U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

78–813 PDF 2013

S. HRG. 112–714 

IMPLEMENTING WALL STREET REFORM: ENHANCING BANK SUPERVISION AND REDUCING SYSTEMIC RISK 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING WALL STREET REFORM 

JUNE 6, 2012 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

GLEN SEARS, Senior Policy Advisor 

JANA STEENHOLDT, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

BETH ZORC, Republican Counsel 

MIKE PIWOWAR, Republican Chief Economist 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

WEDNESDAY, JUNE 6, 2012 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Prepared statement .......................................................................................... 41 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 3 

WITNESSES 

Neal S. Wolin, Deputy Secretary, Department of the Treasury .......................... 5 

Prepared statement .......................................................................................... 42 

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

System ................................................................................................................... 7 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Senator Brown ........................................................................................... 71 

Senator Vitter ............................................................................................ 72 

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

of the Currency ..................................................................................................... 8 

Prepared statement .......................................................................................... 51 

Responses to written questions of: 

Senator Johnson ........................................................................................ 75 

Senator Shelby ........................................................................................... 78 

Senator Menendez ..................................................................................... 81 

Senator Brown ........................................................................................... 81 

Senator Vitter ............................................................................................ 82 

Senator Toomey ......................................................................................... 84 

Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance 

Corporation ........................................................................................................... 9 

Prepared statement .......................................................................................... 62 

Responses to written questions of: 

Senator Johnson ........................................................................................ 85 

Senator Shelby ........................................................................................... 86 

Senator Brown ........................................................................................... 88 

Senator Vitter ............................................................................................ 90 

Senator Toomey ......................................................................................... 91 

Senator Wicker .......................................................................................... 91 

Richard Cordray, Director, Consumer Financial Protection Bureau ................... 11 

Prepared statement .......................................................................................... 67 

(III)

(1) 

IMPLEMENTING WALL STREET REFORM: ENHANCING BANK SUPERVISION AND REDUCING SYSTEMIC RISK 

WEDNESDAY, JUNE 6, 2012 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. This hearing is 

part of the Committee’s continued oversight of the implementation 

of the Wall Street Reform Act, and it is also an opportunity to discuss with our bank regulators the implications of the massive trading loss recently announced by JPMorgan Chase, one of our Nation’s largest banks. When a bank with JPMorgan’s solid reputation announces that it lost billions of dollars on a large trade reportedly designed to reduce the firm’s risks, it reminds us that no 

financial institution is immune from bad judgment. 

While the JPMorgan trading loss does not appear to have caused 

systemic problems, it is a clear reminder that Wall Street continues 

to need better risk management, vigorous oversight, and, if the 

rules are broken, unyielding enforcement. To repeal or weaken 

Wall Street reform and defund the cops enforcing it would take us 

back to the days before the financial crisis of 2008. 

Wall Street reform was a response to the crisis caused by a lack 

of consumer protection, reckless behavior in the financial sector, 

and regulators who failed to take action in time. We now have an 

agency solely focused on consumer protection, tough new rules to 

end negligent and reckless practices by some on Wall Street, and 

regulators armed with new powers to ensure the safety and soundness of the banks they supervise. 

The regulators are also in the process of enhancing the standards 

for our Nation’s largest banks through increased capital requirements and more judicious liquidity and leverage standards. 

Wall Street reform also requires regulators to sharpen their focus 

on the largest and riskiest financial institutions. All the regulators 

joining us today are members of the Financial Stability Oversight 

Council, a body created to monitor risks facing our financial system. Most here are also all working on the Volcker Rule to prohibit 

proprietary trading with Government-insured deposits, and the 

2 

FDIC continues to work diligently to implement the living wills requirements and establish the Orderly Liquidation Authority for 

global, large, complex financial institutions. 

Similarly, while there is a need for strong regulation of all financial institutions, Wall Street reform recognizes that small community banks should not be treated the same as the largest banks. 

Because large, complex banks take on the most risk and pose the 

greatest threat to our economic stability, they should be required 

to pay their fair share into the Deposit Insurance Fund. Likewise, 

the small banks that did not cause the crisis should not have to 

pay for the risks taken on by their larger competitors, and their assessments have been lowered accordingly. 

A one-size-fits-all approach is not appropriate, and many parties 

have raised concerns about challenges faced by small community 

banks. I hope to hear from our witnesses today about the steps 

they are taking with regard to small banks. 

Some have claimed that the Wall Street Reform Act was not the 

right set of solutions to the crisis and that it asks our regulators 

to micromanage the activities of the firms they regulate. I disagree. 

To restore confidence in our financial system after the crisis, we 

need more, not less, scrutiny of Wall Street’s activities. The Wall 

Street Reform Act has built a stronger oversight framework that 

closes regulatory gaps, enhances financial stability, and better protects consumers, investors, and taxpayers. 

And so despite the repeated calls to deregulate and to defund by 

those who ignore the costly lessons of the financial crisis, completing the implementation of the Wall Street Reform Act must be, 

and remains, a top priority for this Committee. 

In that vein, I look forward to hearing from the witnesses here 

today about the progress they have made to complete implementation of Wall Street reform, as well as the actions they have taken 

regarding the JPMorgan trading loss, and their thoughts on the potential implications of the loss for supervision and Wall Street reform rulemakings going forward. 

I also want to thank Ranking Member Shelby and my colleagues 

here on the Banking Committee for all their input and cooperation 

over the past several months. At a time when most of America 

thinks that Congress is in a gridlock, the Committee has been very 

busy getting things done on the Senate floor. The bipartisan Export-Import Bank reauthorization passed with broad support and 

was signed into law by the President last week. We passed in the 

Senate this Committee’s bipartisan Iran sanctions bill. Both nominees for the Federal Reserve Board of Governors received floor 

votes, and we helped to secure the passage of their confirmation. 

We passed the bipartisan transportation bill in the Senate, and the 

Transportation Conference Committee meetings are currently ongoing with the House. And we passed a 60-day extension of the National Flood Insurance Program, and we have a commitment from 

the Senate’s leadership to bring the Banking Committee’s bipartisan NFIP reauthorization bill to the floor in the coming weeks. 

In addition, there is another important legislative matter facing 

this Committee: helping responsible homeowners refinance into 

lower interest rates at no cost to the taxpayers. We have already 

had several full Committee and Subcommittee hearings on refiVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
3 

nancing proposals. I would like to take a bipartisan approach similar to the other Committee-passed bills of this Congress where we 

work together on a bipartisan vehicle with amendments limited to 

those related to the underlying bill. I am hopeful that my colleagues will agree to move forward in this manner as well so that 

we can help responsible homeowners and help the housing market 

rebound. 

With that, I turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. Thank you for calling this very, very important hearing. And to our panelists today, 

welcome again. I think we have spent a lot of time together, but 

probably we will spend a lot more in the future right here. 

Today the Committee will hear from the financial regulators who 

supervise our Nation’s banks. The safety and soundness of our 

banking system depends on your efforts. It was not long ago that 

our banking system began to collapse, notwithstanding the presence of a large and vigorous regulatory structure. Hence, I believe 

it is critical that this Committee conduct rigorous oversight to ensure that the financial regulators do not repeat the mistakes of the 

past. 

As the primary regulator of the national banks, the Office of the 

Comptroller of the Currency is responsible for ensuring the safety 

and soundness of our largest banks. This means that the OCC supervises JPMorgan Chase, whose recent $2 billion plus trading loss 

has been in the news. And because taxpayers basically guarantee 

JPMorgan’s deposits, the American public, I believe, has a right to 

know whether these trades threatened or could have threatened 

the solvency of the bank. 

In addition, this Committee, I believe, has an obligation to determine whether this loss reveals any operational or regulatory weakness that could cause more serious problems in the future. 

Next week, here in this Committee JPMorgan CEO Jamie Dimon 

will appear to explain his bank’s actions there. Today I would like 

to hear the OCC’s views on what happened at JPMorgan. In particular, the Comptroller, I believe, should give us his assessment of 

whether these trades ever threatened, as I said earlier, the safety 

and soundness of one of our Nation’s largest banks. 

Banks are in the business of taking risks, and losses, as we all 

know, are an inescapable part of risk taking. Job creation and economic growth depend on banks’ taking risks. It is the job, I believe, 

of regulators to prevent banks from taking risks that expose taxpayers. 

Some people have used JPMorgan’s loss as an opportunity to 

argue for a stronger implementation of the Volcker Rule. But no 

matter where you stand on the Volcker Rule, this argument, I believe, is a bit premature. Most importantly, was the OCC’s current 

authority sufficient to prevent these trades from putting taxpayers 

at risk, if they did? If so, did the OCC properly use the authority 

that it has? I look forward to hearing the Comptroller’s answers to 

these questions, among others. 

Also with us today is the Acting Chairman of the Federal Deposit 

Insurance Corporation, who is no stranger to this Committee. We 

4 

have been told that Dodd-Frank will prevent future taxpayer bailouts and that insolvent financial institutions will be allowed to fail. 

Yet under the FDIC’s plan for implementing Dodd-Frank’s resolution authority, short-term creditors would still be bailed out. The 

lesson we all should have learned from the TARP bailouts is that 

creditors of a failed firm should bear its losses. Today I hope that 

Acting Chairman Gruenberg can reassure this Committee that the 

FDIC’s resolution authority will not institutionalize Government 

bailouts. 

Regrettably, the FDIC is not the only regulator that has taken 

actions that may institutionalize too big to fail. The Financial Stability Oversight Council, led by Treasury, and the Federal Reserve 

Board have recently used the authority granted by Dodd-Frank to 

designate several companies as systemically important and are preparing to designate a larger group soon. I believe the danger presented by such designations is that the market will view it as an 

implicit guarantee that the Federal Government—the taxpayers— 

will not allow the designated institution to fail. This was the same 

problem that arose with Fannie and Freddie and ultimately has led 

to about a $200 billion taxpayer bailout, and more to come. I would 

like to hear from the Treasury and the Federal Reserve Board as 

to how the designation process will eliminate rather than create 

too-big-to-fail companies. 

Finally, we will also hear from the Director of the Bureau of Consumer Financial Protection. The Bureau’s regulation and supervision will impact the safety and soundness of our banking system, 

I believe. But unlike other bank regulators, the Bureau is not required to consider safety and soundness when it writes rules or 

takes actions against banks. I think this is becoming apparent as 

the Bureau’s proposed rule will impose huge costs on banks and 

have created serious confusion about what banks need to do to 

comply with consumer protection laws. 

For example, the Director of the Bureau has unilateral authority 

to declare products to be ‘‘abusive.’’ However, the Bureau has said 

that it will not write a regulation to clarify what the term ‘‘abusive’’ means. Think about it. The refusal to write a rule stands in 

stark contrast to the Director’s statements that the Bureau would 

give banks clear rules of the road—in other words, certainty in 

what they could do and what they could not do. 

The refusal of the Bureau, a lot of us believe, to issue clear rules 

means that banks will have higher costs, more exposure to lawsuits, and less effective operations, something I do not think Congress intended. In the end, it will be consumers that will pay the 

price in the form of higher costs, less access to credit, fewer choices, 

and more paperwork from less efficient banks. But this should 

come as no surprise to the regulators here. After all, it was not our 

regulators or the banks that paid for the poor regulation and practices that led to the financial crisis. It was the taxpayers and the 

consumers. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Shelby. 

This morning, opening statements will be limited to the Chairman and the Ranking Member to allow more time for questions 

from the Committee Members. I want to remind my colleagues that 

5 

the record will be open for the next 7 days for opening statements 

and any other materials you would like to submit. Now I will briefly introduce our witnesses. 

Neal S. Wolin is Deputy Secretary of the U.S. Department of the 

Treasury. 

Dan Tarullo is currently serving as a member of the Board of 

Governors of the Federal Reserve System. 

Thomas Curry is Comptroller of the Currency. Welcome, Mr. 

Curry, to your first hearing before the Banking Committee since 

your confirmation as Comptroller. 

Marty Gruenberg is the Acting Chair of the Federal Deposit Insurance Corporation. 

And Richard Cordray is Director of the Consumer Financial Protection Bureau. 

I thank all of you again for being here today. I would like to ask 

the witnesses to please keep your remarks to 5 minutes. Your full 

written statements will be included in the hearing record. 

Secretary Wolin, you may begin your testimony. 

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, 

DEPARTMENT OF THE TREASURY 

Mr. WOLIN. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, thank you for the opportunity to appear today to discuss implementation of the Dodd-Frank Act. The 

Act’s full implementation will help protect Americans from the excessive risk, fragmented oversight, and poor consumer protections 

that played leading roles in bringing about the recent financial crisis. 

That crisis, and the recession that accompanied it, cost nearly 9 

million jobs, erased a quarter of household wealth, and brought 

GDP growth to nearly negative 9 percent. 

Today our economy has improved substantially, although more 

work remains ahead. More than 4.3 million private sector jobs have 

been created over the past 27 months and, since mid-2009, our 

economy has grown at an average annual rate of 2.4 percent. 

As part of our broader efforts to strengthen the economy, Treasury is focused on implementing the Dodd-Frank Act to build a 

more efficient, transparent, and stable financial system. 

Core elements of the act include tougher constraints on risk taking and leverage; a new orderly liquidation authority to resolve 

large, interconnected firms facing failure; comprehensive oversight 

of derivatives; stronger consumer financial protections; and new 

measures to promote transparency and market integrity. 

Substantial progress has been made since the Dodd-Frank Act 

was enacted. Regulators have proposed or finalized nearly all the 

major rules related to the core elements of reform. 

Treasury’s implementation responsibilities include the Secretary’s role as Chair of the Financial Stability Oversight Council 

and standing up the Office of Financial Research and the Federal 

Insurance Office. Excellent progress has been made setting up each 

of these entities. 

Treasury is also charged with coordinating the Volcker rulemaking. We are working with the regulatory agencies toward a 

final rule that effectively prohibits proprietary trading activities 

6 

and limits investments in—and sponsorships of—hedge funds and 

private equity funds. 

The lessons learned from the recent failures in risk management 

at JPMorgan Chase will be an important input into efforts to design the Dodd-Frank Act reforms, including a strong Volcker Rule. 

The Volcker Rule explicitly exempts from the prohibition on proprietary trading the ability of firms to engage in ‘‘risk-mitigating 

hedging activities in connection with and related to individual or 

aggregated positions . . . designed to reduce the specific risks to 

the banking entity.’’ 

To that end, the final rule should clearly prohibit activity that, 

even if described as hedging, does not reduce the risks related to 

specific individual or aggregate positions held by a firm. 

Losses at JPMorgan raised questions that go beyond the Volcker 

Rule as well. Among other things, regulators should require that 

banks’ senior management and directors put in place effective models to evaluate risk, strengthen reporting structures to ensure risks 

are assessed independently and at appropriately senior levels, and 

establish clear accountability for failures in risk management. Regulators should make sure that they have a clear understanding of 

exposures and that banks and their senior management are held 

accountable for the thoroughness and reliability of their risk management systems. 

Ultimately, the true test of reform is not whether it prevents 

firms from taking risk or from making mistakes. It is whether our 

financial regulatory system is tough enough and designed well 

enough to prevent those mistakes from harming the economy or 

costing taxpayers money. We all have an interest in that outcome. 

Our ability to achieve it depends on the authority and the resources to enforce tougher capital, leverage, and liquidity requirements on banks and the largest, most complex nonbank financial 

companies. 

It depends on implementing the full framework of protections on 

derivatives, from margin requirements and central clearing of 

standardized derivatives to greater transparency into risks and exposures. 

It depends on providing the SEC, the CFTC, the CFPB, and 

other enforcement authorities with the resources to police manipulation, fraud, and abuse. 

It depends on our ability to safely unwind a large firm without 

the broad collateral damage and risk to the taxpayer that we experienced in 2008. 

And it depends on making sure that no exception built into the 

law is allowed to undermine the impact of the tough safeguards we 

need. 

The challenges our economy has continued to experience since 

the financial crisis in 2008 only increase our commitment to implementing lasting financial reform. 

Recent failures in risk management provide an additional reminder that comprehensive reform must continue to move forward. 

The Administration will continue to resist all efforts to roll back reforms already in place or block progress for those that remain to 

be implemented. The lessons of the financial crisis should not be 

left unlearned or forgotten, nor should American workers—or 

7 

American taxpayers—be left unprotected from the consequences of 

future financial instability. 

Thank you. 

Chairman JOHNSON. Thank you. 

Governor Tarullo, please proceed. 

STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. TARULLO. Thank you, Mr. Chairman, Senator Shelby, and 

Members of the Committee. 

You are all probably familiar with the concept of the law of the 

instrument, although you may know it instead as the law of the 

hammer. If you are holding a hammer, everything looks like a nail. 

Now, that concept itself is supposed to be a warning not to use 

reflexively a familiar tool in response to every problem. But I must 

confess that the longer I taught and wrote in the area of financial 

regulation, the more convinced I became of the centrality of strong 

capital standards to a sound financial system. 

My time at the Federal Reserve has not changed my mind. On 

the contrary, a series of events, most recently the JPMorgan loss 

announced a few weeks ago, has only reinforced my conclusion. 

A bank with a strong capital position can absorb losses from unexpected sources, whether those be external shocks to the economy, 

the insolvency of important counterparties, or failures of risk management within the firm. Strong capital buffers ensure that losses 

are borne by shareholders of the bank, not by taxpayers, either directly through some form of bailout or indirectly through a major 

negative effect on the economy resulting from a bank’s failure. 

So I am especially pleased that tomorrow afternoon the Federal 

Reserve Board will be considering a final regulation implementing 

more rigorous capital requirements for market risks of banking organizations, as well as proposed rules to increase the quantity and 

quality of capital held to satisfy regulatory requirements. 

These regulations are the product of cooperative efforts by the 

Federal Reserve, the OCC, and the FDIC over the last few years 

to achieve strong international capital arrangements, and over the 

last several months to draft joint domestic regulations. Along with 

our stress tests, annual capital reviews, and anticipated systemic 

risk surcharges, these regulations will form a complementary set of 

requirements for the country’s largest institutions. 

While capital is central to good financial regulation, it is not all 

there is. There is truly more than a hammer in the regulatory toolbox, which also includes noncapital rules, market discipline, and 

supervisory oversight. We continue to work on rules, notably the 

enhanced prudential standards for larger institutions required by 

sections 165 and 166 of the Dodd-Frank Act, and the Volcker Rule. 

The latter, of course, involves multiple agencies, which have now 

finished reviewing the 19,000 comment letters and are considering 

potential modifications of the proposed rule. 

The enhanced prudential standards elicited considerably fewer 

letters but still present a number of important issues for consideration before final regulations can be implemented, including how to 

tailor the application of these standards to firms of different sizes 

and complexity. 

8 

As to market discipline, one development of note is that the Federal Reserve and FDIC will in the coming months be reviewing the 

resolution plans to be submitted by large firms in accordance with 

the joint rule adopted by the two agencies last year. 

Finally, with respect to supervision, the Federal Reserve continues to build a more centralized, horizontal, and data-driven approach to supervision of our largest institutions. The LISCC process, as we call it, has run the stress tests and other horizontal supervisory exercises since its establishment in 2010 and is extending 

its activities to coordinate other supervisory processes more effectively. 

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

any questions you might have. 

Chairman JOHNSON. Thank you. 

Comptroller Curry, please proceed. 

STATEMENT OF THOMAS J. CURRY, COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. CURRY. Thank you, Chairman Johnson, Ranking Member 

Shelby, and Committee Members. Thank you for the opportunity to 

update you on our implementation of the Dodd-Frank Act, its impact on the supervision of national banks and Federal savings associations, and our response to JPMorgan Chase’s losses reported in 

May. 

Among the many Dodd-Frank-related rulemakings underway are 

rules to remove references to credit ratings from OCC regulations 

and a final market risk rule. In addition, I will soon approve publication of a set of proposals to implement Basel III. The OCC is also 

reviewing comments received in response to proposals regarding 

the Volcker Rule and stress tests required by the Dodd-Frank Act. 

These rules, when final, will make important contributions to the 

regulation of financial institutions in this country. 

The Dodd-Frank Act and other reforms have already done much 

to strengthen our financial regulatory framework. Translating 

these reforms into improved soundness of our banking system and 

fair treatment of bank customers requires strong, effective supervision, which is a theme that flows throughout my testimony and 

will mark my tenure as Comptroller. 

The OCC has already begun efforts to heighten supervisory expectations for the largest institutions we oversee. This process includes increasing our awareness of risks facing banks and the 

banking system, ensuring these risks are understood and well managed, and raising our expectations for management, capital, reserves, liquidity, risk management, and governance. It will take 

time to achieve these objectives, and we must remain vigilant in 

maintaining our course. My testimony provides considerable detail 

about these efforts. 

I want to use the remainder of my time to provide an overview 

of what the OCC is doing in response to the JPMC losses reported 

in May. We are the primary regulator of JPMC’s national bank 

where the activity leading to its losses occurred, and we are responsible for the prudential supervision of the bank. 

9 

Since early April, the OCC has been meeting with bank management to discuss JPMC’s Chief Investment Office positions, risk 

management, and controls. As the positions deteriorated, discussions turned to corrective actions and steps necessary to mitigate 

and reduce the risk of the bank’s positions. We and the Federal Reserve are conducting reviews in the bank and are sharing information with the FDIC and other regulators. 

We are also undertaking a two-pronged review of our supervisory 

activities. The first component focuses on evaluating the adequacy 

of current risk controls at the bank, informed by their application 

to the positions at issue. The second component evaluates the lessons learned from this episode that could enhance risk management processes at this and other banks. Consistent with our supervisory policy of heightened expectations for large banks, we are demanding that the bank adhere to the highest risk management 

standards. 

We are not limiting our inquiry to the particular transactions at 

issue. We are assessing the adequacy of risk management throughout the bank. We are using these events to broadly evaluate the 

effectiveness of the bank’s risk management of its CIO function 

and to identify ways to improve our supervision. If corrective action 

is warranted, we will pursue appropriate informal or formal remedial measures. 

JPMC’s national bank has approximately $1.8 trillion in assets and $101 billion in Tier 1 common capital. Given that scale, the 

loss by JPMC affects its earnings but does not present a solvency 

issue. JPMC has improved its capital, reserves, and liquidity since 

the financial crisis, and those levels are sufficient to absorb this 

loss. It is also worth noting that the events at JPMC do not threaten the broader financial system, and the bank’s effort to manage 

its positions is not creating an unusual risk of contagion. 

There has been much discussion about whether these JPMC activities would be permissible under the proposed Volcker Rule. 

While it is premature to reach any conclusion before our review is 

complete, this episode will certainly help focus our thinking on 

those issues. 

I appreciate the opportunity to appear before the Committee, and 

before closing, I want to stress my commitment to ensuring that 

the OCC continues to enhance supervision. I look forward to updating you throughout my tenure on how we are achieving strong, effective, fair, and balanced supervision of national banks and Federal thrifts. 

Thank you. 

Chairman JOHNSON. Thank you. 

Chairman Gruenberg, please proceed. 

STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Thank you, Chairman Johnson, Ranking Member Shelby, and Members of the Committee, for the opportunity to 

testify today on the FDIC’s efforts to enhance bank supervision and 

reduce systemic risk. 

The most important new FDIC authorities under the Dodd-Frank 

Act are those that provide for the orderly resolution of systemically 

10 

important financial institutions. Since passage of the Dodd-Frank 

Act, the FDIC has taken a number of steps to carry out its new 

responsibilities. First, the FDIC established a new Office of Complex Financial Institutions to carry out three core functions: to 

monitor risk within and across these large, complex firms from the 

standpoint of resolutions and risk to the Deposit Insurance Fund; 

to conduct resolution planning and develop strategies to respond to 

potential crises; and to coordinate with regulators overseas regarding the significant challenges associated with cross-border resolution. 

For the past year and a half, this office has been developing internal resolution plans in order to be ready to resolve a failing systemic financial company. 

The FDIC has also completed the basic rulemaking necessary to 

carry out its systemic resolution responsibilities. In July of last 

year, the FDIC Board of Directors approved a final rule implementing the Title II Orderly Liquidation Authority. Last September, the FDIC Board adopted a rule, jointly issued with the 

Federal Reserve Board, regarding bank holding companies with 

total consolidated assets of $50 billion or more, as well as certain 

nonbank financial companies that the Financial Stability Oversight 

Council may designate as systemic, to develop, maintain, and periodically submit resolution plans to regulators. These are the socalled living wills. 

With the joint rule final, the FDIC and the Federal Reserve have 

started the process of engaging with individual companies on the 

preparation of their resolution plans. The first plans, for companies 

with nonbank assets over $250 billion, are due in July. 

Section 210 of the Dodd-Frank Act also requires the FDIC to ‘‘coordinate, to the maximum extent possible’’ with appropriate foreign 

regulatory authorities in the event of a resolution of a covered financial company with cross-border operations. Although U.S. SIFIs 

have foreign operations in dozens of countries around the world, 

those operations tend to be concentrated in a relatively small number of key foreign jurisdictions, particularly the United Kingdom. 

Our initial work with foreign authorities has been encouraging. In 

particular, the U.S. financial regulatory agencies have made substantial progress with authorities in the U.K. 

In addition to the provisions relevant to systemic risk, the DoddFrank Act also contains a number of other provisions that may 

have a more direct effect on community banks. For example, the 

Dodd-Frank Act made changes to the FDIC’s deposit insurance program, which were implemented soon after enactment, that generally work to the benefit of community institutions. The first of 

these was the rule to implement the act’s provision to permanently 

increase the insurance coverage limit to $250,000. The FDIC has 

also implemented the Dodd-Frank Act requirement to redefine the 

base used for deposit insurance assessments from deposits to assets. When this provision was implemented in the second quarter 

of last year, aggregate premiums paid by institutions with less 

than $10 billion in assets declined by approximately 33 percent. 

Many community bankers have expressed concern about the 

Dodd-Frank Act rules and other regulatory actions that would impact their ability to compete in financial markets. In response, the 

11 

FDIC is undertaking a series of initiatives related to the future of 

community banks. We are holding a series of roundtables with 

groups of community bankers in each of the FDIC’s six regions 

around the country. The FDIC’s Division of Insurance and Research is undertaking a comprehensive review of the evolution of 

community banking in the United States over the past 25 years. 

Additionally, I have asked the FDIC’s Division of Risk Management Supervision and the Division of Depositor and Consumer Protection to review the examination process for both risk management and compliance supervision, as well as to review how we promulgate and release rulemakings and guidance, to see if we can 

improve our processes and communications in ways that benefit 

community banks. 

Mr. Chairman, that concludes my oral statement. I would be glad 

to respond to questions. 

Chairman JOHNSON. Thank you. 

Director Cordray, please proceed. 

STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER 

FINANCIAL PROTECTION BUREAU 

Mr. CORDRAY. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, thank you for the opportunity to testify 

today as part of this panel of my colleagues. As the Director of the 

Consumer Financial Protection Bureau, I am committed to being 

accountable to you for how we carry out the laws that Congress enacted, and we are always happy to have the chance to discuss our 

work with you. This is the 18th time that the new Bureau has testified before either the House or the Senate, and I am pleased to 

be here again today. My testimony will focus on the areas that you 

specified in the letter inviting me to testify at this hearing. 

To begin with, you asked about our bank supervision program. 

We have been focused on recruiting and hiring the best team we 

could find to supervise financial institutions with our focus on consumer protection. We are blessed with great talent: Steve 

Antonakes, the former Commissioner of Banks in Massachusetts, 

leads our bank supervision team; Peggy Twohig, the former Associate Director of the Division of Financial Practices at the FTC, 

leads our nonbank supervision team. Our examiners are working 

to ensure compliance with Federal consumer financial laws, and 

they may seek corrective actions to redress violations and remediate harm to consumers. 

We have met with many supervised institutions to see how they 

operate and how they approach compliance. We are engaged with 

State banking regulator to establish communication and share information to reduce compliance burden. To promote transparency, 

we published our Examination Manual, along with other examination procedures covering particular products and services. 

On Monday, the CFPB and the Federal prudential regulators, as 

referenced earlier, released a Memorandum of Understanding that 

clarifies how we will coordinate our supervisory activities to minimize unnecessary regulatory burden, avoid unnecessary duplication 

of effort, and decrease the risk of conflicting supervisory directives. 

Our responsibility under the law, unique among the Federal regulators, is to achieve evenhanded and reasonable oversight of both 

12 

banks and nonbank firms that compete in the same consumer finance markets. We take a consistent approach to examining both, 

using the same procedures for the same products and services. 

In addition to mortgage lenders, mortgage servicers, payday 

lenders, and private student lenders, we will soon finalize a rule 

to allow us to examine the larger participants in the debt collection 

and credit reporting industries as we develop our nonbank supervision program further. 

The second topic you identified for this hearing is my statutory 

role on the Financial Stability Oversight Council. As you know, 

Congress designated the CFPB’s Director to serve as one of 10 voting members of the FSOC. The U.S. consumer finance market represents over $20 trillion in loans and deposits and, hence, it is central to the stability of domestic and global capital markets. 

Because we share the responsibility of regulating financial institutions with some of our FSOC colleagues, our mutual participation 

furthers our efforts to maintain a collaborative approach. Participation on the FSOC also provides a broader vantage point on the 

kinds of triggers and vulnerabilities that pose larger risks to the 

financial system. I have found this to be valuable as we work toward a sound and vibrant financial system that protects consumers, supports responsible providers, and helps safeguard the 

broader economy against systemic risk. 

Third, you asked how our statutory obligations affect our regulation of community banks. As you know, the Consumer Bureau does 

not generally examine any banks with less than $10 billion in assets and does not enforce the law against any such banks. We do 

have the authority to adopt rules that can affect community banks 

as well as larger banks. 

We will help community banks around the country by our new 

oversight of nonbank firms. I have heard from community bankers 

who refuse to make an ill-considered mortgage loan, only to see 

customers go down the street and get a loan from someone else 

who did not uphold the same standards. The other lender often required no documentation of income and engaged in no recognizable 

form of underwriting, but still managed to sell bad loans into the 

secondary market. Once bundled into securities, those loans 

crashed both the financial system and the economy. 

Consistent application of consumer financial laws will promote 

safety and soundness of the financial system. Over the next year, 

the Bureau is required to adopt new mortgage rules that protect 

consumers. Many of these rules are intended to return to sound underwriting standards and sound customer service, practices that 

are traditional at our good community banks. 

As we develop these regulatory initiatives, we know that one size 

does not fit all. When it makes sense to treat smaller institutions 

differently from larger institutions, we have pledged to consider 

doing so. We are implementing small business review panels on 

several of our mortgage rules and find the input from small providers to be helpful in calibrating our proposals. 

When I became Director of the Consumer Bureau at the beginning of the year, I barely knew my colleagues on this panel. Now, 

5 months later, from our work together in various roles on various 

bodies such as FSOC, I have come to know and respect them all. 

13 

Our team is glad to be working with their teams and with the 

Members of this Committee to strengthen and support a sound and 

vibrant financial system. 

I am happy to answer any questions you may have. Thank you. 

Chairman JOHNSON. Thank you. I would like to thank all of our 

witnesses for their testimony. As we begin questions, I will ask the 

clerk to put 5 minutes on the clock for each Member. 

Mr. Curry, it is clear from your testimony that JPMorgan lacked 

the proper controls to mitigate such a large loss. Was this a failure 

in risk management? If so, what should the bank have done differently? 

Mr. CURRY. Thank you, Mr. Chairman. In essence, we believe 

that the issue at JPMorgan Chase is one of inadequate risk management within the Chief Investment Office. We have been focusing on potential gaps or deviations from accepted standards of risk 

management within that particular office and looking to see whether similar gaps exist in any other areas of JPMorgan’s risk management architecture. 

Chairman JOHNSON. Mr. Curry, the OCC has dozens and dozens 

of examiners at JPMorgan. First, did your agency check the risk 

management and internal controls of all aspects of the bank, including the Chief Investment Office, before this event? Or did you 

miss this? And, second, while regulators are not in the position to 

review every single trade, what assurances can you give us that 

the bank regulators will be able to monitor situations where large 

trades, whether done for hedging or other purposes, could bring 

down a firm or have a systemic impact on the broader economy? 

Mr. CURRY. One of the major focuses of our examination and supervision activities is risk management. We look at risk management in the entire organization and within key areas where there 

is a substantial risk facing the institution. That process is intended 

to go across the entire organization in those key areas. 

In this particular case, we are looking at whether there were 

gaps within our assessment of the risks and the risk controls in 

place in the CIO office. We are in the process of evaluating that 

in our ongoing examination. 

The point I would make in terms of our focus on risk management is that it is one part of the overall approach to identifying 

risks within the organization. As Governor Tarullo mentioned, a 

key component of how we assess and mitigate risks in the institutions is the institutions’ capital levels, their level of reserves, and 

their liquidity. 

In the case of JPMorgan Chase, both their capital levels and liquidity are substantially higher than they were at the beginning of 

the financial crisis, and as I mentioned in both my oral and written 

comments, they are more than sufficient to withstand the reported 

losses in this particular area. 

We are continuing to review, as part of one of the two prongs of 

our ongoing review, what exactly transpired with the trading operation within the CIO’s office, and we are looking to make sure that 

there were appropriate limits and controls on those activities in 

that area and how they compared to other similar areas within the 

organization. 

14 

Chairman JOHNSON. It is important that Wall Street reform implementation is completed to enhance financial stability and reduce 

systemic risk. Secretary Wolin, just to be clear, it does not seem 

to be that the JPMorgan trading loss was systemic. Do you agree? 

And what do you believe are the implications of the recent losses 

at JPMorgan on the Wall Street reform rulemakings that have yet 

to be completed? 

Mr. WOLIN. Thank you, Mr. Chairman, for that question. Obviously, the loss at JPMorgan Chase was a big loss and one that, as 

Mr. Curry suggested, will affect shareholders. But we concur in his 

judgment that it is not about the solvency of the firm or, for that 

matter, the stability of the broader financial system. 

I think what is clear is that the lessons that we all learned from 

what happened at JPMorgan Chase will serve as important lessons 

and insights into the range of Dodd-Frank implementation work to 

come, whether it is the Volcker Rule or questions about risk management or enhanced prudential standards or, for that matter, capital. I think this incident underscores the need for us to pay attention to examples like this in order to learn those lessons, both with 

respect to Dodd-Frank implementation and, as I suggested earlier, 

the broader efforts of supervision that are ongoing. 

Chairman JOHNSON. Secretary Wolin, are regulators better coordinated and prepared after Wall Street reform to deal with external threats to our financial stability and economic growth like the 

euro zone crisis? What steps are you taking in response to this crisis? 

Mr. WOLIN. I think there is no question, Mr. Chairman, that the 

existence of the Financial Stability Oversight Council has given 

Treasury and the various banking and market regulators of the 

U.S. Government an opportunity to constantly monitor financial 

markets and the exposures of our banks and our broader financial 

system to what is going on in Europe. The Financial Stability Oversight Council has spent a lot of time on Europe and thinking 

through what its implications are and might be to our financial 

system. That work, of course, is ongoing. For the first time, this 

Council really gives the range of relevant entities of the U.S. Government the capacity to share perspectives, to work together in engaging counterparts in Europe to make sure that we are as well 

prepared and have thought through the various contingencies that 

might be necessary. 

Chairman JOHNSON. Governor Tarullo, do you have anything to 

add to this? 

Mr. TARULLO. Mr. Chairman, with respect to European preparation, I would just say that one thing about the euro zone problems 

is they have been with us for some time, as a result of which we 

have been able to regularize a system of oversight of U.S. financial 

institution exposures and activities in Europe. Right after the first 

Greek problems arose in May of 2010, on an ad hoc basis we began 

looking at them. Over time we have been able to put in place a system that allows us to check the positions and exposures of individual firms against aggregated data, whether from market sources 

or from supervisory sources, just to make sure that both we and 

the firms have a handle on what is going on. Other than that, I 

would concur with what Secretary Wolin said. 

15 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you. 

I think it is kind of a given here—from what I read and what 

I know, the stress test JPMorgan went through and so forth—that 

they have more than adequate capital. I have been told that they 

would have to sustain losses 40 times, in other words, $70, $80 billion, and they would still be standing. Is that about right, Governor 

Tarullo? 

Mr. TARULLO. Senator, in the stress test, what we did with the 

trading book was to assume an instantaneous shock based on a 

very adverse scenario, which entailed trading losses of $28 billion. 

We also assumed over the period of the stress test credit losses of 

$56 billion. The sum of those gives approximately the number you 

indicated. 

Senator SHELBY. Comptroller Curry, tell us, just walk us through 

from what you know, what was going on at JPMorgan. You know, 

were they managing risk? Were they making money? Were they 

doing a combination? Everybody has got to measure risk, but, in 

other words, what was really going on? You had people on-site, 

right? 

Mr. CURRY. That is correct. 

Senator SHELBY. So they took a position. Was that a position to 

manage something they had already done? Could you explain that 

to us? 

Mr. CURRY. That is actually the key question that we are trying 

to address, Senator, what actually happened in this particular investment strategy, and it is a very complicated investment strategy 

both in terms of its size as well as complexity. 

We are looking to determine what the actual strategy behind 

that investment scheme was and also if there were any other factors that were driving that strategy other than attempting to mitigate known risks in the bank’s portfolio. 

Senator SHELBY. But whether it is the banking arena or some 

other arena, but especially in the area of derivatives and so forth, 

you take a position, somebody else has another position, right? 

Mr. CURRY. Yes. 

Senator SHELBY. So if you win, you are looking great, you are 

looking smart. If you lose, you are maybe having a bad day. But 

you are not trying to take risk out of the market, are you? 

Mr. CURRY. Not necessarily. 

Senator SHELBY. What are you really trying to do? From my perspective, I think banks ought to be able to take risk. They ought 

to manage those risks. The regulators ought to make sure that they 

know what is going on from your perspective and the Fed’s perspective of any huge risk they take, that it might endanger the taxpayer. A lot of us—maybe not everybody, but a lot of us are worried 

about the taxpayer and bailouts and future bailouts. JPMorgan, as 

strong as they are, it seems from your testimony and others’ and 

what we know, was never in any danger if they lost $2 billion or 

$4 billion or what. That is a lot of money to me, and I guess it is 

a lot of money to them. But what did the Comptroller’s office know? 

And were you on top of things? How many people did you have at 

JPMorgan kind of supervising or watching this? 

16 

Mr. CURRY. Let me address the issue of the supervisory strategy 

with respect to risk management, first, Senator. 

Senator SHELBY. OK. 

Mr. CURRY. Number one, we are looking for the institution to 

identify and address the potential for a serious risk within the organization. We are really not looking to eliminate all risk. If you 

did so, you would not have a bank. The nature of a bank is to manage risk and to be profitable. 

The role of capital is really to absorb those areas where risk is 

either unavoidable or occurs just because of the nature of the business. And in the case of JPMorgan’s national bank, which we supervise, there is ample capital. There is over $101 billion worth of 

capital backing just the national bank, not the holding company. 

With respect to the actual supervision of JPMorgan Chase, we 

have 65 individuals who are our core team of examiners who are 

resident at the institution. On top of that, we are able to draw 

upon a considerable reservoir of skilled individuals with expertise 

in a variety of credit market—capital markets and other areas that 

are brought in as targeted exams on an as-needed basis. We also 

work in connection and cooperation with the Federal Reserve System, which also supervises the holding company. 

In terms of this particular investment situation at the CIO’s office, we did begin to examine this early in April. Our interest and 

concern intensified during the month as losses increased within the 

portfolio up to the point that the institution itself announced the 

significance of the losses that were incurred. 

Since that point in time, our focus has been on managing and 

monitoring the bank’s efforts to mitigate or de-risk that particular 

portfolio with the objective of ensuring that there is a soft landing 

of that particular position, to minimize both risk to the institution 

and ultimately to the Deposit Insurance Fund. 

Senator SHELBY. When do you think you will finish your analysis 

of what really happened in all this? 

Mr. CURRY. We hope to do that as quickly as possible, and we 

also hope to use our findings to inform us as to what potential implications there are for the other institutions that we supervise in 

our large bank cadre of institutions. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you very much. 

Mr. Curry, you have 65 personnel devoted to supervision. How 

many are in London? 

Mr. CURRY. We have five individuals who reside or are housed 

in our London office. 

Senator REED. And they are responsible for how many institutions in London? 

Mr. CURRY. They are responsible for any national bank that has 

a global operation, especially with the presence in London, like a 

London branch office. 

Senator REED. So how many would that be, roughly? 

Mr. CURRY. That would be—I will give you the exact number, but 

it would be roughly a half dozen institutions. 

Senator REED. A half dozen. How common is it to have the risk 

office of a national bank located outside of the United States? 

17 

Mr. CURRY. In this particular case, the risk office is actually 

housed in New York where the global operations of the CIO office 

are housed. So from a supervisory standpoint, our focus in supervising that and other global issues is really directed from our resident team in New York. 

Senator REED. One of the impressions you get from reading the 

press, though, is that the CIO office in London actually had significant responsibilities with respect to the overall risks to the bank. 

In fact, the justification that has publicly been made is that they 

were taking these hedged positions, taking these investment positions to protect the bank from the overall portfolio of the bank, 

which is an essential risk operation. Can you explain? 

Mr. CURRY. The individuals who are responsible for managing 

the risk and establishing the parameters for the activities that may 

occur in the London office are housed in New York, and that is 

where the physical focus of our activity has been. 

Senator REED. And they reported directly to the chief management or—— 

Mr. CURRY. The chief executive officer, yes. 

Senator REED. And you are confident from your review that they 

had complete authority to countermand or contradict or direct the 

operations in London? 

Mr. CURRY. One of the focuses of our review is to determine the 

accountability, the involvement of management in supervising the 

design of the risk management controls and their monitoring of it. 

Senator REED. When the model for risk was changed, were you 

aware of that change? Did you evaluate the new model? It took 

place prior to your assuming these duties, I understand that. You 

came on board about April—— 

Mr. CURRY. Nineth. 

Senator REED. The 9th, and April 6th was the first indication of 

difficulty. But was that—I think VaR is the term—model evaluated 

by OCC? 

Mr. CURRY. There are hundreds, if not thousands, of models that 

are employed by large financial institutions to measure and monitor a variety of risks or other functions in the institution. But 

under the authority of the applicable capital regulations, Basel regulations, we are required to approve their capital-related models. 

There are other models that may be at issue here, managementrelated models or other models that would have been involved in 

this particular situation. We would not have had an express approval requirement of those models, but we would likely have been 

aware of them, and we are looking at our procedures for evaluating 

other types of models that are used by an institution such as 

JPMorgan Chase. 

I would point out that a year ago last April, the OCC did publish 

written formal guidance on the use of models by OCC-supervised 

institutions, and that guidance does outline the pitfalls and areas 

in which banks and bank management must assess in the use of 

models in measuring risk throughout their organization. 

Senator REED. Thank you. 

Mr. Wolin, right now we face a serious challenge in Europe with 

European banks who seem to be in a much more adverse condition 

than the United States banking industry based on capital and 

18 

many other measures, as in Governor Tarullo’s testimony. To what 

extent has Dodd-Frank improved our banking situation vis-a-vis 

the Europeans and put us in a better, stronger position? 

Mr. WOLIN. Senator, I think that both Dodd-Frank and the ability of the Financial Stability Oversight Council to come together 

and discuss and understand these things, but also the work of the 

Fed and other regulators sitting at this table to undergo the stress 

tests that have been at the core of making sure that our banking 

system is well-capitalized and well-cushioned from the kinds of exposures it might otherwise have, have been important aspects of 

our being in a much better position than we were before DoddFrank and, frankly, in a much better position than our counterparts in Europe. 

Senator REED. Is that your view, Governor Tarullo? 

Mr. TARULLO. Yes, Senator. Beginning in 2008 and with the 

hearings on reform that were conducted by this Committee and 

your counterparts in the House in 2009 there was a sea change in 

attitudes and orientation both with respect to existing authorities 

and the use of new authorities. As Secretary Wolin indicated, particularly with stress testing and capital requirements, which of 

course are embedded now in Section 165 of the Dodd-Frank Act, we 

all have a much better handle on the positions that our banks will 

have in the case of a tail event, which is to say the very bad ‘‘if’’ 

low probability outcome. 

Senator REED. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Corker. 

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

hearing. And I do hope we are successful in having a markup on 

the Menendez-Boxer bill and that it is a real markup, and hopefully it will happen soon. 

I know that in any big piece of legislation, 2,400 pages, there are 

going to be some good attributes. I know that from my perspective, 

as we get further and further in the rearview mirror, it is more evident to me that in many ways Dodd-Frank was a political response 

to a—instead of real reform in so many ways, and I do hope that 

when this season is over, with everybody talking about it being the 

best thing since sliced bread, we will actually move on to exploring 

some real reforms down the road. 

Mr. Tarullo, I do thank you for talking about capital. I do think 

that that is our best buffer against financial institutions having 

trouble, and I think that has been a contribution. 

Mr. Gruenberg, I appreciate you coming in and talking the other 

day about orderly liquidation. 

I do think, Mr. Chairman—I do not know how many people have 

gone through the FDIC proposed rules on resolution, but the word 

‘‘liquidation’’ is throughout Title II. I know Senator Warner knows 

that well. And I think we have found that it is anything but liquidation, and it really is only dealing with the holding company 

these institutions will continue. And, again, I just think it would 

be great for us to understand that and maybe think about whether 

there should be a Chapter 2 to Title II. 

But let me move on to the issue at hand. I think it is a fool’s 

errand to think that regulators are going to be ahead of, you know, 

19 

bankers, especially in these highly complex organizations, and the 

notion of having a regulator beside every banker is, again, a fool’s 

errand. And I really think we have charged you all with a lot of 

things we should not have charged you with in the first place. 

But the real question to me—I know that, look, JPMorgan lost $2 billion. I think over a 2-year period they could lose like $80 billion and still be OK. And yet we still have not deal with the $200 

billion that taxpayers really lost with the GSEs. I know people may 

be looking at this hearing and wondering why we are having it. 

The reason I think it is important is this is a real live example of 

what Volcker may or may not be. And I know that determinations 

are being made about Volcker, and since we have all the regulators 

here—and I will start with you, Mr. Wolin, and actually ask each 

of you, what does this mean, ‘‘risk-mitigating hedging activities in 

connection with and related to individual or aggregated positions 

or contracts’’? You all know what the rest of it says. But what does 

that mean? Does an institution rightfully, once Volcker is in 

place—by the way, we all understand Volcker is not in place today, 

so it has no relevance whatsoever as it relates to what happened 

to JPMorgan. But what does that mean? If an institution has tremendous exposure in Europe through whole loans, just normal 

loan-making activity, does it or does it not have the opportunity, 

once Volcker is put in place, to hedge against a downturn in economic activity or just activities there that may be adverse to the 

bank? I would just like for you all to go across and tell me what 

this means. And is portfolio hedging something that you envision 

to be something that can happen or cannot happen after Volcker 

is fully implemented? We will start with you, Neal. 

Mr. WOLIN. Senator, I think as the statute says and you quoted 

it, the right question to ask is: Is it related to individual or aggregate positions? If you are hedging something that is related to that, 

then it is permitted. If it is something other than that, then it is 

not. 

I think, the question of portfolio hedging depends a lot on what 

you mean by portfolio hedging. If you are, quote-unquote, hedging 

some macro risk that is not related, as the statute requires it to 

be, to individual or aggregated positions and the risks that come 

from those, then it is not permissible, our read under the statute. 

But, of course, in the end the regulators, with our coordination, will 

have to work through exactly the technical issues of what that 

means. They put out a proposed rule and 18,000 or so comments 

came in. They are working through that right now. But I think the 

question is not really whether it is portfolio hedging or not because 

the statute does not talk about portfolio hedging. It talks about 

whether it is associated with individual or aggregate positions that 

the firm has actually taken and put on their books. 

Senator CORKER. And if you would, as you go through, I assume 

that in order to have a political response to what has just happened during this political season, we could end up making regulations on hedging that make some of the highly complex organizations, if we are going to keep them like they are, even more risky. 

Is that correct? 

Mr. WOLIN. Well, the goal here is to allow hedging that relates 

to risks that are associated with the positions of the firm, and in 

20 

that respect, it is risk reducing. What we do not want to have done 

and what the Volcker Rule is about, of course, at its core is to not 

allow activity, proprietary trading activity, with the firm’s money 

that the rest of us, the taxpayers, are ultimately potentially on the 

hook for making whole. 

Senator CORKER. That is what I thought you would say. Thank 

you. 

Mr. TARULLO. Senator, at the last hearing, we had a discussion 

of the distinction between proprietary trading and market making, 

and I think what we are facing now is the distinction between proprietary trading and a hedging trade. When you asked what does 

that provision, which is basically taken from the statutory language and put in the regulation, mean, at least with respect to 

hedging, what the proposed rule would do would be to put in place 

both some substantive guidelines for trying to distinguish between 

hedging of individual or aggregated positions on the one hand, or 

proprietary trading on the other. And perhaps as importantly, put 

in place a set of risk management reporting and documentation requirements. 

So, in essence, if a firm said we are doing this because it is a 

hedge, they would be required to explain to themselves, importantly, as well as to the primary supervisor, what the hedging 

strategy was, how it was reasonably correlated with the positions 

that they were hedging, and how they would make sure that they 

did not give rise to new kinds of exposures. 

So I think you ask absolutely the right question. What does that 

mean? And that is the reason why in the proposed regulation there 

is an elaboration of both some substantive guidelines but also some 

risk management and documentation requirements. 

Mr. CURRY. I would simply state that from a strictly supervisory 

standpoint, I think we expect all banks, large or small, to have robust and comprehensive assets liability management policies and 

practices in place. 

Senator CORKER. And that includes portfolio hedging. 

Mr. CURRY. It would depend on the risks in that particular institution that they are facing, and it could include that. But the issue, 

I think, as Governor Tarullo mentioned, is really, is there robust 

risk management in place with controls and limits that allows 

these risks to be addressed and mitigated without introducing additional risk? And I think that is the concern or the issues that the 

NPR is trying to address. 

Mr. GRUENBERG. Senator, I think the central issue here is that 

hedging is a risk management activity to reduce risk to the institution as opposed to the activity that would get into a speculative nature where you are really trying to generate income. And I think 

the whole goal would be—and I think this has been the point that 

has been made—creating a set of controls in which you can monitor 

the activity so that the important legitimate hedging activity goes 

forward. If you are getting into riskier speculative activity, you 

want to be able to identify that. I think that is important for the 

institution to be able to recognize and important for the regulators 

to recognize. 

Senator CORKER. Mr. Chairman, I know my time is up, and I realize that the consumer agency is not particularly involved in that 

21 

aspect, but I thank you all. And I do hope that the political pressures of what has happened do not cause regulators to end up 

doing something different than what they think is good for our 

banking system. And I do hope down the road we will look at some 

real reforms that may work for us a little bit better and not put 

all the onus on having a regulator beside every banker. 

Thank you. 

Chairman JOHNSON. Thank you. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I want to pick up 

a little bit where my friend Senator Corker left off. 

Mr. Curry, one of the things you had said was that you are still 

here months after at least looking into some of these JPMorgan activities, trying to determine their strategy. And I believe Governor 

Tarullo said that one of the results of what you envision a Volcker 

Rule being implemented might be is that determining this assessment of whether your hedging strategy would have to be laid out, 

in effect, ahead of time to make a determination of whether it fit 

within the boundaries of appropriate hedging or bled into proprietary trading. So do you think whether this particular Morgan 

transactions fell in or out of the Volcker restrictions or not, would 

the very nature of having this, in effect, sharing of strategy beforehand have perhaps given your office some more guidance? And, 

Governor Tarullo, if you want to comment on that as well. 

Mr. CURRY. I think the point I would like to make in regards to 

the discussion on the Volcker Rule and JPMorgan Chase, we do not 

know all the facts. I think that is important before you make any 

judgments as to whether or not the rule, if it were in effect, would 

have been applicable in this particular instance. I would like to emphasize this was a risk management issue, regardless of whether 

or not the Volcker Rule was in play. And the issues really are similar in the sense that, were there appropriate management controls 

in place in advance of the strategy, were there procedures and reports that enabled management to assess the risks initially and as 

they may have developed in the course of the execution of that particular strategy. 

So I believe that in any event, it is still a risk management issue, 

regardless of the Volcker Rule. 

Mr. TARULLO. Senator, I think the Comptroller has been addressing the question of whether this is a proprietary trade, and I think 

he is saying he does not have information right now that would 

allow him to say whether, if Volcker were in effect, it would have 

been a proprietary trade. 

My point, though, is regardless of what we conclude about the actual nature of this particular set of transactions, if this proposed 

rule had been in place, if the hedging exception were to be invoked 

by a firm, they would have had to ensure that the kinds of risk 

management that Comptroller Curry speaks of would have been in 

place, and they would have been required to document it. And I 

suspect we are going to find in this case that there was an absence 

of documentation both within the firm and in reporting to—— 

Senator WARNER. You would have perhaps a little more guidance 

on aggregate hedging. I mean, clearly I think there is a value in 

aggregate hedging in terms of your portfolio, instead of hedging 

22 

each individual trade, but you would have had at least perhaps a 

little clearer guidance. 

Mr. TARULLO. I think that that is the intention of these additional provisions in the regulation, and then, of course, the ongoing 

supervisory challenges to make sure that the information that is 

received is scanned and reviewed properly. 

Senator WARNER. Let me move to a different subject because my 

time is running out. Again, to Governor Tarullo and Mr. 

Gruenberg, one of the new tools that we have tried to put in 

place—actually that Senator Corker and I worked on—is these living wills. And as we move down that path, I would like both your 

comments in terms of have you had the tools you need to kind of 

evaluate the back and forth on creation of living wills. And to what 

standard are you going to hold the institutions? In a sense, this living will will demonstrate how they would unwind themselves? Are 

you looking at that in kind of a blue skies environment? Are you 

looking at it in the potential real environment we may have with 

the breakup of the euro? I would like to just get some comments 

on that. 

Mr. GRUENBERG. Senator, the statute itself establishes a standard for evaluating the plans, and that standard is the Bankruptcy 

Code. And the requirement is that you have to make a judgment 

as to whether the plan could credibly result in an unwinding of the 

institutions under the standards of the Bankruptcy Code, and that 

is sort of the operating premise for the development of the resolution plans. 

As I indicated previously, the Fed and the FDIC issued a joint 

rule last year establishing the criteria for the plans. We have been 

working with the institutions on their development. Under the 

rule, the first round of plans—and those will be for the largest institutions, those with assets of over $250 billion—will be due in 

July. So we have been engaged in a process with those companies 

in the initial development of those plans. We are going to get the 

initial submissions in July. Then there will be an extensive process 

of review of those plans following the submissions. 

Mr. TARULLO. The only thing I would add to that, Senator, is 

that obviously it is not possible to tailor a lot of different resolution 

plans to a lot of different potential adverse scenarios. That is why 

our review of the plans that are submitted is going to need to include basic questions about the ongoing structure of the firm; that 

is, we are not just going to be able to say, if something bad happens on Thursday, will they be able to resolve by Monday morning? 

We are going to need to ask ourselves whether the drafting and review of the resolution plans shows us that there are structural elements or features of the organization that could be an impediment 

to achieving that end and, thus, as a matter of current supervisory 

policy, we need to adjust. That kind of exercise should help provide 

some more suppleness in response to whatever the risk is that 

could eventually lead to the firm’s problems. 

Senator WARNER. Thank you, Mr. Chairman. 

Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. I want to first indicate that I strongly agree with the tenor of the questions that we 

heard from Senator Corker and Senator Warner with regard to the 

23 

Volcker Rule and those aspects. I think we have covered that thoroughly, so I am not going to go into that further myself, but I did 

want to indicate that that is a direction I would have gone into had 

we not already had a full discussion of that. And I encourage you 

to take their comments to heart as we move forward. I am very 

concerned about how we are moving forward in the regulatory climate right now with regard to the response to things like the 

JPMorgan issues and others. 

I want to just shift the focus for a minute, and, Mr. Cordray, I 

want to talk to you first. The housing credit market continues to 

be very tight, and I am hearing a lot of concern about how DoddFrank will reduce credit availability through the proposed rules for 

qualified mortgage that increases liability and qualified residential 

mortgage that requires a 20 percent downpayment. 

I know that last week the CFPB reopened the comment period 

for the qualified mortgage proposal until July 9th, seeking comments about data that can be used to model the relationship between the borrower’s ability to repay and variables such as the consumer’s ratio of debt to income. 

Is it your intention to also convene a small business panel to discuss the impact of this proposed rule? 

Mr. CORDRAY. So thank you, Senator, for the question about the 

qualified mortgage or ability to repay rule. One of the reasons we 

did reopen the comment period is that we have recently been able 

to obtain a significant amount of data from FHFA that gives us a 

better window into the mortgage market. We are all, I think, quite 

concerned—and I know all of you are as well—about the direction 

and trajectory of that market, and this is an important rule in 

helping shape the future of that market. We want to be clear that 

we craft a rule that is based on sound data and that does not unduly restrict access to credit, which I think is something we have 

been hearing consistently from small banks, large banks, community and consumer groups across the country. 

Even after the Fed’s comment period had closed on this proposed 

rule, we continued to get immense amounts of comment from different groups, and we thought that we would open up a comment 

period again to make sure everybody had an even chance at commenting on those issues, including data issues that we have identified in the re-comment proposal. Because this rule was originally 

proposed by the Fed, the small business panel is not implicated, 

and if we were to try to convene a whole process, we would miss 

the statutory deadline Congress has set for us, which is January 

of 2013, which we fully intend to comply with. 

So that is our approach at the moment. We encourage any small 

provider that wants to take advantage of the renewed comment period—and this is part of the reason why we did it. Those outside 

the Beltway often do not understand the ways that they can access 

the agency, and we want them to have full access and full voice in 

our rulemaking to make sure we are reflecting the entire market. 

Senator CRAPO. Well, thank you, and to Mr. Gruenberg, Mr. 

Curry, and Mr. Tarullo, it would seem to me that because of the 

qualified residential mortgage is supposed to be more broadly defined than the qualified mortgage, would it be correct to say that 

24 

the banking regulators should wait for the CFPB to finish its rules 

before they move ahead with their risk retention rules? 

Mr. GRUENBERG. Senator, I do not know that a judgment has 

been made on that. I think as a general matter we thought there 

was a logic in having the QRM follow the QM. So we will have to 

see. But there is a logic to that. 

Senator CRAPO. Mr. Curry, do you agree? 

Mr. CURRY. I think that that is a necessary component to the entire package of rulemaking, the QRM and the QM. 

Senator CRAPO. Mr. Tarullo. 

Mr. TARULLO. It is an interagency process, Senator. If people 

want to wait, we will wait, too. 

Senator CRAPO. All right. I would encourage you to do that. 

Mr. Tarullo, recent events have highlighted the difficulty in modeling risk. My understanding is that the Federal Reserve is following or utilizing the current exposure method and that there has 

been quite a bit of concern about whether that is an accurate method of risk modeling. 

Are you considering other models or are you focused on simply 

staying with the current exposure method? 

Mr. TARULLO. I am sorry, Senator. In what context? In the stress 

test context or in the—— 

Senator CRAPO. That is my understanding, yes. 

Mr. TARULLO. With respect to the stress testing, what we are trying to do in stress tests is make our best judgment as to what 

kinds of losses would be entailed across the industry. 

Senator CRAPO. Let me interrupt. 

Mr. TARULLO. I am sorry. 

Senator CRAPO. I was mistaken. I was more focused on the single 

counterparty. 

Mr. TARULLO. Oh, yes. OK. That is a different issue, right. That 

is a calibration issue with respect to the determination of the exposure of a large institution to another institution for purposes of the 

limits that we will be promulgating. That is one of the topics that 

is being commented on in the consideration of changes to or potential modifications to the proposed rule on sections 165 and 166. 

There have been a number of alternatives suggested. The challenge, without trying to signal where we would go because we have 

not seen all the comments yet, and I certainly have not had a briefing on it. The challenge is going to be on the one hand wanting to 

have a methodology that tries genuinely to track actual risk exposure while on the other not becoming dependent on modeling within firms, because as we have seen in a number of other contexts, 

dependence solely upon the modeling and firms can lead you 

astray, particularly because firms in our observation tend to be 

much better at modeling VaR and associated kinds of risk assessments for more or less normal times, as opposed to the tail events 

that we are trying to guard against. 

So in thinking about the comments on the proposed rule, we will 

have to keep both those issues in mind, trying to hew toward what 

really are the risks associated with the positions on the one hand 

and on the other hand wanting to make sure that we are not totally dependent on some internal model. 

25 

Senator CRAPO. Well, it is another example of where if we model 

too aggressively one way or the other, we will get it wrong and create unintended consequences, so I encourage you to get it right and 

focus on these concerns about the accuracy of the current exposure 

method. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

Does anyone on this panel think that Bruno Iksil, the ‘‘London 

Whale,’’ who ran JPMC’s European strategic investment unit, woke 

up each day trying to mitigate the risk from excess deposits invested between loans and bonds? 

Mr. CURRY. That is a related area of inquiry at the OCC. 

Senator MERKLEY. So you are inquiring, but you would not argue 

that case? 

Mr. CURRY. Not necessarily. 

Senator MERKLEY. No, I would not think anyone would, because 

he woke up each day as head of the strategic investment unit trying to make money for the bank. And so it is kind of a basic observation. 

Small businesses across America—and, Comptroller Curry, I will 

address these to you, and I will try to ask you to keep your responses crisp so I can try to get through a series of questions. But 

across America, small businesses are trying to get access to credit. 

They are highly frustrated. The ability of them to access credit is 

essential to the recovery of our economy. Does it do damage to our 

economy to have banks diverting taxpayer-insured deposits into 

hedge fund investments rather than making loans to families and 

small businesses? 

Mr. CURRY. We at the OCC, Senator, are very supportive of small 

business lending by the entire spectrum of national banks and Federal thrifts that we supervise, both from the largest—— 

Senator MERKLEY. Right, but that was not the question. The 

question is: Is diverting deposits into hedge fund investing rather 

than making loans damaging to our economy? 

Mr. CURRY. I would hope not. I hope that was not the case, 

would not be the case. 

Senator MERKLEY. But it would be if deposits were diverted into 

hedge fund investing rather than making loans to small businesses. 

You are hoping it was not the case, but you are saying it would 

be if that is what happened? 

Mr. CURRY. We expect national banks and Federal thrifts to meet 

the credit needs of their communities, including small business 

lending. We do not direct exactly how they do that. We assess it 

from the CRA. 

Senator MERKLEY. OK. I will continue then. Thank you. Does it 

increase systemic risk to have banks diverting taxpayer-insured deposits into hedge fund investments? 

Mr. CURRY. I believe that is the intent of the Volcker provisions 

of the Dodd-Frank Act, and—— 

Senator MERKLEY. Well, certainly it is the intent, but in your 

opinion, does it increase systemic risk? 

26 

Mr. CURRY. Unrestrained financial risk taking outside a legitimate risk framework is something that we would be very concerned 

about as a supervisor at the OCC. 

Senator MERKLEY. From a common citizen’s point of view, when 

they look at the fate of Long-Term Capital Management, MF Global, AIG, Lehman Brothers, Merrill Lynch, and a host of institutions 

that survived only because we bailed them out, I think the case is 

fairly clear that if you are in the hedge fund business, you increase 

systemic risk; and if you are in the banking world doing hedge 

funds, you would increase systemic risk. Am I way off base here? 

Mr. CURRY. Again, Senator, we would look to the banks engaging 

in safe and sound lending within the context of banking. To the extent that it was undue risk taking that occurred, we would hope 

to either have a statutory or regulatory restraint. 

Senator MERKLEY. OK. Let me explore it from this angle. Do 

bank-hosted hedge fund investment units have a competitive advantage over nonbank hedge funds? Because the bank-hosted funds 

have access to the discount window and they have access to insured deposits. Do they have a competitive advantage over 

nonbank hedge funds? 

Mr. CURRY. I would have to look at the available research to 

come to a conclusion. 

Senator MERKLEY. I would say of course they have an advantage. 

They have taxpayer-insured deposits and access to the discount 

window. Is that an observation that is way off mainstream common 

sense? 

Mr. CURRY. I would like to be able to research that subject further. 

Senator MERKLEY. OK. In terms of proprietary trading being disguised as risk mitigation, it seems like there are basic things that 

kind of create red flags. If a company says it is mitigating risk on 

a long position that is investment in corporate bonds by essentially 

taking a long position by selling insurance, is that a red flag that 

maybe this is not risk mitigation after all? 

Mr. CURRY. That is something that we would raise red flags and 

would have to look at. 

Senator MERKLEY. How about if a so-called risk mitigation operation is investing in hedge funds, private equity funds? Would that 

be a red flag that this is not risk mitigation, this is an investment 

operation, a proprietary trading operation? 

Mr. CURRY. That would be another area under general risk management at a minimum that we would be looking at. 

Senator MERKLEY. So a potential red flag, it would draw attention. 

If a risk mitigation operation is making massive trades that are 

not identified with specific risks from specific assets, whether individual or aggregated, would that be a red flag? 

Mr. CURRY. We would look at that and the other examples you 

have given very closely. 

Senator MERKLEY. OK. So if they are not tightly correlated, 

something—red flag. 

Are you going to support closing the loopholes that the Wall 

Street banks have been arguing for so they can continue hedge 

27 

fund-style operations? Are you going to support closing those loopholes or keeping those loopholes? 

Mr. CURRY. That is one of the issues that all the agencies, the 

banking agencies and the other agencies, are looking at, the proposed NPR on the Volcker Rule. I would add that I think our experience here, as it unfolds with JPMorgan, would help inform our 

views in the final rulemaking. 

Senator MERKLEY. Thank you very much. 

Mr. CURRY. Thank you. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

I would like to start by also acknowledging Mr. Tarullo’s comments about the importance of capital, and I know you have given 

a great deal of thought to this for a very long period of time and 

have considered this in a very sophisticated way. And there may 

be many things you and I may or may not agree on, but I think 

the emphasis on capital as a general matter is exactly the right direction that we ought to be heading in. And I fear that Dodd-Frank 

is a profoundly misguided effort to do many, many other things. I 

have to respectfully disagree with our Chairman, who in his opening comments I think tends to disagree with the characterization 

of Dodd-Frank, as I have characterized it, as a very explicit attempt to require that regulators micromanage banks. I do believe 

very much that it is exactly that and that it is guaranteed to fail 

in that respect. But I want to touch on another topic, if I could. 

Mr. Gruenberg, I observed in a recent speech that you stated, 

among other things, that—and I think this is within context—‘‘the 

typical path toward the failure of an insured bank starts with bad 

loans.’’ My understanding is, according to the FDIC’s Web site, over 

the course of 2009 and 2010, there were almost 300 banks that 

failed—about 297. That is actually quite a high rate of failure, the 

highest since the early 1990s. Ninety-five percent of these failures 

were banks with assets of less than $1 billion. And I would just ask 

you, to your knowledge, how many of them failed because of their 

proprietary trading activities? 

Mr. GRUENBERG. To my knowledge, Senator, none of them. 

Senator TOOMEY. None. Not one. Did they fail because they made 

loans that went bad? 

Mr. GRUENBERG. As a general characterization, I would say yes. 

Senator TOOMEY. Like virtually 100 percent of the cases, it was 

because they had bad loans. So would it be fair to say that historically, including to the present day, the biggest risk of banking is 

the lending activity that is inherent to the banking process? 

Mr. GRUENBERG. Yes. 

Senator TOOMEY. Do you regulate that at all? Does the FDIC and 

does the OCC have any regulatory oversight whatsoever over the 

lending process? 

Mr. CURRY. Yes, that is a considerable focus of our examination 

and supervision. 

Senator TOOMEY. Yes, that is what I thought. Lots of regulation, 

right? Documentation—— 

Mr. CURRY. And on-site examination. 

Senator TOOMEY. Concentration requirements, supervision of the 

activities. And yet, despite that, 100 percent of the failures of 

28 

banks in America in the last 2 years are attributed to bad loans. 

I am not criticizing the regulatory process. It seems to me that if 

we have a banking activity, the very nature of which is to take risk 

in extending credit, some of those banks, especially during tough 

economic times, are going to fail. And that is unfortunate, but it 

is acceptable. It is unavoidable. And the real goal of the regulatory 

regime, it seems to me, ought to be to just ensure that you do not 

have systemic risk, you do not have the failure of one or more institutions taking down the rest. And this is why I go back to Mr. 

Tarullo’s observation. It seems to me that capital is the greatest assurance that you have less leverage if you have more capital and 

less systemic—greater ability, of course, to absorb whatever losses 

might occur. But instead we are going down the direction—and, 

again, you are forced to implement a law that has been passed, but 

Dodd-Frank—to the Chairman’s point about micromanaging, my 

understanding is there are 398 rulemaking requirements, 110 of 

them have been met with finalized rules, another 144 rules have 

been proposed, yet another 144 have yet to be proposed. And as we 

all know, but maybe all of our constituents may not be fully aware 

of, we are talking about rules; we are not talking about an admonition not to play in traffic. We are talking about many, many pages 

of very dense and complex matters that are associated with each 

individual rule. The Volcker Rule alone is staggering in its length 

and complexity. I think it is an impossibility. 

Take one little aspect of the Volcker Rule, the exception that is 

applied to market-making activities. Just in formulating that exception, we have all kinds of metrics that we are going to impose, 

that regulators are going to decide. They are going to invent limits, 

for instance, on how much money can be earned from the bid-offer 

spread versus a subsequent market rule; how much business a 

market maker must do with end users versus interbank dealers; 

what kind of asset classes are permitted to trade what kind of risks 

and under what kind of circumstances. We have to decide whether 

these limits apply to an individual trader or whether we aggregate 

trades. It is staggering. 

I am concerned that it is going to limit the ability of banks to 

manage risk. It is going to have a huge cost. It is going to reduce 

liquidity in the market. And we are doing this while no banks have 

failed because of proprietary trading. 

Oh, and by the way, we create these arbitrary exceptions. It is 

perfectly OK if you do all the risk taking you like, as long as it is 

in Treasurys. As someone who once traded fixed-income instruments, I can assure you, you can lose your shirt trading Treasurys 

just as readily as you can lose your shirt trading corporates, for instance. 

So I guess I do not have a specific question about this. I am just 

very, very concerned that we have created a monster that at my 

last count, between the Comptroller of the Currency and the Fed, 

we have over 100 examiners on the ground I guess pretty much 

full-time at JPMorgan alone. That is before we implement all of 

these rules. 

Mr. Chairman, I have to say I think we have very much taken 

the wrong direction here, and I hope we will reconsider when we 

29 

are in a political environment where it is possible and will consider 

capital as the essential tool to reduce systemic risk. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Curry, I want to ask you about JPMorgan losing $2 billion, 

and possibly more, since the OCC was the primary regulator was 

JPMorgan, and the OCC has a well-deserved reputation for being 

too cozy with the banks that it regulates. And I know you just got 

to your new position, so you have an opportunity here to decide 

what the OCC does in the future. 

I find it interesting. You know, what I do not want to see is a 

repeat of 2008. I know that a free market is essential to our very 

economic vitality, but there is a difference between a free market 

and a free-for-all market. And in 2008, what we obviously came to 

the conclusion of is the consequences of a free-for-all market where 

the decisions of large financial institutions became the collective 

risk of an entire country, even though they were not part of making those investment and other decisions, and then all of us had 

to pay. 

And so, you know, I wish we had insisted on capitalization then. 

I wish we had insisted on a whole host of things that would have 

avoided 2008 because I will never forget that meeting with Chairman Bernanke and Secretary Paulson where they described largely 

a series of financial institutions on the verge of collapse and suggested that if they collapsed, not only would they create systemic 

risk to the entire country, but failure to act would lead us to a new 

Depression. I do not want to revisit that. 

Now, I do not know whether people can forget such quick history 

because it is recent history, but I do not. 

So I know you just got to this position, and I am certainly not 

blaming you personally for this. But I just have a yes-or-no question. Did the OCC screw up in allowing these JPMorgan trades to 

happen? 

Mr. CURRY. Senator, we are going to critically look at that question. Part of my goal in reviewing what happened at JPMorgan 

Chase is not just to see what the bank itself did or did wrong, but 

also how we can improve our supervisory processes at the OCC. So 

it will be a critical self-review as part of this process. 

Senator MENENDEZ. How long is that self-review going to take 

you to come to a conclusion? 

Mr. CURRY. I hope to have it done as quickly as possible, Senator. 

Senator MENENDEZ. What does that mean? 

Mr. CURRY. I would hope within the next several weeks and no 

more than a few months. But I do want to reiterate that my goal 

as Comptroller is to have a strong, effective, and fair supervision 

at the Comptroller’s office, and it is imperative, and the lessons 

learned from the 2008 crisis are clear to me and to my colleagues 

at the OCC. We do need stronger capital, which we are getting 

through Basel III and other rulemakings. We also need heightened 

expectations, and we are requiring that of the largest institutions 

we supervise in terms of the banks’ management, its awareness of 

risks, raising their expectations with what we require for minimum 

30 

reserves, liquidity, and risk management, and also corporate governance, which is critical as a—— 

Senator MENENDEZ. I know you say you are going to reserve it, 

but should not the sheer size of these trades have been a huge red 

flag for the OCC? 

Mr. CURRY. That is an issue; the concentrated nature of the trading and the illiquidity of it are red flags that are clearly apparent 

now. 

Senator MENENDEZ. Well, I just think that for those of us who 

supported Wall Street reform and do not want to relive 2008, I 

think every regulator here responsible for implementing the law 

should know if huge trading losses like this happened at banks 

after we established the Volcker Rule and capital rules have been 

written and implemented, then I think the blood will be on all of 

your hands if the London Whale ultimately goes belly up next time, 

because in this case I know that the comment is, ‘‘Well, they can 

absorb the $2 or $4 billion,’’ whatever it ends up being. But what 

if you had through these trades—what is to stop them from losing 

multiples of that, billions more the next time, or even more significantly, a less well capitalized bank from losses that could bring it 

down? I just do not see where the circuit breakers are here. I do 

not see where the ability to ensure that, in fact, that type of decision making does not become the collective risk of all of us again 

in this country. And I do not think the American people, and certainly this Senator, are willing to go down that road again. I do not 

know what it takes to get everybody to understand that we are serious of purpose here to ensure that the law is fully implemented. 

Now, I know there are those who disagree with the law, but as 

has been said in the past, Americans are free to disagree with the 

law, they are not free to disobey it. They are not free to disobey 

it. And this Senator for one is going to continuously pursue to 

make sure that we do not relive 2008. And I hope that all the regulators but certainly the OCC understands that. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. 

This is one of many hearings that I have participated in that this 

Committee has held in regard to oversight of the implementation 

of Dodd-Frank. When I asked for Committee assignments a year 

and a half ago, I asked for the Banking Committee, was told by 

some, ‘‘Well, you do not want to be on the Banking Committee. Its 

work is done. They have already passed Dodd-Frank. Its heyday 

has come and gone.’’ And in my view, oversight, implementation, 

modification, and alteration of Dodd-Frank is a very important task 

for this Congress and one that I wanted to fully engage in because 

the questions of Dodd-Frank are tremendous, certainly directly to 

financial institutions but, more importantly, to the customers, borrowers, and depositors that we care a lot about. 

It is concerning to me that while we continue to have these hearings, my concern is that there is no legislation that then follows the 

series of ideas that are presented, and certainly I would guess almost every Member of this Committee has expressed, either here 

in a Committee hearing or in a letter to the regulators, a desire 

for a different outcome than what has occurred with Dodd-Frank. 

31 

And so I think there is a general belief among most everyone on 

the Committee that there needs to be some alterations in DoddFrank, and my hope, Mr. Chairman, is that we will take the opportunity to modify through the legislative process provisions of DoddFrank that we think are objectionable or improperly worded or in 

need of alteration based upon the hearings over a long period of 

time that we have had on this topic. And I have always been concerned that anytime legislation is proposed that alters the provisions of Dodd-Frank, the allegation is that the person, the Senator, 

the legislator who wants to make changes is defending big banks, 

does not care about the consumer. But I cannot imagine a circumstance in which there is not legitimate needs that need to be 

addressed that are concerns for everyone on this Committee in different areas, different issues. But I think just we need to make certain that the oversight hearings become something more than an 

oversight hearing, that there actually is a legislative response in 

which we treat each other with great respect and not with political 

allegations that we are carrying water for some particular financial 

institution or segment of the financial industry. 

I would encourage, for example, us to mark up the Menendez legislation. Let us go to work and pursue some of the things that we 

think need to be done in regard to improving the financial regulation, even though we have passed Dodd-Frank, and to prove me 

right that the glory days of the Banking Committee are not over, 

that they are ahead of us and we have lots of work to do. 

I wanted to ask, I guess a series of you have indicated that as 

a result of the loss announced at JPMorgan that your position in 

regard to the Volcker Rule has been ‘‘informed.’’ And I am interested in knowing how the loss as reported, how it has ‘‘informed’’ 

your view in regard to the Volcker Rule, and in particular, what 

do you think needs to occur in regard to Dodd-Frank now that you 

have become informed? 

Mr. CURRY. Since I believe I used that term, I will be the first 

to go. I think by ‘‘informed’’ I mean that our experience with the 

level of risk management that was present at the CIO’s office that 

was engaged in activity that, arguably, may fall under DoddFrank’s Volcker Rule provision in the proprietary trading and possibly the risk mitigation hedging exception. It really is, I think, illustrating in terms of the types and kinds of oversight structures 

and mechanisms that would be needed under that particular provision. 

Senator MORAN. Has anyone else become informed? 

Mr. TARULLO. I did not use the term, Senator, but I will answer 

you anyway. It seems to me what someone will do—we need people 

to run through this—is to say, OK, you have got a situation in 

which the firm has publicly said they did not think this was a wellmanaged risk, it was supposed to be a hedge. So somebody should 

align the rule with the practice and say if the rule had been in effect, would it have precipitated the kinds of risk management, 

identification of strategy, and documentation that would have been 

adequate to being the attention of both the firm and the supervisors to a potentially risky strategy. 

As I sit here today, I think that is the case, but I would certainly 

want someone to go through it more carefully. 

32 

Senator MORAN. Mr. Chairman, thank you. I would like to associate—at least compliment my colleague from Pennsylvania, Mr. 

Toomey, on what I thought was a very logical presentation and, in 

my view, enlightening. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and thank you for 

holding this hearing. 

This was not something I was going to talk about, but I appreciate Senator Moran’s comments. I would say that I think all of us 

believe we want to have as efficient a capital market as possible, 

a profitable capital market, a secure capital market in this country. 

But I just want to be clear because I sat here 3 years ago and 

heard the testimony on the credit default swaps that brought down 

these large financial institutions and put my family and your families through enormous economic turmoil, that it was very clear to 

me that the testimony we were hearing was that no one was 

watching that, that no one had a view of the systemic risk that was 

produced by those transactions, and to think of those as merely bad 

loans rather than securitized instruments that nobody was watching I think is not an accurate reflection—and this is not anything 

you said, Senator, but this is not an accurate reflection of the history of what we heard. I am not for any more regulation than is 

needed, and I share some of the skepticism on the other side about 

the ability of the regulators to keep up with what is going on in 

the capital markets, which raises the importance of capital as you 

described earlier. But I do want people to remember why we are 

here to begin with and the gaps that we saw in the regulation that 

had a profound effect on this economy, on the people that I represent. 

So having said that for the record, I want to go back to actually 

the Ranking Member’s very first question, or one of them, which 

was what was the nature of this transaction. Was it proprietary or 

was it a hedge? And we know through the testimony today that we 

do not have an answer to that yet. But here is how I would like 

to ask that question to Mr. Curry and to Mr. Tarullo, which is this: 

Explain to us what that examination is going to look like. What 

will you consider as you think about defining that? Because I think 

you are quite right, we can learn something from that. Those of us 

that are cautious about those definitions would like to know what 

you are actually going to be looking at. 

Mr. CURRY. At the OCC, we have a two-pronged approach to this 

particular issue. Number one, we want to fully understand the nature of the hedge or trading activity at issue. We also want to get 

an assessment and a full understanding of how the bank intends 

to reduce its exposure or de-risk from that position. 

Part of that process and as part of our secondary prong, which 

is to—— 

Senator BENNET. Can I just—I am sorry to interrupt, but the 

first step is to determine the nature, but the second step is to determine the risk—the attention to risk in the institution. Is that 

second determination dependent on the nature of the transaction? 

Mr. CURRY. No, the first prong is really to assess what is the financial risk to the institution, and that is really a priority, particularly immediately after this issue surfaced. But we are also looking 

33 

at it almost from a postmortem standpoint of what happened, 

where were the deficiencies, what needs to be corrected, are there 

additional risk management gaps elsewhere in the organization, 

and is there an opportunity to learn from this experience in terms 

of the risk management practices at the other large institutions 

that we supervise. That is the general scope of our review. 

Senator BENNET. Governor, do you have anything you would like 

to add? Then I have got one question for you. 

Mr. TARULLO. Then I think, Senator, you should—why don’t you 

go ahead and give me the question, because I think—— 

Senator BENNET. I was going to shift to your—well, you made an 

observation earlier that I thought I heard you say the low likelihood of a tail experience with Europe, and I just wanted—I want 

to know why you think that is a low likelihood or if I misunderstood what you—— 

Mr. TARULLO. No, I was referring more generally, Senator, to the 

fact that, at least in my observation, the modeling that financial 

firms do, VaR modeling and associated kinds of modeling, to try to 

understand what their risk of losses are from any number of contingencies tend not to be as oriented toward tail risks, which 

means events that, while appearing at that moment to be low probability, would, if they transpired, have enormous loss. I was not 

commenting—— 

Senator BENNET. So in that spirit, since we are about to—I do 

not know, Secretary Wolin, if you would like to talk about this at 

all. How do you view that risk right now as you are sitting here? 

I understand that the balance sheets here are in better shape than 

the balance sheets are in Europe, but the risk of collapse there? 

Mr. WOLIN. Well, I think, Senator, a couple things. First of all, 

I think that European leaders appear to be moving with a heightened sense of urgency. I think the run-up to the G20 meetings is 

Los Cabos will be an important opportunity for them to make further progress with respect to their banks, the capitalization of their 

banks and the restructuring of their banks. And as you have seen, 

they are considering those things really now on a European-wide 

basis. 

The Europeans have the will and they certainly have the capacity to keep this thing together. The President, the Secretary of the 

Treasury, and others throughout the Administration are very much 

engaged; I think that we will see as developments move forward. 

I think it is not useful for me to hazard a guess, but I think what 

is clear is they have the will, they have the capacity, and I think 

they understand more than ever before the urgency to start taking 

the actions that are consistent with avoiding some of the most unpleasant outcomes. 

Senator BENNET. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

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

joining us. 

I am glad to hear my colleagues on both sides of the aisle talk 

about the importance of capital requirements. They seemed less 

convinced of that during the drawing up of Dodd-Frank, but if 

there are changes to Dodd-Frank, that may be somewhere where 

34 

we want to look, and especially the discussion from Mr. Toomey 

and Mr. Moran on the importance of higher capital requirements. 

Mr. Curry, my questions will be to you, if I could. I have sent 

you a number of written questions. I look forward to your prompt 

and substantive response, and I would appreciate those answers 

prior to Mr. Dimon appearing in front of this Committee next 

week. I really hope you are able to do that. 

Last June, about a year, my Subcommittee held a hearing on 

bank examination and supervision at which the OCC testified. You 

were not here then, of course. I appreciate your taking the responsibility of this job. It is difficult in these circumstances, especially 

with the reputation of the history of your agency. 

I want to share some of that testimony, and I appreciate—I 

would insist on brief answers because I have several questions and 

limited time, as you know how this works. And I particularly would 

appreciate a yes or no response. 

David Wilson, OCC’s head of credit and risk, testified, ‘‘Given the 

importance in the role that these large institutions play in the 

overall financial stability of the United States, we have instructed 

our examiners that these organizations should not operate with 

anything less than strong risk management and audit functions. 

Anything less will no longer be sufficient.’’ 

Jamie Dimon himself said JPMorgan’s trades were flawed and 

complex and poorly reviewed, poorly executed, and poorly monitored. I would like a yes or no on this question. Did OCC meet the 

standard prior to your being there, did it meet the standard that 

it set for itself in this case? 

Mr. CURRY. Before I answer that, I do want to acknowledge that 

we are working on responses to your written letter and will endeavor to get it to you prior to Mr. Dimon’s testimony. 

Senator BROWN. Thank you for that. 

Mr. CURRY. In this answer, I think the answer is no, not in the 

particular case of the CIO’s office, it does not appear that they met 

the heightened expectation—— 

Senator BROWN. Thank you for that answer. 

Mr. CURRY. ——to meet demand. 

Senator BROWN. Mr. Wilson also said at that hearing that every 

report of examination is reviewed and approved by the responsible 

ADC or Deputy Controller before it is finalized. Both units have 

formal quality assurance processes that assess the effectiveness of 

our supervision and compliance with OCC policies. Again, I know 

you were not there, but did they just not—did the Deputy Comptroller and the Assistant Deputy Comptroller simply not know 

about them? 

Mr. CURRY. This is part of the inquiry that we are conducting to 

determine how we can improve our processes. 

Senator BROWN. Thank you for that. Your written testimony suggests that the examiners and the supervisors were unaware of the 

activities occurring at JPMorgan’s Chief Investment Office until 

April of this year. And what is intriguing about that is this: This 

office was making $360 billion in trades. This is larger than the assets of 7,299 banks in the United States. If there were a standalone bank, it would be the eighth largest bank in the United 

States. It was making a trade that you say is the biggest, most 

35 

complex trade in the entire banking system, and the question then 

is this: Should the eighth largest bank in the Nation be allowed to 

make the biggest, most complex trade—your words—in the entire 

banking system without the OCC’s knowledge? 

Mr. CURRY. We would expect to be aware of significant risks, to 

have the bank identify them and for us to have adequate reporting 

about those risks. 

I just want to clarify that the CIO’s office invests a pool of approximately $350 billion, but that this particular area was a discrete portion of it, and that may be part of the reason why it was 

not identified as quickly as we would like. 

Senator BROWN. It still should have been identified, and that is 

an issue of the structure of OCC—again, under different management than when you were there—than you are there now, of 

course. 

This is not about—I hear that—and this will be a discussion for 

next week, but I hear about the $2 billion or $4 billion lost at the 

Chief Investment Office. That is serious, but it is obviously more 

than that. JPMorgan took a $25 billion hit to their stock. That is 

401(k)s, that is pension funds, that is a loss of wealth to a large 

number of people. We went through that in multiples higher than 

that, of course, 2 and 3 years ago. And they are a signal that the 

market believes that this event demonstrates bigger problems in 

the management and oversight at JPMorgan. 

This begs the issue that these trillion dollar—$2 trillion in that 

case—mega banks are not just too big to fail; they are too big to 

manage and they are too big to regulate. But the OCC’s position 

has been that, ‘‘They do not subscribe to the view that big in and 

of itself is bad.’’ 

As long as OCC continues to insist that big, complex banks are 

actually essential to our economy, they are responsible for their inability to properly examine and supervise these mega, mega banks. 

I appreciate you are working to improve your oversight, but I 

heard the same promise last year—again, under different management. For the OCC to, in your words, ‘‘determine what in retrospect the OCC could have done differently, you need to’’—and I 

know you want to look forward. That is your job. But you need to 

identify what mistakes were made, by whom those mistakes were 

made, and if JPMorgan can hold its senior executives accountable, 

which they appear, at least in part, to be doing, we should expect 

nothing less than you, Mr. Curry, and the people who work for you, 

whether they are the people that are there now or the people whom 

you replace them with. 

Thank you. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman, and I thank the 

witnesses. 

One of the obvious issues raised by JPMorgan trading losses is 

the role of risk management at the banks, especially large banks. 

As some of you know, I fought to have included in Dodd-Frank a 

provision, Section 165(h), requiring all banks with over $10 billion 

in assets and all nonbank financial firms supervised by the Fed to 

have a separate risk committee that includes at least one ‘‘risk 

36 

management expert having experience in identifying, assessing, 

and managing risk exposures of large, complex firms.’’ 

Now, Mr. Curry, in your testimony, you say you ‘‘will require the 

bank to adhere to the highest risk management standards.’’ In your 

assessment, did the JPMorgan risk policy committee have sufficient expertise in risk management to carry out its duties? Also, it 

has been reported JPMorgan is changing the composition of its risk 

policy committee. Can you provide the Committee with an update 

on those changes and discuss whether you think the new Members 

of the Committee have sufficient expertise? 

Mr. CURRY. Thank you, Senator. The introduction of the risk 

committees through Dodd-Frank is a welcome improvement to the 

overall corporate governance of financial institutions, particularly 

large institutions, and we view the role of the board in terms of 

corporate governance as a mitigant to excessive risk as being a critical feature of sound risk management. 

In this particular case, there appears to have been a breakdown 

at the CIO level’s risk management architecture and system and 

controls. That is a matter of significant concern to us at the OCC, 

and it is also one in which we have endeavored to make sure is not 

endemic throughout the entire organization. We hope that the reconstituted risk committee members of the board will be experts 

in—— 

Senator SCHUMER. Have you reviewed the risk committees of 

other banks with over $10 billion to determine whether they have 

the necessary expertise? And that is for Mr. Tarullo as well. 

Mr. TARULLO. Senator, one of the virtues of the provision that 

you referred to is that, as one of the enhanced prudential standards, it will now precipitate what we call a horizontal comparison 

and review, meaning that for those largest institutions, our large 

institution supervision committee will look at each and compare 

them. And I think it is that process which is actually going to give 

the individual supervisory teams on the ground more guidance and 

more insight as to what they should expect. 

Senator SCHUMER. Right. And I suppose there is some difference. 

There are some banks that are over $10 billion that are pretty 

plain vanilla banks and other banks over $10 billion—— 

Mr. TARULLO. That is absolutely correct. 

Senator SCHUMER. ——that are doing all these fancy, sometimes 

unfathomable things. 

Mr. TARULLO. That is correct. 

Senator SCHUMER. You did not correct the word ‘‘unfathomable.’’ 

Mr. Curry, are you reviewing other banks as well? 

Mr. CURRY. That is a critical component of our assessment of corporate governance and the overall risk management policies. 

Senator SCHUMER. So you are. 

Mr. CURRY. Yes. 

Senator SCHUMER. OK. Second question, and this is for you, Mr. 

Curry. JPMorgan’s credit derivative trades were made by a group 

that is part of the U.S. bank, but apparently all booked in London. 

Do you as the U.S. regulator have full access to the information 

you need about trading activity conducted in London if it is carried 

out by a U.S. bank? And what more needs to be done to improve 

37 

coordination with international regulators to prevent these kinds of 

cross-border losses? 

Mr. CURRY. The London operations at JPMorgan are conducted 

through a branch of the national bank. So in terms of jurisdiction, 

we have clear jurisdiction over the activities of that branch. 

In the case of JPMorgan Chase, those activities are managed on 

a global basis through the New York office where we have the majority of our core staff. 

Senator SCHUMER. OK, good. All right. Third question, and it is 

about early warning systems. Traders at several hedge funds, we 

have read in the newspapers, have been able to spot the JPMorgan 

trade through its irregular impact on the market for credit derivatives. So it begs the obvious question. Why didn’t the regulators 

know? Obviously, regulators cannot micromanage every trading position at every bank. That would be impossible for you to do. But 

is it possible to build an early warning system that could warn us 

if, say, a single company accumulates unusually large positions in 

any single product, as it appears with the JPMorgan case? Last 

month, I asked the SEC and CFTC Chairmen if it would be possible. They both said that with the new information to be reported 

under Dodd-Frank, we will be able to set up early warning systems 

that could identify risky positions before they blow up. 

So my question goes to both you, Mr. Tarullo, and any others 

who care to add their opinions. What can and should regulators do 

to improve their ability to identify potentially risky trading activity 

ahead of time. And I realize foresight is a gift and it is not easy, 

but at least when you are getting above a certain level of money, 

a little bell could go off, and maybe it is a perfectly plain vanilla 

safe trade and maybe it is not, but it would not ask you to get involved in every single thing that the banks are doing. 

I will first go to Mr. Tarullo, Mr. Curry, and anybody else. 

Mr. TARULLO. So, first, obviously, is the risk management of the 

firm as overseen by the supervisors, which should include and generally does include things like position limits, and that should be 

a first early warning. 

Second, Senator, we do already within our supervisory process 

look at market indicators, including aggregated market information, to try to identify trends that might be relevant to the particular institution. But our ability to do that obviously depends on 

the relative granularity or specificity of the information, and in this 

case, for example, I believe there were products which, although 

they could be a big part of a market, JPMorgan could be a big part 

of a market, for the overall financial markets are still relatively 

small. So unless there is reporting on more specific products like 

that, our normal look at market information would not have revealed this. So it has to come internally. 

Senator SCHUMER. And what about after Dodd-Frank is fully implemented where you will get more significant information? 

Mr. TARULLO. Yes, there I think what is most important is when 

a firm is taking a hedging position, it will be required to specify 

what its strategy is and what its risk management and what the 

monitoring of that strategy will be, and the supervisors will have 

ex ante, or beforehand, access to that information rather than have 

to rely on us going in afterwards. 

38 

Senator SCHUMER. OK. So you think it will improve with DoddFrank being implemented? 

Mr. TARULLO. I think it will improve. 

Senator SCHUMER. Mr. Curry. 

Mr. CURRY. Yes, as Governor Tarullo mentioned, this was a highly complex, illiquid, and concentrated investment. It would have 

been very helpful if there were market or other data available that 

would highlight this concentration to us as a regulator. So to the 

extent that the Dodd-Frank Act does provide that or that there is 

other readily market information that we could utilize, it would be 

very helpful. 

Senator SCHUMER. And the fact that they have to report and justify this, does that tend to be prophylactic, or do they still have to 

do that within the bank anyway so it does not make a difference 

if they send the report to you? 

Mr. CURRY. The reporting would be very helpful, and that is one 

of the issues here, whether there was adequacy of reporting and 

whether that reporting was available to the OCC and the Federal 

Reserve examiners. 

Senator SCHUMER. My time has expired. Anyone else care to 

comment? 

[No response.] 

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

Chairman JOHNSON. Thank you. 

Senator Shelby has an additional question. 

Senator SHELBY. Thank you. 

Governor Tarullo, in your testimony you state, and I will quote— 

and I want to be like Senator Toomey and agree with you on this. 

You said, ‘‘Recent events serve to remind us that the presence of 

substantial amounts of high-quality capital is the best way to ensure that significant losses at individual firms’’—meaning financial 

institutions—‘‘are borne by their shareholders and not depositors or 

taxpayers.’’ 

What percentage of capital under Basel III will large banks likely hold under the new enhanced capital standards? And will this 

amount, in your judgment, be sufficient? I think it is a given here 

that there is no substitute for capital. You can regulate everything 

in the world, but if they have inadequate capital, you know what 

is going to happen sooner or later. 

Mr. TARULLO. Senator, as you know, because you quoted from 

me, I do believe in the centrality of capital. I do not think it is the 

only way—— 

Senator SHELBY. Oh, no. 

Mr. TARULLO. But it is a central way. 

Senator SHELBY. But it is number one, is it not? 

Mr. TARULLO. In my judgment, yes. 

The Basel requirements are for a 7-percent common equity ratio, 

which is a substantial increase over the pre-crisis level. 

Senator SHELBY. Tell the public what you mean by common equity, 7 percent. 

Mr. TARULLO. Traditionally, measures of capital, the measure of 

capital, so-called Tier 1 capital, which could include common equity, which people generally think of as shareholdings, shareholder 

earnings, retained earnings, and what they have put into the comVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
39 

pany; but it also included some other kinds of hybrid instruments, 

the loss absorption capacity of which for an ongoing firm is not as 

strong as for common equity. So basically pre-crisis, if you went 

down, dug down into the requirements, it was only really a 2-percent common equity ratio requirement, meaning you had to have 

common equity which was at least 2 percent of your risk-weighted 

assets; Basel III takes that up to 7 percent for banks generally. 

And then as you referenced, with respect to very large institutions, 

there will be, once we have implemented our additional authority, 

a surcharge, which at present we think will be between another 1 

percentage point and 2.5 percentage points. 

Now, is that enough? Well, as I have said publicly before, my 

preference would have been to have both somewhat higher, but 

these were negotiated internationally. We did set them with an eye 

to those other regulatory tools that you talked about. So there are 

some restraints on activities. There is some market discipline. 

There is some supervisory capacity. And it is always going to be 

a balance as to how much capital is enough given what other tools 

you have. 

Senator SHELBY. Do you believe that our banks are overall in 

much better shape than they were 3 years ago? 

Mr. TARULLO. Yes, Senator. 

Senator SHELBY. Do you agree with that, Mr. Secretary? 

Mr. WOLIN. I do, Senator. Yes, absolutely. 

Senator SHELBY. Mr. Curry. 

Mr. CURRY. Yes, definitely, with respect to national banks and 

Federal thrifts. 

Mr. GRUENBERG. Yes, Senator. 

Senator SHELBY. OK. And do you believe that a lot of it is because of required capital and the buildup of capital—not everything, but do you believe that that is central to that? Governor 

Tarullo. 

Mr. TARULLO. I do believe it is central, but I do also think that 

there has been a good bit of de-risking during that period. 

Senator SHELBY. Is there some risk to the economy if people try 

to take most risk out of the banking system? In other words, you 

make a loan, that is a risk. You hedge something, that is a risk. 

Or you are trying to manage risk. You cannot take real risk out 

of the financial system, can you? Mr. Secretary. 

Mr. WOLIN. No, you cannot, Senator. 

Senator SHELBY. We would not want to, would we? 

Mr. WOLIN. You would not want to. 

Senator SHELBY. Governor. 

Mr. TARULLO. That is correct. It is always a question of, one, 

properly understood and managed risk; and, two, of course, a capital buffer when things happen that you do not anticipate. 

Senator SHELBY. Any comment? 

Mr. CURRY. I would agree with the Governor. 

Mr. GRUENBERG. I agree also, Senator. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you all for your testimony and for 

being here with us today. 

Now with the continued threat from Europe and the recent reminder that risks in the financial system must be appropriately 

40 

managed, we must remain vigilant and complete the implementation of Wall Street reform to enhance financial stability and reduce 

systemic risk. 

This hearing is adjourned. 

[Whereupon, at 12:20 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

41 

PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON 

I call this hearing to order. This hearing is part of the Committee’s continued 

oversight of the implementation of the Wall Street Reform Act, and it is also an opportunity to discuss with our bank regulators the implications of the massive trading loss recently announced by JPMorgan Chase, one of our Nation’s largest banks. 

When a bank with JPMorgan’s solid reputation announces that it lost billions of dollars on a large trade reportedly designed to reduce the firm’s risks, it reminds us 

that no financial institution is immune from bad judgment. 

While the JPMorgan trading loss does not appear to have caused systemic problems, it is a clear reminder that Wall Street continues to need better risk management, vigorous oversight and, if the rules are broken, unyielding enforcement. To 

repeal or weaken Wall Street Reform, and defund the cops enforcing it, would take 

us back to the days before the financial crisis of 2008. 

Wall Street Reform was a response to the crisis caused by a lack of consumer protection, reckless behavior in the financial sector, and regulators who failed to take 

action in time. We now have an agency solely focused on consumer protection, tough 

new rules to end negligent and reckless practices by some on Wall Street, and regulators armed with new powers to ensure the safety and soundness of the banks they 

supervise. 

The regulators are also in the process of enhancing the standards for our Nation’s 

largest banks, through increased capital requirements and more judicious liquidity 

and leverage standards. 

Wall Street Reform also requires regulators to sharpen their focus on the largest 

and riskiest financial institutions. All the regulators joining us today are members 

of the Financial Stability Oversight Council, a body created to monitor risks facing 

our financial system. Most here are also all working on the ‘‘Volcker Rule’’ to prohibit proprietary trading with Government-insured deposits, and the FDIC continues to work diligently to implement the ‘‘living wills’’ requirements and establish 

the Orderly Liquidation Authority for global, large, complex financial institutions. 

Similarly, while there is a need for strong regulation of all financial institutions, 

Wall Street Reform recognizes that small community banks should not be treated 

the same as the largest banks. Because large, complex banks take on the most risk 

and pose the greatest threat to our economic stability, they should be required to 

pay their fair share into the Deposit Insurance Fund. Likewise, the small banks 

that did not cause the crisis should not have to pay for the risks taken on by their 

larger competitors—and their assessments have been lowered accordingly. 

A one-size-fits-all approach is not appropriate and many parties have raised concerns about challenges faced by small community banks. I hope to hear from our 

witnesses today about the steps they are taking with regard to small banks. 

Some have claimed that the Wall Street Reform Act was not the right set of solutions to the crisis, and that it asks our regulators to micromanage the activities of 

the firms they regulate. I disagree. To restore confidence in our financial system 

after the crisis, we need more, not less, scrutiny of Wall Street’s activities. The Wall 

Street Reform Act has built a stronger oversight framework that closes regulatory 

gaps, enhances financial stability, and better protects consumers, investors, and taxpayers. 

And so despite the repeated calls to deregulate and to defund by those who ignore 

the costly lessons of the financial crisis, completing the implementation of the Wall 

Street Reform Act must be, and remains, a top priority for this Committee. 

In that vein, I look forward to hearing from the witnesses here today about the 

progress they have made to complete implementation of Wall Street Reform, as well 

as the actions they have taken regarding the JPMorgan trading loss, and their 

thoughts on potential implications of the loss for supervision and Wall Street Reform rulemakings going forward. 

I also want to thank Ranking Member Shelby and my colleagues here on the 

Banking Committee for all their input and cooperation over the past several 

months. At a time when most of America thinks that Congress is in a gridlock, the 

Committee has been very busy getting things done on the Senate floor. The bipartisan Export-Import Bank Reauthorization passed with broad support and was 

signed into law by the President last week. We passed in the Senate this Committee’s bipartisan Iran Sanctions bill. Both nominees for the Federal Reserve Board 

of Governors received floor votes, and we helped to secure the passage of their confirmation. We passed the bipartisan Transportation bill in the Senate, and the 

Transportation Conference Committee meetings are currently ongoing with the 

House. And we passed a 60-day extension of the National Flood Insurance Program, 

and we have a commitment from the Senate’s leadership to bring the Banking Committee’s bipartisan NFIP reauthorization bill to the floor in the coming weeks. 

42 

In addition, there is another important legislative matter facing this Committee— 

helping responsible homeowners refinance into lower interest rates at no cost to the 

taxpayers. We have already had several full Committee and Subcommittee hearings 

on refinancing proposals. I would like to take a bipartisan approach similar to the 

other Committee-passed bills of this Congress where we work together on a bipartisan vehicle with amendments limited to those related to the underlying bill. I am 

hopeful that my colleagues will agree to move forward in this manner as well so 

we can help responsible homeowners and help the housing market rebound. 

PREPARED STATEMENT OF NEAL S. WOLIN 

DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY

JUNE 6, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the opportunity to appear here today to discuss progress implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 

Dodd-Frank Act). 

The Dodd-Frank Act represents the most significant set of financial reforms since 

the Great Depression. Its full implementation will help protect Americans from the 

excessive risk, fragmented oversight, and poor consumer protections that played 

such leading roles in bringing about the recent financial crisis. 

That crisis, and the recession that accompanied it, cost nearly 9 million jobs, 

erased a quarter of families’ household wealth, and brought GDP growth to a low 

of nearly negative 9 percent. 

Today, our economy has improved substantially, although more work remains 

ahead. More than 4.3 million private sector jobs have been created over the past 

27 months and, since mid-2009, our economy has grown at an average annual rate 

of 2.4 percent. 

As part of our broader efforts to strengthen the economy, Treasury is focused on 

fulfilling its role in implementing the Dodd-Frank Act to build a more efficient, 

transparent, and stable financial system—one that contributes to our country’s economic strength, instead of putting it at risk. 

The Dodd-Frank Act’s reforms address key failures in our financial system that 

precipitated and prolonged the financial crisis. The Act’s core elements include: 

Tougher constraints on excessive risk-taking and leverage across the financial system. To lower the risk of failure of large financial institutions and reduce damage 

to the broader economy in the event a large financial institution does fail, the DoddFrank Act provides authority for regulators to impose tougher safeguards against 

risks that could threaten the stability of the financial system and the broader economy. 

The Federal Reserve has proposed new standards to require banks to hold greater 

capital against risk and fund themselves more conservatively. New rules restricting 

proprietary trading under the Volcker Rule and limits to the size of financial institutions relative to the total financial system have been proposed or will be proposed 

in the coming months. Safeguards against excessive risk-taking and leverage will 

not only apply to the biggest banks, but also designated nonbank financial companies. Importantly, the bulk of these requirements do not apply to small and community banks, and help level the playing field for these smaller participants by helping 

eliminate distortions that previously favored the biggest banks that held the most 

risk. 

The Dodd-Frank Act also established the Financial Stability Oversight Council 

(the Council) to coordinate agencies’ efforts to monitor risks and emerging threats 

to U.S. financial stability, and the Office of Financial Research (OFR) to collect and 

standardize financial data, perform essential research, and develop new tools for 

measuring and monitoring risk in the financial system. 

Orderly liquidation authority. The Dodd-Frank Act created a new orderly liquidation authority to resolve a failed or failing financial firm if its failure would have 

serious adverse effects on the financial stability of the United States. The statute 

makes clear that taxpayers will not be put at risk in the event a large financial firm 

fails. Investors and management, not taxpayers, will be responsible for the cost of 

the failure. 

The FDIC has completed most of the rules necessary to implement the orderly liquidation authority, and is engaging in planning exercises with Treasury and other 

regulators to coordinate how it would work in practice. This summer, the largest 

bank holding companies will submit the first set of ‘‘living wills’’ to regulators and 

43 

the Council. These documents will lay out plans for winding down a firm if it faces 

failure. 

Comprehensive oversight of derivatives. The Dodd-Frank Act created a new regulatory framework for over-the-counter derivatives markets to increase oversight, 

transparency, and stability in this previously unregulated area of the financial system. 

Regulators have proposed almost all the necessary rules to implement comprehensive oversight of the derivatives markets, and we expect most to be finalized this 

year. We are already seeing signs of standardized derivatives moving to central 

clearing, and substantial work is being done to build out new financial infrastructure to move trades into clearing and onto electronic trading platforms. 

Stronger consumer financial protection. The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to consolidate consumer financial protection responsibilities that had been fragmented across several Federal regulators into 

a single institution dedicated solely to that purpose. The CFPB’s mission is to help 

ensure consumers have the information they need to make financial decisions appropriate for them, enforce Federal consumer financial laws, and restrict unfair, deceptive, or abusive acts and practices. 

The CFPB is currently working to improve clarity and choice in consumer financial products through the Know Before You Owe project, which aims to simplify 

mortgage forms, credit card disclosures, and student financial aid offers. The CFPB 

is also focused on helping improve consumer financial protections for groups like 

servicemembers and older Americans, as well as bringing previously unregulated 

consumer financial institutions, like payday lenders, credit reporting bureaus, and 

private mortgage originators, under Federal supervision for the first time. Earlier 

this year, the CFPB commenced its supervision of debt collectors and credit reporting agencies. 

Transparency and market integrity. The Dodd-Frank Act included a number of 

measures that increase disclosure and transparency of financial markets, including 

new reporting rules for hedge funds, trade repositories to collect information on derivatives markets, and improved disclosures on asset-backed securities. 

This summer, the largest hedge funds and private equity funds will be required 

to report important information about their investments and borrowing for the first 

time, helping regulators understand exposures at these significant investment vehicles. New swaps data repositories are being created that will provide regulators and 

market participants with a stronger understanding of the scale and nature of exposures within previously opaque derivatives markets. 

Treasury’s core responsibilities in implementing the Dodd-Frank Act include the 

Secretary’s role as Chairperson of the Council, standing up the Office of Financial 

Research and Federal Insurance Office, and coordinating the rulemaking processes 

for risk retention for asset-backed securities and the Volcker Rule. 

The Financial Stability Oversight Council 

The Dodd-Frank Act created the Financial Stability Oversight Council to identify 

risks to the financial stability of the United States, promote market discipline, and 

respond to emerging threats to the stability of the U.S. financial system. 

The Council is actively engaged in these activities and has begun to institutionalize its role. To date, the Council has held 17 principals meetings, four since 

I last testified in December. In recent months, the Council’s principals have come 

together to share information on a range of important financial developments as the 

Council, its members, and staff have actively engaged in monitoring the situation 

in Europe, in housing markets, the interaction of the economy and energy markets, 

and the lessons to be drawn from recent errors in risk management at several major 

financial institutions, including the failure of MF Global and trading losses at 

JPMorgan Chase. In addition to regular engagement at the principals level, the 

Council has active staff discussions through twice monthly deputies level meetings 

and ongoing staff work on individual committee and project workstreams. 

The Council expects to release its second annual report on financial market and 

regulatory developments and potential emerging threats to our financial system in 

July. In addition to providing new recommendations, the report will include an update on the progress made on last year’s recommendations, which focused on enhancing the integrity, efficiency, competitiveness, and stability of U.S. financial 

markets, promoting market discipline, and maintaining investor confidence. 

One of the duties of the Council is to facilitate information-sharing and coordination among its members regarding rulemaking, examinations, reporting requirements, and enforcement actions. Through meetings among principals, deputies, and 

staff, the Council has served as an important forum for increasing coordination 

among the member agencies. Some argue that the Council should be able to ensure 

44 

particular outcomes in independent agencies’ rules, or perfect harmony between 

rules with disparate statutory bases. While the Council serves a very important role 

in bringing regulators together, the Dodd-Frank Act did not eliminate the independence of regulators to write rules within their statutory mandates. 

Nonetheless, the Dodd-Frank Act implementation process has brought about unprecedented cooperation among agencies in writing new rules for our financial system. As Chair of the Council, Treasury continues to make it a top priority that the 

work of the regulators is well-coordinated. 

The Treasury Secretary, as Chairperson of the Council, is coordinating the rulemaking required for the Dodd-Frank Act’s risk retention requirements, which are 

designed to improve the alignment of interests between originators of risk and 

securitizers of, and investors in, asset-backed securities. After the proposed rule was 

released, the rule writers received over 13,000 comment letters, and they are continuing to review feedback as they work towards a final rule. 

The Council has also made progress on two of its direct responsibilities under the 

Dodd-Frank Act: designating financial market utilities (FMUs) and nonbank financial companies for enhanced prudential standards and supervision. 

In July 2011, the Council finalized a rule setting the process and criteria for designating FMUs and, in August, began working to identify FMUs for consideration 

in accordance with the statue and the rule. In January 2012, an initial set of FMUs 

were notified that they would be under consideration for designation. In May, the 

Council unanimously voted to propose the designation of an initial set of FMUs as 

systemically important. This vote is not a final determination, and FMUs may request a hearing before the Council to contest a proposed designation. The Council 

expects to make final determinations on an initial set of FMU designations as early 

as this summer. 

In April 2012, the Council issued a final rule and interpretive guidance establishing quantitative and qualitative criteria and procedures for designations of 

nonbank financial companies. The Council has begun work to apply the process described in the guidance. The Council recognizes that the designation of nonbank financial companies is an important part of the Dodd-Frank Act’s implementation and 

intends to proceed with due care as expeditiously as possible. 

The Dodd-Frank Act also provides for limits on the growth and concentration of 

our largest financial institutions. The Council has released a study and recommendations on the effective implementation of these limitations, and the Federal 

Reserve is expected to propose a rule to implement concentration limits later this 

year. 

The Office of Financial Research 

The Dodd-Frank Act established the Office of Financial Research to collect and 

standardize financial data, perform essential research, and develop new tools for 

measuring and monitoring risk in the financial system. 

In December 2011, President Obama nominated Richard Berner to be the OFR’s 

first Director. I appreciate this Committee’s support of Mr. Berner’s nomination. 

Confirmation by the full Senate is important to ensure the OFR can fulfill its critical role. 

A key component of the OFR’s mission is supporting the Council and its member 

agencies by analyzing financial data to monitor risk within the financial system. 

Currently, the OFR is working on a number of projects with the Council, including 

providing analysis related to the Council’s evaluation of nonbank financial companies for potential designation for Federal Reserve supervision and enhanced prudential standards; providing data and analysis in support of the Council’s second annual report on financial market and regulatory developments and potential emerging threats to our financial system; and, in collaboration with Council member agencies, developing metrics and indicators related to financial stability. 

To avoid duplicating existing Government collection efforts or imposing unnecessary burdens on financial institutions, the OFR is focused on ensuring it relies on 

data already collected by regulatory agencies whenever possible. The OFR is working with regulators to catalogue the data they already collect, along with exploring 

ways it could promote stronger data sharing for the regulatory community to generate efficiencies and improved interagency cooperation. 

As part of its mission, the OFR is also promoting standards to improve the quality 

and scope of financial data, which in turn should help regulators and market participants mitigate risks to the financial system and provide firms with important efficiencies and cost-savings. One ongoing priority is establishing a Legal Entity Identifier (LEI), or unique, global standard for identifying parties to financial transactions, to improve data quality and consistency. The OFR is playing a lead role in 

the international process coordinated by the Financial Stability Board (FSB) to deVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
45 

velop an LEI. Just last week, the FSB endorsed recommendations the OFR developed in conjunction with its international counterparts to establish a global LEI system. This recognition allows market participants to begin preparing for the implementation of the global LEI next year. 

A more comprehensive understanding of the largest and most complex financial 

firms’ exposures is critical to identifying risks to the financial system and mitigating 

future crises. However, some have expressed concerns about the OFR—involving its 

accountability, access to personal financial information, and ability to secure sensitive data—that are unfounded. 

First, Congress has oversight authority over the OFR, and the statute requires 

the Director to testify regularly before Congress. Consistent with requirements 

under the Dodd-Frank Act, the OFR will provide the Congress with its first Annual 

Report on its activities this summer and a second report, on the Office’s human resources practices, later this year. In addition, the Dodd-Frank Act provides authority for Treasury’s Inspector General, the Government Accountability Office, and the 

Council of Inspectors General on Financial Oversight to oversee the activities of the 

OFR. 

Second, regarding data collection, the Dodd-Frank Act does not contemplate and 

the OFR will not collect personal financial information from consumers. The OFR, 

like other banking regulators, only has the authority to collect information from financial institutions, not individual citizens. The OFR will only utilize data required 

to fulfill its mission—assessing threats to stability across the financial system. 

Lastly, data security is the highest priority for the OFR. As an office of the Department of the Treasury, the OFR utilizes Treasury’s sophisticated security systems to protect sensitive data. The OFR is also implementing additional controls for 

OFR-specific systems, including a secure data enclave within Treasury’s IT infrastructure. Access to confidential information will only be granted to personnel that 

require it to perform specific functions, and the OFR will regularly monitor and 

verify its use to protect against unauthorized access. In addition, the OFR is working in collaboration with other Council members to develop a mapping among data 

classification structures and tools to support secure collaboration and data sharing. 

Such tools include a data transmission protocol currently used by other Council 

members that will enable interagency data exchange and a secure collaboration tool 

for sharing documents. 

The Federal Insurance Office 

The Dodd-Frank Act created the Federal Insurance Office to monitor all aspects 

of the insurance industry, identify issues or gaps in regulation that could contribute 

to a systemic crisis in the insurance industry or financial system, monitor the accessibility and affordability of nonhealth insurance products to traditionally underserved communities, coordinate and develop Federal policy on prudential aspects of 

international insurance matters, and contribute expertise to the Council. 

As a member of the Council, FIO, in addition to two additional Council members 

that focus on insurance, has been actively involved in the rulemaking establishing 

the process for the designation of nonbank financial companies. FIO will be engaged 

in the review of nonbank financial companies as this process moves forward. 

Until the establishment of FIO, the United States was not represented by a single, unified Federal voice in the development of international insurance supervisory 

standards. FIO is providing important leadership in developing international insurance policy. Recently, FIO assumed a seat on the executive committee of the International Association of Insurance Supervisors (IAIS). The IAIS, in cooperation with 

the Financial Stability Board (FSB), is developing the methodology and indicators 

to identify global systemically important insurers, and FIO is actively engaged in 

that process. Additionally, FIO established and has provided necessary leadership 

in the EU–U.S. insurance dialogue regarding such matters as group supervision, 

capital requirements, reinsurance, and financial reporting. FIO also participated in 

the recent U.S.–China Strategic and Economic Dialogue in Beijing. Importantly, 

FIO has and will continue to work closely and consult with State insurance regulators and other Federal agencies in its work. 

Priorities Ahead 

Under the Dodd-Frank Act, Treasury is charged with coordinating the implementation of the Volcker Rule. Treasury is actively engaged with the independent regulatory agencies in their work to finalize the Volcker Rule and make sure it is implemented effectively to prohibit proprietary trading activities and limit investments 

in and sponsorship of hedge funds and private equity funds. 

The five Volcker Rule rulemaking agencies released substantially identical proposed rules, which reflect the commitment of Treasury and the regulators to a coVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
46 

ordinated approach. The comment periods for all five rulemaking agencies are now 

complete, and we are reviewing and analyzing over 18,000 public comment letters. 

Treasury is hosting and actively participates in weekly interagency meetings to review those comments, and remains committed to fulfilling our coordination role and 

working with the rulemaking agencies to achieve a strong and consistent final rule. 

Regulators are still in the process of conducting their evaluation of what happened with respect to recent losses at JPMorgan Chase, and why. The lessons 

learned from the recent failures in risk management at JPMorgan are an important 

input into the ongoing efforts to design strong safeguards and reforms, including, 

of course, those in the Volcker Rule. 

The Volcker Rule, as reflected in the statutory language enacted as part of the 

Dodd-Frank Act and in the proposed rule, explicitly exempts from the prohibition 

on proprietary trading the ability of firms to engage in ‘‘risk-mitigating hedging activities in connection with and related to individual or aggregated positions—designed to reduce the specific risks to the banking entity.’’ To that end, the final rule 

should clearly prohibit activity that, even if described as hedging, does not reduce 

the risks related to specific individual or aggregate positions held by a firm. 

The exposures accumulated by JPMorgan, in the words of its executives, resulted 

in potential losses that exceeded its internal limits and those estimated by its internal risk management systems. This raises concerns that go well beyond the scope 

of the Volcker Rule. Among other things, regulators should require that banks’ senior management and directors put in place effective models to evaluate risk, 

strengthen reporting structures to ensure risks are assessed independently and at 

appropriately senior levels, and establish clear accountability for failures in risk 

management. Regulators should make sure that they have a clear understanding of 

exposures and that banks and their senior management are held accountable for the 

thoroughness and reliability of their risk management systems. To further accountability, there should also be appropriate public transparency of risk management 

systems and internal limits. 

Ultimately, the true test of reform is not whether it prevents firms from taking 

risk or from making mistakes, but whether our financial regulatory system is tough 

enough and designed well enough to prevent those mistakes from hurting the broader economy or costing taxpayers money. We all have an interest in achieving this 

outcome. 

I emphasize the broader framework of reforms because our ability to protect the 

economy from financial mistakes in banks depends on the authority and resources 

we have to enforce tougher capital, leverage, and liquidity requirements on banks 

and the largest, most complex nonbank financial companies. 

It depends on our ability to put in place the full framework of protections in the 

Dodd-Frank Act on derivatives, from margin requirements and central clearing of 

standardized derivatives to greater transparency into risks and exposures. 

It depends on the resources available to the SEC, the CFTC, the CFPB and the 

other enforcement authorities to police and deter manipulation, fraud, and abuse. 

It depends on our ability to protect taxpayers from future financial failures, in 

particular our ability to safely unwind a large firm without the broad collateral 

damage and risk to the taxpayer that we experienced in 2008. 

And it depends on making sure that no exception built into the law is allowed 

to swallow the rule, frustrate the core purpose of the legislation, or otherwise undermine the impact of the tough safeguards we need. 

The challenges our economy continues to experience since the financial crisis in 

2008 only increase our commitment to make sure we meet our responsibility to the 

American public to implement lasting financial reform. 

Recent events provide an additional reminder that comprehensive reform must 

continue to move forward. The Administration will continue to resist all efforts to 

roll back reforms already in place or block progress for those that remain to be implemented. The lessons of the financial crisis should not be left unlearned or forgotten, nor should American workers—or American taxpayers—be left unprotected 

from the consequences of future financial instability. 

I appreciate the opportunity to discuss the priorities and progress associated with 

our work implementing the Dodd-Frank Act, and the leadership and support of this 

Committee in those efforts. 

Thank you. 

47 

PREPARED STATEMENT OF DANIEL K. TARULLO 

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JUNE 6, 2012 

Chairman Johnson, Ranking Member Shelby, and other Members of the Committee, thank you for the opportunity to testify on the Federal Reserve’s implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

(Dodd-Frank Act). 

As we approach the second anniversary of the Dodd-Frank Act, implementation 

of the financial reforms enacted by the Congress remains a formidable task. At the 

Federal Reserve, staff teams with a wide range of expertise continue to contribute 

to Dodd-Frank Act projects, many as part of joint rulemaking efforts with other Federal agencies. We have been working to put final Dodd-Frank Act rules in place and 

to negotiate and implement international reforms compatible with various DoddFrank Act provisions; these include enhanced capital requirements for systemically 

important banks, liquidity requirements, resolution mechanisms, and margining requirements for over-the-counter derivatives. 

As we continue rule implementation and the related international initiatives, we 

are trying to provide as much clarity as possible to financial markets and the public 

about the post-crisis financial regulatory landscape, and are also taking the time to 

consider comments and alternatives carefully. In addition, the Federal Reserve continues to work cooperatively with other supervisors to ensure that prudential supervision is conducted in a manner that supports these important reforms. 

As a final introductory point, it bears noting that both the Dodd-Frank Act reforms and the international regulatory reforms share an important feature—a 

strong focus on the largest, most complex, and most interconnected financial firms 

and the systemic risks posed by those firms. This effort reflects the provenance of 

both the Dodd-Frank Act and international reform initiatives, which were motivated 

largely by the failure or near failure of a number of major financial firms and the 

significant public policy problems created by the market perception that such firms 

are ‘‘too big to fail.’’ As the Federal Reserve implements reforms, we have maintained this core focus on the largest firms by proposing rules that try to mitigate 

the systemic risks posed by those firms and minimize the burden on smaller entities, particularly community banks. Similarly, we seek to implement reforms in a 

manner that is faithful to statutory requirements and that maximizes financial stability and other economic benefits at the least cost to credit availability and economic growth. 

This morning I will briefly describe the Federal Reserve’s progress on several important Dodd-Frank Act rules and recent reforms to the international bank regulatory framework. I will also describe briefly the Federal Reserve’s role in supervising and examining the largest financial firms in cooperation with other Federal 

and State supervisors. 

Enhanced Capital Standards 

While robust bank capital requirements alone cannot ensure the safety and 

soundness of our financial system, they are central to good financial regulation precisely because capital is available to absorb all kinds of potential losses—unanticipated as well as anticipated. Indeed, the best way to safeguard against taxpayerfunded bailouts in the future is for our large financial institutions to have capital 

buffers commensurate with their own risk profiles and the damage that would be 

done to the financial system if such institutions were to fail. Recent events serve 

to remind us that the presence of substantial amounts of high-quality capital is the 

best way to ensure that significant losses at individual firms are borne by their 

shareholders, and not by depositors or taxpayers. Ensuring the capital adequacy of 

financial firms requires both improvement of the traditional, firm-based approach 

to capital regulation and the creation of a more systemic, or macroprudential, component of capital regulation. 

With respect to improving the traditional approach to capital regulation, the Federal Reserve’s work has principally involved the development of stronger regulatory 

capital standards in cooperation with other supervisors in the Basel Committee on 

Banking Supervision. This work includes the so-called Basel 2.5 reforms that 

strengthened the market-risk capital requirements of Basel II. This work also includes the Basel III reforms, which improve the quality of regulatory capital, increase the quantity of required minimum regulatory capital, require banks to maintain a capital conservation buffer and, for the first time internationally, introduce 

a minimum leverage ratio. The Federal Reserve and other U.S. banking agencies 

are moving to finalize regulations to implement Basel 2.5 in the United States and 

soon will be proposing regulations to implement Basel III. 

48 

These significant changes to the international regulatory capital framework have 

been supplemented by an important element of the Dodd-Frank Act known as the 

‘‘Collins Amendment.’’ The Collins Amendment provides a safeguard against declines in minimum capital requirements in the Basel II capital regime based on 

bank internal modeling. The Federal Reserve and other U.S. banking agencies 

issued final rules to implement this provision in June 2011. 

Capital Surcharges for Systemically Important Financial Firms 

The recent financial crisis also made clear that the existing international regulatory capital framework was not sufficiently responsive to macroprudential concerns, such as the threat to financial stability posed by systemically important financial institutions. Accordingly, in Basel Committee deliberations, the Federal Reserve advocated for capital surcharges on the world’s largest, most interconnected 

banking organizations based on their global systemic importance. Last year, an 

international agreement was reached on a framework for such surcharges, to be implemented during the same 2016–2019 transition period for the capital conservation 

buffers in Basel III. This initiative is consistent with the Federal Reserve’s obligation under section 165 of the Dodd-Frank Act to impose more stringent capital 

standards on systemically important financial institutions, including the requirement that these additional standards be graduated based on the systemic footprint 

of the institution. 

Both the Dodd-Frank Act provision and the Basel framework are motivated by the 

fact that the failure of a systemically important firm would have dramatically greater negative consequences on the financial system and the economy than the failure 

of other firms. Stricter capital requirements on systemically important firms should 

also help offset any funding advantage these firms derive from any remaining perceived status as too-big-to-fail and provide an incentive for such firms to reduce 

their systemic footprint. The Federal Reserve’s aim has been to fashion the enhanced capital requirements of section 165 and work toward an associated international framework in a simultaneous and congruent manner. 

Stress Testing and Capital Planning 

Recent improvements to the regulatory capital framework have important supervisory complements in the Federal Reserve’s development of firm-specific stress testing and capital planning requirements. These supervisory tools serve two related 

functions. First, they make capital regulation more forward-looking by testing 

whether firms would have enough capital to remain viable financial intermediaries 

if they sustained hypothetical losses in asset values and earnings in an adverse 

macroeconomic scenario. Second, they contribute to the macroprudential dimension 

of supervision by enabling simultaneous examination of the risks faced by all large 

financial institutions in a hypothetical adverse economic scenario. 

The Dodd-Frank Act creates two forms of stress-testing requirements. These requirements mirror the Supervisory Capital Assessment Program model, a 2009 effort led by the Federal Reserve that helped restore confidence in the viability of the 

banking system during the financial crisis. First, the act mandates that the Federal 

Reserve conduct annual stress tests on all bank holding companies with $50 billion 

or more in assets to determine whether they have the capital needed to absorb 

losses in hypothetical baseline, adverse, and severely adverse economic conditions. 

Second, the act requires both these companies and certain other regulated financial 

firms with assets between $10 billion and $50 billion to conduct internal stress 

tests. The Federal Reserve must publish a summary of results of the supervisory 

stress tests and issue regulations requiring firms to publish a summary of the company-run stress tests. 

Regular and rigorous stress testing provides regulators with knowledge that can 

be applied to both microprudential and macroprudential supervision efforts. Disclosure of the general methodology and firm-specific results of our stress testing has 

additional regulatory benefits. First, the release of certain details about assumptions, methods, and conclusions exposes the supervisory approach to greater external scrutiny and discussion. Such discussions will almost surely help us improve our 

assumptions and methodology over time. Second, because bank portfolios are difficult to value without a great deal of detailed information, the stress test results 

should be very useful to investors in and counterparties of the largest banking 

firms. Further, I believe the demands of supervisors for well-specified data and projections from firms have improved risk management at these firms. The stress testing that the Federal Reserve has instituted during the past few years has become 

an important part of our horizontal, interdisciplinary approach to supervising the 

largest bank holding companies. 

49 

Firm-specific capital planning has also become an important supervisory tool. In 

November 2011, the Federal Reserve issued a new regulation requiring large banking organizations to submit an annual capital plan; This tool serves multiple purposes. First, it provides a regular, structured, and comparative way to promote and 

assess the capacity of large bank holding companies to understand and manage 

their capital positions. Second, it provides supervisors with an opportunity to evaluate any capital distribution plans against the backdrop of the firm’s overall capital 

position, a matter of considerable importance given the significant distributions that 

some firms made in 2007 even as the financial crisis gathered momentum. Third, 

at least for the next few years, it will provide a regular assessment of whether large 

bank holding companies will readily meet the Basel 2.5 and Basel III capital requirements as they take effect in the United States. 

A stress test is a critical part of the annual capital plan review. But, as these 

three different purposes indicate, the capital plan review is about more than using 

a stress test to determine whether a firm’s capital distribution plans are consistent 

with remaining a viable financial intermediary in adverse economic conditions. As 

indicated during our capital plan reviews in both 2011 and 2012, the Federal Reserve may object to a capital plan because of significant deficiencies in a firm’s capital planning process, as well as because’ one or more relevant capital ratios would 

fall below required levels under the assumptions of stress and planned capital distributions. Likewise, the stress test is relevant not only for its role in the capital 

planning process. As noted earlier, it also serves other important purposes, not least 

of which is increased transparency of both bank holding company balance sheets 

and the supervisory process of the Federal Reserve. 

Enhanced Liquidity Standards 

As with capital, the financial crisis also brought attention to defects in the liquidity risk-management practices of large financial firms. As seen during the crisis, a 

financial firm-particularly one with significant amounts of short-term funding—can 

become illiquid before it becomes insolvent, as creditors run in the face of uncertainty about the firm’s viability. While higher levels and quality of capital can mitigate some of this risk, it was widely agreed that quantitative liquidity requirements 

should be developed. The Basel Committee generated two liquidity standards: one, 

a Liquidity Coverage Ratio (LCR) with a 30-day time horizon; the other, a Net Stable Funding Ratio (NSFR) with a 1-year time horizon. However, insofar as this was 

the first-ever effort to specify such requirements, the Governors and Heads of Supervision of the countries represented on the Basel Committee determined that implementation of both frameworks should be delayed while they are subject to further 

examination and possible revision. As is the case with enhanced capital standards 

for the largest banking firms, the Basel Committee’s liquidity initiatives are consistent with the Federal Reserve’s obligation under section 165 of the Dodd-Frank 

Act to impose more stringent liquidity standards on the largest bank holding companies as well as other systemically important nonbank financial firms. 

The LCR has been actively reconsidered within the Basel Committee over the last 

year or so. As this work proceeds, four types of changes appear particularly ripe for 

consideration. First, the LCR’s definition of high-quality liquid assets should be 

broadened. In this regard, we support efforts to move away from the current credit 

risk-based approach and toward a quantitative liquidity-based approach. Second, 

some of the assumptions embedded in the LCR about run rates of liabilities and the 

liquidity of assets might be grounded more firmly in actual experience during the 

crisis, as the LCR may overstate in particular the liquidity risks of commercial 

banking activities. Third, additional consideration needs to be given to the liquidity 

risks inherent in trading activities that rely upon large amounts of short-term 

wholesale funding. Fourth, the LCR could be better adapted to ensure usability of 

the high-quality liquid asset buffer in appropriate circumstances: for example, by 

making credibly clear that ordinary minimum liquidity levels need not be maintained in the midst of a crisis. As currently constituted, the LCR may have the unintended effect of exacerbating a period of stress by forcing liquidity hoarding. The 

Basel Committee will likely suggest a set of changes to the LCR later this year, with 

a goal of introducing the LCR in 2015. Work on the NSFR is on a considerably slower track; the current plan is for implementation in 2018. 

Enhanced Prudential Standards for the Largest Financial Firms 

Sections 165 and 166 of the Dodd-Frank Act require the Federal Reserve to establish a broad set of enhanced prudential standards, both for bank holding companies 

with total consolidated assets of $50 billion or more and for nonbank financial companies designated by the Financial Stability Oversight Council (Council). In addition 

to enhanced risk-based capital and liquidity requirements and stress testing, the reVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
50 

quired standards also include single-counterparty credit limits, an early remediation 

regime, and risk-management and resolution-planning requirements. Sections 165 

and 166 also require that these prudential standards become more stringent as the 

systemic footprint of a firm increases. 

In December, the Federal Reserve issued a package of proposed rules to implement sections 165 and 166 of the Dodd-Frank Act. The Federal Reserve’s proposed 

rules would apply the same set of enhanced prudential standards to covered companies that are bank holding companies and to covered companies that are nonbank 

financial companies designated by the Council. As we made clear in the proposal, 

however, the Federal Reserve expects to tailor the application of the enhanced 

standards to different companies individually or by category, taking into consideration each company’s capital structure, riskiness, complexity, financial activities, 

size, and any other risk-related factors that the Federal Reserve deems appropriate. 

The comment period for our enhanced prudential standards proposal closed on April 

30. Nearly 100 comment letters were received. The Federal Reserve is currently reviewing those comments carefully as we work to develop final rules. 

The Volcker Rule 

Section 619 of the Dodd-Frank Act, commonly known as the ‘‘Volcker Rule,’’ generally prohibits banking entities from engaging in proprietary trading or acquiring 

an ownership interest in, sponsoring, or having certain relationships with a hedge 

fund or private equity fund. In October, the Federal Reserve joined the Office of the 

Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation 

(FDIC), and the Securities and Exchange Commission in seeking public comment on 

a proposal to implement the Volcker Rule. The Commodities Futures Trading Commission issued its substantially similar proposal for comment shortly thereafter. Because of the importance and complexity of the issues raised by the statutory provisions that make up the Volcker Rule, the Federal Reserve and other agencies provided the public with a 120-day opportunity to submit comments. The comment period is now closed, and nearly 19,000 public comments were received. The agencies 

are now working together to review and consider these comments and put final implementing rules in place as soon as practicable. 

In April, after consultation with the other agencies, the Federal Reserve issued 

guidance on a Volcker Rule conformance period that was intended to help limit any 

confusion about when banking entities will need to comply with the final rules once 

issued. The Federal Reserve’s statement clarified that a banking entity has the full 

2-year period provided by the statute (i.e., until July 21, 2014), unless that period 

is extended by the Board, to fully conform its activities and investments to the requirements of the Volcker Rule, including any final implementing rules adopted by 

the agencies. 

Prudential Supervision of Large Financial Firms 

In the wake of the Dodd-Frank Act, the prudential supervision of the largest, 

most complex financial firms remains a cooperative effort. As before, the law mandates that a variety of Federal and State supervisors execute particular supervisory 

and examination responsibilities for certain parts of a firm. This allocation of supervisory oversight among different agencies reflects, among other factors, the historical development of various types of financial intermediaries in the United States 

and a series of legislative decisions about regulatory and supervisory structure. 

As the regulator and supervisor of bank holding companies, the Federal Reserve’s 

role in this statutory arrangement is typically that of consolidated regulator and supervisor of the parent holding company. Accordingly, our supervisory program for 

such firms generally takes a broad view of the activities, risks, and management 

of the consolidated firm, with a particular focus on the capital adequacy, governance, and risk-management practices and competencies of the firm as a whole. 

Many of the principal business activities of the largest financial firms are conducted through the functionally regulated subsidiaries of those firms, such as insured depository institutions, broker-dealers, and insurance companies. As required 

by section 5 of the Bank Holding Company Act, the Federal Reserve generally relies 

to the fullest extent possible on the examination and supervision of those subsidiaries by the functional regulators. Together, the Federal Reserve and other functional regulators work to discharge the supervisory and examination responsibility 

given to each agency for particular parts of a large financial firm in a way that 

maximizes the expertise and resources of each agency and best ensures the safety 

and soundness of the consolidated firm and each of its constituent parts. 

Just as the financial crisis revealed the need for change in the prudential standards applicable to financial firms and activities, so too did it make clear that important changes in supervisory practices were needed to improve both the microprudenVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
51 

tial and macroprudential oversight of banks and bank holding companies. To that 

end, even before passage of the Dodd-Frank Act, the Federal Reserve began to reorient its supervisory structure and strengthen its supervision of the largest, most 

complex financial firms. 

The most important change has been creation of the Large Institution Supervision 

Coordinating Committee (LISCC). The LISCC is founded on several principles: that 

large institution supervision should be more centralized; that it should conduct regular, simultaneous, horizontal (cross-firm) supervisory exercises; and that it should 

be more interdisciplinary than it has been in the past. Thus, the LISCC includes 

senior Federal Reserve staff from research, legal and other divisions at the Board, 

from the markets and payments systems groups at the Federal Reserve Bank of 

New York, and senior bank supervisors from the Board and relevant reserve banks. 

Relative to previous practices, this approach to supervision relies more on quantitative methods for evaluating the performance and vulnerabilities of firms. 

To date, the LISCC has developed and administered various horizontal supervisory exercises, notably the capital stress tests and the related comprehensive capital reviews of the Nation’s largest bank holding companies, and is now extending 

its activities to coordinate other supervisory processes more effectively. It also has 

focused its attention on potential implications for financial stability in the United 

States from stresses arising in Europe. 

Review of JPMorgan Chase & Co. Trading Loss 

In response to the significant trading losses that were recently announced by 

JPMorgan Chase & Co. (JPMorgan) as a result of trading operations at the London 

branch of its national bank, the Federal Reserve—in its capacity as consolidated supervisor of the bank holding company—is working with the OCC, the regulator of 

the national bank, to review the firm’s response and remedial actions. In particular, 

the Federal Reserve has been assisting in the oversight of JPMorgan’s efforts to 

manage and de-risk the portfolio in question. As this process proceeds, we anticipate 

also working with the OCC and FDIC to identify the changes in risk measurement, 

management, and governance that will be necessary to improve risk-control practices surrounding the firm’s trading activities and to address trading strategies that 

led to these losses. 

In addition, the Federal Reserve has been looking at other parts of the holding 

company to determine if governance, risk management, and control weaknesses— 

similar to those exposed by this incident—are present elsewhere. While we have, to 

date found no evidence that they are, this review is not yet complete. 

Conclusion 

The recent financial crisis disrupted the financial system and the broader economy on a scale and scope not seen since the 1930s. Some of the world’s largest financial firms collapsed or required Government assistance to stay afloat, sending 

shock waves through the highly interconnected global financial system. Asset prices 

fell sharply, flows of credit to American families and businesses slowed dramatically, and millions of people lost their jobs. Extraordinary actions by Governments 

around the world helped to provide stability, but more than 4 years after the onset 

of the crisis, the recovery is far from complete. It is critical that we complete the 

implementation of capital and other prudential measures to prevent another crisis 

and protect taxpayers from having again to recapitalize financial firms. 

Thank you very much for your attention. I would be pleased to answer any questions you may have. 

PREPARED STATEMENT OF THOMAS J. CURRY 

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

JUNE 6, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, it 

is a pleasure to be here as the 30th Comptroller of the Currency to testify as part 

of the Committee’s ongoing hearings on the implementation of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act or Act). Before beginning, I want to express my appreciation for the confidence and trust that Members 

52 

*Statement Required by 12 U.S.C. §250: The views expressed herein are those of the Office 

of the Comptroller of the Currency and do not necessarily represent the views of the President. 

of this Committee and the President have bestowed upon me to lead the Office of 

the Comptroller of the Currency (OCC).* 

The OCC supervises nearly 2,000 national banks and Federal savings associations 

(collectively ‘‘banks’’), which constitute approximately 26 percent of all federally insured banks and thrifts, holding more than 69 percent of all commercial bank and 

thrift assets. These institutions range in size from nearly 1,800 community banks 

with assets of $1 billion or less to the Nation’s largest and most complex financial 

institutions with assets exceeding $100 billion. More than 90 percent of the institutions the OCC supervises are community banks and 75 percent of our bank supervision staff directly supports the supervision of these important institutions across 

the country. At the same time, examiners with diverse experience and specialized 

skills are embedded in the large banks we regulate to provide continuous ongoing 

supervision. To meet the supervisory needs of banks with such diversity, the OCC 

has structured its supervision activities into three lines of business: our Large Bank 

program, which typically covers banks with assets of $50 billion or more; our 

Midsize Bank program, which covers banks with assets generally ranging from $10 

billion to $50 billion; and our Community Bank program, which is focused on banks 

under $10 billion in assets. We tailor our supervisory activities for these three 

groups of institutions to the challenges they face. 

The Dodd-Frank Act and rulemakings by the OCC and other agencies have done 

much to strengthen the regulatory framework for our country’s financial institutions. Translating these reforms into improved soundness and fair treatment of customers by individual institutions requires strong, effective supervision. I am committed to strong supervision and to taking additional steps to enhance our supervision where necessary. Strong supervision is a theme that will flow through the 

balance of my testimony and mark my tenure as Comptroller. The agency has already begun efforts to heighten supervisory expectations among the largest institutions we oversee. This process includes increasing the awareness of risks facing 

banks and the banking system, reducing risk to manageable levels, and raising expectations for management, capital, reserves, liquidity, risk management, and corporate governance and oversight. This is a process that will take time to accomplish, 

and we must be vigilant to maintain our course. 

In response to the Committee’s letter of invitation, my testimony covers five broad 

topics 

• The status of several rulemakings implementing some key provisions of the 

Dodd-Frank Act; 

• A description of the OCC’s supervision of community banks summarizing the 

steps we take to assure that our supervision is consistent, balanced, and reflective of the risks these banks face, as well as the compliance challenges they experience when new rules or policies are introduced; 

• An overview of how the Dodd-Frank Act changed the regulatory framework for 

the supervision of large banking organizations and the mechanisms for regulatory collaboration; 

• A discussion of the OCC’s large bank supervisory program and how provisions 

of the Dodd-Frank Act will enhance and supplement our supervision; and 

• A summary of our oversight and work underway at JPMorgan Chase (JPMC) 

related to their recently announced losses. 

I. Update on Key Regulatory Reform and Dodd-Frank Act Rulemakings 

The OCC has taken action on several key regulatory reform and Dodd-Frank Act 

rulemakings since our last testimony before this Committee. These are summarized 

below. 

Final Rule To Revise the OCC’s Regulations To Remove References to Credit Ratings 

The OCC will soon be publishing in the Federal Register a final rule that addresses section 939A of the Dodd-Frank Act by removing references to credit ratings from 

the OCC’s regulations dealing with topics other than capital requirements. For example, the investment securities regulation sets forth the types of investment securities that national banks and Federal savings associations may purchase, sell, deal 

in, underwrite, and hold. Under existing OCC rules, permissible investment securities generally include Treasury securities, agency securities, municipal bonds, and 

other securities rated ‘‘investment grade’’ by nationally recognized statistical rating 

organizations such as Moody’s, S&P, or Fitch Ratings. The OCC’s final rule revises 

the definition of ‘‘investment grade’’ to remove the reference to credit ratings and 

53 

replaces it with a new nonratings based creditworthiness standard. To determine 

that a security is ‘‘investment grade’’ under the new standard, a bank will be required to perform due diligence necessary to establish: 1) that the risk of default 

by the obligor is low; and 2) that full and timely repayment of principal and interest 

is expected. Generally, securities with good to very strong credit quality will meet 

this standard. 

In comments on the proposed rule, banks and industry groups expressed concern 

about the amount of due diligence that the OCC would require a bank to conduct 

to determine whether an issuer has an adequate capacity to meet financial commitments under a security. The OCC believes that the proposed ‘‘investment grade’’ 

standard and the due diligence required to meet it are consistent with those under 

the prior ratings-based standards and existing due diligence requirements and guidance. Even under the prior ratings-based standards, national banks and Federal 

savings associations of all sizes should not have relied solely on a credit rating to 

evaluate the credit risk of a security, and have been advised to supplement any use 

of credit ratings with additional diligence on the credit risk of a particular security. 

Nevertheless, the OCC recognizes that it may take time for some national banks 

and Federal savings associations to make the adjustments necessary to make ‘‘investment grade’’ determinations under the new standard. Therefore, the OCC is allowing institutions until January 1, 2013, to come into compliance with the final 

rule. 

To aid this adjustment process, the OCC also will publish guidance to assist 

banks in interpreting the new standard and to clarify the steps banks can take to 

demonstrate that they meet their diligence requirements when purchasing investment securities and conducting ongoing reviews of their investment portfolios. 

Final Market Risk Capital Rule 

On December 21, 2011, the OCC, Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC) issued a notice 

of proposed rulemaking (NPR) that amended the agencies’ January 2011 market 

risk capital proposal by removing references to credit ratings, consistent with section 939A of the Dodd-Frank Act. The NPR proposed alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rule. 

I will soon approve for publication in the Federal Register the final market risk 

rule that implements various enhancements adopted by the Basel Committee on 

Banking Supervision to strengthen the capital requirements that apply to banks’ 

trading activities. The final rule modifies the scope of positions covered by the rule 

to better capture positions for which the market risk capital rules are appropriate; 

reduce procyclicality in market risk capital requirements; enhance the rule’s sensitivity to risks that are not adequately captured under the current regulatory measurement methodologies; and increase transparency through enhanced disclosures. 

The rule also removes references to credit ratings from the market risk capital 

framework and requires banks to receive written approval before making material 

changes to models used to calculate their market risk capital requirement. The rule 

will be published once approved by the boards of the FDIC and the FRB. 

Basel III Capital Standards 

I also will soon approve for publication in the Federal Register a set of proposals 

that would revise the agencies’ current ‘‘advanced approaches’’ risk-based capital 

rules and replace the agencies’ current generally applicable risk-based capital rules 

with rules that implement various enhancements adopted by the Basel Committee. 

These enhancements, which were more fully discussed in the OCC’s December 2011 

testimony, include: 

• A new, more rigorous definition of capital, which excludes funds raised through 

hybrid instruments that were unable to absorb losses as the crisis deepened; . 

Increased minimum risk-based capital requirements, which include increased 

minimum Tier 1 capital requirements and a new common equity requirement; 

• The creation of a capital conservation ‘‘buffer’’ on top of regulatory minimums 

to be drawn down in times of economic stress and that trigger restrictions on 

capital distributions (such as dividends), and discretionary bonus payments; 

• Enhanced risk-based capital requirements for counterparty credit to capture the 

risk that a counterparty in a complex financial transaction could grow weaker 

at precisely the time that a bank’s exposure to the counterparty grows larger; 

• The addition of a new leverage ratio requirement for larger institutions that incorporates off-balance-sheet exposures; and 

54 

• The removal of the references to credit ratings from the agencies’ risk-based 

capital rules, pursuant to section 939A of the Dodd-Frank Act. 

The agencies have divided the proposals into three separate NPRs that will be 

published together in the Federal Register to allow interested parties to better understand and focus on the various aspects of the overall capital framework, including which aspects of the rules will apply to which banking organizations. Separating 

the proposals into three documents will make it easier for banks of all sizes to understand which proposed changes are related to improving the quality and increasing the quantity of capital and which are related to enhancing the risk sensitivity 

of the calculation of total risk-weighted assets. 

Dodd-Frank Stress Tests 

The Dodd-Frank Act requires two types of stress testing requirements: stress tests 

conducted by the company and stress tests conducted by the FRB. The companyrun stress test applies to all financial companies, including national banks and Federal savings associations, with total consolidated assets of more than $10 billion, 

and requires the primary financial regulatory agency of those financial companies 

to issue regulations implementing the stress test requirements. Company-run stress 

tests are required semi-annually for financial companies with consolidated assets 

exceeding $50 billion, and annually for those from $10 to $50 billion in size. The 

primary financial regulatory agency is required to define ‘‘stress test,’’ establish 

methods for the conduct of the company-conducted stress test that must include at 

least three different sets of conditions (baseline, adverse, and severely adverse), establish the form and content of the institution’s report, and compel the institution 

to publish a summary of the results of the institutional stress tests. 

On January 24, 2012, the OCC published an NPR to implement the company-run 

stress test for banks. We are currently reviewing the comments we received and are 

working closely with the FRB and FDIC to ensure that the final rules are consistent 

and reduce burden to the greatest extent possible by avoiding duplication. 

Volcker Rule 

Section 619 of the Dodd-Frank Act added a new section 13 to the Bank Holding 

Company Act (BHCA) that contains certain prohibitions and limitations on the ability of a banking entity and a nonbank financial company supervised by the FRB 

to engage in proprietary trading and to have certain interests in, or relationships 

with, a hedge fund or private equity fund. The OCC, FDIC, FRB, and the Securities 

and Exchange Commission (SEC) issued proposed rules implementing that section’s 

requirements on October 11, 2011. On January 3, 2012, the period for filing public 

comments on this proposal was extended for an additional 30 days, until February 

13, 2012. On January 11, 2012, the Commodity Futures Trading Commission 

(CFTC) issued a substantively similar proposed rule implementing section 13 of the 

BHCA and invited public comment through April 16, 2012. The agencies are now 

considering the more than 18,000 comments received. 

On April 19, 2012, the FRB clarified that entities covered by the Volcker Rule 

have a period of 2 years after the statutory effective date, which would be until July 

21, 2014, to fully conform their activities and investments to the requirements of 

section 619 of the Dodd-Frank Act and any final rules adopted, unless that period 

is extended by the FRB. 

The OCC, FDIC, SEC, and CFTC announced that they plan to administer their 

oversight of banking entities under their respective jurisdictions in accordance with 

the FRB’s conformance rule and statement of April 19. 

Lending Limits 

The OCC’s lending limit rules at 12 U.S.C. §84 provide that the total loans and 

extensions of credit by a national bank to a person outstanding at one time shall 

not exceed 15 percent of the unimpaired capital and unimpaired surplus of the bank 

if the loan is not fully secured, plus an additional 10 percent of unimpaired capital 

and unimpaired surplus if the loan is fully secured by certain types of collateral. 

Section 610 of the Dodd-Frank Act amends this provision to expand the definition 

of ‘‘loans and extensions of credit’’ to include any credit exposure to a person arising 

from a derivative transaction, repurchase agreement, reverse repurchase agreement, 

securities lending transaction, or securities borrowing transaction between a national bank and that person. This amendment is effective July 21, 2012. 

The OCC plans to issue a rule shortly to establish how the credit exposures from 

these types of transactions should be measured for lending-limit purposes. In implementing these provisions, the OCC has been mindful of opportunities to minimize 

complexity, particularly for community banks, and of providing sufficient time for 

banks to comply with the new requirements. 

55 

1See, http://www.occ.gov/news-issuances/congressional-testimony/2011/pub-test-2011-42- 

written.pdf. 

II. OCC’s Commitment to and Supervision of Community Banks 

The OCC’s community bank supervision program is built around our local field 

offices, staffed by local examiners, based in more than 60 cities throughout the 

United States in close proximity to the banks they supervise. Every community 

bank is assigned to an examiner who monitors the bank’s condition on an ongoing 

basis and who serves as the focal point for communications with the bank. 

The OCC’s structure ensures that community banks receive the benefits of highly 

trained examiners with local knowledge and experience, along with the resources 

and specialized expertise that a nationwide organization provides. Examiners conduct their examinations using the Community Bank Supervision section of the 

Comptroller’s Handbook that tailors procedures to community banks. While the 

OCC’s bank supervision policies and procedures establish a common framework and 

set of expectations, examiners tailor their supervision of each community bank to 

its individual risk profile, business model, and management strategies. As a result, 

the OCC’s Assistant Deputy Comptrollers are given considerable decision-making 

authority, reflecting their experience, expertise, and their on-the-ground knowledge 

of the institutions they supervise. 

The OCC has mechanisms in place to ensure that examiners apply our supervisory policies, procedures, and expectations in a consistent and balanced manner. 

The responsible manager reviews and signs off on each report of examination before 

being finalized. When significant issues are identified and an enforcement action is 

already in place, or is being contemplated, additional levels of review occur prior to 

finalizing the examination conclusions. The OCC also has formal quality assurance 

processes, overseen by the agency’s Enterprise Governance office that reports directly to me, that assess the effectiveness of our supervision and compliance with 

OCC policies through periodic, randomly selected reviews of the supervisory record. 

As a former State banking commissioner, I have a keen appreciation for the critical role that community banks play in providing consumers and small businesses 

in communities across the Nation with essential financial services as well as the 

credit that is critical to economic growth and job creation. While community banks 

comprise about 11 percent of the banking assets in our country, they make 39 percent of the small business loans that keep America working. I am committed to 

making sure our supervision of these institutions is fair and balanced, and that 

wherever possible, we minimize their regulatory and compliance burdens. 

As the OCC has previously testified, while the focus of the Dodd-Frank Act is generally on larger financial institutions, other provisions broadly amend banking and 

financial laws in ways that affect the entire banking sector, including community 

banks. 1 Some of these involve provisions where the OCC has rulemaking authority, 

while others fall outside of the OCC’s jurisdiction. As we implement regulations for 

the Dodd-Frank Act and other key reform efforts, one of my early directives to the 

OCC staff has been to assess the potential impact on smaller institutions, seek ways 

to minimize potential burden, and explain and organize our rulemakings in ways 

that help community bankers understand the scope and application of the rules to 

their institutions. 

The companion guidance to our rulemaking to remove credit ratings from our investment securities regulations, described above, is one example of how we are trying to minimize burden on smaller banks. In implementing this provision of the 

Dodd-Frank Act, our goal has been to meet the objective of the statute while recognizing the effectiveness of the tools and analyses that well-managed community 

banks have routinely used to aid their credit analysis and investment decisions. 

III. Dodd-Frank Impact on Supervision of Large Banking Organizations 

The Dodd-Frank Act will have a significant and lasting impact on the supervision 

and oversight of our Nation’s large financial firms. Indeed, among the Act’s key objectives are to strengthen the oversight, regulation, and resolution regimes applicable to large financial organizations to lessen the potential that disruptions or failures could have on the stability of the U.S. financial system. The Act also seeks to 

promote greater market stability through increased transparency and oversight of 

swaps and other derivative activities. Finally, the Act also seeks to strengthen consumer protection related to financial products and services. 

The Dodd-Frank Act establishes a variety of mechanisms to achieve these objectives. Some of these mechanisms, such as the risk retention, Volcker, and swap margin and central counterparty and clearing provisions, are targeted at how and where 

various financial activities and risk taking are to be conducted in the future. As 

more fully described in the OCC’s December 2011 and March 2012 testimonies beVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00059 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
56 

2See, http://www.occ.gov/news-issuances/congressional-testimony/2011/pub-test-2011-142- 

written.pdf and http://www.occ.gov/news-issuances/congressional-testimony/2012/pub-test2012-50-written.pdf. 

fore this Committee, work on these rulemakings is underway. 2 Other provisions established new or expanded regulatory authorities. These include the Title II orderly 

liquidation provisions and tools provided to the FDIC and the FRB; the transfer of 

powers and functions from the Office of Thrift Supervision to the OCC; and the creation of the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC). Finally, other provisions, most notably those related to heightened prudential standards are designed to strengthen the risk management, capital, and liquidity that govern and support risk-taking activities. 

The financial crisis underscored that supervisors must be cognizant not only of 

what is going on within the individual firms they oversee, but also how those activities affect, or can be affected by, events at other firms, markets, and the broader 

economy. The Dodd-Frank Act established the FSOC to provide a formal body to assess and exchange such information. The OCC is an active participant in FSOC and 

its various operating committees, including those developing and assessing potential 

designations for systemically important financial market utilities and nonbank financial firms; the systemic risk committee, charged with assessing and monitoring 

potential emerging systemic issues; and the committee providing input to the FRB’s 

heightened prudential FSOC meeting last month and believe it will be a valuable 

forum for exchanging market intelligence and coordinating regulatory actions on a 

variety of cross-cutting issues that may affect OCC-supervised large institutions. 

One such example that was widely reported from the most recent FSOC meeting 

included a discussion, led by the OCC, of risks and supervisory actions related to 

reports of JPMC activities and disclosed losses—a topic also discussed later in this 

testimony. 

To promote consistent and comprehensive oversight of large banking organizations, the Dodd-Frank Act appropriately requires close collaboration among the Federal financial agencies with respect to rulemaking and various ongoing supervisory 

activities. In this regard, two provisions of the Act have had a direct impact on the 

scope and nature of the OCC’s supervisory activities. 

The first, and most immediate impact, was the transfer to the OCC of all functions of the OTS relating to Federal savings associations. From an operational perspective, this transfer was successfully completed last July, and the ongoing supervision of more than 600 Federal savings associations has been integrated into our 

supervisory programs. The integration of the OTS into the OCC will help achieve 

a more consistent supervisory regime for federally chartered depository institutions. 

In this regard, and as discussed more fully in the OCC’s December 2011 testimony, 

we are conducting a comprehensive, multiphased review of our regulations, as well 

as those of the OTS, to eliminate duplication, reduce unnecessary burden, and provide consistent treatment, where appropriate, for both national banks and Federal 

savings associations. A similar effort is underway to integrate the more than 1,000 

OTS policies into a consolidated OCC policy framework. 

While we believe having a common set of rules and policies will benefit national 

banks and Federal savings associations, we recognize that these changes can create 

uncertainty for Federal savings associations. To help Federal savings associations 

understand these changes and the OCC’s approach to supervision, we continue to 

hold various outreach meetings and teleconferences for Federal savings associations. 

These opportunities allow Federal savings association executives to voice concerns, 

to get answers to their questions, and to gain a better understanding of supervisory 

issues of specific interest to them. We are also in the process of re-establishing the 

OTS’ advisory committees for mutual savings associations and minority institutions 

to provide a venue for industry input on the unique challenges facing those institutions. 

The second shift in OCC supervisory responsibilities as the result of Dodd-Frank 

has been the transfer of oversight responsibility for compliance with certain Federal 

consumer laws to the CFPB for national banks and Federal savings associations 

with total assets greater than $10 billion. To minimize regulatory burden on institutions, the Dodd-Frank Act requires the CFPB to coordinate its activities with the 

supervisory activities conducted by the prudential regulators. Section 1025 requires 

the CFPB to consult with the prudential regulators regarding respective schedules 

for examining an institution. Similarly, the CFPB and the prudential regulators are 

required to conduct their respective examinations simultaneously in an insured depository institution and to share and comment on related draft reports of examination that result from the simultaneous examinations. The law also provides that the 

regulated institution may opt out of a simultaneous examination by the prudential 

57 

regulator and the CFPB. I am pleased to report that the OCC and other Federal 

banking agencies recently signed and earlier this week published a Memorandum 

of Understanding that implements these coordination requirements in a realistic 

and practical manner. 

With respect to supervision of individual large banking organizations, the OCC 

serves as the primary Federal banking regulator for activities conducted within the 

national bank or Federal savings association charter and its subsidiaries, except for 

compliance with statutes and regulations where jurisdiction has been expressly provided to another supervisor, such as the SEC for certain broker-dealer activities, 

and the CFPB for certain Federal consumer laws. Since most large banks are part 

of a bank holding company, we work closely with the FRB in planning and conducting our supervisory activities for these institutions. 

Successful implementation of the heightened prudential standards provisions of 

the Dodd-Frank Act will require close collaboration between the OCC and the FRB. 

For example, bank holding companies subject to the heightened prudential standards, and their subsidiary national banks and Federal savings associations, will be 

subject to multiple stress tests, including the annual Comprehensive Capital Analysis and Review (CCAR), and the supervisory and company-run stress tests set forth 

in the FRB’s Heightened Prudential Standards rules and the OCC’s stress test rule. 

It is important that our agencies work together to align resources and strategy, and 

to ensure consistency in scenarios and models, in both the CCAR and Dodd-Frank 

Act stress testing processes. 

IV. OCC Supervision of Large Banks and the Dodd-Frank Act 

Overview of the OCC’s Supervisory Program for Large Banks 

The OCC’s Large Bank supervision program is structured to promote consistent 

risk-based supervision. It is a centralized program headquartered in Washington 

with a national perspective that facilitates coordination across large institutions. 

The foundation of the OCC’s supervisory efforts is our continuous, on-site presence of examiners at each of the 19 largest banking companies. These on-site teams 

are led by an Examiner-In-Charge (EIC) who manages a staff of seasoned examiners, generally with 20 or more years of experience across numerous banks and 

multiple business cycles, and possessing advanced skills in key risk areas such as 

credit, capital markets, and compliance. In addition, certain supervisory activities 

are staffed by our team of PhD economists from the OCC Economics Department. 

The examiners are also supplemented by lawyers, other economists, as well as policy and subject matter experts to support their ongoing supervision. 

The on-site examination teams have three main objectives. The first is to know 

the objectives of the bank and its lines of business, the key risks, and the controls 

that are put in place to manage them. The second is to assess the levels of risk in 

the bank and the quality of risk management over the course of the examination 

cycle. Finally, examiners are charged with communicating examination findings, 

concerns, and ratings through our CAMELS and Risk Assessment System. Examiners communicate by meeting with bank management and the board of directors, 

and through written supervisory letters and reports of examination. They identify 

concerns and ensure that corrective actions are taken, through the supervisory process, or if needed, appropriate enforcement actions. 

To enhance our ability to identify key risks as well as emerging issues and share 

best practices across the large banks, we have examiner network groups across 

eight major disciplines: Commercial Credit, Retail Credit, Mortgage Banking, Capital Markets, Asset Management, Information Technology, Operational Risk, and 

Compliance. These groups share information, concerns, and policy application 

among examiners. They also identify areas of common interest as well as risks that 

are elevated or emerging. The EICs and leadership teams of each of the network 

groups work closely with specialists in our Supervision Policy and Risk Analysis Divisions to promote consistent application of supervisory standards and coordinated 

responses to emerging issues. 

Examinations are conducted pursuant to risk-based supervisory strategies that 

are developed for each institution. Although each strategy is tailored to the business 

model and risk profile of the individual institution, the strategy development process is governed by supervisory objectives established annually by our senior supervision management team. Through this planning process, the OCC identifies key 

risks and issues that cut across the industry and promotes consistency in areas of 

concern. Each strategy is reviewed and approved by the appropriate Large Bank 

Deputy Comptroller. In addition, a Quality Assurance group within our Large Bank 

program reviews selected strategies as part of a structured process review to ensure 

that examination activities are executed consistently and in a quality manner. 

58 

It is important to remember that the job of risk management is not to eliminate 

losses. Rather, risk management ensures that risk exposures are fully identified and 

understood by bank management and directors to allow them to make informed 

business decisions about the firm’s risks, and that the bank has sufficient capital, 

reserves, and liquidity to withstand a range of potentially adverse outcomes. Banks 

must manage their risks effectively to meet the credit and borrowing needs of the 

customers and communities they serve. 

Resident examiners apply risk-based supervision to a broad array of issues and 

risks, including credit, liquidity, price, interest rate, compliance, and operational 

risks. The primary focus of examiners is to determine whether banks have sound 

risk control processes commensurate with the nature of their risk-taking activities, 

capital, reserves, and liquidity. Given the millions of transactions that large banks 

conduct daily across varied product lines and businesses, examiners do not review 

every transaction in a bank. 

OCC examiners probe to see where activities, earnings, or losses diverge from expectations to a degree indicative of a breach of approved parameters or breakdown 

of controls. For example, examiners look for lending or trading activities operating 

outside approved limits, especially where risk management activities did not identify or escalate such instances; and for models breaking or not going through proper 

validation. Risk management seeks to mitigate and control risk but not eliminate 

it entirely. Losses occur even when all controls function properly. That is why banks 

are required to maintain capital, reserves, and liquidity to absorb adverse outcomes 

and unexpected losses. 

When we find weaknesses or deficiencies, we communicate them to bank senior 

management and require corrective actions. Most often this is accomplished through 

‘‘Matters Requiring Attention’’ (MRA) that are sent to the bank’s senior management and board of directors. When needed, we take more formal enforcement actions. 

OCC Actions and the Dodd-Frank Act Require Stronger Risk Management for Systemically Important Banks 

At the OCC, we have raised the bar on our supervisory expectations for the largest banks we supervise. Large banks are critically important to the vitality of our 

economy and the orderly functioning of the capital markets. As a result, they must 

be managed and governed in a higher quality manner than less systemically important banks. Our experience in the recent crisis showed that we needed to elevate 

expectations with respect to balance sheets as well as governance and oversight 

processes. 

Stronger Capital, Reserves, and Liquidity Standards 

Since the onset of the financial crisis, we directed the largest institutions to 

strengthen their capital, reserves, and liquidity positions. As a result, the quality 

and level of capital at national banks and bank holding companies with total assets 

over $50 billion have improved significantly. The median percentage of Tier 1 common capital relative to total assets for bank holding companies increased from 5.2 

percent to more than 7 percent, while the comparable ratio for national banks and 

Federal savings institutions rose from 6.4 percent to 8.7 percent, over that same period. 

Under scrutiny of our examiners, the largest banks have more than doubled their 

loan loss reserves as a percentage of gross loans since the end of 2007, from 1.4 percent to 2.9 percent. Similarly, the largest banks have materially strengthened their 

liquidity buffers through increases in short-term liquid assets that can be used to 

meet unanticipated liquidity demands and through a decreased reliance on shortterm, volatile funding. While these are positive developments, we are taking actions 

to ensure that these are permanent and not just temporary improvements. 

In concert with the Basel Committee, we are raising both the quality and quantity 

of regulatory capital that banks generally must hold. Consistent with section 171 

of the Dodd-Frank Act, these enhanced capital requirements will also apply to bank 

holding companies. These changes are being implemented by the forthcoming Basel 

III capital rulemakings, which were previously described. Under the proposed rules, 

large banks subject to the ‘‘advanced approaches’’ capital regime will face additional 

capital requirements that will not apply to smaller banks. These include a countercyclical capital charge, which banking supervisors can activate to curb excessive 

credit growth, and a supplemental leverage ratio that will capture off-balance-sheet 

exposures. This enhanced leverage ratio is broadly consistent with section 165 of the 

Dodd-Frank Act, which directs that off-balance-sheet activities be included in the 

regulatory capital calculation for bank holding companies with total consolidated assets equal to or greater than $50 billion. Basel III also calls for adopting a capital 

59 

surcharge that would apply only to the 29 largest global, systemically important 

banks, seven of which are U.S. entities. The FRB supervises all of these bank holding companies, and the OCC supervises the national banks in five of these companies. It is envisioned that this provision will be included in the FRB’s heightened 

prudential capital standards rule as part of its implementation of section 165. 

Basel III also introduces two explicit quantitative minimum liquidity ratios to assist a bank in maintaining sufficient liquidity during periods of financial distress: 

the Liquidity Coverage Ratio and the Net Stable Funding Ratio. These ratios are 

designed to achieve two separate but complementary objectives. The Liquidity Coverage Ratio, with a 1-month time horizon, addresses short-term resilience by ensuring that a bank has sufficient high quality liquid resources to offset cash outflows 

under acute short-term stresses. The Net Stable Funding Ratio is targeted toward 

promoting longer-term resilience by creating additional incentives for a bank to fund 

its ongoing activities with stable sources of funding. Its goal is to limit over-reliance 

on short-term wholesale funding during times of robust market liquidity and to encourage better assessment of liquidity risk across all on- and off-balance-sheet 

items. 

The Basel Committee included a lengthy implementation timeline for both ratios 

to provide regulators the opportunity to conduct further analysis and to make 

changes as necessary. The OCC is continuing its work with the Basel Committee 

to develop and recommend changes to the Liquidity Coverage Ratio to ensure that 

it will produce appropriate requirements and incentives, especially during economic 

downturns, and to otherwise limit potential unintended consequences. 

These explicit liquidity thresholds, once fully implemented, will complement the 

more rigorous liquidity risk management expectations that the OCC and other 

banking agencies issued in 2010 and that are helping to form the enhanced liquidity 

standards the FRB is promulgating as part of the heightened prudential standards 

under section 165 of the Dodd-Frank Act. In the interim, the OCC this week published a revised Liquidity Risk Management booklet as part of its Comptroller’s 

Handbook series. This booklet forms the framework for our liquidity examinations. 

While the core concepts in the booklet apply to national banks and Federal savings 

associations of all sizes, the booklet emphasizes that the complexity and sophistication of liquidity risk management, along with the liquidity positions held must be 

tailored to a bank’s risk profile and scope of activities. 

Heightened Expectations for Strong Corporate Governance and Oversight 

Higher supervisory expectations, along with sharper execution by bank management and independent directors in fundamental areas, will go a long way toward 

maintaining the improvements achieved since the financial crisis and minimizing 

the probability and impact of future crises. We set higher expectations for large 

banks in five specific areas. 

Board willingness to provide credible challenge. A key element in corporate governance is a strong, knowledgeable board with independent directors who provide 

a credible challenge to bank management. The capacity to dedicate sufficient time 

and energy in reviewing information and developing an understanding of the key 

issues related to bank activities are critical to being an effective director. Informed 

directors are well positioned to engage in value-added discussions that provide 

knowledgeable approvals and guidance. Effective directors prudently question the 

propriety of strategic initiatives, talent decisions, and the balance between risk taking and reward. And obviously, it is essential to the ability of directors to perform 

this role to have effective information flow and risk identification within the organization. 

Talent management and compensation. Human capital is a key asset in any organization, and we expect large banks to have a well defined personnel management 

process that ensures appropriate quality staffing levels and provides for orderly succession. Large bank management processes are typically extensive. OCC EICs are 

enhancing their knowledge in this area and incorporating their assessments into the 

‘‘management’’ rating in CAMELS, with particular focus on the adequacy of current 

staffing levels, the ability to provide for orderly succession, the proactive identification of staffing gaps that require external hires, and appropriate compensation tools 

to motivate and retain talent. Of particular importance is the need to ensure that 

incentive compensation structures balance risk and financial rewards and are compatible with effective controls and risk management. This is a key objective of the 

interagency guidance on sound incentive compensation that the OCC, FRB, and 

FDIC issued in June 2010, and the proposed rulemaking that the Federal banking 

agencies, the National Credit Union Administration, the SEC, and the Federal 

Housing Finance Agency have issued to implement the incentive-based compensation provisions in the Dodd-Frank Act. Work on that rulemaking is underway. 

60 

3OCC examiners rate the quality of the bank’s audit function and the quality of risk management as weak, satisfactory, or strong. 

Defining and communicating risk tolerance expectations across the company. Consistent with prudent governance practices, banks must define and communicate acceptable risk tolerance, and results need to be periodically compared to pre-defined 

limits. As banks have grown, the process of defining and measuring risk tolerance 

has typically been confined to the business unit and more micro levels. While these 

lower level risk limits can generally control individual areas of risk taking, they do 

not enable senior management or board members to monitor or evaluate concentrations or risk levels at the broader firm level. Examiners are directing banks to complement existing risk tolerance structures with measures and limits of risk addressing the amount of capital or earnings that may be at risk on a firm-wide basis, the 

amount of risk that may be taken in each line of business, and the amount of risk 

that may be taken in each of the key risk categories monitored by the banks. This 

process will result in better identification and measurement of concentrations, with 

attendant monitoring and controls. 

Development and maintenance of strong audit and risk management functions. 

The recent crisis reinforced the importance of quality audit and risk management 

functions. The scale and breadth of large banks presents added challenges to the 

roles of executive management and directors in knowing the risk profile and whether pre-defined policies and procedures are being followed appropriately. While regulators operated for many years with the premise that satisfactory 3 oversight functions were generally sufficient, the financial crisis has led us to conclude that large 

banks should not operate with anything less than strong audit and risk management functions. To meet this higher standard, we have directed bank audit and risk 

management committees to perform gap analyses relative to OCC’s standards and 

industry practices and to take appropriate action to improve their audit and risk 

management functions. We expect members of the bank’s board and its executive 

management team to ensure audit and risk management teams are visibly and substantively supported. As part of their ongoing supervision, OCC examiners are evaluating the state of these key oversight functions and identifying areas that require 

strengthening. 

Sanctity of the charter. While holding companies of large banks are typically managed on a line of business basis, directors at the bank level are responsible for oversight of the bank’s charter—the legal entity. Such responsibility requires separate 

and focused governance. We have reminded the boards of banks that their primary 

fiduciary duty is to ensure the safety and soundness of the national bank or Federal 

savings association. Execution of this responsibility involves focus on the risk and 

control infrastructure necessary to maintain it. Directors must be certain that appropriate personnel, strategic planning, risk tolerance, operating processes, delegations of authority, and controls are in place to effectively oversee the performance 

of the bank. The bank should not simply function as a booking entity for the holding 

company. It is incumbent upon bank directors to be mindful of this primary fiduciary duty as they execute their responsibilities. 

V. JPMorgan Chase Loss and OCC Role and Responsibilities 

With this background, let me turn to the recently announced losses at JPMC. This 

event raises questions about the adequacy and rigor of JPMC’s risk management 

practices that we are actively examining. 

JPMC is a $2.3 trillion bank holding company with approximately $128 billion in 

Tier 1 common capital as of March 31, 2012. The FRB oversees the holding company 

and its affiliates. The OCC oversees JPMC’s national banks and various subsidiaries. The lead national bank has approximately $1.8 trillion in total consolidated 

assets and $101 billion in Tier 1 common capital. The OCC’s supervisory team includes approximately 65 on-site examiners who are responsible for reviewing nearly 

all facets of the bank’s activities and operations, including commercial and retail 

credit, mortgage banking, trading and other capital markets activities, asset liability 

management, bank technology and other aspects of operational risk, audit and internal controls, and compliance with the Bank Secrecy Act, and anti-money laundering 

laws and the Community Reinvestment Act. These on-site examiners are supported 

by additional subject-matter experts from across the OCC. 

Given the scale of the bank, the loss by JPMC affects its earnings, but does not 

present a solvency issue. JPMC, like other large banks, has improved its capital, 

reserves, and liquidity since the financial crisis, and its levels are sufficient to absorb this loss. The Basel III rulemakings described earlier will further increase the 

required level of high-quality capital for all U.S. banks, and work underway by the 

61 

Financial Stability Board will further increase capital requirements for systemically 

significant firms, like JPMC. 

Similarly, the events at JPMC do not threaten the broader financial system. 

Under current market conditions, the JPMC effort to manage its positions is not 

creating an unusual risk of contagion to other banks. Beyond JPMC, we have directed OCC examiners to evaluate the risk management strategies and practices in 

place at other large banks, and examiners have reported that there is no activity 

similar to the scale or complexity of JPMC. However, this is a continuing focus of 

our supervision. The activities that generated the reported $2 billion loss were conducted in the 

national bank by JPMC’s Chief Investment Office (CIO), which is responsible for the 

bank’s asset-liability management activities. This asset-liability management function is separate from JPMC’s investment banking business, where most trading and 

market making takes place. The CIO reports to the Chief Executive Officer of 

JPMC. Its activities are conducted globally but managed and controlled out of 

JPMC’s New York offices. These activities are supervised by OCC staff assigned to 

the JPMC headquarters in New York. Part of our ongoing review includes an evaluation of this structure, its oversight, and controls. 

In 2007 and 2008, the bank constructed a portfolio designed to partially offset 

credit risk using credit default swaps to help protect the company from potential 

credit losses in a stressed global economy. This strategy was reflected in regular reports received by OCC examiners. The OCC focused on the risk management systems and controls that the bank employed to mitigate credit risk in its portfolio. For 

several years thereafter, risk levels operated within bank-approved stress and other 

limits. 

In late 2011 and early 2012, bank management revised its strategy and decided 

to offset it original position and reduce the amount of stress loss protection. The instruments chosen by the bank to execute the strategy were not identical to the instruments used in the original position, which introduced basis, liquidity, and other 

risks. As the new strategy was executed in the first quarter, actual performance deviated from expectations, and resulted in substantial losses in the second quarter. 

Whether risk management controls, procedures, and reports were properly structured, reviewed, approved, and acted upon in the execution of this strategy is another focus of our ongoing examination. 

In April 2012, as part of our supervisory activities, OCC examiners met with bank 

management to discuss the bank’s transaction activity and the current state of the 

position. OCC examiners directed the bank to provide additional details regarding 

the transactions, their scope, and risk. Our examiners were in the process of evaluating the bank’s current position and strategy when, at the end of April and during 

the first days of May, the value of the position deteriorated rapidly. 

Since that time, the OCC has been meeting daily with bank management with 

respect to the bank’s response to this situation, to re-evaluate the risk management 

activities and controls of the bank and how they applied to its CIO function, and 

to determine what additional action is necessary. This includes the ongoing daily 

oversight of the bank’s actions to mitigate and reduce the risk of the positions at 

issue. We and the Federal Reserve are conducting reviews in the bank and are sharing information with the FDIC and other regulators. 

We are also undertaking a two-pronged review of our supervisory activities and 

response. The first component is focused on evaluating the adequacy of current risk 

controls and risk governance at the bank, informed by their application to the positions at issue. The second component evaluates the lessons learned from this episode that could enhance risk control and risk management processes at this and 

other banks and improve OCC supervisory approaches. Consistent with our supervisory policy of heightened expectations for large banks, we will require that the 

bank adhere to the highest risk management standards. 

We are not limiting our inquiry just to the particular transactions at issue. We 

will assess not just the adequacy of risk management and controls for the positions 

now spotlighted, but also activities in comparable bank operations. We will use 

these events to more broadly evaluate the effectiveness of the bank’s risk management throughout the firm and to identify ways to improve our supervision. 

The first prong of our approach involves our on-site exam team focusing on three 

broad areas. To begin with, we are actively assessing the quality of management 

and risk management in the CIO function, including decision making; board oversight, including whether the risk committee is appropriately informed and engaged; 

the types and reasonableness of risk measurement metrics and limits; the model 

governance review process; and the quality of work by the independent risk management team as well as internal audit. We are also assessing the adequacy of the information provided within the bank and made available to the OCC to evaluate the 

62 

risks and risk controls associated with the positions undertaken by the CIO. Finally, 

we are evaluating the compensation process of the CIO and will assess the bank’s 

determination on ‘‘claw backs’’ as part of that analysis. If corrective action is warranted, we will pursue and implement appropriate informal and/or formal remedial 

measures. 

Working on a parallel track, as part of the second prong of our supervisory response, we are evaluating the events leading up to and through the bank announcement of losses associated with the CIO, and what these events teach us to improve 

risk management and to enhance our supervisory activity. Particular attention is 

being directed to the rationale for the transactions and how they fit within the 

framework of the bank’s risk management processes; the quality and extent of information provided to the OCC; and consistency of the bank’s activities with OCC supervisory guidance. 

We are reviewing the bank’s management information systems, committee minutes, audit reports, and conducting discussions examiners to establish a detailed 

chronology of events surrounding the CIO decision-making and the resulting losses. 

Our analysis will focus on where breakdowns or failures occurred. This will include 

assessments of senior management communication and monitoring of strategies; 

business judgment and execution; the articulation of risk tolerance relative to strategy; risk measurement (including models, limits, stress scenarios, and changes to 

those tools during the period in question); flow of information, proper authority, and 

approvals; and the appropriateness and timeliness of particular actions. 

As part of this second prong of our supervisory response, we are also assessing 

relevant audit or examination findings and whether they were addressed; how the 

risks associated with the strategy were recognized and evaluated; whether there 

was an effective exchange of views among the business unit and control groups; 

whether incentives were properly aligned with desired behaviors; and whether the 

bank’s actions were consistent with OCC supervisory guidance and expectations. 

Again, if corrective action is warranted, we will pursue and implement appropriate 

informal and/or formal remedial measures. 

Finally, a vital part of this second component of our supervisory effort is identifying the lessons learned for improving the effectiveness of our supervision. The 

areas that we will explore here include whether the quality and extent of information available to OCC examiners was sufficient to permit an understanding of the 

risk and management processes in place to govern it. We will also determine what, 

in retrospect, the OCC could have done differently, and how to ensure that the risk 

management processes of this bank—and others—are effective. 

I should also note that the OCC is not drawing any conclusion about whether the 

activities of JPMC’s CIO would be subject to the Volcker Rule. It is premature to 

reach any conclusion based upon the facts and information as they currently exist. 

VI. Conclusion 

I appreciate the opportunity to appear before this Committee. While my testimony 

reports significant progress on implementing the Dodd-Frank Act and other reforms 

and shares insight into our ongoing efforts to enhance supervision of community 

banks and large banks, I want to stress my commitment to ensuring this process 

continues. The recent events at JPMC also remind us of the need to continuously 

assess OCC’s supervisory processes. I look forward to providing additional information to the Committee throughout my tenure as Comptroller and continuing to share 

how we are meeting our commitment to strong, effective, fair, and balanced supervision of the national banks and Federal savings associations that we supervise. 

PREPARED STATEMENT OF MARTIN J. GRUENBERG 

ACTING CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

JUNE 6, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the opportunity to testify today on the Federal Deposit Insurance Corporation’s efforts to enhance bank supervision and reduce systemic risk. I will summarize the FDIC’s progress in implementing the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act), with a particular emphasis on the 

FDIC’s implementation of the Title II Orderly Liquidation Authority, as well as how 

new rules promulgated under the Act affect community banking institutions. Before 

concluding, I will also briefly address the implications of the recent trading losses 

at JPMorgan Chase. 

63 

Implementation of the Dodd-Frank Act: Measures To Address Systemic 

Risk 

The economic dislocations we have experienced in recent years, which have far exceeded those associated with any recession since the 1930s, were the direct result 

of the financial crisis of 2007–08. The reforms enacted under the Dodd-Frank Act 

were aimed at addressing the root causes of the crisis. Foremost among these reforms were measures to curb excessive risk-taking at large, complex banks and 

nonbank financial companies, where the crisis began. Title I of the Dodd-Frank Act 

includes new provisions that enhance prudential supervision and capital requirements for systemically important financial institutions (SIFIs), while Title II authorizes a new orderly liquidation authority that significantly enhances the ability to resolve a failed SIFI without contributing to additional financial market distress. 

SIFI Resolution Authorities. The most important new FDIC authorities under the 

Dodd-Frank Act are those that provide for enhanced resolution planning and, if 

needed, the orderly resolution of SIFIs. Prior to the recent crisis, the FDIC’s receivership authorities were limited to federally insured banks and thrift institutions. 

There was no authority to place the holding company or affiliates of an insured institution or any other nonbank financial company into an FDIC receivership to 

avoid systemic consequences. The lack of this authority severely constrained the 

ability of the Government to resolve a SIFI and contributed to the excessive risk 

taking that led to the crisis. 

Since passage of the Dodd-Frank Act, the FDIC has taken a number of steps to 

carry out its new systemic resolution responsibilities. First, the FDIC established 

a new Office of Complex Financial Institutions (OCFI) to carry out three core functions: 

• monitor risk within and across these large, complex financial firms from the 

standpoint of resolutions and risk to the Deposit Insurance Fund; 

• conduct resolution planning and develop strategies to respond to potential crises; and 

• coordinate with regulators overseas regarding the significant challenges associated with cross-border resolution. 

For the past year, the OCFI has been developing internal resolution plans in 

order to be ready to resolve a failing systemic financial company. These internal 

FDIC resolution plans, developed pursuant to the Orderly Liquidation Authority 

provided under Title II of the Dodd-Frank Act, apply many of the same powers that 

the FDIC has long used to manage failed-bank receiverships to a failing SIFI. This 

internal resolution planning work is the foundation of the FDIC’s implementation 

of its new resolution responsibilities under the Dodd-Frank Act. 

The FDIC has largely completed the basic rulemaking necessary to carry out its 

responsibilities under the Dodd-Frank Act. In July of last year, the FDIC Board approved a final rule implementing the Title II Orderly Liquidation Authority. This 

rulemaking addressed, among other things, the priority of claims and the treatment 

of similarly situated creditors. Last September, the FDIC Board adopted two rules 

regarding resolution plans that systemically important financial institutions themselves will be required to prepare—the so-called ‘‘living wills.’’ The first resolution 

plan rule, jointly issued with the Federal Reserve Board, requires bank holding companies with total consolidated assets of $50 billion or more, and certain nonbank 

financial companies that the Financial Stability Oversight Council (FSOC) designates as systemic, to develop, maintain, and periodically submit resolution plans 

to regulators. 

Complementing this joint rulemaking, the FDIC also issued another rule requiring any FDIC-insured depository institution with assets over $50 billion to develop, 

maintain, and periodically submit plans outlining how the FDIC would resolve the 

institution through the traditional resolution powers under the Federal Deposit Insurance Act. These two resolution plan rulemakings are designed to work in tandem 

and complement each other by covering the full range of business lines, legal entities, and capital-structure combinations within a large financial firm. Both of these 

resolution plan requirements will improve efficiencies, risk management, and contingency planning at the institutions themselves. Importantly, they will supplement 

the FDIC’s own resolution planning work with information that would help facilitate 

an orderly resolution in the event of failure. With the joint rule final, the FDIC and 

the Federal Reserve Board have started the process of engaging with individual 

companies on the preparation of their resolution plans. The first plans, for companies with nonbank assets over $250 billion, are due in July. 

Section 210 of the Dodd-Frank Act requires the FDIC to ‘‘coordinate, to the maximum extent possible’’ with appropriate foreign regulatory authorities in the event 

64 

of a resolution of a covered financial company with cross-border operations. The 

FDIC has been working diligently on both multilateral and bilateral bases with our 

foreign counterparts in supervision and resolution to address these crucial cross-border issues. 

The FDIC has participated in the work of the Financial Stability Board through 

its membership on the Resolution Steering Group, the Cross-border Crisis Management Group and a number of technical working groups. The FDIC also has cochaired the Basel Committee’s Cross-border Bank Resolution Group since its inception in 2007. Since the internationally active SIFIs (termed Global- or G–SIFIs) 

present complex international legal and operational issues, the FDIC is also actively 

reaching out on a bilateral basis to the foreign supervisors and resolution authorities with jurisdiction over the foreign operations of key U.S. firms. The goal is to 

be prepared to address issues regarding cross-border regulatory requirements and 

to gain an in-depth understanding of cross-border resolution regimes and the concerns that face our international counterparts in approaching the resolution of these 

large international organizations. As we evaluate the opportunities for cooperation 

in any future resolution, and the ways that such cooperation will benefit creditors 

in all countries, we are forging a more collaborative process as well as laying the 

foundation for more reliable cooperation based on mutual interests in national and 

global financial stability. 

Although U.S. SIFIs have foreign operations in dozens of countries around the 

world, those operations tend to be concentrated in a relatively small number of key 

foreign jurisdictions, particularly the United Kingdom (U.K.). While the challenges 

to cross-border resolution are formidable, they may be more amenable than is commonly thought to effective management through bilateral cooperation. 

The focus of our bilateral discussions is to: (i) identify impediments to orderly resolution that are unique to specific jurisdictions and discuss how to mitigate such impediments through rule changes or bilateral cooperation and (ii) examine possible 

resolution strategies and practical issues related to implementation of such strategies with respect to particular jurisdictions. This work entails gaining a clear understanding of how U.S. and foreign laws governing cross-border companies will interact in any crisis. Our initial work with foreign authorities has been encouraging. 

In particular, the U.S. financial regulatory agencies have made substantial progress 

with authorities in the U.K. in understanding how possible U.S. resolution structures might be treated under existing U.K. legal and policy frameworks. We have 

engaged in in-depth examinations of potential impediments to efficient resolutions 

and are, on a cooperative basis, in the process of exploring methods of resolving 

them. 

To facilitate bilateral discussions and cooperation, the FDIC is negotiating the 

terms of memoranda of understanding pertaining to resolutions with regulators in 

various countries. These memoranda of understanding will provide a formal basis 

for information sharing and cooperation relating to our resolution planning and implementation functions under the legal framework of the Dodd-Frank Act. 

Financial Stability Oversight Council (FSOC). The FSOC, chaired by the Secretary of the Treasury and comprising all of the key Federal financial regulatory 

bodies, was designed to fill the gaps in oversight between existing regulatory jurisdictions and create common accountability for identifying and constraining risks to 

the financial system as a whole. Among other requirements, the Dodd-Frank Act directs the FSOC to facilitate regulatory coordination and information sharing among 

its members regarding policy development, rulemaking, supervisory information, 

and reporting requirements. The FSOC is also responsible for determining whether 

a nonbank financial company should be supervised by the Federal Reserve Board 

and subject to prudential standards, and for designating financial market utilities 

and payment, clearing, or settlement activities that are, or are likely to become, systemically important. On April 3, 2012, the FSOC unanimously approved a final rule 

and interpretive guidance that details the process and analytical framework for 

evaluating whether a nonbank financial company should be subject to supervision 

by the Federal Reserve Board and be subject to enhanced prudential standards (including the requirement to prepare resolution plans). On May 22, 2012, the FSOC 

adopted procedures governing the conduct of hearings in connection with proposed 

determinations and other related actions under Titles I and VIII of the Act. Additionally, on May 22, the FSOC voted to propose the preliminary designation of an 

initial set of financial market utilities. After those entities are provided with an opportunity for a hearing, the FSOC will be asked to vote on the final designation of 

those entities. 

The Volcker Rule. The Dodd-Frank Act requires the Securities and Exchange 

Commission (SEC), the Commodities Futures Trading Commission and the Federal 

65 

banking agencies to adopt regulations generally prohibiting proprietary trading and 

certain acquisitions of interest in hedge funds or private equity funds. 

Last November, the FDIC, jointly with the Federal Reserve Board, the OCC, and 

the SEC, published a notice of proposed rulemaking (NPR) requesting public comment on a proposed regulation implementing the Volcker Rule requirements of the 

Dodd-Frank Act. In December, the comment period was extended to allow interested 

persons more time to analyze the issues and prepare their comments, and to facilitate coordination of the rulemaking among the responsible agencies. 

The proposed rule also requires banking entities with significant covered trading 

activities to furnish periodic reports with quantitative measurements designed to 

help differentiate permitted market-making-related activities from prohibited proprietary trading. Under the proposed rule these requirements contain important exclusions for banking organizations with trading assets and liabilities less than $1 

billion, and reduced reporting requirements for organizations with trading assets 

and liabilities of less than $5 billion. These thresholds are designed to reduce the 

burden on smaller, less complex banking entities, which generally engage in limited 

market-making and other trading activities. 

The Agencies have requested comments on whether the proposed rule represents 

a balanced and effective approach in implementing the Volcker provision or whether 

alternative approaches exist that would provide greater benefits or implement the 

statutory requirements with fewer costs. The FDIC is committed to developing a 

final rule that meets the objectives of the statute while preserving the ability of 

banking entities to perform important underwriting and market-making functions, 

including the ability to effectively carry out these functions in less-liquid markets. 

Most community banks do not engage in trading activities that would be subject to 

the proposed rule. 

Implementation of the Dodd-Frank Act: Community Banks 

In addition to the provisions relevant to systemic risk, the Dodd-Frank Act also 

contains a number of other provisions that may have a more direct effect on community institutions. For example, the Dodd-Frank Act made changes to the FDIC’s deposit insurance program, which were implemented soon after enactment, that generally work to the benefit of community institutions. The first of these was the rule 

to implement the Act’s provision to permanently increase the insurance coverage 

limit to $250,000, the level that had already been introduced on a temporary basis 

during the crisis. The FDIC has also implemented the Dodd-Frank Act requirement 

to redefine the base used for deposit insurance assessments as average consolidated 

total assets minus average tangible equity. This change in the assessment base 

shifted some of the overall assessment burden from community banks to the largest 

institutions, which rely less on domestic deposits for their funding than do smaller 

institutions—but did so without affecting the overall amount of assessment revenue 

collected. The result has been a sharing of the assessment burden that better reflects each group’s share of industry assets. When this provision was implemented 

in the second quarter of last year, aggregate premiums paid by institutions with less 

than $10 billion in assets declined by approximately 33 percent, primarily as a result of the base change. 

As of March 31, 2012, the Deposit Insurance Fund (DIF) reserve ratio stood at 

0.22 percent of estimated insured deposits, up from -0.02 percent a year earlier. The 

Dodd-Frank Act raised the minimum reserve ratio for the DIF from 1.15 percent 

to 1.35 percent, and requires that the reserve ratio reach 1.35 percent by September 

30, 2020. The FDIC is currently operating under a DIF Restoration Plan that is designed to meet this deadline. However, the Dodd-Frank Act also specifically requires 

the FDIC to provide an offset to institutions with total consolidated assets of less 

than $10 billion to relieve them of the extra cost of increasing the reserve ratio from 

1.15 percent to 1.35 percent. 

A number of community bankers have expressed specific concerns about certain 

Dodd-Frank Act requirements that they believe would particularly impact them. For 

example, a number of community bankers have expressed concerns about the provisions of Title XIV that deal with real estate appraisal activities. The Federal Reserve Board implemented these provisions by an interim rule in late 2010 that prohibits coercion or conflicts of interest that could compromise the independent judgment of appraisers and prohibits the extension of credit if coercion or conflicts of 

interest are suspected to have influenced an appraisal. The banking agencies followed by issuing joint guidance describing supervisory expectations for appraisals 

under the new rules. The guidelines clarify standards for the appropriate use of analytical methods, the criteria for selecting appraisers, and the independence of the 

appraisal process. Under the guidelines, institutions also are responsible for moniVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00069 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
66 

toring and periodically updating valuations of collateral for existing real estate loans 

and for transactions, such as modifications and workouts. 

The banking agencies have received a number of formal and informal communications from bankers citing concerns about the new appraisal guidelines. Of particular 

concern are the requirements to update valuations for existing real estate loans. 

This is deemed a best practice for evaluating and monitoring the risk of loans. However, the agencies clarified in the guidance that working with the borrower, particularly as the recovery takes hold, is encouraged. To that end, if no new funds are 

advanced in a modification, a formal appraisal is not required. 

The agencies are still in the process of writing proposed rules for higher risk 

mortgages and proposed rules for automated loan valuations and registration requirements for the appraisal management companies. The agencies are aware of the 

potential impact these rulemakings could have on the industry and have met with 

small business representatives and other industry segments in advance of writing 

the rules to hear their concerns firsthand. The agencies strongly encourage the public to comment on the proposed rules when they are issued for comment. 

Another area of concern for community bankers is the new mortgage escrow requirement. The wave of subprime and nontraditional mortgage lending that led to 

the crisis frequently included loans where escrow accounts for property taxes and 

insurance were not maintained. The failure to set aside funds in escrow has been 

cited as contributing to the financial distress of borrowers when their loans became 

delinquent. Accordingly, the Dodd-Frank Act directed the Federal Reserve Board to 

issue new proposed rules that require the establishment of escrow accounts for 

many closed-end first and second mortgage loans, expand the minimum mandatory 

period for escrow accounts, and establish new disclosure requirements in this area. 

While the new rule directly addresses one of the structural weaknesses in the 

risky loans that led to the crisis, community bankers have expressed concerns about 

applying these same requirements to what they say are lower-risk mortgage loans 

that they hold in portfolio. In many cases, bankers say they hold too few such loans 

or loans of such small size that the fixed cost of setting up an escrow account would 

be prohibitive—and they would cease originating such loans for their customers. We 

have shared the concerns we have heard from community bankers with the Consumer Financial Protection Bureau and they are expected to issue a final rule on 

this topic later this year. 

FDIC Community Banking Initiatives 

During a period with significant economic challenges and many regulatory 

changes, it is natural for community bankers to reflect on their future role in the 

financial marketplace. As noted above, many community bankers have expressed 

concerns that the Dodd-Frank Act reforms will adversely affect their ability to compete with larger banks and nonbank competitors. The FDIC takes these concerns 

seriously. As the lead Federal regulator for the majority of community banks in the 

United States and the insurer of all, it is incumbent on us to better understand the 

role of community banks in our economy and the particular challenges they face in 

the financial marketplace. 

This is why the FDIC is undertaking a series of initiatives related to the future 

of community banks. We began this effort with a conference at our Arlington, Virginia training facility in February, where we received a great deal of useful input 

on the regulatory and competitive challenges currently facing the industry. We are 

also in the process of holding a series of roundtables with groups of community 

bankers in each of the FDIC’s six regions around the country. At these roundtables, 

I am joined by the FDIC’s senior executives for supervision so that we can hear 

first-hand about the concerns of bankers and what the FDIC can do to respond to 

those concerns. The roundtables are proving to be productive and frank discussions. 

In my experience, community bankers are not shy about expressing their views, and 

we appreciate receiving their ideas and input. 

Even with all the attention community banking issues have received in recent 

years, there remains a need for more thoughtful and careful research and analysis 

about the role that community banks play in the U.S. financial system. As part of 

our initiative, the FDIC’s Division of Insurance and Research also is undertaking 

a comprehensive review of the evolution of community banking in the United States 

over the past 25 years. Our hope is that this study will identify the key challenges 

facing community banks as well as stories of successful community bank business 

models and will provide an analysis that may be useful for community banks going 

forward. 

Additionally, I have asked the Directors of the FDIC’s Division of Risk Management Supervision and Division of Depositor and Consumer Protection to review the 

examination process for both risk management and compliance supervision, as well 

67 

as to review how we promulgate and release rulemakings and guidance, to see if 

we can improve our processes and communications in ways that benefit community 

banks, while maintaining our supervisory standards. 

Amid the challenging economic conditions of the past few years, the FDIC’s examination program has continued to strive for a balanced approach. During each bank 

examination, our supervisory staff conducts a fact-based review of an institution’s 

financial risk, the quality of its assets, and conformance with bank regulations. Care 

is taken to ensure national consistency. We make sure that examiners follow prescribed procedures and FDIC policy through our national training program and commissioning process, through internal quality reviews, and with ongoing communication at every level of our supervision staff. 

In addition, we also strive to ensure that our examiners understand and follow 

the FDIC’s policies with regard to lending to creditworthy borrowers. The FDIC has 

adopted supervisory policies and issued several directives that encourage the institutions to lend to creditworthy borrowers. We recognize that safe and sound banking 

is not an end in itself but a means to an end, which is to ensure that FDIC-insured 

institutions can be consistent sources of credit for our economy across the business 

cycle. 

Trading Losses at JPMorgan Chase 

The recent losses at JPMorgan Chase revealed certain risks that reside within 

large and complex financial institutions. They also highlighted the significance of effective risk controls and governance at these institutions. As the deposit insurer and 

backup supervisor of JPMorgan Chase, the FDIC staff work through the primary 

Federal regulators to obtain information necessary to monitor the risk within the 

institution. The FDIC is currently working with JPMorgan Chase’s primary Federal 

regulators, the OCC and the Federal Reserve System, as well as the institution 

itself, to investigate both the circumstances that led to the losses and the institution’s ongoing efforts to manage the risks at the firm. Following this review, we expect to work with the primary regulators to address inadequate risk management 

practices that are identified. 

Conclusion 

Significant progress has been made in implementing the financial reforms authorized by the Dodd-Frank Act. The FDIC has completed the core rulemakings for carrying out its lead responsibilities under the Act regarding deposit insurance and 

systemic resolution. 

Successful implementation of the Act will provide a foundation for a financial system that is more stable and less susceptible to crises, and a regulatory system that 

is better able to respond to future crises. 

PREPARED STATEMENT OF RICHARD CORDRAY 

DIRECTOR, CONSUMER FINANCIAL PROTECTION BUREAU

JUNE 6, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the opportunity to testify today as part of this panel of my colleagues. 

As the Director of the Consumer Financial Protection Bureau, I am committed to 

being accountable to you for how we carry out the laws that Congress enacted, and 

we are always happy to have the chance to discuss our work with you. This is the 

18th time that the Bureau has testified before either the House or the Senate, and 

I am pleased to be here with you again today. My testimony will focus on the areas 

that you specified in the letter inviting me to testify at this hearing. 

To begin with, you asked about our Bank Supervision program. Since certain supervisory powers were transferred to us in July of 2011, and even before that time, 

we have been focused on recruiting and hiring the best team we could find to carry 

out our role in supervising financial institutions with a singular focus on consumer 

protection. We are blessed with great talent: Steve Antonakes, the former Superintendent of Banks in Massachusetts, heads up our Bank Supervision team; Peggy 

Twohig, formerly the Associate Director of the Division of Financial Practices at the 

FTC, heads up our Nonbank Supervision team. Our examiners evaluate products, 

services, policies, and practices to ensure compliance with Federal consumer financial laws, and to address any harm to consumers that may be resulting from violations of those laws. If a company is not complying with the law, we may seek corrective actions to strengthen its programs and processes, redress violations, and remediate any harm consumers may have suffered. 

68 

We have met with many supervised institutions to obtain a better understanding 

of how they operate and how they approach compliance. We have been engaged with 

our prudential and State regulator partners to ensure open lines of communication 

and information sharing. As the law contemplates, we have been coordinating the 

logistics of simultaneous examinations with our fellow agencies to reduce compliance burden for financial institutions. The Bureau has recruited and hired examiners all across the country, reporting through our four regional offices—covering 

the Northeast, Southeast, Midwest, and West. We have commenced examination 

work in all four regions. For the largest and most complex banks and credit unions 

in the country, the Bureau is implementing a year-round supervision program customized to address the consumer protection risk profile of the organization. For 

other companies that we supervise, we are conducting periodic examinations and 

other reviews as appropriate. 

To ensure that our work is transparent, we published our Examination Manual, 

along with other examination procedures covering particular products and services. 

In order to implement a consistent approach, CFPB examiners examine both banks 

and nonbanks, and use the same examination procedures for the same products and 

services. That means the mortgage servicing procedures that we published last October cover both bank and nonbank mortgage servicers, and the mortgage origination procedures we published in January guide our examiners reviewing bank and 

nonbank originators. Likewise, our short-term, small-dollar lending procedures will 

be used to examine payday loans made by nonbanks and deposit advance products 

offered by banks, because these products have many of the same characteristics. As 

such, they should be reviewed using a consistent set of procedures. Consistency, 

however, does not dictate complete uniformity in supervisory expectations. Large, 

complex entities may well have different compliance oversight and management systems than much smaller entities or those offering a more limited number of products and services. 

Our responsibility under the law, which is unique among the Federal regulators, 

is to accomplish evenhanded and reasonable oversight of both banks and nonbank 

institutions that compete in the consumer finance markets. Last July, we assumed 

authority to supervise depository institutions with assets of more than $10 billion, 

and their affiliates, for compliance with Federal consumer financial laws. In January of this year, with the appointment of a Director, we rolled out our nonbank supervision program, starting with nonbank mortgage originators, mortgage servicers, 

and payday lenders. There are tens of thousands of nonbank firms, and their products affect virtually every American. For example, according to studies and industry 

sources, nonbank lenders originated almost 2 million mortgages in 2010, nearly 20 

million consumers used payday loans, over 30 million people are being pursued by 

debt collectors, and roughly 200 million Americans rely on credit reporting agencies 

to report their credit histories accurately. 

When considering whether and how to supervise particular nonbanks, the DoddFrank Act requires the CFPB to consider several relevant factors, including the 

nonbank’s volume of business, the risks to consumers created by the provision of 

products and services, and the extent of State oversight. Through our oversight, we 

are working to level the playing field and make sure these businesses are being held 

accountable for their actions. We are now considering finalizing a regulation to 

allow us to examine the larger participants in the debt collection and credit reporting industries, and others will follow as we develop our Nonbank Supervision program. A market in which all competing firms play by the same rules will be of special benefit to community banks, which may operate in similar product markets as 

nonbank entities. 

On Monday, the CFPB and the prudential regulators released a Memorandum of 

Understanding that clarifies how the agencies will coordinate their supervisory activities, consistent with the Dodd-Frank Act. This MOU establishes arrangements 

for coordination and cooperation, to minimize unnecessary regulatory burden, avoid 

unnecessary duplication of effort, and decrease the risk of conflicting supervisory directives. 

We welcome feedback on our supervision program from each of you, and from consumer groups, industry participants, and members of the public. We have an e-mail 

address on our Web site, CFPBlSupervision@CFPB.gov, where anyone can submit 

comments on our exam procedures. 

Second, among the topics you identified to be addressed at this hearing is my statutory role on the Financial Stability Oversight Council. As you know, in the DoddFrank Act the Congress designated the Director of the CFPB to serve as one of the 

10 voting members of the FSOC. The U.S. consumer finance marketplace represents 

over $20 trillion in loans and deposits, and hence is central to the stability of domesVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00072 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
69 

tic and global capital markets. We are pleased to participate in that capacity, and 

to bring a consumer-facing focus to our work on that body. 

Because we share the responsibility of regulating financial institutions with many 

of our fellow members of the FSOC, our mutual participation is helpful to our efforts 

to coordinate with one another so as to reduce overall regulatory burden and to 

maintain a collaborative approach to the work we do together. Frequent and sustained interactions among fellow regulators are essential for each of us to fulfill our 

obligations and improve the effectiveness of our joint oversight of the financial system. The work we are doing together on the FSOC also helps lift our perspective 

out of the day-to-day work each of us is doing so as to develop a broader vantage 

point on the various factors that pose larger risks to the entire financial system 

taken in the aggregate. I have found this to be valuable as we work together to 

build a sound and vibrant financial system that protects consumers, supports responsible providers, and helps safeguard the broader economy against systemic risk. 

Third, you also indicated that my testimony should address how our statutory obligations affect our regulation of community banks. As you know, the Consumer Bureau generally does not examine any banks with less than $10 billion in assets and 

does not enforce the law against any such banks, which remain subject to their existing prudential regulator in those respects. We do have the authority to adopt regulations that can affect community banks as well as larger financial institutions, 

and in this regard we understand it is important for us to coordinate closely with 

my colleagues on this panel, who will continue to examine and enforce various regulations that we formulate. For this reason, we are creating a consultative rulemaking process with the other agencies to ensure that we develop rules that are 

consistent with the objectives and obligations of the prudential regulators and other 

agencies. We have already convened meetings to work cooperatively on issues like 

overdraft protection and mortgage servicing, and we are consulting with them as we 

devise the various mandated rules on the mortgage market that Congress has directed us to complete by early next year. 

In this respect, it is critical to keep in mind that Congress created the Consumer 

Financial Protection Bureau in response to the greatest financial crisis since the 

Great Depression. The United States learned—or relearned—a hard lesson in that 

crisis: unregulated or poorly regulated markets destabilize the economy and undermine the general welfare. Over-regulation can indeed stifle entrepreneurship, but 

under-regulation can also lead to terribly antibusiness results. The most mortal 

threat to many banks, thrifts, and credit unions in our lifetime was dramatically 

posed by the extreme credit crunch and freezing-up of the financial markets in 2008. 

In their wake, the ensuing financial meltdown and the enduring consequences of the 

deep recession continue to dog our economy, particularly the housing market, now 

4 years later and counting. 

What will be very helpful to community banks around the country is our new 

mandate to oversee and regularize the practices of nonbank financial institutions 

that often compete in the same markets. We hear much favorable comment from 

the community banks about this important task. We saw with the meltdown in the 

mortgage market how a partial and incomplete regulatory scheme was doomed to 

fail. Banks, thrifts, and credit unions were subject to explicit oversight, whereas 

many other mortgage market participants, such as lenders and brokers and originators, were held to little or no standards of accountability at all. The competitive 

pressure fostered by this regime stimulated a race to the bottom to capture market 

share. Regulatory arbitrage through charter choice placed further pressures on the 

system that impeded its effectiveness. The result was a kind of Gresham’s Law for 

financial regulation: the bad practices drove out the good. 

I have heard stories from many community bankers who refused to make ill-considered loans to prospective customers, only to see those people go down the street 

and get that very loan from someone else who did not uphold the same standards. 

That other lender often required no documentation of income or assets, engaged in 

no form of recognizable underwriting, but still managed to sell those bad loans into 

the secondary market. There they were bundled into securities that eventually 

crashed the entire financial system and with it the broader economy. 

Consistent application of consumer financial laws will promote safety and soundness of supervised entities. Over the next year, the Bureau is required to adopt new 

mortgage rules that protect consumers. These include a new statutory requirement 

that lenders make a good faith and reasonable determination that borrowers have 

the ability to repay a residential mortgage loan. Similarly, ensuring that consumers 

receive required disclosures to help them understand financial products and make 

informed decisions will help prevent some of the problems we saw in the run-up to 

the crisis. Other rules are intended to return to sound underwriting standards and 

70 

sound customer service—the kind of practices that are traditional at our good community banks. 

As we develop these initiatives, we know that one size does not fit all. Where it 

makes sense to treat smaller institutions differently from larger institutions, we 

have pledged to consider doing so. We also want our regulations to be more accessible, and to find ways to work with institutions to implement regulations successfully and in ways that will help minimize the burdens of properly complying with 

the law. To ensure that our rulemaking process is transparent and that we have 

the benefit of informed comments from a wide variety of stakeholders and the public, the Bureau’s regulatory agenda and proposed rules are published on our Web 

site at www.ConsumerFinance.gov/regulation. We are implementing small business 

review panels on several of our mortgage rules, and find the input from small providers to be helpful in calibrating our proposals. 

As we think about systemic risks to the financial system, I would note that the 

financial world that today’s consumers are navigating has become more complex in 

recent years. The failure to navigate that world successfully can lead to poor choices 

being made, especially about life-changing decisions that people may confront only 

once or twice in their lifetimes. When decisions like how to finance an education 

or a home purchase do not work out well, that can spell disaster for entire families 

and alter the trajectory of people’s opportunities. When this is happening on a large 

scale, the resulting dislocation can become a trigger for instability, given the trillions of dollars that are represented by loans and deposits in consumer finance markets. 

Clear and accurate disclosures benefit the public and the markets by driving competition based on informed customer choice. We have launched several ‘‘Know Before You Owe’’ projects, all of which are pushing to make costs and risks clear up 

front for consumers. Our signature ‘‘Know Before You Owe’’ mortgage project is focused on simplifying and streamlining the conflicting mortgage forms that reflected 

no functional need or reality other than the fact that multiple Government agencies 

were involved. These forms have been confusing homebuyers and burdening industry for many years—an all-too-common occurrence in the realm of consumer finance—and we are taking head-on the responsibility to effect meaningful change in 

this area. 

We are eager to explore alternatives to compulsory regulations where we can 

make alternatives work. We are collaborating with the industry on a new approach 

to credit card disclosures. We released a prototype credit card contract that is significantly shorter and clearer than current credit card agreements. We tried to keep 

the prototype simple and written in plain language to make it accessible to as many 

consumers as possible. This prototype is now being piloted at the Pentagon Federal 

Credit Union, and we are spurring similar efforts by other leading financial institutions. More and more of them appear to be recognizing the value for their customers 

in consumer-friendly information that is more accessible. We wholeheartedly agree. 

By working closely with the Department of Education, we have also created a ‘‘Financial Aid Shopping Sheet.’’ The Shopping Sheet presents young people and their 

families with a uniform, easy-to-understand explanation of the total cost of post-secondary education and the available options for financing it. We followed that by 

launching the ‘‘Financial Aid Comparison Shopper’’. The Comparison Shopper builds 

on the Shopping Sheet by helping students to compare—in an online, side-by-side 

format—information about the cost of different schools and how their decisions will 

affect the level of debt they can expect to incur. 

We see financial education and disclosure as a way to help close the gap between 

consumers’ financial capability and where they need to be to navigate consumer finance markets successfully. We can close that gap in two distinct ways: by striving 

to elevate people’s capacity to handle personal finance matters, and by reducing unnecessary complexity in the information provided in that marketplace. And we are 

actively pursuing both approaches. The work we do in our specialty offices prescribed by Congress, such as our Office of Servicemember Affairs, Office of Older 

Americans, and Student Loan Ombudsman, also is crucial to understanding and 

meeting the particular needs of consumers who deserve protection across the country and—as pertains to servicemembers—around the globe. 

When I became Director of the Consumer Bureau at the beginning of the year, 

I barely knew my colleagues on this panel. Now, 5 months later, from our work together in various roles on various bodies such as FSOC, I have come to know and 

respect them all. Our team is glad to be working with their teams—and with the 

Members of this Committee—to strengthen and support a sound and vibrant financial system that serves both the interests of consumers and the long-term foundations of the American economy. I am happy to answer any questions you may have. 

71 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DANIEL K. TARULLO 

Q.1. During the June 6th hearing, Mr. Gruenberg agreed that ‘‘historically, including to the present day, the biggest risk of banking 

is the lending activity that is inherent to the banking process.’’ 

In testimony before the Subcommittee on Financial Institutions 

and Consumer Protection on May 9th, the former Chief Economist 

of the Senate Committee on Banking, Housing, and Urban Affairs 

stated: 

In a remarkably understated 2007 annual inspection report on Citigroup, the Federal Reserve Bank of New York 

observed that ‘‘[m]anagement did not properly identify and 

assess its subprime risk in the CDO trading books, leading 

to significant losses. Serious deficiencies in risk management and controls were identified in the management of 

Super Senior CDO positions and other subprime-related 

traded credit products.’’ By the end of 2008 Citigroup had 

written off $38.8 billion related to these positions and to 

ABS and CDO securities it held in anticipation of constructing additional CDOs. [Testimony of Marc Jarsulic, 

Chief Economist, Better Markets, Inc., before the Senate 

Committee on Banking Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection, ‘‘Is Simpler Better? Limiting Federal Support for Financial Institutions’’, May 9, 2012.] 

According to accounts of the hearings held by the Financial Crisis Inquiry Commission, two witnesses agreed that CDOs were responsible for Citigroup’s financial difficulties: 

[Former Citigroup chief executive Charles] Prince ultimately blamed much of Citi’s problems on CDOs, which he 

said were complex and entirely misunderstood. He said the 

company, its risk officers, regulators and credit rating 

agencies believed CDOs were low-risk activities. As it 

turned out, they resulted in $30 billion worth of losses . . . 

[Former Comptroller of the Currency John] Dugan, too, 

put much of the blame on CDOs, partly as a way of defending his own agency. He said the bank, which the Office of the Comptroller of the Currency oversaw, did not 

damage the holding company, while Citi’s securities 

broker-dealers, which managed the CDOs and were overseen by the Securities and Exchange Commission, were at 

fault. 

‘‘The overwhelming majority of Citi’s mortgage problems 

did not arise from mortgages originated by Citibank,’’ 

Dugan said. ‘‘Instead, the huge mortgage losses arose primarily from the collateralized debt obligations structured 

by Citigroup’s securities broker-dealer with mortgages purchased from third parties.’’—Cheyenne Hopkins, ‘‘No One 

Was Sleeping as Citi Slipped’’, Am. Banker, Apr. 8, 2010. 

Do you agree with the New York Fed, the former Comptroller of 

the Currency, the former Chief Economist of the Senate Banking 

72 

Committee, and the former CEO of Citigroup that CDOs were a 

substantial cause of Citigroup’s financial difficulties in 2008, resulting in significant support from the Federal Government, including 

capital injections from the Treasury Department, debt guarantees 

from the FDIC, and loans from the Federal Reserve? 

A.1. Although information regarding examinations of banks and 

bank holding companies is protected by law, testimony before the 

Senate Banking Committee, as you note, disclosed that management of Citigroup did not properly identify, monitor, and assess the 

risk of certain CDO positions in its portfolio. The SEC reported 

that by September 2007 Citigroup amassed a position in assetbacked security CDOs in excess of $50 billion. Between the third 

quarter of 2007 and the first quarter of 2009, Citigroup reported 

losses on ‘‘subprime related direct exposures’’ of approximately $35 

billion, the majority of which was attributed to this CDO position. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM DANIEL K. TARULLO 

Q.1. At what point in the process of JPMorgan making this trade 

and the public reporting of the losses did the Fed examiners become aware of this trade? 

A.1. See response to Question 2. 

Q.2. Precisely when were Fed regulators aware of this trade? 

A.2. JPMorgan Chase publicly announced in May 2012 that it had 

suffered significant trading losses on credit derivative positions entered into by its Chief Investment Office (CIO). The CIO is an organizational unit of JPMorgan Chase, N.A., that carries out a variety 

of asset-liability management and other activities. The activities of 

the CIO are managed and controlled out of JPMorgan Chase’s New 

York headquarters, with a substantial portion of the CIO’s activities conducted through the bank’s London branch and other overseas branches or offices. 

The Federal Reserve, in its capacity as JPMorgan Chase’s holding company supervisor, first discussed the losses on the trades in 

the CIO with JPMorgan Chase’s senior management in the first 

half of April 2012. 

Q.3. How many trades does JPMorgan have of this magnitude and 

what are the possibilities, given Europe and a softening domestic 

economy, that a number of these bets go bad at the same time? 

A.3. JPMorgan Chase has admitted that it did not have appropriate risk management processes in place to monitor the risk of 

its trading activities. As indicated in the response to Question 4, 

the Federal Reserve is working with JPMorgan Chase and the OCC 

to address these risk management failures. Confidential information regarding specific positions held by a bank holding company 

and examinations of bank holding companies, such as JPMorgan 

Chase, are protected by law. 

Q.4. Does the Fed examine each of these trades as they occur? If 

not, how does the OCC monitor the risk that the bank it supervises 

is undertaking? 

73 

A.4. The trading losses suffered by the CIO arose out of a complex 

synthetic credit portfolio that the CIO had developed over time, 

which was primarily composed of both long and short credit default 

swap positions on a number of different credit assets and indices. 

Trading in this synthetic credit portfolio was executed through the 

London branch of JPMorgan Chase’s subsidiary national bank. 

JPMorgan Chase has stated that, because of a combination of riskmanagement failures and execution errors, and the complexity and 

illiquidity of the positions involved, the CIO’s synthetic credit portfolio gave rise to significant trading risks that resulted in the 

losses. 

The Federal Reserve—in its capacity as consolidated supervisor 

of the bank holding company—is working with the OCC to review 

the firm’s response and remedial actions. In particular, the Federal 

Reserve has been assisting in the oversight of JPMorgan’s efforts 

to manage and de-risk the portfolio in question. As this process 

proceeds, the Federal Reserve anticipates that it would also work 

with the OCC and FDIC to identify the changes in risk measurement, management and governance that will be necessary to improve risk-control practices surrounding the firm’s trading activities and to address trading strategies that led to these losses. 

In addition, the Federal Reserve has been looking at other parts 

of the holding company to determine if governance, risk management and control weaknesses—similar to those exposed by this incident—are present elsewhere. While we have, to date, found no 

evidence that they are, this review is not yet complete. 

Q.5. If regulators are focused on regulating risk management practices, and not focused on individual trades regardless of size, would 

the regulators and the banking system would be safer and better 

off if the larger banks were required to hold more capital than regional or community banks? 

A.5. The trading losses at JPMorgan Chase have served to remind 

us of the fundamental importance of capital regulation in our prudential oversight of the largest banking firms to ensure that capital 

is available to absorb all kinds of losses. For precisely this reason, 

the Federal Reserve has been a strong advocate for higher and better quality capital at the largest and most complex banking organizations. Crucially, the Federal Reserve through the Supervisory 

Capital Assessment Program, Comprehensive Capital Analysis and 

Review (CCAR), and its supervisory efforts has encouraged the 

large banking firms to increase their tier 1 common ratio, which 

compares high-quality capital to risk-weighted assets, by more than 

double during the past 3 years to a weighted average of 10.9 percent from 5.4 percent in the first quarter of 2009. The Federal Reserve has also worked both nationally and internationally to improve and increase capital positions at large banking firms. In the 

United States, the Federal Reserve has worked with the other Federal banking regulators to take important steps to strengthen bank 

capital regulation, especially for the largest, most complex banks. 

Over the past several months, the Federal Reserve, OCC, and 

FDIC have acted jointly to finalize U.S. implementation of the socalled Basel 2.5 reforms that will materially strengthen the market 

risk capital requirements of Basel II. We have also requested pubVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00077 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
74 

lic comment on changes to the U.S. regulatory capital rules to implement the Basel III reforms and the capital requirements in the 

Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act). The proposed changes would improve the quality 

and quantity of regulatory capital held at our Nation’s banking organizations. Importantly, many of these regulatory reforms specifically address and strengthen the capital requirements applicable to 

trading activities and positions, including complex derivatives. 

The Federal Reserve has also advocated internationally for capital surcharges on the world’s largest, most interconnected banking 

organizations based on their global systemic importance. Last year, 

an international agreement was reached on a framework for such 

surcharges, to be implemented over a 2016–19 transition period. 

This initiative is consistent with the Federal Reserve’s obligation 

under section 165 of the Dodd-Frank Act, 12 U.S.C. 5365, to impose 

more stringent capital standards on systemically important financial institutions, including the requirement that these additional 

standards be graduated based on the systemic footprint of the institution. In December 2011, the Board issued a proposal to implement section 165, including enhanced capital requirements for 

large bank holding companies, such as JPMorgan Chase, that 

would require these bank holding companies to meet higher capital 

requirements than apply to smaller banking organizations. See 77 

Federal Register 592 (January 5, 2012). 

Q.6. Dodd Frank very clearly limits the potential that commercial 

companies could somehow become regulated like banks. One of the 

ways it does this is achieved through an amendment that I and 

Senator Pryor offered, which clearly limits the definition of ‘‘financial activities’’ to those things listed under Section 4(k) of the Bank 

Holding Company Act. However the Fed has proposed that it can 

ignore the definition contained in 4(k) and create a separate list of 

‘‘financial activities’’ for purposes of Dodd Frank. That is clearly 

contrary to both the plain language and the intent of our amendment. 

A.6. See response to Question 9. 

Q.7. As you know section 113 of Dodd-Frank gives the FSOC the 

authority to designate a company that is intentionally structured 

to avoid the 85 percent test, and 167 of Dodd-Frank allows the Fed 

to regulate only a separately set up financial company of an otherwise validly designated NBFC. Neither provision gives the Fed the 

ability to create its own list. 

A.7. See response to Question 9. 

Q.8. Can you tell me why the Federal Reserve thinks it can ignore 

the law in this area, and put commercial companies that were not 

involved in the financial crisis at risk? 

A.8. See response to Question 9. 

Q.9. What is the intent of the Federal Reserve’s rulemaking in this 

area if the intent isn’t to circumvent the Vitter-Pryor amendment 

to Dodd-Frank? 

A.9. Questions 6 through 9 address the provisions of the DoddFrank Act that define the type of firm that is eligible to be designated by the Financial Stability Oversight Council for enhanced 

75 

1Section 102(a)(6) of the Dodd-Frank Act; 12 U.S.C. §5311(a)(6). 2 Id. 

supervision by the Federal Reserve where the Council finds that 

the firm poses a threat to the financial stability of the United 

States. These provisions apply only to firms that derive 85 percent 

or more of their annual gross revenues from financial activities or 

where 85 percent or more of the firm’s consolidated assets are related to financial activities. 1 As you note, for purposes of this provision, financial activities are defined by reference to section 4(k) 

of the Bank Holding Company Act (BHC Act). 2

In April 2012, the Board invited public comment on proposed 

rules implementing these provisions (April 2012 proposal). The proposal would adopt the list of financial activities created under section 4(k) of the BHC Act. The April 2012 proposal also noted that 

the list of financial activities published by the Federal Reserve in 

its Regulation Y incorporates various conditions that the Board has 

imposed on bank holding companies to ensure that bank holding 

companies that engage in these financial activities do so in a safe 

and sound manner. Many of these conditions were imposed so that 

a bank holding company’s financial activities did not threaten the 

safety and soundness of its subsidiary insured depository institution. Other conditions were imposed by the Board because they 

were required by other provisions of law, such as the GlassSteagall Act. In each of these cases, the condition was distinct from 

the definition of the activity itself or the nature of the activity as 

financial. The April 2012 proposal sought public comment on 

whether any of the conditions were essential to the definition of an 

activity as financial. 

We appreciate your views, which we will take into consideration 

in formulating our final rule. We will place your letter in the public 

comment file for this proposed rule. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM THOMAS J. CURRY 

Q.1. Mr. Curry, in response to my question during the hearing 

about the risk management of JPMorgan Chase & Co. (JPMorgan), 

you stated that the Office of the Comptroller of the Currency (OCC) 

is reviewing ‘‘what exactly transpired with the trading operation 

within the CIO’s office, and . . . looking to make sure that there 

were appropriate limits and controls on those activities in that area 

and how they compared to other areas within the organization.’’ 

Two weeks later, you stated that ‘‘we do believe, as a preliminary 

matter, that there are apparent serious risk management weaknesses or failures at the bank. We’re attempting . . . to continue 

to examine the root causes for those failures and to determine 

whether or not there are other weaknesses in the bank besides the 

CIO.’’ 

When do you expect to complete your review? Do you have any 

further preliminary conclusions on your review of the bank’s risk 

management? What gaps have you identified as supervisors? 

Please provide additional detail about what you meant by ‘‘serious 

risk management weaknesses or failures at the bank.’’ 

76 

A.1. Our examination process is well advanced and we expect to 

reach conclusions and communicate our findings to bank management before the end of the third quarter. Our work will also consider whether any additional remediation is warranted. 

At this time our preliminary conclusions regarding the weaknesses or failures that have been identified are consistent with the 

findings and principal conclusions of the bank’s internal task force. 

In mid-July, 2012 these determinations were publicly communicated: 

• The core issue was that CIO was not subjected to the same 

level of scrutiny as client facing businesses, causing a lack of 

effective challenge by senior management and the board. 

• CIO judgment, execution, and escalation in 1Q12 were poor. 

• The level of scrutiny did not evolve commensurate with the increasing complexity of CIO activities. 

• CIO risk management was ineffective in dealing with the synthetic credit portfolio. 

• Risk limits for CIO were not sufficiently granular. 

• Approval and implementation of CIO synthetic credit VaR 

model were inadequate. 

The company is implementing corrective actions. An entirely new 

CIO senior management group is in place and is undertaking an 

end-to-end review of all CIO processes and practices. Firm-wide 

risk management and processes are also being evaluated and new 

committees and processes are being put in place. 

Q.2. How many staff members are ordinarily involved in supervising JPMorgan, especially with regard to the company’s risk 

management, and how many additional staff have you dedicated to 

this review? 

A.2. The OCC’s supervisory team includes approximately 65 full 

time on-site examiners who are responsible for reviewing nearly all 

facets of the bank’s activities and operations, including commercial 

and retail credit, mortgage banking, trading and other capital markets activities, asset liability management, bank technology and 

other aspects of operational risk, audit and internal controls, and 

compliance with the Bank Secrecy Act, antimoney laundering laws, 

and the Community Reinvestment Act. These on-site examiners are 

supported by additional subject matter experts from across the 

OCC. All these examiners are essentially involved in supervising 

the risk management practices of JPMorgan as risk management 

systems are in place throughout the bank’s operations to identify, 

measure, monitor, and control risk. 

We have one dedicated examiner who directly oversees the CIO 

with support of a team of capital markets specialists representing 

8 FTEs to review specific capital markets areas depending on the 

topic. We have added staff on assignment from our London team, 

our Risk Analysis Division (quantitative experts), and received assistance from our Office of Chief Accountant. 

Q.3. In testimony, you stated that ‘‘in hindsight, if the reporting 

were more robust or granular, we believe we may have had an inkling of the size and potential complexity and risk of the position.’’ 

77 

You also stated before this Committee, that the ‘‘concentrated nature of the trading and the illiquidity of [the trading] are red flags 

that are clearly apparent now.’’ 

What requirements or guidelines does the OCC have for granularity of reporting, and what does the OCC plan to require in the 

future as a result of these events? 

A.3. We expect risk reports to accurately present the nature and 

level(s) of risk taken and compliance with approved limits. 

Q.4. What role do concentrations and liquidity of positions play in 

your assessment of trading risks, and how will the OCC ensure 

that it can capture such red flags in its supervision? 

A.4. We consider both concentrations and position liquidity when 

we assess trading activities. We expect that risk limits and controls 

fully address the nature of risks being undertaken. In instances 

where there is limited market liquidity, or excessive concentrations, we expect limits to address the risk and that appropriate 

valuation adjustments are made. 

Q.5. Please describe how the OCC works with other regulators that 

may be collecting information that would be helpful in identifying 

developing risks or problems. Does the OCC work with the Office 

of Financial Research, for example, in a way to maximize data collection and analysis, across financial agencies in a way that will 

provide a stronger early warning system? 

A.5. OCC is an active member of the Office of Financial Research 

(OFR) data advisory group. This group is undertaking several initiatives involving data collection involving the financial agencies. 

The most recent initiatives of this group are the data inventory, 

and the legal entity identifier projects. For the data inventory 

project, OFR has completed an inventory of all the financial agencies purchased data and they are working on building a portal to 

share this inventory with all participating agencies. OCC is also a 

member of the Financial Stability Oversight Council (FSOC) data 

subcommittee. The data subcommittee is working to develop a 

strategy for managing the set of data initially needed by the OFR 

to monitor and study the financial stability of the Nation’s economy. 

Q.6. You indicated that because you may not have been given adequate or accurate information by bank management, your supervisory abilities were limited, and that ‘‘quality supervision is dependent on the quality of information available to examiners.’’ 

What is the role of institution-generated information in your 

agency’s assessment of an institution’s risk management? Please 

describe the process and importance of how your agency independently verifies that any information a company provides is accurate. 

A.6. The role of institution-generated information is critical in our 

assessment of the bank’s risk profile and risk management processes. We assess management’s process to develop and maintain 

management information systems (MIS) that will ensure information is timely, accurate, and pertinent. This assessment not only includes the processes to develop and test new MIS, but also the reliability of this information through the bank’s quality assurance 

process at the line of business level and the independent reviews 

78 

performed by the bank’s risk management and audit functions. We 

check to confirm that the scope and frequency of these independent 

reviews include verification procedures for the quality of MIS. In 

addition, the examiners through ongoing supervision and target examinations perform transactional testing that confirms the accuracy of critical MIS relied upon by bank management and the regulators. 

Q.7. You stated before this Committee that ‘‘it does not appear that 

the [OCC] met the heightened expectations’’ of ‘‘strong risk management and audit.’’ Please explain what these heightened expectations are, and what steps you are taking to ensure the OCC meets 

them. 

A.7. My intent was that the bank did not meet the OCC’s heightened expectations for strong risk management and audit functions. 

The OCC sets higher expectations for our large banks as part of 

our lessons learned from the financial crisis. I described the OCC’s 

heightened expectations in my testimony before the U.S. Senate’s 

Committee on Banking, Housing, and Urban Affairs on June 6, 

2012, including comments on strong risk management and audit. 

We have communicated the importance of meeting these expectations to our large banks and their boards of directors. We are monitoring, evaluating, and discussing with bank management the 

bank’s progress in working towards our heightened expectations. 

We will use our supervisory tools including informal or formal enforcement actions to ensure each large bank achieves a strong risk 

management and audit function. 

Q.8. At the Committee’s hearing where Jamie Dimon, Chairman of 

the Board, President and Chief Executive Officer of JPMorgan testified, Mr. Dimon indicated that while the company has a compensation claw back policy in place, that authority has not been exercised. For the largest national banks the OCC regulates, are you 

aware of any bank exercising a claw back of compensation when 

major mistakes are made? Is it important for Boards of Directors 

of national banks to utilize their claw back authority to deter other 

employees from making the same mistakes, and correct some of the 

misaligned pay incentives we saw leading up to the recent financial 

crisis? 

A.8. We are not aware of the use of claw backs to date in large national banks. As conveyed in the Interagency Guidance on Sound 

Incentive Compensation Policies (OCC Bulletin 2010-24), the OCC 

believes boards of directors should use claw back authority under 

appropriate circumstances. JPMC notified us and subsequently has 

announced that it plans to claw back compensation from the individuals directly responsible for the CIO losses. The bank’s investigation into the matters is ongoing and additional claw backs may 

be coming. The OCC will review these decisions to ensure they are 

appropriate. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM THOMAS J. CURRY 

Q.1. In the wake of the JPMorgan loss there has been a lot of discussion about hedging activities. Many financial institutions deVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00082 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
79 

velop hedging strategies with interest rate and credit derivatives to 

hedge volatility. 

What is the oversight process for banks who hedge risk and how 

are these hedges examined? 

How do you determine whether a particular activity is or is not 

ready ‘‘hedging’’? 

A.1. As banking is a risk-taking business, we fully expect that 

banks will take actions to reduce or eliminate unwanted risk exposures. Hedging actions can take place on a transaction-by-transaction basis, or on a portfolio basis. Transaction hedging is easier 

to define and understand as one can see the risk additive transactions being offset by risk reduction transactions. 

The concept is the same for portfolio hedging, but the measurement of the correlation between the portfolio of risk and the hedge 

is more difficult to document, as the hedging instrument is not always the specific offset to the underlying risk. Similar to transaction hedging, we look to understand the nature of the portfolio 

of risk, how its value changes with price or rate changes. We then 

look to see how the hedge performs in similar situations. We expect 

bank reports to document and support a strong negative correlation 

between the risk position and the hedge. 

A hedge position must be offsetting some existing risk exposure. 

Bank risk reports need to identify the underlying position and document its sensitivity to price or rate movements. 

Q.2. Given the complexities identified during the hearing with determining whether or not a trade is a hedge or a proprietary trade, 

it appears the real issue is whether a trade threatens the safety 

and soundness of the bank. 

How do you determine whether the trade presents risks to the 

safety and soundness of a bank? 

If a trade does present such risks, what authority do you have 

to stop or prevent the trade from occurring? 

A.2. A trade (or trading position consisting of multiple trades) 

would present risks to the safety and soundness of a bank if the 

loss exposure materially impacted the earnings and capital of the 

bank. We evaluate risk measures, position reports, and limits (including VaR and others established to guard against illiquid or concentrated positions) to ensure that the risk appetite is reasonable 

and would not pose a material threat to earnings or capital. Controls should also be in place and be tested regularly to ensure that 

risk-takers operate within their limits. 

Through the examination process, the OCC will evaluate risk 

mitigation activities. In the event that we determine inappropriate 

risk, we will call this to management’s attention and require actions to remediate our concerns. 

If bank management is not sufficiently responsive, the OCC has 

a wide-range of supervisory tools that it can use to address an unsafe and unsound position that threatens the bank including a temporary Cease and Desist Order. A temporary Cease and Desist 

Order is an interim order issued by the OCC pursuant to its authority under 12 U.S.C. 1818(c) and is used to impose measures 

that are needed immediately pending resolution of a final Cease 

and Desist Order. Such orders are typically used only when immeVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
80 

diately necessary to protect the bank against ongoing or expected 

harm. A Temporary Cease and Desist Order may be challenged in 

U.S. district court within 10 days of issuance, but is effective upon 

issuance and remains effective unless overturned by the court or 

until a final order is in place. 

Q.3. The FDIC has testified today that small bankers have told the 

FDIC that compliance with the escrow account requirement in 

Dodd-Frank could be so costly as to be prohibitive, and that they 

would cease originating mortgage loans for their customers. 

Do you agree with the FDIC? 

What specific recommendations has the OCC given the Bureau 

as it develops the final rule implementing the Dodd-Frank escrow 

requirements? 

A.3. While we have not received direct communication from the 

community banks that we supervise about the potential changes to 

the escrow requirements, we have received anecdotal reports that 

indicate some community bankers have concerns about these proposed changes. We are also aware of the comment letters that the 

Independent Bankers Association of Texas submitted to the Federal Reserve Board and more recently, to the Consumer Financial 

Protection Bureau (CFPB) on this issue. 

Community bankers, however, have expressed concerns to us 

about the overall cumulative impact that the Dodd-Frank Act may 

have on their operations. In the area of mortgage lending, for example, the Dodd-Frank Act also directs the CFPB to issue new 

standards for mortgage loan originators; minimum standards on 

mortgages themselves; limits on charges for mortgage prepayments; new disclosure requirements in connection with mortgage 

origination and in monthly statements; a new regime of standards 

and oversight for appraisers; and a significant expansion of HMDA 

requirements for mortgage lenders to report and publicly disclose 

detailed information about mortgage loans they originate. We support strong consumer protections for residential mortgages, but it 

is also important to recognize that the fixed costs associated with 

new regulatory requirements have a proportionately larger impact 

on community banks due to their smaller revenue base. As the 

OCC has previously testified, a particular concern is whether these 

and other forthcoming regulations combine to create a tipping point 

causing banks to exit lines of business that provide important diversification of their business, and increase their concentration in 

other activities that raise their overall risk profile. 

For these reasons, we believe it is important that the OCC and 

other regulatory agencies seek to implement the Dodd-Frank Act in 

a manner that accomplishes the legislative intent without unduly 

harming the ability of community banks to fulfill their role of supporting local economies and providing the services their customers 

rely on. Over the past year, OCC has engaged in constructive dialogue with the CFPB on a range of supervisory and regulatory matters of mutual concern. As the CFPB rulemaking process moves 

forward, OCC will continue to participate in the consultative process to ensure that alternatives that lessen the burdens on community banks are considered. 

81 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM THOMAS J. CURRY 

Q.1. Do you agree with the comments that former Comptroller of 

the Currency John Walsh made in London at the Center for the 

Study of Financial Innovation in 2011 to the effect that regulators 

should not require more capital at our largest banks? 

A.1. As I have stated previously to the Senate Banking Committee, 

I am a strong proponent of increasing both the quantity and quality of the capital reserves held by our financial institutions. Towards that end, I support and continue to move forward with the 

revisions to capital standards developed by the Basel Committee. 

The OCC and the other Federal banking agencies recently approved a set of proposed rules and a final rule that move the 

United States forward in adopting the Basel capital standards 

often referred to as Basel III. 

More specifically, we continue to support the higher capital 

standards developed by the Basel Committee for systemically important banks, and we are working with the Federal Reserve Board 

as it develops enhanced prudential standards (including capital) for 

bank holding companies with over $50 billion in assets as part of 

the implementation of section 165 of the Dodd-Frank Act. 

Q.2. Are there any tools that you need to correct the problems with 

large trading losses at systemically significant institutions that 

Congress has not already given you in the Wall Street reform law 

or that is in other existing authority? 

A.2. No. The OCC has appropriate authority to review and assess 

trading operations conducted within the institutions we supervise, 

and, if warranted, take appropriate enforcement actions based on 

those assessments. Our authority includes the ability to access relevant books and records of a bank’s trading activities and its associated policies, procedures, and controls to manage those risks. We 

likewise have an array of tools that we can use to compel corrective 

action, ranging from Matters Requiring Attention to formal cease 

and desist orders. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM THOMAS J. CURRY 

Q.1. During the June 6th hearing, Mr. Gruenberg agreed that ‘‘historically, including to the present day, the biggest risk of banking 

is the lending activity that is inherent to the banking process.’’ 

In testimony before the Subcommittee on Financial Institutions 

and Consumer Protection on May 9th, the former Chief Economist 

of the Senate Committee on Banking, Housing, and Urban Affairs 

stated: 

In a remarkably understated 2007 annual inspection report on Citigroup, the Federal Reserve Bank of New York 

observed that ‘‘[m]anagement did not properly identify and 

assess its subprime risk in the CDO trading books, leading 

to significant losses. Serious deficiencies in risk management and controls were identified in the management of 

Super Senior CDO positions and other subprime-related 

traded credit products.’’ By the end of 2008 Citigroup had 

82 

written off $38.8 billion related to these positions and to 

ABS and CDO securities it held in anticipation of constructing additional CDOs. [Testimony of Marc Jarsulic, 

Chief Economist, Better Markets, Inc., before the Senate 

Committee on Banking Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection, ‘‘Is Simpler Better? Limiting Federal Support for Financial Institutions’’, May 9, 2012.] 

According to accounts of the hearings held by the Financial Crisis Inquiry Commission, two witnesses agreed that CDOs were responsible for Citigroup’s financial difficulties: 

[Former Citigroup chief executive Charles] Prince ultimately blamed much of Citi’s problems on CDOs, which he 

said were complex and entirely misunderstood. He said the 

company, its risk officers, regulators and credit rating 

agencies believed CDOs were low-risk activities. As it 

turned out, they resulted in $30 billion worth of losses . . . 

[Former Comptroller of the Currency John] Dugan, too, 

put much of the blame on CDOs, partly as a way of defending his own agency. He said the bank, which the Office of the Comptroller of the Currency oversaw, did not 

damage the holding company, while Citi’s securities 

broker-dealers, which managed the CDOs and were overseen by the Securities and Exchange Commission, were at 

fault. 

‘‘The overwhelming majority of Citi’s mortgage problems 

did not arise from mortgages originated by Citibank,’’ 

Dugan said. ‘‘Instead, the huge mortgage losses arose primarily from the collateralized debt obligations structured 

by Citigroup’s securities broker-dealer with mortgages purchased from third parties.’’—Cheyenne Hopkins, ‘‘No One 

Was Sleeping as Citi Slipped’’, Am. Banker, Apr. 8, 2010. 

Do you agree with the New York Fed, the former Comptroller of 

the Currency, the former Chief Economist of the Senate Banking 

Committee, and the former CEO of Citigroup that CDOs were a 

substantial cause of Citigroup’s financial difficulties in 2008, resulting in significant support from the Federal Government, including 

capital injections from the Treasury Department, debt guarantees 

from the FDIC, and loans from the Federal Reserve? 

A.1. Yes. Excessive risk-taking in subprime collateralized debt obligations (CDOs) was a substantial cause of Citigroup’s financial difficulties in 2008. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM THOMAS J. CURRY 

Q.1. At what point in the process of JPMorgan making this trade 

and the public reporting of the losses did the OCC examiners become aware of this trade? 

A.1. The OCC knew the bank was planning to modify its position; 

however, we were not fully aware of the manner in which management chose to do that, or the rapid build-up in the size or comVerDate Nov 24 2008 13:07 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00086 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\06-06 IMPLEMENTING WALL STREET REFORM\HEARING\60612.TXT
83 

plexity of the bank’s CDS positions in the first quarter of 2012. 

Bank reports did not initially fully identify and convey measurements of the change in risk, and bank executive management did 

not understand the full impact of the new exposures. Unexpected 

losses were first identified in late March. The CEO of the CIO explained that these were an anomaly in market prices and that the 

market would ‘‘mean-revert.’’ Profit and loss volatility increased in 

early April leading up to the ‘‘London Whale’’ article on April 6, 

2012. We spoke with bank management at various times in April 

and obtained more detailed information on the position as press reports appeared about the bank’s positions in the market. At the 

time, management indicated the situation was managed and under 

control. We advised bank management to keep us informed and notify us of material changes, and we began discussing additional follow up actions. From that time forward, the losses became larger 

and the explanation of market anomaly was less viable. On May 

4, management contacted the OCC EIC to notify him of the 

changed assessment and the magnitude of losses realized during 

the second half of April. 

Q.2. Does the OCC examine each of these trades as they occur? If 

not, how does the OCC monitor the risk that the banks it supervises is undertaking? 

A.2. The OCC does not examine individual trades (or loans) as they 

occur. Our role is not to approve or manage the bank’s risk positions. Rather, we assess the bank’s risk management and controls 

over its activities. 

Bank management is responsible for managing risks. The OCC 

focuses on whether a bank has a sound risk management system. 

A sound program will identify risk, measure risk, monitor risk, and 

control risk. Through a combination of discussions with management supported by review of board and management reports, examination activities are targeted based on assessment of risk. OCC examiners evaluate policies, procedures, activities and performance. 

Under this approach, examiners focus on a bank’s risk appetite and 

the limits and controls that are designed and implemented to identify and control the risks they assume. 

The OCC recognizes that banking is a business of taking risks 

in order to earn a profit. However, when risk is not properly managed, the OCC directs bank management to take corrective action. 

In all cases, the OCC’s primary concern is that the bank operates 

in a safe and sound manner and maintains capital, reserves, and 

liquidity commensurate with its risk. 

Q.3. How many trades does JPMorgan have of this magnitude and 

what are the possibilities, given Europe and a softening domestic 

economy that a number of these bets go bad at the same time? 

A.3. Trading in these instruments historically occurs primarily in 

the Investment Bank, where the controls are appropriate for the 

risk and activity. We do not believe that other such significant positions exist in the company. Stress testing for a variety of stress 

scenarios occurs regularly, and both European and domestic considerations are among those analyzed. 

84 

Q.4. If regulators are focused on regulating risk management practices, and not focused on individual trades regardless of size, would 

the regulators and the banking system would be safer and better 

off if the larger banks were required to hold more capital than regional or community banks? 

A.4. The OCC supports both the Basel Committee’s efforts to require higher capital for systemically important banks and the provisions of the Dodd-Frank Act which require enhanced prudential 

standards (including capital) for bank holding companies with over 

$50 billion in assets. Both of these initiatives will lead large banks 

to hold more capital than regional and community banks. 

In addition, the U.S. bank regulatory agencies recently finalized 

changes to capital standards that apply to banks’ trading activities. 

These changes are consistent with changes made by the Basel 

Committee to reflect lessons learned during the financial crisis. 

These enhancements, often referred to as Basel 2.5, should improve 

the risk sensitivity of capital standards with respect to banks’ trading exposures. 

While the changes to capital standards represent marked improvements in risk measurement and material increases in capital 

requirements for large banks, we do not view them as a substitute 

for, but rather as a complement to, strong supervision and improved bank risk management practices. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM THOMAS J. CURRY 

Q.1. When Congress passed the Volcker Rule provisions of the 

Dodd-Frank Act, Congress intended to give regulators the authority 

to exclude venture capital funds from the definition of ‘‘covered 

funds.’’ In a recent study, the FSOC recommended ‘‘that Agencies 

carefully evaluate the range of funds and other legal vehicles that 

rely on the exclusions contained in section 3(c)(1) or 3(c)(7) and consider whether it is appropriate to narrow the statutory definition 

by rule in some cases.’’ 

Do you agree that you have the authority and discretion to exclude venture capital funds from the definition of ‘‘covered funds’’? 

A.1. The agencies are reviewing and carefully considering the many 

comments we have received on the scope of our authority and discretion to exclude certain funds and other legal vehicles that rely 

on the exclusions contained in section 3(c)(1) or 3(c)(7) from the definition of ‘‘covered fund.’’ Because we are in the midst of this joint 

rulemaking, we are unable to express our views on the merits of 

the question you raised or provide interpretive advice on the provisions of section 619. Rest assured, however, that the OCC is committed to working expeditiously with the other regulators to develop a final rule that is consistent with statutory requirements. 

As you know, the OCC regulates national banks and Federal 

thrifts that have limited authority to directly make venture capital 

investments. The involvement of national banks and Federal thrifts 

in venture capital investments is limited given the restrictions on 

their authority to invest in securities under applicable laws and 

regulations. See 12 U.S.C. §§24 (Seventh) and 1464(c); and 12 CFR 

Part 1 and 160.30. 

85 

However, national banks and Federal thrifts may rely on their 

small business investment company and public welfare investment 

authorities to make equity and equity-like venture capital investments. See 15 U.S.C. §682(b); 12 U.S.C. §§24 (Eleventh) and 

1464(c)(4)(F). For example, national banks and Federal thrifts each 

may invest up to specified limits in small business investment companies (SBICs), which are privately owned and managed investment funds licensed by the Small Business Administration (SBA) 

that can make venture capital investments, and in community development venture capital companies (CDVCs), which operate similarly to an SBIC but without SBA involvement. We note that section 619 expressly preserves the ability of banks and thrifts to invest in SBICs and other public welfare investments of the type permitted under 12 U.S.C. 24 (Eleventh). 

Q.2. Do you agree that sound venture capital investments lead to 

job creation and economic growth? 

A.2. While questions related to the impact of specific types of entities on job creation and economic growth are not within the scope 

of the OCC’s mission, the sound deployment of capital is clearly 

critical to a well-functioning economy. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM MARTIN J. GRUENBERG 

Q.1. In recent testimony on the trading loss by JPMorgan Chase 

& Co. (JPMorgan), you stated that the FDIC’s ‘‘discussions have 

also focused on the quality and consistency of the models used in 

the CIO as well as the approval and validation processes surrounding them.’’ What have you learned about the quality and consistency of the models and the approval and validation processes at 

JPMorgan? 

A.1. The FDIC continues to work with both OCC and Federal Reserve staff to review the models used in JPMorgan Chase’s CIO 

unit for the assessment of risk associated with that unit’s credit 

hybrid’s business. This review has focused on an assessment of the 

JPMorgan Chase’s VaR methodology and the identification of any 

weaknesses in the firm’s processes and procedures for model governance, validation, and controls. This evaluation is ongoing and 

the FDIC does not publicly disclose regulators’ findings. 

Q.2. You have stated that your agency is in the process of internally reviewing the transactions, including identifying any ‘‘potential gaps within the firm’s overall risk management.’’ Mr. Curry 

has additionally stated that the Office of the Comptroller of the 

Currency (OCC) will be assessing how it can improve supervisory 

processes at the OCC. What gaps have you identified at the bank 

and as supervisors? 

A.2. Along with the OCC and the Federal Reserve, the FDIC continues its evaluation of the CIO portfolio, its governance structure, 

and the results of the work performed by JPMorgan Chase’s internal investigation. The firm has identified major gaps in several 

areas within the CIO business line that contributed to the losses 

incurred. The primary areas of focus for the firm include the CIO 

trading strategy, VaR methodology and model governance, strength 

86 

of risk management, and the CIO limit structure/escalation process. 

Q.3. You also stated in recent testimony, that the FDIC has added 

temporary staff to assist in its review. How many staff members 

have been hired, and do you have any updates on the FDIC’s review? 

A.3. The FDIC has a permanent staff of four professionals on-site 

at JPMorgan Chase. Three additional FDIC staff members have 

been engaged to focus on the analysis of CIO related issues in addition to the analytical support of other FDIC examiners on an ad 

hoc basis. 

Q.4. At the Committee’s hearing where Jamie Dimon, Chairman of 

the Board, President and Chief Executive Officer of JPMorgan testified, Mr. Dimon indicated that while the company has a compensation claw back policy in place, that authority has not been exercised. For the largest banks that benefit from the $250,000 deposit insurance guarantee, are you aware of any bank exercising a 

claw back of compensation when major mistakes are made? Is it 

important for Boards of Directors of a large bank to utilize their 

claw back authority to deter other employees from making the 

same mistakes, and correct some of the misaligned pay incentives 

we saw leading up to the recent financial crisis? 

A.4. JPMorgan Chase announced during its second quarter earnings release that the firm intended to claw back compensation from 

CIO managers in London responsible for the CIO Synthetic Credit 

Portfolio. These employees were terminated without a severance or 

2012 incentive compensation and the firm imposed the maximum 

claw back amount of 2 years of annual compensation. In one instance, an employee volunteered the claw back; and all claw back 

decisions were reviewed by JPMorgan Chase’s Board of Directors. 

A firm’s board of directors should be involved in the application of 

claw back provisions; and in the JPMorgan Chase situation, it appears that senior management took action without prompting from 

the Board. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARTIN J. GRUENBERG 

Q.1. You testified today that small bankers have told the FDIC 

that compliance with the escrow account requirement in DoddFrank could be so costly as to be prohibitive, and that they would 

cease originating mortgage loans for their customers. What specific 

recommendations have you given the Bureau as it develops the 

final rule implementing the Dodd-Frank escrow requirements? 

A.1. As you know, the FDIC is the primary Federal regulator for 

the Nation’s small community banks. My staff engages frequently 

with community banks in roundtables around the country to be certain that we understand how regulatory changes affect them and 

to listen to their concerns. We know that in many rural and underserved areas, community banks are the primary source to meet the 

financial services needs in those communities. 

We understand that the Dodd-Frank Act’s mandatory escrow accounts do not apply to all mortgage lending. The requirement does 

87 

1 15 U.S.C. 1639d(b). 

2 76 Fed. Reg. 11598 (March 2, 2011), proposing amendments to Regulation Z, 12 C.F.R. 

1026.35(b)(3). 

not apply to market-rate loans that are not insured by a Government agency, unless State or Federal law provides otherwise. 1 Additionally, the Dodd-Frank Act allows the Bureau to exempt banks 

and other lenders operating in rural or underserved areas from the 

escrow requirements. 

Prior to the implementation of the CFPA (Consumer Financial 

Protection Act of 2010) and the Consumer Financial Protection Bureau’s start-up date, the Federal Reserve Board issued a notice of 

proposed rulemaking that would amend the existing escrow rule to 

reflect the Dodd-Frank Act changes. 2 As of July 21, 2011, this proposal became a CFPB proposed rule. 

The proposed rule contemplated an exemption for creditors in 

rural and underserved areas. We have shared with the CFPB the 

feedback we have received from community banks, particularly 

those in rural areas, regarding the banks’ concerns about the impact of the proposed escrow rule, and we have suggested that the 

Bureau exempt from the escrow requirement all banks that operate 

predominantly in rural areas. 

We will continue to explore options to improve the examination 

process for community banks while preserving the benefits of appropriate regulation that ultimately will serve the interest of lenders, consumers, and the economy as a whole. We will continue to 

offer to the Bureau the perspective we bring as a result of our commitment both to the health and continued vibrancy of small community banks and to the needs of the customers they serve. 

Q.2. Mr. Gruenberg, in a recent speech you said that the failure 

of a systemically important financial institution will likely have 

significant international operations and that this will create a 

number of challenges. What specific steps have been taken to improve the cross-border resolution of a SIFI? 

A.2. The following specific steps have been taken to improve the 

cross-border resolution of a SIFI: 

• Identification of Priority Jurisdictions: The FDIC has conducted a series of ‘‘heat map’’ exercises with respect to the 

global footprint of U.S. SIFIs to identify the priority jurisdictions and regulators for cross-border coordination in connection 

with crisis management, recovery and resolution planning, and 

implementation. Based on the onbalance sheet and off-balance 

sheet information reported by each of the top eight U.S. SIFIs, 

the FDIC has identified 12 priority jurisdictions that are host 

to over 97 percent of the total reported foreign activities of the 

top U.S. SIFIs. Of these 12 jurisdictions, over 90 percent of the 

SIFIs’ total reported foreign activities are in two jurisdictions, 

the United Kingdom and Ireland. The FDIC is conducting robust outreach in these priority jurisdictions. 

• Jurisdictional Survey: In addition to these heat mapping exercises, the FDIC is conducting a survey on the legal and regulatory regimes in the priority jurisdictions. The survey assists 

us in identifying the obstacles to effective cross-border resolution and cooperation and the coordination measures we may 

88 

take with fellow regulatory and resolution authorities to mitigate such obstacles. 

• Participation in Crisis Management Group Meetings: Under the 

auspices of the Financial Stability Board, the FDIC and its 

U.S. and non-U.S. banking regulatory authority colleagues are 

working in Crisis Management Groups on recovery and resolution strategies for each of the global systemically important financial institutions identified by the G20 at their November 4, 

2011, meeting. The work of these Crisis Management Groups, 

consisting of both home and host authorities, is intended to enhance cross-border institution-specific planning and cooperation for a possible resolution, should it become necessary. The 

work also allows regulators to identify impediments to a more 

effective resolution based on the unique characteristics of a 

particular financial company and the jurisdictions in which it 

operates. 

Q.3. In your view, what additional steps must be taken with respect to the cross-border resolution of a SIFI? 

A.3. In our view, the following additional steps must be taken with 

respect to the cross-border resolution of a SIFI: 

• Dialogues with foreign resolution counterparties must continue. Many jurisdictions are in the process of amending their 

resolution regimes and we are following these developments 

with great interest. 

• As jurisdictions develop resolution strategies for their respective SIFis, we must understand their impact on the U.S. operations. 

• The FDIC is in the process of understanding the usage of financial market utilities by each SIFI and the impact of a 

SIFI’s entry into Title II receivership on its membership and 

processing arrangements with financial market utilities. 

• Through the review of the Title I resolution plans or ‘‘living 

wills’’ and enhanced heat mapping exercises, the FDIC will 

gain transparency on the location and usage of each SIFI’s 

data and profit centers, as well as location where liquidity is 

concentrated. 

• The FDIC is working with fellow regulators in determining the 

extent of information with respect to each SIFI that may be 

shared on a confidential basis with other resolution authorities 

in connection with our cross-border coordination efforts on crisis management, recovery and resolution planning, and implementation. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM MARTIN J. GRUENBERG 

Q.1. During the June 6th hearing, Mr. Gruenberg agreed that ‘‘historically, including to the present day, the biggest risk of banking 

is the lending activity that is inherent to the banking process.’’ 

In testimony before the Subcommittee on Financial Institutions 

and Consumer Protection on May 9th, the former Chief Economist 

89 

of the Senate Committee on Banking, Housing, and Urban Affairs 

stated: 

In a remarkably understated 2007 annual inspection report on Citigroup, the Federal Reserve Bank of New York 

observed that ‘‘[m]anagement did not properly identify and 

assess its subprime risk in the CDO trading books, leading 

to significant losses. Serious deficiencies in risk management and controls were identified in the management of 

Super Senior CDO positions and other subprime-related 

traded credit products.’’ By the end of 2008 Citigroup had 

written off $38.8 billion related to these positions and to 

ABS and CDO securities it held in anticipation of constructing additional CDOs. [Testimony of Marc Jarsulic, 

Chief Economist, Better Markets, Inc., before the Senate 

Committee on Banking Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection, ‘‘Is Simpler Better? Limiting Federal Support for Financial Institutions’’, May 9, 2012.] 

According to accounts of the hearings held by the Financial Crisis Inquiry Commission, two witnesses agreed that CDOs were responsible for Citigroup’s financial difficulties: 

[Former Citigroup chief executive Charles] Prince ultimately blamed much of Citi’s problems on CDOs, which he 

said were complex and entirely misunderstood. He said the 

company, its risk officers, regulators and credit rating 

agencies believed CDOs were low-risk activities. As it 

turned out, they resulted in $30 billion worth of losses . . . 

[Former Comptroller of the Currency John] Dugan, too, 

put much of the blame on CDOs, partly as a way of defending his own agency. He said the bank, which the Office of the Comptroller of the Currency oversaw, did not 

damage the holding company, while Citi’s securities 

broker-dealers, which managed the CDOs and were overseen by the Securities and Exchange Commission, were at 

fault. 

‘‘The overwhelming majority of Citi’s mortgage problems 

did not arise from mortgages originated by Citibank,’’ 

Dugan said. ‘‘Instead, the huge mortgage losses arose primarily from the collateralized debt obligations structured 

by Citigroup’s securities broker-dealer with mortgages purchased from third parties.’’—Cheyenne Hopkins, ‘‘No One 

Was Sleeping as Citi Slipped’’, Am. Banker, Apr. 8, 2010. 

Do you agree with the New York Fed, the former Comptroller of 

the Currency, the former Chief Economist of the Senate Banking 

Committee, and the former CEO of Citigroup that CDOs were a 

substantial cause of Citigroup’s financial difficulties in 2008, resulting in significant support from the Federal Government, including 

capital injections from the Treasury Department, debt guarantees 

from the FDIC, and loans from the Federal Reserve? 

A.1. Without getting into the specifics with respect to Citigroup, I 

agree that CDOs and other model-driven, structured products 

90 

played a substantial role in the most recent crisis. Many banks 

viewed the creation of these products as a means to fund lending 

activities and shift credit risk off balance sheet. Unfortunately, as 

these products continued to develop, they resulted in untenable 

concentrations of systemic risk and leverage in products that, by 

their very nature, lacked transparency. The popularity of these instruments as investment vehicles increased dramatically as the 

senior-most tranches received the highest investment-grade ratings, and their coupon rates dramatically exceeded the steadily declining Federal Funds and U.S. Treasury rates. The high investor 

demand for CDOs placed considerable stress on banks and 

nonbank mortgage brokers to underwrite the significant volume of 

mortgages that ultimately backed the CDOs. This resulted in the 

weakening of underwriting standards and the issuance of poorer 

quality CDOs. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM MARTIN J. GRUENBERG 

Q.1. On December 31st, Section 343 of the Dodd-Frank Act, addressing unlimited FDIC-insurance coverage for noninterest bearing transaction accounts, is scheduled to sunset. As you know this 

section was based upon the FDIC’s Transaction Account Guarantee 

Program. Whether or not TAG is extended through the end of the 

year, it is clear that this type of supernatural Government involvement cannot be maintained indefinitely. Can you advise the Committee whether any alternatives exist, or which are under consideration by the FDIC, that would instill the confidence our small businesses and our local governments need to avoid having to pull payroll or transaction accounts from their local community banks since 

each Friday it seems that these folks read about some local bank 

being put on the FDIC’s receiverships list? 

What precisely has the FDIC done to foster the development of 

private sector solutions to TAG? 

A.1. From the FDIC’s standpoint, the most effective action that 

bank regulatory agencies can take to maintain the confidence of 

small business and local Government depositors in their community banks is to ensure that these banks strengthen their capital 

and liquidity positions. To the great credit of community banks, 

with the encouragement of bank examiners, they have significantly 

strengthened their capital and liquidity over the past several years. 

As of June 2012, the average leverage capital ratio for banks with 

less than $1 billion in assets was 10.3 percent, almost exactly what 

it was at the end of 2007, when it was 10.4 percent, and more than 

it was at the end of 2002, when it was 9.6 percent. As of June 2012 

the average ratio of short-term assets to short-term liabilities for 

commercial banks with less than $1 billion in assets was 105.7 percent, compared to 84.7 percent at the end of 2007 and 86.7 percent 

at the end of 2002. These actions by community banks to increase 

their capital and liquidity are, in fact, a strong private sector response to the issue of maintaining confidence. 

91 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM MARTIN J. GRUENBERG 

Q.1. When Congress passed the Volcker Rule provisions of the 

Dodd-Frank Act, Congress intended to give regulators the authority 

to exclude venture capital funds from the definition of ‘‘covered 

funds.’’ In a recent study, the FSOC recommended ‘‘that Agencies 

carefully evaluate the range of funds and other legal vehicles that 

rely on the exclusions contained in section 3(c)(1) or 3(c)(7) and consider whether it is appropriate to narrow the statutory definition 

by rule in some cases.’’ 

Do you agree that you have the authority and discretion to exclude venture capital funds from the definition of ‘‘covered funds?’’ 

Do you agree that sound venture capital investments lead to job 

creation and economic growth? 

A.1. Section 619(h)(2) of the Dodd-Frank Act defines the terms 

‘‘hedge fund’’ and ‘‘private equity fund’’ as ‘‘an issuer that would be 

an investment company, as defined in the Investment Company 

Act of 1940 (15 U.S.C. 80a-1 et seq.), but for section 3(c)(1) or 

3(c)(7) of that Act, or such similar funds as the appropriate Federal 

banking agencies, the Securities and Exchange Commission, and 

the Commodity Futures Trading Commission may, by rule, as provided in subsection (b)(2), determine.’’ This definition, as written, 

would cover the majority of venture capital funds. 

As part of the Notice of Proposed Rulemaking (NPR), the agencies sought public comment on whether venture capital funds 

should be excluded from the definition of ‘‘hedge fund’’ and ‘‘private 

equity fund’’ for purposes of the Volcker Rule. In Question 310 in 

the NPR, the agencies ask: 

Should venture capital funds be excluded from the definition of ‘‘covered fund’’? Why or why not? If so, should the 

definition contained in rule 203(l)-(1) under the [Investment] Advisers Act be used? Should any modifications to 

that definition of venture capital fund be made? How 

would permitting a banking entity to invest in such a fund 

meet the standards contained in section 13(d)(1)(J) of the 

[Bank Holding Company Act]? 

Sound venture capital investments, like other investment activities, can contribute to job creation and economic growth. In conjunction with the development of the final rule, the agencies are reviewing public comments responding to the NPR, including comments on Question 310 related to venture capital funds. The agencies will take these and all comments into consideration in the development of the final rule. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WICKER 

FROM MARTIN J. GRUENBERG 

Q.1. Section 165 of the Dodd-Frank Act requires certain nonbank 

financial companies and each bank holding company with total consolidated assets of $50 billion or more to periodically file a Resolution Plan, or ‘‘living will,’’ for the company’s resolution in the event 

of material financial distress or failure, and to report on the nature 

92 

and extent of each company’s credit exposures. In implementing 

this requirement, please explain: 

Whether and to what extent the FDIC will compare Resolution 

Plans submitted by each institution to assess how many have identified the same issues in their plans and whether that might have 

systemic risk implications. 

A.1. The FDIC’s plan review process is designed to include a ‘‘horizontal review’’ of certain identified topics expected to be addressed 

by each institution. This horizontal review includes an analysis of 

the strategies of each institution put forward for its material entities, as well as the various resolution regimes (such as bankruptcy 

for holding companies, receiverships for insured depository institutions and administrations for foreign entities) under which the material entities will be required to be resolved, identified obstacles, 

related mitigants to those identified obstacles, and the assumptions 

upon which the institution relies to support the feasibility of those 

strategies. 

This comparative review will help to focus on key systemic issues 

that have been raised in the industry domestically as well as globally. The review will include: 

• interconnections and interdependencies such as cross company 

borrowing, lending, or shared services; 

• the treatment and booking of derivatives, domestically and 

cross-border 

• the impact of qualified financial contracts; 

• the ability to separate and substitute core business lines and 

critical operations; and 

• the reliance on common global payment systems and financial 

market utilities and infrastructures. 

Additionally, the comparative review and assessment will help to 

identify gaps and areas that may require further regulatory consideration and guidance in order to strengthen the oversight of systemically important financial institutions. 

Q.2. To what extent regulators have ascertained the costs to the 

private sector of preparing Resolution Plans. (Has the FDIC considered asking each company to compile a cost of assembling such a 

plan?) 

A.2. Each of the companies that were required to submit plans by 

July 1, 2012, expended significant resources in developing their 

resolution plans, representative of the seriousness placed on these 

plans and the challenges associated with a first time reporting requirement. In addition to the dedication of internal staff resources, 

many of these initial companies, which included the largest and 

most complex financial institutions, also hired external legal, accounting, and general consulting firms to support their efforts. The 

FDIC has not asked each company to compile the total cost of assembling such plan. In conjunction with the 165(d) rulemaking, the 

FDIC developed some preliminary estimates of the hours that 

would likely be required to complete the initial plan submissions, 

which assumed an internal preliminary estimate of 9,200 hours for 

an initial full report by the largest institutions and approximately 

half that amount for others. Once baseline plans are established, 

93 

we would anticipate the burden to be substantially less in future 

years. These estimates did not include the cost of systems upgrades 

and other investments that firms may make in order both to comply with the ongoing requirements and to better manage resolution 

risk. 

Q.3. Whether the FDIC intends to report to Congress or otherwise 

release any information about what the FDIC has learned as a result of receiving such information. 

A.3. Please see response to Question 2. 

Q.4. Whether the FDIC expects that its review of the initial Resolution Plans will form the basis of revising the requirement for the 

institutions required to file by July 1, 2013. 

A.4. Yes, we expect that the FDIC and the Federal Reserve Board 

(FRB) will provide further guidance to those institutions that are 

required to submit initial plans by July 1, 2013, that will be informed by our review of the first submissions. These initial plans 

will inform the FDIC and FRB as to whether the guidance provided 

to the firms needs further clarification, and which assumptions provided to the firms should be modified. Through a comparative review of the plans, we expect to identify the approaches which best 

address the intent of the resolution plan requirement and facilitate 

FDIC and FRB review. 

We also anticipate that guidance for those institutions required 

to file by July 1, 2013, may be modified beginning in the fourth 

quarter of 2012 because of the nature of those firms relative to the 

initial filers, which included some of the largest and most complex 

financial institutions. 

Q.5. With respect to the FDIC’s stated intention to resolve a failing 

financial institution by placing the top-tier holding company into 

the orderly liquidation authority and continuing to operate all of 

the subsidiaries, how, if at all, this approach should affect the content or direction of a Resolution Plan. 

A.5. The ‘‘Living Wills’’ are the firms’ plans to resolve themselves 

under the U.S. Bankruptcy Code and therefore the plans should 

not be affected by the FDIC’s strategies for resolving the firms 

under Title II of the Dodd-Frank Act. 

Q.6. Whether the FDIC intends to report to Congress or otherwise 

release any information about what the FDIC has learned as a result of reviewing Resolution Plans. 

A.6. The public portion of the plans are currently available to the 

public on our Web site and have been the subject of considerable 

analyst comment. 

Q.7. Whether Resolution Plans will be used in enforcement actions. 

A.7. The Resolution Plans are not being sought for the purpose of 

developing or supporting an enforcement action. If, however, a situation arises in which a Resolution Plan (or a portion of it) would 

constitute relevant evidence in an enforcement action, there is no 

prohibition on the FDIC or another appropriate Federal regulator 

using it for that purpose. 

Q.8. While the Dodd-Frank Act does not appear to require that an 

institution make any part of its Resolution Plan public, Federal 

94 

regulations seem to permit an institution to prepare a public section (with the institution exercising its own judgment about what 

information is proprietary and should not be disclosed). Does the 

FDIC plan to second guess those judgments? Does it plan to issue 

any further guidance about the content of the public section? 

A.8. 12 CFR Part 381.8(c) sets forth the required elements of the 

public section of a resolution plan filed pursuant to section 165(d) 

of the Dodd-Frank Act. The FDIC intends to review the public section of each resolution plan for compliance with this subsection of 

the regulation. Based on this review, the FDIC’s Office of Complex 

Financial Institutions may add to or amend one or more of the required elements. However, there are no specific plans to do so at 

this time. 

Q.9. With regard to the confidential portion of a Resolution Plan, 

will the FDIC accord it the same degree of confidentiality that it 

accords reports of examination? If not, why not, and what degree 

of confidentiality would the FDIC extend to such information? How 

widely will the FDIC share a Resolution Plan with other banking 

regulators? 

A.9. Yes, the FDIC will provide the Resolution Plans with the same 

level of confidentiality as accorded to reports of examination. Section 112(d)(5)(A) of the Dodd-Frank Act (18 U.S.C. §5322(d)(5)(A)) 

requires the Federal Reserve Board and the FDIC to maintain the 

confidentiality of any data, information, and reports submitted 

under Title I (including the resolution plans prepared and submitted as required under section 165(d) of the Dodd-Frank Act), 

and the FDIC fully intends to comply with that legal requirement. 

The FDIC has implemented security practices for the plans to ensure that we maintain their confidentiality consistent with applicable exemptions under the Freedom of Information Act (5 U.S.C. 

552(b)) and the FDIC’s Disclosure of Information Rules (12 CFR 

part 309). 

The FDIC will share the resolution plans with other banking regulators to the extent permitted by law.