance burden, the cost of 

which is probably not worth whatever incremental prudential benefits might be 

gained at these small banks. Even in the relatively unusual circumstance in which 

a practice at a smaller bank might raise safety and soundness concerns, the supervisory process would remain available to rectify any problems. 

The second threshold that is worth discussing is the $50 billion level established 

by section 165 of the Dodd-Frank Act. As noted earlier, the import of this threshold 

is to require enhanced prudential standards and supervisory stress testing for banking organizations whose assets exceed that amount. As also noted, the Federal Reserve has tailored those standards in accordance with the increasing stringency requirement of section 165, so that they are more flexible for institutions closer to the 

$50 billion threshold and most demanding for the eight firms of global systemic importance. It has been somewhat more difficult to customize supervisory stress testing. While some elements of the test, such as the market shock and singlecounterparty default scenarios, are applied only to larger firms, the basic requirements for the aggregation and reporting of data conforming to our supervisory 

model and for firms to run our scenarios through their own models do entail substantial expenditures of out-of-pocket and human resources. This can be a considerable challenge for a $60 billion or $70 billion bank. On the other side of the ledger, 

while we do derive some supervisory benefits from inclusion of these banks toward 

the lower end of the range in the supervisory stress tests, those benefits are relatively modest, and we believe we could probably realize them through other supervisory means. 

These are the factors that lay behind my suggestion last year that it might be 

worth thinking about the level of this threshold, which I understand to be a purpose 

of today’s hearing. That said, I want to emphasize a few points. First, consideration 

of potential increases in the threshold for mandatory prudential measures should 

not remove the discretion of the banking agencies to require additional measures— 

including such things as more capital or liquidity—for specific firms or groups of 

firms in appropriate circumstances. That is, while it is sensible to limit mandatory 

measures for classes of firms where most banks in that class are unlikely to present 

35 

Statement Required by 12 U.S.C. §250: The views expressed herein are those of the Office 

of the Comptroller of the Currency and do not necessarily represent the views of the President. 

a particular kind of risk, it would be very ill-advised to preclude supervisors from 

requiring such measures of firms where that risk may become more of a concern. 

Second, any consideration of raising the threshold to take account of the factors 

I mentioned earlier should not extend to removal of the application of enhanced 

standards and other rules to the largest banking organizations. As senators and regulators have discussed many times before in this Committee, the tasks of combating 

the reality and the perception of too big to fail, and of vulnerabilities in broader financial markets, are crucial and ongoing. 

Conclusion 

The innovation in the Dodd-Frank Act that requires tiered regulation is central 

to our shared goals of protecting financial stability and ensuring the availability of 

credit. Smaller banks do not pose risks to financial stability, though they can suffer 

collateral damage when stress builds throughout the financial system. And, while 

enhanced prudential standards are important to ensure that larger banks can continue to provide credit even in periods of stress, some of those same enhancements 

could actually inhibit credit extension by rendering the reasonable business models 

of middle-sized and smaller banks unprofitable. The Federal Reserve will continue 

to use statutory authorities to calibrate our regulation and supervision to the risks 

posed by the different classes of banks, avoiding a one-size-fits-all approach. We 

and, I believe, many others are committed to the dual goals of protecting systemic 

stability and fostering the efficient intermediation of credit by the overwhelming 

majority of American banks that do not pose systemic or far-reaching risks. 

Thank you. I would be pleased to take any questions you may have. 

PREPARED STATEMENT OF THOMAS J. CURRY 

COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY

MARCH 19, 2015 

Introduction 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, 

thank you for the opportunity to discuss the Office of the Comptroller of the Currency’s (OCC) experience with, and views on, section 165 of the Dodd-Frank Act and 

the OCC’s approach to tailoring our regulatory and supervisory expectations, especially with respect to regional banks, which include banks in the OCC’s midsize program and many of those in our large bank program. Because the focus of section 

165, as it applies to the banking sector, is on bank holding companies, almost all 

of the authorities under this section are assigned to the Board of Governors of the 

Federal Reserve System (Federal Reserve). The OCC’s only direct rulemaking authority under section 165 is with respect to the company-run stress test requirements under section 165(i)(2). Otherwise, the OCC’s role in section 165 is limited 

to a consultative one on matters affecting national banks. Nonetheless, the provisions of section 165 are extremely important to the OCC and our supervisory programs as national banks typically comprise a substantial majority of the assets held 

by bank holding companies with consolidated assets of $50 billion or more. Indeed, 

the national bank is typically the dominant legal entity within each company. Consequently, the provisions of section 165 have a significant effect on national banks 

and our supervisory oversight of those institutions. 

My testimony today provides a brief overview of the key provisions of section 165 

as they apply to bank holding companies. I then describe how the OCC’s supervisory 

and regulatory tools complement and support the objectives of these provisions. As 

I will discuss, the OCC believes that the supervisory areas addressed in section 165 

for which the Federal Reserve is required to develop prudential standards are fundamental to safe and sound banking and are essential elements of our ongoing supervision of national banks and Federal savings should reflect the complexity and 

risk of a bank’s activities. This is why the OCC has tailored its supervisory programs into three distinct portfolios—community banks, midsize banks, and large 

banks. It is also why the OCC seeks to tailor the application of our supervisory 

standards and expectations to the size and complexity of each individual bank. In 

some areas, such as capital standards, we do this by setting explicit regulatory minimums that apply to all banks. We then augment these minimums with additional 

requirements for the largest banks that reflect the complexity and risk of their operations and their interconnections with the broader financial market. In other areas, 

36 

such as corporate governance, while our approach is more qualitative, we have higher expectations and apply higher standards as the complexity, risk, and scale of 

banks’ operations increase. The OCC believes this flexibility to tailor supervisory 

and regulatory requirements to reflect our assessment of the risk of individual 

banks promotes an effective and efficient supervisory regime while minimizing 

undue burden. 

As the Committee considers and evaluates the effectiveness of section 165 and the 

banks that are affected by its provisions, I would stress two points. First, I believe 

it is essential for the OCC to retain the ability to tailor and apply our supervisory 

and regulatory requirements to reflect the complexity and risk of individual banks. 

We believe our risk-based supervisory approach is consistent with the tailored application that Congress provided for in section 165. While a bank’s asset size is often 

a starting point in our assessment of appropriate standards, it is rarely, if ever, the 

sole determinant. For this reason, we would be concerned with any proposal that 

would inhibit our ability to apply specific regulatory or supervisory tools to an individual bank or group of banks. We need access to these tools should we, through 

our supervision, determine that they are needed to address a bank or a group of 

banks’ risk. Second, although the OCC in our role as the primary supervisor of national banks. We would be happy to work with the Committee should the Committee 

determine that changes are needed to make the application of section 165 more effective and efficient. 

Overview of Key Section 165 Standards and Requirements for Bank Holding Companies 

Section 165(a) of the Dodd-Frank Act authorizes the Federal Reserve on its own 

or pursuant to recommendations from the Financial Stability Oversight Council 

(FSOC) to establish certain heightened prudential standards for bank holding companies with total consolidated assets equal to or greater than $50 billion. Standards 

are required for five areas: (1) leverage and risk-based capital; (2) liquidity; (3) overall risk management; (4) resolution plan and credit exposures; and (5) concentration 

limits. The Federal Reserve is given discretionary authority to establish standards 

for: (1) contingent capital; (2) enhanced public disclosures; (3) short-term debt limits; 

and (4) any other prudential standards that the Federal Reserve, on its own or pursuant to a recommendation by the FSOC, determines are appropriate. 

Section 165 directs that the standards should be more stringent than those required for bank holding companies that do not present similar risks to the financial 

stability of the United States (and thus, are not covered by section 165), and that 

the standards should increase in stringency, based on various qualitative risk factors. It also permits the standards to be tailored to individual or groups of banking 

organizations based on their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve deems appropriate. Finally, section 165 permits the Federal Reserve, pursuant to a standards 

related to the discretionary standards, listed above, and for the resolution plans and 

credit exposure reports. 

Section 165 has two provisions that use a lower asset threshold than is used for 

the other prudential standards. These are the stress testing requirements in section 

165(i) and the risk committee requirements in section 165(h). Under section 165(i), 

all banks and other financial companies (not just bank holding companies) with assets above $10 billion are required annually to conduct and publicly report the results of stress tests using scenarios developed by their primary Federal financial 

regulator. Section 165(h) requires publicly traded bank holding companies with assets of $10 billion or more to establish risk committees. 

The Complementary Nature of Section 165 and the OCC’s Supervisory Approach 

A key principle underlying section 165 is that the rigor of capital, liquidity, and 

risk management standards and the intensity of supervisory oversight should increase with, and be reflective of, the risk and complexity of a banking organization’s 

structure and activities. This principle also underlies the OCC’s risk-based supervisory approach and programs, and it is one that we fully support. 

As noted earlier, we begin the application of this principle by structuring our 

bank supervisory activities into three distinct portfolios—community banks, midsize 

banks, and large banks—to reflect the inherent differences in these banks’ business 

models, risk profiles, and complexity. In this respect, while asset size is important 

and is generally the starting point in determining to which portfolio an individual 

bank is assigned, it is not the sole determinant. Thus, for example, while most 

banks in our midsize portfolio fall into the $8 to $50 billion range, model, corporate 

structure, and risk profile that are distinctly different from the banks in our large 

37 

1See September 9, 2014, testimony of Comptroller of the Currency Thomas J. Curry before 

the Committee on Banking, Housing, and Urban Affairs available at: http://www.occ.gov/newsissuances/congressionaltestimony/2014/pub-test-2014-122-written.pdf for a fuller description of 

these enhancements. 2See OCC Bulletin 2010-13 available at http://www.occ.gov/news-issuances/bulletins/2010/ 

bulletin-2010-13.html. 3Generally, these are banks with $250 billion or more in total consolidated assets or $10 billion or more in onbalance-sheet foreign exposure and any consolidated bank or savings association subsidiary of one of these companies that, at the bank level, has total consolidated assets 

of $10 billion or more. 

bank portfolio, which typically have national or global operations, complex corporate 

structures, extensive activities and exposures in the wholesale funding and capital 

markets, or are part of a larger, complex financial conglomerate. This flexible approach, which considers both size and risk profiles, allows us to transition and adjust the intensity of our supervision and our supervisory expectations as a bank’s 

profile changes. 

Our midsize bank program is an example of how we tailor and transition our supervisory expectations as a bank’s size and complexity increase. As noted above, the 

banks in this program range in size and, at the low end, may overlap with some 

banks that are in our community bank portfolio, and at the high end, overlap with 

banks that are in our large bank portfolio. Banks in our midsize portfolio are generally those that through growth and mergers have acquired a regional or 

multistate footprint, yet do not present the same level of complexity and interconnectedness as banks in our large bank program. A major focus of midsize supervision is ensuring that as the scale of each bank’s operations and activities increases, so does its risk management and control systems. Banks in this program 

have a dedicated examiner-in-charge and a team of specialists for each core risk 

function that provide ongoing monitoring and continuity in our supervision of each 

bank. The individual examination program for each bank is tailored and may, depending on the complexity and risks of the particular area, draw examiners and 

blend examination procedures from both our community bank and large bank programs. 

As I noted earlier, section 165 requires the development of prudential standards 

in various areas, including capital, liquidity, risk management, and concentrations. 

The OCC has, areas that we expect national banks and Federal savings associations 

to meet. This combination is reflected, for example, in our approach to assessing 

capital adequacy. Through regulation, we have established explicit, minimum capital requirements that all banks must meet. There are additional, explicit requirements related to market and operational risks that generally apply only to the largest banks that have significant trading activities and complex operations. Our capital rules, however, also allow us to require additional capital based on factors that 

are not explicitly covered by our quantitative capital rules, including for example, 

exposures to interest rate risk and credit concentrations. Our supervisory guidance 

on interest rate risk, concentrations, and capital planning set forth factors that examiners will consider when determining whether additional capital may be needed. 

The ability to require an individual bank to maintain capital levels above regulatory 

minimums is especially important when we encounter banks, regardless of size, that 

may have significant concentrations in certain loan products or market segments. 

In the aftermath of the financial crisis, we, along with our U.S. and international 

supervisory colleagues, have been revising the standards for many of the areas specified in section 165 to strengthen those that apply to the most complex banking organizations and to better align them with risk in the system. With respect to leverage and risk-based capital requirements, the OCC, along with the Federal Reserve 

and the Federal Deposit Insurance Corporation (FDIC), has implemented a number 

of enhancements that improve the quality and quantity of capital and impose additional, more stringent leverage ratio requirements for large, internationally active 

banks, with even higher levels required for the largest, most systemically important 

banks. 1 With respect to liquidity, in 2010, the OCC and other banking agencies 

issued an interagency policy statement on funding and liquidity risk management. 2

Consistent with our risk-based approach to supervision, the policy applies to all 

banks, but specifies that the processes and systems used by banks will vary, based 

on their size and complexity. In 2013, we, the Federal Reserve, and the FDIC augmented these qualitative expectations with explicit, quantitative liquidity requirements for large, internationally active banks. 3 These requirements, known as the 

Liquidity Coverage Ratio (LCR), set minimums for the level of high-qualityliquidassets that a bank must maintain to cover its projected net cash outflows over a 

38 

4See OCC Bulletin 2014-51 available at http://www.occ.gov/news-issuances/bulletins/2014/ 

bulletin-2014-51.html. 5See September 9, 2014, testimony noted above. 

30-day period. 4 The Federal Reserve separately adopted a modified LCR requirement for bank holding companies and savings and loan holding companies without 

significant insurance or commercial operations that, in each case, have $50 billion 

or more in total consolidated assets but are not internationally active. 

As I discussed in an appearance before this Committee in September, 5 the OCC 

also has taken action to apply heightened risk management and corporate governance standards to large institutions. These standards address: comprehensive and 

effective risk management; the need for an engaged board of directors that exercises 

independent judgment; the need for a robust audit function; the importance of talent 

development, recruitment, and succession planning; and a compensation structure 

that does not encourage inappropriate risk taking. We issued the final standards as 

a new appendix to Part 30 of our regulations. Part 30 codifies an enforcement process set out in the Federal Deposit Insurance Act that authorizes the OCC to prescribe operational and managerial standards and is a valuable part of our regulatory toolbox. Under Part 30, if an insured bank fails to satisfy a standard, the 

OCC may require it to submit a compliance plan detailing how it will correct the 

deficiencies and how long it will take. Rather than prescribing a ‘‘one-size-fits-all’’ 

remedy, this approach allows us and the bank to implement actions that are appropriate to the bank’s unique circumstances. The approach, however, does not diminish our ability to take more forceful action: we can issue an enforceable order if the 

bank fails to submit an acceptable compliance plan or fails in any material way to 

implement an OCC-approved plan. 

We believe the expectations for a strong risk management culture, effective lines 

of defense against excessive or imprudent risk taking, and an engaged board of directors as set forth in our heightened standards are essential for all large banks 

with significant operations and size. We also recognize, however, that systems and 

processes that a bank may need to implement, such as culture and risk controls, 

will vary according to the size and complexity of the bank. Thus, our expectations 

for how the largest banks implement these standards are substantially more demanding than our expectations for banks with less extensive operations. This difference in expectations is reflected in the phased-in compliance dates we established 

such that the guidelines were effective immediately for the largest banks but are 

being phased-in for the other banks covered by our standards with lesser risk profiles. While our heightened standards generally apply to all insured national banks 

and Federal savings associations with consolidated assets equal to or greater than 

$50 billion, our rule provides us with the flexibility to determine that compliance 

with the standards is not required if a bank’s operations are no longer highly are 

consistent with and complement the objectives of section 165, and they illustrate 

how we are able through our supervisory processes to apply, tailor, and adjust our 

standards to risks inherent in individual banks. 

The only provision of section 165 for which the OCC has direct rulemaking authority is section 165(i)(2) with respect to the annual company-run stress testing requirements. As previously noted, this provision mandates that all banks with consolidated assets of more than $10 billion must conduct stress tests using at least 

three sets of economic conditions. The OCC issued its final rule to implement section 165(i)(2) in October 2012. The rule, which is consistent with and comparable 

to the stress test rules issued by the other Federal banking agencies, establishes 

methods for conducting stress tests and requires that the tests be based on at least 

three different economic scenarios (baseline, adverse, and severely adverse). The 

rule also requires banks to report test results in the manner specified by the OCC 

and publish a summary of their results. 

In drafting the rule to implement this provision of the Dodd-Frank Act, the OCC, 

FDIC, and Federal Reserve worked to tailor the requirements as appropriate for the 

smaller, less complex firms. Thus, banks with consolidated assets of between $10 

and $50 billion are only required to conduct the stress test once per year (versus 

the two submissions per year required for bank holding companies with consolidated 

assets in excess of $50 billion). They also do not have to develop their own stress 

testing scenarios, nor are they subject to a supervisory stress test. The rule provided 

a delayed implementation date for banks with between $10 and $50 billion in assets, thereby giving them time to prepare for their first stress test submission. The 

rule also extended the annual due date for submission of stress test results three 

months beyond the submission date required for banks with consolidated assets in 

excess of $50 billion, thereby providing the smaller banks more time in which to 

conduct their stress tests and report the results. Additionally, we developed a subVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
39 

6See OCC Bulletin 2012-14, available at: http://www.occ.gov/news-issuances/bulletins/ 

2012/bulletin-2012-14.html. 7See OCC Bulletin 2012-33, available at: http://www.occ.gov/news-issuances/bulletins/ 

2012/bulletin-2012-33.html. 

stantially abbreviated data reporting template for these smaller banks, thereby reducing the amount and granularity of data the institutions are required to provide 

to the agencies. The abbreviated data reporting templates have a further benefit of 

permitting these banks to publish simpler, less detailed public disclosures relative 

to the requirements for the $50 billion and over banks. The rule also delayed for 

a year the initial public disclosure for banks with less than $50 billion in assets. 

In addition, to reduce burden and avoid duplicative regulatory requirements, the 

OCC’s rule permits disclosure of the summary of the stress test results by the parent bank holding company of a covered institution if the parent holding company 

satisfactorily complies with the disclosure requirements under the Federal Reserve’s 

company-run stress test rule. 

As the OCC noted in its final rule, the annual stress tests required by the DoddFrank Act are only one component of the broader stress testing activities that the 

OCC expects of banks. The OCC’s more general and qualitative expectations are set 

forth in the 2012 interagency guidance on ‘‘Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets.’’ 6 That guidance emphasizes that stress tests should be an integral part of a bank’s risk management 

and capital planning framework and tailored to a bank’s exposures, activities, and 

risks. It also sets out the broad principles that we expect banks to adhere to when 

conducting their stress tests. We have tailored separate guidance and tools for community banks to use to assess the impact of various stress scenarios on concentrations within their loan portfolios. 7

Conclusion 

The OCC is committed to a supervisory approach that appropriately tailors supervisory expectations and requirements to the scale, complexity, and risks of individual and groups of banks. We have structured our supervisory programs in a manner that allows us to adjust effectively and efficiently the intensity of our supervisory oversight as a bank’s risk profile changes. We have used our regulatory tools 

and authorities to enhance and apply more rigorous capital, liquidity, and risk management requirements to large banks whose size, scope of operations, complexity, 

and interconnections with other financial institutions pose more risk to financial 

stability. While the OCC has taken most of these actions outside of Dodd-Frank section 165 authorities, we believe our actions and supervisory approach are consistent 

with and complement the objectives of section 165. As the primary supervisor of the 

Nation’s largest banks, the OCC has a vital interest in ensuring a robust regime 

of prudential standards for these institutions and retaining the tools we have to effect such a regime. 

PREPARED STATEMENT OF MARTIN J. GRUENBERG 

CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

MARCH 19, 2015 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, I appreciate the opportunity to testify on the regulatory regime for regional banks. My 

testimony will begin with a profile of the large companies subject to the enhanced 

prudential standards requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). I then will describe how regulators have implemented the enhanced standards requirements. Finally, I will review various considerations important to any discussion of proposals to change these requirements. 

Profile of Large Companies Subject to Section 165 

Section 165 of the Dodd-Frank Act requires the Board of Governors of the Federal 

Reserve System (Federal Reserve) to establish enhanced prudential standards for 

certain groups of institutions. The Act defines these institutions to include bank 

holding companies with total consolidated assets equal to or greater than $50 billion 

and nonbank financial companies that the Financial Stability Oversight Council 

(Council) has designated for Federal Reserve supervision. 

The companies that meet the $50 billion threshold for enhanced prudential standards represent a significant portion of the U.S. banking industry. As of December 

31, 2014, 37 companies with combined assets of $15.7 trillion reported total assets 

greater than $50 billion. They owned a total of 72 FDIC-insured subsidiary banks 

40 

and savings institutions, with combined assets of $11.3 trillion, or 73 percent of 

total FDIC-insured institution assets. 

The 37 companies represent a diverse set of business models. The four largest companies, holding combined assets of $8.2 trillion, are universal banks that engage 

in commercial banking, investment banking, and other financial services. Another 

20 companies holding $3.3 trillion in assets are diversified commercial banks that 

essentially take deposits and make loans. The remaining 13 companies, with a combined total of $4.2 trillion in assets, do not engage predominantly in traditional commercial banking activities. These companies include two investment banks, four custodial banks, two credit-card banks, one online bank, and four specialty institutions. 

The 37 institutions include eight U.S.-owned institutions that are designated as 

global systemically important banks by the Financial Stability Board. They include 

the four universal banks, two investment banks, and two custodial banks. 

By way of contrast, the FDIC’s Community Banking Study of December 2012 

profiled institutions that provide traditional, relationship-based banking services. 

The FDIC developed criteria for the Study to identify community banks that included more than a strict asset size threshold. These criteria included a ratio of 

loans-to-assets of at least 33 percent, a ratio of core deposits-to-assets of at least 

50 percent, and a maximum of 75 offices operating in no more than two large metropolitan statistical areas and in no more than three States. Based on criteria developed in the Study, 93 percent of all FDIC-insured institutions with 13 percent of 

FDIC-insured institution assets currently meet the criteria of a community bank. 

This represents 6,037 institutions, 5,676 of which have assets under $1 billion. The 

average community bank holds $342 million in assets, has a total of six offices, and 

operates in one State and one large metropolitan area. 

The FDIC does not have a similar set of criteria to identify regional banks. Regional banks may be thought of as institutions that are much larger in asset size 

than a typical community bank and that tend to focus on more traditional activities 

and lending products. These institutions typically have expanded branch operations 

and lending products that may serve several metropolitan areas and they may do 

business across several States. Regional banks are less complex than the very largest banks, which may have operations and revenue sources beyond traditional lending products. 

The 20 holding companies identified as diversified commercial banks—the subset of the 37 institutions with total assets over $50 billion noted earlier—have a traditional banking business model that involves taking deposits and making loans, and 

they derive the majority of their income from their lending activities. Operationally, 

however, the 20 diversified commercial banks are much more complex than traditional community banks. They operate in a much larger geographic region, and have 

a much larger footprint within their geographic region. 

Of the 20 holding companies: 

• Seven have total assets from $50 billion to $100 billion. They have an average 

of nearly 700 offices, and operate in 12 States and 22 large metropolitan areas. 

• Nine have assets from $100 billion to $250 billion. They have an average of 

nearly 1,200 offices, and operate in 12 States and 24 large metropolitan areas. 

• Four have total assets from $250 billion to $500 billion. They have an average 

of nearly 1,800 offices, and operate in 18 States and 24 large metropolitan 

areas. 

The operational complexity of these 20 diversified commercial bank holding companies presents challenges that community banks do not. Supervisory tools and regulations need to match the complexity of these large $50 billion plus organizations. 

Any particular institution at the lower to middle part of the grouping may be a dominant player within a particular geographic or market segment and as such may require greater regulatory attention. If there would be a failure, the resolution of any 

one of these organizations may present challenges. In addition, the failure of more 

than one of these institutions during a period of severe financial stress could 

present challenges to financial stability. 

Implementation of Enhanced Prudential Standards 

Section 165 provides the FDIC with explicit responsibilities in two substantive 

areas related to prudential supervision: resolution plans and stress testing. In both 

areas, the FDIC has tailored requirements to fit the complexity of the affected institutions. 

Resolution Planning 

Resolution plans, or living wills, are an important tool for protecting the economy 

and preventing future taxpayer bailouts. Requiring these plans ensures that firms 

41 

establish, in advance, how they could be resolved in an orderly way under the Bankruptcy Code in the event of material financial distress or failure. The plans also provide important information to regulators, so they can better prepare for failure to 

protect markets and taxpayers. 

In 2011, the FDIC and the Federal Reserve jointly issued a final rule implementing the resolution plan requirements of Section 165(d) of the Dodd-Frank Act 

(the 165(d) rule) for bank holding companies. The FDIC also issued a separate rule 

that requires all insured depository institutions (IDIs) with greater than $50 billion 

in assets to submit resolution plans to the FDIC for their orderly resolution through 

the FDIC’s traditional resolution powers under the Federal Deposit Insurance Act 

(FDI Act). The 165(d) rule and the IDI resolution plan rule are designed to work 

in tandem by covering the full range of business lines, legal entities, and capitalstructure combinations within a large financial firm. 

Bank holding companies with $50 billion or more in total consolidated assets and 

nonbank financial companies regulated by the Federal Reserve are subject to the 

requirement to prepare resolution plans. However, the FDIC and the Federal Reserve used our statutory discretion to develop a joint resolution planning rule which 

recognizes the differences among institutions and scales the regulatory requirements and potential burdens to the size and complexity of the institutions subject 

to that rule. The joint rule also allows the agencies to modify the frequency and timing of required resolution plans. 

Our resolution plan regulations also are structured so that both firms and regulators are focused on the areas of greatest risk. Smaller, simpler, and less complex 

institutions have much smaller and simpler resolution plans than more systemic institutions, with complex structures, multiple business lines, and large numbers of 

legal entities. 

In implementing the requirement for resolution plans, the FDIC and the Federal 

Reserve instituted a staggered schedule for plan submissions to reflect differing risk 

profiles. The first group of companies required to file plans on or before July 1, 

2012, included bank holding companies with $250 billion or more in nonbank assets. 

This group comprised 11 institutions—seven U.S. bank holding companies and four 

foreign banking organizations. These institutions generally ranked among the largest institutions in the United States, although some equally large institutions with 

smaller amounts of nonbank assets, did not file in this group. 

The second group was comprised of bank holding companies with $100 billion or 

more, but less than $250 billion, in total nonbank assets. These firms submitted 

their initial resolution plans on or before July 1, 2013. The remaining companies, 

those subject to the rule with less than $100 billion in total nonbank assets, submitted their initial plans on or before December 31, 2013. 

Grouping the firms by their holdings of nonbank assets provided the agencies 

with an initial proxy for firm complexity. By delaying the submission of plans for 

those with fewer nonbank assets, less complex firms were given more time to prepare. The FDIC and the Federal Reserve also were able to focus on those firms that 

are more likely to pose serious adverse effects to the U.S. financial system should 

they need to be resolved under the Bankruptcy Code. Based on their groupings and 

measured by asset size as of December 2011, no U.S. bank holding company (BHC) 

with less than $200 billion in total consolidated assets was required to file with either the first or second group of filers. 

For their initial submissions, bank holding companies with less than $100 billion 

in total nonbank assets and 85 percent or more of their assets in an insured depository institution also were generally permitted to submit tailored resolution plans. 

Tailored resolution plans simplify the task of creating a living will by aligning it 

with the FDIC’s IDI resolution plan requirement and focusing on the firm’s nonbank 

operations. Since the initial filings, the FDIC and Federal Reserve have further recognized differences among institutions with less than $100 billion in nonbank assets 

and nearly all U.S. institutions in this category filed tailored plans. 

Though smaller firms are less systemic, appropriately tailored resolution plans or 

other enhanced prudential supervision requirements for these firms provide important benefits. Any particular institution at the lower to middle part of the grouping 

may be a dominant player within a particular geographic or market segment, and 

its failure would likely have a sizeable impact for those markets. The Deposit Insurance Fund also would face a substantial loss from the failure of even one of these 

firms. Finally, the size of these firms presents an obstacle in arranging the sale to 

another firm as only other larger firms would be likely acquirers. Therefore, the 

FDIC and Federal Reserve should continue to receive and review resolution plans 

in order to ensure that a rapid and orderly resolution of these companies through 

bankruptcy could occur in a way that protects taxpayers and the economy. 

42 

1This group consists of banking organizations with total assets of at least $250 billion or foreign exposures of at least $10 billion. 

Stress Testing 

Section 165(i)(2) of the Dodd-Frank Act requires the Federal banking agencies to 

issue regulations requiring financial companies with more than $10 billion in total 

consolidated assets to conduct annual stress tests. The statutory language governing 

stress testing is more detailed and prescriptive than the language covering other 

prudential standards, leaving the regulators with less discretion to tailor the stress 

testing process. The Act requires IDIs and BHCs with assets greater than $10 billion to conduct an annual company-run stress test, while BHCs with assets greater 

than $50 billion must conduct semiannual, company-run stress tests and also are 

subject to stress tests conducted by the Federal Reserve. The company-run tests 

must include three scenarios and the institutions must publish a summary of the 

results. 

In October 2012, the FDIC, OCC, and the Federal Reserve issued substantially 

similar regulations to implement the company-run stress test requirements. The 

FDIC’s stress testing rules, like those of the other agencies, are tailored to the size 

of the institutions consistent with the expectations under section 165 for progressive 

application of the requirements. Under the agencies’ implementing regulations, organizations in the $10 billion to $50 billion asset size range have more time to conduct the tests and are subject to less extensive informational requirements, as compared to larger institutions. Currently, 107 IDIs are subject to the banking agencies’ 

stress testing rules, with the FDIC serving as primary Federal regulator for 28 of 

these IDIs. 

Stress testing requirements are an important risk-assessment supervisory tool. 

The stress tests conducted under the Dodd-Frank Act provide forward-looking information to supervisors to assist in their overall assessments of a covered bank’s capital adequacy and to aid in identifying downside risks and the potential impact of 

adverse outcomes on the covered bank. Further, these stress tests are expected to 

support ongoing improvement in a covered bank’s internal assessments of capital 

adequacy and overall capital planning. 

Other Regulatory Standards Affecting Regional Banks 

Many of the standards required under section 165 address issues that are within 

the longstanding regulatory and supervisory purview of the Federal banking agencies. For example, with respect to banking organizations, the agencies have preexisting authority to establish regulatory capital requirements, liquidity standards, 

risk-management standards, and concentration limits, to mandate disclosures and 

regular reports, and to conduct stress tests or require banking organizations to do 

so. These are important safety and soundness authorities that the agencies have exercised by regulation and supervision in the normal course and outside the context 

of section 165. 

The FDIC’s capital rules are issued pursuant to its general safety and soundness 

authority and the FDI Act. In many cases, FDIC capital regulations and those of 

other Federal banking agencies are consistent with standards developed by the 

Basel Committee on Banking Supervision. For example, recent comprehensive revisions to the agencies’ capital rules and the liquidity coverage ratio rule incorporated 

aspects of the Basel III accord, which was developed separate and independent from, 

and mostly before, the Dodd-Frank Act was finalized. 

These capital and liquidity rules play an important role in promoting the safety 

and soundness of the banking industry, including regional and larger banks. The 

agencies’ capital rules are entirely consistent with the statutory goal in section 165 

of progressively strengthening standards for the largest institutions. As a baseline, 

a set of generally applicable capital rules apply to all institutions. A defined group 1

of large or internationally active banking organizations are subject to more extensive U.S. application of Basel capital and liquidity standards. In addition, eight 

Global Systemically Important Banks (G–SIBs) are subject to enhanced supplemental leverage capital requirements. 

Policy Considerations 

Section 165 establishes the principle that regulatory standards should be more 

stringent for the largest institutions. This idea is rooted in the experience of the financial crisis, where the largest financial institutions proved most vulnerable to 

sudden market-based stress, with effects that included significant disruption of the 

real economy. The thresholds in the enhanced prudential standards legislative 

framework state Congress’s expectation for the asset levels at which enhanced reguVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00046 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
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latory standards should start to apply, while providing for regulatory flexibility to 

set the details of how those standards should progress in stringency. 

In our judgment, the concept of enhanced regulatory standards for the largest institutions is sound, and is consistent with our longstanding approach to bank supervision. Certainly, degrees of size, risk, and complexity exist among the banking organizations subject to section 165, but all are large institutions. Some of the specializations and more extensive operations of regional banks require elevated risk 

controls, risk mitigations, corporate governance, and internal expertise than what 

is expected from community banks. We should be cautious about making changes 

to the statutory framework of heightened prudential standards that would result in 

a lowering of expectations for the risk management of large banks. 

That being said, it is appropriate to take into account differences in the size and 

complexity of banking organizations when formulating regulatory standards. The 

Federal banking agencies have taken into account such differences in a number of 

contexts separate and apart from section 165. Examples include asset thresholds for 

the interagency capital rules, trading book thresholds for the application of the market risk rule, and proposed notional derivatives thresholds for margin requirements. 

These examples and other size thresholds illustrate that precedents exist apart from 

section 165 for the application of different and heightened regulatory standards to 

larger institutions, and that different size thresholds may be appropriate for different types of requirements. Finally, many of the rules that apply to more complex 

capital market activities do not apply, as a practical matter, to the types of traditional lending activities that many regional banks conduct. 

Conclusion 

Section 165 provides for significant flexibility in implementation of its requirements. The agencies have made appropriate use of this flexibility thus far, and 

where issues have been raised by industry, we believe that we have been responsive. 

The FDIC remains open to further discussion on how best to tailor various enhanced 

prudential standards and other regulations and supervisory actions to best address 

risk profiles presented by large institutions, including regional banks. 

44 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DANIEL K. TARULLO 

Q.1. Governor Tarullo, we talked about the Federal Reserve’s 

tiering of enhanced prudential standards, however, there seemed to 

be some disagreement about how the tiering works. 

Please explain: Each enhanced prudential standard that applies to bank holding companies with $50 billion in total assets. 

A.1. In February 2014, the Federal Reserve adopted a final rule 

implementing enhanced prudential standards under section 165 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) for bank holding companies and foreign banking 

organizations, each with $50 billion or more in total consolidated 

assets (Regulation YY). For bank holding companies with total consolidated assets of $50 billion or more, Regulation YY incorporated 

as enhanced prudential standards the previously issued capital 

planning and stress-testing requirements, and imposed enhanced 

liquidity requirements, enhanced risk-management requirements, 

and a debt-to-equity limit for those companies that the Financial 

Stability Oversight Council (Council) has determined pose a grave 

threat to the financial stability of the United States. 

For a foreign banking organization with total consolidated assets of $50 billion or more, Regulation YY implemented enhanced riskbased and leverage capital requirements, liquidity requirements, 

risk-management requirements, stress testing requirements, and 

the debt-to-equity limit for those companies that the Council has 

determined pose a grave threat to the financial stability of the 

United States. In addition, it required foreign banking organizations with U.S. non-branch assets, as defined in Regulation YY, of 

$50 billion or more to form a U.S. intermediate holding company 

and imposed enhanced risk-based and leverage capital requirements, liquidity requirements, risk-management requirements, and 

capital-planning and stress-testing requirements on the U.S. intermediate holding company. 

In addition to the enhanced prudential standards in Regulation 

YY, the Board has strengthened capital requirements applicable to 

all banking organizations through comprehensive revisions to its 

capital framework (revised capital framework). Further, the Resolution Plans rule (Regulation QQ), adopted in October 2011, requires bank holding companies with assets of $50 billion or more 

and nonbank financial firms designated by the Council for supervision by the Board to annually submit resolution plans to the 

Board and the Federal Deposit Insurance Corporation (FDIC). 

Finally, as part of the liquidity coverage ratio (LCR) rule (Regulation WW), adopted in September 2014 as an enhanced prudential 

standard, the Board will apply a less stringent modified LCR requirement to bank holding companies and certain savings and loan 

holding companies that have $50 billion or more in total assets, but 

less than $250 billion in total consolidated assets or $10 billion in 

on-balance-sheet foreign exposure. As described in (b) below, the 

Federal Reserve also will apply the more stringent LCR requirement to all banking organizations with $250 billion or more in total 

consolidated assets. In addition, the banking organizations subject 

to the less stringent modified LCR requirements are required to report their LCR monthly rather than daily as required of those 

45 

1 IDI subsidiaries of covered bank holding companies must maintain at least a 6 percent supplementary leverage ratio to be considered ‘‘well capitalized’’ under the banking agencies’ 

prompt corrective action framework. 

banking organizations with $250 billion or more in total consolidated assets. 

Q.2. Each enhanced prudential standard that applies to bank hold- ing companies with $250 billion in assets or $10 billion in foreign 

exposures; and 

A.2. Regulation WW also will apply to all banking organizations with $250 billion or more in total consolidated assets or $10 billion 

or more in on-balance sheet foreign exposure (advanced approaches 

banking organizations) and to these banking organizations’ subsidiary depository institutions that have assets of $10 billion or 

more. 

Advanced approaches banking organizations are subject to 

heightened risk-based and leverage capital requirements under the 

Federal Reserve’s revised capital framework. For instance, these 

firms must reflect changes in accumulated other comprehensive income in regulatory capital, and hold an additional buffer of capital 

if the Federal banking agencies determine that the economy is experiencing excessive credit growth, as well as meet a minimum 

supplementary leverage ratio requirement of 3 percent. 

Q.3. Any other enhanced prudential standards that may apply, including the thresholds upon which that applicability is based. 

A.3. The Board has adopted risk-based and leverage capital surcharges applicable to the largest, most systemically important U.S. 

bank holding companies globally systemically important financial 

banking organizations (G–SIBs). Effective January 1, 2016 (subject 

to transition arrangements), a bank holding company that is designated as a G–SIB is subject to a risk-based capital surcharge (G– 

SIB surcharge) above its minimum regulatory capital requirements. The amount of the G–SIB surcharge is calibrated to each 

firm’s overall systemic risk. In addition, effective January 1, 2018, 

a G–SIB must maintain a leverage buffer greater than 2 percentage points above the minimum supplementary leverage ratio requirement of 3 percent, for a total of more than 5 percent (enhanced supplementary leverage ratio ). 1 Failure to maintain capital above the G–SIB surcharge or supplementary leverage ratio 

will result in restrictions on capital distributions and certain discretionary bonus payments. 

Q.4. Governor Tarullo, we talked about stress tests. 

In a submission for the record, one regional bank stated that the 

leverage a risk-based capital requirement under section 165(b) of 

the Dodd-Frank Act ‘‘is primarily manifested through higher riskbased capital standards and through the annual Comprehensive 

Capital Analysis and Review (CCAR).’’ We have heard from other 

regional banks that the Federal Reserve is using CCAR to satisfy 

165(b)’s enhanced risk-based capital and leverage standards. 

What is the legal authority for CCAR and which enhanced prudential standard does CCAR satisfy? 

A.4. In the Comprehensive Capital Analysis and Review (CCAR), 

the Federal Reserve evaluates whether a bank holding company 

46 

2Section 616(a) of the Dodd-Frank Act amended section 5(b) of the BHC Act (12 U.S.C. 

1844(b)) to specifically authorize the Board to issue regulations and orders relating to capital 

requirements for bank holding companies. 3See 12 CFR 225.8. 

4See 12 CFR part 252, subpart E. 

5See 12 CFR part 252. Regulation YY imposes risk-based capital and leverage requirements 

on U.S. intermediate holding companies of foreign banking organizations. These requirements 

are generally the same as those described above for bank holding companies. 6See 78 FR 62018 (October 11, 2013). 

has effective capital planning processes and sufficient capital to absorb losses during stressful conditions, while meeting obligations to 

creditors and counterparties and continuing to serve as credit 

intermediaries. The Federal Reserve derives its authority for CCAR 

from the Bank Holding Company Act (BHC Act) and the International Lending Supervision Act. Specifically, section 5 of the 

BHC Act (12 U.S.C. 1844) authorizes the Board to issue regulations 

and orders, and to collect and require reports from bank holding 

companies. 2 Further, the Federal Reserve’s rulemaking authority 

to set regulatory capital requirements and standards for bank holding companies is found in sections 908 and 910 of the International 

Lending Supervision Act, as amended (12 U.S.C. 3907 and 3909). 

In addition, the Dodd-Frank Act expressly directed the Federal 

Reserve to impose enhanced prudential standards on large bank 

holding companies to prevent or mitigate risks to the financial stability of the United States. These standards must include enhanced 

risk-based and leverage capital requirements, among other requirements. The capital plan rule, which governs CCAR, serves as enhanced risk-based and leverage capital standards for large bank 

holding companies. 3 In addition, the Dodd-Frank Act mandates 

that the Federal Reserve conduct annual stress tests on large bank 

holding companies to determine whether large bank holding companies have the capital needed to absorb losses in baseline, adverse, and severely adverse economic conditions. These stress tests 

are integrated into the ongoing assessments of a bank holding company’s required capital and are an important component of the annual assessment of capital plans. 4

Q.5. How is the Federal Reserve satisfying the 165(b) enhanced 

risk-based capital and leverage standards? 

A.5. The Federal Reserve has strengthened the capital requirements applied to all banking organizations it supervises and, in 

keeping with the mandate established by section 165 for progressively more stringent prudential standards to be applied to banks 

of greater systemic importance, the Federal Reserve has also established several tiers of enhanced requirements. 5 In July 2013, the 

Federal Reserve issued a final rule to comprehensively revise the 

capital regulations applicable to banking organizations (revised 

capital framework). 6 The revised capital framework strengthens 

the definition of regulatory capital, generally increases the minimum risk-based capital requirements, modifies the methodologies 

for calculating risk-weighted assets, and imposes a minimum generally applicable leverage ratio requirement of 4 percent for all 

banking organizations. 

The Federal Reserve’s capital plan rule serves as an enhanced 

risk-based capital and leverage standard by helping to ensure that 

bank holding companies with assets above the threshold estabVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
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7 A U.S. banking organization is subject to the advanced approaches rule if it has consolidated assets of at least $250 billion, if it has total consolidated on-balance sheet foreign exposures of 

at least $10 billion, if it elects to apply the advanced approaches rule, or it is a subsidiary of 

a depository institution, bank holding company, or savings and loan holding company that uses 

the advanced approaches to calculate risk-weighted assets. See 78 FR 62018, 62204 (October 11, 

2013); 78 FR 55340, 55523 (September 10, 2013); 79 FR 57725 (September 26, 2014). 8See 79 FR 24528 (May 1, 2014). In addition, all insured depository institution subsidiaries 

of such bank holding companies would be subject to an enhanced supplementary leverage ratio 

of 6 percent in order to be considered well-capitalized under the prompt corrective action framework. 9See ‘‘Regulatory Capital Rules: Implementation of Risk-based Capital Surcharges for Global 

Systemically Important Bank Holding Companies’’, available at: www.federalreserve.gov/ 

newsevents/press/bcreg/bcreg20150720a1.pdf. 

lished by Congress in section 165 hold sufficient capital to meet obligations to creditors and other counterparties and serve as financial intermediaries during periods of stress. 

The revised capital framework imposes additional requirements 

on large, complex organizations that are internationally active and 

subject to the banking agencies’ advanced approaches risk-based 

capital rules. For instance, these firms must reflect changes in accumulated other comprehensive income in regulatory capital, hold 

an additional buffer of capital if the Federal banking agencies determine that the economy is experiencing excessive credit growth, 

and meet a minimum supplementary leverage ratio requirement of 

3 percent. 7 This supplementary leverage ratio is developed to help 

reduce risk to U.S. financial stability and improve the resilience of 

the U.S. banking system by limiting the amount of leverage that 

a banking organization may incur. 

Finally, the Federal Reserve has adopted both a risk-based and 

leverage capital surcharge applicable to the largest, most systemically important U.S. bank holding companies (G–SIBs). A bank 

holding company that is designated as a G–SIB will be subject to 

enhanced supplementary leverage ratio standards through application of a ‘‘leverage buffer’’ of 2 percent (in addition to the minimum 

supplementary leverage ratio of 3 percent). 8 In addition, the G– 

SIB will be subject to a risk-based capital surcharge that is calibrated to each firm’s overall systemic risk. 9 These enhanced riskbased and leverage capital standards are designed to help reduce 

the probability of failure of systemically important banking organizations, thereby mitigating the risks to the financial stability of the 

United States posed by these organizations. 

Q.6. During the Committee hearing on March 24th, Deron Smithy, 

the Treasurer for Regions Bank, said: 

[A]t the $50 billion level, we are subject to enhanced 

standards, which, again, as I mentioned, includes stress 

tests, which frankly we think are a good idea. I will fully 

stipulate that pre-crisis the banking industry was in greater need of enhanced risk management practices and 

stronger internal modeling, stronger capital planning activities. I think the stress test that emanated from the 

original SCAP and have evolved into CCAR are a good 

thing. As a matter of fact, we built our whole entire capital 

planning process and strategic planning process around 

the stress testing framework . . . Where it becomes more 

challenging or restrictive is, as part of the CCAR process, 

there is a stress test that the Fed conducts on banks, and 

48 

there is an outcome from that stress test in terms of 

losses. And at the end of the day, our capital levels that 

we must manage to, despite what we calculate internally, 

the binding constraint becomes what the Fed calculates for 

us. And so one of the challenges—there are certain asset 

classes and products where the Fed sees risk just inherently higher than do the banks. 

Do you continue to believe that stress testing is not appropriate 

for regional banks? 

A.6. Rigorous stress testing helps to compensate for the somewhat 

backward-looking nature of conventional capital requirements by 

assessing on a forward-looking basis the losses that would be suffered by a bank under stipulated adverse economic scenarios. In 

doing so, capital can be built and maintained at levels high enough 

for banks to withstand such losses and still remain viable financial 

intermediaries. The importance of this aim is reflected in Congress’ 

mandate, via the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act), to require annual supervisory 

stress tests for bank holding companies (BHCs) with $50 billion or 

more in assets and to require company-run stress tests for institutions with $10 billion or more in assets. These stress tests allow 

supervisors to assess whether firms have enough capital to weather 

a severe economic downturn and contribute to the Federal Reserve’s ability to make assessments of the resilience of the U.S. 

banking system under stress scenarios. 

As I stated in my testimony, it has been somewhat difficult to 

customize the supervisory stress tests that are required by the 

Dodd-Frank Act. While some elements of the test, such as the market shock and single counterparty default scenarios, are applied 

only to larger firms, the basic requirements for the aggregation and 

reporting of data conforming to our supervisory model and for firms 

to run our scenarios through their own models entail substantial 

expenditures of out-of-pocket and human resources. This can be a 

considerable challenge for a $60 billion or $70 billion bank. On the 

other side of the ledger, while we do derive some supervisory benefits from the inclusion of these banks toward the lower end of the 

range in the supervisory stress tests, those benefits are relatively 

modest, and we believe we could probably realize them through 

other supervisory means. This is why I have suggested that it may 

be appropriate to raise the threshold to $100 billion. 

Dodd-Frank Act stress testing is a complementary exercise to the 

Comprehensive Capital Analysis and Review (CCAR), an annual 

exercise by the Federal Reserve to assess whether bank holding 

companies with $50 billion or more in assets have rigorous, forward-looking capital planning processes and sufficient capital to 

continue to operate through times of extreme economic and financial stress. Because we generally believe that smaller institutions 

would not impose sizable negative externalities on the U.S. financial system in the event of their stress or failure and that the regulatory costs to these institutions of complying with CCAR far outweigh any supervisory benefit that might result, we do not subject 

them to CCAR. We believe, however, that all banking organizaVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
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tions, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial condition. 

Q.7. We discussed the importance of the Fed’s separate stress testing evaluations. How do you respond to Mr. Smithy’s comments? 

A.7. As noted above, with the CCAR, the Federal Reserve evaluates 

whether BHCs with total consolidated assets greater than $50 billion have sufficient capital to continue operations throughout times 

of economic and financial market stress. To do so, the Federal Reserve uses its own independent, validated models, with detailed 

data provided by the banks, to project post-stress capital ratios 

that are applied consistently across all subject firms. By using the 

same set of scenarios, models, and assumptions, the supervisory 

stress test ensures the comparability of results across various 

firms. The results of supervisory stress tests and a BHC’s own 

stress tests may differ for a number of reasons, including modeling 

techniques, key assumptions, and accounting treatments. For example, the Federal Reserve uses an expected loss framework for estimating loan losses, which pulls losses forward, while firms may 

produce accounting-based loss estimates, which tend to be more 

spread out over time. These differences can result in divergence in 

projected loan losses for the same portfolio. 

Qualitative assessments in CCAR do not consider differences in 

quantitative outcomes between supervisory stress tests and the 

banks’ own stress tests, but rather focus on the banks’ capital planning processes, including banks’ internal stress testing practices. 

We want to encourage firms to think innovatively about risk management and that can mean adopting different modeling approaches. We believe that looking at capital adequacy from multiple perspectives and under multiple models is useful for understanding vulnerabilities under a range of scenarios. 

Q.8. Should Members of the Committee be concerned by the March 

23 Wall Street Journal report that there is a $400 million discrepancy between the loss estimates of the Federal Reserve and Zions 

Bank related to Zions’ CDO portfolio? If not, why not? 

A.8. As noted in response to Question 2, there are numerous reasons why a bank’s own estimate of losses may vary from the estimate generated in our supervisory stress tests. An assessment of 

the reasons for significant variations is part of our qualitative assessment of a firm’s capital planning process. In any case, investors 

and the public know that the Federal Reserve’s estimates are based 

on models and assumptions applied consistently to all CCAR 

banks. 

Q.9. Governor Tarullo, you have said—both in speeches and your 

testimony—that it may be appropriate to lift the $50 billion threshold for enhanced prudential standards generally, and particularly 

for stress tests. In addition to section 165, a number of other provisions of Dodd-Frank use a $50 billion threshold. 

Would you also support lifting the $50 billion thresholds for the 

following provisions: 

a. Section 163 

b. Section 164 

c. Section 166 

50 

d. Section 210 

e. Section 726 

f. Section 763 

g. Section 765 

A.9. In the Dodd-Frank Act, Congress used the $50 billion threshold for the mandatory application of a number of regulatory requirements, including those cited above. Establishing such statutory thresholds is a useful means of not merely giving banking 

agencies the authority to engage in a particular form of prudential 

regulation, but requiring that they do so. In that way, Congress 

was in effect guarding against memories of the problems the provisions were meant to protect fading and the consequent possibility 

of supervisory relaxation, which might allow for a recurrence of 

similar banking problems in the future. 

The requirements for mandatory application of the provisions in 

sections 163, 164, 166, and 210 seem to me similar to those in section 165. Thus I would be inclined to raise the threshold in these 

sections, with the important caveat—as with section 165—that 

Congress should be clear it is not restricting the authority of the 

Federal Reserve to use its discretion to apply additional requirements to any bank, as needed for prudential reasons. 

The thresholds in Title VII have a somewhat different purpose 

and effect, more relevant to the activities of market regulators, to 

whose judgment I would defer on the issue of raising these thresholds. 

Q.10. At our Committee hearing on March 24th, one of the majority witnesses, Oliver Ireland from Morrison & Foerster, testified: ‘‘I 

find the statutory language a little bit confusing myself, but one of 

the listed criteria or requirements in subsection (b) which is not accepted is resolution plans. And so it appears that they cannot lift 

the resolution plans if they are adhering to that statutory language.’’ As I read the text of the Dodd-Frank Act, the Federal Reserve has the authority to lift the $50 billion threshold for resolution plans because they are contained in section 165(d). 

Does the Federal Reserve interpret the statute as providing the 

Federal Reserve the authority to lift the threshold for resolution 

plans, pursuant to a recommendation by the Financial Stability 

Oversight Council (FSOC)? 

A.10. Section 165(a)(2)(B) of the Dodd-Frank Act grants authority 

to raise the asset threshold for resolution plans, though only pursuant to a recommendation from the Financial Stability Oversight 

Council. While Mr. Ireland is correct that the statutory language 

is potentially a little confusing, the Federal Reserve believes that 

the adjustments authorized in subsection (a)(2)(B) to the enhanced 

prudential standards established in subsections (c) through (g) also 

apply to those same enhanced prudential standards generally referenced in subsection (b) (i.e., contingent capital, resolution plans, 

concentration limits, enhanced public disclosures, and short term 

debt limits). 

51 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM DANIEL K. TARULLO 

Q.1. Mr. Tarullo in your written statement you suggested raising the asset threshold to $10 billion for regulating small banks under 

the Volcker rule and the incentive compensation requirements of 

Sec. 956 of the Dodd-Frank Act. 

What criteria led you to determine that $10 billion in assets is 

an appropriate line where the benefits of compliance are not exceeded by the costs of the regulations? 

A.1. Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which added a new section 

13 to the Bank Holding Company Act of 1956 (BHC Act), also 

known as the Volcker Rule, generally prohibits any banking entity 

from engaging in proprietary trading, and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exemptions. Under 

the terms of the statute, section 13 applies to any banking entity 

regardless of its size. As a result, section 13 and the final rules 

apply to community banks of all sizes. 

Section 956 of the Dodd-Frank Act requires the Federal Reserve, 

the Office of the Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the Securities and Exchange Commission, 

the National Credit Union Administration Board, and the Federal 

Housing Finance Agency (the Agencies) to jointly issue regulations 

or guidelines that would prohibit any types of incentive-based payment arrangement, or any feature of any such arrangement, that 

regulators determine encourage inappropriate risks by providing 

excessive compensation or that could lead to material financial loss 

to a covered financial institution. Under the terms of the statute, 

covered financial institutions with assets of less than $1 billion are 

exempt; larger institutions, including those with assets between $1 

billion and $10 billion, would be covered. 

The Federal Reserve makes substantial efforts to tailor its supervisory practices in accordance with the size, business models, risks, 

and other salient considerations of the institutions supervised. Requirements are the least stringent for smaller, local institutions 

and increase with factors including the size, complexity, and geographic reach of firms. In general, we shape our supervisory practices by considering the increase in safety and soundness that we 

are likely to achieve through a specific practice or requirement, in 

light of the regulatory costs for the banking organization at issue 

and the impact that the stress or failure of that organization would 

likely have on credit intermediation, the deposit insurance fund, 

and financial stability. 

In a number of instances in the Dodd-Frank Act where Congress 

showed an intent to distinguish between smaller and larger, more 

complex institutions, a $10 billion threshold was used. For example, formal stress testing was required only for banks with total assets of $10 billion or more. In addition, the Dodd-Frank Act required the Federal Reserve to issue regulations requiring that publicly traded bank holding companies with more than $10 billion establish risk committees. Furthermore, banks with less than $10 billion in total assets were exempted from a number of the debit 

interchange restrictions. 

52 

1See ‘‘The Volcker Rule: Community Bank Applicability’’ (Dec. 10, 2013), available at: http:// 

www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf. 

With respect to the Volcker Rule, the Agencies charged with implementing that statutory provision endeavored to minimize the 

compliance burden on banking entities. As part of the implementing rules, the Agencies reduced the compliance program and 

reporting requirements applicable to banking entities with $10 billion or less in total consolidated assets. This was based in part on 

information that indicated that banking entities of this size generally have little or no involvement in prohibited proprietary trading or investment activities in covered funds. 1 Exempting community banks from section 13 would provide relief for thousands of 

community banks that face ongoing compliance costs incurred simply to confirm that their activities and investments are indeed exempt from the statute. At the same time, an exemption at this 

level likely would not increase risk to the financial system. The 

vast majority of the activity and investment that section 13 of the 

BHC Act is intended to address takes place at the largest and most 

complex financial firms whose failure would have a significant effect on the stability of the U.S. financial system. Moreover, were 

an exemption granted, the Federal banking agencies could continue 

to use their existing prudential authority in the event that these 

small institutions engage in imprudent investment activities that 

raise safety and soundness concerns. 

Similarly, with respect to incentive compensation, the $10 billion 

threshold would reflect the fact that the types of incentive compensation concerns intended to be addressed by section 956 apply 

almost exclusively to larger financial institutions. Community 

banking organizations are less likely to be significant users of incentive compensation arrangements and any incentive compensation issues at these organizations would be less likely to have adverse effects on the broader financial system. While the Agencies 

expect to tailor application of section 956 to make clear the limited 

extent to which it should effect small institutions, it may be appropriate for Congress to consider exempting community banking organizations with less than $10 billion in total consolidated assets 

completely from the requirements of the rule. 

Q.2. Mr. Tarullo, in your written statement you concluded ‘‘while 

enhanced prudential standards are important to ensure that larger 

banks can continue to provide credit even in periods of stress, some 

of those same enhancements could actually inhibit credit extension 

by rending the reasonable business models of middle-sized and 

smaller banks unprofitable.’’ 

In light of this statement, do you believe these regulations on 

smaller community banks has led to the sharp consolidation in 

their number? Are these regulations in any way responsible for the 

slow-moving economic recovery the United States is experiencing 

since the financial crisis of 2008? 

A.2. Relevant data suggests that the economic reverberations of the 

financial crisis and recession were a major cause of the consolidation that has taken place in recent years. Figure 1 displays the percent decline in the number of community banks from the prior 

53 

2The decline includes both failed banks and acquired banks. 

year. 2 The annual rate of community bank consolidation was generally trending lower before the financial crisis, but then began to 

increase during and after the crisis. 

However, even if the main drivers of consolidation have been the 

challenges of an adverse economic environment, we surely do not 

want to add to those challenges through the application of regulations that are unnecessary to protect the safety and soundness of 

small banks, and in many cases, were developed in response to the 

quite different activities and risks at the larger banks. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM DANIEL K. TARULLO 

Q.1. Regulators clearly already have some flexibility on how they 

apply the same regulatory principles to different kinds of institutions. For example, the Liquidity Coverage Ratio (LCR) rule allows 

for ‘‘modified’’ applications to firms that are not complex enough to 

warrant full treatment. But even in the LCR, where regulators 

knew they had this flexibility, a line was drawn at $250 billion that 

seemed to take sheer size into account more than the actual business activities firms were engaged in. In fact, banking regulators 

appear to have a sensible methodology in place to determine which 

firms are ‘‘globally systemically important banks.’’ 

Testimony by the Federal Reserve for this hearing acknowledged 

that banking regulators begin with the same ‘‘unitary approach’’ to 

supervising regional banks, regardless of their size. Why then, is 

this principle not followed when promulgating regulations? 

54 

A.1. In September 2014, the Federal Reserve adopted a final LCR 

rule which provides for different liquidity requirements based on 

the size and complexity of a banking organization. Under the LCR 

rule, large banking organizations—those with total consolidated assets of $250 billion or more or total consolidated on-balance sheet 

foreign exposure of $10 billion or more, and their bank and thrift 

subsidiaries with total consolidated assets of $10 billion or more— 

are subject to the most stringent quantitative liquidity requirement 

and to daily calculation requirements. The Federal Reserve’s modified LCR rule applies less stringent requirements to certain depository institution holding companies with total consolidated assets of 

at least $50 billion but less than $250 billion. The LCR is designed 

to promote the short-term resilience of the liquidity risk profile of 

large banking organizations and to improve the banking sector’s 

ability to absorb shocks during periods of significant stress. The 

LCR does not apply to community banking organizations. 

The Federal Reserve recognizes that, when setting an asset 

threshold in a regulation, relatively similar banking organizations 

on different sides of that threshold will be affected differently. 

Nonetheless, the Federal Reserve believes that the LCR rule’s asset 

thresholds appropriately address the liquidity risks that covered 

banking organizations could pose to the funding markets and the 

overall economy taking into account factors such as their size, complexity, risk profile, and interconnectedness. In implementing internationally agreed upon regulatory standards in the United States, 

the Federal banking agencies have historically applied a consistent 

threshold for determining whether a U.S. banking organization 

should be subject to such standards based upon similar factors. The 

thresholds in the LCR rule are consistent with this approach. The 

Federal Reserve’s modified LCR’s $50 billion asset threshold is consistent with the enhanced prudential standards required under section 165 of the Dodd-Frank Wall Street and Consumer Protection 

Act. 

The LCR rule takes into account individual characteristics of a 

covered company in several ways. For example, the rule calibrates 

the net cash outflow requirement for an individual covered company based on the company’s balance sheet, off-balance sheet commitments, business activities, and funding profile. Sources of funding that are considered less likely to be affected at a time of a liquidity stress are assigned significantly lower outflow rates. Conversely, the types of funding that are historically vulnerable to liquidity stress events are assigned higher outflow rates. The Federal Reserve expects that covered companies with less complex balance sheets and less risky funding profiles will have lower net cash 

outflows and will therefore require a lower amount of high quality 

liquid assets to meet the rule’s minimum standard. Furthermore, 

systemic risks that could impair the safety of banking organizations are also reflected in the rule, including provisions to address 

wrong-way risk, shocks to asset prices, and other industry-wide 

risks. Banking organizations that have greater interconnectedness 

to financial counterparties and have liquidity risks related to risky 

capital market instruments may have larger net cash outflows. 

Conversely, banking organizations that choose to rely on a more 

55 

traditional funding profile may limit or avoid such outflows under 

the rule. 

In promulgating the LCR rule, the Federal Reserve recognized 

that some financial institutions could face operational difficulties 

implementing the rule in the near term. To address these difficulties, the LCR rule provides relief to non-G–SIB financial institutions by differentiating among the transition periods for the LCR 

daily calculation requirement. Accordingly, the Federal Reserve 

provided an extended implementation schedule for calculation of 

the LCR on a daily basis. The Federal Reserve anticipates finalizing liquidity reporting requirements for companies subject to the 

LCR rule in the near future. Banking organizations subject to the 

Federal Reserve’s modified LCR requirements will calculate the 

LCR on a monthly basis. 

Q.2. Wouldn’t it be better to apply ‘‘modified’’ treatment of the 

LCR, or other rules, to banks of similar operational activities or 

risk profiles, even if their sizes differ substantially? 

A.2. The Federal Reserve sought to calibrate the LCR requirement 

so that a banking organization holds an amount of highly liquid assets commensurate with both the organization’s liquidity risk profile and the wider impact of the organization facing a liquidity 

shortfall at a time of significant stress. For example, the LCR rule 

considers not only the resilience of the organization’s short-term 

funding but also the interconnectedness of the organization with 

the financial sector and its ability to continue lending to retail and 

corporate counterparties. The Federal Reserve fully expects firms 

with less complex, more resilient near-term funding profiles to 

have a lower requirement under the rule. Liquidity risk can also 

be a function of the scale of an organization’s funding profile. 

Banking organizations with historically more stable funding 

sources, such as certain types of deposits, may still face significantly greater funding needs in a period of severe liquidity stress 

based on the overall volume and regional distribution of their funding sources. Larger banking institutions are typically more significant contributors to the provision of credit in a regional economy. 

The Federal Reserve believes that the ability of an institution to 

continue to be able to provide credit in a period of significant stress 

should be a consideration in a banking organization’s wider liquidity risk management practices. 

Q.3. Would you be open to setting a break-point for regulatory 

treatment where there seems to be a natural delineation in terms 

of the systemic risk arising from those firms? As an example, 

would you be open to reserving full treatment under the LCR for 

firms that have been designated as globally systemically important 

banks (G–SIBs)? 

A.3. The Federal Reserve issued the LCR rule consistent with its 

responsibility to promulgate, on a tailored basis, enhanced prudential standards for large, complex banking organizations. The LCR 

ensures that important aspects of the liquidity risk profile of large 

banking organizations are addressed in a prudent, consistent, and 

sophisticated manner. While the rule incorporates aspects of financial interconnectedness, the Federal Reserve believes that such 

prudent practices are important for the continued safety and 

56 

soundness of large banking institutions individually, beyond the 

wider impact of their failure on the financial system as a whole. 

The G–SIB designation takes into account size, interconnectedness, 

substitutability, complexity, and crossjurisdictional activities and is 

applied only to the largest, most complex institutions. The Federal 

Reserve’s regulations, including risk-based prudential regulations 

such as the LCR rule, recognize the need to apply higher standards 

to a wider set of large and internationally active banking organizations. 

Q.4. In July of 2013, the Treasury Borrowing Advisory Committee 

reported that new regulations stemming from Basel III and DoddFrank will likely result in constrained liquidity in the market. 

Even well-intentioned rules like the Supplementary Leverage Ratio 

(SLR) may constrain liquidity in markets as deep and understood 

as those for U.S. Treasury securities. 

What work have you done to take into account the views of the 

TBAC and other market participants? 

A.4. The Federal Reserve has a strong interest in market liquidity 

across a range of key financial markets, as conditions are relevant 

to the conduct of monetary policy and financial stability. Federal 

Reserve staff monitor a variety of markets on an ongoing basis to 

keep abreast of current liquidity conditions and emerging trends. 

Board members meet regularly with market participants, including 

the Treasury Borrowing Advisory Committee (TBAC), who provide 

their views on market liquidity conditions and trends. 

We have been listening to the concerns expressed about reduced 

bond market liquidity, and we are monitoring a wide range of indicators of liquidity. Federal Reserve System staff worked with staff 

at the Department of the Treasury, the Securities and Exchange 

Commission, and the Commodities Futures Trading Commission to 

produce the report ‘‘The U.S. Treasury Market on October 15, 

2014’’ that analyzed reductions in market depth in the Treasury securities and futures markets during a 12-minute event window 

that day. The report also highlights important changes in market 

structure in recent years, including the increased role of high-speed 

electronic trading and the reduced share of traditional bank-dealer 

activity in the interdealer market. We are committed to further 

studying liquidity in the Treasury markets, including monitoring of 

trading and risk management practices of market participants, assessing available data, and strengthening monitoring efforts. Overall, many price-based and volume-based measures do not indicate 

a notable deterioration in liquidity, although average trade sizes 

have fallen. 

There are a number of reasons for why liquidity in markets may 

be changing. Currently there are fewer active trading participants 

and an increase in ‘‘buy and hold’’ investors. Broker-dealers may 

now be willing to buy and sell bonds at the request of their clients 

because of new regulatory requirements, as the question suggests, 

but also importantly because of changes to risk management practices that they have made on their own. Technological changes also 

may be affecting the provision of liquidity. Increased reporting requirements have reduced trading costs, but also perhaps trading 

sizes. In Treasury markets, greater high-speed electronic trading 

57 

may be leading to fundamental changes in trading practices. Federal Reserve staff, along with other regulatory agencies, are studying the potential role of these various factors. An important consideration in any analysis is that some of the possible changes may 

be transitory, reflecting an adjustment to new regulations and 

technology, and a low interest rate environment. As a result, fully 

understanding the effects of these various factors on market liquidity may take time so that a sufficient amount of data and experience can be brought to bear on the question. 

Q.5. What has been done specifically to address concerns regarding 

market liquidity in anticipation or as a result of new regulations? 

A.5. As noted above, Federal Reserve staff have been working with 

other agencies to monitor liquidity conditions across a range of key 

financial markets and are talking to market participants. As postcrisis reforms go into effect and begin to have perceptible impacts 

on financial markets, Federal Reserve staff will continue these 

monitoring efforts, including exploring the effects of financial reforms on market liquidity and financial stability. 

Q.6. Given the views and commentary of the TBAC and other market participants, which rules have you considered revisiting? 

A.6. Given that many of the post-crisis reforms in question have either recently been implemented or are still in the process of being 

implemented, the Federal Reserve is not actively considering any 

specific changes at this time. Changing rules shortly after their implementation can create confusion and uncertainty in markets that 

may outweigh any benefits that the changes might produce. As 

market participants adjust to the reforms, the Federal Reserve will 

consider whether changes are necessary to improve the regulatory 

framework’s ability to achieve the goal of enhancing financial stability without unduly constraining market liquidity. 

Q.7. As the Federal Reserve contemplates an increase in interest 

rates, wouldn’t it be prudent systemic risk management to foster 

liquidity rather than hampering it? 

A.7. The Federal Reserve has a strong interest in fostering a level 

of robust market functioning while maintaining financial stability. 

Some degree of liquidity risk will always be present in securities 

markets. A key consideration for financial stability is whether the 

bearers of liquidity risk are sufficiently resilient to provide liquidity 

in most situations. The Federal Reserve is committed to designing 

and implementing policies consistent with the objectives of fostering efficient markets and financial stability. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM THOMAS J. CURRY 

Q.1. Regulators clearly already have some flexibility on how they 

apply the same regulatory principles to different kinds of institutions. For example, the Liquidity Coverage Ratio (LCR) rule allows 

for ‘‘modified’’ applications to firms that are not complex enough to 

warrant full treatment. But even in the LCR, where regulators 

knew they had this flexibility, a line was drawn at $250 billion that 

seemed to take sheer size into account more than the actual busiVerDate Nov 24 2008 15:04 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\03-19 EXAMINING THE REGULATORY REGIME FOR REGIONAL BAN
58 

ness activities firms were engaged in. In fact, banking regulators 

appear to have a sensible methodology in place to determine which 

firms are ‘‘globally systemically important banks.’’ 

Testimony by the Federal Reserve for this hearing acknowledged 

that banking regulators begin with the same ‘‘unitary approach’’ to 

supervising regional banks, regardless of their size. Why then, is 

this principle not followed when promulgating regulations? 

Wouldn’t it be better to apply ‘‘modified’’ treatment of the LCR, 

or other rules, to banks of similar operational activities or risk profiles, even if their sizes differ substantially? 

Would you be open to setting a break-point for regulatory treatment where there seems to be a natural delineation in terms of the 

systemic risk arising from those firms? As an example, would you 

be open to reserving full treatment under the LCR for firms that 

have been designated as globally systemically important banks (G– 

SIBs)? 

A.1. The OCC believes that the final LCR rule is calibrated appropriately so that it applies in a tailored fashion to the financial institutions with the most significant liquidity risk profiles. In September 2014, the agencies adopted a tailored LCR regime that increases in stringency based on the asset size of a financial institution. Under the LCR rule, large financial institutions—those with 

total consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign exposure of $10 billion or more, and 

their bank and savings association subsidiaries with total consolidated assets of $10 billion or more—are subject to the most stringent liquidity buffer and daily reporting requirements. The Federal 

Reserve Board separately adopted a less stringent, modified LCR 

requirement for bank holding companies and savings and loan 

holding companies without significant insurance or commercial operations that, in each case, have $50 billion or more in total consolidated assets but are not internationally active. Those holding 

companies are permitted to hold a lower amount of a liquidity buffer and report the LCR monthly, rather than daily. 

As the preamble to the final rule explains, the agencies believe 

that the LCR rules’ asset thresholds appropriately address the liquidity risks that covered financial institutions could pose to the 

funding markets and the overall economy taking into account their 

size, complexity, risk profile, and interconnectedness. The LCR 

rule’s $250 billion total consolidated asset and $10 billion foreign 

exposure thresholds also are consistent with the thresholds that 

trigger the more stringent capital requirements for larger financial 

institutions under the agencies’ capital rules. The tailored LCR 

asset thresholds appropriately address the liquidity risks that financial institutions could pose to the funding markets and the 

overall economy. 

In promulgating the final LCR rule, the agencies recognized that 

some financial institutions, including regional financial institutions, could face operational difficulties implementing the rule in 

the near term. To address these difficulties, the LCR final rule provides relief to non-G–SIB financial institutions by differentiating 

among the transition periods for the LCR daily calculation requirement. Accordingly, regional financial institutions subject to the 

59 

LCR rule were granted a delay by the agencies and do not have 

to calculate the LCR on a daily basis until July 1, 2016. 

Q.2. In July of 2013, the Treasury Borrowing Advisory Committee 

reported that new regulations stemming from Basel III and DoddFrank will likely result in constrained liquidity inthe market. Even 

well-intentioned rules like the Supplementary Leverage Ratio 

(SLR) may constrain liquidity in markets as deep and understood 

as those for U.S. Treasury securities. 

What work have you done to take into account the views of the 

TBAC and other market participants? 

What has been done specifically to address concerns regarding 

market liquidity in anticipation or as a result of new regulations? 

Given the views and commentary of the TBAC and other market 

participants, which rules have you considered revisiting? 

As the Federal Reserve contemplates an increase in interest 

rates, wouldn’t it be prudent systemic risk management to foster 

liquidity rather than hampering it? 

A.2. The OCC generally receives comments on proposed regulations 

from a variety of market participants, including U.S. and foreign 

firms and trade associations representing them, public officials (including members of the U.S. Congress and State and local government officials), public interest groups, private individuals, and 

other interested parties. The OCC carefully reviews all comments 

we receive to identify areas where changes would be appropriate, 

and we often modify or adjust a proposed rule in response to commenters’ concerns. For example, in the LCR final rule, based on the 

banking agencies’ consideration of requests by several commenters 

to the proposed rule, the agencies expanded the pool of publicly 

traded common equity shares that may be included as high quality 

liquid assets (HQLA). 

Many post-crisis regulations were developed to provide increased 

stability to the banking system and strengthen banking system 

risk management throughout the economic cycle, taking into account interest rates and other economic factors. The final LCR rule, 

in particular, requires banks to hold sufficient HQLA to cover outflows over a 30-day stress period, which reduces systemic risk by 

ensuring adequate liquidity at banking organizations. A bank’s 

stock of HQLA provides a means of meeting obligations during 

times of stress and is independent of the current interest rate environment. It helps to strengthen a bank’s ability to meet its obligations during both rising and falling interest rate scenarios. Furthermore, the final LCR rule requirement will enable a bank to 

continue to meet its liquidity needs during times of stress, thereby 

helping to reduce the depth and duration of the systemic stress. 

The OCC prepared an assessment of the economic impact of the 

liquidity rule and considered potential effects related to market liquidity and economic growth. Such effects are difficult to quantify 

before a regulation takes effect, but our assessment describes them 

qualitatively. The OCC’s ongoing supervision of national banks and 

Federal savings associations facilitates our ability to monitor market liquidity, and will enable us to evaluate the effects on market 

liquidity of the LCR rule and other rules over time. 

60 

The OCC, along with the Federal Deposit Insurance Corporation 

and the Federal Reserve Board, are currently engaged in a review 

of their regulations, as required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). Specifically, 

the EGRPRA requires that, at least once every 10 years, the agencies seek public comment on rules that are outdated or otherwise 

unnecessary. The agencies specifically request public comment on 

ways to reduce unnecessary burden associated with their regulations. The agencies will solicit comment on all of our regulations 

issued in final form up to the date that we publish our last 

EGRPRA notice for public comment, including the LCR, SLR, and 

other Basel and Dodd-Frank regulations. 

61 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

SYSTEMIC IMPORTANCE INDICATORS FOR 33 U.S. BANK HOLDING 

COMPANIES: AN OVERVIEW OF RECENT DATA, SUBMITTED BY 

CHAIRMAN SHELBY 

62 

63 

64 

65 

66 

67 

68 

BCBS SYSTEMIC IMPORTANCE INDICATORS, SUBMITTED BY 

CHAIRMAN SHELBY 

69