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[Senate Hearing 112-714]
[From the U.S. Government Publishing Office]

                                                        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 /

                  U.S. GOVERNMENT PRINTING OFFICE
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     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)

    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 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 
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 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 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 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 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 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.
    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.
    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 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 so-called 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 Dodd-Frank 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 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 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. 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.
    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.
    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?
    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?
    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, management-related 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 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 Dodd-Frank 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, 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 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 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 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 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 Dodd-Frank 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 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.
    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?
    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 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 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 
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 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.
    And so I think there is a general belief among most 
everyone on the Committee that there needs to be some 
alterations in Dodd-Frank, and my hope, Mr. Chairman, is that 
we will take the opportunity to modify through the legislative 
process provisions of Dodd-Frank 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 Dodd-Frank'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 well-managed 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.
    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 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 
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 stand-alone bank, it would be the eighth largest 
bank in the United States. It was making a trade that you say 
is the biggest, most 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 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 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.
    Senator Schumer. OK. So you think it will improve with 
Dodd-Frank 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 company; 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 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:]
               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.
    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 Dodd-Frank 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 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 
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 develop 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 coordinated 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.
                                 ______
                                 
                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 
Dodd-Frank 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 taxpayer-funded 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.
    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.
    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 required 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 microprudential 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 of 
this Committee and the President have bestowed upon me to lead the 
Office of the Comptroller of the Currency (OCC).*
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     *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.
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    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 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

    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 company-run 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.
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.
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     \1\ See, http://www.occ.gov/news-issuances/congressional-
testimony/2011/pub-test-2011-42-written.pdf.
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    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 before 
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.
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     \2\ See, 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-test-2012-50-
written.pdf.
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    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 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.
    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 
short-term, 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 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.
    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.
---------------------------------------------------------------------------
     \3\ OCC examiners rate the quality of the bank's audit function 
and the quality of risk management as weak, satisfactory, or strong.
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    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 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 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.
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 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 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 monitoring 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 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.
    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 Dodd-Frank 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, 
[email protected], 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 Dodd-Frank 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 domestic 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 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.
        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 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 asset-backed 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?

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 risk-management 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 so-called Basel 2.5 reforms that will 
materially strengthen the market risk capital requirements of 
Basel II. We have also requested public 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 Dodd-
Frank Act that define the type of firm that is eligible to be 
designated by the Financial Stability Oversight Council for 
enhanced 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\
---------------------------------------------------------------------------
     \1\ Section 102(a)(6) of the Dodd-Frank Act; 12 U.S.C. 
5311(a)(6).
     \2\ Id.
---------------------------------------------------------------------------
    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 Glass-Steagall 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.''

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.'' 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 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 develop 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 immediately 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.
                                ------                                

               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 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 complexity 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.

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.
    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 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 Dodd-
Frank 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 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.
---------------------------------------------------------------------------
     \1\ 15 U.S.C. 1639d(b).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \2\ 76 Fed. Reg. 11598 (March 2, 2011), proposing amendments to 
Regulation Z, 12 C.F.R. 1026.35(b)(3).
---------------------------------------------------------------------------
    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 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 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 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.
                                ------                                

        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 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, 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 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.
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