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[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

 

                    HEARING TO REVIEW THE FINANCIAL
                       STABILITY IMPROVEMENT ACT
                            DISCUSSION DRAFT
=======================================================================

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 17, 2009

                              __________

                           Serial No. 111-36

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                               _________

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53-954 PDF                   WASHINGTON: 2010
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20402-0001

                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

                 Nicole Scott, Minority Staff Director

                                  (ii)
                             C O N T E N T S

                              ----------                              
                                                                   Page
Boccieri, Hon. John A., a Representative in Congress from Ohio, 
  prepared statement.............................................     4
Cuellar, Hon. Henry, a Representative in Congress from Texas, 
  prepared statement.............................................     4
Latta, Hon. Robert E., a Representative in Congress from Ohio, 
  prepared statement.............................................     5
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     3
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     1

                               Witnesses

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, D.C....................................     6
    Prepared statement...........................................     7
Walter, Hon. Elisse B., Commissioner, U.S. Securities and 
  Exchange Commission, Washington, D.C...........................    11
    Prepared statement...........................................    12
Strom, Hon. Leland A., Chairman and CEO, Farm Credit 
  Administration, McLean, VA.....................................    16
    Prepared statement...........................................    18

 
                    HEARING TO REVIEW THE FINANCIAL
                       STABILITY IMPROVEMENT ACT

 
                            DISCUSSION DRAFT

                              ----------                              

                       TUESDAY, NOVEMBER 17, 2009

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 11:00 a.m., in Room 
1300 of the Longworth House Office Building, Hon. Collin C. 
Peterson [Chairman of the Committee] presiding.
    Members present: Representatives Peterson, Holden, 
McIntyre, Boswell, Baca, Scott, Marshall, Herseth Sandlin, 
Cuellar, Costa, Ellsworth, Walz, Schrader, Dahlkemper, Massa, 
Bright, Markey, Kratovil, Schauer, Kissell, Boccieri, Murphy, 
Pomeroy, Minnick, Lucas, Moran, Johnson, Rogers, Conaway, 
Fortenberry, Schmidt, Smith, Roe, Luetkemeyer, Cassidy, and 
Lummis.
    Staff present: Tyler Jameson, John Konya, Scott Kuschmider, 
Robert L. Larew, Clark Ogilvie, James Ryder, Rebekah Solem, 
Tamara Hinton, Kevin Kramp, Josh Mathis, Nicole Scott, Jamie 
Mitchell, and Sangina Wright.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    The Chairman. The Committee will come to order. This 
hearing of the Committee on Agriculture to review the Financial 
Stability Improvement Act discussion draft will come to order. 
Good morning and welcome to today's hearing.
    Late last month the House Financial Services Committee 
released draft legislation to address systemic risk to our 
nation's financial sector, as well as to monitor financial 
institutions considered too big to fail. This legislation was 
based on a proposal put forth by the Treasury Department 
earlier this year, and we are reviewing this legislation today 
given its implications and impact upon derivative markets and 
the Farm Credit System, both of which belong to this 
Committee's jurisdiction.
    The Financial Services draft creates a Financial Services 
Oversight Council made up of several agencies including the 
CFTC, which would be given powers to identify certain financial 
players and activities that could pose a systemic risk to the 
economy, and, therefore, should be subject to heightened 
standards, but beyond that the Council's authority is very 
limited. The real power is being divested to the Federal 
Reserve. The Federal Reserve would become the super-regulator 
under the draft legislation. To the extent a financial entity 
or activity is identified by the Council of deserving 
heightened credential standards, the Federal Reserve can impose 
whatever standards it sees fit over that entity or activity. 
Even if the entity or activity is regulated by another member 
of the Council, the Fed can impose its own regulatory standard 
despite the agency's objections or expertise. For example, such 
a setup would allow the Federal Reserve to impose its 
regulatory review upon clearing entities like derivatives 
clearing organizations and clearing agencies despite having no 
experience as the primary regulator of these entities.
    Why are we even thinking about giving more power and 
authority to the Fed? It is one of the most unaccountable parts 
of Federal Government. Its governance is influenced more on the 
wishes of major banks than the American people. It refused to 
police mortgage underwriting or impose suitability standards on 
mortgage lenders. Its lax regulatory oversight contributed 
greatly to the economic crisis last year.
    I am skeptical of the idea of a systemic regulator in 
general, and very much opposed to having the Fed play a leading 
role as this draft proposes. As I have said before, no one 
regulator, agency, board or entity is smart enough to measure a 
true rise in the value of assets imposed to the creation of the 
public, nor should any one regulator be given so much 
independent power over our economy. Given the Federal Reserve's 
cozy relationship for many decades with many of the too-big-to-
fail institutions that fall under their regulatory power it 
makes me wonder whether anything would really change.
    The proposed draft also contains provisions affecting the 
Farm Credit Administration which is of concern to this 
Committee and rural America. Under the draft, farm credit 
institutions would fall into a loan retention provision aimed 
at making sure creditors maintain some skin in the game when 
making lending choices. While this may be appropriate for some 
lenders, putting Farm Credit under this umbrella would have 
unintended effects on rural America and the people that depend 
on the Farm Credit loans. We had a ten percent risk protection 
for Farm Credit-backed securities, but Congress removed it 
because it was preventing a viable secondary market for 
agriculture organisms. The repeal was accompanied by a strong 
underwriting security appraisal and repayment statutory 
standards, which have prevented any investor from credit losses 
in Farm Credit-backed securities since then.
    Farm country has experienced some credit stress, since the 
1980s crisis we have been diligent in our oversight and have 
made changes that have resulted in a more stable, reliable 
financing network for rural America. As we speak, the Financial 
Services Committee is marking up this proposed legislation. We 
are monitoring this legislation closely and we expect it will 
change in many ways before the Committee's work is done. If the 
legislation's impact on those areas in our Committee's 
jurisdictions are not addressed, we will be back here again.
    So once again, I welcome today's witnesses. I look forward 
to their input on how this legislation can be made stronger.
    And at this time I would like to recognize my friend and 
colleague the Ranking Member from Oklahoma, Mr. Lucas, for any 
statement he would like to make.

 OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN 
                     CONGRESS FROM OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman, and thank you for 
holding this hearing today.
    As you know, I also sit on the Financial Services 
Committee, the Committee that wrote the legislation we are to 
consider today, and the House Agriculture Committee at the 
conclusion of today's hearing will have had as many hearings as 
the House Financial Services Committee had on the discussion 
draft before it moved into markup. This bill, if nothing else, 
certainly needs more consideration not less, and I congratulate 
you on moving with haste to expose the shortcomings.
    As we proclaimed in this Committee more than once, it 
wasn't the futures markets that caused the financial meltdown 
that this country experienced a little over a year ago. Why is 
there a rush to change how futures markets are regulated? If we 
take any pride in the integrity of the futures market then 
certainly the CFTC can, yet it seems as though the CFTC is all 
ready to rollback what many consider to be safe and sound core 
principles based on its regulatory regime. But what is the risk 
that we are trying to regulate out of existence? I will agree 
there may be some issues that can be addressed in the OTC 
markets and that, perhaps, different regulatory approaches in 
that trading space can be beneficial. The legislation we review 
today is not impressing just the less regulated or unregulated 
OTC market but also the robustly regulated futures market.
    Even if one can make a persuasive argument that the futures 
markets need more regulation, and if someone can I don't think 
I have really heard it yet, no one can credibly argue that the 
Federal Reserve Board ought to be the primary regulator. In 
fact, I would argue that it isn't and shouldn't be a market 
regulator at all. It is a central bank and the maker of 
monetary policy. It can be a bank regulator. It is not and 
should not be the regulator of day-to-day market activities, 
especially in markets that have no or very little resemblance 
to the market or banking industry.
    The CFTC has done a remarkably competent job in regulating 
America's futures markets. Yes, everyone can point to a 
frustration or two. We still have convergence problems in some 
agricultural commodity contracts. We are still waiting on the 
joint rulemaking for a single stock futures portfolio margin. 
We can always argue whether financial risk should be afforded a 
hedge exemption, or whether certain foreign entities should be 
allowed to operate under staff issued no-action letters. These 
issues, however, are evidence that the regulatory scheme and 
the regulators are effective and competent. These issues aren't 
a cause for a regulatory overhaul. Why this Congress would be 
so interested in throwing the baby out with the bath water is 
beyond me, but that is exactly what Chairman Frank's discussion 
draft does. It takes competent regulators and an effective 
regulatory system and subordinates them to a potential entity 
that hasn't shown the ability to be effective and efficiently 
use the power that it has, or that it has any particular 
expertise in this specialized, nuanced market. On this same 
theme the legislation sucks in the Farm Credit Administration. 
I didn't say the legislation sucks. I said it sucked in the 
Farm Credit Administration and the System institutions with no 
understanding of the issues of financial risk that were 
resolved in the 1980s. The System has shown its own insurance 
fund and existing joint and civil liability among institutions 
can protect against risky behavior. In short, the Farm Credit 
System does not belong in this bill.
    Mr. Chairman, I again thank you for holding this hearing. I 
thank you for allowing us to bring more attention to this piece 
of legislation that needs to withstand more critical thought, 
more critical scrutiny before it potentially progresses. Thank 
you, sir.
    The Chairman. I thank the gentleman for his statement and 
other Members will have the opportunity to enter their opening 
statements for the record.
    [The prepared statements of Messers. Boccieri, Cuellar, and 
Latta follow:]

   Prepared Statement of Hon. John A. Boccieri, a Representative in 
                           Congress from Ohio
    I want to thank Chairman Peterson for holding this hearing today. 
While I believe that the taxpayers on Main Street should never again 
pay for the greed on Wall Street, we must ensure that any new 
regulations do not have unintended consequences on the CFTC's ability 
to do its job. More importantly, we must protect the Farm Credit System 
from unnecessary regulations that could threaten its ability to provide 
affordable sources of credit to our farmers. It is clear the 
legislation is a work in progress but I must express reservations about 
potential unintended effects on the Farm Credit System. As Mr. Strom's 
testimony indicates, the Farm Credit System is a unique financial 
market and I am committed to ensuring that the farmers in the 16th 
District of Ohio, who put food on my table and milk in my refrigerator, 
have access to the reliable credit they have come to expect from the 
Farm Credit System. I plan to work with Chairmen Peterson and Frank to 
ensure the Farm Credit System is protected from unnecessary reforms 
that have the potential to harm the robust and dependable lending 
system that our nation's farmers depend on.
                                 ______
                                 
Prepared Statement of Hon. Henry Cuellar, a Representative in Congress 
                               from Texas
    Thank you Chairman Peterson and Ranking Member Lucas for holding 
today's hearing of the House Committee on Agriculture on the Financial 
Stability Improvement Act. I am pleased that we can engage in a healthy 
debate on the legislation at hand, and offer our expertise as it 
pertains to the agriculture community.
    As we have seen in the last year, troubles in our financial markets 
are capable of having long-lasting, wide-reaching affects on all 
Americans. I believe strongly in strengthening the markets, by giving 
agencies such as the CFTC and FDIC the proper means to identify and 
monitor entities that might pose a systemic risk to the economy. 
Transparency and accountability are paramount to fixing our markets; 
however, placing new regulations on entities, such as Farm Credit, that 
have displayed strength throughout the financial crisis may only serve 
to limit their effectiveness.
    Over the most recent years, including the current crisis, Farm 
Credit has weathered tough economic times. However, due to strong 
leadership in Farm Credit, and on this Committee, the System was able 
to continue serving agriculture as a reliable provider of credit. To 
this day, Farm Credit remains strong and producers in the 28th 
Congressional District of Texas rely on the Farm Credit System. For 
this, I ask that we carefully review the impact this legislation will 
have on a trusted, effective entity.
    In the current form of this legislation, the Consumer Financial 
Protection Agency Act will create a new Federal agency, tasked with 
overseeing all credit services to consumers. In fact, under the bill, 
Farm Credit System institutions are treated no differently than 
unregulated finance companies rather than the highly regulated set of 
federally chartered institutions that they are. With this legislation, 
we risk taking a part of the market that is functioning effectively, 
and imposing it through new rules and regulations needlessly.
    As I have said earlier, agriculture is going through difficult 
times. In my area alone, we are seeing record droughts, followed by 
devastating floods that leave producers in Texas on the brink of 
bankruptcy. The work done on this Committee has been crucial to 
ensuring that the Farm Credit System remains strong, and available to 
our farmers and ranchers.
    Again, I thank; the Chairman and the Ranking Member for holding 
this hearing. As a native of south Texas, I understand the relationship 
that Farm Credit has with our producers. Regulatory reform is crucial, 
but we must be careful to not over reach, and harm agencies that have 
acted responsibly for our communities. I look forward to the testimony 
today, and our continued work in this Committee on this important 
issue.
                                 ______
                                 
    Prepared Statement of Hon. Robert E. Latta, a Representative in 
                           Congress from Ohio
    Good morning, Chairman Peterson and Ranking Member Lucas.
    Today, we are holding a hearing to review the Financial Stability 
Improvement Act discussion draft. I would like to welcome the Chairman 
of the Commodity Futures Trading Commission, the Chairwoman of the 
Securities and Exchange Commission and the Chairman and Chief Executive 
Officer of the Farm Credit Administration. I look forward to all three 
of your testimony and insight today into this legislation.
    I have heard the concerns of my constituents and from the vast 
amount of agriculture groups on this issue. Unfortunately, this 
proposed plan furthers government regulation into our private citizen's 
lives by giving the Federal Reserve the authority on systemic risk and 
financial stability, and gives the Federal Deposit Insurance 
Corporation (FDIC) the authority to help ``systematically significant'' 
institutions rather than allow them to go into bankruptcy which is more 
efficient and does not expose our taxpayers to such financial loss. 
This legislation will be detrimental to our national debt and to the 
taxpayers as it creates further government bureaucracy by creating a 
permanent ``bailout fund'' to be controlled by the FDIC and gives 
tremendous authority to unelected government bureaucrats with the 
creation of a Financial Services Oversight Council. Companies and 
corporations who are deemed ``too big to fail'' will not be allowed to 
do so and will be able to access the ``bailout fund,'' which will be 
funded at the taxpayers' expense. In a July 20, 2009 Bloomberg article, 
Neil Barofsky the Special Inspector General for TARP stated, ``U.S. 
taxpayers may be on the hook for as much as $23.7 trillion to bolster 
the economy and bailout financial companies . . .'' American 
International Group (AIG) is a prime example of this. The taxpayers 
through the Federal Reserve and the Treasury have spent over $135 
billion to keep AIG intact.
    In addition, the language under this legislation reaches into the 
Agriculture Committee's jurisdiction and assesses Farm Credit 
Institutions to cover the cost of troubled financial institutions under 
their jurisdiction. I believe Farm Credit Institutions were not the 
cause of the current financial crisis and should not be penalized for 
the bad practices of the ones who were. Furthermore, the language under 
this legislation puts the Farm Credit System in the hands of the rules 
written by the Securities and Exchange Commission as opposed to the 
Farm Credit Administration. This provision will remove this Committee's 
jurisdiction on oversight of the underwriting and risk retention 
requirements for agricultural loans that are securitized by the Farm 
Credit System and Farmer Mac.
    House Republicans, meanwhile, have come up with strong solutions to 
help our troubled financial sector. We have found a way to bring fiscal 
responsibility to our Federal Government and to the men and women on 
Wall Street. The solutions we have brought forth will bring an end to 
the reckless bailouts; it will look to restore fiscal responsibility 
and all the while protecting the taxpayers. One of our Founding 
Father's Thomas Jefferson once said ``A wise and frugal government, 
which shall leave men free to regulate their own pursuits of industry 
and improvement, and shall not take from the mouth of labor the bread 
it has earned--this is the sum of good government.''
    Thank you and I look forward to working with my colleagues on the 
House Committee on Agriculture to make certain that this Committee 
takes jurisdiction on these issues under this legislation to ensure it 
protects our American farmers and the lending systems they use. Our 
financial crisis and economic woes should not be resolved by further 
government intervention and bureaucracy, especially on our American 
farmers who produce the safest, most economically viable food in the 
world.

    The Chairman. I would like to welcome the witnesses, the 
Honorable Gary Gensler, the Chairman of the CFTC, back to the 
Committee. The Honorable Elisse Walter, the Commissioner with 
the Securities and Exchange Commission, welcome to the 
Committee, and the Honorable Leland Strom, the Chairman and CEO 
of the Farm Credit Administration. We appreciate you being with 
us today and, Chairman Gensler, we will start with you.

           STATEMENT OF HON. GARY GENSLER, CHAIRMAN,
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Gensler. Thank you, Chairman Peterson, Ranking Member 
Lucas, and Members of the Committee. Thank you for inviting me 
to testify today on financial reform proposals that might 
intersect with the Commodity Futures Trading Commission's 
oversight of markets.
    I am also pleased to testify on behalf of the full 
Commission on this significant date in our nation's history. On 
this date actually in 1800, Congress held its first session in 
Washington, D.C. in the partially completed Capitol Building.
    Last year's financial crisis taught us that large financial 
institutions were not only too big to fail, but also had become 
so interconnected that one firm's failure could affect the 
entire system. To address these risks the Administration 
proposed to fill the gaps in our financial regulatory structure 
and most importantly, in the over-the-counter derivatives 
marketplace. This Committee passed historic legislation to 
introduce comprehensive regulation that would lower risk and 
lessen some of the interconnectedness of these large financial 
institutions through the over-the-counter market. To further 
promote transparency and lower risk, I hope that by working 
together we will be able to add requirements that all standard 
contracts are brought to transparent trading venues, and if 
there are exceptions from clearing that we keep those narrowed 
to corporate end-users. Now, beyond the over-the-counter 
derivatives marketplace the Administration also focused on two 
features that are in the bill that you have asked me to testify 
on, one establishing comprehensive, consolidated supervision of 
financial firms and two, establishing a resolution regime, a 
way to wind down large financial firms so that if they are on 
the brink of failure they don't spill out into the economy.
    Consolidated supervision, if I might just quickly note, 
that right now there is no effective Federal regulation that 
exists for holding companies of broad financial firms. This is 
what the Administration is trying to address. Through the 1956 
Bank Holding Company Act, the Federal Reserve is the holding 
company regulator but it has to have a bank in the system. The 
two changes the Administration has talked about are making sure 
that the next AIG would have effective consolidated 
supervision, and that the supervision would be clear at the 
holding company level.
    Second, is resolution authority. Resolution authority is 
something that the Federal Deposit Insurance Corporation 
currently has for banks. If the bank is near failing, they can 
step in, replace management and actually ``haircut'' contracts 
and modify contracts. This was not the case with AIG to the 
cost of $180 billion of U.S. taxpayers' money last year. So 
under current law there was no way to step in as a receiver and 
modify the contracts with the counterparties, and thus we read 
in today's newspapers there were no haircuts through AIG. So 
that is what the Administration is trying to address so that 
not 100 cents on the dollar is paid through these institutions, 
and that the FDIC would have resolution authority including 
both the entire bank holding company, but also these major 
financial firms that could pose risk to the system.
    You have asked me how these reforms would affect the 
Commodities Exchange Act and the CFTC and let me say clearly 
they do affect the regulation of the futures markets and they 
affect them directly. First, under the proposal certain 
financial companies would be designated as identified financial 
holding companies and become subject to the heightened 
credential standards of the Federal Reserve Board. And though 
it may have been unintended, this appears to include securities 
in futures exchanges such as the New York Stock Exchange, the 
Chicago Mercantile Exchange, NASDAQ, all of which in some ways 
are regulated by the CFTC, and often jointly with the 
Securities Exchange Commission.
    Second, the financial reform proposals establish a 
Financial Services Oversight Council that would not only 
designate holding companies for this heightened regulation, but 
also would designate activities or practices for similar 
oversight. And as many market activities that the SEC and CFTC 
oversee today are central to the economy or central to the 
financial system [I mean that is what we do really at the 
behest of the American public] this has potential of setting up 
multiple regulators, the Council, the Federal Reserve, the SEC 
and CFTC all intertwined in overseeing the markets that we 
currently oversee.
    Third, financial reform proposals authorize the Federal 
Reserve to effectively regulate futures and securities 
clearinghouses, including setting standards and reviewing and 
approving clearinghouse rules. This also could result in dual 
regulation of clearinghouses.
    I thank you for inviting me to testify today. I hope that 
my full testimony could be entered into the record, and I look 
forward to your questions.
    [The prepared statement of Mr. Gensler follows:]

 Prepared Statement of Hon. Gary Gensler, Chairman, Commodity Futures 
                  Trading Commission, Washington, D.C.
    Good morning Chairman Peterson, Ranking Member Lucas and Members of 
the Committee. Thank you for inviting me to testify today about 
financial regulatory reform. This Committee has recently moved historic 
legislation to comprehensively regulate over-the-counter (OTC) 
derivatives. Today, you requested that I address other aspects of 
reform. Specifically, I will address how those proposals might 
intersect with the Commodity Futures Trading Commission's (CFTC) 
oversight of markets. I am pleased to testify on behalf of the 
Commodity Futures Trading Commission (CFTC).
    This morning's hearing falls on the anniversary of a significant 
date in our nation's history. On November 17th, 1800, the United States 
Congress held its first session in Washington, D.C. in the partially 
completed Capitol Building. More than 2 centuries ago, this body 
convened to address a great many challenges facing a young nation. We 
now face a new set of challenges as the nation continues to recover 
from last year's failure of the financial system and the financial 
regulatory system. We must work to ensure that we do not again face a 
similar crisis.
    Last year's financial crisis taught us that American and global 
financial institutions had not only become what some called too big to 
fail, but also too interconnected to fail. Institutions have become so 
large and so intertwined with each other and the rest of the financial 
system that the government was forced to make untenable decisions last 
year. Effective regulatory reform requires mechanisms to handle firms 
whose failure could threaten the integrity of the entire financial 
system.
    To address these risks, the Administration has proposed that we 
fill gaps in our financial regulatory structure, and most importantly, 
over-the-counter derivatives. I commend this Committee, as well as the 
House Financial Services Committee, for taking historic action last 
month to, for the first time, introduce regulation to the OTC markets.
    OTC derivatives reform is just one important piece of the 
Administration's broader financial reform proposals, which address many 
of the lessons learned from last year's crisis. You have asked me to 
focus my testimony today on this issue as well as two other critical 
features to lower the risk to the American public presented by large 
financial institutions. The Administration has outlined two fundamental 
goals: establishing comprehensive, consolidated supervision of 
financial firms and establishing a resolution regime to wind down 
large, complex financial institutions that are on the brink of failure.
Over-the-Counter Derivatives
    I believe that comprehensive OTC derivatives reform is a critical 
component of addressing the risks posed by large financial 
institutions. These institutions have become interconnected with 
literally thousands of counterparties located in every sector of our 
economy and in every state in our nation. The historic legislation 
passed by this Committee and the Financial Services Committee does this 
by comprehensively regulating the dealers, by requiring standard 
contracts to be traded on transparent trading venues and by moving the 
standard transactions off the books of financial institutions and into 
regulated clearinghouses. This would remove the transactions, once 
arranged, from the balance sheets of large financial firms, limiting 
the effect that one firm's failure could have on the system.
    Building upon these critical features of the bill, I am hopeful 
that we can clarify exceptions such that all standard contracts are 
brought to transparent trade execution facilities even if Congress were 
to allow for exceptions from clearing requirements. Further, I am 
hopeful any exceptions from clearing would be narrowly limited to 
corporate end-users.
Consolidated Supervision
    Another gap in our financial regulatory system relates to 
consolidated comprehensive supervision and regulation of major 
financial firms that could pose a risk to the financial system. Under 
the Bank Holding Company Act, passed in the 1950s, the Federal Reserve 
has supervisory authority over a bank holding company, but no effective 
Federal regulation exists for complex financial institutions that do 
not have a bank subsidiary. This left ineffective or even no Federal 
oversight of investment banking holding companies, insurance holding 
companies and other financial conglomerates. Also, even in the context 
of bank holding companies, the coordination and authority of the 
Federal Reserve, as the holding company regulator, in relation to other 
regulators overseeing particular subsidiaries needs to be enhanced.
    The Administration and Congressional proposals address these issues 
by creating an overall prudential regulatory scheme for complex 
financial firms. This would ensure that one regulator, working in 
coordination with other regulators, could set capital, liquidity, risk 
management and other prudential standards for major financial firms. 
This would include setting standards for subsidiaries that otherwise 
are not subject to prudential regulation, as well as working with the 
primary regulators of subsidiaries that are currently regulated.
Resolution Authority
    Another lesson of the financial crisis is that the Federal 
Government needs more flexible tools to wind down major financial firms 
without causing significant harm to the financial system as a whole or 
the economy. A successful financial regulatory system must provide for 
the orderly resolution of complex financial firms in a manner that 
mitigates the risk that one institution's collapse could cause the 
failure of other institutions. As the experience with Lehman Brothers 
showed, resolving such firms through the bankruptcy process can cause 
significant economic disruption and displacement. Results may differ 
from one jurisdiction to another, and the process may be cumbersome and 
unresponsive to the need to resolve an institution rapidly in the 
public interest.
    Under current law, the Federal Deposit Insurance Corporation (FDIC) 
has the ability to step in and put a bank into receivership when it is 
about to fail. This allows them to step in as management, to modify 
contracts and to oversee the orderly resolution of the banks to best 
lower costs to taxpayers. The government, however, was limited in its 
ability to use similar resolution authorities at the holding company 
level or for financial institutions that were not banks. Such 
limitation was starkly evident when even $180 billion of our taxpayer 
dollars sent to AIG did not enable the government to modify contracts 
with AIG's counterparties or with their senior executives for 
compensation. In the case of AIG, counterparties were not required to 
take a haircut and many senior executives argued that their contracts 
should remain unaltered. Thus, the Administration and Congressional 
proposals seek to broaden the FDIC's resolution authority to include 
both the entire holding company of a bank as well as major financial 
firms that could pose a risk to the entire financial system.
Implications for CFTC--Regulation
    In inviting me to testify here today, you have asked us to address 
how broader financial reform proposals interplay with the Commodity 
Exchange Act and the Commission's existing authorities. In that regard, 
I will outline three areas on which this Committee may want to focus as 
it further considers these proposals.
Inclusion of Exchanges and Clearinghouses under Consolidated 
        Supervision
    Under the proposed regime of consolidated comprehensive 
supervision, certain financial companies would be designated as 
``identified financial holding companies.'' The companies could become 
subject to heightened prudential standards set by the Federal Reserve 
Board. The Federal Reserve would be required by statute to set 
standards for such companies in the following areas: risk-based capital 
requirements; leverage limits; liquidity requirements; concentration 
requirements; prompt corrective action; resolution plans; and overall 
risk management.
    The Federal Reserve Board's prudential supervision also would 
extend to the identified financial holding company's affiliates and 
subsidiaries. This would include intermediaries registered with the 
CFTC, such as futures commission merchants (FCMs), commodity pool 
operators (CPOs) or other intermediaries. The statute authorizes the 
Federal Reserve to prescribe heightened prudential standards for such 
subsidiaries. If the regulatory agency declines to implement the 
recommended standards, the statute authorizes the Federal Reserve to 
directly implement the heightened prudential standards.
    While seeking to address the gaps and inconsistencies that exist in 
the current regulatory structure of complex, consolidated financial 
firms, the proposals also may have unintentionally encompassed robustly 
regulated markets such as securities and futures exchanges. While it 
does not appear that the intent of the legislation is to capture these 
entities, exchange companies nevertheless may be included as they are 
organized under holding companies and may meet a broad definition of 
financial company. As these holding companies and their subsidiaries, 
such as the New York Stock Exchange or the Chicago Mercantile Exchange, 
are currently comprehensively regulated by the Securities and Exchange 
Commission (SEC) and the CFTC, Congress may wish to clarify if they 
should be included in the Federal Reserve's prudential supervisory 
authority over holding companies.
Supervision of Financial Activities
    The Administration and Congressional proposals include a new 
financial Services Oversight Council, which would include the heads of 
various Federal regulators. While the responsibilities and authorities 
of such a Council vary amongst the proposals, one of the proposed 
duties is to designate identified financial holding companies that 
would be subject to heightened prudential standards. In addition, some 
proposals recommend that the Council also identify activities or 
practices that the Council or the Federal Reserve would be authorized 
to subject to heightened prudential standards.
    Such financial activity or practice could apply to a broad range of 
market activities, many of which are currently regulated by the SEC and 
the CFTC. If the SEC or the CFTC declined to implement the Federal 
Reserve's recommended standard, the Federal Reserve would have 
authority to directly implement its own recommendations.
    Much of what the CFTC and SEC currently oversee in the financial 
markets could be determined by the Council to be systemically relevant. 
Thus, proposals to have a Council and the Federal Reserve involved as 
just described has the potential of setting up multiple regulators 
overseeing markets and market functions in the United States. While it 
is important to enhance the oversight of markets by both the SEC and 
CFTC, I think Congress would want to closely consider whether it's best 
to set up multiple regulators for some functions.
Regulation of Payment and Clearing Systems
    Administration and Congressional proposals also address oversight 
of payment and clearing systems. Currently, clearing organizations for 
futures and securities are overseen by the market regulators: the CFTC 
and the SEC. With respect to wholesale inter-bank payment and 
settlement systems, the Federal Reserve relies on a patchwork of 
authorities, largely derived from its role as a banking supervisor to 
help oversee them. There is no explicit statutory basis, however, for 
the Federal Reserve's oversight of these payment and settlement 
systems, and there is no uniform regulatory structure. It is important 
for reform to address such gaps in the regulatory structure.
    Under the historic derivatives legislation passed by this 
Committee, important enhancements to the CFTC's oversight of clearing 
organizations were included, both for futures and OTC derivatives. 
These provisions clarify the Commission's ability to regulate 
clearinghouses, write rules and oversee the setting of margin to 
protect the financial integrity of clearinghouses. The bill also 
strengthened the core principles to bring them up to international 
standards. I believe that these are all important enhancements so that 
the CFTC can robustly regulate risk management and other aspects of 
futures and OTC clearinghouses.
    The broader financial reform proposals importantly address a gap in 
oversight of payment systems by giving statutory authority to the 
Federal Reserve to oversee inter-bank payment systems. The proposals, 
however, go further by also authorizing the Federal Reserve to 
effectively regulate securities, futures and derivatives 
clearinghouses. The Federal Reserve would be able to set standards and 
review and approve rules to address risk management policies and 
procedures, margin and collateral requirements, counterparty default 
policies and procedures, timely clearing and settlement of 
transactions, capital and financial resource requirements.
    In addition to prescribing standards, the Federal Reserve would 
have the authority to directly participate in examinations, make 
recommendations for enforcement and implement those recommendations in 
certain circumstances. Thus, the proposals may effectively set up a 
system of dual regulation of clearinghouses between the market 
regulators on the one hand and the Federal Reserve on the other.
    Ever since President Roosevelt called for the regulation of the 
commodities and securities markets in the early 1930s, the CFTC (and 
its predecessor) and the SEC have each regulated the clearing functions 
for the exchanges under their respective jurisdiction. This well-
established practice of having the agency which regulates an exchange 
or trade execution facility also regulate the clearinghouses for that 
market should continue as we extend regulations to cover the OTC 
derivatives market. Market regulation of clearing, customer protection, 
segregation rules, trading venues and other components are so closely 
intertwined that Congress has for decades had them regulated by single 
regulators--either the CFTC or the SEC. Furthermore, Congress has 
stated expressly that the purpose of the Commodity Exchange Act is to 
ensure the financial integrity of all transactions subject to the 
CFTC's jurisdiction and the avoidance of systemic risk.
Additional Items
    In addition to the three areas that I have outlined above, since I 
last testified before this Commission, the CFTC and the SEC announced 
20 joint recommendations to tailor our regulations in the best interest 
of the American public. I look forward to working with this Committee 
and Congress on a number of these proposals that will require changes 
in statute. One important proposal is to establish a more efficient 
process for the SEC and CFTC product approval, including an ability to 
resolve any differences by referring such instances to the full 
Commissions and, if necessary, a Federal court of appeals. While the 
various regulatory reform proposals designate the Council as the 
arbitrator of an interagency dispute involving products, among other 
things, I believe that our joint recommendation is a preferred 
approach.
    Last, one aspect of the proposed resolution authority may cause an 
unintended consequence when applied to a financial company that is a 
member of a derivatives or securities clearing organization. The 
resolution authority provisions provide for the suspension of contract 
obligations for entities under receivership. This means that 
obligations of clearing members would be suspended until 5 p.m. on the 
business day after a receiver is appointed. Suspending a clearing 
member's obligations, even for a day, would preclude a derivatives or 
securities clearing organization from liquidating a clearing member's 
contracts during that time. Collateral that might have been sufficient 
to fund an immediate close-out might then be inadequate to cover the 
losses of a delayed close-out, particularly in the case of a financial 
institution whose failure has system wide effects.
Closing
    One year ago, the financial system failed the American public. The 
financial regulatory system failed the American public. We must now do 
all we can to ensure that it does not happen again. While a year has 
passed and the system appears to have stabilized, we cannot relent in 
our mission to vigorously address weaknesses and gaps in our regulatory 
structure. On the 209th anniversary of the first session of Congress in 
the new Capitol building, we have a profound responsibility to address 
the causes of the last crisis and work to prevent the next one.
    I thank you for inviting me to testify today. I look forward to 
working with you in the coming months to implement comprehensive reform 
of our financial regulatory system. I will be happy to answer any 
questions you may have.

    The Chairman. Thank you very much.
    Ms. Walter.

    STATEMENT OF HON. ELISSE B. WALTER, COMMISSIONER, U.S. 
      SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.

    Ms. Walter. Thank you, Mr. Chairman. Chairman Peterson, 
Ranking Member Lucas, and Members of the Committee, I am 
pleased to have the opportunity to testify today concerning the 
discussion draft of the Financial Stability Improvement Act.
    This legislation currently being marked up by the House 
Financial Services Committee would make significant changes to 
the regulation and resolution of the large interconnected 
financial firms. There are many lessons we can learn from the 
recent financial crisis. In particular, these events 
demonstrated the need to watch for, warn about and eliminate 
conditions that could lead to a market seizure or a cascade of 
failures that put the entire financial system at risk. While 
traditional financial oversight and regulation can help prevent 
systemic risks, this regulatory structure failed to identify 
and address systemic risks that developed over recent years. 
The current structure was hampered by regulatory gaps that 
permitted regulatory arbitrage and failed to ensure adequate 
transparency.
    Given the shortcomings of the current regulatory structure, 
I believe that there is a need to establish a framework for 
macro-prudential oversight that looks across markets and avoids 
the silos that exist today. Within that framework, I believe a 
hybrid approach consisting of a powerful council of regulators 
and a single systemic risk regulator is most appropriate. Such 
a structure would best ensure clear accountability for systemic 
risk, enable a strong and nimble response should adverse 
circumstances arise, benefit from broad and differing 
perspectives and minimize unintended consequences.
    In establishing and implementing such an approach, however, 
policymakers should fully consider its limitations and risks. 
No one can perfectly forecast future events and free markets 
can be faster and more informed than regulators, thus even an 
improved system will not identify every risk and fashion 
perfect solutions before financial crises develop. Moreover, in 
crafting a more stable system, policymakers might 
unintentionally foster a system that is unfair or unworkable. 
This can occur over time. For example, focusing on system risk 
could slowly weaken other important protections or lead to 
over-regulation. It can also take place quickly. For example, 
in times of crisis regulators might feel compelled to change 
rules or pick winners and losers.
    To minimize these adverse consequences, I recommend that 
the discussion draft be strengthened and clarified in several 
key areas to ensure that it does not unintentionally sacrifice 
other important market protections, or create new regulatory 
arbitrage opportunities or competitive advantages that could 
foster rather than reduce systemic risk. My written testimony 
provides specifics. I would like to briefly emphasize a few key 
points.
    First, to help ensure more robust risk management policies 
while minimizing competitive imbalances and unintended 
consequences, Congress should vest greater prudential risk 
management policymaking power with the Financial Services 
Oversight Council. Vesting such power in the Council would 
assure that these policies benefit from the input and 
experience of multidisciplinary experts with authority over and 
experience in dealing with various types of financial 
institutions. More than any single regulator, the Council would 
be able and should be empowered to make informed, balanced 
macro-prudential policy decisions.
    Second, the discussion draft should ensure that the 
systemic risk rules do not undercut necessary consumer and 
investor protections. The best approach to the application of 
new systemic risk powers is to ensure that any new framework be 
appropriately tailored to systemic risks, additive to existing 
and future rules and protections, and work through an open and 
transparent process to avoid unintended consequences.
    Third, the discussion draft should ensure that existing 
clearing agency requirements are not eliminated and existing 
capital standards are not lowered. And, finally, the discussion 
draft language regarding the identification and regulation of 
systemically important activities is very broad and could apply 
to many small institutions that do not themselves pose any 
systemic risk. Congress should consider defining the term 
activities and ensure once again that it is the Council which 
is charged with identifying those activities and developing 
processes to address them. Functional regulators could then 
implement these policies through traditional, transparent 
rulemaking processes with the Federal Reserve Board serving as 
a second set of eyes. In conclusion, I believe that we can do a 
great deal to protect against systemic risk by filling gaps in 
our regulatory system, reducing regulatory arbitrage by 
ensuring that similar products are regulated similarly, and 
ensuring that a new macro-prudential oversight regime is able 
to raise standards for entities that might be systemically 
important.
    Thank you again for the opportunity to present my views. I 
look forward to working with the Committee and the Congress as 
you consider these issues, and I would be pleased to answer any 
questions.
    [The prepared statement of Ms. Walter follows:]

    Prepared Statement of Hon. Elisse B. Walter, Commissioner, U.S. 
          Securities and Exchange Commission, Washington, D.C.
    Chairman Peterson, Ranking Member Lucas and Members of the 
Committee:

    I am pleased to have the opportunity to testify concerning the 
Discussion Draft of the Financial Stability Improvement Act (Discussion 
Draft).\1\ This legislation, currently being marked-up by the House 
Financial Services Committee,\2\ would make significant changes to the 
regulation and resolution of large, interconnected financial firms 
whose disorderly failure might put the financial system at risk.
---------------------------------------------------------------------------
    \1\ This testimony is delivered on my own behalf, as a Commissioner 
of the Securities and Exchange Commission. The full Commission has not 
voted on this testimony, but Chairman Schapiro endorses this testimony.
    \2\ Because this legislation is being currently marked-up, this 
testimony relates to the circulated Discussion Draft. We recognize that 
the bill is changing and some of these issues may still be addressed by 
the Committee.
---------------------------------------------------------------------------
Lessons from the Recent Financial Crisis
    There are many lessons we can learn from the recent financial 
crisis and events of last fall. In particular, these events 
demonstrated the need to watch for, warn about, and eliminate 
conditions that could cause a sudden shock to lead to a market seizure 
or cascade of failures that put the entire financial system at risk. 
While traditional financial oversight and regulation can help prevent 
systemic risks from developing, it is clear that this regulatory 
structure failed to identify and address systemic risks that were 
developing over recent years. The current structure was hampered by 
regulatory gaps that permitted regulatory arbitrage and failed to 
ensure adequate transparency. This contributed to excessive risk-taking 
by market participants, insufficient oversight by regulators, and 
uninformed decisions by investors.
    Given the shortcomings of the current regulatory structure, I 
believe there is a need to establish a framework for macro-prudential 
oversight that looks across markets and avoids the silos that exist 
today. Within that framework, I believe a hybrid approach consisting of 
a single systemic risk regulator and a powerful council of regulators 
is most appropriate. Such an approach would provide the best structure 
to ensure clear accountability for systemic risk, enable a strong, 
nimble response should adverse circumstances arise, and benefit from 
the broad and differing perspectives needed to best identify developing 
risks and minimize unintended consequences.
    The Discussion Draft is the latest in a series of significant 
legislative proposals designed to reform the financial system by 
filling regulatory gaps, improving investor and consumer protection and 
updating our financial regulatory apparatus to improve our ability to 
identify and reduce systemic risk. The Discussion Draft would enable 
regulators to raise capital requirements and impose heightened 
prudential standards on large, interconnected firms, and unwind--in an 
orderly fashion--those that have failed. It also would establish a 
council of regulators to identify certain large interconnected firms 
that require additional oversight, provide significant new information 
to the Federal Reserve Board, and empower the Federal Reserve Board to 
impose a host of additional requirements on institutions and activities 
deemed systemically important.
Strengthening the Discussion Draft
    Given the recent financial crisis and the weaknesses in our 
financial regulatory framework that it helped identify, new 
comprehensive oversight over systemically important institutions and 
activities is needed, and the Discussion Draft is an important step 
toward achieving that goal.
    In establishing (and implementing) such an approach, however, 
policymakers should fully consider its limitations and risks. Because 
no one--not even a systemic risk regulator or council--can perfectly 
forecast future events, and free markets can be faster and more 
informed than regulators, even an improved system will not identify 
every risk and fashion perfect solutions before financial crises 
develop. Moreover, there are also risks that, in an effort to craft a 
more stable system, policymakers might unintentionally foster a system 
that is unfair or unworkable. This can occur over time: for example, 
focusing on ``systemic risk'' could slowly weaken other important 
protections or lead to over-regulation. It can also take place quickly: 
for example, in times of crisis, regulators might feel compelled to 
change rules or pick winners and losers.
    To minimize these risks, we recommend that the Discussion Draft be 
strengthened and clarified in several key areas to ensure that it does 
not unintentionally sacrifice other important market protections or 
create new regulatory arbitrage opportunities or competitive advantages 
that could foster--rather than reduce--systemic risk. To address these 
issues, Congress should consider the following:
1. Strengthen the Council to Improve Risk Management Rules and Reduce 
        Moral Hazard.
    Policies and standards designed to address systemic risk should 
benefit from the perspectives of multiple regulators with different 
expertise, experience and missions, be formulated with an understanding 
of their direct and indirect impacts on other parts of the markets, and 
be tailored so that they do not inadvertently favor large institutions 
relative to small institutions (thereby unintentionally fueling, 
instead of reducing, systemic risk). To help ensure more robust risk 
management policies that fully consider and minimize any competitive 
imbalances and unintended consequences that might flow as a result of 
certain large institutions being ``systemically important,'' Congress 
should vest greater prudential risk management policymaking power with 
the Financial Services Oversight Council (``Council''). Vesting such 
power in the Council would assure that these policies benefit from the 
input and experience of multi-disciplinary experts with authority over, 
and experience in dealing with, various types of financial 
institutions.
    In particular, the Council should have the tools needed to identify 
emerging risks, be able to establish more stringent standards for 
leverage and risk-based capital for systemically important 
institutions, and be empowered to serve as a ready mechanism for 
identifying emerging risks and minimizing the regulatory arbitrage that 
can lead to a regulatory race to the bottom. This authority could 
include the ability to direct functional regulators to promulgate rules 
or review potentially systemic risks or the risks posed by systemically 
important institutions.
    The Council should have authority to identify institutions, 
practices, and markets that create potential systemic risks and set or 
recommend standards for liquidity, capital, and other risk management 
practices at systemically important institutions. The Federal Reserve 
Board could be responsible for monitoring risks at particular 
institutions and ensuring that these standards are implemented. This 
hybrid approach can help minimize systemic risk in a number of ways:

   The Council would ensure that different perspectives are 
        brought to bear in identifying risks that an individual 
        regulator might miss or consider too small to warrant 
        attention. These perspectives also would improve the quality of 
        systemic risk requirements by increasing the likelihood that 
        second-order consequences are identified and considered.

   The financial regulators on the Council would have 
        experience regulating different types of institutions 
        (including smaller institutions) and different products, so 
        that the Council would be more likely than any single regulator 
        to ensure that risk-based capital and leverage requirements do 
        not unintentionally foster systemic risk by advantaging the 
        largest institutions.

   The Council would include multiple agencies, thereby 
        significantly reducing potential conflicts of interest (e.g., 
        conflicts with other regulatory missions).

    The Council also would monitor the development of financial 
institutions to prevent the creation of institutions that are either 
``too-big-to-fail'' or ``too-big-to-succeed.'' We must remain vigilant 
against the risks posed by institutions whose businesses are so large 
and diverse that they have become, for all intents and purposes, 
unmanageable. Given the potential ongoing oversight role of any 
individual systemic risk regulator, it is important to have another 
level of impartial analysis take place through a multi-member Council. 
Accordingly, the Council is vital to ensure that our desire to minimize 
short-term systemic risk does not inadvertently undermine our system's 
long-term health. To ensure the independence of the Council, Congress 
should also consider requiring it to have an independent Chair and 
permanent staff.
    Although the Discussion Draft strengthens the Council in a number 
of important ways, a real risk remains that market participants will 
favor large interconnected firms, particularly those identified as 
systemically important, over smaller firms of equivalent 
creditworthiness, because of the belief that the government will step 
in and support such an institution, its bondholders, or counterparties 
in times of crisis. Although the Discussion Draft seeks to address this 
imbalance through heightened prudential standards and a new resolution 
regime, the new requirements are not set forth with sufficient 
specificity to determine whether they will adequately address the 
risks. Similarly, the new resolution regime does not clearly set forth 
how bondholders or counterparties will be treated. If bondholders or 
counterparties believe they can get a better deal under the new 
resolution regime, they may be more willing to lend to these 
institutions even if, relatively speaking, they are less credit worthy 
than other, smaller institutions. This would lower the cost of capital 
for larger interconnected institutions, increasing their size and 
potentially creating more systemic risk.
2. Ensure That New Systemic Risk Rules Do Not Undercut Needed Consumer 
        and Investor Protections.
    Although the Discussion Draft states that new rules can only 
supersede existing conflicting less stringent regulatory requirements 
to the extent of the inconsistency, Congress should make clear that 
needed investor and consumer protections remain fully in place. The 
best approach to the application of new systemic risk powers is to 
ensure that any new systemic risk framework be appropriately tailored 
to such risks, additive to existing and future rules and protections, 
and works through an open and transparent process to avoid unintended 
consequences.
3. Ensure that Existing Clearing Agency Requirements Are Not 
        Eliminated.
    A new systemic risk regulator should act as a second set of eyes 
over all systemically important entities (such as systemically 
important securities clearing agencies and other clearinghouses for 
financial products), participate in examinations, review risk 
management practices, and evaluate whether the existing functional 
regulation is sufficiently protective. However, Subtitle E of the 
Discussion Draft as currently formulated could fundamentally undermine 
the existing regulation and oversight of clearing agencies that are 
crucial to the overall competitiveness of U.S. securities markets. As 
currently drafted, Subtitle E would provide the Federal Reserve Board 
with the authority ``by regulation or order'' to ``prescribe or issue 
risk management standards governing the operations of identified 
financial market utilities and the conduct of identified activities by 
financial institutions.'' This language would include clearing agencies 
and a host of other entities that might be subject to other regulatory 
requirements, and could be exercised subject only to ``consultation'' 
with the Council and existing supervisory entities.
    In addition to potentially being a wholesale change in the way such 
institutions are regulated and supervised, it is unclear how these new 
standards would interact with existing risk management requirements or 
other important policy goals. For example, under existing laws, 
securities clearing agencies must provide fair access to and cannot 
discriminate among market participants seeking to become members of the 
clearinghouse. This requirement fosters competition and addresses 
potential conflicts of interest, but is not clearly protected under the 
language in Subtitle E. Although there may be a benefit to Congress 
empowering a regulator to act as a second set of eyes to reduce risks 
over certain institutions, this authority should not automatically 
override other important policy goals like transparency and fair 
competition that promote investor protection and the competitiveness of 
U.S. securities markets.
    To ensure that the supervision of these entities and concerns about 
systemic risk are appropriately balanced, these standards (as with 
others) could be established by the Council, implemented by the 
functional regulator, and designed to supplement but not supersede 
existing regulation and protections. The Council should coordinate with 
the Federal Reserve Board and functional regulators to eliminate 
regulatory gaps in a manner that reduces duplicative requirements. To 
the extent a conflict exists between the Federal Reserve and the 
functional regulator regarding the standards to be applied, the Council 
should resolve the conflict so that all regulatory goals are achieved, 
including safety and soundness.
4. Ensure That Existing Capital Requirements Are Not Lowered.
    Although the Discussion Draft calls for heightened prudential 
standards for identified financial holding companies, the language 
should be clarified to ensure that these standards are heightened in a 
meaningful sense to reduce the risk to the system appropriately and 
ensure that counterparties do not favor large institutions because they 
are ``too big to fail''--fueling greater size and risk at the expense 
of smaller more nimble competitors. The Discussion Draft currently 
defines heightened prudential standards as higher than for a normal 
financial holding company. It is not clear that this standard is higher 
than would apply today for a particular regulated entity. Accordingly, 
the Discussion Draft should be clarified to ensure that these new 
authorities cannot lower any standard that would otherwise apply to a 
company, including standards set by functional regulators.
    For example, the Discussion Draft could permit the Federal Reserve 
Board to impose bank-like capital requirements on a broker-dealer 
subsidiary of a Bank Holding Company (BHC). Such a requirement could 
(1) lower capital requirements for a broker-dealer in a BHC--
potentially putting customer accounts at risk in the case of failure; 
and (2) provide a competitive advantage for broker-dealers within a BHC 
relative to broker-dealers outside a BHC. This could have the effect of 
increasing systemic risk by permitting the big to get bigger.
    Therefore, the Discussion Draft should be clarified that Federal 
Reserve Board (or any other entity) cannot lower or reduce capital and 
other requirements for a regulated entity. This will better protect 
customers and investors and ensure that broker-dealers and other 
companies that are within large institutions do not receive an 
additional competitive advantage relative to smaller, less systemically 
risky, entities.
5. Revise Approach for Identifying and Regulating Systemic 
        ``Activities''.
    The Discussion Draft permits the regulation of systemically 
important ``activities'' and establishes multiple mechanisms for doing 
so (see subtitles B and E). This language is very broad and could apply 
to many small institutions that do not themselves pose any systemic 
risk. To minimize confusion, reduce the potentially unlimited reach of 
this grant of authority, and give affected parties due process, 
Congress should:

   Ensure that the Council identifies systemically important 
        ``activities'' and develops policies to address them. Where the 
        affected entities are already subject to a regulatory regime, 
        the Council could direct the functional regulators to implement 
        these policies, with the Federal Reserve Board as a ``second 
        set of eyes'' over already regulated entities. This will ensure 
        that the regulation of activities is not unchecked, and that 
        transparent, traditional rulemaking requirements (including 
        public notice and comment) are followed; and

   Consider defining what the term ``activities'' means in this 
        context to provide more guidance to regulators and reduce the 
        likelihood that this authority will expand over time.
6. Protect Independent Accounting Standards.
    I am pleased that the Discussion Draft does not alter existing 
protections that ensure the independence of accounting standard 
setting, but would like to raise the issue in anticipation of possible 
amendments on the topic. Investors must have transparent, unbiased and 
comparable information about the companies in which they choose to 
invest. Providing investors with this information, to assist them in 
allocating capital to its most efficient use, is essential to the 
health of our capital markets. High quality, consistent accounting 
standards provide the framework for investors to make the comparisons 
of investment opportunities and perform the analysis necessary to make 
informed investment decisions.
    Some have argued that prudential regulators should have a greater 
role in the setting of accounting standards or that accounting 
standards should be tied to ``systemic risk.'' This would be a grave 
mistake. Accounting standards are measurement and disclosure tools that 
convey information about financial performance and condition, tools for 
investors and investor protection--not for institution protection. To 
continue to be useful, accounting standards should endeavor be the same 
across the markets and market participants, just as they should be 
consistently applied over time. As noted above, one key anchor in this 
process to guard against systemic risk must be a requirement that 
standards be raised, not lowered. Establishing a new process that would 
permit regulators to weaken accounting standards, reduce disclosure or 
allow the basis by which economic performance is measured to fluctuate 
with the economic environment, could provide a new avenue for 
particular institutions to lobby for--and potentially receive--special 
treatment.
Conclusion
    While remaining vigilant to the inherent tensions and risks, I 
believe that we can do a great deal to protect against systemic risk by 
(1) filling gaps in our regulatory system; (2) reducing regulatory 
arbitrage by ensuring that similar products are regulated similarly; 
and (3) ensuring that a new macro-prudential oversight regime have the 
ability to raise standards for entities that might be systemically 
important.
    Thank you again for the opportunity to present my views. I look 
forward to working with the Committee and the Congress as it considers 
these issues and I would be pleased to answer any questions.

    The Chairman. Thank you very much, Commissioner.
    Mr. Strom.

   STATEMENT OF HON. LELAND A. STROM, CHAIRMAN AND CEO, FARM 
               CREDIT ADMINISTRATION, McLEAN, VA

    Mr. Strom. Chairman Peterson, Ranking Member Lucas, and 
Members of the Committee, I am Leland A. Strom, Chairman and 
CEO of the Farm Credit Administration, and I thank you also for 
this opportunity to testify in front of you today.
    I serve on the FCA Board with my colleagues, Nancy Pellett 
and Kenneth Spearman. FCA is an independent, arms-length agency 
responsible for examining and regulating the institutions of 
the Farm Credit System, including the Federal Agricultural 
Mortgage Corporation. The FCS is a network of borrower-owned, 
financial institutions that provide credit to farmers, 
ranchers, rural residents, agriculture and rural utility 
cooperatives, and other eligible borrowers. Mr. Chairman, this 
is a very timely and important hearing today regarding the 
Financial Stability Improvement Act discussion draft.
    FCA supports Congressional efforts to strengthen regulation 
and supervision of financial markets, as every American has 
been affected by the crisis in our global financial system. I 
want to emphasize that the System institutions remain safe and 
sound and did not contribute to the recent financial crisis. 
This was because the Agriculture Committee's oversight and the 
significant reforms made to the Farm Credit Administration and 
the System as a result of the agricultural credit crisis of the 
1980s. This included restructuring FCA as an independent, arms-
length regulator with formal enforcement powers, providing 
borrower rights to System borrowers, and establishing the Farm 
Credit System Insurance Corporation to protect System investors 
and resolve failed System institutions.
    The draft legislation is a comprehensive proposal designed 
to strengthen regulation and supervision of financial markets 
and some of the largest, most complex financial institutions. 
As proposed, the legislation does not directly amend the Farm 
Credit Act. However, a close reading reveals potential conflict 
with the Farm Credit Act as it relates to the credit risk 
retention requirements for securitizations. In addition, the 
discussion draft could create uncertainty in the definition of 
a financial company and other parts that potentially include 
Farm Credit System institutions in the regulatory structure or 
activities authorized.
    Over the past weekend, my staff had productive discussions 
with key policy officials at the Treasury. They informed FCA 
that it was not their intention to include FCS institutions. 
Further, they committed to work quickly to develop clarifying 
language to ensure that this intent is carried out in the 
proposal and does not create a jurisdictional conflict. In our 
discussions, we expressed concerns in three areas which they 
agreed to remedy.
    First, the Financial Services Oversight Council, composed 
of all Federal financial institutions regulatory agencies 
except the Farm Credit Administration and our Insurance 
Corporation, is established to monitor and address systemic 
risk to the financial stability of the United States. The far-
reaching authority and regulatory activities of this Council 
extend broadly to any financial company, as defined. 
Institutions of the System would appear to meet that 
definition. However, Treasury has drafted a proposed amendment 
to the financial company definition to clarify that the 
authorities of the Oversight Council do not extend to Farm 
Credit System institutions, including Farmer Mac, or impact the 
authorities of FCA.
    Second, subtitle F of the draft legislation would require 
creditors and those that securitize loans to retain ten percent 
of the credit risk on any loan that is transferred, sold, 
conveyed or securitized. This new requirement would directly 
apply to the securitization activities of Farmer Mac and 
perhaps to other activities of System institutions. It is 
important to note that in 1996, Congress repealed a similar ten 
percent retention requirement for loans sold to Farmer Mac. 
Clarifying that language is necessary to ensure enforcement of 
the credit risk retention requirements would not fall to 
another agency, and that FCA retains jurisdictional authority 
in these matters.
    Third, subtitle G of the draft legislation would provide 
the FDIC enhanced resolution authority for financial companies 
that pose systemic risks to the financial stability of the 
United States. Although the draft seems to imply that this 
authority does not cover System institutions, this should be 
clarified. A related issue is confusion over the authority of 
the FDIC to assess System banks and associations that already 
pay premiums to the Farm Credit System Insurance Corporation in 
order to cover the costs of resolving large interconnected 
financial companies that fail. Treasury, again, has drafted a 
proposed amendment to exclude all FCS institutions from the 
definition of financial company used for enhanced resolution 
and assessment authorities.
    Mr. Chairman, thank you again for this opportunity to 
participate in today's hearing. I look forward to commenting 
further on the draft legislation, including any revised 
proposals, and working with this Committee and Treasury on this 
matter. As new standards evolve for other financial 
institutions, you may require changes in the regulatory 
oversight of the Farm Credit System and Farmer Mac. As 
appropriate, the Farm Credit Administration is prepared to 
discuss with this Committee suggestions for enhancing FCA and 
Insurance Corporation statutory authorities. This concludes my 
statement, and I will be happy to answer your questions.
    [The prepared statement of Mr. Strom follows:]

  Prepared Statement of Hon. Leland A. Strom, Chairman and CEO, Farm 
                   Credit Administration, McLean, VA
    Mr. Chairman, Members of the Committee, I am Leland A. Strom, 
Chairman and Chief Executive Officer of the Farm Credit Administration 
(FCA or Agency). On behalf of my colleagues on the FCA Board, Nancy 
Pellett of Iowa, and Kenneth Spearman of Florida, and the dedicated men 
and women of the Agency, I want to thank the Committee for this 
important and timely hearing regarding the Financial Stability 
Improvement Act Discussion Draft (FSIA).
    The FSIA is a comprehensive proposal designed to strengthen 
regulation and supervision of financial markets and some of the 
largest, most complex financial institutions. The FSIA establishes a 
regulatory framework to monitor and oversee the stability of the 
financial system and address stability threats. As proposed, the 
legislation does not directly amend the Farm Credit Act of 1971, as 
amended, (Farm Credit Act), which provides the primary statutory 
authority for the establishment and regulation of institutions of the 
Farm Credit System (FCS or System), including the Federal Agricultural 
Mortgage Corporation (Farmer Mac). However, a close reading of the FSIA 
reveals direct conflict with the Farm Credit Act as it relates to the 
requirement for credit risk retention in the context of 
securitizations. In addition, the FSIA creates uncertainty in the 
definition of a financial company and other parts that potentially 
include FCS institutions in the regulatory structure and activities 
authorized by the FSIA.
    Over the past weekend, my staff had productive discussions with key 
policy officials at the Treasury. They told us that it was not 
Treasury's intent to cover FCS institutions in the FSIA. They committed 
to work with my staff over the next several days to develop clarifying 
language for the FSIA to insure that their intent is carried out and to 
ensure the FSIA does not create a jurisdictional conflict. I look 
forward to working with the Committee and Treasury on addressing these 
matters. The Agency's more complete description and analysis of the 
FSIA is included later in my testimony.
Mission of the Farm Credit Administration
    FCA is an independent agency responsible for examining and 
regulating the banks, associations, and related entities in the FCS, 
including Farmer Mac. The FCS finances almost 39 percent of all U.S. 
farm business debt, providing credit to more than 450,000 eligible 
agricultural borrowers through a nationwide framework of five banks and 
90 local retail associations. In addition, the System finances 
cooperatives, agribusinesses, rural utilities, and rural residents. The 
System also has a special mission to develop programs and make special 
efforts to serve young, beginning, and small (YBS) farmers and 
ranchers.
    As directed by Congress, FCA's mission is to ensure a safe, sound, 
and dependable source of credit and related services for agriculture 
and rural America. The Agency accomplishes its mission in two important 
ways.
    First, FCA ensures that FCS institutions, including Farmer Mac, 
operate in a safe and sound manner and comply with applicable law and 
regulations. Our examinations and oversight strategies focus on an 
institution's financial condition and any material existing or 
potential risk. We evaluate the ability of management and board to 
direct operations in each institution. We also evaluate each 
institution's compliance with laws and regulations to serve all 
eligible borrowers, including YBS farmers and ranchers. If a System 
institution violates a law or regulation or operates in an unsafe or 
unsound manner, we use our supervisory and enforcement authorities to 
ensure appropriate corrective action.
    Second, FCA develops policies and regulations that govern how 
System institutions conduct their business and interact with customers. 
FCA's policy and regulation development focuses on protecting System 
safety and soundness, implementing the Farm Credit Act, providing 
minimum requirements for lending, related services, investments, and 
capital, and ensuring adequate financial disclosure and governance. In 
addition, FCA has adopted regulations to implement statutory borrower 
rights provisions, including actions for restructuring a distressed 
agricultural loan before initiating foreclosure, and other borrower 
protection rules. The policy development program includes approval of 
corporate charter changes, System debt issuance, and other financial 
and operational matters.
    As the arms-length regulator of the FCS, the Agency will continue 
to focus on ensuring that the System remains safe and sound by 
promulgating regulations, providing appropriate guidance and 
maintaining strong and proactive examination and supervisory programs.
Farm Credit System
    The FCS is a government-sponsored enterprise (GSE) created by 
Congress in 1916 to provide American agriculture with a dependable 
source of credit. The FCS is a nationwide network of cooperatively 
organized banks and associations that are owned and controlled by their 
borrowers, serving all 50 states and the Commonwealth of Puerto Rico. 
The System provides credit and other services to agricultural producers 
and farmer-owned agricultural and aquatic cooperatives. It also makes 
loans for agricultural processing and marketing activities, rural 
housing, farm-related businesses, rural utilities, and foreign and 
domestic companies involved in international agricultural trade.
    Despite the unprecedented instability in the U.S. and global 
financial markets and a recessionary world economy, the overall 
condition and performance of the System remains fundamentally safe and 
sound. As of September 30, 2009, total FCS assets were $215 billion and 
loans exceeded $162 billion.
    While supporting significantly higher provisions for loan losses of 
$733 million, the System maintained positive profitability with net 
income of $2.02 billion for the first 9 months of 2009, compared to 
$2.37 billion for the same period in 2008. Improved net interest 
margins and spreads contributed to this earnings performance, and were 
primarily caused by better conditions in the debt markets and the lower 
interest rate environment.
    Total capital grew 8.1 percent, or $2.2 billion, to $29.3 billion 
at September 30, well above the 0.5 percent and 0.4 percent growth in 
loans and total assets, respectively. Capital as a percentage of total 
assets grew from 12.7 percent at December 31, 2008, to 13.6 percent at 
September 30, 2009. Capital increased primarily due to net income 
earned and retained, and a decrease in accumulated other comprehensive 
loss, but this may be impacted by year-end patronage programs.
    Asset quality overall remained acceptable at September 30, 2009, 
with 94.8 percent of the loan portfolio classified ``acceptable'' and 
``other assets especially mentioned,'' down from 97.1 percent at year 
end 2008. Asset quality in stressed agricultural sectors remains under 
pressure, and further deterioration in System credit quality is 
expected.
    In the first 9 months of 2009, nonaccrual loans increased $1.9 
billion to $4.1 billion, and now represent 2.78 percent of the loan 
portfolio, compared to 1.52 percent at year end 2008. However, the 
System's capital and loss reserves provide sufficient overall risk-
bearing capacity. The nonperforming assets to risk funds ratio was 14.7 
percent at September 30, 2009, and the adverse assets to risk funds 
ratio was 28.2 percent.
Farm Credit System Insurance Corporation
    The Farm Credit System Insurance Corporation (FCSIC or Corporation) 
was established by the Agricultural Credit Act of 1987. The Corporation 
insures the timely payment of principal and interest on System-wide 
consolidated joint and several debt obligations issued to investors. 
FCSIC holds the Farm Credit Insurance Fund (Insurance Fund) and 
collects annual insurance premiums from System banks and associations. 
At September 30, 2009, the Insurance Fund totaled $3.2 billion and 
System-wide debt securities were $177.1 billion. The Corporation also 
serves as conservator or receiver of any System bank or association 
placed into conservatorship or receivership by the FCA Board. 
Similarly, it is empowered to provide assistance to System banks and 
direct lender associations suffering financial difficulties subject to 
a cost-test limitation. As a result, the Corporation protects investors 
in System-wide debt securities.
Federal Agricultural Mortgage Corporation
    Congress established Farmer Mac in 1988 to provide secondary market 
arrangements for agricultural mortgage and rural home loans. Farmer Mac 
creates and guarantees securities and other secondary market products 
that are backed by mortgages on farms and rural homes, including 
certain USDA guaranteed loans. The 2008 Farm Bill expanded Farmer Mac's 
program authorities by allowing it to purchase and guarantee securities 
backed by eligible rural utility loans made by cooperative lenders. 
Through a separate office required by statute (Office of Secondary 
Market Oversight), the Agency examines, regulates, and monitors Farmer 
Mac's operations.
    Farmer Mac is a separate GSE devoted to agriculture and rural 
America. By statute, in extreme circumstances Farmer Mac may issue 
obligations to the U.S. Treasury Department, not to exceed $1.5 
billion, to fulfill the guarantee obligations of Farmer Mac Guaranteed 
Securities. The Insurance Fund does not back Farmer Mac's securities, 
and the System is not liable for any Farmer Mac obligations.
    Total program business of loans, guarantees and commitments as of 
September 30, 2009, stood at $10.8 billion. Farmer Mac's net income for 
the 9 months ended September 30, 2009 was $76.8 million, and its 
capital surplus over the statutory minimum was $126 million, up from 
$100 million as of June 30, 2009.
    Farmer Mac's nonperforming assets decreased to $84.8 million, or 
1.94 percent of the portfolio, as of September 30, 2009. Its 90 day 
delinquencies were $59.4 million, or 1.36 percent of the portfolio. The 
reduced levels of nonperforming assets and delinquencies as of 
September 30, 2009 from earlier dates in the year reflect sales of 
acquired property previously owned.
    Farmer Mac was also impacted last year by the financial system 
stress. Losses on certain investments required Farmer Mac to raise 
additional capital during the Fall of 2008 and management changes were 
made by its Board of Directors. Farmer Mac continues to restructure its 
balance sheet and further strengthen its operations and risk bearing 
capacity to focus on fulfilling its mission.
Examination Programs for FCS Banks and Associations
    The Agency's highest priority is to maintain appropriate risk-based 
oversight and examination programs. FCA's programs have worked well 
over the years and have contributed to the present overall safe and 
sound condition of the System, but we must continue to evolve and 
prepare for the increasingly complex nature of financing agriculture 
and rural America. We are hiring more examiners and increasing onsite 
presence and oversight of FCS institutions in response to the changing 
and more risky environment we face today.
    We evaluate each institution's risk profile on a regular basis. The 
Financial Institution Rating System (FIRS) is the primary risk 
categorization and rating tool used by examiners to indicate the safety 
and soundness of an institution.
FCA Actions to Mitigate Risk
    To address the heightened risk environment facing the System, we 
have told FCS boards and management that solid portfolio management and 
underwriting are paramount in these uncertain times and have emphasized 
the importance of portfolio stress testing. The Agency's examiners are 
increasing onsite presence and placing special emphasis on testing and 
evaluating:

   Internal audit and credit review programs to ensure they are 
        adequate and timely reflect each institution's risks;

   Portfolio management and stress testing functions to ensure 
        they are appropriate for the institution;

   Large loans held by multiple institutions to ensure 
        underwriting, servicing, and independent credit decisions are 
        made by purchasing FCS institutions and that representations 
        and warranties of the FCS originating lender are appropriate;

   Adequacy of the Allowance for Loan Losses and loan loss 
        provisions;

   Capital adequacy and capital management; and

   Adequacy and quality of liquidity at System banks.
Working With Financially Stressed Borrowers
    Agriculture involves significant inherent risks and volatility 
because of many factors, including adverse weather, changes in 
government programs, international trade issues, fluctuations in 
commodity prices, and crop and livestock diseases. The significant 
risks in agriculture can sometimes make it difficult for borrowers to 
repay loans. The System (under provisions of the Farm Credit Act) 
provides borrowers certain rights when they apply for loans and when 
they have difficulty repaying loans. For example, the Act requires FCS 
institutions to consider restructuring a distressed agricultural loan 
before initiating foreclosure. It also provides borrowers an 
opportunity to seek review of certain credit and restructuring 
decisions. If a borrower's loan goes through foreclosure, the Farm 
Credit Act and implementing regulations provide borrowers that qualify 
the opportunity to buy back their property at the appraised fair market 
value or make an offer to buy the property back at less than this 
value.
    FCA enforces the borrower rights provisions of the Farm Credit Act 
and examines institutions to make sure that they are complying with 
these provisions. It also receives and reviews complaints from 
borrowers regarding their rights as borrowers. Through these efforts, 
FCA ensures compliance with the law and helps FCS institutions continue 
to provide sound and constructive credit and related services to 
eligible farmers and ranchers.
Recent Deterioration in the Economic Environment
    The United States is slowly recovering from a severe global 
recession. The economic downturn began in late 2007; it worsened in 
2008 from significant financial market instability; then it extended 
into 2009 with increased unemployment, lost consumer confidence, and 
continued housing sector weaknesses. The government responded to this 
crisis with significant programs to stabilize the financial markets and 
stimulate economic growth.
    The confluence of economic and financial and market events resulted 
in the System facing funding challenges in the Agency debt markets, 
particularly for term debt. Due to the strong condition of the FCS and 
its status as a GSE, it was able to issue short-term debt securities, 
even though the issuance of longer-term debt became much more 
difficult. The financial environment also negatively impacted the 
System's cost of funding, as spreads relative to Treasuries increased 
significantly. Early in 2009, the System faced increased costs and 
limited liquidity access for term debt funding (5 years maturity or 
greater). For instance, the spread to comparable Treasuries for 2 year 
FCS debt peaked at 230 basis points compared to typical levels before 
the financial market crisis, ranging from 20 to 30 basis points. 
However, as the year progressed, there was steady improvement in market 
access for term financing and generally low interest rates overall, 
despite relatively wider spreads to Treasury. More recently, the 
improved economic and financial market conditions have afforded the 
System good access to funding across the yield curve with narrower 
spreads. The access to a wider range of debt securities helped support 
net interest income and profitability and allowed some improvements in 
pricing options for System borrowers.
    During this period of extreme market volatility, many non-System 
banks and financial institutions were able to access funds through 
various programs created or expanded by the U.S. Government in response 
to the financial crisis. The System does not have access to these 
programs or to any other U.S. Government backed liquidity credit line. 
While this situation has not prevented the System from obtaining funds, 
continued volatility within the GSE debt market makes the outlook for 
the availability and pricing of future funding less certain. This is an 
area meriting close monitoring by the FCS, its regulator, and Congress.
    At present, financial market turmoil, prolonged economic 
weaknesses, and deterioration in the agricultural economy pose 
significant management challenges for borrowers, FCS institutions, and 
FCA. High unemployment and the domestic and global recession have 
caused demand for U.S. farm products to falter and lowered commodity 
prices, thereby weakening the agricultural economy. After setting a 
record in 2008, net cash farm income is forecast to drop by 30 percent 
to a forecasted $66.2 billion in 2009. The 10 year average is $71.2 
billion.
    System borrowers face increased risk from volatile commodity 
prices, soft farm product demand, higher input prices, and uncertain 
weather conditions. The specific sectors showing the most stress are 
hogs, dairy, forestry, ethanol, and poultry. Those sectors represent 
21.8 percent of the System's portfolio. The cattle sector is also 
experiencing some stress.
    In addition to volatile commodity prices, agricultural producers 
have had to endure much more volatile input costs, although costs are 
down from records set in 2008. Squeezed profit margins have seriously 
undermined incomes and thus repayment capacity for major farm commodity 
groups. While many agricultural producers entered this economic 
downturn with a relatively strong financial condition, the downturn has 
reduced their financial strength and equity positions.
    Increased unemployment has also adversely impacted many rural 
communities. Continued job loss is a potential ongoing risk for these 
communities and may become an issue for the large number of System 
borrowers who depend on off-farm income to pay their loans. The housing 
slump has significantly reduced demand for lumber and nursery products, 
leading to reduced income, lost jobs, and increased stress in these 
industries.
    The potentially slow economic recovery and lagging prospects for 
employment growth as well as an uncertain housing recovery suggest that 
2010 may likely be another difficult year for many agricultural 
producers. These uncertainties will present challenges to lenders and 
regulators alike.
    The System's capital position and solid financial condition will 
help it weather these difficult times. Also importantly, as increased 
stress is beginning to surface in FCS portfolios, we recognize that 
System senior management is well experienced and seasoned. Many gained 
experience during the agricultural credit crisis of the 1980s, and we 
believe appropriate actions, in general, are being taken by FCS boards 
and management.
Experience Gained From 1980's Agricultural Credit Crisis
    Through the oversight and leadership of the House and Senate 
Agriculture Committees, many important reforms were made to the Farm 
Credit Administration and the FCS as a result of the agricultural 
credit crisis of the 1980's. This included restructuring FCA as an 
independent arm's-length regulator with formal enforcement powers, 
providing borrowers rights to System borrowers with distressed loans, 
and establishing the Insurance Fund to protect System investors.
    Then, over the ensuing 2 decades, the System restored its financial 
health and the trust of its borrowers. With its new authority as an 
arm's length regulator, FCA was able to ensure that System institutions 
adhered to safety and soundness standards. And the Insurance Fund also 
helped restore investor confidence.
    Both the System and FCA learned much during the crisis of the 
1980s, and those lessons helped build a much stronger Farm Credit 
System, as well as a stronger regulator. Mr. Chairman, I want to 
emphasize that System institutions were not involved in and did not 
contribute to the financial crisis that our nation experienced during 
the past 2 years.
Comments Regarding the Financial Stability Improvement Act
    The FSIA is a comprehensive proposal designed to strengthen 
regulation and supervision of financial markets and some of the 
largest, most complex financial institutions. A key feature of the 
proposal is the establishment of a new Financial Services Oversight 
Council (FSOC) that would bring together representatives of nearly all 
Federal financial regulatory agencies to monitor and oversee the 
stability of the financial system and address stability threats. Among 
its many other detailed provisions, the draft also addresses prudential 
regulation of financial companies and activities for financial 
stability; merges the Office of Thrift Supervision into the Office of 
the Comptroller of the Currency; improves regulation for bank holding 
companies and depository institutions; addresses payment, clearing, and 
settlement supervision; creates new standards for asset-backed 
securities and imposes credit risk retention requirements; enhances 
regulatory resolution authority; and enhances powers for financial 
crisis management.
Support for Congressional Efforts
    The FCA supports Congressional efforts to address the root causes 
and systemic failures that resulted in the catastrophic meltdown in the 
financial industry and marketplace last year. The Committee on 
Financial Services' FSIA legislation under review seeks to provide a 
mechanism for the oversight, control, and resolution of any financial 
company or U.S. financial marketplace activity that could pose a 
systemic risk to financial stability or the economy. The focus is to 
eliminate gaps in the supervision, regulation, identification, and 
control of risks in the U.S. financial markets and the largest, 
interconnected, and complex financial firms present to financial 
stability or the economy. The overall objective is to ensure the 
regulatory structure protects the economy and financial system as a 
whole. The proposal is far reaching, complex, modifies many existing 
laws, and affects numerous financial marketplace participants.
    The objectives of the Committee draft are commendable, and we 
support the efforts of Congress to improve the financial regulatory 
structure. Whether through legislative changes, new regulatory 
activities, or a combination of both, there must be robust supervision 
and regulation of financial firms and market practices that pose 
threats to the financial stability of the country or the economy.
Farm Credit System Not a Contributor to the Economic Downturn or 
        Financial Market Destabilization
    The Farm Credit Act of 1971, as amended, (Farm Credit Act) and 
sound regulations adopted by the FCA address the fundamental safety and 
soundness requirements for the FCS and Farmer Mac. Under FCA's 
examination and oversight, the System and Farmer Mac did not engage in 
lending practices and market activities that contributed to the 
economic downturn and financial market turmoil. However, the FCA, 
System, and Farmer Mac had to manage through the spillover impacts on 
the agricultural economy, the lending environment, the funding 
challenges, and unintended impacts from government stabilization 
programs to ensure that credit and related services remained available 
to agricultural producers and rural areas.
    From Farmer Mac's creation, Congress included strong statutory 
underwriting, security appraisal, and repayment standards for qualified 
loans, with Farmer Mac's activities regulated and supervised by the 
FCA. In addition to statutory minimum requirements, Farmer Mac was 
required to develop sound underwriting standards for loans to qualify 
for its programs. To date, these standards and regulations have 
prevented any investor credit losses in Farmer Mac securities.
    For direct lender institutions of the cooperative Farm Credit 
System, regulations are in place for sound and constructive loans, 
including loan underwriting requirements, loan security appraisal 
standards, and repayment capacity requirements. Regulatory requirements 
are also in place for eligibility and scope of financing, lending and 
leasing limits, and regulatory capital. Additionally, requirements were 
put in place 20 years ago to provide for borrower rights that require 
clear disclosures and certain safeguards for borrowers when loans are 
made, as well as when their loans become distressed. Regulatory 
requirements and risk-based examinations have ensured the System 
continues to serve eligible borrowers in a safe and sound manner 
despite the prolonged economic recession and destabilized financial 
markets.
    Under the jurisdiction of the Agriculture Committee, the FCA 
continues to effectively address FCS and Farmer Mac systemic, credit, 
and operational risk issues to ensure continued credit availability for 
agriculture and rural areas. Importantly, the FCA has the statutory 
authority to examine, regulate, and oversee the System and Farmer Mac, 
including strong enforcement authorities and the ability to appoint a 
conservator or receiver. Enforcement actions can result in written 
agreements; orders to cease and desist; civil money penalties; and 
orders of removal, suspension, or prohibition. When appointed by FCA, 
the Insurance Corporation has the statutory responsibility to serve as 
receiver or conservator for the orderly wind down of System 
institutions.
Scope of the FSOC Established by the FSIA
    The draft legislation would subject all financial companies that 
may pose significant risks to the financial system to the framework for 
consolidated supervision that currently applies to bank holding 
companies (BHC). Large, interconnected banks, non-bank financial 
companies, and industrial lending companies would be subjected to 
comprehensive supervisory oversight applied to BHC. Large, 
interconnected financial companies are actively engaged in the 
financial markets for profit purposes. They tend to amass a material 
volume of complex financial transactions and obligations with other 
financial companies. Such firms frequently trade in various securities, 
financial instruments, and derivatives. At times, they may take highly 
leveraged speculative positions in the financial marketplace. As a 
result, large, interconnected financial companies are at the core of 
the financial markets and relied on by market participants for the 
intermediation of various financial transactions. Considering their 
central role in the marketplace, these companies can pose systemic risk 
due to their size, level of activity, interconnectivity and business 
practices.
    The draft legislation would create the FSOC, with voting membership 
consisting of Federal financial regulatory agencies, to reinforce 
regulatory systemic risk oversight of large, interconnected financial 
companies. The FSOC would have exclusive and broad authority to 
identify any financial company where a material financial distress 
could pose a threat to financial stability or the economy or financial 
activity that could pose such a threat. Criteria for identifying 
systemically significant financial companies include the nature of the 
financial assets, liabilities, off-balance sheet exposures, and 
transactions with other companies as well as its importance as a source 
of credit and liquidity. While the nature, scope, and mix of the 
company's activities are important considerations, the FSOC would have 
the discretion to consider other factors it deems appropriate.
    Once the FSOC identifies a financial company as posing a systemic 
risk, it would be treated as a BHC and the Board of Governors of the 
Federal Reserve System (Board) would be required to impose heightened 
prudential standards. These standards include risk-based capital 
requirements, leverage limits, liquidity requirements, concentration 
limits, prompt corrective action requirements, resolution plans, and 
overall risk management requirements. After notice, the Board may also 
require the identified financial company to reduce its asset size and 
scope of business activities. For a subsidiary depository institution 
of an identified financial company, the Board would be authorized to 
recommend heightened prudential regulation to the primary financial 
regulatory agency for such subsidiary. The Board would have backup 
authority to impose its recommendation if the primary financial 
regulatory agency failed to impose the prudential standards.
    To ensure the bankruptcy of a large interconnected financial 
company does not destabilize the financial markets or the economy, the 
proposed legislation provides for the orderly resolution of such firms 
by the Federal Deposit Insurance Corporation (FDIC). An identified 
financial company would be subject to the enhanced resolution process 
based on a recommendation by the Board and FDIC or the Security and 
Exchange Commission (SEC) and certain determinations by the Secretary 
of the Treasury. The FDIC would then be authorized to wind down an 
identified company's operation in a manner that ensures market critical 
obligations are honored and shareholders and creditors bear the brunt 
of any resulting losses. The FDIC would also be able to draw on the 
Treasury any amount needed for the resolution of such financial firms 
and recoup the expenditures from assessments on the financial services 
industry through the ex post creation of the systemic resolution fund. 
Risk-based assessments would be made on all financial companies with 
more than $10 billion in consolidated assets on a graduated basis, with 
credit given for fees paid to deposit insurance, investor protection, 
or insurance company funds.
    In summary, the FSIA would grant the FSOC broad far-reaching powers 
over financial companies. These powers would include the authority to 
gather information and identify a financial company as posing a 
systemic risk to financial stability or the economy. Upon identifying a 
financial company, the FSOC would empower the Board to require 
heightened prudential standards and subject the identified company to 
enhanced resolution authorities. The FSOC and Board also would have 
broad authority to identify financial activities and practices that 
pose risks to financial stability and the economy. Once an activity or 
practice is identified, the Board would be required to recommend 
prudential standards to the primary financial regulatory agencies.
Effect of the Legislation on Farm Credit System Institutions
    As proposed, the legislation does not directly amend the Farm 
Credit Act, which provides the primary statutory authority for the 
establishment and regulation of institutions of the System, including 
Farmer Mac. The draft does not indicate an intention to affect the 
System or include FCA. Moreover, its scope seems to be directed at 
systemic financial marketplace issues and very large, interconnected 
financial companies that pose systemic risk to the entire financial 
system and the nation's economy as a whole. However, a close reading of 
the draft reveals direct conflict with the Farm Credit Act as it 
relates to the requirement for credit risk retention in the context of 
securitizations. In addition, the draft creates uncertainty for the 
potential inclusion of the System in the regulatory structure or 
activities authorized. Three specific areas are noted.
    First, the FSOC, composed of all Federal financial institutions 
regulatory agencies except the FCA and FCSIC, is established to monitor 
and address systemic risk to the financial stability of the United 
States. The significant and far reaching authority and regulatory 
activities of the FSOC extend broadly to any ``financial company'' as 
defined. It is not clear what the many implications may be of simply 
meeting the basic definition of ``financial company.'' Nevertheless, as 
written, institutions of the System would appear to meet that 
definition, as they are companies or entities engaged in financial 
activities.\1\ Therefore, the FSOC would have regulatory authority 
without inclusion of the FCA, the FCS's primary regulator, or 
consultation with the Agriculture Committees responsible for overseeing 
agricultural credit and related services delivered through the System. 
Similarly, any potential action by the FSOC to identify a System 
institution as systemically significant and treat it as a BHC would be 
impractical given the System's unique structure and public policy 
purpose. Given the FCA already analyzes, regulates, examines and 
oversees potential systemic risks of the System, the FSOC appears to 
create a conflicting regulatory framework if it applied to the System. 
The end result is regulatory uncertainty and confusion for the 
cooperative System that lends to farmers, ranchers, and others as 
authorized by the Farm Credit Act.
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    \1\ Section 4(k)(4) of the BHC Act considers lending, guaranteeing 
against loss, or issuing instruments representing interest in pools of 
assets as activities that are financial in nature.
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    Subtitle F of the draft legislation, through the Securities and 
Exchange Commission, would require creditors and those that securitize 
loans to retain ten percent of the credit risk on any loan that is 
transferred, sold, conveyed, or securitized. This new requirement would 
be directly applicable to the securitization activities of Farmer Mac 
and perhaps to other activities of System institutions when they extend 
credit within the System or with external lenders. It is important to 
note that in 1996, Congress repealed a similar ten percent retention 
requirement that existed in title VIII of the Farm Credit Act for loans 
sold to Farmer Mac. Farmer Mac has minimum statutory loan underwriting 
requirements outlined in 12 U.S.C. 2279aa-8 and definitions applying to 
qualified loans in 12 U.S.C. 2279aa. Separately, the FCA repealed 
regulations that required lead lenders to retain ten percent of the 
credit risk in loan participations they sold to other lenders. As 
written, since the FCA is not a named Federal financial regulator on 
the FSOC, enforcement of the credit risk retention requirements would 
fall to the Securities and Exchange Commission, as outlined in 
1502(e)(2), creating further conflicts.
    Third, subtitle G of the draft legislation would provide the FDIC 
enhanced resolution authority for large, interconnected financial 
companies that pose systemic risks to the financial stability of the 
United States. Although the structure and text of subtitle G seems to 
imply that it does not cover the System (which is not a large, 
interconnected company that could pose systemic financial risks), this 
matter is not absolutely clear. A related issue is confusion over the 
authority of the FDIC to assess System banks and associations to cover 
the costs of dealing with failed financial institutions that already 
pay premiums to FCSIC.
Conclusion
    Thank you for the opportunity to participate in today's hearing. I 
look forward to commenting further on the FSIA, including any revised 
proposals, and working with the Committee on this legislation. As you 
consider credit issues in agriculture, I stand ready to work with this 
Committee on enhancements to the Farm Credit Act to ensure our 
regulatory, enforcement, and resolution authorities keep pace with best 
practices.

    The Chairman. Thank you very much, Mr. Strom, and I thank 
all of the witnesses for being with us today.
    You know, we had Mr. Parkinson from the Federal Reserve 
here a little while ago, a year ago, and we asked him about 
their experience, in this regard. He testified that the Federal 
Reserve has never been a primary regulator for any of the 
central counterparty and clearing service. You guys, Mr. 
Gensler and Ms. Walter, do you have any idea of where the--how 
they came up with this idea that the Federal Reserve is better 
equipped to do this, given the fact that they don't, they have 
never done this before? Do you have any insight for me?
    Mr. Gensler. I think since President Roosevelt came to 
Congress in the 1930s, and Congress responded and set up the 
Securities and Exchange Commission, our predecessor was setup 
under the Commodities and Exchange Act in 1936, that 
clearinghouses and exchanges have been overseen respectively 
either by the SEC or the CFTC. They are so intertwined with 
customer protection rules, segregation rules, product 
development, that this is the best place, and that is where 
they have been now for 75 years.
    The clearinghouses and the exchanges are systemically 
relevant. They are relevant to the broader economy and the 
success of all Americans, so I think that they are getting 
caught up in this view because they are systemically relevant. 
But I think much of what the CFTC and the SEC does is 
systemically relevant and is appropriately regulated by the 
market regulators.
    The Chairman. Well, these, some of these guys were involved 
in unwinding the Lehman situation and so forth, and they 
survived that whole situation and didn't have any defaults that 
I am aware of.
    Mr. Gensler. I believe the clearinghouse is a significantly 
lower risk to the system and that is why this Committee 
incorporated that in the over-the-counter derivatives bill that 
requires many transactions in the central clearing. You are 
correct, Mr. Chairman, that in the bankruptcy of Lehman 
Brothers, over a weekend, the particular transactions that 
Lehman had with the clearinghouses were allowed to be moved. 
Under the Commodity Exchange Act currently there are provisions 
for portability to move the transactions from one futures 
commission merchant to another and that was done successfully. 
Similarly in Refco, when Refco failed 4 or 5 years earlier, it 
happened similarly, and I would also note that currently in 
statute we have authority to actually step in as a receiver of 
the clearinghouse if there was such a problem with the 
clearinghouse itself.
    The Chairman. Well, apparently this draft legislation would 
give the Fed the power to override what you are doing, right, 
the way I read it?
    Mr. Gensler. That is correct. The various proposals have a 
Council. The Council can set various standards, but ultimately 
the Federal Reserve could, if the CFTC or the SEC did not 
follow the Federal Reserve guidance, have full examination 
authority, enforcement authority, ability to set rules and 
orders for clearinghouses.
    The Chairman. What under the draft, what ability would you 
have to challenge or appeal a decision made by the Fed? I mean, 
can the Council override the Fed actions or could you challenge 
them in court?
    Mr. Gensler. Not as I understand the draft legislation, but 
maybe others have a different read of it.
    The Chairman. So we are going to take somebody who has no 
experience and put them in charge is apparently what they are 
doing, is what it sounds like to me, so I won't make you answer 
that.
    Mr. Strom, does the Farm Credit agency or Act, excuse me, 
the Farm Credit Act provide for a way to shut down a Farm 
Credit institution that gets into financial difficulty?
    Mr. Strom. Mr. Chairman, the revisions of the Farm Credit 
Act in 1987 did put in strong enforcement powers for the 
agency, and there are mechanisms involving the agency and the 
Insurance Corporation for the resolution, under which the 
Insurance Corporation can be designated as either a receiver or 
conservator of a Farm Credit institution at the direction of 
the Farm Credit Administration. So yes, there are wind-down 
provisions.
    The Chairman. And you would use that?
    Mr. Strom. We can use that.
    The Chairman. Have you used it?
    Mr. Strom. No, we have not had to use it. We have had no 
System failures in the last 20 years that have had to utilize 
that.
    The Chairman. Now, I guess in your testimony you were 
saying the Treasury added some language to try to fix some of 
these problems, is that what you said?
    Mr. Strom. Mr. Chairman, yes, there were three primary 
areas that we were concerned about. The definition area--as of 
late yesterday they had responded that, in their view of the 
language of the bill, there was never an intent to include the 
Farm Credit System institutions. So, they have said that they 
would put an exclusion in the bill, under the terms of 
definition of a financial company to exclude Farm Credit System 
institutions. They also agreed, or mentioned, that they would 
put in exclusion language in the area of the resolution issue 
that would have put FDIC in charge of resolutions. But, we 
still are not certain where we stand with them on the credit 
retention issue.
    The Chairman. But they are not writing the bill.
    Mr. Strom. I agree 100 percent and that is why.
    The Chairman. Well, how is this going to work? Have they 
got somebody over on the Financial Services Committee that is 
going to offer these amendments or how is that going to work?
    Mr. Strom. They have told us that they have had contact 
with the Financial Services Committee to offer these amendments 
to the bill.
    The Chairman. And do you, I am a little over time but do 
you have the authority, anymore, to put in this ten percent 
requirement if you wanted to, or did we take that away in 1996?
    Mr. Strom. That was taken away in 1996.
    The Chairman. You can't do that even if you wanted to?
    Mr. Strom. That is correct. I was pretty certain that we 
can't go back and do it because that was put in the law to take 
that out back in 1996, so it is in the statute.
    The Chairman. Thank you.
    The gentleman from Oklahoma.
    Mr. Lucas. Thank you, Mr. Chairman, and to continue a point 
that you brought up initially, in a market emergency, of 
course, I think we would all agree that one of the most 
important things is for everyone to know who is in charge.
    And under present law, Chairman Gensler, clearly CFTC has 
very robust emergency powers and Title I, as we are discussing 
here, seems to give substantial emergency powers including 
futures clearing to the Federal Reserve. Could you take us 
through a scenario as you envision the bill now if there is a 
market and a problem occurs your people would be the first to 
recognize it because you are the primary regulator, from that 
point on as you envision the legislation describe for me the 
scenario. Would you begin to respond? Would you report to the 
Fed? Would you report to the Council? How do you envision this 
bill working if you have a problem within a particular market?
    Mr. Gensler. Well, I think that it would probably evolve 
over time. What the bill envisions is that there would be 
effectively dual regulation or even multiple regulators because 
you would have a Council, you would have the Federal Reserve, 
and then you would have the market regulator, in this case the 
CFTC that would have some oversight or involvement with the 
clearinghouse that you mentioned. I think if we saw it, we 
would still do what our expert staff does already. We would 
work with the clearinghouses and exchanges on whatever that 
issue was. If it has to do with risk management, with the 
support of this Committee, the derivatives bill that you passed 
out of this Committee enhanced some of our ability in those 
circumstances to write rules. But, foremost, we would rely on 
the clearinghouse to write rules but if they didn't, we could 
write rules under the legislation you passed out of this 
Committee. But under this proposed legislation, if that wasn't 
satisfactory to the Council or was not satisfactory to the 
Federal Reserve, they could step in and write their own rules.
    Mr. Lucas. So you would be reporting to the Council as you 
were proceeding after CFTC determined there was a problem, you 
would begin to assess the situation, you would prepare to take 
action, you would be reporting to the Council. I assume you 
would be reporting to the Council what CFTC would envision as 
the action to take for remediation. The way this bill is 
drafted they would review those proposed movements or actions, 
conceivably. The way the bill is put together, if they 
determine that the CFTC's remedy was inappropriate or didn't 
match what they perceived to be appropriate, then as you 
envision the bill, the draft legislation, they could then 
immediately override CFTC?
    Mr. Gensler. Well, I think just as it is now, we do a lot 
of consultation with our fellow regulators. I think that 
consultation is a positive thing and I would assume with or 
without a draft bill, we would consult with other regulators. 
But what the draft proposal also does is say that Council 
regulators may recommend, and if the CFTC or SEC does not 
follow that recommendation, we have to then publicly say why we 
didn't follow the recommendation, and then the Federal Reserve 
could step in and set their own rules of the road.
    Mr. Lucas. I think you see where I am going. I am trying to 
work through my own mind the consequences of a problem, 
conceivably something like a phased liquidation of trading 
positions over a number of days, not something that is beyond 
the realm of what you would in a potential scenario. If the Fed 
determined on a Saturday night that that wasn't fast enough or 
didn't meet the overall scheme of things and they ordered an 
immediate liquidation or dramatic move, I am just trying to 
work through my own mind before we get to that scenario if this 
draft proposal would become law, what the consequences would be 
to the market and the economy?
    Mr. Gensler. I think, sir, that it would evolve, but the 
legislative language is very broad, and if the Federal Reserve 
or the Council sought more heightened prudential standards, 
they would have broad enforcement authority. I think you are 
correct on that.
    Mr. Lucas. So ultimately the Fed would be the 12 ton 
regulatory gorilla at the end of the line.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Pennsylvania, Mr. Holden.
    Mr. Holden. Thank you, Mr. Chairman.
    Mr. Strom, following up on your conversation with the 
Chairman about Farmer Mac, how in the Farm Credit Act of 1987 
we had the ten percent hold-back provision put in and then we 
repealed it in 1996. Can you elaborate on why we repealed it, 
what damage it was causing or restrictions it was causing?
    Mr. Strom. Congressman, Farmer Mac was established in 1988 
to be a secondary market for agriculture real estate mortgages. 
That was a ten percent first-loss retention that Farmer Mac had 
to retain, and they found that a very unworkable situation. It 
was a struggle for them to add volume with that retention piece 
in there. And so I think because Congress recognized, and this 
Committee recognized, that that was repealed. It opened the 
door for them to do more business with stronger regulatory 
standards also included; so that we, as the regulator in our 
oversight of Farmer Mac, would make sure and enforce those 
strong regulatory standards. They have been able to emerge now 
as an almost $11 billion entity in that secondary market.
    Mr. Holden. Thank you. Also, Mr. Strom, you mentioned your 
concerns about the Farm Credit System Insurance Corporation 
with the Financial Service Committee's draft. Can you tell us 
about the status of the Insurance Corporation? What are its 
assets and what are you concerned about with the other 
Committee's draft?
    Mr. Strom. The Insurance Corporation was established as 
part of the 1987 amendments to the Farm Credit Act, and it is 
currently fully funded with over $3 billion in the insurance 
fund to give backstop, to insure timely payment of System debt 
obligations, so it is currently fully funded. The confusion in 
this new draft legislation is that it has put in place on it 
charging premiums on banks or other financial companies in 
excess of $10 billion to fund the FDIC oversight and resolution 
authority. We already have that in the Farm Credit System in 
this Insurance Corporation and, hence, System institutions, and 
there are a number of them including the five banks of the Farm 
Credit System, that are in excess of $10 billion in size, which 
would be paying additional premiums on top of the premiums they 
already pay to their own insurance fund. So we see it as a kind 
of piling on for them, and it really clouds the authority of 
the resolution authority if the FDIC is placed in ahead of our 
own Insurance Corporation.
    Mr. Holden. Any idea what the proposed premiums would be?
    Mr. Strom. No, I am not aware of levels of proposed 
premiums.
    Mr. Holden. Thank you.
    I yield back, Mr. Chairman.
    The Chairman. What are the current fees of the bank, your 
bank is paying?
    Mr. Strom. We have authority in the Insurance Corporation 
to charge up to a 20 basis point premium on System institutions 
to insure that the fund stays at the two percent secured base 
of outstanding debt of Farm Credit System institutions. This is 
approximately $160-$170 billion at this time, and so the fund 
at $3.2 billion is now fully funded. Let me reiterate that this 
Committee took the action with the Congress last year in the 
farm bill to raise our level of premium assessment. There was a 
cap of 15 basis points. You raised it to 20 basis points, 
working with us, so that we can ensure flexibility. Now, we 
will adjust that premium level as time goes on to ensure that 
it stays at the full secure base.
    The Chairman. So when you hit the maximum then you suspend 
the assessment?
    Mr. Strom. Yes, the Insurance Corporation has the 
flexibility, the Board of the Insurance Corporation has the 
flexibility to establish those premiums.
    The Chairman. Now, there is no premiums?
    Mr. Strom. Well, right now we are looking at the fact that 
we will probably be making the decision in the coming months 
because we collect the premiums in arrears. So, as they come in 
we will be addressing that situation.
    The Chairman. Okay.
    The gentleman from Kansas, Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you.
    Let me follow onto Mr. Holden, the gentleman from 
Pennsylvania, his question. You talked about, Mr. Strom, you 
talked about the double premium charges. Can you outline the 
benefits that come from the additional premiums that you would 
be paying? What would be the Farm Credit System benefit for 
what it is paying in additional premiums?
    Mr. Strom. Congressman, I think this is all part of the 
wise decision of this Committee back in the 1980s at the height 
of the agricultural crisis. This Committee set many pieces in 
place for the Farm Credit System and the success of FCA as a 
regulator today. The insurance fund was put in place. It is now 
fully funded. That serves as a backstop. That is a positive 
aspect for any System investor that looks at investing in 
System debt obligations to know with assurance that this Farm 
Credit System is safe and sound. The Insurance Corporation and 
the fund that was established there is one integral piece of 
that.
    Mr. Moran. So no additional soundness and security comes 
from paying additional premiums to this additional fund for the 
Farm Credit System, is that correct?
    Mr. Strom. At this time, the statute says that the fund 
should be kept at the two percent secure base and, as the 
Insurance Corporation, our job is to make sure it gets there 
and stays there.
    Mr. Moran. The requiring of additional retention, the ten 
percent securitized debt on your books, does that cause 
interest rates to increase and have the consequence of 
constricting credit?
    Mr. Strom. Well, I think in the general context of this 
entire piece of legislation with the layering effect of 
additional oversight, if there are premiums charged by FDIC for 
their fund and for the resolution authorities, and if it were 
applied to Farm Credit System institutions, certainly there 
would be additional costs that would be passed on. You have 
staffing cost for the regulation on top of this. We fully 
understand, as a regulator, the importance of safe and sound 
regulation. We understand the intent of this bill, but this 
Committee, back to the earlier question about the Treasury's 
involvement, the Agriculture Committee has done the right 
things in the last 20 years with the Farm Credit System. We 
believe that in working with Treasury, ultimately, it will be 
this Committee's decision. We understand the jurisdiction issue 
here and your work with the Financial Service Committee is to 
resolve this issue.
    Mr. Moran. Unless I misunderstood, I am going to suggest 
that your answer to me to both my questions about increasing 
premiums and additional set-aside for securitized debt means 
increased interest rates and less credit availability.
    Mr. Strom. Yes.
    Mr. Moran. Thank you.
    Let me ask a question of the Chairman, Mr. Gensler, and of 
the Commissioner. I was reading your testimony, Mr. Gensler. In 
the last paragraph before you close, it deals with 
clearinghouse obligations and the appointment of a receiver. I 
understand that clearinghouses are not subject to a stay under 
current law. Would such a stay, I am not sure what you are 
saying in your testimony. Does that stay concern you and 
shouldn't we have clear language that allows a receiver to 
continue to perform clearing activities that is feasible and 
exercise all the rights to liquidate in that setting?
    Mr. Gensler. I thank you for asking because I wasn't able 
to say it in my oral testimony, but clearinghouses reduce risk 
immediately upon a default that one of their clearing members 
make and can close out, liquidate the position, and that is 
fundamental and that has been true for decades, a very 
important feature. I think it is probably unintended but what 
is in the various proposals would be that the FDIC can step in 
and stay for up to a day and a half until 5:00 p.m. the next 
day these provisions--I think that we should work with this 
Committee and, hopefully, with Congress to clarify, because 
that would actually raise risk of clearinghouses rather than 
lowering risk of the clearinghouse.
    Mr. Moran. Thank you. Let me ask a final question on this 
on the topic of clearinghouses. In our bill that this House 
Agriculture Committee passed out several weeks ago, we 
prohibited the Fed from providing assistance through the, at 
the window, excuse me for stuttering, and it appears to me that 
this language prohibits clearinghouses from accessing the 
discount window as well. So my question is, is that a prudent 
thing to do to bar access to the window?
    Mr. Gensler. I think that clearinghouses should be robustly 
regulated by the market regulators, and that the clearinghouses 
should have in place roads to access liquidity from the central 
bank. A discount window is actually a routine feature that 
banks currently have that they can access. In current law in 
extreme circumstances, extraordinary circumstances and I think 
it is under 13.3 of the Federal Reserve Act, with super 
majority vote of the Fed and so forth, they could lend to a 
clearinghouse. It has never happened but that is more an 
extraordinary circumstance. I don't believe that you would want 
to have a routine lending facility to these clearinghouses.
    Mr. Moran. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from North Carolina, Mr. McIntyre.
    Mr. McIntyre. Thank you, Mr. Chairman. Thanks to all of you 
for being with us today.
    Farm Credit, as we know, is already regulated to a higher 
degree than most financial institutions, as it is regulated at 
the Farm Credit Administration. If this bill were to be put in 
place it would greatly reduce the effectiveness of Farm Credit 
and their ability to serve farmers and rural communities. Mr. 
Strom, I have had the pleasure, as you may know, of working 
with Cape Fear Farm Credit located in southeastern North 
Carolina, and I have seen first-hand the good work that they do 
in our rural communities. We have seen that virtually every 
other financial institution in the country seems to have had a 
direct line to the Treasury as a backstop to their lending 
activity, and some even for capital in recent months. In your 
opinion, does the Farm Credit System have a backstop at the 
Treasury or at the Federal Reserve?
    Mr. Strom. Congressman, the answer is no, the Farm Credit 
System does not have that immediate backstop to either. As we 
saw last fall a year ago, as the financial crisis unfolded, one 
of the issues that the Farm Credit System faced was on the 
funding side of its operations. I mean it is authorized to 
issue consolidated debt obligations through its funding 
operations up in New Jersey. As investors worldwide backed 
away, we saw the cost of the debt obligations issued by the 
System skyrocket, and those costs eventually were borne by the 
System institutions and eventually by the borrowers because of 
the dislocations in the market, which was an unintended 
consequence for this GSE, the Farm Credit System. Those costs 
of funding have come down. It is now able to issue a little 
longer term debt because at some point the System couldn't 
issue anything beyond 5 year debt, and that, again, was a 
difficult situation. My thought is that if there was eventually 
some sort of a crisis situation, the Farm Credit System might 
need to have some avenue for that because, again, they do not 
currently have that backstop.
    Mr. McIntyre. Could you explain briefly for the Committee 
what the role of the Farm Credit System Insurance Corporation 
is and what it does? How does that compare with the FDIC, for 
instance?
    Mr. Strom. The Insurance Corporation insures the timely 
repayment of the debt obligations of the Farm Credit System, so 
investors look at that as an insurance for the timely payment 
of these debt obligations. The Insurance Corporation also has 
the conservatorship or receivership authorities if a System 
institution is failing. It would be placed under the Insurance 
Corporation to resolve those issues, going forward. So, that is 
the current basic authority of the Insurance Corporation.
    Mr. Moran. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Texas, Mr. Conaway.
    Mr. Conaway. Mr. Chairman, thank you very much. Witnesses, 
thank you.
    Mr. Gensler, as I have listened to your testimony I was 
trying to parse through the sensitiveness to your being an 
Administration person backing what their play is, but did I 
hear you say that this new proposed multi-tiered, both your 
organization and the regulatory scheme over certain activities, 
is better than the current focused regulatory scheme that the 
SEC and the CFTC bring to the table?
    Mr. Gensler. Congressman, what I am saying is that in 
response to this Committee's request to testify, this bill has 
some aspects that I think we do have to address, gaps in the 
system. There should be some consolidated supervision, 
stronger, consolidated supervision than what we had with AIG, 
for instance, which had ineffective oversight, and some better 
resolution authority to resolve these things. However, it does 
also setup, and I don't think this is necessary, to achieve 
those first two goals, I don't think the other things are 
necessary that is sets up a multi-tiered or a multiple 
regulator oversight of activities. I don't think you need to 
bring these activities in.
    Mr. Conaway. Okay.
    Mr. Gensler. You could just oversee entities, and I think 
on clearing the SEC and CFTC have done this for about 75 years.
    Mr. Conaway. Okay.
    Mr. Gensler. And it is intertwined with the rest of what we 
do overseeing markets.
    Mr. Conaway. All right, thank you.
    The Financial Services Oversight Council, is that the right 
name? At first blush, some uninformed reader might think that 
this is some super regulatory basis deal for everything the 
Federal, all the Federal services as opposed to perhaps 
financial services, but we will let Barney worry about that. 
Put in place this Financial Services Oversight Council in the 
early 1990s and any of the three want to take a shot at this, 
how would this Council have dealt with Fannie and Freddie, and 
AIG as two examples of pieces of the wreck this past year that 
most of us agree were contributed? How would this Council have 
identified it and prevented those issues from getting to where 
they were, given the information available in the early 2000s 
about the wreck that Fannie and Freddie were proposing and all 
that? How would it work?
    Ms. Walter. Well, what the bill contemplates, Congressman, 
is that the Council would first identify systemically important 
institutions so let us take it as a given.
    Mr. Conaway. The Council is made up of existing players in 
the arena right now?
    Ms. Walter. Yes, it is.
    Mr. Conaway. Okay.
    Ms. Walter. And it brings together a variety of expertise 
including Chairman Gensler and representation from the SEC, 
representation from the bank regulators.
    Mr. Conaway. Wait, wait, wait, I understand how, what it is 
made up of and all of those players were in the regulatory 
arena throughout this time-frame. How would it work? I mean who 
brings it to the table? Listen, focus on Fannie and Freddie. 
How does it work to prevent that wreck?
    Ms. Walter. One can assume that they would have been 
identified as systemically important, and then the idea is that 
they could recommend, the Council could recommend heightened 
regulatory standards.
    Mr. Conaway. Okay, well, I don't mean to be abrupt but we 
have to find this out, they were identified from 2000 on, 
multiple attempts to reign them in. So this Council then, 
rather than driving legislation that might address all these 
things, we are going to invest in this Council all of the 
authority and power necessary to do what Congress couldn't do 
in reigning in Fannie and Freddie, and what lawyers at the 
Administration could not do when it dealt with AIG, is that how 
we work?
    Ms. Walter. I think that is a fair statement. With the 
knowledge that we have gained in the crisis, hopefully, whoever 
makes those decision will do a better job than has been done in 
that past.
    Mr. Conaway. Okay and all of those folks will be political 
appointees for the most part across the Council. How do we 
protect the Council from untoward influence by Members of 
Congress who apparently worked their magic from 2000 to 2008 to 
protect Fannie and Freddie from causing the wreck they caused? 
How does it work?
    Ms. Walter. The Council as constituted under the bill would 
be headed by an existing regulator. Our recommendation would be 
that the Council have an independent chair and permanent staff 
so that the Council would have its own independent wherewithal.
    Mr. Conaway. Well, I thank the witnesses. I appreciate 
that. It sounds like it is a great works program for a new 
regulatory entity, and I have grave concerns that this is going 
to help us deal with some of the things we dealt with.
    Mr. Chairman, thank you. Thank you, witnesses. I again 
apologize for being abrupt but he is very high and handy with 
the gavel at 5 minutes so I yield back.
    The Chairman. I thank the gentleman.
    The gentleman from Iowa, Mr. Boswell.
    Mr. Boswell. Thank you, Mr. Chairman, for having this 
hearing. Some of these things that have been covered were just 
to be sure of the facts. I realize you had the discussion with 
the Chairman about Farmer Mac and what happened in 1996, but I 
would like to ask the question as it continues, what was the 
affect of the ten percent credit risk retention on the 
availability of credit to farmers for one, and number two, what 
do you think adding this requirement to Farmer Mac would have 
today on producers, anybody?
    Mr. Strom. Congressman, in my view the ten percent first-
loss position, prior to that 1996 repeal, made it really an 
untenable situation for Farmer Mac to engage in the market and 
actually effectively operate as a securitization for these 
agriculture real estate mortgages. So, with the repeal of that 
and not having to hold back that ten percent on their books, it 
allowed them with, again, the strong regulatory standards that 
were put in place for the regulator to make sure that Farmer 
Mac does the proper underwriting, all of the things that need 
to be done in this. It has worked for Farmer Mac, going 
forward. They have been effective in the marketplace without 
that, and so putting this back in place puts them, in our 
minds, back to that pre-1996 situation.
    Mr. Boswell. So you think that answer is what is needed 
today, what you have just said, that is needed?
    Mr. Strom. I would say what is needed is the current status 
where, we as a regulator, have the authority over them from a 
safety and soundness aspect. They have no retention requirement 
and they work effectively. We are eager--we are willing to work 
with this.
    Mr. Boswell. Okay, not to cause you to repeat, but just in 
your own words, what do you think from your perspective 
realizing the credit crunch out there for the producers today, 
and assuming you understand it very well and some of us up here 
too, what do we need to do to advance the ability to Farmer Mac 
to do its job?
    Mr. Strom. Well, we are more than willing to work with this 
Committee to look at new ideas and new strategies for 
additional opportunities for them to access the marketplace. 
There may be authorities out there for them to do or changes 
that should be put in place, but we are more than willing to 
work with the Committee to look at those, going forward. I 
think this piece of the legislation is we understand that this 
Committee should retain the jurisdiction over this.
    Mr. Boswell. I understand that and I appreciate your 
willingness, but I just wondered if you happened to have a 
suggestion. I will give you a moment or two to talk to your 
people sitting behind you if you want to. I think this is a 
pretty important matter.
    Mr. Strom. Congressman, again, I think there is the 
possibility. I can't come to any thing specific at this point, 
but I think there are a number of opportunities and authorities 
that Farmer Mac, and we as the regulator could look at to help 
Farmer Mac expand their business opportunity to serve America 
in agriculture and the rural segment that is so vitally 
important.
    Mr. Boswell. Okay, we appreciate your taking the question 
and your willingness to work with us, and maybe a little more 
discussion later with you, I guess. Last fall, almost every 
financial institution was experiencing severe difficulty 
obtaining funds from the money markets. Most commercial banks 
relied on the Federal Reserve to provide them liquidity. What 
was the experience of the Farm Credit System at that time, and 
are there changes that this Committee needs to be thinking 
about to ensure that the System can continue to access funding 
during a time of severe liquidity crisis?
    Mr. Strom. I am sorry, Congressman, I was still trying to 
think of an idea for Farmer Mac so I apologize for the nature 
of the question. If I could I would like to expand one moment 
on Farmer Mac. I thought your question was directed to the 
other members at the table here. In the 2008 Farm Bill, Farmer 
Mac was granted expanded authorities in rural utility lending 
authorizations and that was an example of how they have gotten 
into more rural lending, and they have been pretty effective in 
that. So, that is one example that was granted to them, and 
they have expanded into that arena. There may be others similar 
to that.
    Mr. Boswell. Well, the time has run out so I will get the 
staff to contact you to get you to answer this question a 
little more specifically, and I am assuming you would want to 
do that?
    Mr. Strom. I would be happy to.
    Mr. Boswell. I yield back.
    The Chairman. I thank the gentleman.
    The gentleman from Nebraska, Mr. Fortenberry.
    Mr. Fortenberry. Thank you, Mr. Chairman.
    I think many of the institutions that we have deemed too 
big to fail are actually too big to succeed, and I agree with 
the movement toward the aggressively addressing this whole 
issue of systemic risk. With that said, however, Commissioner 
Walter, I want to, I would like you to further unpack one of 
your statements here, which is particularly provocative and has 
implications and points of contention in trying to 
appropriately address systemic risk without disadvantaging 
smaller institutions who actually are counterbalanced to 
systemic risk. With this concentration of assets into fewer and 
fewer hands in this country, clearly there is a significant 
problem here, and yet the intended effect of trying to disburse 
that risk might disproportionately affect smaller institutions 
as you are applying in this sentence. Do you suggest that 
policies and standards should be formulated with an 
understanding that their direct and indirect impacts on other 
parts of the market be tailored so that they do not 
inadvertently favor large institutions relative to small ones, 
thereby unintentionally fueling instead of reducing systemic 
risk? Can you unpack that further, please?
    Ms. Walter. I would be happy to. I do believe that this is 
a grave concern and that application of systemic risk 
requirements have to be looked at carefully from that 
perspective. I believe it is the intent of the bill that we are 
looking at to impose more onerous, more stringent requirements 
on the larger, systemically important institutions. But, it 
would be good to clarify that and to make sure that a couple of 
things are true, one to clarify that that is the case and to 
make those requirements additive to requirements that would 
otherwise be applicable and, in fact, it should be a burden to 
be a systemically important institution, not a benefit.
    The other thing that I believe should be done is to clarify 
that it would not affect existing standards because many 
standards could be interpreted, prudential standards could be 
interpreted as falling within the legislation when, in fact, 
they might actually loosen standards. One good example, 
perhaps, would be imposing bank-based capital on a registered 
broker dealer. If you did that, you would in effect be giving 
that bank-related broker dealer an advantage because it would 
lower their capital standards. So existing standards should be 
preserved and it should be clear that these systemic 
requirements are in addition to, additive to existing 
standards.
    Mr. Fortenberry. So you are favoring leaving this 
regulatory structure as we have it in place and have a super 
structure that would look at systemic risk?
    Ms. Walter. Correct, we think that the experiences of the 
recent past suggest that there is a need for back row 
prudential oversight that really expands across markets and 
eliminates silos, but there is not a need to eliminate existing 
regulations.
    Mr. Fortenberry. Well, here we talk about, you talk about 
establishing more stringent standards for leverage and risk-
based capital for systemically important institutions. So, 
would you foresee a different set of standards for what would 
be defined as a systemically important institution and how 
would that be structured?
    Ms. Walter. I would foresee additional standards being 
applied to systemically important institutions so the standards 
in effect would be stricter. What we have suggested is that the 
ability to apply those standards be granted to the multi-member 
Council rather than to any single regulator.
    Mr. Fortenberry. And this would serve as a roving 
institution, if you will, that looks at this problem of 
systemic risk?
    Ms. Walter. It would serve as an extra backstop for which 
the Federal Reserve Board could serve as a set of eyes and ears 
participating in exams along with primary regulators.
    Mr. Fortenberry. Well, did you write this sentence, that 
the last part of this sentence ``and be empowered to serve as a 
ready mechanism for identifying emerging risk and minimizing 
the regulatory arbitrage that can lead to the regulatory race 
to the bottom?'' That is very well said for whoever wrote that.
    Ms. Walter. I will not claim personal authorship. I will 
claim institutional authorship.
    Mr. Fortenberry. That is all I have, Mr. Chairman, thank 
you.
    The Chairman. I thank the gentleman.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman, and I want to say at 
the outset that I do think that more than anything else this is 
going to boil down to a jurisdictional fight. I serve both on 
the Financial Services Committee and the Agriculture Committee, 
and it is my hope that the Agricultural Committee will 
certainly fight for our jurisdiction, particularly in view of 
the Farm Credit issue which I think is most important. I might 
add that I did bring up some of these concerns in Financial 
Services when we were marking up both the consumer protection 
bill and the systemic risk.
    But let me ask you, Mr. Strom, I think either today or 
tomorrow in our Financial Services Committee they are going to 
vote to what we call an assessment level that is based more on 
our risk profile rather than just size, as an effort to 
determine what level of assessment fee for the resolution trust 
fund. So if Farm Credit is required to contribute do you feel 
that the Financial Services Oversight Council will have 
sufficient expertise in your operations to set your assessments 
at the appropriate level?
    Mr. Strom. Congressman, no, I don't believe that they will 
have the ability or expertise. As you all know, and I come from 
an agricultural background, the agricultural industry is a very 
complex, very risky, very volatile industry. As a Farm Credit 
System lender into that and as the regulator of those System 
institutions, we understand the volatile nature and the 
difficulties in this industry. So, as we deal with institutions 
within the Farm Credit System, and we do stress testing of our 
own System institutions, we look at the risk inherent in the 
System institutions and we act accordingly. I believe that this 
draft legislation and the establishment of a Council that would 
oversee our operations only clouds the direct line of authority 
that we would have as a regulator over our System institutions.
    Mr. Scott. Should be there a representative of Farm Credit 
on this Council?
    Mr. Strom. Should there be a representative on the Council?
    Mr. Scott. On the Council.
    Mr. Strom. If there was no other avenue to be excluded from 
this draft legislation, I believe that the Farm Credit System 
and the Farm Credit Administration should have a seat. We 
currently are the only ones excluded in the draft legislation 
from membership on this Council.
    Mr. Scott. Now, my good friend, Congressman Brad Sherman 
mentioned to me that, he serves on Financial Services as well, 
and he mentioned that either today or tomorrow he will offer an 
amendment to increase the asset base for companies subject to 
the assessment for the resolution trust fund, resolution fund, 
from the current $10 billion up to $75 billion. So my question 
to you would be if we adopt, in Financial Services, that 
amendment to raise it up to $75 billion, would that alleviate 
Farm Credit's institutions from being assessed or do you have 
banks larger than $75 billion?
    Mr. Strom. Congressman, currently there are no banks in the 
Farm Credit System larger than $75 billion. There are a couple 
that are approaching that level, in excess of $50 billion, 
close to $60 billion, so there is the potential that they could 
eventually grow to that level and be assessed. But, then again, 
I think rather than the issue of assessment, it is the issue of 
the resolution authority also within that subtitle G of the 
draft legislation that, really in our mind, complicates the 
line of authority and the regulatory jurisdiction of who is 
really calling the shots in these situations.
    Mr. Scott. Thank you very much, Mr. Chairman, I yield back.
    The Chairman. The gentleman had a--if I could ask does 
anybody know if you have this two percent target for your 
insurance thing, does anybody know with the FDIC have they got 
an equivalent target date, when they are determining their fee? 
Does anybody know how that works? I know they are broke right 
now, but they are supposed--I was just wondering how that two 
percent compared to what the FDIC is doing. Nobody knows. Okay, 
we will figure that out.
    The gentleman from Louisiana, Mr. Cassidy.
    Mr. Cassidy. Thank you, Mr. Chairman.
    I enjoyed reading your testimony and I always come here 
with humility because you know so much more than me. I am 
struck, speaking to Mr. Gensler and Ms. Walter, that both of 
you expressed concerns that there is going to be overlapping 
regulatory activity. In fact, when I speak to my bankers back 
home about all of this, they all say we are going to have more 
than one regulator and we already have one in our office 
everyday and now they are going to be in every other day--
excuse me--every other day, now they are going to be in 
everyday. And although, Ms. Walter, in one part of your 
testimony you expressed this kind of belief in the Council with 
the over-regulator, if you will, later on you speak about, on 
page nine, the proposal may setup effectively a dual system of 
regulation between market regulators and the Federal Reserve, 
expressing some sort of concern about dual regulation. I am 
concerned about that because--if I can gather my papers--I have 
a Washington Post article which is referring to the primary 
article from Bloomberg speaking about how during this meltdown 
allegedly AIG was getting pressured by the Federal Reserve not 
to file documents with the SEC that would divulge the deal's 
details. It almost seems that we have the model that we are 
prescribing we have a Council, in this case SEC, and they were 
trumped by the over-regulator, in this case the Federal Reserve 
which limited the SEC's ability to perform their function. I 
guess I am calling into question the entire model. Should there 
be this over-regulator or should there just be a Council of 
fractious, puny equals with the chairmanship rotating much 
perhaps as we do with the Joint Chiefs of Staff. Where we 
actually, with that friction, make sure that everybody does 
their job, as opposed to the over-regulator, according to 
Bloomberg, which actually trumps your ability to do your job. 
Do you follow what I am saying?
    Ms. Walter. Yes, I do, Congressman. I would say that first 
of all we do see a need for someone to address the systemic 
risk issues and address it across the markets, and that is why 
we have supported the idea of a very strong Council. We would 
like the power to be vested in that multi-member body rather 
than any single agency. We do think that as a group, more than 
one agency thinks better than one agency solely or as the 
Chairman said in his opening statement, no one regulator is 
smart enough. There is also the problem of a potential conflict 
between that single regulator's special mission and the overall 
issues. So that is one change we would suggest to the 
discussion draft at some point, the reason we are supportive of 
a Council is at some point someone needs to make the final 
decision. I think the notion of having a rotating chairmanship 
is one that deserves some attention. We have also suggested 
consideration of having a separate, independent chairman and 
permanent staff rather than having the staff detailed from the 
Federal Reserve Board and the Treasury.
    Mr. Cassidy. But again, would that person with their 
separate staff be able to trump or again allegedly pressure 
institutions not to file documents with other members of the 
regulatory Council?
    Ms. Walter. Well, of course, I can't speak to any 
particular circumstance and the idea would be that that 
institution would have the ability to set standards and in 
setting those standards, implement those standards. In our view 
this should fall to the functional regulators, the expert 
regulators that we have today as well as you of course.
    Mr. Cassidy. Just because I am about to run out of time, 
Mr. Gensler, you very nicely, in your testimony and also your 
written testimony, speak about the problem of dual regulation. 
I am really getting a sense that in our Council again, it may 
not want the over-regulator, the one person that can trump 
everybody else because it cannot just think of the banks and 
the institutions. How do I please this person? How do I please 
that person?
    Mr. Gensler. I think, Congressman, you have hit upon the 
core question for Congress in this. We want to strengthen our 
regulation and fill the gaps and that is why this Committee 
passed historic, over-the-counter regulation, to fill an 
important gap. There are some gaps even in consolidated 
supervision that certain holding companies need stronger, 
perfected regulation. I think we have been well-served for 75 
years in this nation having independent market regulation, and 
at times there might be a tension between market regulation 
protecting investors, protecting the integrity of the market, 
policing against fraud manipulation, and there may be a tension 
between that and the profitability of financial institutions 
where a prudential regulator is overseeing that. So I think it 
is actually a healthy thing for the American public to have 
independent market regulation of the Securities and Exchange 
Commission and the Commodity Futures Trading Commission, and 
not be subordinate to other regulators.
    Mr. Cassidy. Okay, with that I yield back.
    The Chairman. I thank the gentleman.
    The gentleman from Georgia, Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman, and thank you all 
for testifying and for what you do for us.
    Mr. Strom, in the 7 odd years that I have been here, I 
can't tell you how often I have been visited by Farm Credit 
System folks asking that we expand in different ways their 
ability to make loans. And with regard to this proposed 
exception to FSOC jurisdiction, I find myself sort of wondering 
to what extent are we going to hear more and more of this as 
the years progress if the FSOC is doing things like requiring 
that ten percent be retained by different institutions that 
otherwise would pass that exposure along. And if it is 
acknowledged that the effect of this is, if you cause retention 
anyway the effect of this is to increase the cost of credit. 
You know, I can see as the years progress, more and more 
requests to expand FCS ability to lend because FCS is just 
going to be able to do it cheaper, and so there are going to be 
a lot of people out there who would prefer to borrow from FCS 
then from local community banks. And we are constantly met with 
that kind of tension here on the Agriculture Committee, 
complaints about competition with credit unions, competition 
with local community banks. Would you make a comment about 
that, generally?
    Mr. Strom. Congressman, as the regulator of the Farm Credit 
System, our job is to ensure the safety and soundness of these 
institutions and that they work within the framework of the 
statute. We develop regulations around that. As we look at the 
changing agricultural industry and the issues in rural America, 
we are constantly addressing how the changes in the industry 
and the needs of rural America affect what Farm Credit can or 
should be doing. And we understand the importance of the 
strength of the rural banking system within these communities, 
and that they should be working side-by-side to serve these 
rural communities. We are happy to continue to work as a 
regulator of the System institutions with this Committee to 
look at how this changing industry is affecting the 
availability of credit in rural America, especially at a very 
stressful time right now. I mean we are seeing some of those.
    Mr. Marshall. Are you agreeing with my point here that if 
there is a separate regulator, separate regime, costs are 
higher in the rest of the market than they are in the Farm 
Credit System? There is going to be continual pressure on 
Congress to expand the availability to Farm Credit System 
credit.
    Mr. Strom. Congressman, that could be, realizing again the 
System institutions already pay a premium into an insurance 
fund on their own which is a cost that they bear. They also are 
at the mercy of the debt markets to be able to issue debt.
    Mr. Marshall. Yes, and do you know what percent roughly you 
occupy in lending across the United States? Are you one 
percent, less than one percent, two percent?
    Mr. Strom. The Farm Credit System has about 39 percent of 
the agricultural debt market in the U.S.
    Mr. Marshall. That is not what I am referring to. I am 
talking about the overall credit markets in the United States.
    Mr. Strom. Oh, the overall credit markets.
    Mr. Marshall. In all the credit markets in the United 
States, I would imagine you are small.
    Mr. Strom. I would imagine the System is very small, and in 
the context of whether the Farm Credit System is a systemic 
risk to the entire economy? No.
    Mr. Marshall. It could be a risk to the farm economy.
    Mr. Strom. It could be a risk to the farm economy, yes.
    Mr. Marshall. All right, the other thing that I just 
observed is that one of the arguments for expanding Farm Credit 
System's lending authority, makes me at least uneasy and 
probably other Members, is that it was very difficult to 
persuade community banks, small independent banks, you name it 
to join in extending credit for ethanol facilities that were 
being built across the country, and the argument was that they 
won't take this exposure. We will take this exposure. This is 
good for the rural economy. They are not willing to step up 
when we need them to step up, and, consequently, you need to 
expand our lending authority. And one of the thoughts I had was 
that well, part of the reason why they might not be willing to 
do this is they are worried about the exposure. How are you all 
doing with your ethanol facilities?
    Mr. Strom. The System at its peak had about $3 billion 
extended to the ethanol industry in the U.S. and, yes, there 
have been significant challenges within that industry as we 
have seen the various effects of the volatile markets of last 
year, including corn and crude oil prices. The System is 
managing through that. We have four System institutions to put 
up provisions for losses to cover any exposure on these, but at 
this point, the System is handling those exposures well.
    Mr. Marshall. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from California, Mr. Costa.
    Mr. Costa. Thank you very much, Mr. Chairman, for holding 
this timely hearing.
    As has been stated by a number of my colleagues, and 
certainly by the three witnesses who were all concerned about 
the current impact that this economic recession has distressed 
our entire nation, obviously the focus for many of us who 
represent rural America is the added challenges that we face in 
parts of the country where we are dependent, primarily, on an 
agricultural economy. The issuance of credit, the availability 
of credit is dependent upon numerous factors in the economy. In 
my area we have a third consecutive dry year and the drought 
crisis with the regulatory impacts on the Federal level that is 
making a difficult situation worse. So as I talk to my farmers 
and ranchers and, of course, we have the meltdown in the dairy 
industry that is across the country, I am trying to figure out 
from the standpoint of Farm Credit, and the work that you do 
here, the impacts. I know we have had stories in each of our 
constituencies, but I kind of come from the old school of if it 
is not broke, what is there to fix. I would like you to comment 
as it relates to the proposed legislation what do you think, 
Mr. Strom, is broke here that needs to be fixed? And I would 
also like to ask Ms. Walter, again, the same question.
    Mr. Strom. Congressman, I would say that within the context 
of the Farm Credit System, and we as the regulator, I don't 
think there is anything broken within the Farm Credit System. 
This Committee 20 years ago put the proper pieces in place, and 
let me just reference the strong borrower rights provisions 
that were put in the 1987 Act. I mean they are a leader in 
consumer protections as we term borrower rights in these very 
stressful times, and so that has been a very positive aspect. I 
reminded System institutions to employ those borrower rights 
provisions as they work with distressed borrowers during this 
difficult time. But I think this legislation clearly has 
implications that in our mind clouds the jurisdictional lines, 
the authorities, and really who is in charge. And, again, I 
don't think we fit in the regulatory scope of this new Council 
and, therefore, should not be part of it.
    Mr. Costa. Could you fit in it?
    Mr. Strom. Pardon?
    Mr. Costa. Could you fit in it?
    Mr. Strom. Again, I think that the agricultural system and 
FCA as the regulator are so unique, we are under the 
jurisdiction of the people that know this industry.
    Mr. Costa. No, I know. I work with them everyday in my 
district.
    Mr. Strom. Yes.
    Mr. Costa. They serve on their boards. They farm, they 
understand the unique challenges that farmers, ranchers and 
dairymen have faced. Ms. Walter, do you want to comment?
    Ms. Walter. I believe that with respect to the financial 
services industry, the financial crisis has shown us that there 
are gaps in our regulatory system which need to be filled.
    Mr. Costa. How is that applicable to the Farm Credit 
System?
    Ms. Walter. I am not saying that it is and I do not have 
expertise with respect to the Farm Credit System. I don't take 
a position with respect to the coverage of this legislation to 
that System.
    Mr. Costa. All right, so you are not sure whether it is 
applicable or not then.
    Ms. Walter. Correct.
    Mr. Costa. Mr. Gensler.
    Mr. Gensler. Aside from the Farm Credit System, I think the 
financial system as a whole failed the American public.
    Mr. Costa. No, I would concur with that.
    Mr. Gensler. All right, so we and the regulatory system 
failed and that is why this Committee reported out a 
historically important bill on derivatives and it has worked to 
enhance other regulation, but I don't have any point on Farm 
Credit.
    Mr. Costa. Then you are not required to comment, okay, very 
good.
    Mr. Gensler. Yes, sir.
    Mr. Costa. In my last minutes then I would like, since that 
is a good transition, a segue between the derivative inference 
that Chairman Peterson and this Committee worked upon, would 
the Chairman avail himself to a colloquy? Because of those 
efforts that this Committee pursued with the Financial Services 
Committee, what, seemingly, so far seems to be a collaboration 
although it is not a done deal. Is it the Chairman's intent to 
indicate to the Financial Services Committee, that Chairman, 
our concerns about the impact on the Farm Credit System and how 
the law of unintended consequences could impact the Farm Credit 
System?
    The Chairman. Well, this discussion started 3 months ago. 
We brought it up with Chairman Frank and at that time we got 
the indication that this would be resolved and there was 
supposed to be a letter. I don't think it happened. Obviously, 
this draft is not resolved yet. Mr. Strom indicated the 
Treasury now has some amendments to this. I think there is no 
question that we are going to get the Farm Credit situation 
resolved in a manner that is acceptable to this Committee 
before this bill comes to the floor.
    Mr. Costa. Well, I appreciate the Chairman's good work as 
he has demonstrated in the past for the farm bill and this year 
with the derivatives legislation. I would just note, as the 
Chairman pursues a course that we want to protect the Farm 
Credit System in this country. If there is some sort of a 
response or support by the Committee in terms of the impacts, I 
think it would be bipartisan support to submit such a concern 
to the Financial Services Committee, as to the impact of this 
proposed legislation.
    The Chairman. Yes, in regard to Farmer Mac that became an 
issue here in the last couple of weeks, and Chairman Frank is 
sending me a letter indicating that that is our jurisdiction, 
whatever we decide to do with Farmer Mac is our business, so I 
think it is going to get resolved. You know, you have people, 
staff people that drafted this systemic risk thing that have a 
typical no clue of what we are doing in farm country and they 
just didn't understand, basically, what happened. So I am at 
this point pretty comfortable we are going to get this 
resolved, but we haven't gotten it done yet.
    Mr. Costa. Well, thank you very much, Mr. Chairman, for 
holding this hearing and for making sure that people in farm 
country understand that we want to protect the Farm Credit 
System as we know it. Obviously these are difficult times, and 
I certainly want to support the Chairman in his efforts.
    The Chairman. I thank the gentleman.
    The gentlelady from Pennsylvania, Mrs. Dahlkemper.
    Mrs. Dahlkemper. Thank you, Mr. Chairman. Thank you for 
holding this hearing. I want to thank the witnesses as well.
    Many of the questions that I had have been asked 
previously, and so I don't want to go over them again. I just 
have one question for Mr. Strom. What have your conversations 
with the Treasury Department been about? Could you expand on 
that a little bit regarding these proposals and what is their 
view as to whether this should be applied to the Farm Credit 
System?
    Mr. Strom. Congresswoman, our discussions with Treasury 
began last Thursday, and actually I think as a result of this 
Committee holding this hearing they were interested in 
discussing our concerns with us. So, in discussions with them 
we raised our three main concerns, the area of the definitions 
of financial companies, and we believe that even though the 
System is not specifically mentioned, they are included. 
Second, the conflict on the retention issue with Farmer Mac, 
and, third, on the resolution authorities. Their response to us 
as late as last evening was that they would be willing to have 
put in the bill with the Financial Services Committee, wording 
that would exclude the Farm Credit System from financial 
company definition, and exclude the Farm Credit System 
institutions and the regulator from the resolution issue and 
FDIC. Now, they indicated that they were proposing language to 
us on the retention issue regarding Farmer Mac. We have not 
come to a comfort level on that yet, so discussions were, as 
late as last night, still ongoing. But, again, I understand 
that anything that happens with Treasury is going to be brought 
to this Committee so you understand what those discussions are. 
But, they indicated that Treasury would be working with the 
Financial Service Committee to get these amendments put in the 
draft.
    Mrs. Dahlkemper. So they are in ongoing conversations as of 
last night.
    Mr. Strom. Yes, let me also add that we want to make sure 
that the Agriculture Committee is involved in the resolution of 
any of this retention issue regarding Farmer Mac.
    Mrs. Dahlkemper. Well, that is great. Good to hear that. 
Thank you very much.
    The Chairman. I thank the lady.
    The gentleman from North Dakota, Mr. Pomeroy.
    Mr. Pomeroy. Mr. Chairman, I have been in a Ways and Means 
hearing and I will catch up on your summary. Thank you. I yield 
back.
    The Chairman. The gentleman from New York, Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chairman. All my questions have 
been answered. I think we have worn out the subject here.
    The Chairman. Well, I thank the panel for being with us and 
for your patience and your answers, and somebody on the staff 
or somebody can figure out what the percentages that FDIC pays 
versus what Farm Credit pays and what level they are trying to 
hit. Is it two percent of assets or what is it that they are 
trying to do so we can, and so I can, get a better 
understanding of what the relationship is between those two. So 
with that, the Committee on Agriculture will stand adjourned 
subject to the call of the chair.
    [Whereupon, at 12:40 p.m., the Committee was adjourned.]

                                  
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