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FINANCIAL REGULATORY REFORM: 

THE INTERNATIONAL CONTEXT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 16, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–39 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

June 16, 2011 .................................................................................................... 1 

Appendix: 

June 16, 2011 .................................................................................................... 57 

WITNESSES 

THURSDAY, JUNE 16, 2011 

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 15 

Brainard, Hon. Lael, Under Secretary for International Affairs, U.S. Department of the Treasury ........................................................................................... 11 

Gensler, Hon. Gary, Chairman, The Commodity Futures Trading Commission 

(CFTC) ................................................................................................................... 19 

O’Connor, Stephen, Managing Director, Morgan Stanley, and Chairman, 

International Swaps and Derivatives Association, on behalf of the International Swaps and Derivatives Association (ISDA) ........................................ 36 

Ryan, T. Timothy, Jr., President & CEO of the Securities Industry and 

Financial Markets Association (SIFMA) ............................................................ 38 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission ........................................................................................................................ 17

Scott, Hal S., Nomura Professor and Director of the Program on International 

Financial Systems, Harvard Law School ........................................................... 39 

Silvers, Damon A., Policy Director & Special Counsel, American Federation 

of Labor and Congress of Industrial Organizations (AFL–CIO) ...................... 42 

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

System ................................................................................................................... 13 

Walsh, Hon. John, Acting Comptroller of the Currency, Office of the Comptroller of the Currency ......................................................................................... 21 

Zubrow, Barry, Executive Vice President and Chief Risk Officer, JPMorgan 

Chase & Co. .......................................................................................................... 41 

APPENDIX 

Prepared statements: 

Fincher, Hon. Stephen ..................................................................................... 58 

Bair, Hon. Sheila C. ......................................................................................... 59 

Brainard, Hon. Lael ......................................................................................... 90 

Gensler, Hon. Gary ........................................................................................... 96 

O’Connor, Stephen ............................................................................................ 110 

Ryan, T. Timothy, Jr. ....................................................................................... 121 

Schapiro, Hon. Mary ........................................................................................ 146 

Scott, Hal S. ...................................................................................................... 156 

Silvers, Damon A. ............................................................................................. 183 

Tarullo, Hon. Daniel K. .................................................................................... 191 

Walsh, John ...................................................................................................... 203 

Zubrow, Barry L. .............................................................................................. 222 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Written statement of The Clearing House Association ................................. 239 

Biggert, Hon. Judy: 

Written statement of the Institute of International Bankers ....................... 274 

Page

IV 

Fincher, Hon. Stephen: 

Written responses to questions submitted to Hon. Gary Gensler ................ 286 

Stivers, Hon. Steve: 

Written responses to questions submitted to Hon. Sheila Bair .................... 287 

Written responses to questions submitted to Hon. Lael Brainard ............... 292 

Written responses to questions submitted to Hon. Gary Gensler ................ 294 

Written responses to questions submitted to Hon. Mary Schapiro .............. 295 

Written responses to questions submitted to Hon. Daniel K. Tarullo ......... 298 

Written responses to questions submitted to Hon. John Walsh ................... 301 

(1) 

FINANCIAL REGULATORY REFORM: 

THE INTERNATIONAL CONTEXT 

Thursday, June 16, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Manzullo, Biggert, Capito, Garrett, Neugebauer, McHenry, Pearce, 

Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, 

Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, 

Fincher; Frank, Waters, Maloney, Watt, Sherman, Capuano, Hinojosa, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Ellison, Perlmutter, Carson, and Carney. 

Chairman BACHUS. The hearing will come to order. 

Without objection, all members’ written statements will be made 

a part of the record. The Chair will recognize himself for an opening statement. 

When President Obama signed the Dodd-Frank Act into law last 

summer, he set in motion the most ambitious changes in financial 

institution regulation since the Great Depression. 

While American regulators and financial institutions sort 

through its 2,300 pages to find out what the new legislation means 

for them and to race to meet its deadlines, the international implications of the law have garnered relatively little attention. 

Receiving even less attention has been the work of the Basel 

Committee on Banking Supervision. Last November, the G-20 formally adopted its recommendations for Basel III, a new global 

framework for determining the minimum amount of capital that 

banks must hold to cushion against losses or insolvency. These 

complex matters are too significant to ignore. 

During today’s hearing we will examine the implementation of 

these new bank regulations and the implications for the competitiveness of our financial markets. We need to know, if we lead, will 

others follow? Does it matter? 

It has been said that if banks impose cost and risk on a country’s 

economy, the country is better off with rules that limit the risk and 

cost, even if others are not doing the same. 

That might be true, if the only risk and cost to a country were 

the risk and cost of bank failure. But there are other threats and 

dangers. If we overregulate and ignore the plans of the rest of the 

2 

world, then I fear we will push capital, industry, and jobs out of 

the country. 

At a time when each new release of government data seems to 

underscore the sensitivity of our economic recovery, it is fair to ask 

Treasury and other agencies represented on our first panel whether 

they have carefully considered the cumulative effect that the tsunami of regulatory mandates unleashed by Dodd-Frank is having 

on the real economy. 

We will be discussing four critical issues during this hearing and 

raising important questions I hope our panelists will address. 

First, capital and liquidity. Will the Basel III rules make the financial sector more stable? And if so, at what cost? Is a banking 

system awash in capital worth the potential trade-off of slower economic growth, less innovation, and diminished credit availability? 

Second, regulation of SIFIs. Is Governor Tarullo’s proposal to impose additional capital requirements on the SIFIs that reflect the 

amount of harm a SIFI failure will inflict on the rest of the financial system the right approach, or will it just make U.S. significantly important financial institutions less efficient and less competitive without making the system safer? 

As we dial up the capital and liquidity constraints on the regulated financial sector, do we run the risk that more activity will migrate to the shadow banking system and the jurisdictions offering 

a lighter regulatory structure? 

Third, derivatives regulation. Should we expect that participants 

in derivatives markets will shift their business to non-U.S. firms, 

if other countries refuse to follow our lead on margin and capital 

requirements? How should we expect U.S. firms to compete if they 

face higher costs than their foreign competitors? 

And fourth, regulation of proprietary trading. Not even Paul 

Volcker claims that proprietary trading caused the financial crisis 

in 2008, but the Dodd-Frank Act Volcker Rule prohibits banks and 

non-bank financial companies from engaging in trades for their 

own gain. 

Now that the rest of the world has rejected the call to impose 

similar proprietary trading bans on their institutions, what effect 

will unilateral U.S. application of the Volcker Rule have on the liquidity and vibrancy of our capital markets? 

These are important questions, and I am pleased we have two 

distinguished panels of witnesses with us today to answer them. I 

look forward to the discussion, and I will now recognize the ranking member. 

Mr. FRANK. Mr. Chairman, before I start, how much time on 

each side? 

Chairman BACHUS. We have 12 minutes on each side. 

Mr. FRANK. Then I will yield myself 5 minutes. 

Chairman BACHUS. Okay. 

Mr. FRANK. I was looking at the testimony of Mr. Zubrow, which 

we will hear later, and I was pleased to see him say in his first 

page, ‘‘Certainly, the financial crisis exposed serious flaws in the 

U.S. regulatory system, particularly the dangers of unchecked leverage and regulatory arbitrage. Most of the reforms imposed in 

the wake of the recent financial crisis by market participants, accounting authorities, supervisors, regulators and the Congress will 

3 

improve the soundness of our system while allowing U.S. firms to 

remain competitive.’’ 

I appreciate that, because that is the framework in which we operate. 

Now, within that framework there are several things we want to 

do: first, to make sure that capital is adequate; and second, not to 

put American institutions at a competitive disadvantage. But there 

are a couple of points I want to make about this first. 

And I say to my friends in the financial industry, you do understand that we have to separate, to the extent that we can, two important desires that you have. One is not to be regulated in a way 

that puts you at a disadvantage vis-a-vis your foreign competitors, 

and two is the desire not to be regulated. 

Now, I understand that. That doesn’t make you bad people. Everybody would rather do what he or she wants and not be told 

what to do by others. And we won’t always be able to make that 

clear. 

But I do have to say, we have had a history—and that is why 

I was pleased that Mr. Zubrow mentioned; this is Mr. Zubrow, who 

is the chief risk officer of JPMorgan Chase—‘‘the dangers,’’ he said, 

‘‘we learned of unchecked leverage and regulatory arbitrage.’’ 

Regulatory arbitrage is one of the factors we have to deal with, 

but what we have in part is a problem in which the desire of American institutions not to be regulated and the desire of European institutions not to be regulated can reinforce each other, and it is important for us to single those out. 

There is a second point I want to make to my friends in the financial community, and I think another important distinction we 

have to keep in mind that I must say, to be honest, they don’t always—and I can understand that—they are the means to a sound 

financial system. They are not the end. Their profitability in and 

of itself is not important to anyone other than themselves. 

That doesn’t make it unimportant. They have that right. But 

their role in the financial system is to be the intermediary. Their 

role in the financial system is to help us gather enough capital in 

the system from a variety of sources and make it available to people who will do things productively. 

The fact that a particular financial institution may or may not 

be making a good profit is really not a matter for public policy. 

That does not mean, as some have suggested, that we should set 

out consciously to try and reduce the role of the financial sector in 

the economy, although there was a very interesting paper by Adair 

Turner from the Financial Services Authority raising some of these 

questions. 

It does say to me that if, as a consequence of regulation that we 

think preserves the safety and soundness of the system, the simple 

fact of a reduction in profitability from some very profitable institutions with some very well-paid executives is not a problem. 

It is a problem if that reaches the point where it interferes with 

our ability to have capital formation. And I want to look at that. 

Now, we also have the question of what comes first, the chicken 

or the egg? And that is a particular problem here. There is a danger that various financial institutions in each country will lobby to 

the point where there is an overall reduction. 

4 

I am told by some of our regulators that when they talk to their 

European counterparts in particular, they are told that the counterparts hear the same things that they hear: ‘‘If you don’t stop, we 

are moving elsewhere.’’ 

I do know, for example, in the area of compensation, there is a 

strong argument from Europe, and I heard it myself from Michel 

Barnier, the markets commissioner of the European Union, that 

the extremely lax rules in America on compensation for chief executives puts Europeans at a disadvantage, that in fact Europe has 

much tougher rules on compensation. 

That doesn’t drive me to do anything differently, but I do have 

to note that. 

I understand people talk about the level playing field and we are 

told that we won’t have a level playing field here if we are too 

tough. I have noted something extraordinary about the level playing field, which would defy logic. 

That is, in all the years I have heard people complain about the 

unlevel playing field, I have never heard of an instance in which 

anybody was at the top of the unlevel playing field. It is a constantly declining playing field. Maybe I get a Nobel prize for that, 

like a constantly declining—I yield myself another minute. 

We have a constantly declining playing field in which everybody 

is at the bottom and no one has ever been at the top. And I worry 

that we get into that same situation in which all the financial institutions in the world will be able to prove to their regulators that 

they are at a disadvantage vis-a-vis every other financial institution in the world, and the result will be a net lowering. 

There were some reasonable points to be made. I do not think, 

for example, that margin requirements on sovereign entities are a 

good idea. I could be persuaded otherwise. My New York colleagues 

have pointed out a very particular case where there might be some 

disadvantage. 

I do believe, and I will be interested if the regulators have any 

different view, that the law as adopted gives them the flexibility to 

take that into account. I do not think that the CFTC would be 

mandated to do things that would put people at a disadvantage, if 

that can be clearly established for no other purpose. 

But the general framework is, yes, as Mr. Zubrow said, we had 

a problem of unchecked leverage. We had a problem of there not 

being enough rules. We got into a terrible financial crisis because 

we hadn’t done appropriate regulation. 

And as we do the regulation, it is important to keep in mind two 

things, that the role of the financial institution is not to make 

money for themselves, but to be the intermediary between the various sources of capital and people who will put it to good use, and 

the need not to allow a competition to be used simply to denigrate 

regulation in general, but rather to try to get cooperation so that 

we get a good regulatory scheme that puts no one of our people at 

an international competitive disadvantage. 

Chairman BACHUS. Thank you. 

Mr. Royce for 1 minute? 

Mr. ROYCE. Given where the financial crisis originated, Mr. 

Chairman, it is unfortunate how far off the radar this reform effort 

has gone. Let us not forget this all started when Congress decided 

5 

to embark on a course of social justice to get everyone who wanted 

one into a home regardless of whether or not they could afford it. 

Then came the crisis, followed by Dodd-Frank. 

Let us be clear: An avalanche of regulation doesn’t mean better 

regulation. The new regulations were simply piled on top of the old 

ones. Will it make our financial system any safer? Unlikely. 

Rather than giving markets more stability, this new law fundamentally weakened the global financial system by encouraging 

capital flight out of the most stable and liquid markets in the 

world. 

Buried in the pile of new regulations coming down the pike may 

be a few good ideas, such as higher capital standards. Unfortunately, this effort is getting trumped by 2,300 pages of government 

attempting to micromanage virtually every player throughout our 

financial system. 

As The Wall Street Journal noted today, the most competitive 

banking system is one with high capital requirements and few 

rules on the extension of credit, whether to a consumer or a corporate derivatives customer. 

It is up to us to correct the mistakes and ensure the end result 

is a financial system built on higher capital, built on market discipline and commonsense regulation. 

I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Ms. Waters for 2 minutes? 

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

I would like to thank our witnesses for coming today, particularly 

Chairman Bair, whose 5-year tenure at the FDIC will come to an 

end on July 8th. 

Chairman Bair, I imagine this may be your last time testifying 

before this committee, so I would like to thank you for your service 

during this unprecedented, turbulent time for our Nation’s financial system. 

It has been almost a year since Democrats in Congress passed 

the most sweeping reform of our financial market since the Great 

Depression. Because of that reform, our regulators now have the 

tools to closely monitor systemically significant institutions, unwind failing firms in an orderly fashion, regulate the shadow banking industry, and bring transparency to the derivatives market. 

Of course, the statutory authority we provided will only be as effective as the rules adopted to implement that authority, and the 

ability to prevent another crisis will only be realized if regulators 

are willing to test-drive the enforcement and resolution powers we 

granted. 

Our hearing today is about implementation of Dodd-Frank, as 

well as Basel III. And I am very interested to hear from our regulators about how they are cooperating with their international partners. I am also interested to hear from the industry witnesses on 

the second panel, who are concerned about their competitive position relative to their international counterparts. 

But I think it is extremely important to caution against engaging 

in a global race to the bottom when it comes to financial regulation. 

If we water down financial reform in order to entice firms to locate 

in the United States, we may find the only thing we have accomVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
6 

plished is ensuring that the next bailout recipient is headquartered 

in the United States. 

As I have said consistently, strong, transparent, and fairly regulated markets are our best way to increase certainty, prevent another crisis, and create jobs. 

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

time. 

Chairman BACHUS. Thank you. 

Mr. Hensarling for 1 minute? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

This week is the 1-year anniversary of the Administration’s summer of recovery. We now have one in seven Americans on food 

stamps. New business starts are at a 17-year low. 

It now takes 10 months, according to the Bureau of Labor Statistics, to find a job. This is the longest period in recorded history. 

And we now have 28 months where unemployment has been north 

of 8 percent, the longest period of sustained high unemployment 

since the Great Depression. 

We now have on top of this, Dodd-Frank signed into law—which 

is fraught with intended and unintended consequences—that I believe has impeded and will harm job creation in America. 

Dodd-Frank was not passed in the E.U. It was not passed by the 

G-20, and our regulators must proceed with great care. We do not 

know what the total impact is. We cannot afford greater job loss. 

I yield back. 

Chairman BACHUS. Thank you. 

Mrs. Maloney for 2 minutes? 

Mrs. MALONEY. Thank you, Mr. Chairman, for calling this hearing. 

I welcome all of the witnesses today and thank you for your service. 

And I join my colleagues in thanking Sheila Bair for her extraordinary leadership during one of the most difficult times in our history. 

You did an incredible, outstanding job. Thank you. And I am interested in seeing what your next goal will be, and I am sure you 

will continue to have an outstanding career in service to our country. 

I join the chairman and the ranking member in expressing my 

concern for any competitive disadvantage for American institutions 

in the world economy. 

I am particularly concerned about a requirement in the DoddFrank Wall Street Reform Act, which responded to the worst financial crisis in our country’s history since the Great Depression and 

certainly moved forward with an improved regulatory infrastructure in the financial services sector. 

It was very clear that our infrastructure had not kept pace with 

the development of financial products and services, and it was a 

long-needed reform. 

But I am concerned about one of the features in it that would 

impose heightened capital requirements on the most complex U.S. 

banking entities and unbanked financial institutions. And I wonder 

if this SIFI surcharge adopted under Basel III satisfies that reVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
7 

quirement, or is this an additional burden that would be on our financial institutions? And what would that impact be? 

Also, with the implementation of Basel III and Dodd-Frank, how 

the implementation schedules are different, how you are coordinating that, how you are working with our European counterparties and other counterparties across the world to make sure that 

we are moving in the same direction and, hopefully, enacting similar regulations. 

I had raised these concerns with Federal Reserve Chairman Ben 

Bernanke during his annual testimony before our committee. And 

he had indicated that he thought that we could be at a competitive 

disadvantage. 

I look forward to hearing what your comments are on the capital 

requirements specifically for entities and complex U.S. entities and 

nonbanks. 

Chairman BACHUS. Thank you, Mrs. Maloney. 

Mrs. MALONEY. Thank you. 

Chairman BACHUS. Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

One of the most important dynamics of implementing regulatory 

reform is to keep our U.S. financial industry competitive. Without 

a strong financial sector that can issue loans and supply capital to 

help businesses grow and create jobs, our economy will continue to 

falter. More jobs will be lost. 

If we unnecessarily constrain American financial institutions 

through unlevel standards to those of their international competitors, businesses will migrate to the international competitors. And 

if we restrict our financial institutions from providing innovative 

and competitive products to consumers, consumers will look elsewhere. 

It is counterproductive if the most stringent regulation of our 

U.S. financial institutions drives businesses overseas and shifts 

risky behavior to unregulated sectors of the economy. We must find 

the right balance. U.S. jobs and our economy depend on it. 

And I would like just for a moment to also talk about Sheila 

Bair. I think you have done a wonderful, wonderful job in your role 

during this financial crisis, and I know that whatever you do next 

is going to be very important, and I know that will also help all 

of us in this country. We thank you so much for all that you have 

done. 

Thank you. 

Chairman BACHUS. Mr. Scott for 2 minutes? 

Mr. DAVID SCOTT. Thank you, Mr. Chairman. 

Welcome, panel. 

And I would like to also convey my deep appreciation to Ms. Bair 

for her excellent work. 

I want to talk about the international aspects of this, but there 

is no more important deal for us to in our financial system to take 

care of a pressing issue at home. 

And so I want to start off by putting on the table—hopefully, 

your comments will reflect—I am certainly going to ask a question—on our failure of our financial system right here at home to 

deal with this extraordinary problem of home foreclosure and the 

8 

downward turn of home values. I think our standing in the world 

is going to go down with our failure to address this. 

We have a problem with our loan servicers and our banking establishment. They are good people, but we have to figure out a way 

to get them, our financial system, to be more responsive to the 

issue of home foreclosures. It is the core that will drag our economy 

down and we are not responding. So I hope that as we move on 

in some of our comments, we can get that. 

But I also want to mention that the Dodd-Frank measure in 

terms of international aspects, the measure included requirements 

for increased transparency of derivatives by mandating that they 

be traded on transparent exchanges and by pursuing legal recourse 

against banks that violate this condition. 

And although the provisions of the Dodd-Frank Act are a needed 

reform to the derivatives market, parts of the financial industry 

have expressed concern regarding the application of these regulations in foreign countries, particularly their effect on competitiveness. 

The rules would require international branches of U.S. banks to 

collect margins from financial end-users for uncleared swaps, thus 

potentially jeopardizing their ability to compete with foreign entities. 

And in addition, it is unlikely that foreign jurisdictions will adopt 

similar laws as that within the Dodd-Frank law, since the issue 

was not addressed as part of the G-20 accords. 

So I would like for us to, as we move forward in the questionand-answer period, both address that and certainly reflect here 

what is happening at home with foreclosures, and particularly, as 

I am putting together a major event in Atlanta, Georgia, this weekend, to address that. 

So your comments will be very much appreciated on those two 

issues—derivatives and home foreclosures. 

Thank you very much, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mrs. Capito for 1 minute? 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I think there are many lessons that we learned from the recent 

financial crisis, but few are more clear than that we are in a global 

financial system that is more interconnected than ever before. 

On the one hand, we see technological and communication advances that allow companies from around the world to interact. But 

on the other hand, we have seen in the last few financial crises, 

problems in one part of the globe can flow throughout the entire 

financial system. 

Whether we supported Dodd-Frank or not, it set a new regulatory benchmark across the entire financial services industry. The 

regulators before this committee today are going to bear a considerable burden on writing hundreds of rules and regulations. 

I would encourage you all to move forward with caution, and to 

work with your counterparts from around the globe to ensure that 

America remains a financial leader. 

We have the opportunity today to bring an important discussion 

in front of the committee about the cumulative effects of DoddFrank on financial institutions. I think failing to examine the agVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
9 

gregate cost of compliance with Dodd-Frank could lead to job losses 

and, in the worst case, a downgrade of the United States as a financial center. 

I look forward to hearing from our witnesses today, and I thank 

the chairman for holding this hearing. 

Thank you all. 

Chairman BACHUS. Thank you. 

Mr. Garrett for 1 minute? 

Mr. GARRETT. Thank you, Mr. Chairman. 

So as far as international coordination of financial reform is concerned, I guess we are a long way from the solidarity that we had 

back in 2009, back in Pittsburgh, with the G-20 to where we are 

today. 

I guess that is because there are some substantial differences beginning to emerge between Dodd-Frank financial reform and what 

we are seeing in the rest of the world. 

Back then, it was more like, ‘‘Well, you lead here in the U.S., and 

we will follow,’’ for the rest of the world. Now, it is, ‘‘You lead here 

in the U.S., and we will sort of pick and choose as to what we are 

going to follow with.’’ 

That is because: Dodd-Frank has the Volcker Rule, and they 

don’t; Dodd-Frank requires multi-dealer exchange trading of swaps, 

and they don’t; Dodd-Frank wants pension funds to tie up more retirement money as collateral for trades, and they don’t. Those are 

just a few examples. 

So because of that, this country now risks capital and jobs fleeing 

this country, going overseas, and impairing our economy and our 

competitiveness. 

The overreaching policies that were codified in Dodd-Frank have 

basically incentivized other countries to do what we would think 

they would do—increase their taxable revenues through basically 

strategic regulatory arbitrage. 

And so, the cumulative impact of all these new regulations may 

be hard to measure, but that is precisely what the FSOC must undertake to do. What is the total cost of all this additional regulation 

in the form of jobs and economic growth? Which of these regulations actually address real problems and which ones simply add 

cost? 

This type of economic and cost-benefit analysis must be done 

now. Why? Because the stakes are just too high to do it otherwise 

and get it wrong. 

With that, I yield back. 

Chairman BACHUS. Thank you. 

Mr. Neugebauer? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I am putting a chart up, and I apologize; it is a small chart. But 

basically, these are the 50 top financial firms by country by market 

cap. And over on the far right-hand side in 2003, the United States 

had 51 percent of the total capitalization. 

You move into 2006, it dropped to 35 percent of total market capitalization. And then U.S. companies in 2010 moved to 24 percent 

of market capital, with China going from 1 percent in 2003 to 22 

percent in 2010. You also see a little bit of a shrinking in the E.U. 

and the U.K. 

10 

And so when we talk about how important market harmonization 

is, and regulatory harmonization, it is extremely important that we 

accomplish that goal, because already we are seeing a migration of 

capital to these other countries. 

And for those of you who maybe don’t understand jobs creation, 

capital is a primary driving force for that, and that is the reason, 

if we are trying to create jobs, we need to make sure that capital 

is in the United States of America. 

What I am extremely concerned about—and I appreciate the 

chairman holding this hearing today—is that if we do not make 

sure we get this right, we will see further deterioration of capital 

formation in the United States of America. And that is going to 

mean more unemployment and less jobs for American families. 

With that, Mr. Chairman, I yield back my time. 

Chairman BACHUS. Mr. McHenry for 30 seconds? 

Mr. MCHENRY. Thank you, Mr. Chairman. 

I am deeply concerned that the cumulative effect of all these regulations will be a vacuum, and that will be the huge sucking sound 

of capital out of our market into other markets across the globe. 

And this is at a very time when we have companies that are 

starved for capital in order to create jobs. 

This week, the head of Japan’s second-largest bank predicted 

that our stringent regulations on Western banks will help double 

their lending. This is a great example of the loss of competitiveness, and I hope that the regulators will understand this, that our 

folks are starved for capital, and we need to get more capital on 

the street so we can actually create jobs. 

I look forward to this hearing from the panel. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Manzullo? 

Mr. MANZULLO. I thank the chairman for calling the— 

Chairman BACHUS. Oh, 30 seconds, Mr. Manzullo. 

Mr. MANZULLO. It is ironic that you talk about the international 

context when still I have companies back home, factories with orders, business people who are unable to get their lines of credit renewed because of capricious and arbitrary actions on the part of 

the examiners. 

This has to stop. 

For years, I have been complaining that these people, who are 

in the process of trying to create jobs, who are solvent, who have 

never had a problem, are suddenly having their loans classified 

and have complained bitterly to the OCC, the FDIC, and the Fed. 

It always falls upon deaf ears: ‘‘We will check into it. We will 

talk to our examiners.’’ But there has been no change in policy. 

There had better be a change in policy on the U.S. side before 

we worry about the international side. 

Chairman BACHUS. Mr. Grimm? 

Mr. GRIMM. Thank you, Chairman Bachus, for holding this hearing. 

And thank you to our witnesses. 

I think most of it has been said, so I will be very, very brief. Obviously, we are concerned that the implementation of Dodd-Frank 

is going to hurt the U.S. market competitiveness. But I think we 

11 

need to emphasize, it is U.S. competitiveness as a whole, these 

markets that provide capitalization for the businesses to grow and 

to entrepreneurs. 

Everywhere you go, you hear about job creation. We are not 

going to be able to do that if we are at a competitive disadvantage 

that moves industry, capital and jobs overseas. 

So I am very interested in hearing the panel today and how the 

implementation process will go with respect to our competitiveness 

throughout the world. 

Thank you. I yield back. 

Chairman BACHUS. Thank you. 

Our last statement will be 30 seconds from Mr. Schweikert. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

And to our witnesses today, I appreciate this. This is potentially 

just a fascinating discussion. 

On occasion, we will visit the comments of regulatory arbitrage. 

I am trying to get my head around how much of that is folklore, 

it actually exists, how much of that is actually rule-for-rule where 

you have variations, perception of stability of the rulewriting. But 

also, there is that other fundamental out there, actual enforcement. 

We may have equal rules, but this particular government, this 

particular sovereign entity, has a bad habit of never really looking 

at that capital reserve. And that actually either puts us at quite 

a disadvantage or actually creates a greater instability, and that is 

a concern. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

And at this time, I would like to welcome our esteemed panelists. 

Several of the members have acknowledged the challenges you 

face, and we commend you for your hard work and industry. 

Our first witness, from my, I guess, left to right, is the Honorable 

Lael Brainard, Under Secretary of the Treasury for International 

Affairs. Our second witness is the Honorable Daniel Tarullo, Governor, Board of Governors of the Federal Reserve System. 

Our third witness is the Honorable Sheila Bair, Chairman of the 

Federal Deposit Insurance Corporation. And you will be leaving, so 

we wish you well in your new endeavor. 

Our fourth witness is the Honorable Mary Schapiro, Chairman 

of the Securities and Exchange Commission. Our fifth witness is 

the Honorable Gary Gensler, Chairman of the Commodities Futures Trading Commission. 

And our last witness is Mr. John Walsh, the Acting Comptroller 

of the Currency. 

We welcome our panelists. 

And we will start with Under Secretary Brainard. 

STATEMENT OF THE HONORABLE LAEL BRAINARD, UNDER 

SECRETARY FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY 

Ms. BRAINARD. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee. I appreciate the opportunity. 

12 

There are some who would argue that the United States is moving too fast on financial reform, that we should slow it down, and 

wait to see what other countries implement. 

I don’t agree. By moving first and leading from a position of 

strength, we are elevating the world’s standards to ours. For financial markets that are more globally integrated than ever, we need 

financial reforms that are more globally convergent than ever. 

While we don’t need to synchronize across all issues, there are 

a few key reforms that must be global in scope if they are to succeed. 

The risk of regulatory arbitrage carries real impacts. It means a 

race to the bottom for standards and protections. It means the potential loss of jobs in the American financial sector if firms move 

overseas. 

And it may increase the possibility of future financial instability, 

if riskier activities migrate to areas with less transparency, looser 

regulation, and laxer supervision. 

Acting in concert is the best way to address the potential for regulatory arbitrage and the concerns of American firms about competing fairly. The sooner we level the playing field, the better. 

Let me just briefly touch on the four priority areas that are most 

relevant. 

The first priority is to strengthen capital liquidity and leverage. 

These standards can make the difference between the success or 

failure of firms and the jobs and livelihoods they are lending support, confidence or contagion in the markets, and the protection of 

taxpayer dollars. 

The new capital framework known as Basel III will help ensure 

that banks hold significantly more capital, that the capital will be 

able to absorb losses of a magnitude associated with the crisis 

without relying on taxpayers, and that the definition of ‘‘capital’’ 

will be uniform across borders. 

But full international convergence will be achieved only if supervisors in all major financial jurisdictions ensure that banks across 

the world measure risk-weighted assets similarly. That is why the 

United States has called on the Basel Committee to pursue greater 

visibility across borders and to supervise their scrutiny of how 

banks measure risk-weighted assets. And we are pleased that is 

now on the committee’s agenda. 

In addition, Basel III includes a simple check, called a mandatory leverage ratio, to protect against the possibility of weak international implementation. 

A second vital issue is reducing the systemic risk from large 

interconnected financial firms, so-called SIFIs or global SIFIs. Prior 

to the crisis, many of these firms held too little capital, putting the 

global financial system at risk and necessitating significant government intervention. 

To make sure that does not happen again, Dodd-Frank requires 

that the Fed subject our largest firms to heightened prudential 

standards. And G-20 leaders adopted a parallel commitment to develop additional capital requirements for these firms across borders. 

In those negotiations, the United States has been very clear 

about our priorities. First, additional capital must consist of high 

13 

quality and loss-absorbing common equity. Second, the surcharge 

must be well calibrated to balance the imperatives of financial sector stability and of macroeconomic stability. And, third, it must 

apply to a wide range of the large interconnected banks across the 

globe and be mandatory and comparable across jurisdictions to promote a level playing field. 

The third area is resolution. Dodd-Frank established a special robust resolution regime that provides Federal authorities with 

strong authority to resolve the largest institutions. 

But the best national regime in the world is not going to be adequate if other countries do not adopt robust resolution toolkits and 

complementary authorities. The United States is working actively 

in the FSB to implement an international framework. 

The U.K. and Germany have already passed resolution legislation, and we will continue working to encourage other financial jurisdictions to do the same. 

And finally, international convergence is critical across derivatives markets. In the run-up to the crisis, few understood the magnitude of aggregate derivatives exposures in the system, because 

derivatives such as credit default swaps were traded over the 

counter on a bilateral basis and without transparency. 

As we learned from the crisis, we must require greater transparency, move trading onto exchanges or platforms, and require 

them to be centrally cleared. But, of course, if we do not have alignment across borders in these rules, firms will move activities to jurisdictions with lower standards, which will increase risk to the 

system. For this reason, G-20 leaders set forward principles that 

are in full alignment with Dodd-Frank. 

Both the United States and the European Commission are developing margin requirements for OTC derivatives that are not central cleared. We think it is important for those requirements to be 

developed internationally, and our regulators have agreed to work 

with international regulators to do so. 

If we don’t have a consistent margin standard for uncleared 

trades, we run the risk that activities will migrate to jurisdictions 

that do not provide incentives for central clearing. 

In sum, we are making great strides to ensure that the financial 

system is stronger so that future generations can avoid a financial 

crisis of the type that we have just witnessed. And we appreciate 

the leadership of this committee on these key challenges. 

[The prepared statement of Under Secretary Brainard can be 

found on page 90 of the appendix.] 

Chairman BACHUS. Thank you. 

Governor Tarullo? 

STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. TARULLO. Thank you, Mr. Chairman, and members of the 

committee. 

I want to try to make four points in 5 minutes. First, it is important to remember why we have strengthened minimum capital 

standards and introduced liquidity standards, both the three banking agencies in front of you and regulators around the world. 

14 

The financial crisis revealed that the amount of capital held by 

many banking institutions under prevailing capital requirements 

proved quite inadequate in both quantity and quality. 

Firms with substantial reliance on wholesale funding markets 

found that those sources of funding dried up quickly, at times almost overnight, as market concerns rose. 

Back in 2008, the prospect of the failure of the most systemically 

important institutions raised in turn the prospect of a collapse of 

the financial system, to which none of these large complex financial 

institutions would have been immune. 

And that, of course, is what led to TARP. I think it is fair to say, 

as we sit here today, that no one wants another TARP—not those 

who reluctantly supported it 21⁄2 years ago, and certainly not those 

of you who opposed it. 

If we are to avoid another Hobson’s choice between a TARP-like 

mechanism on the one hand or a collapse of the financial system 

on the other, we have to ensure that financial firms have adequate 

loss absorption capacity and can sustain stresses in funding markets. 

Second point: In a global financial market, serious problems in 

any major financial center can spread, sometimes very quickly. 

That is why it is important to negotiate good capital and liquidity 

requirements for all internationally active banks. That is what 

Basel III was about. 

And that is why it is important to ensure that the most systemically significant institutions around the world have an additional 

capital buffer in light of the impact that their failure would have 

on the financial system. 

Third point: There are a number of additional areas where there 

is need for more international cooperation. Several of you have 

mentioned derivatives, and I wholeheartedly agree. 

Fourth point—and this is the one where I want to spend most 

of my time—the financial stability benefits of Basel III and other 

international reforms will be realized only if they are implemented 

rigorously and consistently across jurisdictions. 

And here I want to distinguish between implementation in the 

sense of incorporating the agreements into domestic legislation and 

regulation on the one hand, and on the other hand ensuring that 

those standards are in practice observed by firms in all the Basel 

Committee countries. 

The first step—getting the agreement into laws and regulations—is obviously necessary, but it is not sufficient. Yet, historically, that is about all that the Basel Committee implementation 

efforts have been able to achieve. 

As effective, external monitoring of international capital and now 

liquidity agreements becomes harder, it is all the more important 

to take the second step. 

For example, there has been considerable external analysis in recent months of the apparent divergence in risk-weighting of traded 

assets across institutions and countries. A number of reports issued 

by financial analysts both in the United States and in Europe suggested that, generally speaking, it appears as though risk-weighted 

assets and similar portfolios are more risk-weighted here than in 

at least some European countries. 

15 

These analyses raise significant questions, but their authors 

don’t have access to the models and processes of the financial institutions in question, so they cannot provide definitive answers to 

those questions. 

That is where an effective international monitoring mechanism 

comes in. 

We have raised this issue in the Basel Committee. I raised it just 

last week at the Financial Stability Board steering committee 

meeting. And as we move to the implementation phase of Basel III, 

we will be putting forth detailed proposals for how international 

agreements can be effectively monitored at the firm level. 

I have provided some ideas along these lines in my testimony 

this morning and would be happy to discuss them further with you. 

The key point, though, is that much more needs to be done for 

at least three reasons: first, as I said earlier, to ensure that the financial stability benefits of the agreements are realized; second, to 

avoid a situation in which firms from some countries, including the 

United States, are competitively disadvantaged; and third, because 

the effectiveness of these rather complex standards will benefit 

from the very concrete sharing of perspective and problem solving 

among supervisors from all the Basel Committee countries that 

will be entailed when such a monitoring mechanism is in place. 

Thank you very much for your attention, and I am, of course, 

pleased to answer questions. 

[The prepared statement of Governor Tarullo can be found on 

page 191 of the appendix.] 

Chairman BACHUS. Thank you. 

Chairman Bair? 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Thank you. Good morning, Chairman Bachus and 

Ranking Member Frank. 

I am pleased to testify about how current regulatory initiatives 

will affect the economic health and international competitiveness of 

the United States. 

This morning, I want to focus in particular on the importance of 

strengthening capital regulation. 

A strong and stable financial system is a precondition for a vibrant and competitive U.S. economy. Unfortunately, in the years 

leading up to the crisis, some large financial institutions strayed 

from their core mission of providing credit intermediation to support the real economy. 

Instead, they exploited regulatory gaps and weaknesses to reap 

huge fees through complex securitization structures and esoteric 

derivative instruments that did little to support real economic 

growth and productivity. 

Fueled by the market perception of too-big-to-fail, many were 

able to access low-cost debt financing which they funneled into high 

risk lending and investment strategies, misallocating economic resources into unstable financial activities instead of more productive 

uses such as manufacturing, energy, technology, and infrastructure. 

16 

The full costs of the financial crisis are not yet known. We know 

that we have lost almost 9 million payroll jobs in 25 months, homeowners have suffered a one-third decline in house prices since 

2006, and over 9 million foreclosures have started over the past 4 

years. 

Lending by insured banks alone contracted by $750 billion since 

the start of the crisis, and loan commitments have declined by $2.7 

trillion. Trillions more in credit availability have been lost with the 

collapse of the so-called ‘‘shadow banking sector.’’ 

A healthy and competitive U.S. economy requires a financial system that is stable and supports the credit needs of the real economy. This is not the system we had prior to the crisis. 

As we debate the needed improvements, there is much discussion, as there should be, of how financial reforms will impact the 

overall competitiveness of the U.S. economy. 

U.S. economic competitiveness is a broad concept, of which financial industry competitiveness is only one part. The short-term profitability of financial institutions should not be confused with our 

international competitiveness. 

Many of the regulatory gaps and lapses which occurred pre-crisis 

were rationalized as the way to strengthen our international competitive position. What we discovered was that sacrificing safety 

and soundness in the name of global competition made both the financial institutions themselves and the broader economy worse off. 

A prime example is capital regulation during the pre-crisis years, 

which in retrospect gave undue weight to the desire of financial institutions to boost the return on equity with leverage. Capital requirements were repeatedly and materially weakened in the precrisis years. As a direct result, the leverage of large financial institutions steadily increased to the point where capital was inadequate entering the crisis. 

Insufficient capital skews incentives. Shareholders and management reap the upside when times are good and bets are paying off, 

but the costs of the subsequent unraveling are borne by the broader economy. We are still paying the price as a country for accommodating the pre-crisis appetite for leverage of some of our largest institutions. 

With Basel III and an important provision of the Dodd-Frank Act 

known as the Collins Amendment, we have an historic opportunity 

to strengthen the capital of our banking system. The Basel III 

agreement strengthens capital in a variety of ways and is a marked 

improvement over the current regulation. 

The numerical Basel III ratios are probably on the low end of 

what is needed for banks to weather a severe crisis. This is especially true for the largest banks. We saw in 2008 the substantial 

external costs associated with the failure of large interconnected financial institutions. I strongly support the need for additional common equity buffers for such institutions. 

It seems self-evident that capital requirements for the largest financial institutions should be higher, not lower, than the general 

standard that applies to smaller banks. Yet, prior to the crisis a 

number of large European banks were allowed to implement the 

so-called Advanced Approaches under Basel II, which allowed them 

17 

to significantly increase their leverage by using their internal models to set capital requirements. 

Large U.S.-insured banks and their holding companies were also 

on a course to take on additional leverage by using their risk models to drive risk-based capital requirements. 

On Tuesday of this week, we corrected the situation. The FDIC 

board approved a final rule, joint with the OCC and the Federal 

Reserve, to implement Section 171 of the Dodd-Frank Act. This 

provision of the Act, the Collins Amendment, says simply that the 

capital requirements of our largest banks cannot be less than the 

capital requirements community banks face for the same exposures. Thus, models under Basel II can be used to increase, but not 

reduce, capital requirements. 

Unfortunately, large banks in Europe and elsewhere are still allowed to effect their own capital requirements. This concerns me 

greatly, for all the reasons that Governor Tarullo has also indicated, and I look forward to discussing that more with the committee. 

I think we need, as we strengthen capital standards here, to 

make sure that Europe follows suit, and I will be glad to work with 

this committee for as long as I can, which is not much longer, and 

I hope my fellow colleagues will continue this course to maintain 

very strong capital standards in the United States. 

Thank you. 

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

59 of the appendix.] 

Chairman BACHUS. Chairman Schapiro? 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee. I appreciate the opportunity 

to testify today on behalf of the Securities and Exchange Commission regarding the international implications of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. 

The Act establishes a host of new reforms that will have implications for U.S. companies that compete internationally. My written 

testimony discusses a number of these reforms, as well as the 

SEC’s efforts to coordinate with foreign regulators and to limit regulatory arbitrage. 

I would like to focus in particular on the over-the-counter derivatives marketplace. Today, the OTC derivatives marketplace has a 

global notional value of just over $600 trillion. Yet, OTC derivatives were largely excluded from the financial regulatory framework by the Commodity Futures Modernization Act of 2000. 

Title VII of the Dodd-Frank Act would bring this market under 

the regulatory umbrella requiring that the SEC and CFTC write 

rules relating to, among other priorities, mandatory clearing, the 

operation of execution facilities and data repositories, capital and 

margin requirements, business conduct standards for dealers, and 

greater transparency of transaction information. 

These rules are designed to greatly improve transparency, facilitate centralized clearing, enhance regulatory oversight, and reduce 

counterparty risk. By promoting transparency, efficiency, and staVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
18 

bility, this framework should foster a more nimble and competitive 

market. 

Because this marketplace already exists as a functioning global 

market with limited regulation, international coordination is critical as we seek to limit opportunities for regulatory arbitrage, 

eliminate competitive disadvantages, and address duplicative and 

conflicting regulations. 

Domestically, the SEC is working closely with the CFTC, the 

Federal Reserve Board, and other Federal prudential regulators to 

coordinate implementation of Title VII, while recognizing relevant 

differences in products, entities, and markets. 

Working closely domestically also bolsters our efforts internationally. The Act specifically requires the SEC, the CFTC, and the prudential regulators to consult and coordinate with foreign regulatory 

authorities on the establishment of consistent international standards, and we are working closely with international regulators in 

this regard. 

While the United States is the leader in this area, a significant 

international consensus exists around core components of OTC derivatives reform. While progress is being made internationally, 

other nations do lag behind U.S. efforts. 

To address differences in scope and timing, the SEC has been extremely active in bilateral and multilateral discussions with regulators abroad. We have been engaged with international market 

regulators both bilaterally and through participation in and leadership of various international task forces and working groups to discuss the full range of issues surrounding the regulation of OTC derivatives. 

Rather than addressing the international implications of Title 

VII of Dodd-Frank piecemeal, we are considering addressing the 

relevant international issues holistically in a single proposal. This 

approach should generate thoughtful and constructive comments 

for us to consider in the application of Title VII to cross-border 

transactions. 

In addition, after proposing all of the key rules under Title VII, 

we intend to consider seeking public comment on a detailed implementation plan that will permit a rollout of the new security-based 

swap requirements in an efficient manner while minimizing unnecessary disruption and cost to the market. 

I also would note that last Friday, the SEC announced that it 

would be taking a series of actions in the coming weeks to clarify 

the requirements that will apply to security-based swap transactions as of July 16th, the effective date of Title VII, and provide 

appropriate temporary relief. 

And yesterday, in the first such action, the SEC provided guidance making clear that many of Title VII’s requirements applicable 

to security-based swaps will not go into effect on July 16th and 

granted temporary relief from compliance with many of the new requirements that would otherwise apply. 

We took this action to avoid market disruption as we work expeditiously to finish rule writing and adopt our rules. 

While derivatives are a key focus of the international efforts of 

the SEC, other policy areas also demand our attention. For examVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
19 

ple, accounting and financial reporting standards are essential to 

efficient allocation of capital by investors everywhere in the world. 

The SEC is continuing its work on the important issue of whether to incorporate international accounting standards into the U.S. 

financial reporting regime. Our primary consideration in these activities is the best interests of U.S. investors. 

In conclusion, the SEC continues to work closely with regulators 

in the United States and abroad and members of the financial community and investing public to conduct rulemakings with international implications in a manner that supports the interests of 

U.S. markets, investors, and firms. 

Thank you for the opportunity to share my thoughts with you. 

And of course, I am happy to respond to questions. 

[The prepared statement of Chairman Schapiro can be found on 

page 146 of the appendix.] 

Chairman BACHUS. Thank you. 

Chairman Gensler? 

STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, 

COMMODITY FUTURES TRADING COMMISSION (CFTC) 

Mr. GENSLER. Good morning, Chairman Bachus, Ranking Member Frank, and members of the committee. I thank you for inviting 

me to today’s hearing on the international context of financial regulatory reform. 

I thank Ms. Bair, because this might be the last of five or six 

times we have testified together, and I wish you the best in everything you do. 

It has now been more than 2 years since the financial crisis, 

when both the financial system and, I would say, the financial regulatory system failed America. So many people throughout the 

world who never had any connection to derivatives or exotic financial contracts had their lives hurt by the risks taken by financial 

actors. 

All over the world, we still have high unemployment, homes that 

are worth less than their mortgages, and pension funds that have 

not regained the value they had before the crisis. And we still have 

very real uncertainties in our economy. 

And though the crisis had many causes, and I would agree with 

many of the members’ statements on that, it is clear that the 

swaps market did play a central role in the crisis. They added leverage to the financial system where more risk could be backed 

with less capital. 

They contributed, particularly through credit default swaps, to 

an asset bubble in the housing market, and I believe also accelerated the financial crisis as we got nearer to it. They contributed to 

a system where large financial institutions were not only thought 

to be too-big-to-fail, but we had a new phrase called ‘‘too-interconnected-to-fail.’’ 

The swaps, which do help manage and lower risk for many end 

users, actually concentrated and heightened risk in the economy by 

concentrating it amongst these large financially important firms. 

And as capital and risk knows no geographical boundaries, we 

really need to have international oversight that ensures that these 

20 

markets, these swaps and derivatives markets, function with integrity, transparency, openness, and competition. 

Transparency, openness, and competition have been found since 

the great reforms of the 1930s to benefit the securities markets and 

the futures markets and to benefit the economy and job growth and 

creation. 

To address the real weaknesses in the swap markets, the President and the G-20 leaders in Pittsburgh in 2009 laid out a framework for regulation of the swaps market. The United States and 

Japan both have passed reform through legislatures and are working on implementation. The European Council and the European 

Parliament currently are considering their swaps proposal, and 

Asian nations, as well as Canada, are working on their reforms. 

As we work to implement Dodd-Frank, we are actively coordinating with international regulators to promote robust and consistent standards, and the Commission participates in numerous 

international work groups. 

But we are also sharing our work product. At the CFTC, we actually started last July and August sharing our memos and term 

sheets and draft work products with international regulators both 

in Europe and in Asia. We have found this to be a great benefit, 

because we get comments even before we put some of the proposals 

out, and then, consistent with the Administrative Procedures Act, 

as we put proposals out, we have gotten more comments. 

Specifically, we are coordinating with regard to the scope of the 

derivatives regulation—central clearing, capital, margin, which has 

been raised by many members here, data reporting, business conduct standards, and the transparency initiatives, including trading 

on electronic trading platforms. 

Furthermore, a very important feature of the Act was a section 

called 722(d). I have learned so much now. But it states specifically 

that the Act relating to swaps shall not apply to activities outside 

the United States, unless those activities have a direct and significant connection with the activities of the commerce here. 

We are developing a plan for the application, as I said, 722(d), 

and expect to receive public input on that plan. And we are working closely with the SEC on the similar work that they are going 

to be doing there. 

Before I close, I will address the issue related to what occurs on 

July 16th. The Commission, 2 days ago, had a public meeting on 

this matter. First, a substantial portion of Title VII actually only 

becomes effective once we finalize rules. So, a majority of Title VII 

is not effective on July 16th. 

But for the provisions that are not dependent on a final rule— 

they are sort of self-executing—we proposed exemptive relief until 

December 31st of this year. This will provide relief from most of 

title VII. We look forward to hearing public comment on it. To the 

extent that we need to tailor additional relief towards the end of 

the year, we would look for additional relief at that time as we 

move forward. 

Effective reform requires comprehensive international response, 

and yes, consistency, but I thank you and I look forward to your 

questions. 

21 

[The prepared statement of Chairman Gensler can be found on 

page 96 of the appendix.] 

Chairman BACHUS. Thank you. 

Comptroller Walsh? 

STATEMENT OF THE HONORABLE JOHN WALSH, ACTING 

COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. WALSH. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee. I appreciate this opportunity to discuss the work that the OCC and the other banking 

agencies have under way to revise bank capital and liquidity requirements, consistent with the Dodd-Frank Act and Basel III. 

This is a complex undertaking, and we believe it is important to 

determine not only how individual requirements of Basel and 

Dodd-Frank will impact U.S. firms and their international competitiveness, but the cumulative impact of the provisions as well. 

The invitation letter raised the issue of an international race to 

the bottom, but I don’t think this is a serious concern when regulatory requirements are becoming more stringent around the world. 

The concern, instead, is that standards are being raised both significantly and comprehensively, and so much so that we could unnecessarily restrict financial intermediation and economic performance. 

At the same time, it is certainly true that if the same high standards are not adopted by all countries and enforced with the same 

vigor, U.S. institutions could be left at a competitive disadvantage. 

Our challenge, then, is to address the problems that led to the financial crisis without undermining the ability of banking institutions to support a strong national economy or placing U.S. institutions at an unfair competitive disadvantage internationally. 

Both the Dodd-Frank Act and Basel III aim to promote a more 

resilient banking sector by imposing stronger capital and liquidity 

standards. They raise the amount of regulatory capital and, just as 

important, the quality of that capital is improved significantly by 

placing much greater reliance on common equity and raising capital charges on risky asset classes. 

Banks will also be required to hold substantially more liquidity 

in the form of short-term, low-risk assets, and to increase their reliance on more stable long-term debt and core deposits. 

The Basel III standards were designed around the crisis experience of the largest internationally active U.S. banks. So while the 

OCC has also supported a capital surcharge of common equity for 

a small number of the very largest banks, that add-on should be 

modest, given where capital requirements have already moved. 

This is not to argue that surcharges should not be higher in 

countries where large institutions represent a greater risk to the 

national economy, particularly where the assets of the largest 

banks exceed national GDP, like Switzerland or the U.K. The 

United States, on the other hand, has imposed statutory caps on 

the size of our largest firms, and even the largest firms are only 

a fraction of GDP. 

While 27 countries reached general agreement on the policies 

and standards outlined in Basel III, the details of its implementaVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
22 

tion will likely vary from country to country. U.S. implementation 

is likely to be more complex and impose additional constraints than 

in other countries, owing to its interaction with Dodd-Frank. 

For example, the Collins Amendment set the floor on capital 

based upon current Basel I standards, a dual capital calculation 

that non-U.S. banks will not face. And with the simpler Basel I 

framework still used to determine capital, large U.S. banks will 

have far less incentive to rigorously pursue the complex and costly 

task of implementing the Basel II framework. 

The Dodd-Frank Act’s prohibition against the use of credit ratings also will impede our efforts to achieve international consistency in the implementation of Basel III since Basel III, the Basel 

II framework upon which it is built, and Basel I for that matter 

make use of internal ratings in several areas, including 

securitizations, assessment of counterparty credit risk, and trading 

book positions. 

Given capital already raised by large banks, a return to profitability and the extended phase-in period for the higher capital 

standards of Basel III, U.S. banks should be able to transition to 

the 7 percent standard without causing undue stress on the economic recovery. 

However, I am concerned with how much further we can turn up 

the dial without negative effects on lending capacity. A very real 

risk is that lending will fall, will become more expensive, and will 

again move from the regulated banking sector into the less regulated shadow banking sector. Certainly, a lesson of the financial 

crisis is that risk can migrate to and accumulate in the unregulated shadow sector with undesirable consequences. 

The fact that so many Dodd-Frank and Basel III reforms are occurring at once, with combined effects we cannot measure, is cause 

for caution. Before contemplating substantial further increases to 

capital and finalizing liquidity requirements, we need to take account of all the reforms being introduced, to increase the ability of 

the financial system to absorb losses, and to reduce the probability 

and potential impact of the failure of large institutions. 

The goal of all these changes is to improve the system’s resilience, but taken too far, we may limit the availability of credit that 

is needed to support economic growth. 

Thank you, and I welcome your questions. 

[The prepared statement of Acting Comptroller Walsh can be 

found on page 203 of the appendix.] 

Chairman BACHUS. Thank you. 

I think we all agree that banks should be sufficiently capitalized, 

particularly all the banks, but our global SIFIs, because we want 

to avoid bailouts. We want to avoid taxpayer funding and the shock 

that it does to the economy. And I think the same is true about 

overleveraging and borrowing overnight, which some of our investment banks were doing. 

Having said that, I think Comptroller Walsh has an important 

point. As we raise capital, and I know, Governor Tarullo, you actually had talked about 700 basis points on some of our SIFIs, how 

does that affect our lending? And do you think that will have any 

negative effect on our economy? 

Mr. TARULLO. Mr. Chairman, let me say a couple of things here. 

23 

First, it is important to understand that the rationale for a surcharge on systemically important institutions— 

Chairman BACHUS. Yes, that is what we are talking about, the 

surcharge. 

Mr. TARULLO. Right. It complements the rationale for Basel III, 

which is essentially a micro-prudential or firm-by-firm analysis. So 

for the Basel III capital standards, we will look at each firm and, 

basically on the basis of its balance sheet and its balance sheet 

alone, say what is the riskiness of the various assets on your balance sheet and relevant off-balance sheet assets. 

It doesn’t take into account the correlation of risk among firms 

that hold similar assets. In a financial crisis, what happens, of 

course, is that those assets, particularly traded assets, are the ones 

that come under the most stress, the ones for which the market is 

most imploding. And that is why these systemic effects that we saw 

in 2008 are of such concern to us. 

So the motivation for the surcharge is one that takes into account the size, interconnectedness, and associated systemic consequences of the failure of such an institution. That is the first 

point. 

Second point: There has been a fair amount of attention to the 

numbers I cited in that speech I gave about a week-and-a-half ago. 

What I said in that speech is that when analysts here and abroad 

have applied some analyses or some modes of analysis as to how 

much the surcharge should be in order to try to contain that systemic risk, there is a range that everybody comes up with, within 

which you have to make a certain set of assumptions. 

And that range, which I indicated was some variant on a certain 

number of percentage points as high as maybe 7 percentage points 

above Basil III, is just what different studies have produced. That 

is not to say that this is the amount that gets eventually adopted. 

There are reasons to calibrate any such range. You have to 

choose a number somewhere, and that is what is going on right 

now in the international process, and domestically it is what will 

go on when the Federal Reserve does its rulemaking on the enhanced prudential standards. 

So I absolutely agree, Mr. Chairman, that you have to take into 

account the cost for the firms and the benefits to the firms, and we 

have done a cost analysis. We have used the analytic tools we have 

available to us. But what is important is not to lose sight of the 

cost of not acting here. 

Chairman BACHUS. I understand. Yes, and I understand there is 

a cost to not acting, but if you—for instance, Comptroller Walsh is 

concerned, as I am, and I know that Chairman Bair takes a different approach, but under Basel III, I think it is called the advanced approach to risk management, other countries will be using 

this approach to sort of refine their approach, and the Collins 

amendment takes that off the table for us. 

I would ask Under Secretary Brainard, are you concerned about 

that? Are you concerned about that, Governor Tarullo? 

Mr. TARULLO. Sir, as you probably know, my concerns about the 

implementation of Basel II pre-dated my arrival at the Federal Reserve. That related to a lot of the academic work I was doing before 

I came to the Fed. 

24 

And yes, I am concerned. I am particularly concerned about the 

way it has been implemented. One would think that if you put a 

procyclical capital regime into place in the middle of the biggest recession since the 1930s, that capital requirements ought to go up. 

But they didn’t, and that is why I think it is important to make 

the kind of proposals on compliance that I made in my testimony. 

Chairman BACHUS. Under Secretary? 

Ms. BRAINARD. I think it is very important as we are looking at 

this SIFI surcharge. Because these institutions are competing 

internationally, it is absolutely critical that whatever is agreed is 

comparable across countries and mandatory in every jurisdiction. 

And that is why we have put such an emphasis on having common equity, which is, of course, the strongest, most loss-absorbing 

kind of capital. We would like to see an international agreement 

that has common equity and where it gives very little discretion to 

supervisors. 

The other thing that I think is important just on the issue that 

you raise, risk-rated assets and how they are assessed, I think our 

institutions are concerned and we share those concerns. And that 

is why, as I said earlier, and as Governor Tarullo said, we are trying to put in place monitoring mechanisms for the first time so that 

we will be able to have some visibility into how supervisors are actually assessing risk weights. 

The simple leverage ratio that was agreed to in Basel III will be 

helpful. It doesn’t go as far as the Collins amendment, but it is another way of trying to create a floor. 

Chairman BACHUS. Thank you. And I think we are all concerned 

about rules that are on the books that aren’t enforced by some of 

these other countries. 

Ms. BAIR. Mr. Chairman, if I could just add, I think I want to 

reiterate what Governor Tarullo indicated, that these Advanced 

Approaches have not worked. They allowed European banks implementing them to significantly reduce their capital levels. They were 

overleveraged going into this crisis. 

And then, as the recession hit, when you expect the capital levels 

to go up because the probability of default on loans is going up in 

a recession, capital kept going down. 

Capital is still going down. There is a recent Barclay’s report 

which we are happy to share with you. Investors have no confidence in the Advanced Approaches. It is a very large issue, but 

all the effort in the Basel Committee is to try to put more objective 

constraints on the ability of these individual banks to essentially 

set their own capital standards. 

The United States is very strongly pushing that. I think that is 

the direction to go. 

I must say, in terms of easing regulatory burden on large institutions, given the tremendous flaws in the Advanced Approaches, it 

is very expensive to implement. I would just get rid of it. It is 

harmful, and it is not helpful. And I think we can improve the current Basel I standard. But if we are going to try to decrease compliance costs, I think one way to do that would be to just get rid of 

the Advanced Approaches altogether. 

Chairman BACHUS. Thank you. 

Mr. Frank? 

25 

Mr. FRANK. I want to begin by joining my colleague, Ms. Waters, 

in saying good-bye to Sheila Bair. I will say that my working relationship with Chairman Bair has been an extraordinarily beneficial 

one for me, and I just wanted to make a prediction now to Chairman Bair that she will be missed, even by people who don’t know 

that now. But I think that her tenure will stand out as an extraordinary example of the right kind of public service. 

I am not sure I will be able to get back. I would like to give credit where it is due. Mr. Zubrow, from JPMorgan Chase, I just want 

to read a little bit from what he says, because we tend in hearings, 

obviously, to focus on differences. But we ought to understand the 

commonality that we come from. 

On page 3, he has a quick—recent initiatives designed to reduce 

risk taken by U.S. financial firms. And it is Federal Reserve supervision, off-balance sheet activity being reduced, margins reporting 

and supervision of derivatives, centrally clearing derivatives, risk 

retention, prohibition on proprietary trading. 

Here is what he says, ‘‘As a result of these post-financial crisis 

changes, Lehman Brothers would have been subject to the same 

Federal Reserve capital and prudential supervision as JPMorgan 

Chase, including extremely high capital charges for collateralized 

debt obligations and other exotic securities. 

‘‘AIG would have been required to register as a major swap participant, report on its positions and subject itself to Federal supervision. 

‘‘Countrywide and Washington Mutual would have been subject 

to the same mortgage underwriting standards as national banks 

and would have been either significantly limited in making 

subprime loans or required to retain the risk of these mortgages. 

‘‘And the FSOC and the Office of Financial Research would have 

been gathering data. These are important changes.’’ 

I appreciate this acknowledgement. Those are all things that are 

in this bill and, as he notes, would have substantially lessened the 

likelihood of those institutions that were major failures and, as he 

notes, apply all of the restrictions in the banking system to the unregulated. This is where the shadow bank system came in. 

He also then, on page 5, talks about what we did in terms of resolution of large institutions, which I continue to believe should be 

called dissolution. That is a euphemism too far. 

And what he says in summary of the listing of these is, ‘‘The 

United States is ahead of the rest of the world. The FDIC’s new 

authorities are already in place. Most countries have no plans for 

orderly resolution. Some have prospectively acknowledged that 

their banks should be bailed out at taxpayer expense, should a crisis occur. 

‘‘The U.S. is doing the hard work to make orderly resolution of 

large financial institutions a viable option. And JPMorgan Chase 

and other banks are devoting extraordinary resources to this 

unheralded project.’’ 

It is very clear from the context that this is not a case where he 

is complaining that America is different from the rest of the world. 

It is a case where he is boasting that together with the financial 

institutions, with Congress and the regulatory agencies, we are 

ahead of the rest of the world. 

26 

And on page 6, he has a heading, ‘‘Further Insulation for Taxpayers.’’ And Mr. Zubrow says, ‘‘Aside from decreasing the risk of 

trouble at large financial institutions, Dodd-Frank also reduces the 

risk that a large institution’s failure would impose costs on taxpayers.’’ 

So, Mr. Zubrow, I thank you for that. And we have some differences, but I think we ought to be clear where they are. 

Mr. Tarullo, one point, because it goes on too-big-to-fail. On the 

imposition of a capital charge, I noticed that one of the contributory 

factors you said could be considered would be an increase in the 

capital charge to offset the perceived advantage of being too-big-tofail. 

I differ with that, because I do not think we ought to be reinforcing it. Rather than charge people for what I believe is an increasingly inaccurate perception—even Moody’s, my own view is on 

the rating agencies, when Moody’s finally gets it, it has to be pretty 

clear-cut—what we have now, I think, is an increasing recognition 

that is not the case. And I think that is one area where, and I understand that we don’t want to charge banks excessively. 

I would hope you would reconsider that. It does not seem to me— 

and rather than charge the bank for inaccurate perception, let us 

all make sure that we dissolve the inaccurate perception. And I 

would hope that would drop out. 

Finally, to Mr. Gensler, there have been concerns about margin 

requirements on sovereign wealth funds. Margin requirements, my 

New York colleagues have noted, when the non-U.S. subsidiary of 

a U.S. bank is dealing with a non-U.S. entity, that there could be 

a margin requirement. 

My own view is that is a very legitimate area of competitive advantage. Do you, under the statute, have the authority to take that 

into account? And can you and your fellow Commissioners adjust 

with regard to margins so that in those very particular cases where 

there would be an international setting, a competitive disadvantage, make it go away? 

Mr. GENSLER. We are working along with the prudential regulators, because they actually have authority under Dodd-Frank to 

set the margins for the banks. We just have the non-banks. But we 

are, along with the SEC, initiating dialogues with international colleagues to try to get— 

Mr. FRANK. But do you have the existing statutory authority collectively to adjust, if it looks like there might be a problem? 

Mr. GENSLER. I think that we have the existing authority. It has 

to be based upon rational reasons, along with how the Administrative Procedure Act has us do it. Yes. 

Mr. FRANK. I understand. I am assuming rationality, but you do 

have sufficient statutory authority to deal with those specific situations that we are talking about? 

Mr. GENSLER. Along with other regulators who actually have the 

auuthority, because we are not— 

Mr. FRANK. I appreciate that. Let me then ask you—may I have 

just 30 seconds—do the other regulators who would have that authority concur that in those very specific situations where we were 

talking about a competitive disadvantage, the authority would be 

there to take that into account? 

27 

Mr. Tarullo? 

Mr. TARULLO. Generally, I think that is true. 

Mr. FRANK. Ms. Bair? 

Ms. BAIR. Yes, we have the authority. 

Mr. FRANK. Thank you. 

Thank you, Mr. Chairman. 

Oh, I am sorry. Mr. Walsh? 

Mr. WALSH. Yes. 

And you agree also? 

Okay. Waving doesn’t quite make it into the record. 

Mr. WALSH. I didn’t know you wanted to hear, but, yes, absolutely. 

Mr. FRANK. That I wanted to hear. I don’t always want to hear, 

but that I wanted to hear. 

Chairman BACHUS. Thank you. 

Was JPMorgan Chase’s testimony inside a Valentine card? 

Mr. FRANK. Yes, but there was no box of candy with it, so I didn’t 

have to report it to the Ethics Committee. 

Chairman BACHUS. Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Certainly, there is wide agreement that capital and liquidity 

standards were most inadequate going into the financial panic of 

2008, and clearly there is a convergence of opinion they must be 

raised. 

But I think the question, particularly in this hearing, that has 

to be addressed, is what is the cumulative impact of raising those 

capital standards under Basel III? What will be the impact of the 

extra capital standards to be assessed against the SIFI institutions 

just imposed in the 2,000-plus pages of Dodd-Frank? 

I am uncertain that we know the answer to that question. I have 

heard many testify that we must have stability in our capital markets. I agree that stability is a good thing. But we have had stability in our employment markets for almost 21⁄2 years. Unemployment has stabilized at roughly 9 percent. So stability as a macroeconomic virtue may be somewhat overrated. 

And, clearly, I think we have to look at the balance, again, of 

what ultimately will be the impact of this extra stability on our job 

creation. 

Secretary Brainard, you confused me with one part of your testimony, and perhaps I am going to give you an opportunity to explain it. 

What I thought I heard you say is that it was critical that the 

United States essentially be the first mover in regulatory reform. 

But at the same time, I believe I heard you and almost every other 

panelist talk about their fears of essentially a race to the bottom 

in what we know as regulatory arbitrage. 

So I am having a little trouble understanding why it is missioncritical to move first and why we should not move concurrently. I 

cannot reconcile the two. Did I misunderstand part of your testimony? 

Ms. BRAINARD. Let me just address both points that you raised. 

First on all, on the capital standards, there was a great deal of 

consideration in the development of the Basel III capital standards 

to the macroeconomic impacts of those capital standards. 

28 

Our regulators did a lot of impacts here on the United States, 

and it was also done internationally. There was a broad agreement—I have seen the analysis—that the transition timelines, 

which are quite generous in the Basel III framework, give our institutions plenty of time to earn their way to meeting those capital 

standards without having any adverse impact. 

And so, I don’t think we are actually choosing between stability 

and growth. In fact, I think the real point here is that we will have 

much healthier growth if, in fact, we put in place a safe and sound 

financial system. 

With regard to the advantages— 

Mr. HENSARLING. Let me interrupt here, if I could. Chairman 

Bernanke, I guess about 10 days ago, spoke before the International Monetary Policy Conference in Atlanta. When asked about 

the cumulative impact of Basel III, Dodd-Frank, SIFI charges, he 

said, ‘‘Has anybody done a comprehensive analysis of the impact on 

credit? I can’t pretend that anybody really has. It is just too complicated.’’ 

So I think what I am hearing from you, Secretary, is that you 

may know something that the Chairman doesn’t. 

Ms. BRAINARD. With regard to the capital standards in particular, within Basel III— 

Mr. HENSARLING. So you are looking solely to the capital standards? 

Ms. BRAINARD. Yes, there has been quite a bit of analysis of that. 

Secondly, with regard to moving first, really, I think, we have a 

choice, and we have chosen as a nation to put in place very strong 

standards and then to work internationally to get other countries 

to agree on those standards. 

Mr. HENSARLING. But what assurance for convergence— 

Ms. BRAINARD. But in terms of implementation, we actually 

agree— 

Mr. HENSARLING. If I could, Madam Secretary, what assures the 

convergence of these standards? Many of you have come before this 

committee to say that Basel II had disparate interpretations, disparity of compliance. And that was with Basel II. What assurance 

is there that there is going to be this uniformity of compliance and 

timing? What is the mechanism? 

Ms. BRAINARD. What we have done is, first of all, we have gotten 

agreement in the G-20 and the FSB and the Basel Committee 

around the same standards, the same set of reforms, the same 

principles in all of the three areas that were under discussion 

today. 

Second, there are implementation deadlines for most of those 

areas. And third, there are processes put in place that permit supervisors to have peer review and to hold other jurisdictions to account for those implementation deadlines. 

Mr. HENSARLING. I just would say, in the remaining time I do 

not have, that Michael Barnier has said, ‘‘Europe is not going to 

be under American supervision.’’ And they seem to be on a different timeline. 

I am out of time. I will— 

Chairman BACHUS. Thank you. 

Ms. Waters? 

29 

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

I would like to engage the Honorable Sheila Bair. 

Chairman Bair, as you know, so many bad practices and a considerable amount of fraud has proliferated throughout the mortgage servicing industry in the years following the financial crisis. 

And to be honest, I think the response of regulators could have 

been much quicker and stronger. 

For example, I was dissatisfied with the Federal interagency 

foreclosure review released by regulators in April. And since you 

have been leading the charge for sustainable loan modifications, I 

think the FDIC was likewise disappointed. 

Let me read from the FDIC’s press release: ‘‘The interagency review was limited to the management of foreclosure practices and 

procedures and was not by its nature a full-scope review of the loan 

modification or other loss mitigation efforts of these servicers. A 

thorough regulatory review of loss mitigation efforts is needed to 

ensure processes are sufficiently robust to prevent wrongful foreclosure actions and to ensure servicers have identified the extent 

to which individual homeowners have been harmed.’’ 

So, first, it seems you believe that another regulatory review is 

needed. Is that what we need to deal with this, Chairman Bair? 

Ms. BAIR. I just wanted to make sure it was clear what the scope 

of the review was. I don’t think there was disagreement among any 

of the regulators in describing the scope. 

Right now, pursuant to the consent orders that are being discussed, there needs to be a look-back. These major servicers need 

to do a thorough review of servicing errors retroactively, and identify harmed borrowers and provide appropriate redress for that, as 

well as some type of complaint process. 

We are in discussions with our fellow regulators on that right 

now. I would defer to Mr. Walsh, who is the lead regulator for most 

of the servicers and has been playing a key role in this. 

But I do think it is important for the public to explain what was 

and was not covered. This is also being coordinated with the Justice Department and the State AGs on the law enforcement end. 

There is some hope that this can all be packaged together so that 

there is one set of standards for both the prospective reforms, to 

make sure we don’t have these errors going forward, as well as the 

look-back to make sure that borrowers who were harmed receive 

appropriate redress. 

Ms. WATERS. So this recommendation about letting the servicers 

hire outside consultants to investigate them is of concern to, I suppose, many of us. Do you believe that outside consultants can do 

the job that is needed to be done, instead of a regulatory review? 

Ms. BAIR. There needs to be a robust validation process. So, yes, 

we would like to see an interagency examination team reviewing 

sizable samples of the reviews that the independent consultants 

are doing to validate the work. 

I think everybody is operating in good faith here, but an extra 

set of eyes, given the importance of this project, would be helpful. 

Ms. WATERS. Mr. Walsh, you testified to the Senate Banking 

Committee in March that only a small number of wrongful foreclosures took place. Do you still think that? And if the Federal 

interagency review was limited, how would we know that? 

30 

Mr. WALSH. I think the key there will be the look-back that 

Chairman Bair was referring to. The sampling that was done in 

those exams was to establish whether there were sufficient grounds 

to determine that the servicers had failed in significant ways and 

that remedial actions, cease-and-desist orders, remediation plans, 

were needed. 

And the result of that sampling was to determine that was indeed the case. Now, having done that, we have enforcement orders 

in place that will require significant follow-up, both implementation plans and also, again, this look-back process that Chairman 

Bair referred to and that we are working on, on an interagency 

basis. 

And that will establish the wider scope of problems, if there are 

more substantial problems. The reference was only made to the 

sample. 

Ms. WATERS. In that review, how could it be determined if a foreclosure was improper, if the review didn’t look at how servicer software applied to borrower payments or to look to see if the fees 

servicers charged borrowers were proper or otherwise verify that 

servicer records were in fact correct? 

None of that was looked at in the review. Is that right? 

Mr. WALSH. Certain of those elements were looked at. Fees and 

other things were checked, but the task will now be to look at those 

things in the context of this look-back review, where you will drill 

down deeper. 

Ms. WATERS. Thank you, Mr. Chairman, and I yield back. 

Chairman BACHUS. Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. 

I wanted to ask Chairman Bair and Mr. Tarullo on a point here, 

and it goes to Tom Hoenig, the president of the Kansas City Fed’s, 

commentary on this very thing you are struggling with, and that 

is, as he says, ‘‘The funding advantages the too-big-to-fail organizations have over others amounted to $250 billion for the 28 largest 

banks in 2009.’’ 

‘‘At the Federal Reserve Bank of Kansas City,’’ he says, ‘‘we estimate the ratings and funding advantage for the five largest U.S. 

banking organizations during the crisis, and in 2009, these organizations had senior long-term bank debt that was rated four notches 

higher on average than it would have been based on just the actual 

condition of the banks, with one bank given an eight-notch upgrade 

for being too-big-to-fail. Looking at the yield curve, this four-notch 

advantage translates into 160 basis point savings for debt, with 2 

years to maturity and over 360 basis points for 7 years to maturity.’’ 

This is huge. And it has a highly distorting influence on the market. 

I also notice, Mr. Tarullo, you argue, ‘‘An ancillary rationale is 

that additional capital requirements could help offset any funding 

advantage derived from the perceived status of such institutions as 

too-big-to-fail.’’ 

We had a hearing yesterday regarding too-big-to-fail. And I think 

some very well-meaning people believe that the problem is solved 

by this new Orderly Liquidation Authority. 

31 

And, of course, according to their logic, because of the new authority, the institutions will not be perceived as being bailed out, 

and the rating agencies will downgrade those institutions, which is 

going to lead to higher borrowing costs, thus eliminating that status. 

But I don’t believe many of the Fed Governors believe this, and 

I don’t believe many in the market believe it. 

I will start with you, Chairman Bair, and ask you for your perception on this, and how do you believe the Orderly Liquidation 

Authority impacts the size and scope of this global surcharge in the 

future and this global systemically important financial institution 

surcharge? 

Ms. BAIR. I would say too-big-to-fail was a problem pre-crisis. 

There were bump-ups there. The problem is that the bailouts reinforce the perception, and so we have seen widening disparities in 

funding costs between small and large institutions. 

We are making progress already. Moody’s has announced that for 

a number of banks on negative watch for downgrade, they are actively considering removing the bump-up. 

Mr. ROYCE. You said they may— 

Ms. BAIR. They may; that is right. As we have described before, 

the FDIC and the Fed, through implementation of the living will 

requirement, and thus through our liquidation authority, has a 

case to make and will make that. Yes, this can work, it will work, 

and bailouts will be a thing of the past. 

Too-big-to-fail was well-ingrained into market thinking pre-crisis. 

It has been with us for too long. It is going to take some time to 

get rid of it. But I do think Title II and Title I give us the authorities to take the steps to get rid of it over time. It is going to take 

some time, but I do believe that. 

Also, I don’t see any alternative. 

Mr. ROYCE. But let me then go to Mr. Tarullo for his thoughts. 

Mr. TARULLO. Mr. Royce, as Sheila—I will say Chairman Bair for 

the next 22 days, every time I address her—I think Chairman Bair 

has already made the point that it is not an off/on switch. That is, 

we have the orderly resolution authority in place now, which the 

FDIC is implementing. 

As I have suggested, the capital standards are a complement to 

the orderly resolution authority. And in order to get to market discipline, I think, actually, both of these things are going to change. 

If you think about it, if you end up in a situation in which 

counterparties truly believe that there is not going to be a bailout 

forthcoming, those who advance credit to very large organizations 

are going to demand higher levels of capital than existed in the 

past. 

So I have regarded the resolution authority and the SIFI capital 

surcharge as complementary, self-reinforcing mechanisms which 

can move us along the road to what I think everybody on the committee and everybody on this panel agrees should be the end, 

which is eliminating any too-big-to-fail reality or perception. 

Mr. ROYCE. I agree that should be our end goal. And the one concern I have is the way in which the legislation was written. I am 

afraid, in some ways, we may have reinforced it. 

32 

And I say that because counterparties—you can see it right now 

in the market. Clearly, at the moment, things have not changed, 

in terms of the way too-big-to-fail is being perceived, and you see 

it by the basis point spread in the market. 

But my time has expired, and thank you. 

Chairman BACHUS. We will take one more on each side, and 

then, when we come back, we will start with the other members 

who haven’t— 

Mr. FRANK. Right. Yes, Mr. Chairman, I think we both agreed on 

that. For our members, when we return, it may be a different 

panel, but we will start the questioning with the—those of us who 

have already asked will not go again. We will start with those who 

haven’t asked. 

Chairman BACHUS. And after one witness on each side here, we 

will discharge this panel, so you can look forward to lunch off the 

Hill. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you. 

I would like to ask all the panelists about the capital requirements and whether or not they will have a disadvantage on American firms. 

Specifically, I would like to start with Chairwoman Bair. Section 

165 of the Wall Street Reform Act requires the Fed to impose 

heightened capital requirements on the most complex U.S. banking 

entities. In your opinion, should any SIFI charge adopted under 

Basel III satisfy that requirement? Or should American banks be 

subject to a surcharge in addition to what is required under Basel 

III? 

Ms. BAIR. I would defer to Governor Tarullo because the Fed 

does have the authority, but I believe he has said that the Fed is 

going to be taking this up with Basel III. At least for capital, we 

have all made a very, very conscientious effort to make sure that 

the standards are harmonized internationally. 

Mrs. MALONEY. And, Governor? 

Ms. BAIR. I am sorry—the SIFI surcharge would be on top of 

Basel III. Yes. I thought your question was whether the Fed would 

have something in addition to Basel III. 

Mrs. MALONEY. No, the SIFI charge. 

Ms. BAIR. Whatever the SIFI charge is that the Basel Committee 

and the Group of Governors and Heads of Supervision agrees to 

will be what the Fed implements here. Is that correct? Yes. 

Mrs. MALONEY. So in other words—maybe the Fed should answer. 

Ms. BAIR. Yes, the Fed. 

Mrs. MALONEY. The Fed should answer. In other words, are you 

going to put an additional charge? Wouldn’t that be a disadvantage 

for our banks? 

Mr. TARULLO. It would, Mrs. Maloney, it would be an additional 

charge on top of the Basel III standards. But as Chairman Bair 

just noted, it is one that we are working on in the Basel Committee 

to get agreement on internationally so that comparable institutions 

in all the major financial markets would have a comparable surcharge. 

33 

Mrs. MALONEY. That is definitely a good goal. Otherwise, I feel 

that we would be disadvantaged. 

May I ask you and the other panelists whether you believe that 

there is a risk of regulatory arbitrage with the requirements that 

we have in our country? And whether there is any risk that U.S. 

markets and our financial institutions could be placed at a competitive disadvantage? 

Mr. TARULLO. Shall I start? 

Mrs. MALONEY. Yes. 

Mr. TARULLO. Yes, there is always a risk of that. And I think you 

have heard from several of us and a number of your colleagues on 

both sides of the aisle that in the derivatives and margin areas in 

particular, I think a number of us are concerned about that, which 

is why there is a need to accelerate work to get basic convergence 

on that proposition. 

Mrs. MALONEY. Would anyone else like to comment? Mr. Gensler, 

since derivatives is your area, could you comment on competitiveness, whether or not we will be at a disadvantage— 

Mr. GENSLER. It is a concern shared with every regulator and 

even Treasury here, but I think that there is always that challenge. 

It was one of the reasons why I think this nation didn’t regulate 

this market. It was one of the five or six key assumptions before 

the crisis, well, the markets will just go overseas. 

I do think there is international coordination on and good consensus on central clearing, on capital, because that is part of Basel 

III. I think we are going to work together on the margining approach. I think there is good consensus on risk mitigation techniques. There is, frankly, a greater challenge on some of the transparency initiatives. 

We have swap execution facilities. Europe is looking at something called OTFs, but those OTFs might be a little different than 

what we are doing here on swap execution facilities. 

Mrs. MALONEY. And Chairman Schapiro? 

Ms. SCHAPIRO. Thank you. I would just add, I agree there is, of 

course, always a risk of regulatory arbitrage, but there are also 

very significant incentives among the G-20, among the Financial 

Stability Board members who have put forward the recommendations to implement the G-20 commitments, about what needs to be 

done in the OTC derivatives space. 

And while we have a lot of consensus around a lot of issues, 

there are a few, as Chairman Gensler notes—trading platforms and 

transparency regimes I would speak to in particular—where we are 

not exactly in the same place. That is why it is so important for 

us to continue to push, to lead task forces and working groups of 

international regulators, and to persuade others to come to very 

consistent requirements along with the United States. 

Mrs. MALONEY. And Mr. Walsh? 

Mr. WALSH. I guess I would just add to what the others have 

said, that commitments have been made to achieve consistency. 

And if we succeed in achieving consistency in the derivatives area 

and the capital area, and, as Governor Tarullo pointed out, if people actually deliver on those commitments in comparable ways, 

then there should not be an arbitrage or a race-to-the-bottom probVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
34 

lem. But of course, it is challenging to do that in an international 

context and we will have to work at that. 

We also have to be careful here at home that as we integrate 

some of the Dodd-Frank requirements specific to us and the international commitments, that it works well also. 

Mrs. MALONEY. My time has expired. Thank you very much. 

Chairman BACHUS. Thank you. 

Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I would note that there is not a representative of the insurance 

industry on this panel. So I will ask Ms. Brainard, do you know 

when the President plans to finally nominate an independent insurance expert who will have a vote on FSOC? 

Ms. BRAINARD. In fact, we have our new Director of the Federal 

Insurance Office, Michael McRaith, in place; I think it has been 3 

days. 

Mrs. BIGGERT. You have him, but you don’t have the insurance 

expert who has the vote on FSOC, as you all do. 

Ms. BRAINARD. I don’t have the answer for you on the timing on 

that, but I will get that for you. 

Mrs. BIGGERT. All right. Then, critical to the U.S. competitiveness is the FIO person, and I am glad, and he also—I happen to 

be from Illinois, so I am very happy that he is there—but so he will 

proceed right away—3 days he has been there now? 

Ms. BRAINARD. That is right, and I can get you the information 

on the expert as well. 

Mrs. BIGGERT. Okay. Because certainly with what is happening 

in USTR on the trade agreements, it is important that he be there. 

And then to all of you, since all of you represent Federal agencies 

that are a part of FSOC, can someone explain their understanding 

of how FSOC’s proposed rules could impact insurance businesses, 

which are regulated by the States? We have no insurance person 

to really let us know. 

Ms. Brainard? 

Ms. BRAINARD. I think, first of all, the insurance commissioners 

from the States will be represented on FSOC, and as they go 

through the designations process, will be part of that process. 

The other thing that we are working hard on just because this 

hearing is very focused on achieving international consistency, is 

that we already have a representative, the NAIC, on the international body, the IAIS. And we are looking forward to having FIO 

represented there as well. 

Mrs. BIGGERT. Okay. So your resources and staffs are devoted to 

ensuring that the FSOC rules when they are finalized, that taking 

into consideration the uniqueness of the insurance and— 

Ms. BRAINARD. Absolutely. I think given the importance of the 

State insurance commissioners, that FSOC will proceed in a way 

that takes into account the unique nature of this market and the 

way that it is regulated in the United States. 

Mrs. BIGGERT. So looking at the Volcker Rule, which several of 

you have addressed here, would insurance businesses be allowed to 

continue to invest in private equity? 

Ms. BRAINARD. I cannot speak to how the Volcker Rule will be 

applied. As you know, that process is yet to come, and in particular 

35 

how it will applied, but that is something that is still under consideration. 

Mrs. BIGGERT. Mr. Tarullo? 

Mr. TARULLO. The key issue, though, with the Volcker Rule is 

whether or not the depository institution is engaged in the activity 

and then whether any insured institution that is affiliated with 

that entity engaged in the activity. If an insurance company is 

itself not the owner of a depository institution, then it is not going 

to be covered. 

Mrs. BIGGERT. Okay. 

Chairman Schapiro, would you agree with that? 

Ms. SCHAPIRO. Yes, I would. The Volcker Rule applies to banking 

entities, and so it would depend upon the structure of a particular 

insurance company. 

Mrs. BIGGERT. Okay. And I would note that before the August recess, the Subcommittee on Insurance, Housing and Community Opportunity will hold an insurance oversight hearing to further examine these related insurance issues. And I hope that by then we 

have a representative on FSOC, which would be helpful. 

With that, I yield back. 

Chairman BACHUS. Thank you. 

And Under Secretary Brainard, that is something I think many 

of our members are concerned about, that that position is filled. 

And I know that the Administration has put some ethical considerations out, but one of them was that they had not been involved 

in insurance operations, which sort of rules out a lot of people with 

experience. 

At this time, the first panel is discharged. We appreciate your 

testimony. And the fact that the hearing was not a long hearing 

doesn’t mean that—we have your testimony, which will be of great 

value to us. And we look forward to working with you in the coming months as we try to implement Dodd-Frank. 

Thank you. 

The committee stands in recess until votes are over. 

[recess] 

Chairman BACHUS. I want to welcome our panelists. The hearing 

will come to order. 

Our second panel is made up of: Mr. Stephen O’Connor, managing director of Morgan Stanley, and chairman of the International Swaps and Derivatives Association, testifying on behalf of 

the International Swaps and Derivatives Association; Mr. Tim 

Ryan, president and CEO of the Securities Industry and Financial 

Markets Association, SIFMA, and we welcome you, Mr. Ryan; Professor Hal Scott, Nomura professor and director of the Program on 

International Financial Systems at Harvard Law School; Mr. Barry 

Zubrow, executive vice president and chief risk officer of JPMorgan 

Chase; and Mr. Damon Silvers, associate general counsel of the 

AFL-CIO. 

So, Mr. O’Connor, we will start with you. 

36 

STATEMENT OF STEPHEN O’CONNOR, MANAGING DIRECTOR, 

MORGAN STANLEY, AND CHAIRMAN, INTERNATIONAL 

SWAPS AND DERIVATIVES ASSOCIATION, ON BEHALF OF 

THE INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION (ISDA) 

Mr. O’CONNOR. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee, for the opportunity to testify today. 

I would like to begin by making five key points. 

First, ISDA represents more than 800 members from 56 countries. Our broad membership includes corporations, asset managers, governments, supranational entities, exchanges, and clearinghouses, as well as global and regional banks. 

ISDA and our members squarely support the goals of DoddFrank and global financial regulatory reform. We have worked 

proactively with policymakers in the United States and around the 

world to this goal. 

Second, we have made and continue to make substantial progress 

in implementing the most important aspects of reform, those relating to systemic risk mitigation, such as central clearing and trade 

repositories. 

Third, further improvements can and will be made. And I would 

like to note here that there is a high degree of consistency between 

U.S. regulators and regulators in other major jurisdictions on the 

systemic risk rules relating to clearing and regulatory reporting. 

This is very helpful for market participants. 

On the other hand, there is far less consensus between the 

United States and overseas jurisdictions regarding matters outside 

the systemic risk area. These issues relate primarily to OTC derivatives market structure, and they are critical to the viability of 

U.S. markets. 

Finally, in addition to the potentially substantive policy differences between the United States and other regulatory regimes, 

there are equally significant timing differences between jurisdictions, differences that will go a long way in determining the competitiveness of our country’s markets. 

Turning to some of the key policy differences, we believe that the 

application and effect of U.S. law and regulation should be as evenhanded as possible with respect to both U.S. and non-U.S. institutions. And, regrettably, at this point, it seems that there will not 

be equal treatment of U.S. and foreign firms at the institutional 

level. 

In addition, our members are concerned about the potentially divergent approaches at the jurisdictional level. It appears that other 

regulatory jurisdictions are likely to adopt regimes that differ from 

our own in meaningful and material ways. 

As I have mentioned, these policy differences are not generally 

in the area of systemic risk mitigation, the primary driver of regulatory reform. Instead, they are in the area of market structure. 

Here are some examples of the differences. 

Banks operating in the United States will be forced to comply 

with Section 716 of the Dodd-Frank Act, the so-called ‘‘push-out’’ 

provision, which has no counterpart in proposed European or Asian 

regulations. 

37 

ISDA supports the removal of Section 716 to resolve the inefficiencies, competitive challenges, and increased systemic risk that 

will surely result from such a requirement. 

Another area of difference is with regard to electronic trading 

venues or SEFs. At this point, critical components of the CFTC 

rules for SEFs have no regulatory parallel in Europe or other major 

jurisdictions. 

As I have noted in great detail in my written testimony. these 

rules could adversely impact U.S. competitiveness and the depth 

and liquidity of U.S. markets. And ironically, they will likely harm 

the intended beneficiaries of the new rule, the commercial endusers of derivatives. 

Another important point of divergence relates to the proposed 

business conduct rule. The CFTC’s proposal seems to ignore the institutional nature of the OTC derivative market. Moreover, the 

standards far exceed the protections required by the statute and go 

well beyond the regulatory framework contemplated in other jurisdictions. These rules will further impair the viability of U.S. markets. 

Another key issue is the issue of extraterritorial jurisdiction. 

Today, there are serious concerns about the reach of the DoddFrank Act outside of the United States and into activities undertaken overseas. Extraterritorial reach exacerbates the problems 

created by asymmetric rules. Furthermore, it is inconsistent with 

congressional intent in limiting the territorial scope of the new regulatory framework for derivatives. 

As I mentioned, there are also meaningful differences in timing 

between the various jurisdictions. It appears that the U.S. financial 

markets will be subjected to a new regulatory framework well before other jurisdictions. This will create an uneven playing field 

and could cause capital to leave our shore, and will be harmful to 

U.S. markets. 

To summarize, there are large and growing differences in regulatory reform efforts in the United States and abroad. These differences have less to do with systemic issues—risk issues—and 

more to do with the structure of markets. 

Policy differences that impose significant costs but offer few, if 

any, offsetting benefits, may lead to decreased liquidity, a reduction 

in growth of capital, and the erosion of U.S. competitiveness. These 

losses will be measured in jobs and tax revenues. 

The best way to avoid the issues that I have discussed and to 

protect the competitiveness of U.S. markets is to work with Europeans and other overseas policymakers to ensure strong, yet harmonized, rules that are implemented along the same timeline. This 

will reduce the impact of any temporary or permanent regulatory 

differences between markets and mitigate the damages these differences will cause to the United States. 

Thank you, and I would be happy to answer your questions. 

[The prepared statement of Mr. O’Connor can be found on page 

110 of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Ryan? 

38 

STATEMENT OF T. TIMOTHY RYAN, JR., PRESIDENT & CEO OF 

THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. RYAN. Thank you, Mr. Chairman, and members of the committee. 

In my written statement, I have responded to the questions you 

asked in your invitation. So in my oral statement, I want to focus 

on three major issues that significantly warrant special attention. 

It is our hope that Congress will agree with me and press for answers to questions I will raise through a combination of further 

hearings by this committee and additional study by policymakers 

here and globally. 

First, who are the global systemically important financial institutions, the so-called G–SIFIs? This is a very difficult question which 

frames subsequent debate, including the capital surcharge debate 

you had this morning, and impacts what actions should be taken 

with respect to such firms. 

Most of us think we know the firms pre-ordained to make the 

list, but at this moment, no such public list exists. We do know 

there is a long list of firms who do not want to be in the G–SIFI 

club. 

There are related questions that need to be asked on this topic. 

One, who decides whether a firm should be on the list? Two, is this 

a domestic decision or a global decision? 

Three, should countries without a G–SIFI have a say in the process? Four, what will be the criterion factors used to make these determinations? Five, will this process be transparent, fair, and subject to review and appeal? 

None of these questions have been publicly answered. 

A second major question we would like to pose, and you talked 

about this all morning, regulators have spent a lot of time focused 

on the need and size of a special additional capital surcharge on 

G–SIFIs to mitigate systemic risk. 

Like the first question, this one has several related questions associated with it, such as how large should the surcharge be? What 

types of capital should qualify to meet the surcharge? And will 

there be any mitigating factors or actions which might lessen the 

need for a surcharge? 

Since the financial crisis occurred, policymakers, regulators, the 

financial services industry and consumers have all changed their 

behavior. We have been very busy making the systems changes. 

But the industry and government have failed, really, to understand 

or assess the total aggregate impact of all of these actions. 

It is important for you to understand the enormous amount of 

change taking place in our financial markets today. Other witnesses will provide you with definitive figures, but it is really important to note that in the United States, we have raised more 

than $300 billion of common equity, while repaying TARP with a 

$12 billion profit. The largest banks have significantly reduced 

their average leverage. And loan reserves have increased by over 

200 percent. 

Now, I can go through a long list, but you all know the list of 

Dodd-Frank actions which we are now trying to implement. SIFMA 

alone has filed over 100 comments during this regulatory process. 

39 

While we are working through the Dodd-Frank changes, which 

significantly modify the banking activities in the United States, we 

are also faced with comparable changes in Basel which we are trying to work through. 

One point I would like to make that is important, I want to echo 

a comment made yesterday by the General Counsel of the FDIC, 

Mr. Krimminger, which was also discussed this morning, about the 

question of resolution of large systemically important institutions, 

certainly in the United States. 

We worked very hard with this committee to make sure that legislation was done in an appropriate fashion, and we are hopeful 

that both in the United States and outside the United States, that 

resolution scheme is recognized as something that is viable. 

So as to question two, we would like Congress and the regulators 

to postpone any decision on G–SIFI capital surcharge until the industry has had time to implement all of the regulatory changes 

making their way through the system and the affected parties, 

which includes the private sector and government, conduct a study 

to see what impacts this surcharge has actually on the financial institutions and on the economy. 

Now, Mr. Chairman, one last comment. In your letter, you asked 

us to specifically comment on accounting convergence. I can say 

that, from a SIFMA standpoint, we are supportive of the convergence of US GAAP and international accounting standards. 

We are concerned with the application of IEFC standards on offsetting, and we welcome the recent pronouncements by the U.S. 

standards setter, the FASB, supporting the US GAAP standard 

that allows netting. 

Again, thank you for holding this hearing and asking me to testify. 

[The prepared statement of Mr. Ryan can be found on page 121 

of the appendix.] 

Chairman BACHUS. Thank you. 

Professor Scott? 

STATEMENT OF HAL S. SCOTT, NOMURA PROFESSOR AND DIRECTOR OF THE PROGRAM ON INTERNATIONAL FINANCIAL 

SYSTEMS, HARVARD LAW SCHOOL 

Mr. HAL SCOTT. Thank you, Chairman Bachus, and members of 

the committee. 

I am testifying in my own capacity and do not purport to represent the views of any organizations with which I am affiliated, 

although much of my testimony is based on work of the Committee 

on Capital Markets Regulation. Indeed, for the last 6 years, the 

committee has been tracking and making recommendations to 

strengthen the competitiveness of our capital markets. 

Let me address the issues you called on us to comment on. 

Let me begin with the Volcker Rule. The Volcker Rule was 

passed with the hope of Chairman Volcker that other nations 

would follow us. None have. 

This rule was ill-advised from the start, because proprietary 

trading was not responsible for the financial crisis. Indeed, it was 

a source of profitability. 

40 

Now, it could have the effect of making U.S. firms less competitive internationally. There is still time to dampen its potential effect, however, because defining the precise boundaries of the prohibition falls to regulators. They can, and should, take a narrow approach in defining proprietary trading to preserve our competitiveness. 

For the derivatives rules, there are major areas in which the 

U.S. proposals diverge from the proposals of the E.U., our major 

competitor in this area. The differences include standards for membership in and ownership and control of clearinghouses, the scope 

of the end-user exemption, and possibly accounting standards. 

We should put aside for now the initiatives we are taking that 

are in conflict with the E.U. These areas can be defined in concert 

with the E.U. and should be the subject of efforts to harmonize our 

approaches. 

In the meantime, we can implement the non-conflicting initiatives on an appropriate timetable. And, as you know, the CFTC has 

called for comments on proper sequencing. We may have to make 

some compromises, as will the E.U. But it is not credible for us to 

say, ‘‘our way or the highway.’’ 

For capital requirements, we are now in the third version of the 

capital accord, the Basel Capital Accord. Although it is very difficult to precisely quantify the economic impact of Basel III, we 

know it will affect GDP in only one direction—down, perhaps up 

to $951 billion in the U.S. alone, between 2011 and 2015, according 

to one estimate. 

Although Basel III is an international initiative, it has differential impact in different countries. Testimony earlier today by Acting 

Comptroller of the Currency Walsh and of Governor Tarullo frankly acknowledges this problem. But beyond the uniformity problem, 

we should have learned a big lesson from our experiences with 

Basel I and Basel II. 

The ability of Basel to determine the right amount of capital for 

a given risk is highly questionable. Basel III is not a silver bullet. 

Far from it. In my view, we should use the long full phase-in in 

time provided by the Basel III rules to re-examine how these rules 

can be more effective and implemented in a fashion to minimize 

differential impact. 

Next, I want to discuss designating SIFIs, or systemically important financial institutions. Dodd-Frank requires FSOC to designate 

non-bank firms as systemically important and thus subject to Fed 

supervision, along with the $50 billion-plus banking organizations 

which are already subject to Fed supervision under Dodd-Frank. 

Other countries are going through a similar designation process. 

Different approaches to designation and different SIFI surcharges 

could have a major competitive impact. Thus, we should have a 

global approach here. Our national process should be tightly coordinated with the work of the Financial Stability Board, the operational arm of G-20. 

Finally, resolution of failed financial firms remains an important 

and difficult issue with competitive implications. Chief among 

these is that divergent positions on bailouts will alter the cost of 

capital. Countries more willing to bail out banks will lower their 

cost of capital. 

41 

We learned this from our competition with Japan before its lost 

decade. Furthermore, many large banks have significant cross-border operations, and their failures can affect all the countries in 

which they operate. Some countries ring-fence the assets of their 

local banks to protect local creditors. Those banks could get a competitive edge as well. 

We should continue to work with the FSB to achieve as internationally coordinated approach to these resolution issues as possible. 

Thank you, and I look forward to your questions. 

[The prepared statement of Professor Scott can be found on page 

156 of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Zubrow? 

STATEMENT OF BARRY ZUBROW, EXECUTIVE VICE PRESIDENT AND CHIEF RISK OFFICER, JPMORGAN CHASE & CO. 

Mr. ZUBROW. Thank you, Mr. Chairman, and members of the 

committee. My name is Barry Zubrow, and I am the chief risk officer of JPMorgan Chase. 

In the wake of the financial crisis, numerous steps have been 

taken to reduce system risk in U.S. banking. Since some of my testimony was quoted so extensively earlier today, I won’t repeat 

those portions now. However, the important lesson to draw from all 

the actions taken in the last few years is that capital is one tool, 

but certainly not the only tool, nor is it a cure-all for ensuring that 

there is not a recurrence of a financial crisis. 

JPMorgan Chase is not trying to avoid regulation, but we do 

have serious concerns that the regulatory pendulum has swung to 

a point that risks hobbling the competitiveness of our financial system and of our economy. 

Basel III is a dramatic increase in capital standards, focused exclusively on the largest banks. It focuses particularly on trading 

and other assets likely to produce systemic risk. 

At this point, the best course for the system is not adding a surcharge on top of the Basel III standards, but rather ensuring that 

liquidity, derivatives, and other rules are written right and applied 

globally. 

One year after Dodd-Frank, other countries are still debating 

whether to follow suit. And there are indications they will not, in 

many areas. Lack of international coordination on derivatives and 

the potential for extraterritorial application of the U.S. rules could 

prevent U.S. firms from serving our clients overseas. 

There is already evidence that Basel III will not be enforced as 

stringently abroad as it is here. Nowhere has change been more 

profound than in the area of capital, where U.S. banks face a dramatic increase under Basel III. 

And I should emphasize that these increases effectively apply 

only to the largest banks. To illustrate, JPMorgan Chase entered 

the financial crisis with capital sufficient not only to weather the 

crisis but also to make acquisitions and to continue our lending activities. 

The new Basel III rules would require us to hold as much 45 percent more capital than we did during the crisis. 

42 

Let me be clear. JPMorgan Chase supports Basel III capital 

standards. However, we believe that a G–SIFI surcharge on the 

largest U.S. banks would be excessive and could impede economic 

growth. 

Draconian capital requirements come at a cost for U.S. competitiveness and economic growth. Requiring capital at a level above 

Basel III will force large banks to either reduce their balance 

sheets, increase prices or abandon more capital-intensive activities. 

For example, we estimate a hospital requesting a standby letter 

of credit could see its costs go up by as much as 30 percent. Or a 

small mid-market client could see increases of as much as 20 percent on a revolving line of credit. 

In conclusion, our holistic approach to risk management was one 

of the key reasons JPMorgan weathered the financial crisis as well 

as we did. 

My responsibility as chief risk officer is to look at all of the 

bank’s activities across all markets. We believe the FSOC was intended to serve in effect as the chief risk officer for the financial 

system, analyzing and coordinating the impact of regulation on 

safety and soundness, but also on economic growth and competitiveness. 

We believe that before any capital surcharge is imposed, the 

FSOC should review and report on the global regulatory reforms 

that have already been enacted and their impact on competitiveness, whether existing capital standards are being evenly applied, 

and the cumulative impact of existing regulations on safety and 

soundness as well as economic growth. 

We would expect that such an analysis would demonstrate that 

a G–SIFI surcharge is unwarranted. 

Thank you very much, and I look forward to answering your 

questions. 

[The prepared statement of Mr. Zubrow can be found on page 

222 of the appendix.] 

Chairman BACHUS. Thank you, Mr. Zubrow. 

Let me say that Ranking Member Frank acknowledged that he 

only read small inserts which were most favorable to him. And we 

pointed out some of the things that were not so in line. 

Mr. ZUBROW. We appreciate that. And I am sure that he and others on the committee will take my testimony in its entirety. 

Chairman BACHUS. And, actually, since he likes your testimony 

so much, I don’t think we will have any problem getting him to go 

along with some of these suggestions. 

Mr. ZUBROW. We certainly hope that he will be as enthusiastic 

about the conclusions as about the premise. 

Chairman BACHUS. Thank you. 

Mr. Silvers? 

STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR & SPECIAL COUNSEL, AMERICAN FEDERATION OF LABOR AND 

CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL–CIO) 

Mr. SILVERS. Yes, thank you, Mr. Chairman. Good afternoon. I 

appreciate, on behalf of the AFL–CIO and Americans for Financial 

Reform, the opportunity to testify. The Americans for Financial ReVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
43 

form is a coalition of over 250 organizations which represent well 

over 50 million Americans. 

In an age of global markets, any serious effort to ensure that we 

do not repeat the experience of 2008 must include the establishment of an international regulatory floor. Otherwise, every country’s financial institutions are vulnerable to contagion from radically unregulated markets, as Iceland, Ireland, the United Kingdom, and the United States proved in 2008. 

However, minimum standards are inevitably weaker than more 

effective national efforts. That is why they are called minimum 

standards. 

The United States, for example, has moved more rapidly on derivatives regulation than Europe has, but has been less aggressive 

with private pools of capital like hedge funds and private equity. 

And we have been faulted by European regulators for the weakness 

of our approach to regulating executive pay in financial firms. 

And so while we hear this afternoon about the possibility that 

business would leave the United States because of the strength of 

our regulatory effort, over in Europe, parallel threats are being 

made about financial activity moving to the United States as a result of the strength of European regulatory efforts. 

Nonetheless, today the big banks have come seeking help from 

Congress yet again. They say that Dodd-Frank is too tough compared to foreign regulation. 

It seems odd that a group of firms that the American public so 

recently rescued from imminent bankruptcy now, amid 9 percent 

unemployment and after 7 million foreclosures, after record bonuses and amid rising CEO pay, think that they are the people 

whom Congress needs most to help right now. Nonetheless, here 

we are, and so I will now address the banks’ specific arguments. 

On derivatives, we have heard that by requiring that capital be 

posted and that there be disclosure on pricing, we will drive derivatives trading away from U.S. institutions. 

This type of argument has been used to oppose virtually every 

effort to regulate finance for at least the last century and perhaps 

longer. It sounds plausible, but it is historically wrong. 

As a general matter, capital markets activity flows through wellregulated markets, where market participants have confidence in 

their counterparties and can benefit from transparent pricing. 

Radically deregulated markets attract brief bubbles before their inevitable comeuppance. 

In addition, there are some kinds of derivatives businesses that 

we do not want. We do not want the next AIG, the next seller of 

bond insurance without any capital to back it to be a U.S.-based 

firm. We should not want the United States to retain a dominant 

position in derivatives by guaranteeing that derivatives dealers’ 

monopolistic profits at the expense of our real economy. 

We have heard today that the Volcker Rule in Section 716 of 

Dodd-Frank will impair the competitiveness of U.S. financial institutions, apparently by lowering their rates of return. 

This argument ignores the basic principle of investing that seeking higher returns exposes a firm to greater risk. Moving up the 

risk-return curve is not a good idea for a too-big-to-fail institution, 

though it is in the interest of the executives of those firms with 

44 

stock-based compensation who benefit from the heads-I-win, tailsyou-lose nature of allowing systemically significant FDIC-insured 

firms to place bets in the securities markets. 

On capital requirements, the Basel III process envisions basically 

a one-size-fits-all risk-based capital requirement system backstopped by an absolute leverage limit of 33:1, an extraordinary 

high level. 

Here, Congress should ask, do we want the United States to have 

a robust, size-based system of capital requirements for our banks, 

or do we want to be no better than the global minimum standard 

that does not impose higher capital requirements on larger institutions, thereby not addressing the problem of too-big-to-fail? 

Finally, we hear that we cannot implement the resolution authority process envisioned in Dodd-Frank until we have a comprehensive international resolution authority. 

This argument is a red herring and will be used in the future 

to promote new bailouts. It is a red herring, because the resolution 

process in Dodd-Frank is fundamentally focused on the parent company, not its foreign subsidiaries. The breakup and wind-down of 

the failed U.S. parent occurs entirely within U.S. law. 

Now, real progress has been made toward a global financial regulatory floor. Great credit goes to the witnesses in the first panel, 

particularly to Governor Tarullo and his colleagues at the Fed for 

their work on Basel III. 

But a minimum standard is just that, a minimum. 

The measure of U.S. financial regulatory policy should not be 

whether we manage to meet the global minimum. The measure 

should be whether we have ensured that the financial system is a 

contributor to sustained, balanced growth in our real economy. 

International deregulatory whipsawing and infinite delay of the 

kind recommended today by my fellow witnesses may temporarily 

increase some bank profits, but the price will be another cycle of 

economic crisis and job loss. 

Thank you. 

[The prepared statement of Mr. Silvers can be found on page 183 

of the appendix.] 

Mrs. BIGGERT. [presiding]. Thank you. 

And thank you all for being so patient as we left this morning 

to go vote and finally came back. The chairman and the ranking 

member had agreed that we would not start at the top again, but 

would go to those who are here who did not have the opportunity 

to ask a question this morning. 

So we will go to Mr. Luetkemeyer from Missouri, who is recognized for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

Mr. Ryan, with regard to the Foreign Account Tax Compliance 

Act, FATCA, I was going to talk to Ms. Brainard about it, but since 

it is affecting you and your industry, I would like to pose a question to you with regards to under FACTA, the firms will be required to report to the IRS on U.S. clients or face a heavy withholding tax on U.S. assets and treasury bonds. 

As a response, many have indicated that they will either sell all 

of their assets, form subsidiaries that will not touch U.S. assets, or 

stop buying U.S. bonds. This will undoubtedly hurt companies not 

45 

only in my State but across the Nation. And we are curious as to 

what steps that you see that the Treasury Department needs to do 

to prevent FATCA from having a negative impact on U.S. capital 

markets. 

Mr. RYAN. And I will be able to move quickly on this issue, because we have multiple committees working on this issue, and we 

have not come to a conclusion. So what I would like to be able to 

do is to submit our views for the record after the hearing. 

Mr. LUETKEMEYER. Okay. 

It could have a major impact on the ability of investments being 

made by foreign entities and Americans who are purchasing 

through their foreign entities into this country. And that can have 

a dramatic impact on the amount of capital that is available in the 

marketplace if suddenly the foreign entities stop purchasing. So I 

think it is a pretty pertinent question to the title of the hearing 

today, and I appreciate that. 

With regard to the fiduciary rule that is coming out of DOL, of 

all places, with regards to the ability of some securities folks to be 

able to sell different types of securities, what do you think we need 

to do with that one? 

Mr. RYAN. You probably look at my resume, because I have repotted myself many times in my—during the Reagan Administration, I was solicitor of labor so I have had a lot of experience with 

ERISA and a lot of experience with the DOL. 

We have spent quite a bit of time with the Department of Labor 

and other bureaus of the government, basically, trying to get the 

Department of Labor to withdraw their proposal and re-propose. 

We would like to see it better coordinated with other similar work 

that is taking place now with the Securities and Exchange Commission as a result of Dodd-Frank. 

And we are especially concerned about their effort to, for the first 

time ever, regulate at the Department of Labor IRAs. 

Mr. LUETKEMEYER. Okay, Professor Scott, you deal a lot with— 

you are director of the program on international financial systems 

at Harvard. I am just kind of curious, what is your thought process 

on the—with Dodd-Frank, it seems as though we have a lot more 

connectivity between all the different larger institutions. They have 

gotten bigger, and by putting other weaker institutions that absorb—to me, they have gotten bigger and weaker. 

In discussing this with a number of panels over the last several 

months, we have seen the connectivity between our banks here and 

those countries over in Europe, especially some that are in trouble. 

And this morning we saw that Greece—the headlines in the 

paper, anyway, with Greece indicates—one article had a 50/50 

chance that they would default. I think Moody’s made the comment 

this morning that there was a 50/50 chance they would default. 

What do you see as the impact of that? I know we are talking 

about regulations here going in that direction, but the impact of 

them coming this direction, our ability with this Dodd-Frank bill, 

which has caused the connectivity of all these banks to be even 

greater and now connected over there, how is that going to impact 

everything? Can you kind of shed some light on it? 

Mr. HAL SCOTT. You are focused on the issues going on in Europe 

and what their impacts are here. 

46 

Mr. LUETKEMEYER. Right. We also have some regulatory issues 

here that have, I think, impacted that by tying everybody together 

even to a greater extent. 

Mr. HAL SCOTT. I think American banks hold a lot of sovereign 

debt of the countries that we are talking about, directly or indirectly, or have derivatives of such debt. While I have not studied 

this in depth, I believe that there would be—if we were talking 

about any kind of restructuring or default of that debt, which, of 

course, is in the midst of argument at the moment—that we could 

expect that it would have some impact on our banking system. 

That being said, it would have a lot more impact on European 

banks in terms of their holding of this debt. So, overall, whether 

it would rise to the level of real concern, I don’t know, because I 

haven’t looked at the statistics enough. But I would think we would 

have some concern with the impact on our banking system. Whether it is severe or not, I don’t know. 

Mr. LUETKEMEYER. I see my time is over. 

But I would think it would have a pretty significant impact when 

you have—I think the latest figure I saw was $1.3 trillion worth 

of investments from our banks in those countries’ bonds. That is 

pretty significant. And if the domino effect keeps going, we are 

going to be at the end of this line of dominoes. 

So thank you, Madam Chairwoman. 

Mrs. BIGGERT. Thank you. 

Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Mrs. BIGGERT. Five minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

I joined this committee in 2003, and I remember that by the end 

of 2006, certainly early 2007, it was very apparent that there was 

an enormous problem in subprime mortgages, that there would be 

an enormous number of defaults, an enormous number of foreclosures, that because house prices had stopped appreciating, it 

would not be possible for homeowners to sell their homes or refinance their homes. 

And we were assured by the financial industry throughout 2007, 

really through September of 2008, that there was nothing to worry 

about, everything was under control. 

Because of that experience, I have not always known who to believe since then. And I may very well have disbelieved some things 

that people told me that were true as a result of that experience. 

But it is very hard to tell what the liability of some of the banks 

really is for what is going on in mortgage securitization. 

Mr. Silvers, if you may change hats for a second, the Congressional Oversight Panel said in November of last year that the potential liability for the chain of title issues for mortgages that 

ended up in securitized pools was sufficiently serious and uncertain 

that it could threaten solvency of the banks. Sheila Bair said 

roughly the same thing just a month ago. 

And within the last few days, it appears that the New York attorney general is investigating Bank of America, at least, for those 

very violations or potential violations. 

47 

Mr. Silvers, what is your current estimation of the potential liability of the securitizers, which were the biggest banks, for chain 

of title issues? 

Mr. SILVERS. As you said, the Congressional Oversight Panel’s 

report on this matter, the panel which I was the vice chair of, 

found that there were certain key issues that we could not answer, 

partly because we did not have the investigative authority and 

partly—somewhat complex legal issues. 

However, the statements that you were quoting, which I believe 

is still the case, is that if it turned out to be true that systemically 

title was not properly conveyed to the liens on the properties that 

had been securitized, and that if it was also true as a matter of 

law that the lien did not follow in some equitable fashion the note, 

then that would implicate a series of very significant issues associated with the REMIC doctrine in our tax code. And it would also 

implicate some questions in New York trust law. 

If all those things went wrong—meaning wrong from the perspective of causing liability—and it turned out that effectively the 

properties in the securitization trust did not have—that the trust 

did not have liens— 

Mr. MILLER OF NORTH CAROLINA. Instead, they were mortgagebacked securities. They were unsecured debts. 

Mr. SILVERS. Right. They were mortgage-backed. If it turns out 

that the mortgage-backed securities were not mortgage-backed and 

it turned out that could not be cured as a result without incurring 

vast tax liabilities for breaching the REMIC structure, then potentially between the tax liabilities involved and the possibility that 

the holders of the mortgage-backed securities would be able to call 

upon their right to repurchase the loans at face value, that you 

would be talking about liabilities back to the securitizers, the institutions that put those trusts together in the multiple hundreds of 

billions of dollars, well in excess of the numbers that were cited by 

my fellow panelists in terms of new capital raised by the banks. 

Mr. MILLER OF NORTH CAROLINA. Mr. Zubrow, how has 

JPMorgan Chase reserved for that potential liability? 

Mr. ZUBROW. I think, as Mr. Silvers responded to your question, 

there is a long chain of different things that might have to have 

happened in order for that liability to actually have come about. 

And so, we certainly do not think that whole long series of events 

actually did occur. And I would say if— 

Mr. MILLER OF NORTH CAROLINA. So you see it as a long shot, 

and you have reserved it. If at all, it is a long shot. 

Mr. ZUBROW. That would be correct. 

Mr. MILLER OF NORTH CAROLINA. Okay. 

Let me ask you about other pending litigation. There are a couple of insurers of the bond, AMBAC, another that has sued 

JPMorgan Chase really for conduct of Bear Stearns, that Bear 

Stearns sold mortgage-backed securities, but then pursued claims 

against the originators of the mortgages to buy the mortgages back, 

and instead of making them buy it back, took monetary damages. 

Even though they no longer had equitable—excuse me—beneficial ownership of the mortgages, they kept that money and said 

not a word to the investors. That lawsuit appears to be pending. 

It is perhaps moving to trial this fall. 

48 

How has JPMorgan Chase reserved for that litigation? 

Mr. ZUBROW. I am generally familiar with some of the litigation 

in that area. I don’t know off the top of my head the exact way that 

we have assessed the potential or possible liability under that case, 

which as you noted, originated originally with activities that Bear 

Stearns pursued. But we would certainly be happy to get back to 

you and give you a specific answer. 

Mr. MILLER OF NORTH CAROLINA. Okay. 

Mrs. BIGGERT. The gentleman’s time has expired. 

The gentleman from Arizona, Mr. Schweikert, is recognized for 

5 minutes. 

Mr. SCHWEIKERT. Thank you, Madam Chairwoman. 

I don’t know if any of you were able to hear some of the testimony this morning, but one of our current pop culture phrases is 

‘‘regulatory arbitrage.’’ And I was going to actually start with Mr. 

Scott, since I thought we will go from the academic. 

Will you give me, first, some international, but also even some 

domestic examples? 

Mr. HAL SCOTT. Yes, examples of regulatory arbitrage. We have 

had many in our history. When the United States imposed very 

tough requirements on banks in this country in the 1970s, we 

spurred the creation of London as an international banking center. 

When the United States, in my view, overregulated its equity 

capital markets, and our committee has documented this extensively, a lot of the business in those capital markets, in the equity 

capital markets moved abroad, and particularly to London again. 

And the severity of this is once you get whole businesses moving 

someplace, even if we readjust our policies or London gets more aggressive on theirs, people don’t come back. They kind of stay where 

they are. So I think we have had a number of very important examples of regulatory arbitrage in the history of our financial system. 

Mr. SCHWEIKERT. Okay. 

Madam Chairwoman, to the panel, and actually it was Congressman—is it Miller?—who was just speaking, who actually just 

kicked off one of my heads. And I can actually sort of think of 

something domestically, and tell me if this is actually true. And 

this might be appropriate for my friend from Chase. 

If I am in a State that has a 91-day deed of trust default, compared to a State that may use a mortgage document that has a 6- 

month right of redemption, should there not be a difference in the 

pricing of those loans, a 30-year home loan between those two jurisdictions? If both of those actually have a regulatory arbitrage, 

just in the—might threaten my cost of a foreclosure and my liability. 

Mr. ZUBROW. I think that you are certainly correct that, given 

the application of individual State laws, and in some instances individual county laws, to the home financing marketplace can have 

an impact upon how we assess risk and ultimately would expect 

that risk to be reflected in the marketplace. 

I think in addition it is worth noting that, going back to your 

question about historical examples of regulatory arbitrage, there 

certainly was a significant amount of regulatory arbitrage in the 

49 

United States through the disproportionate oversight of different financial institutions. 

And certainly one of the things that we now have is the fact that 

the Federal Reserve Board has overall responsibility for oversight 

and supervision of the large financial institutions in order to avoid 

that sort of arbitrage. 

I would cite on the international side that one of the things that 

we are very concerned about is a form of regulatory arbitrage between different countries, where different supervisors and regulators will apply different standards for measuring risk-weighted 

assets under the Basel III accord such that the application of models and analysis of risk-weighted assets may result in a lower rating or lower ranking of risk in some jurisdictions than what we 

would anticipate will be applied here in the United States. 

Mr. SCHWEIKERT. Okay. If I have that different risk ranking, how 

much of that is also in the quality of, we will call it enforcement? 

If I have, whether it be a derivative trade or a home mortgage, if 

I have a different enforcement of the rules in Greece or someplace 

in Europe compared to if I do in Iowa, how much will you look into, 

when you are doing risk analysis, not only saying, ‘‘Okay, we lined 

up on Basel III rulemaking, but we believe there is a failure of enforcement?’’ 

Mr. ZUBROW. I think that is a very good question, Congressman. 

And certainly that does need to be a factor in our analysis of how 

we assess risks that we take in different jurisdictions and certainly, in the potential for enforceability of contracts around the 

world. 

Mr. SCHWEIKERT. Okay, if anyone else has something to educate 

us in our— 

Mr. RYAN. I don’t want to take anybody’s time, but could I make 

one comment, Madam Chairwoman? 

Mrs. BIGGERT. Mr. Ryan, yes. 

Mr. RYAN. Thank you. 

For us, I think this is not specifically regulatory arbitrage, but 

we are in the middle now of trying to implement Dodd-Frank, 

which is a massive assignment for the government and for the industry. And disparate application of Dodd-Frank by various U.S. 

agencies is a real issue. 

We have recently sent a letter to Secretary Geithner outlining 

over 20 absolute dead-bang conflicts in regulation that are now 

being offered by various U.S. agencies. 

And to Mr. Zubrow’s comment about FSOC, we actually thought 

that. That is why FSOC was created within Dodd-Frank, to resolve 

those types of issues. So you don’t have to go beyond the borders 

of the United States to find conflicting application of the same law. 

Mr. SCHWEIKERT. Okay. Thank you, Madam Chairwoman. Thank 

you for letting me— 

Mrs. BIGGERT. The gentleman’s time has expired. 

Mr. Carney from Delaware is recognized for 5 minutes. 

Mr. CARNEY. Thank you very much, Madam Chairwoman. I just 

joined the hearing. I just walked in, so I missed all the lead-up to 

this. 

But I was present here this morning when we had the panel of 

regulators and the discussion. Most of the discussion this morning 

50 

was on the cumulative effect of Dodd-Frank regulations and so on, 

capital and liquidity requirements. 

And Sheila Bair in particular said that she thought that the capital requirements were on the low end, and the Governor from the 

Fed, Mr. Tarullo, I spoke with afterwards, and he suggested that 

he agreed. We had some back-and-forth on that. 

And I would like to know—this question may not be germane to 

the discussion that preceded my arriving, but we have some expertise at this panel and I would like your view on that question, if 

I could. 

Please? 

Mr. SILVERS. The answer to this question is not simple, in part 

because of the exchange that just occurred. If your capital requirement—if you are looking at risk-weighted capital requirements and 

you get into the interstices of that and it turns out that riskweighting is being used essentially to pretend that you don’t have 

risks that you do have, as we saw under Basel II around mortgagebacked securities, for example, then you may look like you have 

really strong capital requirements, but you don’t. Okay? 

With Dodd-Frank, some of this is still being put in place. There 

are some very important principles in Dodd-Frank that are very 

good. One of them, for example, is at least Dodd-Frank embodies 

the principle of size-based capital requirements, that we have just 

learned that we tend to like to bail out large institutions, so we 

charge them a higher capital rate. 

That counterbalances for the fact that their cost of capital is subsidized by the market perception that they are going to get bailed 

out. So it is a good thing. 

Mr. CARNEY. If I could stop you there, one of the questions that 

I had of Governor Tarullo was just that—those SIFIs that are on 

the borderline, and whether or not they would be subject to the 

same capital requirements of the big, big SIFIs, if you will. 

And the answer was no, that there was a gradation there, and 

it seems to me that you are addressing that. 

Mr. SILVERS. I think sliding-scale capital requirements are a 

really, really good idea. I think that a cliff structure or a binary 

structure, you get into this argument of, ‘‘I am on the line.’’ 

Mr. CARNEY. Right. 

Mr. SILVERS. And the sad thing about people who are on the line 

is is that when they are setting the rules, they are likely to be exempted. And then when the crisis comes, they are likely to be 

bailed out. 

If you have more of a continuous approach—the kind Governor 

Tarullo, I think, spoke to you about—then you are more likely to 

have a consistent approach. 

Mr. CARNEY. Others? Please? 

Mr. ZUBROW. So I think that the— 

Mr. CARNEY. By the way, your name and your paper was quoted 

profusely by the ranking member, I might say. And somebody 

asked whether it came on Valentine’s Day with a box of chocolates. 

And he said, ‘‘No, the candy didn’t come with it.’’ I say that in a 

complimentary way, if I might. 

Mr. ZUBROW. We did have some comment about that with Chairman Bachus earlier when the panel started. And I think that it 

51 

was acknowledged that the ranking member selectively quoted 

from the paper, and we hope that he will also endorse the conclusions of the testimony, as well as the premise of it. 

I do think that the question of capital is a very important one. 

And as we tried to say in the written testimony, and as I said here 

earlier this afternoon, capital is one tool in the overall framework 

of how large, systemically important institutions have to be regulated and managed. 

But it is not the only tool. And the Basel III capital levels that 

are being enacted at a 7 percent level of tier one common equity 

are much larger than what any of the financial institutions operated under, going into the financial crisis. 

For JPMorgan Chase, that would be an increase of roughly 65 

percent to meet the Basel III standards above what the prior minimum standards were. And, in fact, we think that the Basel Committee and the implementation of Basel III has done an enormous 

amount to both increase the amount of capital in financial institutions, but also the quality of that capital, which is equally important. 

And, our view is at this point in time to add an additional SIFI 

surtax on top of that is both unnecessary, but also has the opportunity to threaten growth in the economy, which we think would 

be very dangerous to the financial system. 

Mrs. BIGGERT. The gentleman’s time has expired. 

The gentleman from Illinois, Mr. Manzullo, is recognized for 5 

minutes. 

Mr. MANZULLO. Thank you, Madam Chairwoman. 

By a showing of hands, could you tell me how many of you here 

agree with this statement? Proprietary trading and private equity 

and hedge fund investing were not responsible for the financial crisis, and, indeed, were the source of profitability to banks during 

the crisis. The losses to banks resulted from bad housing loans and 

investments in pools of those loans, traditional banking activity. 

How many would agree with that statement? 

Mister— 

Mr. HAL SCOTT. I am glad they are endorsing my position. 

Mr. MANZULLO. You got it. 

Mr. ZUBROW. I was going to say— 

Mr. MANZULLO. Those are your words on page 4. 

Mr. ZUBROW. It sounded familiar from prior testimony. 

Mr. MANZULLO. And did you notice how deliberatively he raised 

his hand? 

Mr. RYAN. It is really a payoff. We all hoped we could get a degree from Harvard— 

Mr. MANZULLO. Is that what it is? 

But, Professor Scott, that is a very simple answer to a very complex issue, and I agree with that 100 percent. 

If the Fed had exercised appropriately its jurisdiction over instruments and underwriting standards and not waited until October 1st of 2009 to set forth the rule that requires written proof of 

a person’s earning, would we be in this mess now? 

Mr. HAL SCOTT. I am not really prepared to answer that specific 

question, but I think the thrust of it is that the standards for making loans were low. People got caught up in the bubble. 

52 

This has happened over and over in the history of banking. People get enthusiastic, they lower the standards, they think things 

are going to keep going on as they are, and, boom, there is a burst, 

people are caught short—and almost always in lending, which is 

the core function of banks. 

So the point I was making is this is still anther crisis about lending, really, not a crisis about private equity, hedge funds or proprietary trading. 

Mr. MANZULLO. And you state that so correctly. I am sorry, you 

are in a—no, go ahead. 

We had before this committee and before the House in 2000 a 

GSE reform bill, and it didn’t go anywhere. In 2005, we had a GSE 

reform bill with the Royce amendment that really would have 

tightened things up with regard to lending. That didn’t go anywhere. It passed the House, but didn’t go into the Senate. 

We had numerous hearings here with the president of Fannie 

Mae showing how they cooked the books in order to make themselves eligible for the pensions down to two or three mils to come 

within that particular window. 

It just appears to me that the evidence was out there. Both 

Presidents Bush and Clinton encouraged the GSEs to buy up 

subprime and Alt-A loans into these packages. 

And the reason I quoted your statement—and I am glad you recognized that you are indeed the author of that sentence on page 

4—is the fact that that really is the core reason for why we are in 

this financial crisis today. 

Dodd-Frank addresses a lot of issues, and that is fine and they 

are interesting. But do you believe that the power existed within 

the Federal agencies that they could have stopped these bad loans 

from taking place in the first place, without any further legislation? 

Mr. HAL SCOTT. I definitely think they had the power to maybe 

not stop them, but certainly raise the standard for making loans. 

That is the essence of bank supervision. 

So if a bank supervisor feels that the bank is taking too much 

risk, is not controlling its risk, his job is to go to that bank and 

say so. And the bank works with the regulator to try to address 

it. They didn’t do that. 

On the other hand, Congressman, we were all in a housing price 

euphoria. So, looking back it is obvious, okay, but at the time, if 

you really believed housing prices were going to keep going up, 

which almost everybody did, the pressure to raise those standards 

was not very high, and there would be political push-back, in any 

event, if you tried to lower the standards in a way that deprived 

certain people from getting loans. 

So I think that was the reality of it. 

Mr. MANZULLO. I appreciate that. 

Wasn’t that a great answer? 

Mrs. BIGGERT. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Canseco, is recognized for 5 minutes. 

Mr. CANSECO. Thank you very much, Madam Chairwoman. 

Mr. O’Connor, you mention in your testimony the divergence in 

rules between the European Union and the United States in regards to inter-affiliate derivatives transactions. 

53 

If I understand it correctly, as it currently stands in the United 

States, a financial institution helping one of its affiliates hedge 

their risk through derivatives would essentially have to post margin to itself. Is that correct? 

Mr. O’CONNOR. That is currently the case with the proposed rule 

set. In the E.U., currently the commission is considering exemptions for certain types of inter-affiliate transactions. So, these are 

effectively two subsidiaries of the same parent company. 

In the United States, such an exemption has not yet been given, 

which could result in two parts of the same firm having to clear 

trades between them or post margins between themselves, yes. 

Mr. CANSECO. So what we could end up with is that derivatives 

trades, instead of being conducted between a company and its affiliate, they are conducted between non-related companies if the case 

is where an affiliate has to post a margin with its parent company, 

thus increasing systemic risk and flying in the face of what DoddFrank was intended to do. Is that correct? 

Mr. O’CONNOR. It certainly would increase costs and not directly 

affect systemic risk. But if such a margin had to be segregated, for 

instance, then that would be taking money off the institution’s balance sheet that could ordinarily be put to other uses, such as lending or other things that would have a beneficial effect on the economy. 

Mr. CANSECO. In your opinion, is this worthwhile? 

Mr. O’CONNOR. No. 

Mr. CANSECO. Okay. And does this rule make sense? 

Mr. O’CONNOR. This rule needs—no, this rule does not make 

sense to me. 

Mr. CANSECO. Thank you. 

Mr. Ryan, do you feel the same way, or do you have another 

opinion? 

Mr. RYAN. No, I agree totally with Mr. O’Connor. 

Mr. CANSECO. Okay. 

Mr. Zubrow, is that your answer also? 

Mr. ZUBROW. Congressman, that is correct. I think that rule does 

not make sense. 

I would also point out that I think your example of how it could 

lead to an increase in systemic risk was really predicated on the 

assumption that instead of having a firm engage with transactions 

with affiliates, that instead a firm might have to in effect do a 

three-legged transaction where it goes outside of its affiliates in 

order to lay off certain risks as a way of transferring risks amongst 

its different entities, which would obviously increase the overall exposure to risk and credit risk across the system. 

In addition, I think, as you are aware, there are also proposals 

that are competing between what the United States has proposed 

and what it appears Europe is likely to propose as to the types of 

collateral and margin that could be posted for different transactions, and the U.S. proposals limit the amount of margin that 

could be posted to instruments that are basically denominated in 

U.S. dollars. 

And so therefore, if there is extraterritorial application of the 

U.S. rules to foreign entities, be they affiliates or end customers, 

we would be asking European clients to be posting U.S. dollar secuVerDate Nov 24 2008 17:18 Nov 18, 2011 Jkt 067934 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\67934.TXT TERRIE
54 

rities as opposed to European bond collateral or government collateral or currency, which would obviously be the natural currency in 

which they would have their assets. 

Mr. CANSECO. Let me just clarify what you just said. So even if 

these rules were harmonized across borders, is the restriction and 

cost increase on affiliate trades worthwhile, in your opinion? 

Mr. ZUBROW. If they are harmonized in a way that requires posting of margin in between affiliates, then we would not think that 

that was worthwhile. 

Mr. CANSECO. Thank you very much. 

And I yield back my last 9 seconds. 

Mrs. BIGGERT. Thank you. 

I will recognize myself for 5 minutes. 

This question is for Mr. O’Connor, and I think Mr. Ryan has had 

some part of this in his statement. 

Does the swap push-out provision decrease market liquidity? And 

does it impair safety and soundness, increase systemic risk, and 

make it harder for the large banks to evolve? 

And are you aware of any country besides the United States with 

a sophisticated derivative market that is planning to adopt such a 

push-out requirement? 

Mr. O’CONNOR. Thank you for the question, Congresswoman 

Biggert. 

Answering the second question first, no, I am not aware of any 

jurisdiction that is adopting a rule that would be similar to the 

push-out rule. 

And, yes, I agree with those points that you make, namely, that 

requiring banks to move parts of their businesses outside of the 

bank into differently regulated entities adds to systemic risk in the 

sense that these two entities now need to be managed by the bank 

from a liquidity and a capital point of view, and also customers of 

the bank who typically would engage in derivative transactions 

under one agreement, the netted credit exposure, would now have 

to trade across two master agreements, and therefore they are paying an increase in counterparty credit risk within the market, 

which adds to systemic risk. 

Mrs. BIGGERT. But wouldn’t this put us then at a real disadvantage in the global economy? 

Mr. O’CONNOR. In my testimony, I included that as one of the examples, that it puts the United States at a competitive disadvantage against, yes. 

Mrs. BIGGERT. Thank you. 

Mr. Ryan, would you like to comment on that? 

Mr. RYAN. I concur totally with Mr. O’Connor. It is interesting 

that the end result here—not only Dodd-Frank, but some of the 

things that are going on in Basel—that in effect we are pushing 

risk out of the highly regulated, highly capitalized environment 

and into shadows, and it is predictable that in the future, that will 

be an issue. 

So to answer your question, could it or will it increase systemic 

risk, it is entirely possible. 

Mrs. BIGGERT. So should it be repealed? 

Mr. RYAN. We are not pushing for any repeal of Dodd-Frank 

right now. The industry is really concentrated— 

55 

Mrs. BIGGERT. I mean this section, not— 

Mr. RYAN. Section 716? 

Mrs. BIGGERT. Yes. 

Mr. RYAN. We were against it totally during the enactment of the 

statute. So if it disappeared, we would probably be very happy. 

Mrs. BIGGERT. All right. 

Then, Mr. Zubrow, your testimony was made a lot of this morning. I would just—on page 2 of your testimony, you talk about how 

the regulatory pendulum has swung to a point that the risks are 

hobbling our financial system and our economic growth. 

And you say that U.S. policymakers should focus on how much 

the regulations they propose collectively reduce risk taken by financial firms and how this collective impact is likely to result or reduce the economy and job growth and how many of these regulations are being rejected or deferred by other countries. 

What is putting U.S. firms at a competitive disadvantage? Does 

FSOC have anything to do with this? Is the fact that the FSOC 

members are not coordinating or thinking in the context of the 

global marketplace causing problems? 

Mr. ZUBROW. Madam Chairwoman, I think that you are exactly 

correct, that the FSOC has a very important role to play here. And 

it is really within their purview to be able to analyze and assess 

what is the cumulative impact of all the regulations that are being 

proposed under both Dodd-Frank, but also the additional regulatory activities that the different supervisory agencies as well as 

the Basel Committee are imposing upon the financial system. 

And so, I think that it is very important that the FSOC do a 

study in order to really be able to assess what that cumulative impact is and have we accomplished enough already in order to feel 

comfortable that we have a much safer and sounder banking system? 

Obviously, it is all going to be in how the rules are ultimately 

promulgated and implemented, but so it is very important that we 

constantly step back and look at what that cumulative impact and 

how it is impacting the economy. 

Mrs. BIGGERT. Thank you. 

And with that, I would ask unanimous consent to enter into the 

record a statement for the record by the Institute of International 

Bankers. 

Without objection, it is so ordered. 

And I think that we will give you a rest here. I think that you 

have been here for a very long time. Unfortunately, we haven’t had 

probably as much time as we would have liked. I think we will remember that maybe sometimes having such an important hearing 

not in what we call getaway day is not the best idea. But we are 

thankful that you stayed and gave such great testimony. We really 

appreciate all that you had to say. 

So I would note that some members may have additional questions for this panel, which they may wish to submit in writing. And 

without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 3.18 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

June 16, 2011 

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