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IMPLEMENTING THE DODD–FRANK WALL STREET 

REFORM AND CONSUMER PROTECTION ACT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE MAJOR ASPECTS OF THE DODD-FRANK ACT 

SEPTEMBER 30, 2010 

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

( 

Available at: http://www.fdsys.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

AMY S. FRIEND, Chief Counsel 

BETH COOPER, Professional Staff Member 

DREW COLBERT, Legislative Assistant 

MARK OESTERLE, Republican Chief Counsel 

ANDREW J. OLMEM, JR., Republican Counsel 

DAWN RATLIFF, Chief Clerk 

BRETT HEWITT, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

THURSDAY, SEPTEMBER 30, 2010 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

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

Senator Johnson 

Prepared statement ................................................................................... 55 

Senator Akaka 

Prepared statement ................................................................................... 55 

WITNESSES 

Neal S. Wolin, Deputy Secretary, Department of the Treasury .......................... 6 

Prepared statement .......................................................................................... 56 

Responses to written questions of: 

Senator Shelby ........................................................................................... 101 

Senator Brown ........................................................................................... 114 

Senator Tester ........................................................................................... 116 

Senator Kohl .............................................................................................. 118 

Senator Crapo ............................................................................................ 118 

Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 8 

Prepared statement .......................................................................................... 61 

Responses to written questions of: 

Senator Tester ........................................................................................... 119 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation .................... 11 

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

Responses to written questions of: 

Senator Shelby ........................................................................................... 121 

Senator Brown ........................................................................................... 139 

Senator Tester ........................................................................................... 142 

Senator Kohl .............................................................................................. 144 

Senator Merkley ........................................................................................ 147 

Senator Bunning ....................................................................................... 149 

Senator Crapo ............................................................................................ 151 

Senator Hutchison ..................................................................................... 152 

Mary L. Schapiro, Chairman, Securities and Exchange Commission ................. 13 

Prepared statement .......................................................................................... 71 

Responses to written questions of: 

Senator Shelby ........................................................................................... 153 

Senator Brown ........................................................................................... 161 

Senator Merkley ........................................................................................ 162 

Senator Bunning ....................................................................................... 166 

Senator Crapo ............................................................................................ 168 

Gary Gensler, Chairman, Commodity Futures Trading Commission ................. 14 

Prepared statement .......................................................................................... 80 

Responses to written questions of: 

Senator Shelby ........................................................................................... 170 

Senator Brown ........................................................................................... 176 

Senator Merkley ........................................................................................ 177 

Senator Bunning ....................................................................................... 180 

Senator Crapo ............................................................................................ 180 

(III)
Page

IV 

John Walsh, Acting Comptroller of the Currency, Office of the Comptroller 

of the Currency ..................................................................................................... 16 

Prepared statement .......................................................................................... 83 

Responses to written questions of: 

Senator Shelby ........................................................................................... 181 

Senator Brown ........................................................................................... 189 

Senator Tester ........................................................................................... 190 

Senator Merkley ........................................................................................ 191 

Senator Crapo ............................................................................................ 194 
(1) 

IMPLEMENTING THE DODD-FRANK WALL 

STREET REFORM AND CONSUMER PROTECTION ACT 

THURSDAY, SEPTEMBER 30, 2010 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:03 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Christopher J. Dodd, Chairman of the 

Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

Let me welcome our distinguished panel of witnesses this morning. I cannot recall the last time we gathered in such a setting with 

all the representatives of the major financial regulatory bodies with 

us. Obviously, with the adjournment vote last night and when we 

planned this hearing some weeks ago, we were under the impression we were going to be in session at least, I think, another week. 

Obviously, the agenda changed. But, nonetheless, I thought this 

hearing was so important that I said to Richard that we wanted 

to move ahead with you. So I do not know how much participation 

we will actually get from Members, but I do not want you to believe that is a reflection of any feelings about any of you here this 

morning. 

Senator SHELBY. They will probably like that. 

Chairman DODD. Yes, fewer questions here from Members. But 

if we do get a quorum—and my hope is we do. I have discussed this 

already with Senator Shelby. We are going to move to executive 

session very quickly on a couple of housing measures that I believe 

have been agreed to. We have worked on them, and I think we can 

deal with them fairly quickly. So if that happens, we will interrupt 

the hearing, and I will apologize to whoever is speaking at that moment for the interruption when that moment occurs. But in the 

meantime, I am going to make some opening comments here. I will 

turn to Senator Shelby for any opening comments, and Jack is here 

with us, and since there are few of us here, if any other Members 

have additional thoughts they would like to express this morning, 

we will do that as well. And then we will go into a question period. 

I am going to make the question period not 5 or 6 minutes but 

10 minutes each Member because to try and have—even 10 minutes is not a great deal, but given the representation of our witnesses here, it will give each Member a chance maybe to get into 
2 

a little more depth than you are probably able to in 5 or 6 minutes, 

if that is OK with you. 

All right. Well, anyway, the hearing this morning is implementing the so-called ‘‘Dodd-Frank Wall Street Reform and Consumer Protection Act.’’ And, again, we are very grateful for the 

presence of our witnesses. 

I took over the chairmanship of this Committee nearly 4 years 

ago, in January of 2007, and over that time we have witnessed the 

near collapse of the American economy, a crisis that cost us millions of jobs, wiped out trillions of dollars in wealth and at long last 

provided the impetus for fundamental reform of our financial system. That reform should have happened a long time ago. Many 

could make that case. 

For nearly 3 years, this Committee has held hearing after hearing identifying and examining gaps, overlaps, and shortfalls in a 

regulatory system that had not been updated since the 1930s. 

Today I believe we can say, thanks to the hard work of Democrats and Republicans on this Committee—and I include every 

Member of this Committee who was involved in this effort—and 

with the sage counsel of our witnesses, many of whom are here 

today and whose perspectives we have considered carefully, we 

have delivered the reform our financial system needed and provided the American people with the economic stability that they deserve. We have put an end to too-big-to-fail bailouts and to an era 

in which executives on Wall Street felt free to gamble with other 

people’s money in the belief that American taxpayers would be 

there for them if they lost. 

Now, Americans and executives alike know with certainty that if 

a company puts itself in a position to fail, fail is exactly what it 

will do. 

We have increased transparency and accountability in our markets, bringing the $600 trillion derivatives market into the open 

and preventing shady dealers from operating in the shadows. 

We have established an early warning system so that we never 

again find out that a financial product or practice is unsafe only 

after it has already undermined the stability of our economy. And 

we have established an independent consumer financial protection 

agency to provide Americans with the clear and accurate information that they need to make good financial decisions as well as with 

the security that comes with knowing that someone is watching out 

for your interests and your interests alone. 

But as you will notice, there is no ‘‘Mission Accomplished’’ banner hanging behind me here this morning in this Committee room. 

The work is not done at all. Hardly a mission accomplished. I have 

heard critics say that the new law leaves too much up to the regulators. But it was never my intention to have the U.S. Senate, the 

House of representatives, or the Congress as a whole do the job of 

regulators. Indeed, I do not think anyone wants the Senate or the 

Congress writing detailed prescriptions that require technical, expert knowledge. Nor could we afford to tie the regulators’ hands 

with rigid legislative requirements that cannot be adapted to 

changing circumstances. 

What we have done with this legislation is to eliminate the gaps, 

the overlaps, and the shortfalls that allowed some financial actors 
3 

to game the regulatory structure and some parts of our financial 

system to go unregulated entirely. 

The Glass-Steagall Act of 1933, which established the Federal 

Deposit Insurance Corporation, was 37 pages long. The Securities 

and Exchange Act of 1934 was 29 pages long. Those two acts laid 

the foundation for nearly 75 years of growth and innovation in our 

financial sector and prosperity for generations of Americans. But it 

took competent, energetic regulators to make those laws work. 

Our bill is some 848 pages long, when you get just the actual 

text of the bill, because times have changed. Our financial system 

is far more complex than it was 80 years ago, and we are competing in a global marketplace, which was not the case almost a 

century ago. We were asked to reform the entire financial system, 

and that cannot be done in a handful of pages. But like the GlassSteagall Act and the Securities and Exchange Act, it will require 

very good, competent, energetic regulators. 

Now, I wish I could write a law that prohibits a trader from gambling away his firm’s bottom line or an executive from putting 

short-term gains above long-term stability. But we cannot legislate 

morality, and goodness knows we cannot legislate wisdom. All we 

can do is establish a comprehensive framework and a clear path 

forward, and that is what we have tried to do with this legislation. 

The regulators will have to interpret and enforce the law, and 

those who profit from the innovation and flexibility that define our 

financial system will have to remember that evading the rules of 

the road, in letter or in spirit, hurts all of us. This new law gives 

our President the ability to walk into the G20 meetings as a representative of a world leader in financial services with a framework 

for the rest of the world to follow. 

When we first warned of the flaws in our system back in January 

of 2007, few thought we would end up on the path that we have 

traveled since. After all, if we are making money, what better proof 

of the soundness and stability of a system could there possibly be? 

Well, I believe that our economy will grow again. People will 

make money, and policymakers will be tempted to forget the lessons of this crisis. But mark my words here this morning. There 

will be another crisis as certain as we are sitting here. Greed and 

recklessness will rear their heads again. And I can tell you with 

confidence that when that day comes, we have provided regulators 

with the tools they need to see it coming and to put a stop to it 

in time before it wrecks the economy as this crisis nearly did. But 

whether they will actually do so largely depends upon the foundation laid by those of you who are before us today and the jobs you 

do in the coming weeks and months to lay that foundation within 

your respective regulatory bodies. 

With that, let me turn to my colleague from Alabama, Senator 

Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman, and welcome to all 

of you. It is not the first time you have been here. I hope it will 

not be the last. 

For millions of Americans, the passage of Dodd-Frank provides 

little comfort as they confront a harsh economic reality. The unem-
4 

ployment rate now stands at 9.6 percent. Economic growth is anemic. Bank lending remains depressed. And housing values continue 

to fall in many areas. Not since the Carter administration has the 

Nation’s economy performed so poorly. 

The response of the Administration and Democrats in Congress 

has been to enact a slew of new laws to expand the size and the 

scope of the Federal Government. With the stimulus bill, bank bailouts, Obamacare, and now Frank-Dodd, the Democratic majority 

has clearly articulated—— 

Chairman DODD. Dodd-Frank. 

[Laughter.] 

Senator SHELBY. Dodd-Frank. Interchangeable. 

[Laughter.] 

Senator SHELBY. Frank-Dodd, Dodd-Frank. You know, I think 

Frank would like that, Chris. 

Chairman DODD. Let us wait and see how it works. 

[Laughter.] 

Senator SHELBY. I will call it Dodd-Frank. I do not think it is 

going to work. I hope it does. 

With the stimulus bill, bank bailouts, Obamacare, and now, according to the Chairman, Dodd-Frank, the Democratic majority has 

clearly articulated its vision for the future: more Government, higher taxes, and greater control over the economy. For millions of 

Americans, however, the Democrats’ vision has produced an unfortunate reality: higher unemployment, less access to credit, and trillions of dollars of Government debt on the shoulders of our children 

and our grandchildren. 

Today we will examine the implementation of one of these bills, 

the recently enacted legislation known here as Dodd-Frank. Rather 

than address the core issues that produced the financial crisis, I 

believe the Dodd-Frank legislation adheres to the worn-out Washington theory that more is better—more regulation, more agencies, 

more bureaucrats, and more spending. 

To make matters worse, the bill has delegated to bureaucrats the 

authority to devise dozens, if not hundreds, of new rules for our financial system. The law itself provides no specific guidance in any 

number of areas, including derivatives, consumer protection, and 

systemic risk. In many instances, Dodd-Frank has outsourced this 

Committee’s responsibilities to unelected bureaucrats. 

Typically, an implementation hearing involves Congress making 

sure that regulators are following the law as prescribed. Today, 

however, the roles will be reversed. We will be asking regulators 

to tell us what rules that they will be prescribing. Consequently, 

for all intents and purposes, the real authors of Dodd-Frank will 

be the bureaucrats in our financial regulatory agencies. 

Let us remember that nearly all of the major financial institutions that failed were regulated institutions. Let us also remember 

that the regulators failed to use their already broad authorities to 

take the necessary steps to prevent the crisis. And, finally, let us 

remember that conflicting agency rules created opportunities for 

regulatory arbitrage. 

By ignoring these failures and adding another level of bureaucracy to our already cumbersome financial structure, Dodd-Frank 
5 

could potentially create an even more complex and dysfunctional 

system. 

For example, Dodd-Frank instructed the SEC and the CFTC to 

jointly devise rules on derivatives. In doing so, the legislation intensifies the decades-long turf battle between the two agencies that 

we are quite familiar with. This likely ensures that the final rules 

will be more about protecting bureaucratic fiefdoms than protecting 

the overall financial system. Thus, rather than addressing the regulatory arbitrage in derivatives that we know AIG exploited, this 

bill exacerbates the problem. Additionally, by delegated the major 

policy decisions, and therefore most of the real work, to the regulators, the Dodd-Frank legislation undermines the effectiveness of 

our regulators by asking them to do too much. 

For example, the Federal Reserve has approximately 70 

rulemakings and studies it must complete over the next 18 months. 

How can we expect the head of any agency to properly devise and 

implement so many complex rules while also effectively discharging 

its existing responsibilities? 

The recent financial crisis painfully demonstrated that errors, 

limitations, and conflicts of interest among regulators often play a 

key part in causing a systemic breakdown. The majority has promised the American people that Dodd-Frank will make our financial 

system safer and will help revive the economy. As time passes, 

however, I believe that it will become clear that neither is true. By 

extending the Government safety net over a much larger segment 

of our financial system, the stage, I believe, has been set for more 

severe economic crisis. 

Under current law, the responsibility rests largely with the regulators to avoid future difficulties. Congress, however, can continue 

to exercise its oversight authority by having hearings such as this 

one today and also, when necessary, revisit the law and make 

changes consistent with our findings and the demands of the electorate. In this particular instance, change is not only a good thing; 

I believe it is inevitable. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Does anyone else want to be heard on this matter before we turn 

to our witnesses? 

[No response.] 

Chairman DODD. Well, very good. Welcome to our witnesses, and 

I will be brief in our introductions because you are all well known 

to those of us on the Committee. 

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

the Treasury, prior to that served in the Obama administration as 

Deputy Assistant to the President. We thank you, Neal, for being 

with us once again. 

Chairman Ben Bernanke, as we all know, of the Federal Reserve, 

we thank you, Mr. Chairman, for being here this morning. 

Sheila Bair, of the FDIC, has been before this Committee on numerous occasions over the last 3 or 4 years, and, Sheila, we thank 

you for your service—longstanding service, by the way. Of course, 

many of us knew Sheila when she was legal counsel to Bob Dole 

here in the Senate, so she knows very much what it is like to be 

on this side of the dais as well, so we thank you. 
6 

Mary Schapiro is Chairperson of the U.S. Securities and Exchange Commission, and, Mary, we thank you for being with us 

this morning, and we thank you for the work that you are doing. 

Gary Gensler is Chairman of the Commodity Futures Trading 

Commission and, again, longstanding service to our Government 

and in the private sector as well. And, Gary, we thank you. 

And John Walsh is the Acting Comptroller of the Currency. He 

assumed that position on August 15th, having previously served as 

Chief of Staff for Public Affairs for the OCC. We thank you very 

much, John, for being with us as well. 

I would ask you to begin in the order I have introduced you, 

Neal. And if you can, try and keep it down to 5 to 6 minutes or 

so. And, again, all documentation or supporting materials that you 

think would be worthwhile for us to have as part of this hearing, 

we look forward to. 

And let me just say, by the way, in response to Senator Shelby, 

without going into the details of his statement here, obviously with 

my departure in a few weeks from here, this Committee will have 

to continue its job, obviously, of the oversight function. And Bob 

Bennett and I will be on the outside watching as this all unfolds 

here. But, obviously, it will be very important. We did not—— 

Senator SHELBY. Corker will be here. 

Chairman DODD. Well, we know Corker, and Tim Johnson will 

be here, with the gavel in his hand, we hope. 

[Laughter.] 

Chairman DODD. I know you were. I could not resist the—anyway, put that aside for a second. But the point being that what we 

did not write into the law—and you cannot, obviously, and that is, 

the job on this side of the dais, and that is, to have the oversight 

consistently on how this is all working. And that will be a very, 

very important function in addition to the other jobs that the Committee will assume come January. But I underscore that point very 

strongly. It will be very important to see how this is working and 

how we are performing. 

So, with that, Neal, thank you again for being with us, and we 

will begin with your testimony. And, by the way, as I have said to 

Members, as soon as we have—I think we are getting close. Are we 

one away? Then we are going to interrupt to do a quick markup 

of two bills. 

Neal. 

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, 

DEPARTMENT OF THE TREASURY 

Mr. WOLIN. Mr. Chairman, Ranking Member Shelby, Members of 

the Committee, thank you very much for the opportunity to testify 

about Treasury’s role in implementing the Dodd-Frank Act. 

Mr. Chairman, 2 months ago, against tough odds, Congress enacted historic financial reform. Passing the Dodd-Frank Act was a 

major accomplishment for this country, and it would not have happened without your strong commitment and that of your colleagues. 

Congress stood on the right side of history and with the millions 

of Americans who have lost their jobs, homes, and businesses as a 

result of a crisis caused by basic failures in our financial system. 
7 

Chairman DODD. Neal, I want to congratulate you. You have 

brought us a quorum. 

[Laughter.] 

Mr. WOLIN. Success. 

Chairman DODD. So let me move us into executive session, if I 

may. Without objection, we will go into executive sessions. 

[Whereupon, at 10:20 a.m., the Committee proceeded to other 

business.] 

[Whereupon, at 10:22 a.m., the Committee was reconvened.] 

Chairman DODD. We are back to regular session. Neal, go ahead. 

Mr. WOLIN. Thank you, Mr. Chairman. 

But the work required to make reform a reality, as you noted, 

Mr. Chairman, in your opening, is far from done. We now face the 

task of implementation. 

I know this process can seem remote or distant to many Americans. It is enormously complex and involves unavoidably dense topics. So before providing you with an update on our efforts, I want 

to list our guiding principles. These are the basic things all Americans should know about how we are implementing reform. 

We are moving as quickly and as carefully as we can. We are establishing full transparency. 

Wherever possible, we will streamline and simplify Government 

regulation. We will create a more coordinated regulatory process. 

We will build a level playing field here at home and around the 

world for financial firms. We will protect the freedom for innovation that is absolutely necessary for growth. And we will keep Congress fully informed of our progress on a regular basis. 

Mr. Chairman, Ranking Member Shelby, since passage, Treasury 

has been hard at work implementing reform. We immediately put 

in place a governance structure. We established teams dedicated to 

Treasury’s four main responsibilities. Those responsibilities include 

helping to establish the Financial Stability Oversight Council, laying the groundwork for the Office of Financial Research, launching 

the Consumer Financial Protection Bureau, and creating a Federal 

Insurance Office. 

In my written testimony, I have provided a detailed update on 

where we are with each office. But let me just say a few words 

about two of them: the Financial Stability Oversight Council and 

the Consumer Financial Protection Bureau. 

Tomorrow, the Council will hold its first meeting. As Chair, 

Treasury respects the critical independence of regulators to fulfill 

their responsibilities. We are working with other Members to develop an approach that maintains that independence while maximizing the coordination required for the Council to fulfill its collective responsibility of promoting financial stability. 

Tomorrow, I expect that the Council will take important first 

steps. It will consider draft bylaws. It will consider a proposal to 

seek public comment on the criteria to designate large, interconnected nonbank financial companies for consolidated supervision. And it will consider a proposal to seek public comment to 

inform recommendations the Council will make on how to implement the Volcker Rule. 

Treasury has also made important progress standing up the Consumer Protection Bureau. Upon passage, we set up a staff imple-
8 

mentation team with a clear division of responsibilities. They have 

focused on building the necessary infrastructure, such as human 

resources and IT and on the Bureau’s key functions, including research, preparing for the supervision of financial institutions, and 

working with the various transferor agencies. 

Mr. Chairman, let me just conclude by saying that Treasury and 

all the agencies involved in this process have and will continue to 

put enormous effort toward implementation and the ultimate goal 

of making our financial system safer and our economy stronger. 

Chairman DODD. Thank you very much, Mr. Wolin. I appreciate 

it. 

Chairman Bernanke, thank you. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you, Mr. Chairman. 

Before I turn to my testimony, I would like to thank you and 

Senator Shelby and the rest of the Committee for helping get Senate confirmation of Janet Yellen and Sarah Bloom Raskin to the 

Federal Reserve Board. As you know and as I am going to discuss 

in my testimony, we have a great deal of work before us, and having them on the Board will help us enormously in carrying out the 

responsibilities that we have. 

In the years leading up to the recent financial crisis, the global 

regulatory framework did not effectively keep pace with profound 

changes in the financial system. The Dodd-Frank Act addresses 

critical gaps and weaknesses of the U.S. regulatory framework, 

many of which were revealed by the crisis. The Federal Reserve is 

committed to working with the other financial regulatory agencies 

to effectively implement and execute the act, while also developing 

complementary improvements to the financial regulatory framework. 

The act gives the Federal Reserve several crucial new responsibilities. These responsibilities include being part of the new Financial Stability Oversight Council, supervision of nonbank financial firms that are designated as systemically important by the 

Council, supervision of thrift holding companies, and the development of enhanced prudential standards for large bank holding companies and systemically important nonbank financial firms designated by the Council. In addition, the Federal Reserve has or 

shares important rulemaking authority for implementing the socalled ‘‘Volcker Rule restrictions’’ on proprietary trading and private fund activities of banking firms, credit risk retention requirements for securitizations, and restrictions on interchange fees for 

debit cards, among other provisions. 

All told, the act requires the Federal Reserve to complete more 

than 50 rulemakings and sets of formal guidelines, as well as a 

number of studies and reports, many within a relatively short period. We have also been assigned formal responsibilities to consult 

and collaborate with other agencies on a substantial number of additional rules, provisions, and studies. Overall, we have identified 

approximately 250 projects associated with implementing the act. 

To ensure that we meet our obligations in a timely manner, we are 

drawing on expertise and resources from across the Federal Re-
9 

serve System in areas such as banking supervision, economic research, financial markets, consumer protection, payments, and 

legal analysis. We have created a senior staff position to coordinate 

our efforts and have developed project reporting and tracking tools 

to facilitate management and oversight of all of our implementation 

responsibilities. 

The Federal Reserve is committed to its longstanding practice of 

ensuring that all its rulemakings be conducted in a fair, open, and 

transparent manner. Accordingly, we are disclosing on our public 

Web site summaries of all communications with members of the 

public—including banks, trade associations, consumer groups, and 

academics—regarding matters subject to a proposed or potential future rulemakings under the act. 

In addition to our own rulemakings and studies, we have been 

providing technical and policy advice to the Treasury Department 

as it works to establish the Oversight Council and the related Office of Financial Research. We are working with the Treasury to 

develop the Council’s organizational documents and structure. We 

are also assisting the Council with the construction of its framework for identifying systemically important nonbank financial 

firms and financial market utilities, as well as with its required 

studies on the proprietary trading and private fund activities of 

banking firms and on financial sector concentration limits. 

Additionally, work is well under way to transfer the Federal Reserve’s consumer protection responsibilities specified in the act to 

the new Bureau of Consumer Financial Protection. A transition 

team at the Board, headed by Governor Duke, is working closely 

with Treasury staff responsible for setting up the new agency. We 

have established the operating accounts and initial funding for the 

Bureau, and we have provided the Treasury detailed information 

about our programs and staffing in the areas of rulemaking, compliance examinations, policy analysis, complaint handling, and consumer education. We are also providing advice and information 

about supporting infrastructure that the Bureau will need to carry 

out its responsibilities, such as human resource systems and information technology. 

Well before the enactment of the Dodd-Frank Act, the Federal 

Reserve was working with other regulatory agencies here and 

abroad to design and implement a stronger set of prudential requirements for internationally active banking firms. The governing 

body for the Basel Committee on Banking Supervision reached an 

agreement a few weeks ago on the major elements of a new financial regulatory architecture, commonly known as Basel III. By increasing the quantity and quality of capital that banking firms 

must hold and by strengthening liquidity requirements, Basel III 

aims to constrain bank risk taking, reduce the incidence and severity of future financial crises, and produce a more resilient financial 

system. The key elements of this framework are due to be finalized 

by the end of this year. 

In concordance with the letter and the spirit of the act, the Federal Reserve is also continuing its work to strengthen its supervision of the largest, most complex financial firms and to incorporate macroprudential considerations into supervision. As the act 

recognizes, the Federal Reserve and other financial regulatory 
10 

agencies must supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness 

of each individual firm, but also overall financial stability. Indeed, 

the crisis demonstrated that a too narrow focus on the safety and 

soundness of individual firms can result in a failure to detect and 

thwart emerging threats to financial stability that cut across many 

firms. 

A critical feature of a successful systemic or macroprudential approach to supervision is a multidisciplinary perspective. Our experience in 2009 with the Supervisory Capital Assessment Program— 

popularly known as the bank stress tests—demonstrated the feasibility and benefits of employing such a perspective. 

The stress tests also showed how much the supervision of systemically important institutions can benefit from simultaneous horizontal evaluations of the practices and portfolios of a number of 

individual firms and from employment of robust quantitative assessment tools. Building on that experience, we have reoriented our 

supervision of the largest, most complex banking firms to include 

a quantitative surveillance mechanism and to make greater use of 

the broad range of skills of the Federal Reserve staff. 

A final element of the Federal Reserve’s efforts to implement the 

Dodd-Frank Act relates to the transparency of our balance sheet 

and our liquidity programs. Well before enactment, we were providing a great deal of relevant information on our Web site, in statistical releases, and in regular reports to the Congress. Under a 

framework established by the act, the Federal Reserve will, by December 1st, provide detailed information regarding individual 

transactions conducted across a range of credit and liquidity programs over the period from December 1, 2007, to July 20, 2010. 

This information will include the names of counterparties, the date 

and dollar value of individual transactions, the terms of repayment, 

and other relevant information. On an ongoing basis, subject to 

lags specified by the Congress to protect the efficacy of the programs, the Federal Reserve also will routinely provide information 

regarding the identities of counterparties, amounts financed or purchased and collateral pledged for transactions under the discount 

window, open market operations, and emergency lending facilities. 

To conclude, the Dodd-Frank Act is an important step forward 

for financial regulation in the United States, and it is essential 

that the act be carried out expeditiously and effectively. The Federal Reserve will work closely with our fellow regulators, the Congress, and the Administration to ensure that the law is implemented in a manner that best protects the stability of our financial 

system and strengthens the U.S. economy. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Chairman Bernanke. 

And I should say, by the way—I did not say this at the outset; that 

is my failure—I want to thank all of you, by the way. We have had 

tremendous cooperation from all of you over the last several years 

as we worked our way through all of this, and particularly you, 

Chairman Bernanke, going back obviously to the very difficult days 

in the early fall of 2008. In my view, history will record that your 

involvement and your participation helped save this country, and 
11 

so I appreciate very, very much what you did, and we are grateful 

to you for your service. 

Sheila. 

STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL 

DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank you for the opportunity to testify on 

the FDIC’s efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

Let me say at the outset what a pleasure it has been to work 

with you, Mr. Chairman, on this historic legislation, as well as on 

many other matters over the years. This is a bittersweet moment 

for me, as I am sure it is for many of us, in appearing before you 

for what may be my last time. I wish you well as you take on new 

challenges outside the Senate. 

Chairman DODD. Thanks. 

Ms. BAIR. I would also like to say farewell to Senator Bennett. 

It has been a pleasure to know you for many years, and this will 

probably be the last time I will be appearing before you, but I do 

not think there is anyone in the Senate who understands financial 

services better than you do, and your measured, balanced approach 

to these issues will be very much missed. I wish you well, as well. 

As Chairman Dodd said, I believe it was 6 a.m. in the morning 

shortly after the final vote: ‘‘We have done something that has been 

badly needed, sorely needed for a long time and we hope will protect our country, create the kinds of jobs and wealth and optimism 

and trust once again in our financial system that has become so 

missing.’’ 

Senator Dodd, I can report to you this morning that at the FDIC, 

we are well on our way to putting this, ‘‘badly needed’’ Dodd-Frank 

Act into effect. 

With the U.S. financial system now stable and healing, we are 

moving ahead with some initial rules to implement the orderly liquidation process created under the Dodd-Frank Act for systemically 

important financial companies. 

To restore greater market discipline, it is essential that the liquidation rules make clear to equity shareholders and unsecured 

creditors that they, not taxpayers, are at risk when their company 

fails. We hope to publish this preliminary set of rules in the near 

future. 

To more effectively carry out our new resolution responsibilities, 

we created a new Office of Complex Financial Institutions. This office will focus on monitoring risk at large complex institutions, reviewing their required resolution plans, and developing strategies 

to execute those plans should it become necessary. This office will 

also handle the staff work in connection with the new Financial 

Stability Oversight Council, of which the FDIC is a member. 

To ensure that we have the information necessary to carry out 

the new orderly liquidation authority, we are working on implementing our new back-up examination and enforcement authority 

as granted by the Dodd-Frank Act. This authority will likely play 

a key role in planning for any potential liquidation of a systemically important financial company. Our Board also recently 
12 

strengthened our existing Memorandum of Understanding with the 

other primary Federal regulators with respect to our back-up authority for insured depository institutions. 

As part of ending ‘‘too big to fail,’’ the Dodd-Frank Act also calls 

for the largest and most systemically important banks to meet 

higher capital requirements. These requirements, in concert with 

the new international leverage ratio and other Basel III standards, 

are a major step in strengthening the safety and soundness of the 

financial system and ensuring that credit is available. 

Other important provisions in the Dodd-Frank Act that have not 

received as much public attention concern changes made to our authority as manager of the Deposit Insurance Fund. The FDIC has 

long held the view that the deposit insurance assessment system 

should cushion the impact of economic cycles on insured institutions. However, in practice, the opposite has tended to occur. 

The FDIC Board will soon consider a long-term strategy for managing the Deposit Insurance Fund so that the fund can remain 

positive through a crisis without the need to impose sharp swings 

in the assessment rates. Our Board will look at assessment rates, 

a target reserve ratio, and a dividend policy consistent with longterm FDIC goals and statutory requirements, including the new 

minimum 1.35 percent reserve ratio. 

We know the last two crises will eventually fade from public 

memory and the need for a strong fund will become less apparent. 

Therefore, actions taken now under the Dodd-Frank Act should 

make it easier for future FDIC Boards to resist pressure to reduce 

assessment rates or pay larger dividends at the expense of the 

long-term stability of the fund. 

Finally, the FDIC is actively supporting the new Consumer Financial Protection Bureau established under the Dodd-Frank Act. 

We are working with the Treasury Department and other banking 

agencies to ensure a smooth transition and strong coordination as 

the CFPB is established. Further, the FDIC has taken internal 

steps to strengthen consumer protection by reorganizing our supervisory functions and creating a new Division of Depositor and Consumer Protection. This new division will direct our supervisory resources more effectively while maintaining the necessary coordination and information sharing between consumer protection and 

safety and soundness. 

In conclusion, let me say the success of the Dodd-Frank Act will 

rise or fall depending on the commitment and enthusiasm of the 

various agencies to fully implement it in a timely manner. 

Thank you for the opportunity to testify on the FDIC’s efforts in 

implementing the Dodd-Frank Act, and I would be happy to answer 

any questions. Thank you. 

Chairman DODD. Thank you very much, Chairman Bair, and 

thank you again for your tremendous involvement over these 

many, many months. We thank you immensely. 

Chairman Schapiro, we thank you for being with us this morning. We thank you, as well, for your strong leadership of the SEC. 

It has been welcome. 
13 

STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES 

AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Thank you very much. Chairman Dodd, Ranking 

Member Shelby, and Members of the Committee, thank you for inviting me to testify today on behalf of the Securities and Exchange 

Commission regarding our implementation of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act. And let me add my 

thanks to you, Senator Dodd, to those of my colleagues for your 

leadership of the Committee and for shepherding regulatory reform 

through the legislative process. 

The pace and scope of SEC rulemaking over the next year as we 

work to meet the Act’s requirements will be unprecedented in our 

history. Given the scope and importance of the Act, we are taking 

great care to implement its many provisions effectively and on 

schedule and to do so in a transparent manner that incorporates 

significant public input at every step. 

We believe that the successful execution of this landmark legislation depends in large part on receiving detailed comments from 

stakeholders across America’s financial system. Thus, we began by 

immediately establishing a process for public comment that exceeds 

legal requirements, creating a series of e-mail boxes to which the 

public are invited to send preliminary comments, even before rules 

are proposed and the official comment periods begin. The response, 

with thousands of comments received on 31 different topics, has 

been extraordinary. 

We recognize that the process of establishing regulations works 

best not only when all stakeholders are engaged, but when the discussions and meetings are transparent. Therefore, we ask those 

who request meetings with SEC staff to provide an agenda, which 

is posted on our Web site, along with the names of individuals participating in these meetings and copies of any written materials 

distributed. 

In addition, SEC staff is committed to reaching out as necessary 

to solicit views from affected stakeholders who do not appear to be 

adequately represented by the public record on a particular issue 

and our Web site provides detailed information on our schedule for 

all rules and studies required by Dodd-Frank through July of 2011. 

Our consultative efforts include close collaboration with our fellow regulators, as well. We are consulting and coordinating with 

the CFTC, the Federal Reserve Board, and the Departments of 

Treasury, State, and Commerce, and other agencies. Our Office of 

International Affairs is meeting weekly with our rule-writing staff 

to ensure appropriate coordination with our foreign counterparts. 

Our goal is to establish a seamless and effective framework that 

crosses agencies and borders and which encompasses the full spectrum of financial regulatory issues. 

Since the July signing of the Act, the SEC has issued interim 

rules requiring the registration of municipal advisors, approved exchange rules eliminating broker discretionary voting on executive 

compensation, and revised Regulation FD to remove the exemption 

for NRSROs, or credit rating agencies. We have sought formal comments regarding the study we will conduct of the obligations of brokers, dealers, and investment advisors, and on the definitions of 

certain terms fundamental to derivatives regulation, including 
14 

swap, securities-based swap, swap dealers, and others. And in recent weeks, the SEC has held three joint roundtables with the 

CFTC to inform our over-the-counter derivatives rulemaking. 

Yet our work is just beginning. In October, we expect to release 

at least six new packages of proposed rules for public comment. 

These will include proposals that would, among other things, establish ownership limitations and governance requirements for security-based swap clearing agencies, enhanced due diligence disclosure in the asset-backed securities market, and require that corporate executive compensation and golden parachutes be subject to 

advisory shareholder votes. Also in the next month, we will adopt 

an interim final rule for reporting on pre-Act security-based swaps. 

By the end of October, we will have also completed our administrative process of establishing each of the five new offices created 

by the legislation. We expect to appoint the heads of these new offices during the months of October and November. 

Also in November, we expect to issue an additional nine new 

packages of proposed rules. These will include three separate derivatives rulemaking releases regarding antimanipulation rules, 

data repository registration, record keeping, and real-time reporting, and jointly with the CFTC, definitions and jurisdictional provisions to guide our OTC derivatives oversight. 

By the end of the year, we will have proposed all rules required 

to restructure the derivatives market and to implement changes in 

investment advisor oversight. 

By January, 6 months after passage, we will have completed and 

submitted several studies and reports to Congress, including one 

regarding the obligations of broker-dealers and investment advisors 

and one looking at ways to improve investor access to advisory and 

broker-dealer registration information. By then, we expect the 

broad SEC organizational review to have been completed and conveyed to Congress, as well. 

In conclusion, we are engaged in a comprehensive effort to implement the Act. Indeed, we will write more than 100 rules and conduct more than 20 studies. And while we will undoubtedly encounter some bumps in the road, we are currently on track to meet the 

goals, mandates, and deadlines. We are ensuring that our process 

is fully transparent and that the full spectrum of views on every 

issue is heard and considered. And as we proceed with implementation, we will continue to work closely with Congress, consult with 

our fellow regulators, and listen to members of the financial community and the investing public. 

Thank you for the opportunity to be here and I look forward to 

answering your questions. 

Chairman DODD. Thank you, Chairman Schapiro, very, very 

much. I appreciate your diligent work. And let me make sure that 

in the case of all of you, your respective staffs and others who have 

been working so hard are recognized, as well, for their diligence. 

Mr. Gensler, how are you? Thank you for coming. 

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY 

FUTURES TRADING COMMISSION 

Mr. GENSLER. Good. Doing well. Thank you, Chairman Dodd. 

Good morning, Ranking Member Shelby, Members of the Com-
15 

mittee. I thank you for inviting me to speak here today on the implementation of the Dodd-Frank Act, or the Frank-Dodd Act. 

Chairman DODD. Wait until you go over to the House to make 

that comment. 

[Laughter.] 

Mr. GENSLER. I am honored to appear here today alongside my 

fellow regulators with whom we are working so closely to implement the Act and I am pleased to testify on behalf of the Commission and thank my fellow Commissioners. There are five of us each 

who are independent, Senate-confirmed, and will come and bring 

their views to these really crucial matters. 

Before I move into the testimony, I do want to thank you, Chairman Dodd, for your leadership of the Banking Committee and in 

the Senate. On a personal note, I think we first met about 13 years 

ago when I was asked to serve in the Treasury Department, but 

also worked so closely with you on what became Sarbanes-Oxley, 

and it is bittersweet, and also Senator Bayh and Senator Bennett. 

I remember many private meetings and public meetings, so I thank 

you. As Sheila said, it is a bit bittersweet. 

The Dodd-Frank Act requires the CFTC and the SEC working 

with our fellow regulators to write rules with regard to the derivatives area within 360 days. That means, if one is not counting, we 

have 289 days to go. 

We set up 30 rule teams at the CFTC and publicly put this out, 

and we have two principles really guiding us. One is the law itself, 

not to over-read it, not to under-read it, but to do exactly, as best 

we can, what Congress intended to do and wrote in the 840 pages 

that the Chairman referred to. 

Second is to have broad consultation, heavily both with fellow 

regulators and the public and the Congress, as well. We are working very closely with the SEC and the Federal Reserve particularly, 

but also all of my fellow regulators here today. Within 24 hours 

from the bill signing, we had 20 team leads over at the SEC for 

a joint meeting, and with the Federal Reserve and other regulators 

the following week. In fact, to date—we added it up—we have had 

146 individual meetings of staffs or chairman-to-chairman level between the CFTC and fellow regulators. That is about 100 with the 

SEC and about 45 with all the other regulators to date. 

We are also actively consulting with international regulators. I 

just returned yesterday from a 3-day trip to Brussels, where I met 

with all the different senior regulators there. I know my other regulators are doing the same. Two weeks ago, the European Commission put out their proposal on derivatives and it is very similar and 

consistent with the Dodd-Frank Act. Both have strong clearing requirements. Both have covering financial entities and have a commercial end user exception. Both use data repositories and have 

strong risk lowering standards for the dealers. And so we are working to harmonize to make sure as we go forward with the rule writing we are consistent with what they are doing internationally. 

We are also soliciting broad public comments, as our other agencies are. We want to engage the public as best we can. We have 

had 3 days of roundtables with the SEC, and we have also had 

many public meetings which we, too, list on our site. I think we 
16 

now have a list of 170 meetings on our site with all the details and 

participants and the major topics discussed. 

We plan to actively publish rules starting tomorrow is our first 

public meeting, publishing proposals through the middle of December. We have coordinated that schedule mostly with the SEC, but 

we have shared that schedule with all of the fellow regulators and 

Treasury here today to try to coordinate with the FSOC. 

So the next year of rule writing will test certainly the talented 

staff of the CFTC and my fellow Commissioners and me. Though 

we do have the resources to publish the rules and move forward 

on the rules, we do recognize we would need significantly more resources about a year from now to actually implement these. 

With that, I look forward to taking any questions. 

Chairman DODD. Thank you very much, Chairman Gensler. 

Mr. Walsh, thank you for joining us and thank you for taking on 

the responsibilities at the OCC. 

STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. WALSH. Thank you, Mr. Chairman. Chairman Dodd, Senator 

Shelby, Members of the Committee, it is an honor to testify before 

this Committee where I used to work as staff to Senator John 

Heinz under Senator Bennett’s predecessor, Senator Jake Garn, 

and a privilege to testify before you, Mr. Chairman, on the DoddFrank Act as your service in the Senate draws to a close. 

The Committee asked me to discuss our progress in implementing the Dodd-Frank Act, our plans for integrating the OTS 

staff and functions into the OCC, our plans for identifying employees to transfer to the Consumer Bureau, and our views about how 

Basel III furthers the objectives of the Act. My written statement 

also describes a few challenges we have encountered thus far in implementing the Act that may benefit from legislative clarification. 

To meet the law’s objectives, the OCC is drafting a number of 

new rules, some jointly with other agencies and some on a coordinated basis. The rules cover a broad range of issues, including regulatory capital, proprietary trading, derivatives margin requirements, and appraisals. The law also requires us to revise many of 

our existing regulations, and as the Office of Thrift Supervision is 

integrated into the OCC, we are charged with reviewing and republishing all OTS rules. 

We have worked quickly to identify each of our rulemaking obligations and have established teams of agency experts to lead our 

work and to coordinate with interagency efforts, as appropriate. A 

group of senior managers is directing and coordinating this mammoth effort. My written statement also details specific tasks we 

have initiated, including support we have provided to the Financial 

Stability Oversight Council and an Advanced Notice of Proposed 

Rulemaking we have issued on the requirement to end reliance on 

credit ratings. We have begun work on an interagency basis to implement risk retention requirements for securitization and to limit 

excessive or inappropriate compensation, among other projects. We 

are still in the early stages of work on these projects and we have 

encountered some challenges detailed in my statement. 
17 

One of the most important tasks ahead for the OCC involves the 

transfer of most functions from the Office of Thrift Supervision. 

The OCC will take on the task of supervising Federal thrifts and 

writing rules for all savings associations, while responsibility for 

State chartered thrifts and thrift holding companies will go to the 

FDIC and the Federal Reserve, respectively. 

Most OTS employees will transfer to the OCC and we are focused 

on ensuring the orderly and effective transfer of these functions 

and staff. The OTS employees transferring to the OCC have essential skills and knowledge of the thrift industry that will be important to the OCC in carrying out this new mission. I believe they 

will find the OCC a supportive and rewarding place to continue 

their careers, and we are looking forward to welcoming them to our 

agency. 

We are mindful of the importance of communicating about the 

transition process, both with OTS employees and the thrifts they 

supervise. I recently wrote to all Federal thrift chief executive officers about the transition and I plan to continue reaching out to the 

industry. We are participating in industry events that provide opportunities to interact with thrift executives and we are developing 

an outreach program to provide information about the OCC’s approach to supervision and regulation. 

We also have an obligation to work with Treasury to identify 

OCC employees who have the skills to support the rulemaking, supervision, and examination functions that will transfer to the 

CFPB and who are interested in working for the new agency. We 

have been participating in planning for the new Bureau, and as the 

CFPB organization takes shape, we are committed to providing 

necessary support to that organization. 

Finally, with respect to Basel III, we believe these capital and liquidity reforms which seek to improve the ability of banks to absorb shocks from economic stress advances the objectives of the 

Act. The Dodd-Frank Act addresses many of the same issues as 

Basel III, which seeks improvements to quality of capital, addresses systemic risk concerns, mitigates procyclicality, limits excessive 

leverage in the banking system, and establishes minimum liquidity 

standards. We think the Basel III framework strikes an appropriate balance by setting requirements for higher quality capital 

and liquidity while allowing the banking system to continue to perform its essential function of providing credit to households and 

businesses. Further, the extended transition period minimizes any 

short-term disruptions in financial services while the economy recovers. 

Thank you for the opportunity to testify today. I would be happy 

to answer any questions. 

Chairman DODD. Thank you very much. Thank you very much 

for your testimony. 

What I am going to do if I can here is give a little more time 

to Members this morning, given the range of witnesses we have 

with us from the various regulatory agencies, so I will ask the 

Clerk to put a 10-minute time on. We will try and focus on that. 

Let me pick up on the point, Secretary Wolin, you raised at the 

very outset of your remarks, the very good news that the Financial 

Stability Oversight Council will be meeting tomorrow to work on 
18 

a number of issues. The substantive functions you have identified, 

others have, as well, including designating certain nonbank financial companies for supervision by the Federal Reserve, recommending heightened prudential standards for large interconnected 

financial companies, and several others that will be the job of this 

oversight council. 

I am interested in hearing briefly from each of you—you have 

touched on this already—on, one, who will represent your organization at the Council, who will actually be there, who you are designating so we have a good idea of who that is, and what is your 

view of the key substantive priorities of the Council. There is a lot 

to take on here, but I would love to get some sense of how you 

prioritize those issues, at least in your view of who will be doing 

it. 

And as I say this, let me also editorialize a bit here, because I— 

and again, a couple of you have raised this and I applaud you for 

doing so. We certainly expect the members of the Oversight Council 

to share information and to cooperate and to create an atmosphere 

where any agency is free to contribute in all of this. This organization is not intended to be a top-down but rather a collective fathering of equal partners in all of this, and I would expect no one to 

hide behind the work of the Fed or the Treasury, nor to be intimidated by it, and I say that respectfully, but obviously Treasury and 

the Fed have been very dominant players in all of this, but what 

I want to have happen here is that level of cooperation where each 

of you have a responsibility to bring your designated knowledge 

and expertise to the table and that that information is shared, creating a new culture. 

One of the problems in the past has been I cannot legislate culture. None of us can here. But unless that culture changes on how 

we operate, that sharing of information that particularly an oversight council is going to need in order to succeed, if it is really 

going to work, that has to be a part of this. And again, we can designate responsibilities, but beyond that, it ultimately depends upon 

the leadership of the respective agencies to create that culture. And 

so I am interested in having you comment briefly on this, as well. 

So let me run down with you, Neal, if I can, who is going to be 

at that table tomorrow and what are your priorities. 

Mr. WOLIN. Thank you, Mr. Chairman. Secretary Geithner will 

be at the table chairing the meeting tomorrow for Treasury. I think 

the points that you made, Mr. Chairman, with respect to the cultural issues of the Council are critically important, because while 

on the one hand, the Council members have clearly their own independent regulatory authorities and those need to be respected, getting the information sharing and the sort of collaborative effort to 

make sure that the Council acquits its collective responsibility in 

the right way is also very, very important. So that is something we 

will be focusing on, I think. 

In terms of priorities beyond getting that basic rhythm right, 

clearly, the Council has by statute four studies that it needs to do 

that are important, two relating to the Volcker provisions and one 

relating to risk retention in the securitization area, a final one having to do with the overall economic effect of this regulatory framework. Beyond that, the Council, I think, should and will prioritize 
19 

the question of which nonbank financial institutions ought to be 

designated as systemic, and beyond just firms, also utilities. 

So I think those are the core things beyond keeping abreast in 

a range of ways of the various members’ views about what systemic 

risk exists in the system and how we are addressing them and how 

they ought to be addressed. 

Chairman DODD. Let me just quickly say that I appreciate that 

Secretary Geithner will be at tomorrow’s meeting. I am going to be 

as interested in who shows up at the following meetings. Too often, 

what happens is, again, this gets relegated to some very good people, I am sure, but it takes on less of a priority. And I do not expect 

the Secretary of the Treasury to show up at every meeting, but I 

would really like to know that there is someone, particularly someone who might happen to be coming before this Committee to be 

confirmed, that within that structure has the responsibility, whether it is the member of a commission that someone has designated, 

that that is the person who will be there so we in this Committee 

in the coming years will be able to have someone that comes before 

us from your respective agencies that we can talk to about this so 

it does not end up being, and I say this respectfully, of some staff 

member who has been just given the job to be there and we see 

this culture begin to return to where it has been. 

I do not expect you to necessarily answer that question right now 

unless you know. Do you—— 

Mr. WOLIN. Well, let me say, Mr. Chairman, the Secretary has 

been very, very engaged in these implementation issues to date—— 

Chairman DODD. Right. 

Mr. WOLIN. ——and he does absolutely expect to be very, very 

engaged in them, in the work of the Council on an ongoing basis, 

not just tomorrow. He will personally be very much involved, 

whether that means every single meeting, but I think that is his 

expectation. And a number of his senior staff, myself included, will 

continue to stay fully engaged, as well. So I think the basic answer 

is Secretary Geithner expects that he will be chairing these meetings on an ongoing basis. 

Chairman DODD. All right. Well, that is good, and again, this is 

for all of you here, but I would recommend, because you will set 

the tone for years to come. Long after all of—certainly I am gone 

and you are gone, as well, who your successors are and how you 

set up this and begin to move this will become sort of the standard. 

And so it is very important how this starts, in a way. 

Chairman Bernanke, do you have any thoughts on this? 

Mr. BERNANKE. Yes, Mr. Chairman. I will be attending the meeting along with Governor Tarullo, who has been a point person for 

us on bank supervision and regulation, and I intend to be the regular representative for the Federal Reserve. 

The Dodd-Frank Act provides for a Vice Chairman for Supervision at the Federal Reserve, which has not yet been nominated, 

but that person obviously would also play an important role going 

forward. I think this Council is very important. Given all these 

overlapping responsibilities, coordination is going to be extremely 

important. And in particular, many of the aspects required to set 

up this regime, designating systemically critical firms and utilities, 

for example, comes from the Council, and so that needs to be put 
20 

in place that we can begin to implement the basic structure of the 

Act. 

Chairman DODD. Great. 

Ms. Bair. 

Ms. BAIR. Yes. I will be attending, and, as long as I am Chairman, I will be representing the FDIC. I think it is very important 

that all the principals fully engage with this important effort. 

In terms of priorities, I certainly agree with Deputy Secretary 

Wolin. Certainly, from the FDIC’s perspective, a top priority should 

be the designation of nonbank systemic firms. This is closely related to our ability to be prepared, because that triggers a living 

will resolution planning requirement, and so early identification of 

those entities which the Council feels are systemic is very important. 

Also, I hope that the Council will be forward-looking, identifying 

not just systemic institutions but systemic practices and emerging 

risks. We see some emerging risks now, and being forward-looking 

and proactive—to try to get ahead of them, identify them and deal 

with them before they become big problems—I think is a very important focus for the Council. 

Certainly, coordination is an important function, too, but I think 

people of good will will work collaboratively together and share information and respect each other’s respective spheres of expertise 

to get this work done. I think if we all start trying to rewrite each 

other’s rules, though, this Council will become an impediment, not 

a way to facilitate reform. It is very important to get the balance 

right, and I think we all are committed to working together to 

make sure that happens. 

Chairman DODD. Thanks very much. 

Chairman Schapiro. 

Ms. SCHAPIRO. Thank you. I will represent the Securities and Exchange Commission and I would certainly expect to be at every 

meeting of the Council. 

Obviously, everyone has said designation of the nonbank financial institutions is really a critical and a high priority item. I would 

also say that from my perspective, because we have much to do to 

implement rules to fulfill the Volcker Rule requirements under the 

Act, we will be particularly interested in launching a study that 

predates the rule writing in that area and getting comment and 

getting the background that we need to do that in a thoughtful 

way. 

Chairman DODD. Thanks. 

Mr. GENSLER. Chairman Dodd, I expect to be there and at every 

meeting. I am not even sure under the Commodities and Exchange 

Act I could send somebody else to vote for me there, so I think that 

is pretty clear. 

I would also compliment Treasury. I think they have been excellent. I mean, we are all sort of learning a new thing here, this 

Council—— 

Chairman DODD. Right. 

Mr. GENSLER. ——but they have been excellent, seeking the advice. We are sort of at this end of the table. I would associate myself more with Senator Reed or my Senators from Maryland. Like 

the Senate, there are small States, they are middle States and 
21 

large States, but the Treasury has been excellent in taking all of 

our views into being. 

In terms of priorities for us, at least, one thing that we see over 

the many months ahead is to designate some clearinghouses to be 

systemically relevant. We currently oversee 14 clearinghouses. We 

think that might grow to 20 or so. But some small handful would 

be so important under Title VIII of the statute, the Council would 

designate them, and I hope tomorrow to at least highlight that we 

will do that. But it would certainly come months from now before 

that happens. 

Chairman DODD. I appreciate that. 

John. 

Mr. WALSH. The basic operating rule is principal plus one. I expect to be there. I assume the Comptroller that is nominated by the 

Administration will be there. Our Chief National Bank Examiner 

is the support for our participation. 

I think the key challenge over time is going to be figuring out 

how to assess systemic risk across the entire financial system. We 

need to gather the data that is available in the agencies and the 

private sector to begin mapping risk across the system. We need 

agencies to bring issues to the Committee and I think that will be 

the kind of challenge as it develops its work. And the overall challenge is getting consistent policy across a number of independent 

agencies. That is not so much a challenge for the FSOC, but the 

challenge we all face. 

Chairman DODD. Right. Well, I will come back to that, and 

again, time is up. But let me ask just one quick question of you, 

Chairman Schapiro and Gensler—other questions I have would require participation by more, so I will wait for the next round. 

And you touched on this, Chairman Gensler, on the derivatives 

market and the reaction internationally. It is not only obviously 

vast, but it knows no geographic boundaries obviously and poses 

some issues. The European Commission recently released its proposals it talked about, which will be debated and finalized to the 

European Union legislative process in the coming months. 

Just again, you suggested this to be the case. Maybe develop it 

a little further, and Chairman Schapiro as well, based on what you 

know. And I know you were planning to be there, but for today’s 

hearing. So I am grateful to you for being here today, but urge you 

to get over there quickly as well, given the importance. I know you 

cannot be two places at once. 

[Laughter.] 

Chairman DODD. Is the European approach consistent with 

where we are going on this? We have sort of a sense of that, but 

I do not want to put words in your mouth. That is very important 

to me, this harmonization idea, that we have a consistent set of 

rules to the extent we can around the world. 

Mary, do you want to go first on that? 

Ms. SCHAPIRO. I am happy to. I think Gary said it actually very 

well in his opening statement. 

I think the European Union direction is broadly consistent with 

Dodd-Frank: mandatory clearing of all eligible contracts, reporting 

of OTC derivatives, strict capital and collateralization or other requirements when contracts remain between two counter-parties, 
22 

where they are bilaterally cleared. There is a regulatory framework 

they will put in place for trade repositories, very similar to what 

we are doing here. 

So I think there will obviously be details, but in broad scope it 

is quite surprisingly almost, in my way of thinking, consistent with 

the approach that we have taken in the United States. 

Chairman DODD. You know we were told that this is the fact, 

and again I think we surprised a lot of people, but the fact that 

the Administration, we up here, led on this issue has an impact on 

what Europe has done. Is that a fair assessment? 

Ms. SCHAPIRO. Oh, I do not think there is any question about it, 

that when we lead as the largest market in the world other countries look very carefully at what we have done, and we often look 

to other countries when they have led, to see if we can be consistent. I think there is broad appreciation among international 

regulators that while in every jurisdiction all the rules will not be 

identical, that it is in fact important to get them as close as possible, so that we do not see business migrate for the wrong reasons. 

Mr. GENSLER. And I would just add I mean Commissioner 

Barnier, Michel Barnier, who is the European commissioner who 

has oversight of all of this and recommends to the parliament, and 

Sharon Bowles who sort of has either your or Chairman Frank’s 

role in the parliament, we have been talking to them really since 

last summer and fall. And Treasury and the Federal Reserve have 

in addition to us. It has been an excellent partnership. 

The clearing mandates are very similar—the idea that financials 

would come in and nonfinancials were out. They sort of have a 

clearing threshold, so some nonfinancials would have to come in, 

where we do not have that. They have these trade repositories and 

so forth. 

The one distinct thing is they have said on the trading requirement they are going to take that up in about six or 7 months in 

a different legislative package. So there is some timing delay, and 

we will have to wait to see where that it is. 

Chairman DODD. Thank you very much. 

Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman Bernanke, as you well know, one of the goals of the 

Dodd-Frank legislation was to end Government bailouts. The FDIC 

was granted vast new powers under that legislation to resolve financial institutions, so that no one institution would be, as I understood it, too big to fail. 

If the market still thinks that the Fed, the Federal Reserve, will 

rescue failing firms, it will continue to provide large financial institutions with below-market financing, perpetuating our already severe too-big-to-fail problem. With the passage of this legislation, 

Dodd-Frank, can you, or would you, categorically state that the 

Federal Reserve will never again rescue a failing financial institution such as AIG, for example? 

Mr. BERNANKE. Senator, I can say that because Dodd-Frank has 

eliminated the authority that we used to address AIG, which was 

the ability to lend to an individual firm, so that whatever any future chairman may wish to do that authority is no longer available, 

first of all. 
23 

Senator SHELBY. Do you agree with that? 

Mr. BERNANKE. I do agree. 

Senator SHELBY. OK. 

Mr. BERNANKE. And I supported that throughout, that eliminating that authority was entirely appropriate if we were able to 

develop a regime that would allow for an orderly wind-down of a 

firm, and Chairman Baer and the FDIC have been working very 

hard to develop a set of rules to govern that process. 

I just may add I think the most important additional thing we 

need to do is to keep coordinating with our international colleagues 

because these firms are typically multinational and we would want 

to be able to work closely with foreign regulators as well. 

Senator SHELBY. How important is it for this message and the 

legislation that we have passed that is going to end bailouts, how 

important is that to people running financial institutions? 

Mr. BERNANKE. Well, it is extremely important, Senator. I know 

from a political point of view that American taxpayers do not want 

to be on the hook for these kinds of bailouts in the future. 

Senator SHELBY. Do you blame them? 

Mr. BERNANKE. I certainly do not blame them. 

Senator SHELBY. OK. 

Mr. BERNANKE. But from a financial regulatory point of view the 

other important aspect is that we want to have market discipline. 

We want to lenders to, large firms to believe that they can fail and 

therefore to take due care to make sure that the firms they are 

lending to are not taking excessive risks. 

Senator SHELBY. What is your judgment on Basel III at the moment? Just sum it up. 

Mr. BERNANKE. I think it is moving in a very productive direction. It has strengthened capital, raised capital requirements, improved the quality of capital which is very important. It has created an international leverage ratio. It has introduced liquidity requirements. It has addressed some cyclicality issues. So I do think 

it makes some very substantial progress on providing stability for 

our banking system. There is still work to do be done though. 

Senator SHELBY. Chairman Schapiro, what is the SEC doing now 

to develop and also to implement a permanent solution to the credit rating agency that is deep and with us? I know it is complicated. 

Ms. SCHAPIRO. It is complicated. And as you know, since 2006 

when the Credit Rating Agency Reform Act passed, the agencies 

engaged in quite a lot of rulemaking with the very able assistance, 

I should say, of your former staff and Commissioner Kathy Casey. 

But under the new law we have a number of additional requirements that will go into place. So we have communicated with the 

rating agencies immediately that a number of the provisions take 

effect upon enactment of the law, do not require SEC rulemaking. 

So they need to change their governance, for example, and those 

efforts are underway. 

We are also staff—— 

Senator SHELBY. How important is that to, say, every bringing 

back the securitization market? 

Ms. SCHAPIRO. The role of credit rating agencies is one that is 

particularly important in the securitization market. The law repeals Section 436(g) which would no longer allow the use, or the 
24 

reliance upon—it requires a credit rating agency’s consent to their 

ratings being included in offerings. They will not consent thus far, 

and it is not clear whether securitizations on what basis will continue to go forward until we reach some kind of an accord with the 

rating agencies. 

We have issued a no action letter to effectively remove the requirement from our rule that credit ratings be included where the 

offering is dependent upon the rating. 

So we are working through those issues with the credit rating 

agencies. We are also establishing our credit rating agency office 

that the law requires, that will report directly to me. We are employing the examiners that will be necessary to put credit rating 

agencies on an annual examination cycle, which is particularly important and required under the law as well. 

There are a number of rulemakings that will have to go forward 

relating to due diligence and other issues, reps and warranties in 

the asset-backed securities markets as well, that require the role 

of the rating agencies and the SEC to write rules. 

Senator SHELBY. I hope it works. 

Ms. SCHAPIRO. So do we. And Senator, I am sorry, I should just 

add that the law also requires us to evaluate all of our existing regulations and to remove reliance upon credit rating agencies in all 

of those rules, and that process is also well underway. We had already proposed that in the asset-backed securities markets for the 

use of shelf registration. 

Senator SHELBY. Chairman Gensler, I want to get into your area 

if I can. You publicly argued against an end-user exemption from 

the clearing requirements in the derivatives title that we passed, 

and you have argued repeatedly for keeping any exemption as narrow as possible. What steps are you taking to ensure that your personal aversion to the end-user exemption does not interfere with 

your agency’s mandate to carry out the Dodd-Frank legislation? 

What are you doing here and how will it affect the end user? 

Mr. GENSLER. Senator Shelby, a very good question, but I took 

an oath of office and Congress writes the law. So we are going to 

adopt exactly what you have. 

There is a clear end-user exception for anyone who is hedging or 

mitigating a commercial risk for nonfinancial firms, and I think 

that was a balance, to take that sort of 9 or 10 percent of the market out. Completely what we are going to do is comply with the 

law, and I think that was a balance that Congress appropriately 

made. 

Senator SHELBY. OK. Thank you. 

Secretary Wolin, each of the regulators charged with rulemaking 

under the legislation, Dodd-Frank, has publicly committed to specific steps to provide transparency during their respective processes. You are familiar with that. Will Treasury follow this lead 

and post on its Web site, or otherwise make public, the names and 

affiliations of individuals who meet with Treasury officials, including Special Assistant to Secretary Geithner, Ms. Elizabeth Warren? 

Will you do that? Will there be transparency there? 

Mr. WOLIN. Senator Shelby, we will be, I think, in very short 

order publishing a transparency policy that will be similar to what 
25 

you ask about and making clear that people can know who it is, 

senior officials at the Treasury. 

Senator SHELBY. Going back to you, Chairman Schapiro, the 

SEC’s experience in overseeing securities markets in which participants have the choice of several different trading venues, each of 

you, what are you doing to ensure that the CFTC has the benefit 

of the SEC’s expertise in this area, and vice-versa maybe? 

Ms. SCHAPIRO. I will let Chairman Gensler speak to this as well, 

but we do have a very different kind of a model in the U.S. equity 

markets. They are quite dispersed. There are multiple venues, exchanges, electronic communications networks and even internalization of securities transactions. And we think there is a lot of virtue, 

and there are some downsides as well, but a lot of virtue to that 

competitive model. 

And we have spent a lot of time talking with the CFTC about 

the extent to which the exchange trading or swap execution facilities that will handle both security-based swaps and commodity 

swaps could benefit from understanding what has worked well in 

the equity markets, understanding they are not perfectly analogous. 

Senator SHELBY. Gary, do you want to? 

Mr. GENSLER. It has been tremendous cooperation, over 100 

meetings with the SEC, and it feels a lot are around these trading 

venues. 

I would add, not to muddy up the hearing, within the next couple 

days I think we will put out this May 6 supplemental report. There 

are a lot of lessons from there too, and our joint staffs. And we 

have a joint advisory committee of outside experts that are going 

to give us a lot of advice too which would address your point, and 

lessons from May 6 can apply even to the derivatives marketplace. 

Senator SHELBY. Secretary Wolin, I want to get into the question 

with you. The Treasury Department, I believe on September the 

21st, conducted a mortgage disclosure forum with consumer advocacy groups and others. In a press release surrounding the forum, 

Secretary Geithner stated in regard to the Dodd-Frank legislation, 

I quote, and he said: ‘‘Wherever possible, we are committed to expediting completion of the law’s requirements ahead of statutory 

deadlines.’’ 

Earlier in the month, Secretary Geithner stated in his speech at 

New York University, and I will quote him again, and he says: ‘‘We 

want to move quickly to give consumers simpler disclosures for 

credit cards, auto loans and mortgages, so that they can make better choices, borrow more responsibly and compare costs.’’ Those are 

his words. 

These are laudable goals, but seem to require rule-writing authority which I do believe the new Consumer Financial Protection 

Bureau will not have until a director is appointed and confirmed 

by the Senate. Do you believe the Treasury has the writing authority without a confirmed director, and if so, why? 

Mr. WOLIN. Senator Shelby, I think there is limited rule-writing 

authority, but it is constrained until such time as there is a confirmed director. 

But I think in the meantime there is plenty of work to be done 

to get these various disclosures ready. It is an important piece of 
26 

the legislation and an important part of the mandate of this new 

bureau. As you know, the mortgage disclosure example, the statute 

says it has to be done a year after the transfer date which would 

be July 21, 2012, and so we are keen to make sure that this new 

bureau is ready to move forward with its mandates and its focus, 

important focus on disclosure as quickly as it can do. So it is the 

Secretary’s responsibility under the statute to stand this bureau 

up, and we want to give it as much of a running start as we can, 

consistent obviously with authorities. 

Senator SHELBY. With the law. 

Well, let me ask all of you this. First, it has been brought to my 

attention the Securities and Exchange Commission has posted its 

rulemaking agenda on its Web site. Will each of you do the same 

thing? We are interested in transparency and what is going on. 

Anybody against that? The SEC is already doing it. 

Mr. GENSLER. We did on the day the bill passed. We put the 30. 

We put them in buckets, but 30 teams. It was on our Web site. 

Senator SHELBY. So you are willing to do that? 

Mr. GENSLER. Oh, absolutely. I think we have, but we can do 

more. 

Senator SHELBY. What about you, the Treasury? 

Mr. WOLIN. Insofar as we have rulemakings, Senator Shelby, we 

will be transparent. 

Senator SHELBY. What about at the Fed and rulemaking? 

Mr. BERNANKE. We are going to be as clear as we can. We are 

in discussion with the others. 

Senator SHELBY. What does that mean when you say ‘‘clear as 

you can’’? 

Mr. BERNANKE. Well, we have the following issue which we are 

working on very hard, which is that many of our rulemaking authorities are joint or consultative, and we just want to make sure 

that we are coordinated with the other agencies. 

Senator SHELBY. Sure. 

Mr. BERNANKE. And we have not yet quite got all those ducks in 

a row quite yet, but we will certainly try and make that information available. 

Senator SHELBY. Let us know what you are doing. 

Mr. BERNANKE. OK. 

Senator SHELBY. Thank you, Mr. Chairman. 

Senator REED [presiding]. Thank you, Senator Shelby. 

Thank you for your testimony. 

Secretary Wolin, in response to Senator Dodd’s question about 

the systemic council, I think every respondent talked about the 

need for analytical evaluations, looking ahead, which raises the 

question of the Office of Financial Research. You and the President 

and Secretary Geithner have really the opportunity and obligation 

to create not just an organization but a culture which I hope is analytical and apolitical, which attracts the best minds that are looking across the system and forward. Can you give us an update as 

to where you all are in the process of appointing a head and getting 

that staffed? 

Mr. WOLIN. Senator Reed, thank you. First of all, thank you for 

your leadership in creating the Office of Financial Research. It is, 

I think, a very important opportunity for the council and for the 
27 

Federal Government in general to have a much better handle on 

data and data analysis that can make sure that it is in a good position to fulfill its various regulatory responsibilities and systemic 

risk responsibilities appropriately. 

We are hard at work in trying to begin setting up the structures 

that the statute requires. We want to do it consultatively with the 

other regulators, to make sure we know what data are already 

being collected and how they are being collected, so that we can 

move forward smartly on creating data standards and making sure 

that we do not duplicate efforts, either public sector or private sector efforts at data collection. 

The President, I think is reviewing possibilities for who might be 

the first head of the OFR. We are very much focused on making 

sure that it is someone who has real experience and capacity in 

data collection, data analysis and its application in these important 

contexts. 

And of course we want to make sure that the office, when it is 

stood up, has the independence that the statute intends for it. It 

is a part of the Treasury, but with independent leadership and 

budget capacity and so forth. And that is an important element so 

that the work of this office provides a clean, unbiased, unvarnished 

look at the issues which I think are critical and which give the 

Government, for the first time, a real set of potential tools that it 

has not had. 

Senator REED. Thank you, Mr. Secretary. 

Chairman Bernanke, in a similar vein, Title 9 of the bill requires, as you mentioned in your comments, the appointment of a 

Vice President or a Vice Chair for Regulatory Supervision at the 

Fed. Do you have any notion of when that might happen? 

Mr. BERNANKE. I do not have any precise information. I know it 

is the Administration’s responsibility. I know they are considering 

alternatives, but I have no specific information. 

Senator REED. Switching gears, one of the provisions in the legislation in terms of the Volcker Rule allows an exemption for roughly 

3 percent for an institution to continue proprietary trading. I must 

say Senator Levin and Senator Merkley were really the key people 

pursuing a much tighter regime. But nevertheless, can you give us 

an idea of how much additional capital an institution like that, if 

they have their proprietary trading operation continue, would have 

to carry? Is that something you have considered already? 

Mr. BERNANKE. I am sorry, that the bank would have to carry? 

Senator REED. That the bank would have to carry. Or, let me put 

it another way. Would you require additional capital as one of the 

sort of prudential ways in which you could protect the system from 

proprietary trading if an institution uses the 3 percent? 

Mr. BERNANKE. Well, first of course, as you stated, Senator, there 

is a 3 percent of capital limit that a bank can dedicate to that. 

Senator REED. Right. 

Mr. BERNANKE. But, in addition, we have already in fact begun 

implementation of new rules for capital requirements for trading 

books, for trading of securities and those sorts of things. 

Senator REED. So, essentially, you were already beginning to 

think about if one chooses this option to have additional capital 

even beyond what is required by the minimum rules? 
28 

Mr. BERNANKE. Well, on the Volcker Rule specifically we are of 

course engaged in the study, that we are working with the council 

to develop the study, and we will be working expeditiously to put 

in rules to implement the intent and to figure out what the appropriate exemptions and so on are. 

On a separate track, the Basel II international capital requirements have already significantly increased the capital required 

against risky trading of all types that would be market-based trading as opposed to loans on the banking book. 

Senator REED. Let me ask another question too. As you go forward monitoring these operations, will you have on a frequent 

basis, perhaps even daily basis, actual knowledge of the positions 

that these trading units will be taking and also what units the clients of the bank are taking? Will you have that detailed constant 

information? 

Mr. BERNANKE. We do not have that information on a daily type 

basis now. We mostly operate via rules and policies, assuring that 

the bank or the bank holding company has a set of risk management tools that it is applying consistently, and then we check to 

make sure that is happening. 

I think an open question is whether the Office of Financial Research will be gathering more detailed position information and the 

like, and that is certainly something that we may want to look at 

because that may be the only way in which to identify, across the 

system, crowded trades or other risks that might not be visible 

from the perspective of an individual institution. 

Senator REED. I appreciate the systemic approach, but in just 

looking back it seems to me that the approach of looking at the risk 

assessment and evaluating it and seeing that they were doing what 

they said they were doing did not seem to be particularly helpful 

in many circumstances in the past. And if that is the approach that 

you choose to take, it very well may be ineffectual going forward. 

If these major institutions are going to have, under this exemption, 

a proprietary trading operation I would say, do you not think you 

need to know a lot more than just their risk policies and whether 

on a periodic basis they are doing what they say they are doing? 

Mr. BERNANKE. We certainly do need to test what they are doing 

and to evaluate their positions, but realistically we cannot duplicate their entire operation. 

Senator REED. I understand that. 

Mr. BERNANKE. We are going to have to assess based on sampling and based on spot-checks and the like. 

Senator REED. I think Chairman Schapiro has a comment. 

Ms. SCHAPIRO. I was just going to add that since we have to define market-making and underwriting activities that are permissible under the Volcker Rule, one of the things that we will be looking to is a new large trader reporting system that we have proposed in the consolidated audit trail. That should help provide us 

with much more granular information about trading activities that 

we would hope we could then share with fellow regulators, to make 

a determination whether market-making has been exaggerated and 

goes beyond what is permitted under the rule and has become speculative or proprietary trading. So we are intent on working very 

closely with our colleagues on that. 
29 

Senator REED. Let me just say, both to Chairman Gensler and 

Chairman Schapiro, the comments this morning reflect a collaboration and cooperation that is recent, but is very commendable. 

Just specifically, I know, Chairman Gensler, you are going to 

propose a rule tomorrow or in the next few days about clearing 

platforms. 

Can you both comment on the collaboration that you have entered into in terms of making sure this rule is truly reflective of 

both your equities in the business of clearing derivatives? 

Mr. GENSLER. The three things we are taking up tomorrow and 

all that we are taking up all the way through December, we are 

sharing not only drafts, but we share preliminary term sheets, and 

we try to collaborate. 

On the governance rule tomorrow, I think Chair Schapiro can 

talk. They are about 10 days behind us. We could not quite get our 

commissioners’ schedules lined up. As of now, I think they are 

nearly identical, the actual text and so forth. Now those 10 days 

may change something, but that is what our goal is on each one 

of these—to be, if not identical, nearly there. That is certainly. 

And I think Mary and I have such a relationship. I know future 

chairs might not, but we have been benefited, and we want to use 

that. 

Senator REED. Chairman Schapiro, do you have comments on 

that? 

Ms. SCHAPIRO. No. I would agree completely. I think the cooperation really has been unlike anything I have ever seen in my all 

years in Government, and I think it is very positive. Even where 

we have had slightly different approaches, which I expect we will 

on some issues going forward, we are committed to asking questions about each other’s approaches in our proposals, so that we 

can, even if we do not propose exactly the way, bring them back 

as close together as we can at final. 

Senator REED. Mr. Walsh, please. 

Mr. WALSH. Just on this thought about risk management systems, I think the recent experience showed in some cases that 

large, complex institutions thought they were managing particular 

portfolios and risks and lines of business in an effective way, but 

did not really capture all exposures and all risks across lines of 

business and across activities. Improving their internal MIS to capture risk positions across the whole firm is part of that effective 

risk management that Chairman Bernanke was referring to, and 

that is an emphasis going forward. 

Senator REED. Now I think we have made progress, but my sense 

was, not specific to one regulator, is that there were these elaborate risk procedures and that you reviewed them. And if they made 

sense, sure, they were OK. And if you occasionally spot-checked 

them, that was great. But as you indicated, they did not seem to 

work. 

I do not have a magic answer, but I think there has to be a much 

more textural or granular approach, even periodically. Otherwise, 

I think we will find ourselves right back where we were, and that 

would be unfortunate. 

Thank you. 

Chairman DODD. Thanks very much, Jack. 
30 

I appreciate, Chairman Gensler, you talked about how the two 

of you—you cannot speak for future people who sit in these chairs. 

All the more reason why you need to institutionalize a lot of this 

so that it does not become just a question of two people at this particular moment in time have that relationship. It will be very important in the years to come that that relationship between the 

CFTC and the SEC be a continuation of what you are doing. So 

anything you can do to institutionalize that so that people do not 

drift away, as they are apt to do in the coming years, would be 

very, very helpful as well. 

Mr. GENSLER. I agree with that, and I am personally dedicated 

to figure that out. 

Chairman DODD. And I want to just mention—Jack is finished. 

I did not say it earlier, but I am very grateful to all the Members 

of this Committee who worked so hard on all of this. And even 

though we did not end up with the kind of votes necessarily on 

this, an awful lot of this bill reflects an awful lot of work by a lot 

of Members of this Committee, not the least of which was the person I am about to introduce, and that is Bob Corker. So I would 

not want the moment to pass. That whole Title I, Title II that you 

and Mark worked on in large part is your effort and Mark’s, so I 

thank you immensely for it. 

Senator CORKER. Thank you, Mr. Chairman. I appreciate the 

way you have conducted this Committee for the entire time I have 

been on it. Thank you very much, and I will talk about that later. 

And I appreciate each of you coming today, and nice to hear everybody is playing well with each other at the moment. 

[Laughter.] 

Senator CORKER. Secretary Wolin, the CFPB, the issue of consumer protection, I think there has been some discrepancy about 

whether it actually has rulemaking authority between now and 

July of 2011. You seem to indicate you think there is limited rulemaking ability. I wonder if you would expand upon that, because 

I think a lot of us think that during this transition there absolutely 

is no rulemaking authority until it is actually transitioned. 

Mr. WOLIN. Thank you, Senator Corker. I think, you know, the 

Secretary has by statute a series of authorities to stand this Bureau up, and I think that those include, of course, working with the 

other regulators that are transferring both authorities and people 

as well as getting the Bureau ready to undertake its rulemaking 

and its supervision and enforcement authorities as of the transfer 

date next July. 

I think the rulemaking authority is circumscribed, but I think 

the Secretary probably does have the capacity to do the things that 

I just talked about, getting these authorities and people transferred 

over—— 

Senator CORKER. But not real rules across the financial industry, 

then. 

Mr. WOLIN. I think that is probably right. It is quite limited 

there. I think that is right, Senator. 

Senator CORKER. So let me make sure I understand. So there are 

some abilities to stand the organization up, but I think what you 

are stating today is there is absolutely zero ability to make rules 
31 

as it relates to consumer protection that relate to the financial system. 

Mr. WOLIN. Well, again, Senator, you know, absolutely zero—I 

think that the Bureau, the Secretary on behalf of the Bureau in 

this transition phase as he is standing it up has the capacity to do 

the sorts of things we did last week: have fora, get on top of the 

issues, hear from people about what they think, and so forth. 

Senator CORKER. Right. 

Mr. WOLIN. I think the authority to actually issue a rule that 

would bind private parties, for example, in the mortgage area is a 

tough one until such time as there is a confirmed director. 

Senator CORKER. Let me just—a tough one. That is a vague 

word. What I would like for you, if you would—I know we have had 

a good relationship. If you ever think that you have the ability to 

actually make a rule, would you make sure we all are aware of 

that? 

Mr. WOLIN. Absolutely. 

Senator CORKER. At present, it is my understanding, as I leave 

here today, that you do not have that authority until the organization is stood up in July of 2011. 

Mr. WOLIN. Before we do any such thing or—— 

Senator CORKER. Well, before even thinking about doing—— 

Mr. WOLIN. ——comes to you. 

Senator CORKER. ——thing, I hope that you will talk with us. 

[Laughter.] 

Mr. WOLIN. Fair enough. 

Senator CORKER. Because I assume we would have a Senate-confirmed type of person in that position before you all started making 

rules. 

Mr. WOLIN. The President obviously intends to nominate someone. He is reviewing candidates for that role right now, I think 

committed to making sure he gets the best candidate he can, and 

I believe that he hopes to be in a position to make a nomination 

on this role soon. And as I said, I think the rulemaking authority, 

insofar as you are talking about it, I think, Senator, depends on 

that process moving forward. 

Senator CORKER. And being completed. 

Mr. WOLIN. And being completed. 

Senator CORKER. OK. I understand that the Treasury is going to 

be presenting a GSE proposal around January the 1st, and just— 

because I think like a lot of things we did over this last year, many 

of us will start working together on both sides of the aisle to try 

to figure out the most pragmatic way of doing that. Do you still 

plan on having something that is very tangible on January the 1st? 

Mr. WOLIN. The statute requires it in January, and we intend to 

certainly meet the terms of the statute. We are hard at work on 

this topic, as I think you know, Senator, and we will come forward 

with an approach before that time. 

Senator CORKER. And I assume you are involving other banking 

agencies and entities in that process. 

Mr. WOLIN. We are, Senator. We are consulting broadly within 

the Government and without. 

Chairman DODD. Let me make a suggestion to you as well. You 

are trying to involve people up here, and I think in this process of 
32 

conversing about it, my recommendation would be, as someone who 

will not be here, there are a lot of people interested in this subject 

matter, you would be well advised to invite people to be a part of 

that discussion. You might find yourself on a better track when we 

come forward. Just a thought. Sorry to interrupt. 

Senator CORKER. Yes, and I think—and I appreciate your intervening there? I think would be a good idea. I actually think there 

are a number of people on both sides of the aisle that want to solve 

the problem, and I think it would be good to have a little bit of discussion along the way. I know we are spending a lot of time in our 

office, and I know others are, too. So it is an issue that we all together have got to figure out a way to deal with. I cannot imagine 

anybody likes it the way that it is today, and so I would hope you 

would do that, and I thank you. 

Do you have any idea about the criteria that the FSOC, I guess, 

as we are calling it now, is going to use to define a systemically 

important entity? I imagine there are a lot of companies around the 

country that are wondering if they are going to be in the sights or 

not. Do you have any indication as to what that criteria might be? 

Mr. WOLIN. So let me first, just if I could, Senator, go back on 

the GSEs. We had a fantastic working relationship with you, Senator, and with all the Senators on this Committee on the DoddFrank legislation. We fully intend to have a similar relationship on 

GSEs. We look very much forward to working with you and others 

on the Committee and across Congress on what is clearly a critical 

issue on which we are going to have to work together. 

On the matter of FSOC designations, I should say in the first instance this is really a question for the FSOC collectively to work 

through. As I said in my opening statement, I expect that tomorrow at its first meeting the FSOC members will consider a proposal 

to seek public comments on what those designation criteria ought 

to be so that we have, again, a robust conversation about that before the FSOC lands. But I think not for me to make a judgment, 

ultimately before the full range of the FSOC membership on the 

basis of whatever input it receives—and its own analysis, clearly— 

to make judgments about what those criteria ought to look like. 

Senator CORKER. Chairman Bair, it is good to see you again. It 

has been a long time since you were meddling in all our affairs. 

[Laughter.] 

Senator CORKER. I am just kidding you, of course. 

The interagency working group was going to set up, I guess, the 

risk retention standards and safe harbor. I know you sort of 

jumped out in advance of everybody in that regard, and I am just 

wondering if you have had any input from the other agencies. I 

know the OCC opposed that, and I wonder if you might just expand 

a little bit on that. And I really appreciate your input. I was not 

trying to be—— 

Ms. BAIR. If I could review the history of that. A number of members of the industry came to us late last year in anticipation of the 

new accounting rules, FAS 166 and 167, that changed the accounting treatment for securitized assets. It made it much tougher to get 

what we call true sale accounting where you have a clean sale and 

can move that off balance sheet. 
33 

We had a safe harbor that determined whether we would try to 

claw assets back that had been securitized if the bank fails, and 

we had relied on achieving true sale accounting to provide for that 

safe harbor. 

The concern was that securitizations would no longer meet the 

true sale standard of the new accounting rule. So we provided some 

temporary safe harbor relief for everybody retroactively. But going 

forward, we thought, given all the problems in the securitization 

market, the incentives for lax lending, the losses that had been created for banks, the problems we were seeing with resolution activity with failed banks, that we should impose some conditions on 

the safe harbor. In addition to requiring risk retention, we worked 

very closely with the SEC on more granular loan level disclosure. 

This is something we had heard from the investment community 

that they wanted very much. 

We tackled servicing issues, too. We have had a lot of problems 

with servicing, including lack of servicer oversight, and an inability 

to restructure loans because of restrictions in pooling and servicing 

agreements. 

So we addressed what we thought were key issues in the conditions, and went out for two sets of comments on this. Consequently 

this has been going on for nearly a year. A 5-percent risk retention 

requirement is part of the, which is consistent with the SEC’s proposal. The disclosure requirements are synched up with the SEC, 

to try to have one standard for everyone. 

Yes, we decided to go ahead with the safe harbor rule that was 

expiring at the end of this month. It is important for people to understand we had to do something. If we did not do something, we 

would have disrupted the securitization market, especially all the 

outstanding securitizations currently in existence. We think what 

we did was prudent. 

In addition, we put an auto-conform provision in our rule so that 

once the agencies do get together and define what a qualified residential mortgage (QRM) is, the 5-percent risk retention provision 

will no longer apply. And we are very eager to engage in that process. We hope that, to some extent, this will be an action-forcing 

event so those interagency rules can be done on a very timely 

basis. It is a 270-day timeframe that is provided by Dodd-Frank. 

We hope that is met. We would like to see it sooner than that. 

Senator CORKER. And that is the timeframe to actually define a 

qualified residential mortgage? 

Ms. BAIR. That is right. But pending interagency rules we presently do not have underwriting standards, and, frankly, we do not 

have a securitization market right now. Nothing is happening. I 

think a lot of it is because investors just do not have confidence to 

start it up again. 

Senator CORKER. Why did the OCC object to the rule? 

Mr. WALSH. A fairly straightforward thought that we have held 

the position since this was in a Notice of Proposed Rulemaking that 

it would be preferable to have a single policy on securitization 

across all markets and all securitizers. And we did not see any 

great downside to just extending the safe harbor for the 270 days 

and then having a set of rules in each venue that conform to one 

another. So it is a fairly straightforward point. 
34 

Ms. BAIR. And if I could just say—— 

Senator CORKER. Well, Mr. Chairman, I sense a slightly less 

playing well together than appeared. I think that these are the 

kind of things that are going to take a lot of oversight down the 

road. But if you want to respond. 

Ms. BAIR. Well, thank you, Senator. The 5-percent risk retention 

is the law in Dodd-Frank. It clearly states that you have 5-percent 

risk retention unless the mortgages comply with new underwriting 

standards that will be developed by the agency. So we think we 

were quite consistent with the clear language of what the law is 

now under Dodd-Frank. 

And, again, we hope this happens in 270 days. My experience 

with interagency rulemaking is that sometimes those deadlines are 

missed. The SAFE Act required simply that we do interagency 

rules to register mortgage originators. It was a 1-year timeline, and 

it took us 2 years. 

FCRA is another example where the agencies overshot the statutory deadlines by a significant amount. So we think it is only prudent to have the 5-percent risk retention in place until these underwriting standards are developed, and if this can help facilitate 

a timely process, we welcome that, and we think that is very consistent with what is in the letter of the law now. 

Senator CORKER. Mr. Chairman, thank you for letting me go a 

minute forty over, and I want to thank each of you for your testimony. This whole issue of securitization was one that I think we 

were all trying to understand how this 5-percent retention would 

work, and I do look forward to talking to each of you. This is obviously—especially in the commercial side. I mean, there is nothing 

happening right now. 

Ms. BAIR. It does apply to commercial and to all other 

securitizations. 

Senator CORKER. No. I understand that. I understand that. But 

as it relates to the securitization business in general, I mean, there 

are a lot of problems there, and I do look forward to working with 

each of you to try to deal with that. It looks like you want to say 

one more thing. 

Ms. BAIR. The one private label securitization that I am aware 

of, did have a risk retention of 5 percent vertical and horizontal 

slice. So the one that was done did have this feature in it. 

Senator CORKER. Well, there is a wealth of knowledge sitting at 

the table there, and we certainly look forward to working with you 

over the next couple of years. 

Thank you. 

Chairman DODD. Thank you very much. 

Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman. Thank you for having this hearing, and thanks to all of you for coming together. It 

is fun to have you in one place. 

I think I would like to start with you, Chairman Bernanke and 

Chairman Bair, if you have got thoughts about this, too. You know, 

among ending the TARP and Basel III and setting up the infrastructure for the resolution authority, I wonder if you could tell the 

Committee what actual changes your agencies have been able to 

discern in behavior at the largest, most interconnected financial in-
35 

stitutions. Is there less leverage, those kinds of things? What are 

you actually seeing? And, Chairman Bernanke, I was, as always, 

curious on the quantitative surveillance mechanism you talked 

about, whether you could describe that. Is that something that is 

up now? And how are you going to use it? What are the inputs 

going to be? 

So those are my first two questions. 

Mr. BERNANKE. Well, we are certainly seeing movement in the 

right direction in our banking system. Capital has been increased 

significantly. One of the results of our stress test was to not only 

increase capital but to increase the quality of capital, to have more 

common equity. All of the banking agencies are pushing the banking organizations to improve their management information, their 

risk management systems. Some of the banks were not as able as 

they should have been or we should have insisted they had been 

to identify risks on an enterprise-wide basis running into the crisis. 

And so progress is being made on those lines as well. 

Obviously, this is a period where, given that we have just come 

through a crisis, banks are not, generally speaking, taking excessive risks. In fact, many of the portfolios are quite conservative, 

and so we will have to see how things evolve as the economy normalizes. But I do think things are moving in the right direction. 

At the Fed we are moving toward a more, as I said, 

macroprudential and multidisciplinary approach. We are in the 

process of establishing a staff Office of Financial Stability which 

will draw on staff resources from a wide range of disciplines—economics, finance, payment systems, accounting, legal, et cetera— 

which in turn will provide inputs and analysis to other parts of our 

operation. 

So, in particular, for example, we have revamped our supervisory 

organization to take a more multidisciplinary approach and, for example, to do stress tests which are based on alternative macroeconomic or financial scenarios. This Office of Financial Stability is 

responsible for generating the scenarios and their implications as 

an input into that stress test analysis. And so we are linking together these different parts of our expertise. 

As you mentioned, we have a quantitative evaluation—sorry. 

Senator BENNET. Let me stop you there before you do that. Had 

what you are describing been in place precrisis, what are the 

things that you think—the macroeconomic trends that you think 

you might have picked up that were not picked up by the Fed? 

Mr. BERNANKE. Well, I think we would have identified some of 

the broad-based risks that were occurring, the broad-based leverage. Our Office of Financial Stability, besides providing inputs into 

bank supervision, is going to provide general monitoring functions 

looking across a range of markets and institutions and funding 

markets and the like, trying to support our membership in the 

FSOC and in our collaboration with other agencies. 

So we plan to take a much more holistic viewpoint. I do not think 

people appreciate how much that, prior to the crisis, agencies were 

very focused narrowly on individual markets and institutions, and 

there were very significant gaps. And I think it is important for all 

of us to work together to make sure that those gaps and emerging 
36 

risks are identified, and this is our intellectual framework for approaching that. 

Senator BENNET. And I am sorry, before I interrupted you were 

about to talk about the quantitative surveillance mechanism. 

Mr. BERNANKE. Yes. So we are combining with our traditional 

bank supervision, which goes and looks at the books of individual 

banks, sort of offsite analysis which looks, for example, at real estate trends and housing trends and house price trends, mortgage 

delinquency trends and the like and tries to make broader assessments based on market variables and on macro variables—you 

know, what some of the risks might be to the banking system. And 

interaction between those kinds of analyses and the supervisory 

analyses I think is very helpful. In particular, it was a very helpful 

addition to our stress tests that we did a little over a year ago that 

we were able to supplement the bank’s assessment of the value of 

their mortgage with a model-based econometric analysis that drew 

on information about individual housing markets and the relationship of house prices to macroeconomic developments and the like. 

Senator BENNET. That sounds to me like a big step in the right 

direction, and I am wondering how you are planning on sharing the 

results with the public. Or are you? 

Mr. BERNANKE. We are considering how best to do that. Obviously, the first step is to make sure that our supervisory process 

is comprehensive and macroprudential, and that is what this is all 

about. But I think that we ought to think collectively, the people 

at this table as part of the Financial Stability Oversight Council, 

about what kinds of reports we would like to provide. I think DoddFrank requires a regular report from FSOC about financial stability and risks to financial stability. And one natural thing would 

be for our analysis to be part of the input to our collective reports 

to the Congress and to the public about the stability of the financial system. 

Senator BENNET. Thank you. 

Chairman Bair, do you have anything you want to add to the 

first part? 

Ms. BAIR. Well, I think we are engaged in parallel efforts, and 

as the backup supervisor and insurer, we obviously rely heavily on 

the primary regulators, including the Fed, obviously, for holding 

company data where we just recently were given new authorities. 

We have focused a lot, though, as had the Fed, on liquidity monitoring and annually reporting on liquidity profiles on an ongoing 

basis, including having consistent reporting and horizontal analysis 

to be able to identify outliers. 

I think your original question was what has changed, really. I 

think the good news is underwriting standards have gotten a lot 

better, and I would like for the supervisors to take credit for that. 

I think that is as much to do with the market and all of this coming home to rest. But that has gotten significantly better, and I do 

think large financial institutions, at least insured depositories and 

their holding companies, are in much better shape now, are much 

more stable. I think the SCAP results with the increased capital 

at that time served us well. 

And so I think this is giving us more time to put these new systems in place, but there is a lot of work to do. I think we just went 
37 

too far in the other direction in assuming that the market would 

always correct without providing vigorous oversight. But there is a 

lot of groundwork to be done. 

Senator BENNET. We are—and I know it is not the subject of this 

hearing, but just for the record, still in places like Colorado facing 

incredible challenges with small businesses’ access to credit. And I 

do not think all of that is loan demand, but I am going to—— 

Ms. BAIR. Well, I would not disagree with you on that. I think 

there is a particular problem with small business credit, and I 

think we have tried to take a very balanced supervisory approach, 

telling our banks we want them to lend. For smaller banks, frankly, the loan balances are stronger than they are for the larger institutions. 

Part of the problem, though, is a lot of the small business lending 

went through home equity lines or was collateralized by commercial real estate. Those values have gone down so significantly, the 

collateral just is not there anymore. That is a key part of the problem. 

Senator BENNET. I think unleashing that again is obviously so 

critical to our economic recovery, and both anecdotally and also just 

in the broader trends that I am seeing, we are still not there. 

I wanted to come back, Chairman Schapiro, to something that 

was of a lot of interest to me when we were doing this bill, which 

you talked about earlier with the Ranking Member, about what we 

are doing to minimize the conflicts of interest at the rating agencies. There was one provision in particular that had to do with the 

composition of the boards of directors of those agencies and having 

independent directors. And I was not sure in your answer to the 

Ranking Member whether that was happening. Are they complying 

with that? Are we on track there? 

Ms. SCHAPIRO. We are monitoring it very closely. Right after the 

bill was signed, we sent a letter to all of the credit rating agencies 

informing them that all the provisions in the law that took effect 

upon enactment as opposed to waiting for the SEC to write rules, 

and that is one of them. So we are checking in on them on a regular basis. We would be happy to provide more specific information 

about where they are. 

Senator BENNET. I would appreciate that. That would be tremendous. 

Ms. SCHAPIRO. Sure. 

Senator BENNET. Thank you. And the last question—and I am 

the last person who wants an unhappiness to break out here, but 

I wanted to ask you, Chairman Gensler, and you, Chairman 

Schapiro, about one particular rule that you are going to be writing, which is to determine what types of entities are considered 

major swap participants. How are you working together? What 

process is that going to look like to get to a result? Because part 

of also what I am hearing out there and just as a general matter, 

not related only to Wall Street reform, is just a sense of lack of predictability about things. What are the rules of the road? We need 

to understand that. 

By the way, I think that is a sensitivity that everybody ought to 

have as you think about publishing the rules and publishing the 

notices of the meetings, that there are a lot of people out there that 
38 

are feeling like they have got a complete lack of clarity about what 

the future is going to bring, which is important for us to hear and 

attend to. But in this specific case, what is the process going to 

look like? 

Mr. GENSLER. I think you have raised two very good points, trying to lower regulatory uncertainty so that businesses out there 

can understand where we are. We are going to put out proposed 

joint rules on definitions like major swap participant. I think our 

current hope is to do that in the middle of November right before 

Thanksgiving. We are human. We may slip. But I think Congress 

really spoke to this. This category of major swap participant in the 

statute should be very small. Why is that? Because it is somebody 

who is not a swap dealer but has some systemic relevance. I think 

there were three prongs to it, but all three of them really speak 

that it has to have some—if it fell apart or defaulted, had to have 

some systemwide effect on the economy or the financial system. 

So I think the majority, I would even say the vast majority, of 

end users I would envision—again, it is ten Commissioners between our two Commissions will have to comment on this. But I 

would envision it would be a very small set of companies because 

Congress really has spoken to this in that way. 

Ms. SCHAPIRO. I would agree with that. I think the three criteria 

that are set out in the statute make it clear that this is not intended to be an enormous category of market participants. 

The other thing we have done, though, because we recognize this 

is of such enormous interest, is we put out an Advanced Notice of 

Proposed Rulemaking to solicit comment on how should we define 

a number of things, including in this particular area. So that I 

think will help guide us as well. And it is important as well because a whole regulatory regime attaches to it, and that will be 

new for many market participants who might fall into this category. 

So this is an area where I would expect we would get an enormous amount of comment, and we will listen to it very carefully. 

Senator BENNET. Thank you very much. Thank you all for being 

here. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. You have been very helpful down at the end of that table down there, but you have been 

very, very supportive and helpful in this process over the last couple years, and I personally want to thank you for it. 

Senator Johanns, you, as well, have been a good friend. I appreciate your work. 

Senator JOHANNS. Thank you, Mr. Chairman. Let me just say before I get started here, Mr. Chairman, it has been a pleasure working with you. I think you have handled your chairmanship and 

working with majority and minority in just a very, very fair way. 

I want to say that publicly and tell you how much I appreciate it 

as one of the new people here. 

Let me, if I might, turn to, I think, the best people to ask this 

to would be Chairman Schapiro and Gensler. As you know, there 

was discussion about retroactivity of this legislation relative to derivatives in contracts that had already been entered into and I 

want to make sure that the record is clear in this hearing. Do you 
39 

see any part of this legislation at all applying retroactively to derivative contracts that were entered into before the effective date of 

the legislation? 

Mr. GENSLER. Senator, I think it is a very good question. I can 

only speak for myself, because again, five Commissioners, five 

Commissioners and other regulators, also, as the Federal Reserve 

and the prudential regulators have a very big role in setting capital 

and margin. But I think where this has come up the most and people have raised it in public and private meetings with me is whether, for instance, contracts that existed before the Act stand, and I 

think the Act is very clear they do. 

But also some people have raised, what about clearing requirements or margin requirements and so forth, and I am just sharing 

one Commissioner’s view. I think that we should look that that 

should be prospective, not retrospective in that regard, and I know 

that is something that a lot of people have raised, but I—this is 

a whole rule-writing process and a lot of Commissioners and fellow 

regulators. 

Ms. SCHAPIRO. I would really agree with that. We have heard the 

issue most frequently in connection with whether margin requirements should now apply. We also appreciate, though, that legal 

certainty is absolutely critical in this area. So while my Commission has not dealt with this issue specifically, I think we would be 

hard pressed to suggest that there ought to be retroactive application of margin, but it is an issue we will discuss extensively and 

also continue to take public comment on. 

Senator JOHANNS. Does anyone else want to weigh in on that? 

Let me now go in maybe a bit of a different direction for each 

of you, actually. Having served as a cabinet member and attended 

meetings like this where you have a complex piece of legislation 

that involves a lot of various areas, I have to tell you that, quite 

honestly, I see conflict as somewhat of a positive thing, and I will 

just give you an example. 

Sheila Bair, if we wanted your boss to be Tim Geithner, we could 

do that, but we do not want that. We like a certain amount of independence. The same way with Ben Bernanke. If we wanted your 

boss to be Tim Geithner, we could do that, also. I mean, the words 

do exist in the English language to make that occur if you can find 

the votes. But a decision has been made that you operate independently and that independence is important to the functioning of our 

financial system and your regulatory responsibilities, et cetera. 

So I appreciate the spirit in which you come here, which is to try 

to say, well, we are getting along. I have sat through those meetings, and I did not want the EPA running the USDA, so if they attempted to, I pushed back. So I need to know, because I think this 

is very important for oversight responsibility, and I want to go 

right down the table here, I want to know very specifically the 

areas of conflict that have arisen and the area of conflict that you 

anticipate arising as you implement this legislation. I will start at 

this end, Mr. Secretary. 

Mr. WOLIN. Senator, I think that just to sort of say generally, the 

independence of the regulator’s point is obviously a critical one that 

I have mentioned already. Having said that, at least in the Financial Stability Oversight Council, having a cooperative spirit, estab-
40 

lishing a rhythm to accomplish the collective responsibility of the 

Council itself is also important, and I suspect that in that context 

there will be plenty of good debates with people, as you say, as 

they should, taking different perspectives and offering different 

views. I think the important thing is that it be done in a way in 

which information is shared and that the group understands that 

the ultimate role of that Council is distinct from the individual 

independent responsibilities of the regulators as regulators is something that is also important. 

The Council has not had its first meeting yet, so I think it is too 

early to tell, really, how that all is going to work out. It is in early 

days. I think that as we at Treasury feel like we have tried to convene representatives of all the members of the FSOC in creating 

a governance structure and a set of bylaws by which the Council 

can govern its affairs, it has been a conversation that has been 

very helpful. People have approached it in a very cooperative spirit. 

They have not always agreed on exactly—— 

Senator JOHANNS. What are you not agreeing upon? You know, 

we might want to weigh in here, and we have a responsibility to 

provide oversight. We want this implemented right. Even though 

I did not support it, I want it implemented right. So—— 

Mr. WOLIN. You know, I do not think, Senator, there are disagreements as such, meaning sort of clear fault lines. I think on 

the question of what should be the appropriate transparency policy 

of the Council, what should be, you know, the structure by which 

votes are taken, all those things, people have different views and 

they express those views, but I do not think I am in a position to 

say there has been controversies or fault lines. It has been a good, 

cooperative effort in that respect. You know, that may change. The 

Council is in its nascence and we will see how it does in its first 

meeting tomorrow. But I think from this point, from the point of 

enactment to the cusp of the first meeting, it has been quite collegial and people have been approaching it as they have said here 

at this table, and there are others, of course, who are members not 

at this table, in a very helpful way. 

Senator JOHANNS. Chairman Bernanke. 

Mr. BERNANKE. So I will not take time agreeing with you about 

independence. I think it is very important for a lot of good reasons. 

One of the strategic decisions in the bill is to have a lot of shared 

responsibilities, so for supervision, oversight of utilities, of banks, 

of large complex institutions and the like, in many cases, there are 

multiple regulators who have responsibilities shared and the like. 

I think that was the right decision because these are complex entities and different viewpoints, multiple sets of eyes are good. But I 

think, inevitably, there will be some disagreements or frictions at 

some point. 

But I have to tell you honestly, and I am not just trying to put 

a happy face here, is that in terms of the substance of the rule 

writings that we have so far addressed, I do not see any deep or 

principled controversies at this point, just an issue here on the 

margin. So the Federal Reserve in particular is working with everybody on this table and we have found it to be very productive. 

I would say there is some pressure arising from the fact that 

there is so much to do so quickly, and so it is sometimes a chal-
41 

lenge to make sure that everybody has been appropriately consulted and all the input has been taken and still meet all the deadlines. So there are some challenges here. But I do not see any— 

at this point, I do not see any deep conflicts or differences in point 

of view that are going to threaten the implementation of this Act. 

Senator JOHANNS. Chairman Bair. 

Ms. BAIR. Well, I think there are a lot of different perspectives 

in a lot of different areas, and I agree with you, I think that is not 

an unhealthy thing. I think that is a healthy thing. You come together and try to find the right solution based on different perspectives. 

And I would echo what Chairman Dodd said at the beginning, 

that I think we should all come together collegially. I think it is 

a dangerous dynamic if one or two players try to drive everything 

else, and I do not think that will happen. 

I think in just about all the major areas, we bring different perspectives to the table. I do not think that it is a bad thing and I 

certainly do not see anything that would rise to the level where it 

would need a legislative fix. We are honored that you gave us so 

much flexibility and authority and that you defer to our hopefully 

good expertise and wise judgment in writing these rules and implementing this law, and so I think we all are committed fully to 

doing that. But there will be differences and we will need to overcome them, but I do not think that that is really an unhealthy 

thing. 

Senator JOHANNS. Chairman Schapiro. 

Ms. SCHAPIRO. I think I, needless to say, believe deeply in the 

independence of the SEC, and I know every agency up here feels 

that way. But you should not take the fact that we are here in 

agreement on many things at this early stage as a sign that we 

have not had lots of rigorous debate behind the scenes about very 

specific issues. Where we can resolve those issues among us, we 

want to do that. Where we cannot, we will sometimes present the 

public through the comment process with options and alternatives 

for ways to address issues where we are not all perhaps entirely 

synced up to see what the experts and the public think might be 

the right answer on a particular issue. 

So there is lots of debate and discussion. There are very different 

perspectives that are being brought to bear on each and every one 

of these issues. But I think there is also tremendous commitment 

to try to get to the right answer for the American people in every 

single thing we do. Where we cannot, we might have some differences and agencies will have to go forward doing what they believe is the right thing under their statutory mandates. 

But I think so far, it is actually working the way you would 

want, with that healthy tension yet a spirit of collaboration. 

Mr. GENSLER. I would echo the thoughts about independence, 

which are very important, but the collaboration. I mean, I think it 

is what the American public expects of us. I think with nearly 10 

percent unemployment, they even expect it more, and this was the 

worst financial crisis, where the regulatory system failed, as well. 

It was not just the financial system that failed. 

You asked where there have been disagreements. I will say in 

the clearing area, one area that we are supposed to oversee, and 
42 

it might be sort of selfish of the CFTC, we want to have clearing 

standards that are rigorous enough that the Federal Reserve and 

the bank regulators think they can withstand the test of time, but 

also that international regulators will find our clearinghouses 

equivalent and they will stamp them that the international regulators will allow the U.S. clearinghouses. So there is also a selfish 

goal, in a sense, for American commerce that these things have 

that. 

We did have a little bit of an arms race on transparency. These 

four agencies and now maybe Treasury, I mean, we all sort of, how 

we could be voluntarily, not do more than the law on transparency 

and the rule writing. I think that was healthy. 

I do foresee some debates in the future on how the SEC and 

CFTC take on this swap thing, because futures regulation and securities regulation is not always aligned. We are trying, and Mary 

and I have been committed to avoid regulatory arbitrage, but does 

that mean this new swaps regulation should be more aligned with 

securities regulation, more aligned with futures regulation, or 

somewhere in the middle? And so that is where we will have a 

healthy debate, no doubt. 

Senator JOHANNS. I have some colleagues that—I have gone over 

my time, and so I hate to cut it off here, and maybe there will be 

an opportunity for you to offer your thoughts, but Mr. Chairman, 

again, thanks for your leadership on this. It has been a pleasure 

being on this Committee with you. 

Chairman DODD. That is a great question to ask, Mike, on this, 

because for years, in fact, it was the independence and sort of the 

stovepipe approach that created it. It seemed to almost not only enshrine independence, which we want, but also seemed to enshrine 

conflict without the ability to sit together and come to some common answers where you could. So the very idea of this oversight 

council is designed to perpetuate the independence, but also to 

take, as Chairman Bernanke pointed out, the collaborative multiple 

sets of eyes to look at a situation that one set of eyes or one perspective might not see as clearly. 

So this is obviously going to be an experiment. There has been 

nothing like it before. It is going to require a lot of hard work. So 

I was very pleased to hear that so many of the principals intend 

to stay involved in this process, because what can happen too often 

is it gets related to people down the line and then it begins to fracture and fall apart and does not succeed with that goal of getting 

the cooperation necessary. 

So it is a great question and goes to the heart of whether or not 

this is going to work. You and I cannot legislate that. 

Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. I, too, 

want to add my thanks to you for your hard work here on the 

Dodd-Frank Wall Street Reform and Consumer Protection Act, and 

I want to thank the Committee, too, for all the hard work to ensure 

that the Act makes a strong and clear commitment to the protection and education and empowerment of our investors and consumers. 

Now that we have enacted this historic legislation, I am committed to ensuring that the provisions of the Act will provide tan-
43 

gible assistance and protection to hard-working Americans are 

soundly implemented. I worked to develop many of the Act’s provisions to increase financial literacy and empower hard-working 

Americans and promote informed financial decision making, and so 

I want to go to that ladder and work on one part of it. 

Secretary Wolin, Title 12 of the Dodd-Frank Act will help 

unbanked and underbanked families by increasing access to bank 

and credit union accounts. It will also establish programs to develop small dollar loan alternatives to high-cost and predatory financial products. These provisions are particularly important to me 

personally because I grew up in an unbanked family. What is being 

planned to increase access to mainstream financial institutions and 

services? 

Mr. WOLIN. Thank you, Senator Akaka, and thank you for your 

leadership on this extremely important set of issues. We are very 

focused on implementing Title 12 and to continuing our work on 

the unbanked. As you know, I think we are staffing up in this area 

at the Treasury. We have been working to really survey the landscape. We have had some pilot projects, I think you know, focusing 

on the unbanked and providing opportunities to access, working 

with private sector entities. There has been a lot of excellent work 

that has been going on in the States and among a pretty wide 

range of cities. So we are gearing up. 

We are, of course, looking forward to being funded in this area, 

which is important for us to really take advantage fully of the important opportunities that Title 12 presents. We are very excited 

to work on this set of issues because we believe that it is critical 

to the engagement of a wide range of Americans in our economy 

and allowing them to do the kinds of things that they need and 

want to do to meet their own aspirations. 

So we are hard at work. We will continue to be hard at work and 

we very much look forward to continuing to work with you as we 

move forward. 

Senator AKAKA. Thank you. Chairman Bernanke, consumers that 

sent portions of their earnings to family members abroad can experience serious problems in these remittance transactions. The 

Dodd-Frank Act requires meaningful disclosures of the remittance 

transaction costs and establishes an error resolution process to protect consumers. The Act also instructs the Federal Reserve and 

Treasury to expand the use of ACH, Automated Clearinghouse System, for remittance transfers to foreign countries. 

My question to you is, why is it important to provide these remittances protections and make greater use of the ACH system? 

Mr. BERNANKE. Senator, this has been an area of interest for me 

personally and for the Federal Reserve for a long time. Remittances 

are an important contact point between many unbanked, particularly immigrant families and the financial system, and it is often 

an entree into the normal mainstream financial system. And so we 

want to make that as safe and inviting as possible. 

The Federal Reserve, as part of its payment systems responsibilities, has been involved for a long time in the transmission of remittances, for example, agreements we have done with Mexico and 

other countries. And we will continue, of course, to look for ways 
44 

to reduce the cost and increase the efficiency of remittances via 

ACH as required by the bill. 

I would like to say a world in particular about disclosures and 

error corrections. As you mentioned, because of language and other 

issues, people who use remittances are particularly vulnerable to 

disclosure problems, and so it is very important that they understand the services that they are receiving and what the terms of 

that service are. 

So we are already undertaking, already hard at work implementing the disclosure requirements of Dodd-Frank, and one thing 

in particular that we are doing, which we have used a lot in our 

consumer protection efforts in the last few years, is using consumer 

testing; that is, we actually either directly or engage an outside organization to try different disclosures on real-life consumers and 

then see how well they understand, how much they get the information, how accurately they understand what the disclosure is trying to provide. And we found this to be very successful in the past, 

and I am hopeful that the new Bureau will adopt these consumertesting practices because we think they are very constructive. 

So we are doing that now, and we are looking forward to developing proposed rules along the schedule that the act requires. 

Senator AKAKA. Thank you for what you are doing on that. 

Chairman Bair, I comment the FDIC for working to improve financial literacy, develop affordable financial products, and improve 

access to mainstream financial institutions. I know that these 

issues are important to you, and I respect your perspective on 

them. 

What must be done to ensure that the Dodd-Frank Act’s economic empowerment activities are implemented in a meaningful 

way? 

Ms. BAIR. Well, I think there are a number of new and important 

tools that are provided in Title 12, and some build off of programs 

we have already, especially in the small-dollar loan area. We initiated a pilot a few years ago to try to get some brave banks to try 

to come up with an economically viable small-dollar loan product 

that would provide a low-cost alternative to payday loans. And it 

was quite successful. We were very pleased and are actively trying 

to get other banks to start offering that type of product. 

As you know, our Money Smart curricula has been very successful, and we have issued the high school version of it as well. It is 

used quite extensively. 

Also we have set up our own advisory committee on economic inclusion. When I became Chairman, that was one of the first things 

I did. The committee has a lot of good minds from the banking sector and the community sector, to try to help bring more people into 

mainstream financial services—products and services that are appropriate for them, and not ones that can end up costing a lot of 

money. 

These new tools will be very important, and certainly the new 

Consumer Financial Protection Bureau will also put an added focus 

on this area. I am hoping that one of the outgrowths of this crisis 

is that we will get back to more traditional banking services. There 

was an article in the papers today about how more banks are now 

offering small-dollar loans, seeing it as an economically viable al-
45 

ternative, because such loans are clearer to understand than credit 

cards and are a one-shot deal that are perhaps easier for folks to 

manage. 

There may be actually some positive things coming out of this in 

terms of banks getting back to basics, consumers understanding 

they need to have their eyes open, and then certainly the new Consumer Financial Protection Bureau providing better, consistent 

rules and disclosures. I think these will all be very helpful things. 

Senator AKAKA. Thank you very much. 

Chairman Schapiro, I am pleased that the Dodd-Frank Act will 

significantly improve investor problems. The act establishes the Office of Investor Advocate within the Commission. It provides the 

Commission with the authority to require more meaningful presale 

disclosures. The Commission will also conduct the studies on investor financial literacy and on obligations of broker-dealers and investment advisers. 

Can you please update the Committee on the Commission’s work 

to implement these provisions and explain how they can improve 

investor protection? 

Ms. SCHAPIRO. I would be happy to, and you and I have had 

many conversations over the years about the importance of investor 

literacy. 

I will say we are benefited in all these initiatives that we are undertaking now by the fact that we have really revitalized our Office 

of Individual Investor Education and Advocacy. As just an example 

of that, for the first time, we brought a large group of high school 

teachers to the SEC this summer to train them in how to impart 

education about financial matters throughout their course work, 

and also in specialized courses. And it is a program that was enormously successful and we will continue. 

We do have the investor literacy study that you mentioned. We 

are in the project planning stage right now. It will focus on the current levels of literacy in this country, how to increase particularly, 

as you mentioned, transparency of fees and expenses so investors 

can understand what they are paying for the product that they are 

buying and can compare products in a simpler way because they 

will understand the fees and expenses. 

We are also looking at what have been the most effective private 

and public sector efforts so that we can model our own SEC investor literacy efforts on ones that have been successful. And we are 

looking at investing goals and behaviors as part of this study as 

well. We will report to Congress within the 24-month period. 

We are also in the process of standing up the Office of the Investor Advocate which will report directly to me and will have a role 

throughout the agency in ensuring that while we believe we always 

have investors in the forefront of everything we do, particularly in 

the rulemaking process, this will be a focal point to help ensure 

that the retail investor voice is heard as we engage in many of our 

Dodd-Frank and other rulemakings going forward. 

Senator AKAKA. Thank you very much for your responses. 

My time has expired, Mr. Chairman, and I want to wish you well 

and thank you for your work as Chairman of this Committee. 

Chairman DODD. Thank you, Senator, very much. And let me 

just say thank you as well for your insistence over the years on fi-
46 

nancial literacy. I was speaking to the Economic Club of Washington last evening, and I talked about the financial literacy and 

the importance of it, beginning at the elementary school level. Getting people familiar with just basic math techniques and balancing 

a checkbook and doing other things can contribute significantly to 

this. And no one has done more consistently over the years to advocate on that than Senator Akaka of Hawaii. So we all owe you a 

debt of gratitude. There were not many applause lines in the 

speech last night, but that was one of them, on financial literacy. 

Evan, thank you, by the way. We will be leaving together in January, and I thank you for your friendship and support on this Committee. You have been a great Member of this Committee and a 

great member of the Senate, so thank you. 

Senator BAYH. Well, thank you, Mr. Chairman. All 12 years I 

have been privileged to serve in this body, we have served together 

in the Banking Committee. Have you considered establishing an 

alumni group? 

[Laughter.] 

Senator BAYH. We can be charter members. And I would like to 

thank all of our witnesses today for your contributions. 

It occurred to me, Mr. Chairman, that while those of us on this 

side of the dais may have been the architects of this legislation, 

these men and women will be the builders who will be responsible 

for taking abstract concepts and turning them into a reality that 

will really deliver for the American people. And so I want to thank 

you for your dedication to making that process successful. 

Chairman Gensler, I was really heartened to hear about the sort 

of tension about more transparency. Very often tension leads to, 

you know, sort of the lowest common denominator kind of decision 

making, but maybe we are having a race to best practices here. 

That would be a happy outcome, indeed. So I congratulate you for 

that, and the others. I guess some of the reports of some tension 

have been exaggerated, and that is a good thing. Reconciling independence and consensus building is not always easy, but I am confident that all of you at the table here can get that job done. 

Mr. Wolin, let me start with you, and I want to follow up on 

something that Senator Corker raised, and that is with regard to 

the new consumer protection entity. As I understood your testimony, you are allowed to stand up this agency and do some practical things and gather information, sort of laying the predicate for 

rulemaking, but really cannot get into the meat of rulemaking absent a confirmed head of the entity. Is that a fair summary of your 

interaction with Senator Corker? 

Mr. WOLIN. Yes, I think—Senator Bayh, I appreciate the—thank 

you, Mr. Chairman. I thank you, Senator Bayh, for the opportunity 

to comment on this further. 

I think there are a range of rulemaking authorities that do hinge 

importantly on there bring a Director confirmed. There are authorities that the Secretary has under Section 1066 of the bill that will 

allow him to do the business of transferring and so forth and to 

make sure that the rulemaking and the supervision and so forth 

that the new Consumer Bureau receives from the various other 

Federal agencies from whom they are receiving those authorities 
47 

can go forward. So that would include rulemaking but in that context—— 

Senator BAYH. Well, I think we could agree that—and I understand all that, and you do not want to get unduly constrained here. 

Mr. WOLIN. Right. 

Senator BAYH. That is a job for the lawyers to kind of work 

through. But I think we would all agree that there appears to be 

some significant area of rulemaking that will be impacted if there 

is not a confirmed head of the agency. Is that a fair statement? 

Mr. WOLIN. I think it is important for the Bureau to have its full 

authorities for there to be a confirmed Director. 

Senator BAYH. Well, my question to you, what would be the practical implications if no one was confirmed for a considerable period 

of time? 

Mr. WOLIN. I am not sure, Senator, exactly what those would be. 

We are continuing to sort of work those true. There is an awful lot 

of work to do between now and then. The statute explicitly contemplates that work. Once the various agencies that are contributing authorities that will become the Bureau’s authorities as of 

next July 21st, there will still be a lot of room for the agency, the 

new Bureau, to do its work as it goes forward. 

You know, the President is committed to putting forward a nomination for a Director for the Senate to consider, and hopefully to 

confirm, and I think that, as I said earlier, I believe he will be 

doing that soon. 

So I think there are a lot of things that the Bureau is seized with 

currently and will continue to be seized with. 

Senator BAYH. The reason for my question—and, Chairman, if 

you were raising your hand, please feel free to jump in. The reason 

for my question was the crisis uncovered some significant areas 

where enhanced consumer protection is important, in spite of best 

efforts. And so some of us have, you know, reasonable hopes for 

this Bureau. And yet I do not have to tell all of you, including you, 

Chairman, how difficult it is to get people confirmed under the current environment up here, even in fairly noncontroversial, fairly 

straightforward situations. It is a practice I refer to as hostage taking for unrelated reasons. It is unfortunate, but it is a fact of life. 

Who knows what is going to happen in November? It is entirely 

possible that getting confirmations done in a new Congress may be 

even more difficult, particularly for a Bureau as significant and 

complex as this one. So it is a call for the President, but it seems 

to me that somewhere in the calculus confirmability is going to be 

a factor that has to be weighed. And, of course, sometimes people— 

you know, you can also just decide to have a fight even if confirmability may be unlikely. 

Mr. BERNANKE. Senator, I just want to assure you that there will 

be no lacuna in rulemaking for consumer protection. Until such 

time as that authority is transferred, the Federal Reserve will aggressively pursue its responsibilities, and we are, in fact, working 

very hard on the mortgage rules that are in Dodd-Frank, for example, and we will continue to do that at the same time as we work 

with the Treasury and the new Bureau to make sure there is a 

smooth transition at the appropriate time. 
48 

Senator BAYH. That is an excellent point. I had breakfast this 

morning with Dan Tarullo, and we were going over some of this, 

and he was informing me about the progress that was being made. 

So I want to compliment you on that. 

I am just kind of thinking beyond the horizon posttransfer about 

how, you know, vital the new entity will be, and it seems that having someone in there who is confirmed is going to be an important 

part of that. Thank you both for your responses with regard to 

that. 

Secretary Wolin, again, something for you. This involves—and 

perhaps, Chairman, you as well—the Volcker Rule. Only Congress 

could come up with a situation like this where you have to give 

your recommendations about implementation of the rule, and, indeed, it has to be put into effect in some form. But then there is 

a 9-month study period, and these timelines are not, you know, 

contemporaneous. 

And so my question to you is: Since you have got to opine in 

some ways about how to implement this rule, in fact, go forward 

with implementing some iteration of the rule, what weight, if any, 

will this study have in the decisions that are ultimately made since 

the study may be completed after some of the decisions have been 

required to have been made? 

Mr. BERNANKE. Well, there is a study which the Council has to 

complete by January 21st, and the Federal Reserve is very much 

engaged in working with the Council in doing that. It will be a considerable time after that before any of these rules are actually implemented. In particular, I think there is a 9-month period—— 

Senator BAYH. A 9-month lag time, right. 

Mr. BERNANKE. Lag time, and then even once the rules are in 

place, there is a 2-year conformance period, which could even be extended further, if necessary. So I do not think that there will be 

any situation where rules will be put in place and then rescinded 

because we decided they were not such a good idea. 

Senator BAYH. Well, the reason for the study, as I recall, was 

that many of us understood that there was a potential risk here 

that probably had to be dealt with, but we were concerned we were 

taking a ready-fire-aim approach to handling this. So we wanted to 

make sure that, you know, all of you with authority here sat down, 

really analyzed what the risk was, what the most effective way to 

go about handling it was, and then we would ultimately put into 

place whatever that mechanism might be. That was really the 

heart of my question, to kind of make sure that whatever we end 

up doing, it is informed by your analysis rather than put into place 

and then the analysis comes out later and may have led to a different result if we had known about it beforehand. 

Mr. Wolin. 

Mr. WOLIN. Senator, I think that is exactly the intention. The 

FSOC is meant to do the studies the Chairman noted on the 

Volcker Rule set of issues that will then provide recommendations 

to the regulators who have to make rules in this area, will inform 

that work, so it will be sequenced, I think, in the proper way. 

Senator BAYH. This very brief question, you do not have to jump 

in, but it might go to all of you. Those of us up here on the Hill 

like to think when we are finalizing these things and the cake has 
49 

been sufficiently baked that it really cannot be changed a whole lot. 

We agree to engage in colloquies on the floor of the Senate, and 

these will carry some significant weight when historians and others 

look to divine congressional intent in analyzing legislation. 

I am curious. Will you grant some weight to congressional colloquies where we take the opportunity to say for the record what 

our intent was? Or is that in the legal realm of what the lawyers 

would refer to as an advisory opinion, interesting but not granted 

a whole lot of weight? 

Ms. BAIR. Well, as a former Senate staffer, I take this very seriously. Yes, committee reports, floor statements, colloquies, yes, absolutely carry weight. I think the Collins amendment, for instance, 

is something that is of key interest, and we strongly support it. The 

legislative history there and floor colloquies were quite informed 

and informative, as was the case in a number of other areas. 

So, yes, I think we absolutely need to make sure we are adhering 

to both the letter and the spirit of Congress’ intent, and the legislative history is quite important in that regard. 

Senator BAYH. Thank you, Chairman Bair, and I would not expect any of you to come up here and say, ‘‘Well, no, Senator we are 

not paying any attention to what you had to say when this was enacted.’’ But there were some colloquies with regard to Volcker, and 

some—OK. 

[Laughter.] 

Senator BAYH. Well, unfortunately, mental telepathy is not a 

part of my toolkit. No psychic abilities on the panel. 

I do think it is important with regard to Volcker and some of 

these other things that you look at what was said, give it, you 

know, fair consideration in trying to make the ultimate determinations about what Congress intended and so forth. So enough said. 

But there are some in this area that I would recommend to your 

consideration. 

My last question—and, Chairman, if I could go over by a minute 

or two, I might just have another brief one. 

Chairman DODD. No problem at all. Go ahead. 

Senator BAYH. Chairman Gensler, this involves you. It is great 

to see you again. You have been a friend for many years, and I congratulate you on the excellent work you have done, and, indeed, 

you were somewhat clairvoyant back in the day about what might 

have happened with regard to the crisis, and now you are in a position to do something about it going forward. So it is good to see 

you, and I am grateful for your leadership. 

These are somewhat technical. What is your view on whether 

regulators have the authority to impose margin requirements on 

end users? And, again, I am talking about the end users themselves, not the transactions. 

Mr. GENSLER. I thank you for that compliment. I do not think 

anybody was clairvoyant. But the Dodd-Frank Act does say that to 

lower risk of the swap dealers and to lower risk of the financial 

system as a whole, various regulators sitting here would have an 

authority to set capital margin on these dealers. If they are banks, 

it is the bank regulators, and nonbanked we get involved as well 

with the SEC. And this is an area where Congress has spoken very 

clearly. There is a letter—even Chairman Dodd and Chairman Lin-
50 

coln wrote a letter on this right as the bill was going forward, but 

there were many colloquies. So we are all taking that together. 

If I might say, as I understand the intent, it was that a certain 

group of end users, the nonfinancial end users, are out of clearing 

and then, as Chairman Dodd put in his letter, would be considered 

to be out of this margin requirement. 

So we are taking all of that together and taking it very seriously, 

the intent of Congress that the financial system, about 90 percent 

of the swaps transactions are between financials and financials, 

and it is only about this 9 or 10 percent that is—— 

Senator BAYH. Well, that gets to my next to the last question, 

which does involve end users. And I have discussed the importance 

of, to the extent we can, the harmonization of global standards to 

prevent forum shopping and all that kind of thing. Basel is dealing 

with that in his arena. As I understand it, the EU has moved forward with regard to end users and have taken their approach. You 

know, you are now going to look at what we are doing, and I would 

ask you what kind of effort we will make to harmonize these things 

and, to the extent that there is some disparity, what implications 

that will have on our competitiveness if the Europeans have taken 

on approach and we take perhaps a more restrictive approach? 

Mr. GENSLER. I, after 3 days overseas—I just returned yesterday—am very optimistic. They put forward their proposals 2 weeks 

ago. Their clearing requirement, for instance, on this end user 

issue aligns very similarly. Financial companies would have to use 

the clearinghouses. Nonfinancials would have, you know, a choice. 

They do not have to use it, unless they meet a certain clearing 

threshold, a certain size. We do not have that. Congress has spoken 

clearly. If you are mitigating a commercial risk, you are out of the 

clearinghouse. 

But I think it is very aligned. Swap data repositories are very 

aligned. They say they are going to take up the trading mandate 

later in what they call MiFID review, which is about 6 months 

away. 

Senator BAYH. Good. Well, I would encourage you to keep an eye 

on that because to the extent that they are not harmonized, they 

can lead to some consequences that could hurt us commercially. 

Mr. GENSLER. And if I might say, Senator, also, we are taking 

it to heart in our proposed rules. So in our memos up to our fellow 

Commissioners and the harmonization with the SEC, where Congress has left this discretion—in many ways Congress has decided, 

but if they have left this discretion, we want to harmonize with the 

international—where we think the Europeans will end up on this, 

and the other regulators. 

Senator BAYH. Thank you. 

Chairman, if I can have just 1 minute with Chairman Bernanke? 

Chairman DODD. Yes, certainly. 

Senator BAYH. We have talked before about the Basel process. 

You talked about it here today, and I am delighted to hear your 

opinion that it is moving in a positive direction, capital requirements, quality of capital, liquidity and so forth. I understand some 

of our European friends have some domestic challenges that they 

have got to address. We need to be realistic about that. 
51 

So my question to you is: Were you satisfied with the progress 

that has been made with regard to quality of capital, those things 

that will be counted and those things that perhaps will not? Are 

we moving sufficiently, are they moving sufficiently that this will 

harmonize in a way that is good for the global financial system? 

Mr. BERNANKE. Yes, I think we have made a lot of progress. 

There is now a much larger focus on common equity as the principal source of loss absorption. There is very restricted ability to 

use other types of assets. No more than 15 percent can be noncommon. And in negotiating that, we particularly limited some of 

the types of capital that Europeans had used, minority interest and 

things of that sort that we did not feel were particularly good forms 

of capital. 

So we really have made substantial progress, and I think it was 

a very important achievement. And the FDIC and the OCC joined 

the Federal Reserve at the meeting in Basel, and we all worked together, I think, to get a good international agreement. 

Senator BAYH. Good. Well, let me thank each of you again for 

your public service. It has been a privilege for me to work with you, 

and, Chairman Dodd, with you as well. 

Chairman DODD. Thanks. Thanks, Evan, very much. 

Chairman Bernanke, I did not ask you the question, but I presume I will get the same answer, and that was: Was the fact that 

we moved when we did here, with the legislation, was that helpful 

in terms on the derivatives section, for instance in your view, or 

not? 

Mr. BERNANKE. Well, I am less informed about the derivatives 

than Chairman Gensler and Chairman Schapiro. 

Chairman DODD. Well, on the capital. 

Mr. BERNANKE. But broadly speaking, on capital and on many of 

the issues there is absolutely great interest in what we have done 

around the world, and we have moved first, and we have set an important and high bar, and I think it has been very well received 

internationally. 

Chairman DODD. Let me ask you. I am not going to submit a lot 

of questions because you have a lot of work to do, and the last 

thing I want you to do is answer a lot of questions here while the 

efforts get underway, but just a couple of things come to mind. 

Let me ask, and I want to give you a chance to jump in because 

Mike Johanns asked a question. He got down as far as you and did 

not give you a chance to respond, and I want you to do that. 

But in doing so, Title 3 of our bill transfers the safety and soundness functions, personnel, property and funds of the OTS, primarily 

the OCC, but also the FDIC and the Fed. And let me parenthetically say that I have great respect and admiration for the people 

who worked at OTS. I mean this is not an indictment of this decision to close down that regulatory body, and this is awkward, and 

it is difficult. 

It is very important to me that this be done well and that the 

people who worked at the OTS be treated with a lot of respect and 

understanding. I just want to know how that is going. This is a difficult time for everybody in the Country, and to do something like 

this can be tremendously disruptive obviously to a family and their 

concerns. 
52 

I know we tried to accommodate that in the bill, but I wonder 

if you might just give me a quick answer as to how we are doing 

on that, and then if you want to respond to the Mike Johanns question. 

Mr. BERNANKE. Well, I mean we are working hard at it. I have 

had a number of meetings with Acting Director Bowman. Our management teams have met. In fact, they are meeting this afternoon 

in New York to kind of start talking about how we are going to integrate the supervisory staffs and functions together. 

Tremendous effort being made to ensure that we find the right 

places and the right fit for people at OTS in the agency. They clearly have skills and abilities that we need. We need the people to 

come and do the work. There is going to be about a 50 percent increase in the number of institutions we are called upon to supervise, and we cannot do that without the talent and contribution of 

OTS staff. So we are working very hard to encourage them to look 

to a career in the combined agency. 

It would be very bad to have them go elsewhere. So we are working very hard. 

Chairman DODD. I am going to ask you to keep the Banking 

Committee staff informed as to how that is going, the progress. 

Mr. BERNANKE. Absolutely. 

Chairman DODD. So we have a good understanding of it and how 

it is functioning. 

Mr. BERNANKE. Absolutely. 

Chairman DODD. So they know someone is also working with you 

and watching carefully. 

Mr. BERNANKE. Right, and we have to report to Congress at the 

end of 6 months. 

Chairman DODD. I knew that, but even during this time period 

I would like to know how it is going. 

Mr. BERNANKE. Yes. OK. 

Chairman DODD. Anything you want to respond to Mike Johanns 

at all? I saw you wanted to say something, and then we cut you 

off. 

Mr. BERNANKE. Well, I mean the only thing I would say is that 

there is always some tension in the interagency process. I think it 

essentially has less to do with people’s interests and goals being 

aligned than with kind of differences in mission and approach and 

agencies, and that sort of thing. 

But we are an independent agency within the Treasury. We participate in a lot of interagency discussions. We do interagency rulemaking with the other banking agencies. Congress has kind of endorsed, even expanded, the need for that kind of coordination, but 

you know there are policy differences. We work those out. You 

know. I mean it is a process that can sometimes be torturous, but 

it does work, and it will work again. 

Chairman DODD. Good. Chairman Bernanke, let me thank you 

for your comments about the residential, the mortgage issues, and 

the Fed is working on those. 

And underscore Evan Bayh’s question. Look, this is important as 

well, and you had Bob Corker raise it. I know the Administration 

is working on this, and I have raised the issue. You have got to 
53 

have a confirmable nominee, and we have got to get someone in 

place. 

Otherwise, we are going to be—look, this is a controversial section of the bill. I do not have any illusions. Regardless of the outcome of the election in November, they are going to moving to try 

to get rid of this bureau, and it is going to be a lot easier to get 

rid of it has not gotten up and gotten started, and demonstrating 

the value and the importance of it. 

So it is at risk in my view until we get someone in, running the 

place and demonstrating what it can do and the kind of rules it is 

going to develop. And believe me, there will be people out to get 

rid of it. So be confident of that conclusion. 

But let me ask, if I can, ask both Sheila Bair and Chairman 

Bernanke. Headlines this morning were in the Washington Post— 

I do not know if in the other papers—about JPMorgan and foreclosure issues. We had the problems with the mortgage servicing 

company called Ally, formerly GMAC, regarding certain improper 

actions by its employees and foreclosing on people’s homes. Those 

stories are very troublesome. 

Obviously, I guess I congratulate JPMorgan this morning for 

making the decision it did. I did not read the whole story. 

But I wonder if you might comment, both of you, on this situation. I know it is not exactly the subject matter here, but I would 

be remiss if I did not raise it with you, given attention that is going 

on. And the numbers of foreclosures, I mean this last month or so 

we have seen actually those increases. 

Ms. BAIR. Well, we are still learning about it ourselves. The OCC 

might have something to add on this as well, as the primary regulator of these large institutions. 

I think it is troubling, and it is just a further indication of how 

wrong we went with the mortgage origination process and 

securitization process, which was deeply tied to some of the breakdown in what would ordinarily be expected in terms of underwriting standards—in terms of documentation, in terms of perfecting title. So it is troubling. 

So we will learn more about it, but I think it underscores that 

going forward we need to be very careful. We want to bring the 

securitization market back. We want to bring it back in the right 

way. We want a GSE exit strategy, but we want to make sure the 

alternative promotes stability in the mortgage market. 

It just is another indication that too many things went wrong in 

the mortgage origination process, leading into this crisis. 

Also, as you know, Chairman Dodd, we have been longtime proponents of trying to rework mortgages as an alternative to foreclosure where it makes economic sense, and it frequently does 

make sense. So I think we continue to push and advocate for that 

in various venues. 

But this is very unfortunate, and we are still learning more. I 

would also defer to the Federal Reserve. 

Chairman DODD. Mr. Walsh, do you want to make any comments 

at all? 

Mr. WALSH. Well, just to say that obviously when evidence 

emerges, and has emerged in this case, of deficiencies in the process of reviewing and approving these individual cases, we imme-
54 

diately went and talked to people both at JPMorgan Chase and at 

the other half-dozen large servicers where we are dealing, and instructed them to go back once again. 

I mean we have been to them a number of times to make sure 

they were ramping up processing to keep pace both in particular 

with the mortgage modifications that we were all hopeful would increase, as they have done, but not obviously to anyone’s satisfaction, but asked them to go back and look at those processes again. 

There are State laws that require quite specific requirements for 

the review and approval of cases, and they must comply with those 

laws and have clearly had deficiencies in processing. 

We both want to see that they fix the processing problems, but 

also to look to see whether there is specific harm that has been 

caused in individual cases. So we will be looking both for the procedural improvements, but also any evidence of harm to consumers. 

Chairman DODD. Chairman Bernanke, any comments on this? 

Mr. BERNANKE. Only that it has been a managerial challenge to 

the banks to deal with these foreclosures, modifications, et cetera. 

Chairman DODD. Right. 

Mr. BERNANKE. And they have not always met that challenge, 

and we continue to press them through guidance and supervision 

to ramp up and to make sure they have the people and that they 

are responding quickly to borrowers, and the like. Unfortunately, 

that has not always happened. 

Chairman DODD. Yes. Sheila, I know that Ally is regulated by 

the FDIC. 

Ms. BAIR. Well, actually that was in the holding company. The 

insured depository institution was not involved in the mortgage activities. It was not in the bank. 

Chairman DODD. Well, listen, again I think it is one of these 

areas that I am sure the Committee will want to be kept informed, 

even during this period. We are not in session here as these stories 

are breaking. The staff, I know, and I would appreciate it if you 

would keep us posted as to how this matter is resolving itself. 

With that, again I thank all of you. I am very impressed, by the 

way, at the amount of work being done. I mean there is always 

that given the time and all the other issues you have to grapple 

with. The fact that all of you seem to be working very, very hard, 

and your staff are, to fulfill the commitments of the legislation. 

That is very good news. 

So I am very grateful to all of your being here this morning and 

sharing your testimony with each other, and we look forward to 

working with you. 

We are going to have a couple of hearings in the lame duck session when we come back after the elections. So I will look forward 

to seeing some of you then. In the meantime, I thank you all again 

for your service and your contribution to this effort. 

The Committee will stand adjourned. 

[Whereupon, at 12:52 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
55 

PREPARED STATEMENT OF SENATOR TIM JOHNSON 

Thank you Mr. Chairman for holding this hearing today. First, I want to thank 

you for your leadership. Without your hard work, we would not have passed the historic Dodd-Frank legislation. Second, given the extensive scope of the Dodd Frank 

legislation and the fact that much of it is subject to regulatory interpretation and 

rulemaking, our work is certainly not finished, and I look forward to today’s hearing. 

There is obviously a lot of ground to cover with our witnesses today, but I think 

it is important to begin these conversations, and today’s hearing certainly provides 

us with an opportunity to identify important issues that will need more attention. 

I suspect as we further identify these areas, there will be many more oversight 

hearings in the future. 

As both the regulators and industry proceed with the initial stages of Dodd-Frank 

implementation it is important for us to hear from the regulators on the priorities 

they are making, and the potential challenges they are facing. I know I am hearing 

from constituents in my State who are concerned about this stage of implementation, and I thank the witnesses for being here today to talk about these concerns. 

I believe there are some issues, including derivatives, the ‘‘Volcker Rule,’’ market 

making, insurance and capital standards, to name a few, where it is going to be vitally important that we get the rules right, ensure that we harmonize these rules 

internationally, and guarantee that our Nation’s consumers and investors continue 

to be protected. 

Additionally, as we create the new agencies and entities mandated by Dodd 

Frank, we must do it thoughtfully and carefully. Strong systemic risk regulation, 

common sense consumer and investor protection, certainty and having Federal and 

international expertise on insurance are all key to a stable economy and a strong 

financial services sector. We need to put the right people and resources in place to 

ensure that these agencies and council succeed. 

Last, I want to commend all of today’s witnesses for their hard work. This is not 

a simple task, and I hope that you will come to this Committee with your concerns 

and that your doors will be open for our questions and concerns. 

Thank you. 

PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA 

Mr. Chairman, thank you for convening this hearing today on the implementation 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I thank my 

fellow Members on the Committee for working with me to ensure that the Act 

makes a strong and clear commitment to the protection, education, and empowerment of investors and consumers. Now that we have enacted this historic legislation, I am committed to ensuring that the provisions in the Act that will provide 

tangible assistance and protection to hard-working Americans are soundly implemented. 

Most Americans participate in the financial system by accessing credit to meet 

short-term household needs or relying on financial products to achieve personal 

goals, such as purchasing a home, supporting family members living abroad, planning for retirement, or financing a child’s education. I worked to develop many of 

the Act’s provisions to increase financial literacy, empower hardworking Americans, 

and promote informed financial decision making. 

I developed Title XII of the Act together with my friend, Senator Herb Kohl of 

Wisconsin, to improve access to mainstream financial institutions. Too many lowand moderate-income families are forced to rely on costly and predatory financial 

products to meet their households’ financial needs. Title XII will establish grant programs to bring more Americans into the financial mainstream by providing access 

bank and credit union accounts. A small dollar loans program will also be established to make available safer alternatives to predatory financial products. 

The Consumer Financial Protection Bureau will have the authority to restrict 

predatory financial products and unfair business practices in order to prevent unscrupulous financial services providers from taking advantage of consumers. An Office of Financial Education is established within the Bureau and the Director of the 

Bureau will become the Vice Chairman of the Financial Literacy and Education 

Commission. The Bureau should be established and operate in accordance with 

these functions and responsibilities in order to provide essential consumer protections and encourage coordination and improvement of all Federal financial literacy 

activities. 

Investors will greatly benefit from improvements within the Securities Exchange 

Commission and the additional investor protection responsibilities that are provided 
56 

to the Commission under the Dodd-Frank Act. I am pleased that the Office of the 

Investor Advocate will be created within the Commission. The Investor Advocate is 

exactly the kind of external check, with independent reporting lines and independently determined compensation that could not be provided within the existing structure of the Commission. The Commission will also be required to conduct a study 

of financial literacy among investors and develop a strategy based on its results. 

The Dodd-Frank Act also provides the Commission with the authority to require 

meaningful disclosures be provided to retail investors prior to the purchase of a financial product or service. 

I commend the Commission and the other Federal agencies represented here 

today for moving expeditiously to implement the Dodd-Frank Act. Already, the Commission requested public comment for a study on the obligations of brokers, dealers, 

and investment advisers. There is a harmful and unnecessary regulatory gap in the 

regulatory standards of care which investment advisers, brokers, and dealers must 

adhere to. Investment advisers are held to a fiduciary standard that imposes strong 

and meaningful obligations on them to investors. Yet, brokers and dealers are only 

held to an inferior and inadequate suitability standard. Investors are entitled to reliable and accurate investment advice from these financial professionals. It is important to the protection of investors that a fiduciary duty be uniformly applied to investment advisers, brokers, and dealers. 

The Dodd-Frank Act also includes landmark consumer protections for remittance 

transactions. It will require simple disclosures about the cost of sending remittances 

to be provided to the consumer prior to and after the transaction. A complaint and 

error resolution process for remittance transactions will also be established. These 

improvements will provide essential protection to the many people in Hawaii and 

across the country who send significant portions of their income to relatives who live 

abroad. 

We enacted this legislation to address inadequacies in the financial regulatory 

system and make necessary improvements to the safeguards that protect investors 

and consumers. Now, it is important that the Act is implemented in a sound and 

timely manner. I applaud the respective agencies for promptly beginning their respective implementation processes, and I look forward to each of the witnesses’ testimonies today. Thank you, Mr. Chairman. 

PREPARED STATEMENT OF NEAL S. WOLIN 

DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY

SEPTEMBER 30, 2010 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank 

you for the opportunity to testify about the progress Treasury has made in implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

(Dodd-Frank Act). 

Introduction 

Two months ago, against tough odds, Congress enacted the strongest set of financial reforms since those that followed the Great Depression. The Dodd-Frank Act 

will ultimately reshape our financial system and will affect us all in a number of 

important ways. 

The Act builds a stronger financial system by addressing major gaps and weaknesses in regulation that helped cause the financial crisis that led to the recession. 

It puts in place buffers and safeguards to reduce the chance that another generation 

will have to go through a crisis of similar magnitude. It protects taxpayers from 

bailouts. It brings fairness and transparency to consumers of financial services. And 

it lays the foundation for a financial system that is pro-investment and pro-growth. 

Mr. Chairman, passing this bill was no easy task. It would not have happened 

without your strong commitment and that of your colleagues to make sure that 

meaningful reform became a reality. 

You stood on the right side of history and with the millions of Americans who 

have lost their jobs, homes and businesses as a result of a crisis caused by basic 

failures in our financial system. 

But the work is far from done. Enacting financial reform was just the beginning. 

Guiding Principles 

Implementing the Dodd-Frank Act is a complex undertaking. Effectively describing the process requires terms that are often unavoidably dense, making reform 

seem distant to many. So before outlining the steps we have taken to date, I want 

to detail the broad principles guiding our efforts. 
57 

First, we are moving as quickly and as carefully as we can. 

Wherever possible, we are quickly providing clarity to the public and the markets. 

But the task we face cannot be achieved overnight. We have to write new rules in 

some of the most complex areas of finance; consolidate authority spread across multiple agencies; set up new institutions for consumer protection and for addressing 

systemic risks; and negotiate with countries around the world. In getting this done, 

we are making sure to get it right. 

Second, we are bringing full transparency to this process. 

As we write new rules, we will be consulting a broad range of groups and individuals. And as we seek their input, the American people will be able to see who is 

at the table. Draft rules will be published. Everyone will be able to comment. And 

those comments will be publicly available. 

Third, wherever possible, we will streamline and simplify Government regulation. 

Over the years, our financial system has accumulated layers upon layers of rules, 

which can be overwhelming. That is why alongside our efforts to strengthen and improve protections through the system, we will avoid duplication and seek to eliminate rules that do not work. 

Fourth, we will create a more coordinated regulatory process. 

Ahead of this crisis, gaps and inconsistencies between regulators proved to be a 

major failure. Gaps allowed risks to grow unattended and inconsistencies allowed 

an overall race to the bottom. Better coordination will help prevent a recurrence. 

Fifth, we will build a level playing field. 

A level playing field must exist not just between banks and nonbanks here in the 

United States, but also between major financial institutions globally. We are setting 

high standards at home while working tirelessly to persuade the international community to follow our lead. We welcome the agreement just reached in Basel. It substantially raises the level of capital major banks must hold whether they operate 

out of New York or London or Frankfurt. 

Sixth, we will protect the freedom for innovation that is absolutely necessary for 

growth. 

Our system allowed too much room for abuse and excessive risk. But as we put 

in place rules to correct for those mistakes, we have to achieve a careful balance 

and safeguard the freedom for competition and innovation that are essential for 

growth. 

Seventh, we are keeping Congress fully informed of our progress on a regular 

basis. 

Implementation Update 

Treasury has been working hard to implement the sweeping reforms of the DoddFrank Act since enactment. 

Immediately after passage, we put in place a governance structure that oversees 

Treasury’s role to implement financial reform. The bulk of the work is being done 

by teams dedicated to our core responsibilities such as helping to establish the Financial Stability Oversight Council (Council); laying the groundwork for the Office 

of Financial Research (OFR); launching the Consumer Financial Protection Bureau 

(CFPB); and creating a Federal Insurance Office (FIO). 

These teams provide an update to a steering committee of senior Treasury officials who meet every day and consider options, make decisions, push implementation forward, and, where appropriate, make recommendations for the Secretary. 

Let me now discuss in greater detail our actions around each of our core responsibilities. 

The Financial Stability Oversight Council 

With respect to the Council, we are focused on three things: approach, structure 

and execution. 

First, the Council has a clear statutory mandate and overarching responsibility 

to identify risks to financial stability, respond to any emerging threats in the system 

and promote market discipline. This is a mandate that previously did not exist. In 

the lead-up to this crisis, the regulatory framework focused regulators narrowly on 

individual institutions and markets, which allowed gaps to grow and inconsistencies 

to emerge that allowed arbitrage and weakened standards. Before the Dodd-Frank 

Act, no single institution had responsibility for monitoring and addressing risks to 

financial stability. The Act fixes that through the creation of the Council. 

To carry out its mandate, the Council has been given an important role in several 

consequential regulatory decisions. These include which major nonbank financial 

and critical financial market utilities firms will be subject to heightened supervision, 

and what prudential standards should be applied to those firms. The Council will 
58 

also closely monitor the financial system as a whole, looking out for any emerging 

threats and, where they exist, make recommendations on how to address them. 

As Chair, Treasury respects the critical independence of regulators to fulfill their 

responsibilities. We must develop an approach that maintains that independence 

while maximizing the coordination required for the Council to achieve its mission 

of financial stability. The Dodd-Frank Act makes agencies collectively accountable 

for this mission. While each agency has authority and mandate for a specific part 

of the financial sector or for certain aspects of its functioning, we need to develop 

an approach for the Council and its members of collective accountability for financial stability. This approach will promote the coordination, cooperation, and information sharing necessary for success. 

Our second focus is on structure. 

Tomorrow, the Council will have its first meeting. In advance of that meeting, 

senior officials from each member agency have been looking at how best to set up 

the Council’s governance structure. They have drafted bylaws, and I expect those 

will be considered tomorrow. 

Member agencies have also discussed setting up a committee structure to promote 

shared responsibility and make the best use of each member’s expertise. This plan 

would entail forming committees around the Council’s various statutory responsibilities, and around core issues that relate closely to systemic risk where more than 

one agency has a significant interest. 

For example, we have proposed committees for designating certain nonbank financial firms and financial market utilities, for drafting recommendations for heightened prudential standards, and for monitoring and reporting on threats to financial 

stability. The Council members and their deputies would set the priorities for each 

of the committees, which will draw upon the expertise of each member agency and 

be chaired by one or more members. 

Our third focus is on execution. 

While we settle on structure, the Council has already begun its work because its 

duties commenced immediately upon enactment. Member agencies have already 

formed staff working groups to begin taking action. And, thanks to significant, joint 

work by staff of the member agencies, we expect that the Council will be in a position to take important steps toward fulfilling several of its core responsibilities at 

its meeting tomorrow. 

At that meeting, in addition to adopting organizational documents, I expect the 

Council to consider a resolution to seek public comment on the criteria for designating nonbank financial companies for heightened supervision. 

I also expect the Council will consider tomorrow a resolution to seek public comment to inform recommendations the Council will make on how to implement statutory restrictions on banking institutions’ proprietary trading and investments in private funds (the ‘‘Volcker Rule’’). In addition to that study, the Council must also 

study and make recommendations for implementing the concentration limit; study 

the macroeconomic effects of risk retention requirements; and study the economic 

implications of financial regulation. Work on those reports is also underway. 

The Office of Financial Research 

In drafting the Dodd-Frank Act, Congress recognized that better information and 

analysis will be critical to the success of the Council and its member agencies. In 

the lead-up to this crisis, financial reporting failed to adapt to an ever evolving financial system. Both supervisors and market participants lacked data about the 

buildup of leverage in the rapidly growing shadow banking system. Policymakers 

and investors responded to the crisis with inadequate information about the interconnectedness of firms and associated risks. That is why the Dodd-Frank Act created the Office of Financial Research. 

As the statute requires, the OFR will have a Data Center to set standards for 

financial reporting and improve the quality of data that supervisors and market 

participants rely to manage risk. 

These standards will make it easier to spot emerging threats. For example, more 

consistent and complete reporting of derivatives will make it easier to track how 

they redistribute risk through the system. Data standards will also improve market 

discipline as individual firms will be better able to assess their own risks, and 

standardization may lower firms’ costs over the long run. 

In addition to standards, the Data Center is required to develop and publish key 

reference data that identify and describe financial contracts and institutions. Regulators and supervisors as well as private firms and investors rely on such reference 

data to analyze risk. Gaps and inconsistencies in existing reference sources inhibit 

meaningful analysis. The OFR will seek to close gaps and increase consistency to 

improve risk analysis and strengthen market discipline. 
59 

To help the Council fulfill its role, the Dodd-Frank Act mandates that the OFR 

have a Research and Analysis Center. Although no analytic effort, no matter how 

thoughtful, can anticipate all risks, the OFR can help identify undue concentrations 

of risk such as took place at AIG before the crisis. And the OFR can help ensure 

that when the next crisis begins to emerge the Government has the information and 

analytical tools it needs to respond appropriately. 

The OFR will be headed by a director nominated by the President and confirmed 

by the Senate. The director will have an independent obligation to report to Congress on threats to the financial system. We envision a director who combines the 

capacity to lead a cutting edge research program with experience both in managing 

data systems and in risk analysis. 

Until there is a confirmed Director, the Treasury staff team working on creating 

the OFR has been hard at work planning its functions and gathering input from 

regulators and private parties. Our OFR team will continue to coordinate closely 

with other members of the Council. 

We will move quickly to complete a census of existing data standardization initiatives and existing sources of reference data. The OFR will work to maximize the 

effectiveness of existing private sector efforts. 

The OFR must not duplicate existing Government data collection efforts or impose 

unnecessary burden. That is why we are working with the regulators to catalogue 

carefully the data they already collect to ensure the OFR relies on their data whenever possible, as the Act requires. The OFR will help Government get the most out 

of existing data by facilitating sharing among agencies. We are also identifying existing private data sources to improve risk monitoring without imposing new burdensome data collection mandates. 

When we have finished assessing existing public and private data initiatives, we 

will move quickly to draw up detailed plans for OFR to facilitate and advance these 

initiatives without duplication or unnecessary burden. We also are developing organizational structure, hiring procedures and pay structures, information technology, 

and other requirements. 

Our efforts to establish the OFR will stay focused on ensuring that the OFR protects private information and trade secrets. The Act provides strict protections for 

data security and confidentiality and we take seriously our obligation to implement 

these protections fully. In the coming months our OFR team will be developing confidentiality policies and procedures for the OFR and its data centers that meet the 

highest data security standards. 

We will in all these efforts continue to seek advice and expertise from the private 

sector, academia, and Congress. Working with the Council we will seek to formalize 

our outreach by establishing advisory committees. The lessons and information we 

take back will be built into the foundations of the OFR. 

The Consumer Financial Protection Bureau 

The CFPB will be an independent bureau of the Federal Reserve with the mission 

of ensuring transparency in consumer financial products and services and protecting 

consumers from abuse and deception. It will consolidate existing rulemaking authorities for consumer financial products and services. And it will consolidate agencies’ existing functions for supervising the very largest banking institutions for compliance with consumer financial protection laws. It also will supervise many 

nonbank financial firms that sell consumer financial services, an entirely new Federal function. 

The Act charges the Secretary with standing up the CFPB. Under his leadership 

we set up a staff implementation team with a clear division of responsibilities right 

after enactment. The team has working groups focused on setting up key functions 

of the CFPB such as research, preparing for the supervision of financial institutions, 

and working with the transferor agencies. Other working groups are focused on 

building the CFPB’s supporting infrastructure (e.g., finance and budget, records 

management, legal services, human resources, information technology, procurement, 

and other operations). 

Elizabeth Warren is leading Treasury’s effort to create the CFPB as the Secretary’s Special Advisor. She will chair a steering committee of senior Treasury officials dedicated to overseeing CFPB implementation and reporting to the Secretary. 

The team is tracking and projecting the CFPB’s expenses, working with GAO to 

build audit requirements for FY2011, and developing a budget model. The team is 

also analyzing and aligning salary structures of agencies transferring staff to the 

CFPB, and building a pay and compensation system that fulfills the unique requirements of the Act. Initial privacy protocols are being developed and data management systems are being built. 
60 

The Secretary has designated July 21, 2011, as the date on which the CFPB will 

assume existing authorities of seven agencies (OCC, OTS, FDIC, NCUA, FRB, FTC, 

and HUD). Six of these agencies will also transfer staff to the CFPB. We are developing protocols with these agencies for determining how many people will transfer 

and for determining how the agencies will jointly identify which specific employees 

will transfer. 

We have made substantial progress preparing the CFPB to incorporate staff and 

assume authorities from other agencies. We have begun planning and preparations 

for certain rules mandated by the Dodd-Frank Act so the CFPB can meet statutory 

deadlines. We have met with the agencies that will transfer rulemaking authority 

to coordinate and ensure a smooth transfer. We are coordinating fulfillment of certain rule-writing mandates under the Dodd-Frank Act with the Federal Reserve 

Board to speed clarity for the market and meet statutory deadlines. 

We are also hard at work to ensure a smooth transfer of consumer compliance 

supervision for banks, thrifts, and credit unions with assets exceeding $10 billion. 

Senior experts in consumer compliance supervision of large banks—detailed to 

Treasury from the banking agencies—are laying plans for staffing, training, and information systems. We will make sure to coordinate examination schedules with 

prudential regulators to avoid unnecessary burden. 

Federal Insurance Office 

FIO will provide the Federal Government for the first time dedicated expertise regarding the insurance industry. The Office will monitor the insurance industry, including identifying gaps or issues in the regulation of insurance that could contribute to a systemic crisis in the insurance industry or the United States financial 

system. The director of FIO will advise the Council on these matters as a nonvoting 

member. FIO may receive and collect data and information on and from the insurance industry and insurers; enter into information-sharing agreements; analyze and 

disseminate data and information; and issue reports. 

Under the Act, the director of this office must be a senior career civil servant, and 

we are committed to finding a top caliber person to fill the job. Last week we posted 

a vacancy notice and we will move as fast as the civil service hiring process allows. 

Meanwhile, existing Treasury staff has started the work of FIO. 

We will make every effort to ensure a cooperative and collaborative relationship 

with the National Association of Insurance Commissioners (NAIC). Senior Treasury 

officials and staff are engaging frequently with the NAIC as well as other interested 

parties. We are establishing with NAIC a framework within which FIO and the 

States, as the functional regulators, can work hand-in-hand. 

And we are also making plans for a system that will provide FIO with industry 

and insurer data and information, including data to monitor access to affordable insurance products by traditionally underserved communities and consumers, minorities, and low- and moderate-income people. 

We are working to engage effectively with representatives of other countries on 

insurance prudential issues. We will also be working closely with the United States 

Trade Representative. 

Conclusion 

This economic crisis was caused by fundamental failures in our financial system. 

And over the past few years, those failures have cost us dearly—millions of lost jobs, 

trillions in lost savings, thousands of failed businesses, homes foreclosed, retirements delayed, educations deferred. 

Financial reform addresses those failures so no future generation has to pay such 

a price. But it also rebuilds our financial system so that it can once again be an 

engine for economic growth. 

For much of the last century our financial system was the envy of the world. 

From London to Shanghai, it was analyzed and even emulated for its creativity and 

efficiency in finding innovative ways to channel savings towards credit and capital, 

not just for the biggest companies but also for the individual entrepreneurs who had 

a good idea and a solid plan. 

The Dodd-Frank Act will help ensure that our financial system becomes safer, 

stronger and, just as in the past century, the world leader. 

Thank you. 
61 

PREPARED STATEMENT OF BEN S. BERNANKE 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

SEPTEMBER 30, 2010 

Chairman Dodd, Ranking Member Shelby, and other Members of the Committee, 

thank you for the opportunity to testify about the Federal Reserve’s implementation 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DoddFrank Act). 

In the years leading up to the recent financial crisis, the global regulatory framework did not effectively keep pace with the profound changes in the financial system. The Dodd-Frank Act addresses critical gaps and weaknesses of the U.S. regulatory framework, many of which were revealed by the crisis. The Federal Reserve 

is committed to working with the other financial regulatory agencies to effectively 

implement and execute the act, while also developing complementary improvements 

to the financial regulatory framework. 

The act gives the Federal Reserve several crucial new responsibilities. These responsibilities include being part of the new Financial Stability Oversight Council, 

supervision of nonbank financial firms that are designated as systemically important by the council, supervision of thrift holding companies, and the development 

of enhanced prudential standards for large bank holding companies and systemically important nonbank financial firms designated by the council (including capital, liquidity, stress test, and living will requirements). In addition, the Federal Reserve has or shares important rulemaking authority for implementing the so-called 

‘‘Volcker Rule restrictions’’ on proprietary trading and private fund activities of 

banking firms, credit risk retention requirements for securitizations, and restrictions on interchange fees for debit cards, among other provisions. 

All told, the act requires the Federal Reserve to complete more than 50 

rulemakings and sets of formal guidelines, as well as a number of studies and reports, many within a relatively short period. We have also been assigned formal responsibilities to consult and collaborate with other agencies on a substantial number 

of additional rules, provisions, and studies. Overall, we have identified approximately 250 projects associated with implementing the act. To ensure that we meet 

our obligations in a timely manner, we are drawing on expertise and resources from 

across the Federal Reserve System in areas such as banking supervision, economic 

research, financial markets, consumer protection, payments, and legal analysis. We 

have created a senior staff position to coordinate our efforts and have developed 

project-reporting and tracking tools to facilitate management and oversight of all of 

our implementation responsibilities. 

The Federal Reserve is committed to its long-standing practice of ensuring that 

all its rulemakings be conducted in a fair, open, and transparent manner. Accordingly, we are disclosing on our public Web site summaries of all communications 

with members of the public—including banks, trade associations, consumer groups, 

and academics—regarding matters subject to a proposed or potential future rulemaking under the act. 

In addition to our own rulemakings and studies, we have been providing technical 

and policy advice to the Treasury Department as it works to establish the oversight 

council and the related Office of Financial Research. We are working with the 

Treasury to develop the council’s organizational documents and structure. We are 

also assisting the council with the construction of its framework for identifying systemically important nonbank financial firms and financial market utilities, as well 

as with its required studies on the proprietary trading and private fund activities 

of banking firms and on financial-sector concentration limits. 

Additionally, work is well under way to transfer the Federal Reserve’s consumer 

protection responsibilities specified in the act to the new Bureau of Consumer Financial Protection. A transition team at the Board, headed by Governor Duke, is 

working closely with Treasury staff responsible for setting up the new agency. We 

have established the operating accounts and initial funding for the bureau, and we 

have provided the Treasury detailed information about our programs and staffing 

in the areas of rulemaking, compliance examinations, policy analysis, complaint 

handling, and consumer education. We are also providing advice and information 

about supporting infrastructure that the Bureau will need to carry out its responsibilities, such as human resource systems and information technology. 

Well before the enactment of the Dodd-Frank Act, the Federal Reserve was working with other regulatory agencies here and abroad to design and implement a 

stronger set of prudential requirements for internationally active banking firms. The 

governing body for the Basel Committee on Banking Supervision reached an agreement a few weeks ago on the major elements of a new financial regulatory architec-
62 

1See, Ben S. Bernanke (2010), ‘‘The Supervisory Capital Assessment Program—One Year 

Later’’, speech delivered at the Federal Reserve Bank of Chicago 46th Annual Conference on 

Bank Structure and Competition, held in Chicago, Ill., May 6, www.federalreserve.gov/ 

newsevents/speech/bernanke20100506a.htm; and Daniel K. Tarullo (2010), ‘‘Lessons from the 

Crisis Stress Tests’’, speech delivered at the Federal Reserve Board International Research 

Forum on Monetary Policy, Washington, March 26, www.federalreserve.gov/newsevents/speech/ 

tarullo20100326a.htm. 

ture, commonly known as Basel III. By increasing the quantity and quality of capital that banking firms must hold and by strengthening liquidity requirements, 

Basel III aims to constrain bank risk-taking, reduce the incidence and severity of 

future financial crises, and produce a more resilient financial system. The key elements of this framework are due to be finalized by the end of this year. 

In concordance with the letter and the spirit of the act, the Federal Reserve is 

also continuing its work to strengthen its supervision of the largest, most complex 

financial firms and to incorporate macroprudential considerations into supervision. 

As the act recognizes, the Federal Reserve and other financial regulatory agencies 

must supervise financial institutions and critical infrastructures with an eye toward 

not only the safety and soundness of each individual firm, but also overall financial 

stability. Indeed, the crisis demonstrated that a too narrow focus on the safety and 

soundness of individual firms can result in a failure to detect and thwart emerging 

threats to financial stability that cut across many firms. 

A critical feature of a successful systemic or macroprudential approach to supervision is a multidisciplinary perspective. Our experience in 2009 with the Supervisory Capital Assessment Program (popularly known as the bank stress tests) demonstrated the feasibility and benefits of employing such a perspective. 1 The stress 

tests also showed how much the supervision of systemically important institutions 

can benefit from simultaneous horizontal evaluations of the practices and portfolios 

of a number of individual firms and from employment of robust quantitative assessment tools. Building on that experience, we have reoriented our supervision of the 

largest, most complex banking firms to include a quantitative surveillance mechanism and to make greater use of the broad range of skills of the Federal Reserve 

staff. 

A final element of the Federal Reserve’s efforts to implement the Dodd-Frank Act 

relates to the transparency of our balance sheet and liquidity programs. Well before 

enactment, we were providing a great deal of relevant information on our Web site, 

in statistical releases, and in regular reports to the Congress. Under a framework 

established by the act, the Federal Reserve will, by December 1, provide detailed 

information regarding individual transactions conducted across a range of credit and 

liquidity programs over the period from December 1, 2007, to July 20, 2010. This 

information will include the names of counterparties, the date and dollar value of 

individual transactions, the terms of repayment, and other relevant information. On 

an ongoing basis, subject to lags specified by the Congress to protect the efficacy 

of the programs, the Federal Reserve also will routinely provide information regarding the identities of counterparties, amounts financed or purchased and collateral 

pledged for transactions under the discount window, open market operations, and 

emergency lending facilities. 

To conclude, the Dodd-Frank Act is an important step forward for financial regulation in the United States, and it is essential that the act be carried out expeditiously and effectively. The Federal Reserve will work closely with our fellow regulators, the Congress, and the Administration to ensure that the law is implemented 

in a manner that best protects the stability of our financial system and strengthens 

the U.S. economy. 

PREPARED STATEMENT OF SHEILA C. BAIR 

CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

SEPTEMBER 30, 2010 

I appreciate the opportunity to testify on the priorities of the Federal Deposit Insurance Corporation (FDIC) for implementing the Dodd-Frank Wall Street Reform 

and Consumer Protection Act of 2010 (the Dodd-Frank Act). I also want to thank 

the Committee Members and staff for their hard work to enact this landmark legislation. With new resolution powers for nonbank financial companies, the establishment of the Financial Stability Oversight Council and the creation of the Consumer 

Financial Protection Bureau (CFPB), the Dodd-Frank Act provides financial regulators with the tools that are needed to protect against future financial crises. 
63 

In addition to specific requirements to strengthen our financial system, there are 

important areas where the Dodd-Frank Act establishes broad policy direction while 

leaving the details of implementation to financial regulators. Implementing the 

Dodd-Frank Act in a way that will enhance the stability of our financial system as 

Congress intended, and not just as a regulatory compliance exercise, is a responsibility that the FDIC views with utmost importance. 

The Dodd-Frank Act assigns the FDIC a large number of responsibilities for implementing reform. The FDIC is authorized to write 44 rulemakings—some of which 

are discretionary—including 18 independent and 26 joint rulemakings, new or enhanced enforcement authorities, new reporting requirements and numerous other 

actions. Implementation will require extensive coordination among the regulatory 

agencies and will fundamentally change the way we regulate large complex financial 

institutions. 

It is imperative that regulators work together, with both speed and openness in 

the implementation of the Dodd-Frank Act in order to dispel uncertainties and foster a smooth transition by the industry. To achieve this end, the FDIC has already 

taken several steps to enhance the transparency of our rulemaking process. First, 

we announced that we would hold a series of public roundtables with external parties to discuss particular aspects of implementation and to provide input on draft 

regulations to carryout the Act. To date, we have held two roundtables. The first 

focused on the new orderly liquidation authority provisions of the Dodd-Frank Act. 

The second roundtable addressed the FDIC’s current Deposit Insurance Fund (DIF) 

management and risk-based assessment system and changes made by the DoddFrank Act. Information on our roundtables is posted on our public Web site. 

The FDIC is also disclosing on our Web site the names and affiliations of private 

sector individuals who meet with senior FDIC officials to discuss how the FDIC 

should interpret or implement provisions of the Dodd-Frank Act that are subject to 

independent or joint rulemaking. Moreover, in addition to the longstanding practice 

of publishing public comments on our Web site that are received through our rulemaking process, we are encouraging general input from the public on how the FDIC 

should implement the new law. The comments already received have been published 

on our Web site and we will continue this practice in advance of formal rulemaking. 

Implementation of Dodd-Frank 

The recent financial crisis exposed the short-comings of the current regulatory regime for addressing large, nonbank financial companies that posed systemic risk. 

Specifically, the Government was forced to either prop up a failing institution with 

expensive bailouts or allow a disorderly liquidation through the normal bankruptcy 

process. The bankruptcy of Lehman Brothers triggered a liquidity crisis that led to 

the bailout of AIG and massive public assistance to most major U.S. banking organizations. An orderly closure and liquidation is essential if we are to prevent such crises from occurring in the future. Many provisions of the Dodd-Frank Act are designed to reduce risk to the financial system and economy by enhancing the supervision of large nonfinancial companies or by facilitating their orderly closing and liquidation in the event of failure. The Dodd-Frank Act provides a new comprehensive 

regulatory regime that, coupled with higher capital standards, is designed to reduce 

risk in both individual firms and the wider financial system. Further, in order to 

reduce risk in the system to reasonable levels, it must be made clear to these companies that their financial folly could result in losses to shareholders and bondholders and in the dismissal of their senior managers. 

My testimony reviews the top priorities of the FDIC in implementing the DoddFrank Act, which include: resolution plan requirements and orderly liquidation authority, systemic risk oversight, capital and liquidity requirements, and consumer 

protection. In addition, I will discuss other important implementation issues with 

respect to reliance on credit rating agencies, back-up examination and enforcement 

authorities, supervision of State chartered thrifts and changes to the deposit insurance system that should smooth the effect of economic cycles on IDIs by maintaining 

steady assessment rates and allowing the FDIC to maintain a positive fund balance 

during a financial crisis. 

Orderly Liquidation Authority and Resolution Plans 

The new resolution plan requirements and orderly liquidation authority are fundamental tools necessary to close large, systemically important financial companies 

and end ‘‘Too Big to Fail.’’ The new requirements will ensure that the largest 

nonbank financial companies can be wound down in an orderly fashion without costing taxpayers billions of dollars in the form of bailouts. From the FDIC’s more than 

75 years of bank resolution experience, we have found that clear legal authority and 

transparent rules on creditor priority—coupled with adequate information and co-
64 

1See, James W. Giddens, Trustee for the SIPA Liquidation of Lehman Brothers Inc., Trustee’s 

Preliminary Investigation Report and Recommendations, United States Bankruptcy Court 

Southern District of New York, Case No. 08-01420 (JMP) SIPA, p. 8 ff. 

operation—are critical tools for the effective advance planning of a large, orderly liquidation. 

Legal Authorities for Orderly Liquidation 

The Dodd-Frank Act provides for orderly liquidation of covered ‘‘financial companies’’—that is, those financial companies (including bank holding companies) for 

which a systemic risk determination has been made that failure and resolution 

under otherwise applicable law would have ‘‘serious adverse effects on financial stability in the United States.’’ Title II of the Act vests the FDIC with legal resolution 

authorities similar to those for insured depository institutions (IDIs). Once the FDIC 

is appointed as receiver, it is required to carry out an orderly liquidation of the financial company. In order to implement this authority, the FDIC must determine: 

how a company will be closed; how assets of the receivership will be sold; how 

claims will be determined and paid; and what policies and safeguards must exist 

to ensure that the taxpayers do not bear losses. We are currently establishing processes needed to make these determinations. 

In August, the FDIC Board of Directors approved the creation of an Office of Complex Financial Institutions (OCFI), that will, among other things, carry out the 

FDIC’s new authority to implement orderly liquidations of systemically important 

bank holding companies and nonbank financial companies that fail. I will discuss 

the new OCFI in more detail later. 

Information Necessary for Liquidation 

Without access to information, the FDIC’s legal authority for liquidation under 

the Dodd-Frank Act would be insufficient for implementing an effective and orderly 

liquidation process. For example, the court-appointed trustee overseeing the liquidation of Lehman Brothers found that Lehman Brothers’ lack of a disaster plan ‘‘contributed to the chaos’’ of its bankruptcy and the liquidation of its brokerage. 1 This 

is fully consistent with the FDIC’s experience. Without advance planning, the FDIC 

could not have effectively resolved the many insured banks that have failed. Recognizing this, the Dodd-Frank Act created supervisory and regulatory powers designed 

to give the FDIC information and cooperation from the largest financial companies 

and other regulators, and the authority to conduct extensive advance planning. 

The new legislation requires the FDIC and the Board of Governors of the Federal 

Reserve System (FRB) to jointly issue regulations within 18 months of enactment 

of the Dodd-Frank Act to implement new resolution planning and reporting requirements that apply to bank holding companies with total assets of $50 billion or more 

and nonbank financial companies supervised by the FRB. Importantly, the statute 

requires both periodic reporting of detailed information by the largest financial companies and the development and submission of a plan ‘‘for rapid and orderly resolution in the event of material financial distress or failure.’’ The resolution plan requirement in the Dodd-Frank Act appropriately places the burden on financial companies to develop their own plans in consultation with the FDIC and the FRB. 

We are in the beginning phase of implementation and are closely coordinating the 

development of the resolution plan regulatory requirements with the FRB. This new 

resolution plan regulation will require financial companies to look critically at the 

often highly complex and interconnected corporate structures that have emerged 

within the financial sector. For a resolution plan to be viewed as credible and facilitating orderly resolution under the Bankruptcy Code as required by the Act, it must 

provide a clear discussion with regard to corporate structure and key business operations. The plan should describe which assets and liabilities belong to which legal 

entities, identify functions or services provided by third parties and who within the 

financial firm has the relevant information about these functions. 

These large complex firms are continuously growing and changing, which yields 

complex and opaque legal and operating structures. Over time, these can present 

obstacles not only to regulators, but also to the firm’s management. Resolution plans 

can clarify a financial firm’s risks and lines of authority and control, which can ultimately benefit the firm. 

The existence of a resolution plan will generate financial benefits, as inefficiencies 

associated with resolving a company without sufficient background information will 

be alleviated, financial system resiliency will be improved, and systemic risk will be 

reduced. Taken together, the new resolution powers, the enhanced regulatory and 

supervisory cooperation mandated in the law, and the resolution planning authority 

provide an infrastructure to end ‘‘Too Big to Fail.’’ 
65 

In fact, we view resolution planning as such a critical matter that we already 

have used the FDIC’s preexisting authority to propose a requirement for resolution 

planning for certain large IDIs. In May of this year the FDIC issued a notice of proposed rulemaking which would set forth information-reporting requirements intended to provide the FDIC with key information regarding operations, management, financial aspects and affiliate relationships. Further, the proposed rulemaking 

would require a contingent resolution plan to be submitted to the FDIC that describes how the IDI could be effectively separated from the rest of the organization. 

The Dodd-Frank Act goes one step further by mandating an orderly resolution plan 

for the entire organization. 

The Dodd-Frank Act lays out steps that must be taken with regard to the resolution plans. First, the FRB and the FDIC must review the company’s plan to determine credibility and utility in facilitating an orderly resolution under the Bankruptcy Code. Making these determinations will necessarily involve the agencies having access to the company and relevant information. If a plan is found to be deficient, the company will be asked to submit a revised plan to correct any identified 

deficiencies within a time period determined by the agencies. The revisions must 

demonstrate that the plan is credible and would result in an orderly resolution 

under the Bankruptcy Code. The revised plan could include changes in business operations and corporate structure to facilitate implementation of the plan. If the company fails to resubmit a plan that corrects the identified deficiencies, the DoddFrank Act authorizes the FRB and the FDIC to jointly impose more stringent capital, leverage or liquidity requirements. In addition, our agencies may impose restrictions on growth, activities or operations of the company or any subsidiary, until 

such time as an acceptable plan has been submitted. In certain cases we may force 

divestiture of portions of the nonbank financial firm. 

Systemic Risk 

The Dodd-Frank Act addresses systemic risk in several ways. As discussed above, 

each systemically important financial company must submit a periodic orderly resolution plan that is reviewed by the FDIC and the FRB and assessed for its credibility and ability to facilitate an orderly resolution under the Bankruptcy Code. In 

addition, the FDIC will have the authority to liquidate such entities in the event 

of failure. The Act also addresses the macro-oversight of the financial industry by 

establishing the Financial Stability Oversight Council (Council), strengthening liquidity and capital requirements, and prohibiting the use of credit ratings for regulatory purposes. 

Financial Stability Oversight Council 

The Dodd-Frank Act established the Council and vested it with the responsibility 

for identifying financial companies and practices that could create systemic risk in 

the future and taking actions to mitigate identified risks. The Council’s success will 

be determined by the willingness of its members to work together closely and expeditiously to implement the Council’s duties and to do so in a way that is not just 

a ‘‘paper exercise.’’ One of the highest priorities for the Council is to establish the 

criteria for identifying systemically important financial companies to be subject to 

enhanced prudential supervision by the FRB. The Dodd-Frank Act specifies a number of factors that can be considered when designating a nonbank financial company 

for enhanced supervision, including: leverage; off-balance-sheet exposures; and the 

nature, scope, size, scale, concentration, interconnectedness and mix of activities. 

This process of identifying the nonbank financial companies that should be subject 

to FRB oversight is likely to be involved and take considerable time. It may be prudent to begin the process by qualifying a small group of companies that are clearly 

subject to this provision of the Act while the Council members work through the 

details necessary to identify the more nuanced cases. Once a nonbank financial company is identified and subject to FRB supervision, the company must file an orderly 

resolution plan with the FRB and the FDIC, as discussed earlier. 

Another key priority for the Council is to identify potentially systemic activities 

and practices. The Council needs to have a forward-looking focus to identify emerging risks and recommend that the primary regulators take quick action to mitigate 

those risks. At the same time, the Council members must work together to develop 

the most effective recommendations for enhanced prudential standards for the range 

of potentially systemic financial companies and activities. It is important to remember that the Council was formed to take a long-term, macro viewpoint. It was not 

meant to interfere with or complicate the ability of the independent agencies to fulfill their statutory mandates and move ahead with clearly needed reforms. We look 

forward to collaborating with our colleagues to assure continued progress in 

strengthening the stability of our financial system and utilizing our respective au-
66 

thorities and individual areas of specialized expertise to close regulatory gaps which 

contributed so greatly to the financial crisis. 

In order to accomplish its challenging tasks, I believe that the Council should 

begin with experienced and capable staff from each of the member agencies to work 

as a team in implementing the Council’s responsibilities. Interagency working 

groups should be established to take full advantage of the knowledge and unique 

perspective of each member agency. 

To meet these implementation objectives, as I previously mentioned, the FDIC has 

recently reorganized and established the OCFI to help carry out its responsibilities 

under the Act. To support the priority of systemic risk oversight, the OCFI will perform continuous review and oversight of bank holding companies with more than 

$100 billion in assets as well as nonbank financial companies designated as systemically important by the Council. It will also be responsible for carrying out the 

FDIC’s new orderly liquidation authority over those systemic companies that fail. 

Further, the OCFI will monitor risks among the largest and most complex financial 

institutions and develop plans for the contingency that one or more of these companies might fail. The OCFI will work closely with our counterparts at the U.S. Department of the Treasury (the Treasury Department), the FRB, and the other banking agencies to ensure that the Dodd-Frank Act is implemented in a way that 

makes prudential supervision and orderly liquidation of designated nonbank financial companies as effective as possible. 

Bank Capital and Liquidity Requirements 

One of the fundamental lessons of the financial crisis was the disastrous economic 

consequences of insufficient capital in the global banking system. Over time, the 

regulations that were in place allowed the financial system to become excessively 

leveraged and insufficiently liquid. Excessive leverage fueled a credit bubble and decreased the ability of financial institutions to absorb losses. 

Through the auspices of the Basel Committee on Banking Supervision (Basel 

Committee), the Federal Reserve Board, the FDIC and our fellow U.S. banking regulators have been working with other supervisors and central bank governors 

throughout the world to increase both the level and loss-absorption capacity of capital. While important work remains to be done, as I will describe later in this testimony, the agreements reached in July and September by the Basel Committee and 

it’s oversight body—the Group of Central Bank Governors and Heads of Supervision 

(GHOS)—will do much to improve both the quantity and quality of capital and discourage excessive leverage and excessive risk-taking by large international banking 

organizations. 

The agreement sets out new explicit numerical minimum requirements for common equity, calculated for regulatory purposes in a way that is intended to ensure 

that such equity is fully available to absorb losses. It also includes capital buffers 

designed to encourage banks to hold capital well above regulatory minimums so 

they can absorb losses and keep lending during a crisis; increases in capital requirements for the counterparty credit risk arising from derivatives exposures; explicit 

regulatory liquidity ratios; and of critical importance, an internationally agreed leverage ratio. All of these elements are subject to an extraordinarily long phase-in 

period. 

A great deal of attention has been directed to the potential impact of these requirements. While the agreement does represent a significant strengthening of requirements, we believe achieving the new capital levels will be easily manageable 

with the extremely long transition period. First, none of these enhancements will 

take effect until January 1, 2013, over 2 years from now. At that time, a 3.5 percent 

minimum ratio of tier 1 common equity to risk-weighted assets is introduced—but 

without, at that time, a requirement for any of the new regulatory deductions. For 

U.S. banks, a 3.5 percent common equity requirement is clearly a nonevent. 

During the 5 years following January 1, 2013, new regulatory deductions from 

capital would be phased-in incrementally. In the U.S., the most important of these 

deductions would come from the phase-out of Bank Holding Companies’ tier 1 capital recognition of trust preferred securities. This phase-out is part of both Basel III 

and the Dodd-Frank Act, and appropriately so since these instruments did not prove 

to be loss-absorbing in the crisis and their prevalence greatly weakened the capital 

strength of the U.S. banking industry and increased the FDIC’s insurance losses. 

There is also a more-stringent cap on the recognition of deferred tax assets in tier 

1 common equity. When the value of these assets depends on future income, they 

are not really available to absorb loss in a severe scenario. It is likely, however, that 

banks would avoid much of this deduction simply by realizing the value of these deferred tax assets over time through earnings. 
67 

Another important deduction includes a tighter cap on the capital recognition of 

mortgage servicing rights and the deduction of all other intangible assets (goodwill, 

by far the largest category of intangible assets, has long been deducted from regulatory capital). While the value of mortgage servicing rights can be volatile, they 

clearly have value and the U.S. delegation argued successfully that the full deduction of this asset proposed by the Basel Committee in December was unwarranted. 

Finally, deductions of certain large financial equity investments and cross-holdings 

are designed to reduce the double-counting of capital in the financial system. We 

anticipate banks will avoid many of these types of deductions simply by selling or 

restructuring their holdings. 

Just as these deductions would be phased in gradually, the higher numerical requirements would also be phased-in, even more gradually. This would include a capital buffer over and above the minimum common equity ratio. The minimum plus 

buffer for tier 1 common as a percentage of risk-weighted assets would increase 

from the 3.5 percent on January 1, 2013, to 7 percent on January 1, 2019. Corresponding figures (minimum plus buffer) by 2019 for tier 1 and total capital would 

be 8.5 percent and 10.5 percent respectively. The leverage requirement that tier 1 

capital be at least 3 percent of the sum of balance-sheet assets and selected off-balance-sheet assets would not take effect until January 1, 2018. 

The agreement also includes important new requirements for liquidity. A new Liquidity Coverage Ratio requires banks to hold sufficient high quality liquid assets 

to meet cash needs during a 30-day stress scenario. While simple in concept, implementing this ratio requires many key assumptions and definitions. The agreement 

includes an observation period to allow for potential adjustments if needed. Another 

proposed liquidity ratio, the Net Stable Funding Ratio, in essence attempts to ensure that illiquid assets are not funded with volatile liabilities. This ratio is still 

under development. 

Determining the amount of new capital that banks would ultimately need to retain through earnings or raise externally during the next 8 years under these requirements is extremely difficult. Some of the specific required deductions may be 

avoidable as noted above. Deductions or extremely high capital charges affecting 

certain speculative grade or unrated securitizations may be largely avoidable as 

well, as banks sell, restructure or allow these exposures to pay down over time. 

Our own analysis, that assumes no mitigating actions by the banks and that the 

full increase in risk-weighted assets estimated by the Quantitative Impact Study 

(QIS) is realized, suggests that overwhelmingly, U.S. banks can meet the new requirements through retained earnings over time, with no need to tap external equity markets. 

Our view is that while the evidence supported the case for still higher requirements, the agreement is a major strengthening of current rules and an acceptable 

compromise given the multiple perspectives represented in the negotiations. 

Thus, the requirements agreed by the GHOS would go a long way to strengthen 

the U.S. banking system, but there is more to be done. First, the GHOS and the 

U.S. banking agencies have affirmed that further steps will be taken to augment 

the loss absorbing capacity of systemically important banks. The FDIC places a high 

priority on these efforts, and believes that they are needed to help avoid a recurrence of the events of the Fall of 2008. 

The Dodd-Frank Act establishes a mandate for the largest and most systemically 

important banks to have capital requirements that are higher than those applying 

to community banks, for systemically important nonbank financial companies to be 

subject to strong and appropriate capital regulation, and for depository institution 

holding companies to serve as a source of financial strength to banks. The DoddFrank Act requirement that is most critical to ensuring that all this happens is Section 171. 

Section 171 states that the generally applicable capital requirements shall serve 

as a floor for any capital requirement the agencies may require. Without this provision, the Nation’s largest insured banks and bank holding companies could avoid 

being held to higher capital standards, simply by using their own internal risk 

metrics under the agencies’ rules implementing Basel II’s ‘‘advanced approaches’’ to 

compute the risk-weighted assets against which they hold capital. Section 171 also 

provides that the generally applicable insured bank capital requirements will serve 

as a floor for the capital requirements of depository institution holding companies, 

and of nonbank financial companies supervised by the FRB pursuant to the DoddFrank Act. These important requirements will help ensure that holding companies 

do serve as a source of strength for their banks rather than as a vehicle for increasing leverage, and will address gaps and inconsistencies in regulatory capital between banking organizations and systemically important nonbank financial companies. 
68 

The FDIC attaches enormous importance to working with our fellow regulators 

to promptly implement these important requirements of Section 171. 

Limitation on Reliance on Credit Rating Agencies 

Another lesson of the financial crisis is the importance of performing independent 

due diligence on the underwriting standards and credit risks posed by credit exposures contained within structured products such as mortgage-backed securities and 

credit derivative products. To this end, the Dodd-Frank Act requires the regulatory 

agencies to remove all references to, or reliance on, credit ratings and substitute 

credit-worthiness standards developed by the agencies. 

On August 25, 2010, the banking agencies published a joint Advance Notice of 

Proposed Rulemaking seeking comment on a number of alternatives to the use of 

credit ratings within the various U.S. bank regulations and capital standards that 

reference such ratings. While we are interested in seeing industry comments on the 

alternatives, we also recognize the significant challenges involved with developing 

credit worthiness standards for the broad range of exposures and complex securities 

structures that exist within today’s financial system. 

Consumer Protection 

I have long argued for increased consumer protections and fully supported the creation of the CFPB. Put bluntly, consumer protections need to be beefed up especially 

for nonbank providers of financial services. There is ample evidence that consumers 

did not understand the consequences of the subprime and nontraditional mortgages 

that were sold to them during the buildup of the housing bubble. That is why basic 

consumer protections are a fundamental piece of our regulatory infrastructure, and 

the new CFPB has much work to do to bolster these protections. 

As you know, under the Dodd-Frank Act, the FDIC maintains compliance, exam- ination and enforcement responsibility for over 4,700 insured institutions with $10 

billion or less in assets. The CFPB assumes responsibility to examine, and enforce 

for compliance with Federal consumer financial law, the 46 institutions we now supervise that have more than $10 billion in assets or that are affiliates of institutions 

with over $10 billion in assets. Even for these large organizations the FDIC will 

have back-up authority to enforce Federal consumer laws and address violations. 

The Committee has asked about the transfer of employees to the new CFPB. We 

recognize the tremendous importance of working closely with our colleagues at the 

Treasury Department and the other banking agencies to ensure a smooth transition 

and the need for ongoing agency coordination once the transition is complete. Above 

all, we are fully committed to a fair transition and the equitable treatment of employees. With these goals in mind, we have taken a number of preliminary steps 

to begin the transfer process. 

Initially, two senior employees are being detailed to the Treasury Department to 

work on a wide range of examination and legal issues that will confront the CFPB 

at its inception. We are also actively engaged with the Treasury Department in 

helping to determine staffing levels and identify skill sets needed for the CFPB. Recognizing that FDIC employees have developed expertise, skills, and experience in 

a number of areas to benefit the CFPB, we fully expect some employees will actively 

seek an opportunity to assist the CFPB in its earliest stages, or on a more permanent basis. 

Related to the creation of the CFPB, the Dodd-Frank Act changes the composition 

of the FDIC Board of Directors by replacing the position held by the Director of the 

Office of Thrift Supervision (OTS) with the Director of the CFPB. Given the importance of consumer protections as part of financial reform, it is appropriate that the 

Director of the CFPB is a member of our Board. 

In addition to this change to the Board’s governance structure, the FDIC has 

taken steps to raise the stature and attention of consumer protections by creating 

a new division within FDIC with consumer protection as its focus. The new Division 

of Depositor and Consumer Protection will be created through the transition of staff 

from our existing Division of Supervision and Consumer Protection. We also will 

transfer employees from our existing research staff to the new Division to perform 

consumer research and Home Mortgage Disclosure Act (HMDA)/fair lending analysis. We also are in the process of strengthening our legal workforce dedicated to 

supporting depositor and consumer protection functions. Finally, to maintain 

synergies between safety and soundness and consumer protection, FDIC risk management staff will continue to work closely with the FDIC’s depositor and consumer 

protection staff. 

Additional FDIC-Related Dodd-Frank Act Provisions 

The Dodd-Frank Act provides the FDIC with new and enhanced authorities related to examinations and supervision of nonbank financial companies supervised by 
69 

2Offices of Inspector General of the FDIC and The Treasury, Evaluation of the Federal Oversight of Washington Mutual Bank, Report No. EVAL-10-002, April 2010. http:// 

www.fdicoig.gov/reports10/10002EV.pdf. 

the FRB, IDIs, and their holding companies. Among other things, the Act provides 

the FDIC with back-up examination authority for systemically important nonbank 

financial companies, and bank holding companies. The Act also transfers regulatory 

authority over State chartered thrifts from the OTS to the FDIC. In addition, the 

Act mandates changes to the DIF that will allow the FDIC to more effectively manage the Fund. 

Back-up Examination and Enforcement Authority 

The Dodd-Frank Act grants the FDIC new authorities to examine systemically im- portant nonbank financial companies and bank holding companies with at least $50 

billion in assets for the purposes of implementing the FDIC’s orderly liquidation authority. These back-up examinations may only be conducted in certain circumstances and only if the FDIC Board decides they are necessary to determine the 

condition of the company and other conditions are met. 

Before conducting a back-up examination, the FDIC will review available resolution plans submitted by the company, as well as available ‘‘reports of examination.’’ 

We will coordinate with the FRB to the maximum extent practicable to minimize 

duplicative or conflicting examinations. However, consistent with FDIC’s methods 

for resolving IDIs, back-up examination authority likely would play a key role in 

the planning for any potential orderly liquidation of a systemically important financial company under Title II of the Dodd-Frank Act. The information obtained from 

examinations (along with the information obtained through the resolution plan review process) is crucial for planning an effective liquidation. 

Similarly, the Dodd-Frank Act gives the FDIC back-up enforcement authority over 

a depository institution holding company if the conduct or threatened conduct of the 

holding company poses a risk to the DIF. This new authority recognizes that the 

activities and practices of the holding company may affect the safety and soundness 

of the IDI. 

With respect to our existing back-up examination authority for IDIs prior to passage of the Dodd-Frank Act, the FDIC Board voted on July 12 to revise its Memorandum of Understanding (MOU) with the other primary Federal banking regulators to enhance the FDIC’s existing back-up authorities over IDIs that the FDIC 

does not directly supervise. The revised agreement will improve the FDIC’s ability 

to access information necessary to understand, evaluate, and mitigate its exposure 

as deposit insurer, especially to the largest and most complex firms. 

The complexity and opaqueness of large, complex depository institutions requires 

the FDIC to have a more active on-site presence and greater direct access to information and bank personnel in order to fully evaluate the risks to the DIF. The need 

to revise the existing MOU was previously identified in a report by the Offices of 

Inspector General of the FDIC and the Treasury Department. 2 They criticized the 

then-existing MOU because it limited the FDIC’s ability to make its own independent assessment of risk to the DIF and required the FDIC to place unreasonable 

reliance on the work of the primary Federal regulator. 

Our new back-up supervision MOU meets the recommendations of the Inspectors’ 

General report and the commitment for action that I made personally in response 

to the recommendations. Further, I believe that the new agreement strikes a reasonable balance between preserving the role of the primary Federal regulator and 

providing the FDIC with the information that is critical to meet our statutory responsibilities. While much work lies ahead in implementing the terms of the new 

MOU, the FDIC will benefit from the stronger and more robust agreement. However, we also recognize that our ultimate success will depend heavily upon our ability to work together collectively as regulators and to respect the roles and responsibilities that we have each been given to protect the financial system. 

FDIC’s Authority Over State Chartered Thrifts 

We have initiated discussions with the OTS, the Office of the Comptroller of the 

Currency (OCC), and the FRB to ensure a smooth transition of OTS personnel and 

the approximately 60 State-chartered OTS institutions that will become FDIC-supervised pursuant to the regulatory realignment in the Dodd-Frank Act. An implementation plan for the transfer of OTS powers and personnel will be developed in 

coordination with the other Federal banking agencies. As you know, the Act sets the 

transfer date for OTS functions at 1 year after enactment, with a possibility for a 

6-month extension. Prior to the implementation date, the FDIC, in consultation with 

the OCC, will identify and publish a list of OTS orders and regulations that the 
70 

FDIC will enforce. We plan to use the systems currently in place to communicate 

with the management of these institutions during the transition phase. We are confident that the FDIC will have the resources needed to effectively supervise these 

institutions. 

Changes to the DIF Under the Dodd-Frank Act 

The FDIC has experienced two banking crises in the years following the Great 

Depression. In both of these crises, the balance of the insurance fund became negative, hitting a low of negative $20.9 billion in December 2009, despite high assessment rates and despite other extraordinary measures in the most recent crisis, including a special assessment of $5.5 billion. However, prepaid assessments of approximately $46 billion maintained the fund’s liquidity. 

The FDIC has long advocated that the deposit insurance assessment system 

should smooth the effect of economic cycles on IDIs, not exacerbate them. In practice, however, the opposite has tended to occur—rates have been low during prosperous times and high during crises. At the very least, assessment rates should not 

increase during a crisis. 

In the Dodd-Frank Act, Congress granted the FDIC increased flexibility to manage the DIF to achieve goals for deposit insurance fund management that the FDIC 

has sought for decades but has lacked the tools to achieve. The provisions of the 

Act, used to their fullest extent, should allow the FDIC to maintain a positive fund 

balance even during a banking crisis and maintain steady assessment rates 

throughout economic and credit cycles. 

Specifically, the Dodd-Frank Act raised the minimum level for the Designated Reserve Ratio (DRR) from 1.15 percent to 1.35 percent and removed the requirement 

that the FDIC pay dividends of one-half of any amount in the DIF above a reserve 

ratio of 1.35 percent. The new legislation also allows the FDIC Board, in its sole 

discretion, to suspend or limit dividends when the reserve ratio reaches 1.50 percent. Going forward, the dividend policy set by the Board (combined with assessment rates) will directly determine the size of the DIF. 

The FDIC has analyzed various trade-offs among assessment rates, dividend policies and reserve ratio targets. The analysis shows that the dividend rule and the 

reserve ratio target are among the most important factors in maximizing the probability that the DIF will remain positive during a crisis, when losses are high, and 

in preventing sharp swings in assessment rates, particularly during a crisis. This 

analysis also shows that the DIF minimum reserve ratio (DIF balance/estimated insured deposits) should be about 2 percent in advance of a banking crisis in order 

to avoid high deposit insurance assessment rates when IDIs are strained by a crisis 

and least able to pay. 

The FDIC Board will soon be considering a long-term strategy for DIF management, including assessment rates, a target reserve ratio, and a dividend policy, consistent with long-term FDIC goals and achieving the statutorily required 1.35 percent DIF reserve ratio by September 30, 2020. It is important to take advantage 

of this new fund management authority while the need for a sufficiently large fund 

and stable premiums are apparent to most. Memories of the last two crises will 

eventually fade and the need for a strong fund will become less apparent. Action 

taken now by the FDIC’s present Board, taking advantage of the tools granted by 

the Dodd-Frank Act, will make it easier for future Boards to resist inevitable calls 

to reduce assessment rates or pay larger dividends at the expense of prudent fund 

management. 

In addition, among the various rulemakings that will be required to implement 

the DIF-related provisions in the Dodd-Frank Act, the FDIC Board will issue noticeand-comment rulemaking later this fall to implement the requirement that we 

change the assessment base from domestic deposits to average assets less average 

tangible equity. 

This change, in general, will result in shifting more of the overall assessment burden toward the largest institutions, which rely less on domestic deposits for their 

funding than do smaller institutions. 

Conclusion 

In creating the Dodd-Frank Act, Congress enacted an historic package of financial 

reforms that will shape the financial industry for decades to come. Not only are 

these reforms needed to address the problems and abuses that led to the crisis, but 

they also offer the opportunity to create a financial system that will once again support the American economy, and not the other way around. A stable, profitable and 

internationally competitive U.S. financial services industry is in everyone’s interest. 

This financial reform is about better aligning incentives—internalizing the costs 

of leverage and risk taking—so that financial institutions can safely and efficiently 
71 

1SEC Chairman Schapiro Announces Open Process for Regulatory Reform Rulemaking, Press 

Release 2010-135 (July 27, 2010), http://www.sec.gov/news/press/2010/2010-135.htm. 

channel capital to its highest and best use in our economy. If our economy is to 

prosper and if our Nation is to meet the economic challenges looming ahead, our 

financial sector simply must do its job better. 

As we meet today, much remains to be done. The FDIC has begun its rulemaking 

tasks and is committed to a quick, transparent process to allow the financial industry to readily adapt to the new environment. We have reorganized ourselves internally to produce the focus and accountability needed to ensure the orderly liquidation of nonbank financial entities, the control of systemic risk, and the enhancement 

of consumer protections. We are working with our regulatory counterparts to quickly 

and carefully issue regulations to implement the Dodd-Frank Act. We are approaching these complex tasks with both a sense of urgency and a view toward their longrun efficacy. 

The stakes are high. If we fail to create effective frameworks now for exercising 

our authorities under Dodd-Frank, we will have forfeited this historic chance to put 

our financial system on a sounder and safer path in the future. We must not let 

this tremendous opportunity go to waste. Thank you for today’s hearing. I look forward to answering any questions. 

PREPARED STATEMENT OF MARY L. SCHAPIRO 

CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION

SEPTEMBER 30, 2010 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee: Thank 

you for inviting me to testify today on behalf of the Securities and Exchange Commission regarding our implementation of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (‘‘Dodd-Frank Act’’ or ‘‘Act’’). As you know, the Dodd-Frank 

Act fills a number of significant regulatory gaps, brings greater public transparency 

and market accountability to the financial system, and gives the SEC important 

tools to better protect investors. 

The Act includes over 100 rulemaking provisions applicable to the SEC, many of 

which require action within 1 year. It also requires the SEC to conduct more than 

twenty studies and create five new offices. While this is a very significant task, we 

are fully committed to fulfilling our mandates under the Act, as well as our preexisting responsibilities. 

My testimony today will describe our progress and plans for implementing the 

Dodd-Frank Act, particularly with respect to those issues that you specifically inquired about: derivatives regulation, clearance and settlement activities, registration 

of private fund advisers, credit rating agency regulation, corporate governance and 

executive compensation regulation, reforms to the asset-backed securitization process, the standard of care applicable to financial intermediaries, and other improvements to investor protection. 

Process and Priorities 

Let me begin by discussing our overall approach to implementing the new rules, 

studies, reports, offices and other actions mandated or contemplated by the DoddFrank Act. 

Internal Processes 

To hit the ground running, we established new internal processes and formed 

cross-disciplinary working groups for each of the major rulemaking initiatives and 

studies, and designated team leaders for each effort. Our rule-writing divisions and 

offices are meeting weekly to review the status of rulemakings and studies and to 

plan for the upcoming weeks. My office and the Office of the General Counsel oversee and coordinate much of this planning effort, and all Commissioners are provided 

with both written weekly updates and monthly oral briefings on status. 

Public Consultation 

We also have enhanced our public consultative process by expanding the opportunity for public comment beyond what is required by law. To maximize the opportunity for public comment and to provide greater transparency, less than a week 

after the President signed the Act, we made available to the public a series of email boxes to which interested parties can send preliminary comments before the 

various rules are proposed and the official comment periods begin. 1 These e-mail 
72 

2 Advance Joint Notice of Proposed Rulemaking—Definitions Contained in Title VII of DoddFrank Wall Street Reform and Consumer Protection Act, Rel. No. 34-62717 (Aug. 13, 2010), 

http://www.sec.gov/rules/concept/2010/34-62717.pdf. 3Study Regarding Obligations of Brokers, Dealers, and Investment Advisers, Rel. No. 34- 

62577 (July 27, 2010), http://www.sec.gov/rules/other/2010/34-62577.pdf. 4See, SEC Press Release 2010-135 (July 27, 2010), http://www.sec.gov/news/press/2010/ 

2010-135.htm. 5 Joint Public Roundtable on Swap Execution Facilities and Security-Based Swap Execution 

Facilities, Rel. No. 34-62864 (Sept. 8, 2010), http://www.sec.gov/rules/other/2010/34- 

62864.pdf; Joint Public Roundtable to Discuss Data for Swaps and Security-Based Swaps, Swap 

Data Repositories, Security-Based Swap Data Repositories, and Real-Time Public Reporting, 

Rel. No. 34-62863 (Sept. 8, 2010), http://www.sec.gov/rules/other/2010/34-62863.pdf; and 

Joint Public Roundtable on Governance and Conflicts of Interest in the Clearing and Listing 

of Swaps and Security-Based Swaps, Rel. No. 34-62725 (Aug. 16, 2010) http://www.sec.gov/ 

rules/other/2010/34-62725.pdf. 

boxes are on the SEC Web site, organized by topic. Since July 27th, the public has 

been providing preliminary comments on 31 topics, including over-the-counter (OTC) 

derivatives, private funds, corporate disclosure, fiduciary duty, credit rating agencies, and other areas in which the SEC will be conducting rulemaking and studies 

over the next 12 to 18 months. We also specifically solicited comment on the definitions contained in Title VII of the Act, 2 on the interim final rule on temporary municipal advisor registration and on the study we have undertaken regarding the effectiveness of the existing legal and regulatory standards of care for broker-dealers 

and investment advisers when providing personalized investment advice about securities to retail investors. 3

Through this process, we are receiving a wide variety of views. Indeed, our request for comment on the investment adviser/broker-dealer study alone has generated over 3,000 individualized comments. 

Transparency 

We recognize that the process of establishing regulations works best when all 

stakeholders are engaged and contribute their combined talents and experience, and 

our staff and Commissioners are trying, within reasonable time constraints, to meet 

with anyone who seeks to meet with us on these issues. We have increased transparency for meetings with interested members of the public. 4 We are asking those 

who request meetings to provide an agenda, and we are posting on our Web site 

the agendas and names of individuals participating in these meetings, along with 

copies of any written materials that are distributed at those meetings. In addition, 

staff will reach out as necessary to solicit views from affected stakeholders who do 

not appear to be fully represented by the developing public record on a particular 

issue. Thus far, our approach has resulted in meetings with a broad cross-section 

of interested parties. To further this public outreach effort, the Commission is holding public roundtables and hearings on selected topics. For example, to further inform our OTC derivatives rulemaking efforts under Title VII of the Act, our staff 

has held three joint roundtables with the CFTC staff regarding key swap and security-based swap matters. 5

Coordination With Other Regulators 

We are meeting regularly, both formally and informally, with other financial regulators. Staff working groups consult and coordinate with the staffs of the CFTC, 

Federal Reserve Board and other prudential financial regulators, as well as the Department of the Treasury, the Department of State, the Commerce Department, and 

the Comptroller General. Because the world today really is a global marketplace 

and what we do to implement many provisions of the Act will affect foreign entities 

that do business within our shores, our Office of International Affairs is consulting 

bilaterally and through multilateral organizations with counterparts abroad, and is 

meeting biweekly with our rule-writing staff to ensure appropriate coordination with 

our foreign counterparts. In short, we remain committed to working closely, cooperatively and regularly with our fellow regulators to strengthen our regulatory structure. 

Priorities 

To help us timely complete all rulemakings, as well as studies, reports, and other 

actions, required under the Act, we have prioritized our activity into four principal 

categories. 

The first category includes all matters that require very rapid action. A number 

of provisions of the Dodd-Frank Act became effective immediately upon, or shortly 

after, the Act’s date of enactment, and required prompt interpretive guidance, 

changes to administrative practice, or removal of inconsistent regulations, including: 
73 

6Temporary Registration of Municipal Advisors, Rel. No. 34-62824 (Sept. 1, 2010), http:// 

www.sec.gov/rules/interim/2010/34-62824.pdf. 7 Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers, Rel. No. 33-9142 (Sept. 15, 2010), http://www.sec.gov/rules/final/2010/33- 

9142.pdf. 8 Commission Guidance Regarding Auditing, Attestation, and Related Professional Practice 

Standards Related to Brokers and Dealers, Rel. No. 34-62991 (Sept. 24, 2010), http:// 

www.sec.gov/rules/interp/2010/34-62991.pdf. 9 Interpretation of Section 413(a): Corporation Finance Compliance & Disclosure Interpretation Section 179.01 (July 23, 2010); http://www.sec.gov/divisions/corpfin/guidance/ 

securitiesactrules-interps.htm. 10See, http://www.sec.gov/spotlight/dodd-frank.shtml. 

• Adopting an interim final rule that establishes a procedure for municipal advisors to satisfy temporarily the requirement that they register with the Commission by October 1, 2010, as required by Section 975 of the Act; 6

• Amending our rules that were in conflict with Dodd-Frank’s provision that the 

auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act 

does not apply with respect to nonaccelerated filers; 7

• Issuing an interpretation clarifying the requirement for audits of broker-dealers 

pending implementation of the authority over such audits granted to the Public 

Company Accounting Oversight Board by the Dodd-Frank Act; 8 and 

• Providing interim guidance on calculating the net worth standard for an accredited investor, to reflect the elimination of a person’s principal residence in the 

calculation, as required by Section 413 of the Act; 9

The second category of priorities includes matters that require action within 1 

year from the date of enactment of the Act. This category includes the bulk of the 

rulemakings, reports, and studies about which the Committee inquired. As discussed in more detail below, we have made significant progress on many of the action items in this category. We have performed analyses, reviewed preliminary comments received in response to our public solicitation for comment, and are making 

substantial progress in preparing draft rule proposals for public comment. 

The third category of priorities includes items that require action more than 1 

year from the date of enactment, and the fourth category includes items for which 

there is no prescribed statutory deadline. 

To help the public track our progress as we take actions to implement the Act, 

we have created a new section on our Web site that provides greater detail about 

our schedule for implementation, along with links to completed actions. 10 We think 

this will provide a useful reference tool to both the investing public and the financial industry as we proceed with implementation. 

I will now turn to the specific items raised by the Committee. 

Reform Initiatives 

OTC Derivatives 

Title VII of the Dodd-Frank Act provides a comprehensive framework for the regulation of the OTC derivatives market. Working with other regulators, and the 

CFTC in particular, we are writing rules that address, among other issues, capital 

and margin requirements; mandatory clearing; the operation of execution facilities 

and data repositories; business conduct standards for swap dealers; and public 

transparency for transactional information. Under the Act, primary jurisdiction over 

swaps is divided between the SEC and the CFTC. The SEC has primary jurisdiction 

over security-based swaps, and the CFTC has primary jurisdiction over other swaps, 

such as energy and agricultural swaps. To prevent gaps, regulatory arbitrage and 

confusion, the SEC and CFTC will engage in joint rulemaking regarding issues including the definition of terms like ‘‘swap,’’ ‘‘security-based swap’’ and ‘‘securitybased swap agreement.’’ 

We have done much already in preparation for making rule proposals in this area. 

Jointly with the CFTC, we have held three staff roundtables on the topics of conflicts of interest, data repositories, reporting and dissemination, and execution facilities. We also solicited comment in our Advance Joint Notice of Proposed Rulemaking 

regarding key definitional terms. Based on input from these roundtables and the 

comment letters on key definitions, as well as other comment letters received, we 

anticipate soliciting public comment on a number of proposed rulemakings in this 

area in the coming months. 

As part of our collaborative outreach, our rulemaking teams are working closely 

with the corresponding teams at the CFTC to coordinate our efforts. While the Act 

requires the SEC and CFTC to adopt joint rules further defining key definitional 
74 

11See, Title IV of the Dodd-Frank Act. 12See, Section 408 of the Dodd-Frank Act. 13See, Section 409 of the Dodd-Frank Act. 14See, Section 939C of the Dodd-Frank Act. 15See, Section 939F of the Dodd-Frank Act. 16See, Section 939 of the Dodd-Frank Act. 

terms relating to jurisdiction and certain categories of market participants, we believe that collaboration with the CFTC, the Federal Reserve Board and other prudential regulators also is essential for the rulemakings where joint action is not required by the Act. Our overarching goal is to build on the foundation established 

by Congress in Title VII of the Act to create a robust and workable framework for 

regulating the derivatives market. 

We expect to propose and adopt Title VII rules in a series of actions, beginning 

in October and proceeding over the next few months. We fully expect to meet the 

deadlines described in the Act. 

Clearance and Settlement 

Our staff also is working closely with the Federal Reserve Board and the CFTC 

to develop, as required by Title VIII of the Act, a new framework to supervise systemically important financial market utilities, including clearing agencies registered 

with the Commission. For example, Commission staff has been actively coordinating 

with the other agencies to develop rules regarding submission of notices by systemically important financial market utilities with respect to rules, procedures, or operations that may materially affect the risks presented. 

Commission staff also has discussed with the other agencies the new authority 

granted to SEC and CFTC to develop standards for these financial market utilities. 

Moreover, the SEC and CFTC staffs have begun working with staff from the Federal 

Reserve Board to develop a framework for consulting and working together on 

exams of systemically important financial market utilities consistent with Title VIII. 

This added layer of protection, or ‘‘second set of eyes,’’ called for by the Act provides 

assurance that the U.S. financial system receives well coordinated oversight from 

all relevant supervisory authorities. 

We expect to propose our first set of Title VIII rules in December. 

Private Fund Adviser Registration and Reporting 

By July 2011, all large hedge fund advisers and private equity fund advisers will 

be required to register with the Commission. 11 Under the Act, venture capital ad- visers and private fund advisers with less than $150 million in assets under management in the United States will be exempt from the new registration requirements, although the Act does provide for record keeping and reporting by these advisers. 12 In addition, family offices will not be subject to registration. 13 In order to 

implement the exemptions, the Commission must propose and adopt rules. The staff 

is planning to propose rules on all of these matters between October and December 

of this year. 

Our staff also has begun work regarding the collection of systemic risk information from private fund advisers as required by Title IV of the Act. In this regard, 

our staff has had informal discussions with staffs from the CFTC and other regulators regarding what categories of potentially reportable information would be consistent with the Act. In addition, we are working with the International Organization of Securities Commissions and various foreign regulators, most particularly the 

United Kingdom Financial Services Authority, regarding hedge fund systemic risk 

reporting. The goal of these consultations is to gain a better understanding about 

what categories of data would be useful and necessary for assessing the potential 

systemic risks posed by hedge funds, and how comparable this data would be with 

data from other countries. 

Credit Rating Agency Initiatives 

The Dodd-Frank Act requires the SEC to establish a new Office of Credit Ratings, 

conduct annual exams of each nationally recognized statistical rating organization 

(NRSRO), report on the collective results of those exams, and conduct studies relating to credit rating agencies regarding, among other things, NRSRO independence, 14 conflicts of interest 15 and standardizing ratings terminology. 16 We are in 

the process of establishing this office, and are actively recruiting for its new director. We also are identifying the staff from existing divisions who should be transferred to this new office, and have posted 25 new credit rating agency examination 

positions. 

The Commission is required to undertake approximately a dozen NRSRO-related 

rulemakings. The Act requires the SEC to address internal controls and procedures, 
75 

17See, Subtitle C, Title IX of the Dodd-Frank Act. 18See, Section 939A of the Dodd-Frank Act. 19See, Section 957 of the Dodd-Frank Act. 20See, New York Stock Exchange Rule 452.11(19) and Listed Company Manual Section 

402.08(B)(19); Securities Exchange Act Release No. 34-60215 (July 1, 2009), http:// 

www.sec.gov/rules/sro/nyse/2009/34-60215.pdf; Securities Exchange Act Release No. 34-61732 

(March 18, 2010), http://www.sec.gov/rules/sro/cboe/2010/34-61732.pdf; Securities Exchange 

Act Release No. 34-61733 (March 18, 2010), http://www.sec.gov/rules/sro/chx/2010/34- 

61733.pdf; Securities Exchange Act Release No. 34-61292 (January 5, 2010), http:// 

www.sec.gov/rules/sro/nyseamex/2010/34-61292.pdf; and Securities Exchange Act Release No. 

34-62775 (August 26, 2010), http://www.sec.gov/rules/sro/phlx/2010/34-62775.pdf. 21See, Securities Exchange Act Release No. 34-62874 (September 9, 2010), http:// 

www.sec.gov/rules/sro/nyse/2010/34-62874.pdf. 22See, Securities Exchange Act Release No. 34-62992 (September 24, 2010), http:// 

www.sec.gov/rules/sro/nasdaq/2010/34-62992.pdf. 

conflicts of interest, credit rating methodologies, rating methodology transparency 

and performance, analyst training, credit rating symbology, and disclosures accompanying asset-backed securities ratings. 17 To meet the July 2011 deadline for these 

rules, the staff plans to recommend rule proposals to the Commission by early next 

year. In addition, the SEC, and all other Federal agencies, must review and report 

to Congress on existing references to credit ratings in their rules and undertake 

rulemaking to eliminate these references. 18 SEC staff has begun this review in 

preparation for drafting the report and proposed rulemaking. 

In addition, this week the Commission issued an amendment to Regulation FD 

that implements Section 939B of the Act, which requires that the SEC amend Regulation FD to remove the specific exemption from the rule for disclosures made to 

NRSROs and credit rating agencies for the purpose of determining or monitoring 

credit ratings. The amendment will be effective upon publication in the Federal Register. 

Many of the credit rating agency provisions of the Act became effective immediately upon enactment. Therefore, shortly after the Act was signed by the President, we sent letters to each NRSRO asking how it planned to comply with these 

new requirements. In addition, SEC staff asked each NRSRO to describe the impact 

of the repeal of the expert liability exemption formerly available to NRSROs for ratings used as part of a securities registration statement. We are evaluating the responses to these requests, will conduct appropriate follow-up, and will examine 

these issues as part of our annual examinations of the NRSROs. 

Corporate Governance and Executive Compensation Reforms 

Section 951 of the Act requires a shareholder advisory ‘‘say-on-pay’’ vote on executive compensation at least once every 3 years and a separate advisory vote at least 

once every 6 years on whether the say-on-pay resolution will be presented for shareholder approval every 1, 2, or 3 years. In addition, in any proxy statement asking 

shareholders to approve a merger or similar transaction, the Act requires disclosure 

about, and a shareholder advisory vote to approve, compensation related to the 

transaction, unless the arrangements were already subject to the periodic say-onpay vote. The Act also requires every institutional investment manager subject to 

Exchange Act Section 13(f) to report at least annually how it voted on any of the 

required votes. The staff is preparing rule proposals to address each of these new 

requirements. The Commission’s goal is to adopt final rules in time to inform the 

2011 proxy season. We anticipate that the Commission will propose rules designed 

to implement these provisions in the next few weeks. 

The Act also requires the rules of each national securities exchange to be amended to prohibit brokers from voting uninstructed shares on the election of directors 

(other than uncontested elections of directors of registered investment companies), 

executive compensation, or any other significant matter, as determined by the Commission by rule. 19 The Commission previously approved changes to New York Stock 

Exchange (NYSE) Rule 452 to prohibit broker voting of uninstructed shares in director elections, as well as similar changes for several other national securities exchanges. 20 On September 9, 2010 the Commission approved further changes to the 

NYSE rules to prohibit broker voting on all executive compensation matters. 21 On 

September 24, 2010, the Commission approved corresponding changes to the Nasdaq 

rules, 22 and we anticipate that corresponding changes to the rules of other national 

securities exchanges will be considered by the Commission in the near future. 

By April 2011, the Commission is required to adopt—jointly with other financial 

regulators—incentive-based compensation regulations or guidelines that apply to 

covered financial institutions, including broker-dealers and investment advisers, 
76 

23Section 956 requires the SEC to adopt these regulations or guidelines jointly with the Federal Reserve, Office of the Comptroller of the Currency, the FDIC, the Office of Thrift Supervision, the National Credit Union Administration Board, and the Federal Housing Financing 

Agency. 24See, Section 952 of the Dodd-Frank Act. 25See, Section 953(a) of the Dodd-Frank Act. 26See, Section 953(b) of the Dodd-Frank Act. 27See, Section 955 of the Dodd-Frank Act. 28See, Section 954 of the Dodd-Frank Act. 29See, Section 971 of the Dodd-Frank Act. 30See, Release No. 33-9136, Facilitating Shareholder Director Nominations (Aug. 25, 2010), 

http://www.sec.gov/rules/final/2010/33-9136.pdf. 31See, Section 27B of the Securities Act, as added by Section 621 of the Dodd-Frank Act. 32See, Section 942(b) of the Dodd-Frank Act. 

with assets of $1 billion or more. 23 The regulations or guidelines will prohibit incentive-based compensation practices that encourage firms to take inappropriate risks 

and will require firms to disclose to their respective appropriate financial regulator 

their incentive-based compensation structures. The Commission staff has met with 

other regulators in preparation for drafting either proposed regulations or guidelines. To meet the April 2011 adoption deadline, we anticipate that the staff will 

submit proposed rules to the Commission for consideration as soon as December. 

The Dodd-Frank Act also requires the Commission to write rules mandating new 

listing standards relating to the independence of compensation committees and establishing new disclosure requirements and conflict of interest standards that 

boards must observe when retaining compensation consultants. 24 Under the Act, 

these rules must be adopted by the Commission within 360 days from the date of 

enactment of the Act, and we anticipate that the staff will submit proposed rules 

for the Commission’s consideration by year end. 

In addition, the Act requires the Commission to amend our executive compensation disclosure rules to require public companies to disclose information showing the 

relationship between executive compensation actually paid and the financial performance of the company, 25 as well as information about the total annual compensation of the chief executive officer, the median annual total compensation of all 

other employees, and the ratio of these two amounts. 26 Rule amendments also are 

mandated that will require public companies to disclose in their annual meeting 

proxy materials whether any employee or director is permitted to purchase financial 

instruments designed to hedge any decrease in market value of equity securities 

granted as part of their compensation. 27 Finally, the Act requires the Commission 

to adopt rules mandating changes to listing standards requiring companies to implement and disclose ‘‘clawback’’ policies for recovering from current and former executive officers incentive-based compensation paid during any 3-year period preceding 

a material accounting restatement. 28 We currently anticipate that the staff will submit proposed rules for the Commission’s consideration by the middle of next year. 

Also related to corporate governance, the Act confirmed the Commission’s authority to adopt rules that facilitate shareholders’ ability to nominate director candidates. 29 The Commission had proposed such rules in May 2009, before the Act’s 

enactment, and we approved final rules on August 25, 2010. 30 Further, Section 972 

of the Act requires the Commission to adopt rules requiring an issuer to disclose 

in its annual proxy statement the reasons why it has chosen the same or different 

people to serve as chairman of the board and chief executive officer. The Commission adopted Item 407(h) of Regulation S–K in December 2009, which requires this 

information to be disclosed. 

Asset-Backed Securities 

Section 943 of the Dodd-Frank Act requires the Commission to adopt rules on the 

use of representations and warranties in the market for asset-backed securities 

(ABS). Also, Section 945 of the Act requires the Commission to issue rules requiring 

an asset-backed issuer in a Securities Act registered transaction to perform a review 

of the assets underlying the ABS, and disclose the nature of such review. Under the 

Act, both sets of rules must be adopted by the Commission by January 14, 2011, 

and we expect to propose rules in these areas within the next few weeks. We also 

are working on rules prohibiting material conflicts of interest in certain 

securitizations 31 and rules requiring the disclosure of information regarding the assets backing each tranche or class of security. 32 We expect that these rules also will 

be proposed by the end of the calendar year, and considered for adoption in early 

2011. 

Our efforts to advance the securitization reform envisioned by the Act are not limited to writing new rules. The Act also addresses risk retention (i.e., the require-
77 

33 As a member of the Financial Stability Oversight Council, the Chairman of the SEC is actively participating in this study. 

ment that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party) in connection 

with securitization. The Act mandates two studies on risk retention: one to be conducted by the Federal Reserve Board in coordination and consultation with the 

Commission, among other agencies, which is due October 19, 2010. The other study 

is to be conducted by the Chairman of the Financial Stability Oversight Council, 

and it is due January 14, 2011. 33 Accordingly, we are providing advice and assistance to the Federal Reserve Board in connection with the first study. We are working with other regulators to jointly create the risk retention rules, including the appropriate amount, form and duration of required risk retention, and the definition 

of qualified residential mortgages. For example, to encourage discussion of these 

issues, the staff in the Division of Corporation Finance communicated with Treasury 

and other regulators shortly after the Act’s enactment, raised relevant questions 

and provided preliminary staff thoughts on the risk retention provision. In light of 

the Act’s April 15, 2011, deadline for prescribing rules in this area, we currently 

are planning for Commission consideration of proposed risk retention rules by year 

end. 

Municipal Securities 

Section 979 of the Dodd-Frank Act requires the SEC to establish an Office of Municipal Securities to administer the rules pertaining to broker-dealers, advisors, investors, and issuers of municipal securities. The new office will coordinate with the 

Municipal Securities Rulemaking Board on rulemaking and enforcement actions. We 

expect to create the new office by the end of October, transfer existing staff performing these duties to that office, and begin recruiting for the new director, who 

will report directly to the Chairman. 

Section 975 of the Act also requires the registration of municipal advisors with 

the Commission. This new registration requirement becomes effective on October 1, 

2010. On that date, it becomes unlawful for any municipal advisor to provide advice 

to a municipality unless registered with the Commission. As noted above, on September 1, the Commission adopted an interim final rule establishing a temporary 

means for municipal advisors to satisfy the registration requirement. The SEC staff 

is working on proposed final registration rules for the Commission’s consideration. 

Studies and Reports 

The Dodd-Frank Act requires the Commission to conduct a significant number of 

studies and issue numerous reports, some on a periodic basis. As with our rulemaking efforts, we have prioritized these studies and reports and assigned teams 

to address each of them. While I have already referenced some of the studies we 

are conducting in conjunction with rule writing, I want to share with you our 

progress on three studies that relate to topics about which the Committee specifically requested information. 

Investment Adviser-Broker Dealer Standard of Care Study 

Section 913 of the Dodd-Frank Act mandates that we study the effectiveness of 

existing legal or regulatory standards of care for broker-dealers and investment advisers for providing personalized investment advice and recommendations about securities to retail customers. Under Section 913, we must produce a report on the 

study to the Senate Committee on Banking, Housing, and Urban Affairs, and the 

House of Representatives’ Committee on Financial Services. The report regarding 

the study is due to the Committees in January 2011. 

We are moving rapidly to meet the report’s January deadline. Six days after the 

date of enactment of the Dodd-Frank Act, we published a request for public input, 

comments, and data on issues related to the effectiveness of existing standards of 

care for brokers-dealers and investment advisers, and whether there are gaps, 

shortcomings, or overlaps in the current legal or regulatory standards. In response, 

we received more than 3,000 individualized letters, including letters from investors, 

financial professionals, industry groups, academia, and other regulators. Staff is reviewing the comments, and the views of these commenters will be reflected in the 

report on our study. 

We established a cross-divisional working group to implement the study. To help 

further inform our study and consistent with our public outreach on these issues, 

from August to October, the working group is meeting with as many interested parties representing a variety of perspectives as possible. We also requested assistance 
78 

from State regulators and FINRA with the aspects of the study involving their efforts, such as examinations and enforcement. 

At the completion of the study, the Act gives the SEC the authority to write rules, 

including rules that could create a uniform standard of conduct for professionals 

who provide personalized investment advice to retail customers. Under the Act, any 

new standard can be ‘‘no less stringent’’ than the standard applicable to investment 

advisers under sections 206(1) and (2) of the Investment Advisers Act of 1940. The 

Commission’s ultimate rulemaking in this area will, of course, be informed by what 

we learn from our study and from the comments we receive. 

Internal Operations 

A top challenge is continuing to strengthen the SEC’s organization itself—its 

structure, daily operations, personnel, technological infrastructure, and resources— 

to meet its statutory responsibilities and adapt to the ever changing realities of our 

dynamic markets. To assist the SEC in assessing its operational efficiency, Section 

967 of the Dodd-Frank Act directs the agency to engage the services of an independent consultant to study a number of specific areas of SEC internal operations 

and the SEC’s relationship with self-regulatory organizations (SROs). 

To quickly implement this provision, we sought and received formal reprogramming approval from our House and Senate Appropriations Subcommittees to fund 

the study. On August 3, 2010, the SEC’s Office of Acquisitions issued a formal solicitation (a Request for Quotation, or RFQ) describing the work to be performed and 

asking contractors to submit bids that describe their qualifications and discuss their 

plans to carry out the work. Bids were required to be submitted by August 27. Once 

a contract is awarded, the contractor will be given 150 days to conduct its study, 

and to prepare recommendations to the SEC and to Congress. We have already 

formed the working team of staff that will be made available to assist the consultant 

as requested. 

Financial Literacy 

Section 917 requires the Commission to conduct a broad study regarding the financial literacy of investors. The study will focus on, among other things, the current level of financial literacy of individual investors and how to increase the transparency of expenses and conflicts of interest in investment products such as mutual 

funds. Additionally, we will be studying the most effective private and public efforts 

to educate investors. I have asked the Commission’s Office of Investor Education 

and Advocacy (OIEA), which is focused in this area, to take the lead on the study. 

The staff is currently working on a project plan, including developing an organizational framework, an analysis of required resources, and a calendar of expected completion dates of various project milestones. I expect OIEA will complete the study 

within the next 18 months, and we will be prepared to submit the required report 

to Congress within the two-year period reflected in the statute. 

Agency Growth and Infrastructure 

New Offices 

The Act requires the SEC to establish five new offices, four of which will report 

directly to the Chairman. We are consulting with our appropriations committees regarding the reprogramming of funds needed to establish these new offices. I have 

previously mentioned the new Office of Credit Ratings and Office of Municipal Securities in connection with rulemaking in these areas. The other three offices are: 

Whistleblower Office. Section 924 requires us to establish a new Whistleblower Office. We already have posted a job announcement for the head of the new office, and 

we expect the office to include a senior special counsel and at least four additional 

employees. The office will be located within the Division of Enforcement and will 

work closely with that division’s Office of Market Intelligence, which is dedicated 

to the handling of tips, complaints, and referrals. The primary functions of the new 

office will include: (1) performing intake, tracking, and record keeping of whistleblower tips; (2) overseeing the review process for eligible whistleblower claims and 

presenting recommendations concerning whistleblower awards; and (3) communicating with the general public, the Commission, and reporting to Congress on the 

whistleblower program. The first report to Congress on the whistleblower program 

will be provided on October 30, 2010. 

Staff in the Division of Enforcement, with assistance from other divisions and offices, is actively working to draft implementing regulations for the whistleblower 

program. Pending the issuance of these regulations (due no later than 270 days 

after the date of enactment of the Act), the staff has been and will continue to be 

able to receive whistleblower complaints. Also, information for potential whistle-
79 

34See, http://www.sec.gov/complaint.shtml. 

blowers has been posted on our Web site. 34 Already, since the passage of the Act, 

we have seen a slight uptick in the number of tips and complaints received, and, 

more importantly, an uptick in the quality of complaints. 

Office of the Investor Advocate. Section 915 requires the SEC to establish an Office 

of the Investor Advocate, headed by an Investor Advocate who reports directly to 

the Chairman. The office will assist retail investors in resolving significant problems 

they may have with the Commission or with SROs. The Investor Advocate also will 

identify areas in which investors would benefit from changes in Commission regulations or SRO rules; identify problems that investors have with financial service providers and investment products; and analyze the potential impact on investors of 

proposed Commission regulations and SRO rules. The Investor Advocate must report to Congress annually on its activities, including information on the steps the 

Investor Advocate has taken to improve investor services and responsiveness of the 

Commission and SROs to investor concerns; a summary of the most serious problems encountered by investors; and recommendations for administrative and legislative actions to resolve problems encountered by investors. The Investor Advocate 

also must hire an Ombudsman, whose activities will be included in the Advocate’s 

reports to Congress. The Commission must adopt regulations establishing procedures for responding to all recommendations submitted to the Commission by the 

Investor Advocate. We have developed a position description, and are actively recruiting. 

Office of Minority and Women Inclusion. Section 342 requires specified financial 

agencies, including the SEC, to establish an Office of Minority and Women Inclusion 

that is responsible for all matters of the agency relating to diversity in management, 

employment, and business activities, other than enforcement of civil rights laws. 

The director of this Office will report to the Chairman. The director will develop and 

implement standards for: equal employment opportunity and the racial, ethnic, and 

gender diversity of the workforce and senior management of the SEC; increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency, including standards for coordinating technical assistance to 

such businesses; and assessing the diversity policies and practices of entities regulated by the SEC. 

Additionally, the director will advise the Chairman on the impact of the policies 

and regulations of the SEC on minority-owned and women-owned businesses. We 

have solicited comments from our internal Diversity Council on the structure of this 

new office, as well as several external groups. This is an area in which our request 

for suggestions from the public has been helpful. We are drafting the director position description, and plan to begin recruiting for this position very soon. 

Hiring 

As noted earlier, the Dodd-Frank Act not only requires the Commission to complete a significant number of rulemakings, studies, and reports, it also expands the 

role of the SEC in the regulation of OTC derivatives, private fund advisers, credit 

rating agencies, and other areas of the financial industry. To enable us to carry out 

these new responsibilities, we will need additional resources, and in particular, additional staff. 

We have been working to develop estimates of the resources that will be needed 

to achieve the full implementation of Congress’ regulatory reform mandate. While 

the dollar cost of full implementation will depend greatly on the effective date of 

new rules, the timing of hiring, and other factors, we currently estimate that the 

SEC will need to add approximately 800 new positions over time in order to carry 

out the new or expanded responsibilities given to the agency by the legislation. 

If Congress were to appropriate the funds to support this increase in the agency’s 

workforce, then the SEC would need to be ready to act swiftly to recruit and hire 

hundreds of additional personnel. To accomplish this, the SEC is enhancing our 

human resources staff and streamlining our hiring process. Improvements include 

simplifying the application process and maintaining a searchable database of applicants, so that it is possible to interview for a vacancy as soon as it appears rather 

than having to go through the lengthy posting process each time. Being able to better tailor, target and speed recruiting will enhance the quality of the applicant pool 

and help the agency more efficiently acquire the necessary talent to perform effectively in an increasingly complex financial environment. The expanded streamlined 

hiring authority included in the Dodd-Frank Act will help these efforts. 
80 

Technology 

The SEC’s Office of Information Technology is currently collaborating with the 

principal rule-writing divisions and offices to gather and develop the technology requirements that will be necessary to implement the legislation and the associated 

rulemaking. We currently anticipate technology investment will be required to implement a variety of changes to our responsibilities included in the Dodd-Frank Act, 

such as those relating to SRO rulemaking, regulation of security-based swap intermediaries, disclosure filing requirements, regulation of security-based swap execution facilities and data repositories, advisor registration, equipment to enable improved audits of market participants, end user equipment for additional staff expected to be hired, and changes to our filing and registration management and reporting systems. 

Our ‘‘EDGAR’’ team, which operates our disclosure system for public company filings, will assist in the deployment of changes to the asset-backed securities disclosure system in December 2010, and changes to existing forms, items, and exhibits 

to improve disclosure. While many of the technology requirements remain under development at this stage, the Office of Information Technology, under the leadership 

of our new Chief Operating Officer, will remain closely engaged with our operating 

divisions and offices and work to provide responsive solutions to enable implementation of the legislation. 

Conclusion 

The Dodd-Frank Act provides the SEC with important tools to better meet the 

challenges of today’s financial marketplace. While implementation of the Act clearly 

will require a major effort, this effort is already well underway at the SEC. While 

we undoubtedly will encounter some bumps along the way, we are on track to meet 

the goals, mandates and deadlines specified in the Act and to do so in a transparent 

and inclusive manner. As we proceed with implementation, we look forward to continuing to work closely with Congress, our fellow regulators and members of the financial and investing public. Thank you for inviting me here today to share with 

you our progress on and plans for implementation. I look forward to answering your 

questions. 

PREPARED STATEMENT OF GARY GENSLER 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION

SEPTEMBER 30, 2010 

Good morning Chairman Dodd, Ranking Member Shelby, and Members of the 

Committee. I thank you for inviting me to today’s hearing on implementing the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. I am honored to appear at today’s hearing alongside fellow regulators with whom we are working so 

closely to implement the Dodd-Frank Act. I also look forward to joining my fellow 

panelists as members of the new Financial Stability Oversight Council (FSOC). I am 

pleased to testify on behalf of the Commodity Futures Trading Commission (CFTC). 

I also thank my fellow Commissioners for their hard work and commitment on implementing the legislation. 

Before I move into the testimony, I want to thank Chairman Dodd for his leadership on the Banking Committee and in the Senate. On a personal note, I would like 

to thank Chairman Dodd for his support over the last 13 years. I first worked with 

Chairman Dodd in the late 1990s during my time in the Treasury Department. I 

again worked closely with Chairman Dodd on the Sarbanes-Oxley Act. He actually 

introduced the first bill in committee on that issue before Chairman Sarbanes did 

so. I am honored and pleased to have had this most recent chance to once again 

work with Chairman Dodd on what became the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. 

Implementing the Dodd-Frank Act 

The Dodd-Frank Act brings three critical reforms to the previously unregulated 

swaps marketplace. These reforms lower interconnectedness and risk in the financial system while promoting transparency. First, the Act requires swap dealers to 

come under comprehensive regulation. Second, the Act moves the bulk of the swaps 

marketplace onto transparent trading facilities—either exchanges or swap execution 

facilities (SEFs). Third, the Act requires clearing of standardized swaps by regulated 

clearinghouses to lower risk in the marketplace. 

The Dodd-Frank Act is very detailed, addressing all of the key policy issues regarding regulation of the swaps marketplace. To implement these regulations, the 

Act requires the CFTC and Securities and Exchange Commission (SEC), working 
81 

with our fellow regulators, to write rules generally within 360 days. That means 

that we have 289 days left. At the CFTC, we have organized our effort around 30 

teams who have been actively at work. We had our first meeting with the 30 team 

leads the day before the President signed the law. 

Two principles are guiding us throughout the rule-writing process. First is the 

statute itself. We intend to comply fully with the statute’s provisions and Congressional intent to lower risk and bring transparency to these markets. 

Second, we are consulting heavily with both other regulators and the broader public. We are working very closely with the SEC, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and other 

prudential regulators. Within 24 hours of the President signing the Dodd-Frank Act, 

more than 20 of our rule-writing team leads were meeting at the SEC with their 

counterparts. Our staff was having similar meetings the following week with staff 

from the Federal Reserve. 

Specifically, our rule-writing teams are working with the Federal Reserve in several critical areas: swap dealer regulation, clearinghouse regulation and swap data 

repositories, though we are consulting with them on a number of other areas as 

well. With the SEC, we are working on the entire range of rule writing, including 

those previously mentioned as well as trading requirements, real time reporting and 

key definitions. To the best of our ability, we will be aligning our public meeting 

schedule with the SEC. Tomorrow, the CFTC will hold a public meeting to consider 

rules relating to (1) an interim final rule relating to the time frame for reporting 

preenactment unexpired swaps to a swap data repository or to the Commission, (2) 

proposed rules regarding financial resources of clearing organizations and (3) proposed rules regarding governance of clearinghouses, designated contract markets 

(DCMs) and SEFs. 

Coordination with the SEC, the Federal Reserve and other regulators has been 

strong both at the staff level and at the Chairman’s level. I have personally met 

with leaders at each of my fellow regulators testifying here this morning, starting 

the week the President signed the bill. In each circumstance, we have continued the 

active dialogue, including both exchanging written materials as well as having additional meetings. 

In addition to working with our American counterparts, we have reached out to 

and are actively consulting with international regulators to harmonize our approach 

to swaps oversight. I returned yesterday from Brussels where I met with senior European regulators. In particular, our early discussions have focused on clearing requirements, clearinghouses more generally and data repositories. Two weeks ago, 

the European Commission released their detailed proposal to bring regulation to the 

swaps marketplace. Based upon their release and the Dodd-Frank Act, I am confident that we will bring strong and consistent regulation to the American and European swaps markets. Each of our rule-writing teams will be referring to these new 

proposals in Europe as we seek consistency in our regulatory approaches. 

We also are soliciting broad public input into the rules. This began the day the 

President signed the Dodd-Frank Act when we listed the 30 rule-writing teams and 

set up mailboxes for the public to comment directly. We want to engage the public 

as broadly as possible even before publishing proposed rules. 

In some circumstances, we are organizing roundtables with the SEC to hear specifically on particular subjects. We have had three days of meetings to date, which 

have been very beneficial. So far we have heard from investors, market participants, 

end-users, academics, exchanges and clearinghouses on key topics including governance and conflicts of interest, real time reporting, swap data record keeping, and 

SEFs. Based on how helpful these have been, we intend to have additional 

roundtables in the next month or two. 

Additionally, many individuals have asked for meetings with either our staff or 

Commissioners to discuss swaps regulation. In the first seven weeks after the bill 

was signed, we had more than 141 such meetings. We are now posting on our Web 

site a list of all of the meetings CFTC staff or I have with outside organizations, 

as well as the participants, issues discussed and all materials given to us. 

We plan to actively publish proposed rules in the fall, using weekly public Commission meetings for this purpose. Our first such meeting will be tomorrow at 9:30 

am. Public meetings will allow us to propose rules in the open. With each proposed 

rulemaking, we will solicit public comments for a period not less than 30 days. Since 

a number of the rules we are publishing have Paperwork Reduction Act requirements and thus must stay open for public comment for at least 60 days, we have 

to publish our proposed rulemakings quickly. This is as it generally takes us four 

to 6 months to review all of the public comments on proposed rules and finalize 

those rules. Though as with any such plan, some things may be delayed, our current 

goal is to publish the vast majority of our proposed rules by the end of December. 
82 

We already have published one final rulemaking regarding retail foreign exchange 

transactions. Further, with the SEC, we have published an advanced notice of proposed rulemaking seeking comments on the definitions of key terms in the DoddFrank Act. 

Regulating the Dealers 

Now I will address just a few of the key areas where we will write rules regulating the swaps marketplace. The first is regulating the dealers. Six of our rule 

teams are focused specifically on this area. One team is working jointly with the 

SEC on defining key terms, such as ‘‘swap dealer’’ and ‘‘major swap participant.’’ 

Another team is working on registration requirements for dealers. We also have 

teams working on business conduct standards, capital and margin requirements and 

rules for segregating customer funds. 

It is estimated that as many as 200 entities may register with the CFTC as swap 

dealers. This includes: 

• Approximately 80 global and regional banks currently known to offer swaps in 

the U.S. Of the International Swaps and Derivatives Association’s (ISDA) 830 

members, 209 are ‘‘Primary Members.’’ Under ISDA’s bylaws, a firm is only eligible for primary member status if it deals in derivatives for purposes other 

than ‘‘risk hedging or asset or liability management.’’ Though many of the dealers in emerging markets may not seek to register in the U.S., it is likely that 

most, if not all, of ISDA’s global and international members would; 

• Approximately 60 affiliates of existing swap dealers, based upon the DoddFrank Act’s Section 716 requirement that banks push out their swaps desks to 

affiliates; 

• Approximately 40 nonbank swap dealers currently offering commodity and 

other swaps; and 

• Approximately 20 potential new market makers that wish to become swap dealers. 

I would emphasize, however, that at this point these numbers are only preliminary estimates. The final numbers will, of course, depend upon the decisions of market participants as well as the outcome of the rulemaking process. 

In addition to regulating dealers, we also are tasked with regulating major swap 

participants. The major swap participant category is comprised of entities that are 

not swap dealers but whose participation in the swaps market is substantial enough 

to significantly affect or present systemic risks to the economy or the financial system as a whole. 

Transparent Trading Requirement 

In addition to regulating swap dealers, the Dodd-Frank Act brings transparency 

to the swaps marketplace by requiring standardized swaps to trade on exchanges 

or SEFs. A SEF is ‘‘a trading system or platform in which multiple participants 

have the ability to execute or trade swaps by accepting bids and offers made by multiple participants.’’ We have five teams focused on writing rules related to trading. 

It is anticipated that as many as 30 new entities will register as SEFs or DCMs. 

That is in addition to the 16 futures exchanges that we already regulate. 

Congress also mandated that if a swap both is clearable and it is ‘‘made available 

for trading’’ on a SEF or an exchange, then there is a mandate that it be traded 

on such a facility. Congress also has been very specific that market participants and 

end-users will benefit from real time reporting and that such posttrade transparency must be achieved ‘‘as soon as technologically practicable’’ after a swap is 

executed. Further, the statute says that one of the goals of SEFs is ‘‘to promote 

pretrade transparency in the swaps market,’’ though it appropriately authorizes the 

CFTC to write rules to facilitate block trades. 

Centralized Clearing 

The Dodd-Frank Act requires that standardized derivatives be cleared through 

central clearinghouses. At the CFTC, we have six teams focused on rules related to 

clearing, including determining which contracts will be subject to the mandatory 

clearing requirement. Though we do not yet know the total number of contracts that 

will be submitted for clearing, and the Commission may be able to group many by 

class, the largest swaps clearinghouse currently clears nearly one million unique 

contracts. It is anticipated that the number of registered derivatives clearing organizations will increase from 14 to around 20 as a result of the Dodd-Frank Act. 

Furthermore, for the first time, some derivatives clearinghouses may be designated systemically important by the FSOC. For those clearinghouses, there will 

be enhanced rules for financial resources, risk management and other prudential 
83 

standards. In this regard, we are consulting very closely with the Federal Reserve 

and international regulators. We recognize the need for very robust risk management standards, particularly as more swaps are moved into central clearinghouses. 

Data 

Moreover, the Dodd-Frank Act for the first time sets up a new registration category called swap data repositories (SDRs). The bill requires registrants—including 

swap dealers, major swap participants, SEFs and DCMs—to have robust record 

keeping and reporting, including an audit trail, for swaps, and to report each swap 

to an SDR or to the regulators. 

We anticipate rules in this area to require SDRs to perform their core function 

of collecting and maintaining swaps data and making it directly and electronically 

available to regulators. We also anticipate rules governing how data must be maintained by registrants and sent to the data repositories. 

Position Limits 

In January, the CFTC proposed rules to restore position limits in the four major 

energy futures contracts. Position limits have long been relied upon in futures market regulation to address the effects of excessive speculation and position concentration. Fixed limits that had been in effect for energy contracts were removed in 2001. 

Under the Dodd-Frank Act, the CFTC now is required to publish rules setting aggregate position limits on exempt and agricultural commodities across markets, including futures, swaps that perform significant price discovery functions and linked 

contracts on foreign boards of trade that operate in the U.S. As a result, the CFTC 

has withdrawn its January proposed rule and will build off that proposal and comments that were received as we write a new rule that satisfies the Dodd-Frank Act’s 

mandate. 

The Commission currently administers position limits on nine exchange-listed agricultural futures contracts. Under the Dodd-Frank Act, the CFTC is required to set 

position limits on more than 30 commodities. In general, the Act requires that rules 

establishing position limits be completed within 180 days from the date of enactment for energy and metals and within 270 days for agricultural contracts. 

Foreign Boards of Trade 

The Dodd-Frank Act empowers the CFTC to require that a foreign board of trade 

(FBOT) offering direct access to U.S. persons register with the Commission. This requirement replaces the agency’s no-action regime, under which FBOTs were permitted to offer access to U.S. investors upon meeting certain conditions. 

Conclusion 

The next year of rule writing will test the very talented staff of the CFTC. Our 

staff has significant expertise regulating the on-exchange derivatives markets that 

will translate well into regulating the over-the-counter swaps markets. Still, we 

need significant new resources. 

The President’s budget called for $261 million for the CFTC for fiscal year 2011, 

which is a substantial boost in funding. The House Appropriations Subcommittee 

with jurisdiction over the CFTC matched the President’s request. The Senate Appropriations Subcommittee with jurisdiction over the CFTC boosted that amount to 

$286 million. Though we have the resources to write the rules required by DoddFrank, we will need more staff to implement and enforce them in the years to come. 

The CFTC faces challenges in the months ahead, but we are prepared and geared 

up to meet those challenges. We look forward to continuing our excellent collaboration with other regulators to implement the Dodd-Frank Act. Thank you, and I 

would be happy to take questions. 

PREPARED STATEMENT OF JOHN WALSH 

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

CURRENCY

SEPTEMBER 30, 2010 

Statement Required by 12 U.S.C. §250: The views expressed herein are those of the 

Office of the Comptroller of the Currency and do not necessarily represent the views 

of the President. 

Chairman Dodd, Senator Shelby, and Members of the Committee, I appreciate the 

opportunity to describe the initiatives the Office of the Comptroller of the Currency 

(OCC) has undertaken to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Committee’s letter of invitation asked 
84 

the OCC to address several key topics: (1) the OCC’s priorities in implementing the 

Dodd-Frank Act and the progress we have made; (2) the OCC’s plans for integrating 

the staff and functions of the Office of Thrift Supervision (OTS) into the OCC; (3) 

the OCC’s plans for identifying employees for transfer to the Bureau of Consumer 

Financial Protection (CFPB); and (4) our views about how Basel III will further the 

objectives of the Dodd-Frank Act. My testimony addresses each of these areas in 

turn. We also offer some additional thoughts for the Committee’s consideration on 

a few aspects of the legislation that present particular implementation challenges. 

Rulemaking and Policy Initiatives 

The Dodd-Frank Act directs the OCC to draft rules, some jointly with other agencies and others on a coordinated basis, on a broad range of topics, including: regulatory capital; permissible proprietary trading, hedge fund, and private equity fund 

investments (the so-called ‘‘Volcker rule’’); derivatives margin requirements; executive compensation; and real estate appraisals, among others. The OCC will need to 

revise some regulations to address statutory changes. Moreover, our new role as primary supervisor for Federal savings associations will require us to review and republish rules issued by the OTS. For each of these rulemaking obligations, we have 

established an interdisciplinary team of agency experts dedicated to lead the OCC’s 

efforts and to work with interagency teams, where appropriate, to develop the new 

rules. 

The legislation also requires other financial regulatory agencies to consult with 

primary supervisors as those other agencies draft studies or develop regulations or 

standards, since there may be implications for the safety and soundness of depository institutions. Accordingly, we have designated OCC experts to advise the other 

financial regulatory agencies about the potential impact on the institutions we supervise and their customers. 

Taken together, these responsibilities constitute an implementation challenge of 

unprecedented scale. A large number of staff professionals will be assigned to work 

on the financial regulatory reform provisions of the Dodd-Frank Act, and we have 

established a senior management oversight group within the OCC to direct and coordinate our effort. 

Among our efforts, the OCC is supporting the organization of the Financial Stability Oversight Council (FSOC), which is chaired by the Secretary of the Treasury 

and includes as members, among others, the heads of the Federal banking agencies, 

including the Comptroller of the Currency; the Director of the CFPB; the Chairs of 

the Securities and Exchange Commission (SEC) and Commodities Future Trading 

Commission (CFTC); and the Director of the Federal Housing Finance Agency 

(FHFA). The FSOC’s mission is to identify risks to financial stability that could 

arise from the activities, material financial distress, or failure of large, interconnected financial companies; to recommend standards for implementation by the 

agencies in specified areas; to promote market discipline; and to respond to emerging threats to the stability of the U.S. financial system. 

In addition, a number of implementation projects are already underway. In August, we sought comment through an Advance Notice of Proposed Rulemaking 

(ANPR) on the implementation of section 939A of the Dodd-Frank Act. This section 

directs the Federal agencies to review regulations that require an assessment of the 

creditworthiness of a security or money market instrument, and remove any references or requirements involving credit ratings and substitute an alternative 

standard of creditworthiness. Apart from capital rules, the OCC’s regulations use 

credit ratings in several different ways, most significantly in setting the criteria for 

determining which ‘‘investment securities’’ national banks may acquire as permissible investments. Through the ANPR, the OCC sought comment on the implementation of section 939A with respect to these regulations and others governing securities offerings and international activities where credit ratings are referenced. The 

ANPR also set forth considerations underlying the reliance on credit ratings and requested comments on potential alternatives to the use of credit ratings. 

Separately, we also joined in an interagency ANPR to assess the impact of section 

939A on the banking agencies’ regulatory capital rules, which currently reference 

credit ratings in four general areas: (1) the assignment of risk weights to 

securitization exposures; (2) the assignment of risk weights to claims on, or guaranteed by, qualifying securities firms; (3) the assignment of certain regulatory capital 

add-ons for trading assets held by banks with large trading portfolios; and (4) the 

determination of the eligibility of certain guarantors and collateral for purposes of 

the credit risk mitigation framework under the advanced approaches rules. 

One active interagency project involves standards for uncleared swaps. Sections 

731 and 764 of the Dodd-Frank Act require the banking agencies, the Farm Credit 

Administration, and the FHFA to promulgate margin requirements for uncleared 
85 

swap transactions by swap dealers and major swap participants subject to the agencies’ jurisdiction. The agencies are engaged in discussions to establish the design of 

the margin requirements and margin levels, in light of the risk standards for such 

rules established by the Dodd-Frank Act. 

On another front, an interagency group consisting of the Federal banking agencies, the SEC, Housing and Urban Development (HUD), and the FHFA, has begun 

to discuss the design of several rulemakings mandated by section 941 risk-retention 

requirements. Section 941 generally mandates that the agencies publish rules requiring securitizers (and in some cases, originators of securitized assets) to retain 

at least 5 percent of the credit risk of the loans they package and sell through 

securitizations. Lower risk retention levels may be allowed for specific loans, particularly mortgages, if they are underwritten according to prudential standards to 

be set by the agencies through the rulemaking process. 

The OCC has also begun work on the provisions in section 956 which require the 

Federal agencies jointly to prescribe regulations or guidelines requiring the disclosure of certain incentive-based compensation arrangements and prohibiting compensation arrangements that encourage inappropriate risk-taking by financial institutions. 

In addition, an interagency working group consisting of the FSOC’s member agencies has begun providing input to the FSOC as it initiates its study of proprietary 

trading and hedge fund and private equity fund investments with a view to making 

recommendations to the banking agencies and the SEC when they promulgate regulations for the implementation of section 619. 

As we begin to implement the Dodd-Frank Act, we also have identified some notable implementation challenges that may be of interest to the Committee. These include the practical effects of prohibiting the use of credit ratings in regulations 

under section 939A. Ambiguities in section 171, relating to baselines for existing 

and future leverage and risk-based capital requirements, also raise a number of 

issues that pose implementation challenges and, as in the case of section 939A, 

could pose significant burdens on smaller banking institutions. There also appears 

to be an inconsistency in the duties assigned to the banking agencies and the CFPB 

with regard to fair lending that creates confusion in responsibilities. These issues 

are more fully discussed in Attachment A to this testimony. 

Transfers of Agency Functions 

The Dodd-Frank Act transfers from OTS to the OCC supervisory responsibilities 

for Federal savings associations, as well as rulemaking authority relating to all savings associations. Under the statute, all OTS employees will be transferred to either 

the OCC or the Federal Deposit Insurance Corporation (FDIC) no later than 90 days 

after the ‘‘transfer date,’’ which is 1 year after enactment unless extended for an 

additional 6 months by the Secretary of the Treasury. The allocation is to be based 

generally on the proportion of Federal versus State savings associations regulated 

by the OTS. 

The Dodd-Frank Act also establishes the CFPB as an independent bureau in the 

Federal Reserve System. Certain existing authorities of the banking agencies, HUD, 

and the FTC for consumer protection regulations are to be transferred to the CFPB, 

along with responsibility for overseeing compliance with a number of listed consumer protection standards applicable to depository institutions with assets of more 

than $10 billion. Employees from the banking agencies, HUD, and the FTC will be 

transferred to the CFPB as part of this process. 

Thus, the OCC is uniquely challenged with respect to transfers of functions under 

the Dodd-Frank Act because we are both absorbing significant new functions and 

a significant number of new staff as a result of the integration of the OTS into the 

OCC, while at the same time transferring functions and some associated personnel 

in connection with the organization of the CFPB. 

Integration of Specified OTS Functions Into the OCC 

Although the legislation preserves the thrift charter and the Home Owners’ Loan 

Act, the OTS is abolished 90 days after the transfer date. The OCC recognizes its 

important responsibilities under the Dodd-Frank Act to ensure the orderly and effective transfer of functions and personnel from the OTS to the OCC and to assure 

efficient and effective supervision and regulation of Federal thrifts, and we have already taken a number of steps to begin this process. To centralize efforts in this 

area, the OCC established a transition team and appointed a senior agency official 

to coordinate and supervise the implementation of all issues involving the integration of OTS functions and responsibilities. Transition team members have begun 

working with their counterparts at other agencies to identify and address mutual 

concerns and issues for resolution. While it is early in that process, and many de-
86 

tails are yet to be determined, I can provide some details regarding our planning 

for the transfer of personnel and supervisory functions, as well as the transfer of 

funds, property, and systems. 

Transfer of Personnel and Supervisory Functions. The Dodd-Frank Act provides 

that the OCC will become the appropriate Federal banking agency for Federal savings associations, and the FDIC will assume that role for State savings associations. 

All OTS employees are to be transferred to the OCC or FDIC no later than 90 days 

after the transfer date. The Director of the OTS, the Comptroller of the Currency, 

and the Chairperson of the FDIC will jointly determine the number of OTS employees needed to perform the functions transferred and identify employees for transfer 

to the OCC or FDIC. While the final number of OTS employees who will transfer 

to the OCC has not yet been determined, the preponderance of OTS-supervised institutions are Federal savings associations that will be supervised by the OCC and, 

thus, under the personnel transfer provisions in the Dodd-Frank Act, a correspondingly large portion of OTS employees would be transferred to the OCC. We believe 

that the orderly transfer of these individuals from the OTS to the OCC is essential 

to the success of integrating the supervision of federally chartered savings associations into the OCC. We also recognize that these staff members have critical knowledge and insight into the unique mission and resulting supervisory challenges associated with the thrift industry. The OCC is working with the OTS to plan and ensure an orderly transfer of authority and responsibilities to ensure the effective supervision of both national banks and Federal thrifts. 

To ensure the success of this transition, we are guided by a basic principle that 

informs the legislation, that there will be no gaps in supervision as we expand our 

supervisory framework to include Federal thrifts. Our goal is a rigorous, consistent, 

and balanced supervisory approach for all of the institutions that we will supervise. 

The 1,300 nationally chartered community banks that we currently supervise use 

a variety of business models, including a significant number of institutions that look 

very similar to thrifts with a preponderance of long-term assets. We also supervise 

other types of specialized institutions, including credit card banks and trust banks. 

Because of this diversity of experience, our examiners understand the importance 

of evaluating the condition and future prospects of each institution based on its 

unique characteristics and performance, as well as its local market conditions. 

We also recognize the importance of communicating regularly with the industry 

throughout this process. Among other things, the OCC is developing an outreach 

program for thrift executives to provide information and perspective on the OCC’s 

approach to supervision and regulation. This one-day program will be held at various locations throughout the country and will be cohosted by an OCC District Deputy Comptroller and an OTS Regional Director. During these sessions, our senior 

examiners will explain how we examine banks, including the development of individually tailored supervisory strategies based on the unique risks facing each institution. The program also will describe the functions of our district counsel and district licensing activities. We expect these events to take place in the first and second 

quarters of 2011. 

In addition to the thrift-focused programs, OCC bank supervision managers have 

begun participating in industry events that provide interaction with thrift executives in group settings as well as individual conversations to expand the industry’s 

awareness of the OCC, its policies, procedures, and supervision philosophy. I also 

sent a personal letter to the chief executive officers of all Federal savings associations to begin the process of communication that will be so important to the transition. 

As part of our transition effort, our human resources specialists are also working 

closely with their OTS counterparts to review employee positions, duties, and responsibilities to ensure proper alignment of transferring OTS staff in the combined 

organization. Consistent with the legislation, this process will ensure that OTS employees are treated equitably with regard to status and tenure, and that pay and 

other benefits will be protected. 

We are undertaking a business line approach in these early stages. Each of our 

business units is coordinating with its counterparts at the OTS to review positions, 

responsibilities, and business processes to determine the best means of integrating 

staff and their functions into the OCC. We have found this interaction at a business 

line level promising in establishing relationships and identifying issues of mutual 

concern. To the extent practicable, transferred employees will be placed in OCC positions with functions and duties similar to those they had prior to their transfer. 

In some instances, we already have jointly identified opportunities to detail OTS 

staff to assist with our current responsibilities. 

Our general intent is to integrate transferred employees into the OCC’s organizational structure and pay plan as soon as possible and to maintain existing OCC 
87 

human resources policies. At the same time, we will work closely with our OTS 

counterparts to review and analyze personnel policies and practices and to identify 

and resolve any significant differences. 

The transition team also is reviewing and comparing employee benefits and any 

related contracts, including those under the Financial Institutions Retirement Fund 

(FIRF), which covers some OTS employees, and other supplemental retirement benefits. The OCC is reviewing the FIRF plan to determine what actions need to be 

taken to ensure that it is in a position to meet obligations to employees and retirees 

under that program. As reported in the OTS Annual Report for fiscal year 2009, the 

estimated OTS FIRF pension shortfall as of July 1, 2009, was $80.7 million. 

One area that we have identified as critical to the combined success of the OCC 

and the OTS is the role of training, even at this early stage in the integration process. As a result, we have begun to review each agency’s training and certification 

programs to ensure that existing and transferred employees have the training and 

skills necessary to supervise both national banks and Federal savings associations. 

This review will identify areas where OCC and OTS training programs overlap, as 

well as gaps that need to be addressed. While the legislation does not require additional certification for transferred OTS employees to continue supervising the types 

of institutions that they supervised prior to the transfer, additional training may 

be required before transferred employees can supervise national banks. As a first 

step in integrating our examination workforce, we are developing plans to enroll recent OTS hires in OCC national bank examiner training courses. 

Effective communication is key to managing organizational change as large as 

this and, as we work through these details over the next 10 months, I recognize the 

importance of keeping employees fully informed. Our communications staff and 

bank supervision leadership team are working closely with OTS managers to keep 

employees informed throughout this transition, to demonstrate that the OCC recognizes the importance and value of OTS employee experience, to communicate expectations clearly, and to ensure that OTS employees are aware of the value provided 

by the OCC’s professional work environment and comprehensive benefits and compensation package. While we are still working on answers to many employee questions, establishing regular communication helps to ensure that employees remain focused on their mission while having access to information they need to make informed decisions about their careers. 

As OTS employees look toward this transition, I am confident they will find the 

OCC a supportive and rewarding place to continue their careers. We are proud that 

responses from our own employees documented by the Office of Personnel Management’s Employee Viewpoint Survey placed the OCC in the top five places to work 

among more than 220 Federal agency subcomponents. As our staff expands to include former OTS employees, we will continue our commitment to providing a competitive, comprehensive package of compensation and benefits that meets our employees’ needs and allows us to retain and attract the talent and experience necessary to perform our important and expanded mission. 

Transfer of Funds, Property, and Systems. The OCC’s Chief Financial Officer is 

working closely with his counterparts to review the financial position, statements, 

and existing obligations of the OTS to ensure that the OCC will have the financial 

resources necessary to support the supervision of the Federal savings associations 

and meet the obligations the OCC must assume in the transfer, particularly relating 

to the unfunded OTS liabilities of the FIRF noted previously. This review includes 

determining any changes that may be needed to the assessment structure to provide 

for combined supervision in the future. As this review progresses, the OCC is committed to working closely with the OTS and the FDIC to keep supervised financial 

institutions fully informed. 

Also, as we review the financial considerations associated with integrating the 

OTS into the OCC, we are working closely with the OTS to review the status of 

leased office space supporting the mission of thrift supervision, including the leasing 

decisions required over the next 2 years. This review includes an assessment of 

space needs to support thrift supervision staff throughout the country, as well as 

the continuing space requirements for more than 3,000 current OCC employees. 

Another important issue relating to the transfer of OTS functions to the OCC involves the transfer and integration of information technology systems and assets. 

The OCC’s Chief Information Officer is working closely with his OTS counterpart 

to develop a comprehensive inventory of assets and systems, to compare OCC and 

OTS systems, and to determine the most effective method of integrating these assets 

and systems. In developing this transition plan, the OCC is sensitive to the impact 

that systems change can have on the employees, as well as the industry, and will 

take care to minimize any potential disruption. 
88 

While today’s testimony provides a high-level view of the processes the OCC has 

begun to ensure the effective transfer of staff and functions from the OTS to the 

OCC, the OCC also is working with the OTS, FDIC, and Federal Reserve Board to 

develop the report to Congress that is due in January 2011. This report will provide 

additional details of the initiatives taken to implement the Dodd-Frank Act. 

Transfers of Specified Functions to the CFPB 

The Dodd-Frank Act transfers to the CFPB authorities of specified agencies to 

issue rules, orders, and guidelines under certain Federal consumer financial laws, 

plus the authority of the Federal banking agencies to supervise and examine insured depository institutions of over $10 billion in asset size for compliance with 

enumerated Federal consumer financial laws. 

In addition, the legislation provides for the transfer of personnel to the CFPB for 

two purposes. First, each transferor agency, including the OCC, must jointly determine with the CFPB the number of employees necessary to support the rulemaking 

and supervision examination functions transferred to the CFPB. Second, the CFPB 

and each of the agencies must jointly determine the number of employees necessary 

to perform certain additional functions that are authorized to the CFPB, but that 

also continue to be performed by the agencies. These functions include, for example, 

research, financial literacy, and responses to consumer complaints. 

We are working with the Treasury staff that are organizing the CFPB until a Director is appointed to set up a process to identify personnel that could be transferred. This involves identifying those OCC employees who have both the skills 

needed by the CFPB and are interested in transferring to the CFPB. To facilitate 

this, we have solicited expressions of interest from employees who may be interested 

in moving to the CFPB. 

To further the understanding of our current operations, we also have provided extensive materials to Treasury staff, including organizational charts describing our 

consumer protection functions, details about the national banks with more than $10 

billion in assets that the CFPB will assume responsibility to examine, position descriptions, and FTE requirements for supervision. In addition, we have provided extensive information about the complaint processing function performed by the OCC’s 

Customer Assistance Group, including key operating statistics. As the CFPB’s organizational activities accelerate, we are prepared to work with appropriate Treasury 

staff that is working on the CFPB start-up to follow-through on all these areas. 

Relationship Between the Dodd-Frank Act and Basel III 

The recent initiatives of the Basel Committee on Banking Supervision (Basel 

Committee), including establishing additional prudential standards for large, internationally active banks and setting contingent capital requirements, are focused on 

many of the same issues and concerns that the Dodd-Frank Act sought to address. 

In response to the financial crisis, the Basel Committee initiated a comprehensive 

reform package designed to strengthen global capital and liquidity requirements and 

promote a more resilient banking sector. These reforms, often referred to as ‘‘Basel 

III,’’ seek to improve the ability of banks to absorb the shocks of economic stress, 

thereby strengthening the financial system and reducing risks to the real economy. 

As described in more detail below, the OCC believes that implementation of the 

Basel III rules by the Federal banking agencies will serve to advance the objectives 

of the Dodd-Frank Act, and certain other Basel-initiated measures may also satisfy 

particular requirements of Dodd-Frank. 

Current Basel III Proposal 

The Basel Committee published two consultative papers in December 2009, seeking comment on a series of substantive changes to the standards governing internationally active banks. These changes involved the tightening of the definition of 

what counts as regulatory capital by placing greater reliance on higher quality capital instruments, expanding the types of risk captured within the capital framework, 

establishing more conservative minimum capital ratio and buffer requirements, providing a more balanced consideration of macroprudential and systemic risks in bank 

supervision practices and capital rules, and establishing for the first time an international leverage ratio requirement and global minimum liquidity standards. As a 

complement to the consultation process, the Basel Committee also initiated a quantitative impact study to better assess the impact of these proposals on individual 

banks. 

On July 26, 2010, the Group of Governors and Heads of Supervision (GHOS), the 

oversight body of the Basel Committee, reached broad agreement on the overall design of the capital and liquidity reform package. On September 12, 2010, the GHOS 

and the Basel Committee announced an agreement on the remaining major elements of the Basel III revisions—the calibration of the new, higher capital ratios 
89 

that banks will be expected to maintain and phase-in arrangements of the revised 

framework. A more detailed description of the enhancements introduced by the 

Basel III rules is provided in Attachment B to this document. 

The establishment of higher minimum ratios significantly strengthens existing 

capital requirements by requiring more capital per dollar of measured exposure. 

This change alone will materially enhance the resiliency of the banking sector and 

broader financial system to economic shocks. The September GHOS agreement also 

sets forth harmonized implementation and transition arrangements for national authorities, with implementation of the new requirements beginning January 1, 2013, 

with all aspects of the revisions fully phased-in by 2019. This transition period is 

intended to give institutions the opportunity to implement the new prudential 

standards over time, and thus alleviate the potential for associated short-term pressures on the cost and availability of credit to households and businesses. 

The Dodd-Frank Act and Basel III 

The provisions of the Dodd-Frank Act relating to capital and liquidity share the 

broad objectives and address many of the same issues as the Basel III enhancements noted above. Since the Basel III enhancements can take effect in the U.S. 

only through formal rulemaking by the banking agencies, the steps the OCC and 

other agencies are taking to implement Dodd-Frank may present an opportunity to 

integrate the Basel III agreement with the heightened standards required by DoddFrank in various areas. 

Enhancing the Level, Quality, and Stringency of Capital Requirements. Basel III 

and the Dodd-Frank Act both seek to establish conservative, stringent capital standards, especially for large financial institutions. In addition, Basel III and the DoddFrank Act enhance the quality and consistency of regulatory capital, limiting the 

ability of trust-preferred securities and other similar instruments to qualify as Tier 

1 capital. More generally, Basel III raises the level, quality, consistency, and transparency of capital instruments. Significantly, the Basel Committee has focused considerable attention on common equity, which is superior to other capital instruments in its ability to absorb losses, and articulated a more conservative basis for 

what qualifies as regulatory capital. Basel III also revises regulatory requirements 

to ensure that all material risks confronting financial companies—especially the 

risks held in trading portfolios and the risks posed by complex structured finance 

transactions, including certain securitization positions—are appropriately reflected 

in regulatory capital requirements. Finally, Basel III establishes materially higher 

minimum ratio requirements for internationally active banks. 

Macroprudential and Systemic Risk Considerations. Both Basel III and the DoddFrank Act focus increased attention on macroprudential and systemic risk considerations in bank supervision practices and capital rules, including efforts to address 

excessive interconnectedness of financial sector exposures and the establishment of 

improved incentives for the use of central clearing houses for OTC derivatives. The 

Dodd-Frank Act also establishes more formal mechanisms and requirements to identify risks to the financial stability of the U.S. through the establishment of the 

FSOC and compels action to prevent or mitigate such risks, especially as they relate 

to large, interconnected financial institutions. 

Mitigating Procyclicality of Regulatory Requirements. Both Basel III and the 

Dodd-Frank Act focus on cyclicality concerns and the potential benefits of contingent 

capital instruments. Basel III seeks to mitigate procyclicality in the regulatory capital regime through the development of countercyclical buffers and the study of the 

potential uses and design of contingent capital instruments. Similarly, the DoddFrank Act requires the Federal banking agencies to make capital standards countercyclical and provides the agencies discretion to require large interconnected financial institutions to maintain a minimum amount of contingent capital that is convertible to equity in times of financial stress. 

Leverage Ratio Requirements. Basel III and the Dodd-Frank Act advance similar 

objectives in seeking to limit excessive leverage in the banking system. Basel III establishes for the first time an international leverage ratio requirement that seeks 

to discourage excessive leverage in the banking system. The U.S. currently limits 

leverage based only on a bank’s on-balance sheet assets. However, the Basel III leverage ratio also accounts for certain off-balance sheet exposures that could contribute to the build-up of leverage. Along the same lines, the Dodd-Frank Act mandates that large, interconnected financial institutions be subject to more stringent 

prudential standards and requirements, including standards relating to leverage 

limits. 

Liquidity Requirements. Both the Dodd-Frank Act and Basel III call for the establishment of minimum liquidity standards to promote bank resilience to stressed 

funding conditions, such as those experienced during the recent financial crisis. In 
90 

this regard, Basel III addresses both short-term resilience and long-term structural 

liquidity mismatches. Basel standards are consistent with the Dodd-Frank Act, 

which mandates that large, interconnected financial institutions be subject to more 

stringent prudential standards and requirements relating to liquidity. 

Next Steps 

While the key elements of the Basel III framework have been set forth, much 

work will be needed to implement those enhancements plus the related elements of 

the Dodd-Frank Act. For example, over the remaining months of 2010, the international agreements need to be more fully articulated as a concrete set of standards. 

This will be followed in the U.S. by a formal rulemaking process that will take into 

account, through public notice and comment, the views of all interested parties. In 

addition, there are also many details in terms of the interaction between the DoddFrank Act and Basel III provisions that need to be sorted out. 

The OCC fully supports the Basel III reforms to capital and liquidity standards. 

The agreements represent a significant step forward in reducing the likelihood and 

severity of financial crises, and lay the foundation for a more stable banking system 

that is both less prone to excessive risk-taking and better able to absorb losses. We 

think the framework strikes an appropriate balance between introducing more stringent requirements for banks, while allowing the banking system to continue to perform its essential function of providing credit to creditworthy households and businesses. Furthermore, the extended transition period minimizes any short-term disruptions in financial services during a period of fragile economic conditions. 

Conclusion 

The OCC appreciates the opportunity to testify on the initiatives we have taken 

to date to implement the provisions of the Dodd-Frank Act. We also would be 

pleased to provide additional information as the Committee continues to review 

Dodd-Frank Act implementation. 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM NEAL S. WOLIN 

Q.1. Secretary Wolin, does the Obama administration believe that 

‘‘too-big-to-fail’’ is dead? 

A.1. Through the creation of an orderly liquidation authority, the 

Dodd-Frank Wall Street Reform and Consumer Protection Act 

(DFA) ends ‘‘too-big-to-fail.’’ Under the DFA, the Federal Deposit 

Insurance Corporation has the authority to wind down any firm 

whose failure would pose substantial risks to our financial system. 

Under this liquidation authority, failing firms will be placed into 

a Government-run receivership, holders of common stock and other 

providers of regulatory capital to the firm will be forced to absorb 

any losses, and culpable management of the firm will be terminated. 

Q.2. Section 155 of Dodd-Frank requires that during the 2-year period following enactment the Federal Reserve Board provide to the 

Office of Financial Research ‘‘an amount sufficient to cover the expenses of the Office.’’ 

Secretary Wolin, what has Treasury determined to be the 

amount necessary to cover expenses of the Office of Financial Research for the remainder of the year? 

A.2. The Office of Financial Research (OFR) submitted an initial 

funding request of $2.1 million to the Federal Reserve Board. 

These funds are being used for planning and initial implementation 

of Congressional mandates for the OFR. Estimated expenses for all 

of FY2011 and FY2012 will be reflected in the President’s Budget 

for FY2012. We will provide details regarding those estimates once 

the Budget is published. 

Q.3. Chairman Bernanke and Secretary Wolin, the Fed and Treasury provided extraordinary Government support when it bailed out 

AIG during the recent crisis. The spirit of part of Title II of DoddFrank is to promote transparency of Fed emergency actions. In 

that same spirit, I wonder if you can provide some information 

about taxpayer investments in AIG. 

First, how much taxpayer-funded assistance did the Government 

provide to AIG? Second, to date, and given current market prices 

of AIG financial instruments—not projections of future values— 

how much have U.S. taxpayers lost because of that bailout? 

A.3. Aggregate peak Federal Reserve Bank of New York and Treas- ury commitments to AIG totaled $180 billion. The aggregate 

amount of outstanding Government support to AIG is approximately $93 billion. When that support is valued using current market prices, the taxpayer has not incurred a loss. Instead, the current market value of the $93 billion of taxpayer investment (in the 

form of loans to and investments in AIG and its related entities)— 

based on AIG’s closing stock price on January 26—is approximately 

$120 billion. This represents approximately $27 billion of profit to 

the taxpayer. 

Q.4. Secretary Wolin, the new ‘‘Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau,’’ Elizabeth Warren, writes the following 

in Chapter 6 of her populist 2003 book titled The Two Income Trap: 
102 

‘‘The only way to stop predatory lending once and for all is to go 

directly to the heart of the loan—the interest rate. Limiting the 

amount of interest that creditors can charge avoids the hide-andseek game over what is and what is not ‘predatory,’ offering instead 

a simple, effective means of regulation.’’ 

Secretary Wolin, given Ms. Warren’s calls for usury ceilings on 

allowable interest rates and other forms of price controls in credit 

markets, and given her Special Advisor status, does Treasury plan 

to have the CFPB set allowable prices for credit and nationwide 

ceilings on interest rates? 

A.4. The Treasury does not plan to have the Bureau of Consumer 

Financial Protection (‘‘Consumer Financial Protection Bureau’’ or 

‘‘CFPB’’) set allowable prices for credit and nationwide ceilings on 

interest rates. 

Q.5. Secretary Wolin, you testified that Treasury and those in 

charge of ‘‘standing up’’ the CFPB will ‘‘soon’’ have a transparency 

policy available. When do you expect to have a transparency policy 

available? 

When will Treasury make available, publicly and to this Committee, the names, affiliations and agendas of individuals who meet 

with Treasury officials, including Assistant to the President and 

Special Advisor to the Secretary of the Treasury on the Consumer 

Financial Protection Bureau Ms. Elizabeth Warren? 

A.5. The Department of the Treasury strongly supports increased 

transparency in Government, and the Secretary has committed to 

implementing the DFA in an open and transparent manner. On 

November 1, 2010, Treasury implemented a transparency policy 

that applies to in-person meetings in which Treasury employees 

who are Deputy Assistant Secretaries or Treasury officials of equal 

or higher rank participate. Meetings involving Special Advisor to 

the Secretary Elizabeth Warren are subject to the transparency requirements promulgated under this policy. 

Treasury’s transparency policy requires meetings between these 

Treasury officials and private sector individuals or entities and 

nongovernmental organizations that are set up to discuss policy implementation of the Dodd-Frank Act be posted to the Treasury Department’s Web site. Disclosure consists of: (1) the date of the 

meeting; (2) the names and titles of all covered Treasury participants; (3) the names and affiliations of all non-Treasury participants, and; (4) a list of the primary topics of conversation related 

to Dodd-Frank implementation. 

Meeting disclosures will be posted to the Treasury Web site by 

the last day of each month, covering meetings that took place during the previous month. For example, the first posting occurred on 

December 30, 2010, and covered meetings that took place in November 2010. 

In addition, on a monthly basis, Professor Warren posts her full 

calendar—with minimal redactions—on the Treasury Web site. 

Q.6. Mr. Wolin, while the Dodd-Frank Act prohibits Treasury from 

creating any new programs under the Troubled Asset Relief Program (TARP), it does not affect the TARP’s October 3, 2010, expiration as defined in the Emergency Economic Stabilization Act 

(EESA). While some say that Dodd-Frank ends TARP, it is impor-
103 

tant to remain clear that TARP bailout money will continue to flow 

even with provisions of the Dodd-Frank Act. 

According to the Congressional Oversight Panel’s September 16, 

2010, report titled September Oversight Report: Assessing the 

TARP on the Eve of Its Expiration, with respect to the Treasury 

Secretary’s authority under TARP: 

EESA, which was signed into law on October 3, 2008, is 

clear that the Secretary cannot extend his authority under 

the TARP beyond October 3, 2010. Section 120(b) of EESA 

reads: ‘The Secretary, upon certification to Congress, may 

extend the authority under this Act to expire not later 

than 2 years from the date of enactment of this Act.’ The 

phrase ‘the authority under this Act’ would seem to capture all authority provided under EESA; however, the statute allows for one exception. Section 106(e) of EESA stipulates: ‘The authority of the Secretary to hold any troubled 

assets purchased under this Act before the termination 

date in Section 120, or to purchase or fund the purchase 

of a troubled asset under a commitment entered into before the termination in Section 120, is not subject to the 

provisions of Section 120.’ 

Section 106(e) provides Treasury with two specific authorities. First, it allows Treasury to hold its investments made 

through the TARP after October 3, 2010. Second, it allows 

Treasury to continue to use the TARP to fund TARP commitments, provided Treasury had made those commitments prior to October 3. Treasury has committed TARP 

funding to a variety of programs that it has not yet fully 

funded to their allocated amounts. Many of these programs 

will continue to receive TARP funding well beyond October 

3, 2010. HAMP represents the largest commitment of 

TARP dollars yet to be expended. Treasury considers its 

HAMP contracts to be ‘financial instruments’ or ‘commitments to purchase troubled assets’ and, therefore, captured 

under Section 106(e). According to Treasury, the modification payments ‘made to servicers are the purchase prices 

for the financial instruments’ or troubled assets. As a result, Treasury plans to continue to fund HAMP and make 

modification payments to mortgage servicers in the years 

ahead. 

Treasury has noted to the Panel that it will lose some of 

its flexibility to alter operational aspects of HAMP after 

October 3. First, it will not be able to enlist new servicers 

to HAMP. Treasury has explained to the Panel that in its 

view the authority under Section 106(e) ‘to purchase or 

fund the purchase of a troubled asset under a commitment 

entered into before the termination’ of TARP requires 

Treasury to have entered into a HAMP contract with a 

mortgage servicer on or prior to October 3, 2010. Treasury 

has also explained to the Panel that it will lose its ability 

to use committed dollars under HAMP if a servicer were 

to drop from the program after TARP’s expiration. To provide it with more flexibility and maximize HAMP com-
104 

mitted dollars, Treasury has informed the Panel that it is 

exploring changes to the way in which purchase prices are 

calculated for HAMP contracts. Currently, the purchase 

price in a HAMP contract is a set dollar amount under 

Treasury’s proposed plan, purchase prices will instead be 

based on a formula. This change will enable Treasury to 

preserve RAMP funding after TARP’s expiration date. According to Treasury, under the new arrangement, if a 

servicer were to discontinue participation in HAMP, the 

funds that had been committed to that servicer would not 

lapse, or become unavailable for further use, but instead 

would be spread among the remaining servicers. The 

change would be made by issuance of a supplemental directive. (Footnotes in original text omitted.) 

Mr. Wolin, would you elaborate on any changes in Treasury’s 

TARP programs designed to maintain TARP money availability for 

future uses, to ensure that money will be available so that programs can continue to receive TARP funding ‘‘well beyond October. 

3, 2010,’’ or so that Treasury can preserve TARP funding after 

TARP’s expiration date? 

A.6. Treasury has implemented its TARP programs-including the 

housing programs described above-pursuant to its statutory authority under the Emergency Economic Stabilization Act (EESA). As 

you note, EESA requires that purchases or commitments to purchase troubled assets be entered into by October 3, 2010. 

In regard to the Home Affordable Modification Program (RAMP), 

Treasury entered into contracts with various mortgage servicers 

prior to October 3, 2010. Each contract originally specified a maximum purchase price by Treasury—a fixed dollar amount that represented the maximum amount of TARP funding available to each 

servicer under the program. Treasury periodically adjusted the 

maximum purchase prices based on its analysis of the respective 

servicers’ volume of eligible loans and their performance under the 

program. 

On October 1, 2010, Treasury issued revised guidance regarding 

each servicer’s maximum purchase price. According to the guidance, each servicer’s maximum purchase price will be adjusted in 

the future—beginning on January 1, 2011, and updated at the beginning of each calendar quarter, or at other intervals chosen by 

Treasury—pursuant to a preestablished, set formula. It is important to note that the revised guidance did not change the total 

funding that already had been committed under RAMP, or the participants in the program. Instead, it merely provided a mechanism 

to shift resources among servicers based on their capacity and implementation of the program. In other words, it ensured that taxpayer resources are being allocated in an effective and efficient 

manner. 

Q.7. The Financial Stability Oversight Council is an important feature of Dodd-Frank. During the conference, my amendment was 

adopted to clarify the role of the Council and the Federal Reserve. 

My amendment gave the Council responsibility for financial stability regulation. Up to that point, the legislation had colocated this 

responsibility at the Fed and the Council. The Congressional intent 
105 

is clear that you, as members of the Council, are responsible for all 

policy matters related to financial stability. After the Council acts, 

implementation of your policy determinations will fall to the individual Federal financial regulators, including, of course, the Fed. 

With this in mind, I would like each of you to comment on your 

preparations to serve on the Council: Have you directed your staff 

to examine and study all of the issues that will come before you? 

Are you prepared to participate on the Council, not as a rubber 

stamp for the Chairman of the Council, but as a fully informed individual participant? 

A.7. As Chair of the Financial Stability Oversight Council (FSOC), 

Treasury is fully prepared to participate, together with the other 

members of the Council, in all aspects of the FSOC’s work and is 

committed to ensuring that the FSOC accomplishes its objectives. 

The duties of the FSOC commenced upon enactment and the 

work of implementation started immediately. Member agencies 

have been full participants in the FSOC’s work addressing matters 

related to financial stability. 

The FSOC has already taken important steps to fulfill its duties 

in a rigorous, transparent manner. At its first three meetings, the 

FSOC released requests for public comment regarding the criteria 

for designations of nonbank financial firms and financial market 

utilities for supervision by the Federal Reserve. In addition, the 

FSOC released an integrated implementation roadmap reflecting 

the priorities and statutory requirements of the FSOC and its 

member agencies over the first 18 months of implementation of the 

Dodd-Frank Act. 

In its most recent meeting, the FSOC released a study on effective implementation of the Volcker rule (Section 619 of the DFA) 

and the concentration limit on growth by acquisition (Section 622 

of the DFA). The FSOC also released a notice of proposed rulemaking on the process and criteria to designate nonbank financial 

firms for consolidated supervision. We intend to build upon this collaborative approach for all matters that come before the FSOC. 

Q.8. Secretary Geithner has argued that there is a strong case to 

be made for continuing Government guarantees of mortgage-backed 

securities. Additionally, the Federal Reserve published a paper that 

proposes Government guarantees of a wide range of asset backed 

securities, including those backed by mortgages, credit cards, autos, 

student loans, commercial real estate, and covered bonds. While 

some may believe that the Government will charge fair prices for 

Government guarantees, the history of Government run insurance 

programs suggests that things will not go well. 

Does anyone on the panel support extending or increasing Government insurance against losses on asset backed securities which, 

it seems to me, socializes risk, puts taxpayers on the hook for 

losses, and protects Wall Street against losses? 

A.8. The Administration is committed to carefully considering a 

wide range of reform alternatives. Treasury is performing thorough 

analysis of these alternatives and consulting with a wide array of 

stakeholders in order to determine the potential consequences of 

various reform proposals. 
106 

It is important to emphasize that the current level of Government involvement in the market is neither sustainable nor desirable. In formulating its plan for reform, the Administration is committed to crowding in private capital as soon as is practicable and 

places a high priority on ensuring significant private sector involvement in the future structure of mortgage finance. Should any form 

of Government guarantee survive the rigorous review of alternatives by Congress, it would have to be accurately priced to reflect 

the risk. 

Q.9. Please provide the Committee with an implementation schedule that includes: 

(a) a list of the rules and studies that your agency is responsible 

for promulgating or conducting under Dodd-Frank and the date by 

which you intend to complete each rule or study; and 

(b) a list of the reorganizational tasks your agency will undertake 

to fulfill the mandates of Dodd-Frank and the date by which you 

intend to complete each task. 

A.9. Please see attached timelines. 
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109 
110 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM NEAL S. WOLIN 

Q.1. Over the last 15 years, the 6 biggest banks grew from having 

assets equal to 17 percent of GDP to 63 percent of GDP. The four 

largest banks control about 48 percent of the total assets in the Nation’s banking system. And the 5 largest dealer banks control 80 

percent of the derivatives market and account for 96 percent of the 

exposure to credit derivatives. 

Part of the Volcker Rule, section 622 of the Dodd-Frank Act, requires the Financial Stability Oversight Council (FSOC), to study 

and make recommendations concerning the effects of financial sector concentration on financial stability, moral hazard, efficiency, 

and competitiveness in the financial system. Subject to these recommendations, no company will be permitted to hold more than 10 

percent of the liabilities held by all financial companies, with some 

significant exceptions. 

What are effects does concentration in the financial industry 

have on financial stability, moral hazard, efficiency, and competitiveness? 

A.1. The FSOC believes that the concentration limit that is contained in Section 622 of the DFA will have a positive impact on 

U.S. financial stability. Specifically, the FSOC believes that the 

concentration limit will reduce the risks to U.S. financial stability 

created by increased concentration arising from mergers, consolidations or acquisitions involving the largest U.S. financial companies. 

Restrictions on future growth by acquisition of the largest financial 

companies ultimately will prevent acquisitions that could make 

these firms harder for their officers and directors to manage, for 

the financial markets to understand and discipline, and for regulators to supervise. The concentration limit, as structured, could 

also have the beneficial effect of causing the largest financial companies to either shed risk or raise capital to reduce their liabilities 

so as to permit additional acquisitions under the concentration 

limit. Such actions, other things equal, would tend to reduce the 

chance that the firm would fail. 

Although the FSOC expects the impact of the concentration limit 

on moral hazard, competition, and the availability of credit in the 

U.S. financial system to be generally neutral over the short- to medium-term, over the long run the FSOC expects the concentration 

limit to enhance the competitiveness of U.S. financial markets by 

preventing the increased dominance of those markets by a very 

small number of firms. 

Q.2. Given that the six biggest banks alone have about $7.4 trillion 

in liabilities, almost 53 percent of GDP, do you think this provision 

will meaningfully restrict the size of financial institutions? 

A.2. The concentration limit is one of several regulatory tools, including the tougher prudential standards for the largest, most 

interconnected financial institutions and the new orderly liquidation authority, designed to work in a complementary fashion to restrain the risks posed to financial stability by the largest, most 

interconnected firms. 

Q.3. The Basel Committee on Banking Supervision set the so-called 

‘‘Basel III’’ minimum capital requirements for banks at 8 percent, 
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with an additional 2.5 percent buffer. But a recent study by the 

Bank for International Settlements (BIS) suggests that the optimal 

capital ratio would actually be about 13 percent. The Financial Stability Oversight Council (FSOC), of which your organizations are a 

member, will recommend capital requirements for systemically important financial companies. 

Do you favor increasing capital for systemically important financial companies above the 10.5 percent Basel ITI ratio, and closer 

to the 13 percent number? 

A.3. A subsequent amendment to Basel II by the Basel Committee 

(effective at the beginning of 2012) will increase capital requirements on risky securitizations and bank trading book activities 

that affect the largest banks, thereby reducing the perverse incentives for these banks to engage in such activities. The Basel Committee estimates these changes will increase the capital requirements for these activities by a factor of three to four times. 

Basel III substantially increases the quantity of common equity 

required to absorb losses, while also increasing the deductions from 

the amount of common equity for risky activities. These changes 

will increase the common equity requirement by more than three 

times, before even considering more stringent capital deductions 

that will mostly affect the largest banks. Capital requirements for 

counterparty credit risk, which particularly affects the largest 

banks, are also being increased. Moreover, Basel III introduces, for 

the first time, a global leverage ratio standard and a global liquidity ratio standard. The Basel III requirements are rigorous and are 

designed to ensure that major banks hold enough capital to withstand losses as large as what we saw in the depths of this recession 

and still have the ability to operate without turning to the taxpayer 

for extraordinary help. We are confident this agreement will make 

our financial system more stable and more resilient. 

The Basel Committee has stated that it is ‘‘conducting further 

work on systemic banks and contingent capital in close coordination with the FSB.’’ As our supervisors and regulators work to meet 

the requirements of the Dodd-Frank Act, it is important to align 

international financial rules so as to ensure level playing field. 

Q.4. Would you be comfortable establishing progressive capital requirements that increase as institutions grow larger? 

A.4. We fully endorse the Dodd-Frank Act which requires that the 

largest firms face higher prudential standards, including higher 

capital requirements. These firms should be forced to internalize 

the cost of the risks they impose on the financial system, and to 

strengthen their ability to withstand shocks and downturns. 

Basel III effectively will increase capital requirements for the 

largest banks by increasing the quantity and quality of capital that 

banks must hold, as well as the capital requirements for 

securitization, trading book activities, and counterparty credit risk. 

These new standards will better align regulatory capital requirements with the risks to which banks are exposed. 

The Basel Committee has stated that it is ‘‘conducting further 

work on systemic banks and contingent capital in close coordination with the FSB.’’ As our supervisors and regulators work to meet 
116 

the requirements of the Dodd-Frank Act, it is important to align 

international financial rules so as to ensure a level playing field. 

Q.5. Wall Street often argues that higher capital means higher 

costs for borrowers, and DIS has estimated that for each 1 percent 

of increased capital, banks will have to raise rates by 15 basis 

points (0.15 percent). Do you believe that banks could adapt to new 

capital requirements in ways that do not pass costs on to customers 

and borrowers, for example, by cutting outsized salaries and bonuses? 

A.5. We are confident that the increased capital standards will 

make the system safer and provide an economic benefit in the long 

run. Basel III gives banks a meaningful transition period to meet 

the new standards. The new capital standards will not become effective until the beginning of 2013, and banks will not have to meet 

the full minimum common equity capital requirement until the beginning of 2015. The definition of capital will become progressively 

more stringent between 2013 and 2018. U.S. banks moved quickly 

to raise capital after the 2009 stress tests, and as a result, U.S. financial institutions should be in a very strong position to adopt the 

new global standards. Banks should be able to meet these new requirements through future earnings or equity issuance. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM NEAL S. WOLIN 

Q.1. Section 1022(b) of the Dodd-Frank bill requires that in rulemaking, the Consumer Financial Protection Bureau shall consider 

‘‘the impact of proposed rules on covered persons, as described in 

section 1026, and the impact on consumers in rural areas.’’ 

What specific processes and infrastructure will the Bureau develop to ensure that it has adequate understanding of the impact 

of proposed rules on community banks and credit unions with assets of less than $10 billion? 

How will Treasury work with the FDIC, the Federal Reserve and 

NCUA to ensure that Bureau has the institutional knowledge to 

understand the impact of proposed consumer protection regulations 

on community banks and credit unions? 

What infrastructure will you develop to ensure the coordination 

and sharing of information between the Bureau and the FDIC and 

the Federal Reserve in cases in which the rule writing and examination and enforcement authority is split among agencies? 

A.1. The Bureau of Consumer Financial Protection (Consumer Financial Protection Bureau or CFPB) implementation team is building infrastructure and processes to enable CFPB to acquire the 

knowledge it needs to understand and fully consider the impact of 

any future proposed rules on rural consumers and on banks and 

credit unions With assets of less than $10 billion. 

The implementation team plans to work with Federal supervisors 

of these institutions to develop processes for consultation. The implementation team is also working with other Federal supervisors 

on written agreements for exchanging supervisory information 

about institutions SQ that CFPB can maintain an ongoing understanding of their business models and conditions. 
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The implementation team is also making preparations to comply 

with obligations under the Regulatory Flexibility Act to consider 

the impact of proposed regulations on the smallest banks and credit unions and, in certain cases, to establish panels to seek direct 

input from such institutions before proposing a regulation. 

The CFPB implementation team is analyzing what other processes and infrastructure will be useful in this effort. Elizabeth 

Warren, Special Advisor to Secretary Geithner, is meeting regularly with community bankers across the country to get their perspectives on the impact of consumer protection regulations on community banks and credit unions. 

Q.2. Mr. Wolin, during your testimony you referenced efforts that 

Treasury is undertaking to develop a simpler mortgage disclosure 

form to provide better choices for consumers. Over the past several 

years, Congress has enacted a number of mortgage disclosure provisions which in some cases have led to more paperwork without 

necessarily better informing consumers. 

As it relates to mortgage disclosure, will the Bureau be conducting an analysis of all existing disclosure requirements to simplify requirements or will these efforts be layered on top of existing 

requirements? Will the Bureau evaluate the effectiveness of existing efforts and eliminate requirements that are ineffective? 

A.2. The CFPB is currently reviewing mortgage disclosure requirements as a whole and working to ensure that they promote informed consumers and competitive markets and do not impose unnecessary requirements on banks. The CFPB will not simply layer 

new requirements upon requirements that are outdated or ineffective. As part of this process, the CFPB will consolidate Federal 

mortgage disclosures as required by the DFA. This consolidation 

will improve disclosure for consumers and reduce unwarranted burdens for banks. 

Q.3. Will the Treasury Department designate a senior staff member who is participating in the transition efforts of the Consumer 

Financial Protection Bureau to serve as a liaison to community 

banks and credit unions, specifically those with assets of less than 

$10 billion? 

A.3. The CFPB implementation team is setting up a robust outreach function for the CFPB, including creating an office devoted 

to small business and community banks. Staff is already working 

with small banks and credit unions, expanding the outreach efforts 

of Elizabeth Warren and making certain that the perspectives of 

small banks and credit unions are well-represented: within the consumer agency. 

Q.4. Can you provide me an update on your agencies progress in 

implementing the property appraisal requirements of Title XIV of 

Dodd-Frank? What process will you use to develop and implement 

these requirements? 

A.4. Section 1472 of Title XIV adds a new section to the Truth in 

Lending Act. This provision vests the initial responsibility to implement appraisal independence requirements with the Federal Reserve Board (Board). As the statute requires, the Board released an 

interim final rule on October 18, 2010. 
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With the exception of the Board’s interim final rule, Section 1472 

provides joint rule-writing authority for appraisal independence to 

the Board, the Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the National Credit Union Administration 

Board, the Federal Housing Finance Agency, and the Consumer Financial Protection Bureau. Similarly, Sections 1471 and 1473 

amend the Truth in Lending Act and provide joint rulemaking authority to those same agencies with respect to requirements for inperson appraisals and appraisal management companies. As with 

other rules that are required to be implemented on an interagency 

basis, we expect the agencies to work cooperatively to adopt all the 

rules relating to appraisals under Title XIV by the statutory deadline of January 21, 2013. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM NEAL S. WOLIN 

Q.1. Title XII of Dodd Frank ‘‘encourage[s] initiatives for financial 

products and services that are appropriate and accessible for millions of Americans who are not fully incorporated into the financial 

mainstream.’’ I helped author Section 1206 of the Act which enables the Community Development Financial Institutions Fund to 

establish a grant program within to encourage affordable small dollar lending through loan-loss reserve funds and provision of technical assistance. Can you please describe the Department’s implementation plan for these new programs? 

A.1. The Treasury Department’s Community Development Financial Institutions and Office of Financial Education and Financial 

Access are working together to ensure the agency is ready to implement Title XII once appropriations are secured. In the near future, 

the Treasury Department will publish in the Federal Register one 

or more ‘‘Request for Comments’’ documents, so that it can better 

gauge from the public the key issues to consider when standing up 

these new initiatives, should appropriations be made available. 

Although we have begun these initial steps, appropriated resources will be needed to implement the Small Dollar Loan Program and other proposed programs, such as Bank On USA, which 

are envisioned under Title XII. Funding for Title XII initiatives is 

necessary to capitalize on the important economic empowerment 

opportunities provided by Dodd-Frank. 

In the mean time, we will continue to work with community 

based organizations, financial institutions, financial education providers, and local officials to ensure that we will be able to quickly 

implement Title XII programs once funding becomes available. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM NEAL S. WOLIN 

Q.1. We need to fix our Nation’s broken housing finance system 

and reduce the Government’s involvement in the housing market 

from current levels where the GSEs and FHA are guaranteeing 

about 95 percent of all new mortgages. According to the August 

FHFA report, Fannie Mae and Freddie Mac have burnt through 

$226 billion in capital since the middle of the 2007. Some alter-
119 

natives being discussed range from a completely privatized housing 

finance system to a system in which the Government takes the 

first-loss position in the entire conforming mortgage market. 

Please describe the options and rationale in each category the 

Administration is considering for its comprehensive reform proposal for the GSEs? 

A.1. The Administration is considering a wide range of reform proposals in conjunction with its commitment to present a proposed 

reform white paper, as mandated by the DFA. The Administration 

is committed to meeting with and collecting input from a wide 

range of stakeholders to ensure that options and rationale for each 

type of reform is carefully considered. We look forward to working 

with Congress to deliver a reformed housing finance system as soon 

as practical. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM BEN S. BERNENKE 

Q.1. Section 1022(b) of the Dodd-Frank bill requires that in rulemaking, the Consumer Financial Protection Bureau shall consider 

‘‘the impact of proposed rules on covered persons, as described in 

section 1026, and the impact on consumers in rural areas.’’ 

What specific guidance and resources will the FDIC and the Federal Reserve provide to the Bureau to ensure that it can adequately 

understand the impact of proposed rules on community banks with 

assets of less than $10 billion? 

A.1. Where our experience as the supervisor of community banks 

suggests that a proposed rule could create compliance difficulties 

for these banks or affect credit availability, the Federal Reserve 

would use the public comment process to offer its analyses on the 

impact of the proposed rule. In addition, I would expect our analyses to suggest possible alternatives that would also be effective in 

protecting consumers. 

Q.2. What infrastructure will the Fed and FDIC develop to ensure 

the coordination and sharing of information with the Bureau in 

cases in which the rule writing and examination and enforcement 

authority is split among agencies? 

A.2. With the implementation of the Dodd-Frank Act, the Director 

of the Consumer Financial Protection Bureau will join the Federal 

Reserve and the other depository institution supervisory agencies 

as a member of the Federal Financial Institutions Examination 

Council (FFIEC). The Consumer Compliance Task Force of the 

FFIEC promotes policy coordination, a common supervisory approach, and uniform enforcement with respect to consumer protection laws and regulations. The member agencies of the FFIEC have 

processes in place to share appropriate supervisory information 

among the agencies, as needed. The Bureau’s participation in the 

FREC should ensure that it is in the same position as the other 

agencies with regard to information sharing. 

Q.3. Can you provide me an update on your agencies progress in 

implementing the property appraisal requirements of Title XIV of 

the Dodd-Frank Act? What process will you use to develop and implement these requirements? 
120 

A.3. Sections 1471 and 1472 of the Dodd-Frank Act amend the 

Truth in Lending Act (TILA). Section 1471 establishes certain 

property appraisal requirements for a category of loans designated 

‘‘higher-risk mortgages,’’ including a physical property inspection of 

the interior of the mortgage property in connection with a higher 

risk mortgage and a second appraisal of such properties under certain circumstances. Rulemaking authority under Section 1471 is 

delegated to the Federal Reserve Board (Board), FDIC, OCC, 

NCUA, FHFA, and Bureau. However, those rules must be based on 

final rules to be issued under Section 1411, which establishes minimum lending standards for residential mortgage loans. The rules 

under Section 1471, like all other rules required under Title IV 

where no specific deadline is provided, must be issued within 18 

months after July 21, 2011. 

Section 1472 of the Dodd-Frank Act amends TILA to establish 

requirements for appraisal independence in connection with homesecured loans. Section 1472 mandates that the Board issue interim 

final rules within 90 days after enactment. On October 18, 2010, 

the Board issued an interim final rule implementing the appraisal 

independence, mandatory reporting, and customary and reasonable 

fee requirements of section 1472. Section 1472 also authorizes the 

Board, FDIC, OCC, NCUA, FHFA, and Bureau to jointly issue regulations to address appraisal report portability. 

Section 1473 of the Dodd-Frank Act directs the Board, FDIC, 

OCC, NCUA, FHFA, and the Bureau to jointly develop rules for appraisal management companies and automated valuation models. 

These mandates have been identified in the Board’s Dodd-Frank 

related project work and will require the formation of an interagency working group to draft proposed regulations for comment 

and, after consideration of these comments to issue final regulations. This section also directs the Board, FDIC, OCC, and NCUA, 

in consultation with the Bureau, to assess the agencies’ appraisal 

regulatory threshold for 1-to-4 single family residences for reasonable protection of consumers. All rules required under section 1473 

must be issued within 18 months after July 21, 2011. 

Section 1473 also directs the agencies to address the requirements for appraisal reviews in their appraisal regulations. It 

should be noted that the agencies already address appraisal review 

practices in the Interagency Appraisal and Evaluation Guidelines 

and, more recently, the agencies issued proposed revisions to these 

guidelines. Appraisal review practices are addressed in the proposed revisions to these guidelines. The section also prohibits in 

conjunction with the purchase of a consumer’s principal dwelling 

the use of broker price opinions as the primary basis to determine 

the value of a piece of property for the purpose of a loan origination 

of a residential mortgage loan secured by such piece of property. 

While the Act does not direct the agencies to issue regulations to 

implement this requirement, the Board will consider this mandate 

in safety and soundness regulations and guidance on collateral 

valuation practices. 

Other provisions of section 1473 of the Dodd-Frank Act direct the 

FFIEC Appraisal Subcommittee to take certain actions, including 

its operations, the oversight of State appraisal regulatory authorities, and appraisal management companies. The Board has a rep-
121 

resentative on the Appraisal Subcommittee. Similar to the DoddFrank Act project planning that is occurring at the Board, the Appraisal Subcommittee is developing its own plan and time table for 

implementing the Dodd-Frank mandates. This month, as mandated 

by the Dodd-Frank Act, the Appraisal Subcommittee adopted an increase in the National Appraiser Registry fee from $25 to $40. To 

provide the State appraiser regulatory agencies with sufficient time 

to implement this change, the new fee becomes effective on January 1, 2012. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM SHEILA C. BAIR 

Q.1. Chairman Bair, Section 331 of Dodd-Frank requires that the 

FDIC change its assessment base for computing insurance premiums. 

When will the FDIC change its insurance premium assessment 

base, and will the change be effective on a specific future date that 

the FDIC chooses or will it be retroactive? 

A.1. As a result of the Dodd-Frank Act, an insured depository institution’s (IDI’s) assessment base will be calculated using average 

consolidated total assets less average tangible equity (with the possible exception of banker’s banks and custodial banks, which the 

Dodd-Frank Act allows the FDIC to treat differently). This change 

constitutes a substantial revision to the deposit assessment system, 

which, by statute, can only be made after notice and opportunity 

for comment. On November 9, 2010, the FDIC Board of Directors 

adopted a notice of proposed rulemaking with request for comment 

on the changes to the assessment base mandated by Section 331 

of the Dodd-Frank Act and their anticipated effect. The proposal 

has a 45-day comment period. The FDIC also proposes to make the 

changes effective April 1, 2011, and looks forward to the comments 

on all aspects of the proposed rulemaking. 

The FDIC is committed to implementing the Dodd-Frank Act in 

the most expeditious manner possible and considered the possibility of making the application of the new assessment base retroactive to passage of the Dodd-Frank Act. However, to determine assessments using the new assessment base requires that a number 

of changes be made to the Consolidated Reports of Condition (Call 

Report) and Thrift Financial Report (TFR) that render retroactive 

application of the new assessment base operationally infeasible, 

both for insured depository institutions and the FDIC. Additionally, 

retroactively applying such changes could introduce significant 

legal complexity and introduce unacceptable levels of litigation 

risk. For these reasons, the FDIC did not propose applying the new 

assessment base retroactively. 

Q.2. Chairman Bair, your testimony identifies that Dodd-Frank address macro-oversight of the financial industry in part by prohibiting the use of credit ratings for regulatory purposes. 

Given that interpretation of the law, what is the FDIC going to 

eliminate credit ratings from regulations and when will the process 

be completed? 
122 

A.2. On August 10, 2010, the FDIC and the other Federal banking 

agencies issued an advanced notice of proposed rulemaking (ANPR) 

seeking comment on alternatives to the use of credit ratings. The 

ANPR listed a number of principles that the agencies believe any 

alternative standard of creditworthiness must meet, described the 

use of credit ratings in the agencies’ capital rules, and discussed 

possible approaches to alternative standards of creditworthiness. 

The comment period closed on October 25, 2010. To date the FDIC 

has received 23 comments, which we are reviewing. The FDIC and 

the other banking agencies also held a roundtable discussion on 

this issue with industry and other participants in early November. 

A summary of the items discussed and other materials from the 

participants will be posted on the FDIC and Federal Reserve 

Websites. In addition, the FDIC Board, on November 9, 2010, approved the issuance of a notice of proposed rulemaking to update 

the FDIC’s risk-based assessment system for large banks. This rule 

proposes eliminating any reliance on long-term debt issuer ratings 

in determining risk-based assessments for large banks. 

We anticipate timely completion of all the necessary rulemaking 

to implement Section 939A of the Dodd-Frank Act. 

Q.3. Chairman Bair, under Dodd-Frank, certain firms in distress 

may be resolved under an alternative process to bankruptcy which 

would be managed by the FDIC, if regulators so desire. The idea 

seems to be to provide the firm, or some or all of its counterparties, 

with funds, or ‘‘additional payments,’’ that would not be available 

in a bankruptcy. There are then mechanisms available for the Government to try to recover funds over time from the firm’s assets, 

creditors, or industry. Recently, you stated that ‘‘The authority to 

differentiate among creditors will be used rarely and only where 

such additional payments are ‘essential to the implementation of 

the receivership or any bridge financial company.’ ’’ 

Chairman Bair, what criteria would or could the FDIC use to determine whether payments are ‘‘essential’’ to implementation of a 

receivership or bridge company, and what protections exist to ensure that the criteria do not include political considerations? 

A.3. On October 4, 2010, the FDIC issued a notice of proposed rulemaking addressing certain orderly liquidation authority provisions 

of the Dodd-Frank Act. Of particular significance, the proposed rule 

would clarify that the authority to make additional payments to 

certain creditors will never be used to provide additional payments, 

beyond those appropriate under the statutorily defined priority of 

payments, to shareholders, subordinated debt holders and bondholders. The FDIC, in this proposed rule, is proposing that these 

three types of creditors of the covered financial company could 

never, as a legal matter, meet the statutory criteria for receiving 

such additional payments. 

To emphasize that all unsecured creditors should expect to absorb losses along with other creditors, the proposed rule clarifies 

the narrow circumstances and procedures under which other creditors, including short-term debt holders, could receive any additional payments or credit amounts under Sections 210(b)(4), (d)(4), 

or (h)(5)(E). Under the proposed rule, such payments or credit 

amounts could be provided to a creditor only if the FDIC Board of 
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Directors, by a recorded vote, determines that the payments or 

credits are necessary (i) to maximize the value of the assets of the 

covered financial company; (ii) to initiate and continue operations 

essential to implementation of the receivership or any bridge financial company; (iii) to maximize the present value return from the 

sale or other disposition of the assets of the covered financial company; or (iv) to minimize the amount of any loss realized upon the 

sale or other disposition of the assets of the covered financial company. The proposed rule further provides that the authority of the 

Board to make this decision cannot be delegated to management or 

staff of the FDIC. By requiring a vote by the Board, the proposed 

rule would require a decision on the record and ensure that the 

governing body of the FDIC has made a specific determination that 

such payments are necessary to the essential operations of the receivership or bridge financial company, to maximize the value of 

the assets or returns from sale, or to minimize losses. 

Fundamental to an orderly liquidation of a covered financial company is the ability to continue key operations, services, and transactions that will maximize the value of the firm’s assets and avoid 

a disorderly collapse in the marketplace. The FDIC has long had 

authority under the Federal Deposit Insurance Act to continue operations after the closing of a failed insured bank, if necessary, to 

maximize the value of the assets in order to achieve the ‘‘least costly’’ resolution or to prevent ‘‘serious adverse effects on economic 

conditions or financial stability’’ (12 U.S.C. 1821(d) and 1823(c)). 

Under the Dodd-Frank Act, the corresponding ability to continue 

key operations, services, and transactions is accomplished, in part, 

through authority for the FDIC to charter a bridge financial company. The bridge financial company is a completely new entity that 

will be freed from the shareholders, debt, senior executives, or bad 

assets and operations that contributed to the failure of the covered 

financial company or that would impede an orderly liquidation. 

Shareholders, debt holders, and creditors will receive ‘‘haircuts’’ 

based on a clear priority of payment set out in section 210(b). As 

in prior bridge banks used in the resolution of large insured depository institutions, however, the bridge financial company authority 

will allow the FDIC to stabilize the key operations of the covered 

financial company by continuing valuable, systemically important 

operations in order to maximize value. 

Q.4. Recent news reports have detailed disturbing information 

about servicers’ foreclosure processes. Allegations have ranged from 

forged documents to the signing of eviction notices without review. 

What evidence have your agencies found in regards to these 

charges? 

What actions have been undertaken by your agencies both to address this situation and to prevent future abuses? 

What policies and procedures have your agencies put in place to 

ensure compliance with State laws, and when were they implemented? 

A.4. The FDIC is very concerned about the devastating impact foreclosures are having on homeowners, the American economy and the 

banking industry. As the primary Federal supervisor for nearly 

5,000 State-chartered insured institutions, we vigilantly monitor 
124 

compliance with consumer protection requirements and aggressively pursue enforcement actions to address any violations of law. 

Upon initial review, it appears that FDIC-supervised nonmember 

State banks have not engaged in, and have limited exposure to, 

loans with affidavits signed by ‘‘robo-signers.’’ However, the FDIC 

is closely monitoring the situation and will continue to work closely 

with State officials to ensure compliance with applicable Federal 

and State banking laws and regulations. 

We have contacted the FDIC’s loss-share and LLC partners and 

are receiving certifications that all past and future foreclosure 

claims filed under the loss-share agreement are compliant with the 

law. We will deny loss-share payments for any foreclosures that are 

found not to be compliant with State laws or not fully remediated. 

We are independently verifying full compliance, with a priority on 

owner-occupied properties. 

Through our backup examination authority, our examiners also 

are working with other regulators on site at the major mortgage 

servicers. Our activities include direct verification of the loan file 

documentation handled by the ‘‘robo-signers’’ and review of the 

servicer’s loan modification practices and their record keeping for 

ownership of the underlying loans. The agencies also are working 

together to evaluate the role played by the Mortgage Electronic 

Registry Service or ‘‘MERS.’’ 

Once we have complete and thorough information regarding the 

extent of the foreclosure documentation problems on an individual 

and systemwide basis, we will be in a better position to determine 

what actions should be taken to prevent a recurrence of this situation. 

Q.5. Chairman Bernanke and Chairman Bair, have your agencies 

developed prototypes or templates for what information will be contained in living wills and for how frequently updates of living wills 

might be required of certain financial institutions? 

Do you intend to develop living wills in concert with the international regulatory community and, if so, have you made any 

progress yet? 

A.5. The FDIC and the Federal Reserve Board are in the initial 

stages of exploring the joint rulemaking on Resolution Plans (or 

‘‘living wills’’) required by Section 165(d) of the Dodd-Frank Act. 

We will work with the Federal Reserve Board to produce a consensus template on information to be contained in the living wills 

and the required updating frequency within the 18 month timeframe required by the Act. In addition to the Dodd-Frank Act requirements, the FDIC already has been working extensively with 

domestic and international supervisors, especially over the past 2 

years, to establish requirements for living wills with respect to certain large and complex, internationally active financial firms. 

In May 2010, the FDIC issued a notice of proposed rulemaking 

entitled ‘‘Special Reporting, Analysis and Contingent Resolution 

Plans at Certain Large Insured Depository Institutions’’ (75 FR 

27464 (May 17, 2010)). This proposed rule would require specific 

reporting and resolution planning by insured depository institutions with greater than $10 billion in total assets that are owned 

or controlled by a parent with total assets of more than $100 bil-
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lion. This proposed rule articulated minimum requirements for a 

resolution plan, including information on organizational structure; 

business activities, relationships and counterparty exposures; capital structure; intragroup funding, transactions, accounts, exposures and concentrations; cross-border elements and any other material factors. The proposed rule would require annual updates 

with the additional proviso that ‘‘material information elements 

should be updated more frequently as reasonable and necessary, 

given the risk profile and structure of the institution relative to its 

affiliates and to demonstrate the capacity to provide specific information when needed (e.g., deposit flows, intragroup funding flows, 

short-term funding, derivatives transactions, or material changes 

to capital structure or sources).’’ 

Additionally, at the 2009 Pittsburgh G20 Summit, in response to 

the recent financial crisis, the G20 Leaders called on the Financial 

Stability Board (FSB) to propose possible measures to address the 

‘‘too-big-to-fail’’ and moral hazard concerns associated with systemically important financial institutions. Specifically, the G20 Leaders called for the development of ‘‘internationally consistent firmspecific contingency and resolution plans.’’ The FSB considered the 

issue and presented its Principles for Cross-border Cooperation on 

Crisis Management in April 2009 at the London G20 Summit. The 

FSB principles were based on the ongoing work of the Basel Committee on Banking Supervision’s Cross-border Bank Resolution 

Group (CBRG) (cochaired by the FDIC since 2007). The CBRG’s detailed final Report and Recommendations were issued on March 18, 

2010, emphasizing the importance of preplanning and the development of practical and credible plans to promote resiliency in periods of severe financial distress and to facilitate a rapid resolution 

should that be necessary. 

The FSB’s Principles for Cross-Border Cooperation on Crisis 

Management commit national authorities to ensure that firms develop adequate contingency plans and highlight that information 

needs are paramount, including information regarding group structure and legal, financial and operational intragroup dependencies; 

the interlinkages between the firm and financial system (e.g., in 

markets and infrastructures) in each jurisdiction in which it operates; and potential impediments to a coordinated solution stemming from the legal frameworks and bank resolution procedures of 

the countries in which the firm operates. The FSB Cross-border 

Crisis Management Working Group has recommended that supervisors ensure that firms are capable of supplying in a timely fashion the information that may be required by the authorities in 

managing a financial crisis. The FSB recommendations strongly 

encourage firms to maintain contingency plans and procedures for 

use in a wind-down situation (e.g., fact sheets that could easily be 

used by insolvency practitioners) and to regularly review these 

plans to ensure that they remain accurate and adequate. 

U.S. and international supervisors, along with the firms, have 

been active and responsive to the FSB’s requirements. Development of resolution plans is progressing well in most jurisdictions, 

with individual countries being at various stages of development. 

Crisis management group sessions have been conducted and the 
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FDIC and its sister agencies are committed and engaged in the 

iterative process of establishing viable crisis management plans. 

Q.6. The Financial Stabilty Oversight Council is an important feature of Dodd-Frank. During the conference, my amendment was 

adopted to clarify the role of the Council and the Federal Reserve. 

My amendment gave the Council responsibility for financial stability regulation. Up to that point, the legislation had colocated this 

responsibility at the Fed and the Council. The Congressional intent 

is clear that you, as members of the Council, are responsible for all 

policy matters related to financial stability. After the Council acts, 

implementation of your policy determinations will fall to the individual Federal financial regulators, including, of course, the Fed. 

With this in mind, I would like each of you to comment on your 

preparations to serve on the Council: Have you directed your staff 

to examine and study all of the issues that will come before you? 

Are you prepared to participate on the Council, not as a rubber 

stamp for the Chairman of the Council, but as a fully informed individual participant? 

A.6. As you point out, when the Dodd-Frank Act established the 

Council, it vested the Council with the responsibility for identifying 

financial companies and practices that could create systemic risk 

and taking action to mitigate those identified risks. In order to accomplish these challenging tasks, the Council needs experienced 

and capable staff from each of the member agencies to work as a 

team in implementing the Council’s responsibilities. The FDIC is 

an active participant on a number of staff-level interagency working groups analyzing and providing input on the development of 

study reports and rulemakings. These working groups develop proposals with appropriate direction and review from senior agency 

management, including the FDIC Chairman. For example, prior to 

the first meeting of the Council on October 1, 2010, an interagency 

working group developed and vetted the Advance Notice of Proposed Rulemaking aimed at collecting information on the types of 

things the Council should consider when deciding whether a 

nonbank financial company should be subject to heightened prudential supervision by the Federal Reserve and subject to the resolution plan requirement in section 165(d) of the Act. 

With this in mind, we have a significant number of staff throughout the FDIC in various disciplines that are diligently and carefully 

analyzing and developing positions on Council-related issues. In addition, the FDIC recently established the Office of Complex Financial Institutions, which, in part, was created to support the priority 

of systemic risk oversight. 

The FDIC is committed to participating on the Council as a fully 

informed and engaged participant. In many ways, the Council’s 

success will be determined by the willingness of its members to 

work together closely to implement the Council’s duties. And, while 

the FDIC looks forward to collaborating with our colleagues to assure continued progress in strengthening the stability of our financial system, I also value the diverse views and opinions that each 

agency’s unique perspective and expertise will bring to the table. 

By utilizing each agency’s respective authorities and individual 

areas of specialized expertise to close regulatory gaps, the Council 
127 

will be able to successfully carry out its objectives and prevent financial crises in the future. 

Q.7. Secretary Geithner has argued that there is a strong case to 

be made for continuing Government guarantees of mortgage-backed 

securities. Additionally, the Federal Reserve published a paper that 

proposes Government guarantees of a wide range of asset backed 

securities, including those backed by mortgages, credit cards, autos, 

student loans, commercial real estate, and covered bonds. While 

some may believe that the Government will charge fair prices for 

Government guarantees, the history of Government run insurance 

programs suggests that things will not go well. 

Does anyone on the panel support extending or increasing Government insurance against losses on asset backed securities which, 

it seems to me, socializes risk, puts taxpayers on the hook for 

losses, and protects Wall Street against losses? 

A.7. Asset-backed securitization has grown in recent decades into 

an important means of channeling global savings into credit products for U.S. businesses and households outside of the traditional 

banking system. However, misaligned incentives and risky practices in this ‘‘shadow banking system’’ directly contributed to the 

housing bubble and the financial crisis. While the Dodd-Frank Act 

contains a number of measures to reform private securitization and 

the institutions that engage in this process, future legislation will 

be needed to reform the Government-sponsored mortgage enterprises (GSEs), whose implicit Federal backing also contributed to 

excessive growth and risk taking by these companies. 

The financial reforms of the 1930s were designed to provide 

greater stability in our economy and to ensure that credit remains 

available to U.S. businesses and households in good times and bad. 

Following the recent financial crisis, more research should be done 

on the nature of the market failures that can arise in securitized 

asset markets and the extent to which Government backing is 

needed to address those market failures. 

Any proposal for either a continuation of Federal backing for 

mortgage instruments or an expanded Federal role in backing 

other types of assets must meet three basic tests. First, it must respond to a clearly defined market failure that can be addressed by 

Government involvement. Second, any Government backstop must 

be explicit in nature, clearly delineated in advance and accounted 

for in a transparent fashion on the Government balance sheet. 

Third, any type of explicit Government backstop must be actuarially priced so that its direct beneficiaries—the lenders and borrowers in these markets—end up footing the bill instead of taxpayers. 

These are the basic rules that govern the FDIC’s program of Federal deposit insurance. The confidence of the American public in 

the FDIC guarantee was one of the stabilizing forces in this crisis 

that helped to prevent an outcome that could have been far worse. 

As financial markets continue to evolve in the future, there will always be an essential role for the Federal Government in preserving 

financial stability. But it is incumbent on us, as stewards of that 

Government involvement, to write and enforce a clear set of rules 
128 

that protect taxpayers and prevent bailouts that undermine both 

fairness and financial stability. 

Q.8. Please provide the Committee with an implementation schedule that includes a list of the rules and studies that your agency 

is responsible for promulgating or conducting under Dodd-Frank 

and the date by which you intend to complete each rule or study. 

A.8. The FDIC has committed to implement the reforms required 

by the Dodd-Frank Act as quickly and transparently as possible, 

and within the statutory deadlines, where applicable. As part of 

the FDIC’s efforts to improve transparency, the agency posts its 

planned and completed initiatives to the publicly available FDIC 

Initiatives Web site. The site, available at http://www.tdic.gov/ 

regulations/reform/initiativcs.html and presented at the end of 

this response, includes the FDIC’s financial reform initiatives completed to date and projected through the end of the first quarter 

of 2011. This site is updated weekly to reflect progress made. We 

hope this site will be a useful tool for finding up-to-date information on the FDIC’s financial reform efforts. By the end of this quarter, the projections will be extended to the second quarter of 2011 

and will continue to be updated quarterly. An additional resource 

for financial reform implementation information is the U.S. Department of the Treasury’s Integrated Implementation Roadmap, available at http://www.treasury.gov/FSOC/docs/ 

FSOC%20Integrated%20Roadmap%20-%20October%201.pdf. This 

document includes implementation information for many of the 

interagency rules, with timelines extending through the end of 

2011. 

The following table includes the rules the FDIC is responsible for 

promulgating, as well as the applicable statutory deadlines, if any. 

Items currently included on the FDIC Initiatives Web site with a 

projected completion date are marked with an asterisk. In some instances, the Dodd-Frank Act provides for agency discretion in rulemaking. Where the FDIC has exercised its discretion not to promulgate a rule at this time, it has not been listed below. 
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132 
133 
134 
135 
136 
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Q.9. Please provide the Committee with an implementation schedule that includes a list of the reorganizational tasks your agency 

will undertake to fulfill the mandates of Dodd-Frank and the date 

by which you intend to complete each task. 

A.9. 1. In August, the FDIC Board of Directors approved the creation of an Office of Complex Financial Institutions (OCFI) that 

will: 

• perform continuous review and oversight of banks and bank 

holding companies with more than $100 billion in assets, as 

well as nonbank financial companies designated as systemically important by the FSOC to be supervised by the FRB; 

• monitor risks among the largest and most complex financial institutions and develop plans for the contingency that one or 

more of these companies might fail; and 

• carry out the FDIC’s new authority to implement orderly liquidations of systemically important bank holding companies 

and nonbank financial companies that fail. 

2. We are establishing a new division within FDIC with consumer protection as its focus. The new Division of Depositor and 

Consumer Protection will be created through the transition of staff 

from our existing Division of Supervision and Consumer Protection. 

We also will transfer employees from our existing research staff to 

the new division to perform consumer research and Home Mortgage Disclosure Act (HMDA)/fair lending analysis. On October 12, 

the FDIC announced the appointment of Mark Pearce as director 

of the new division. He will assist in the orderly set-up of the division by January 2011. We also are in the process of strengthening 

our legal workforce dedicated to supporting depositor and consumer 

protection functions. 

3. In addition, the FDIC—jointly with the Board of Governors, 

the OCC, and the OTS—is developing an implementation plan for 

the transfer of OTS powers and personnel. Upon completion of the 

implementation plan, it will be forwarded to the Committee on 

Banking, Housing, and Urban Affairs, among others, for review. 

Any additional organizational changes required will be outlined in 

that document. 

4. Section 342 of the Dodd-Frank Act requires the FDIC and 

other specified agencies to establish an Office of Minority and 

Women Inclusion (OMWI) within 6 months of enactment of the 

new law, which is January 21, 2010. We are currently considering 

how many additional staff will be needed, how best to integrate the 

work of the OMWI with our operating divisions, and whether to advertise the position of Office Director for applicants outside the 

FDIC. While our Board of Directors has not yet made any final decisions on how the Office will be organized and led or how many 

staff will be authorized, the FDIC is having robust discussions 

among senior management on how to best transition our existing 

functions to the OMWI and expand the functions to include the important new responsibilities under Section 342 of the Dodd-Frank 

Act. 
139 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM SHEILA C. BAIR 

Q.1. Over the last 15 years, the 6 biggest banks grew from having 

assets equal to 17 percent of GDP to 63 percent of GDP. The four 

largest banks control about 48 percent of the total assets in the Nation’s banking system. And the 5 largest dealer banks control 80 

percent of the derivatives market and account for 96 percent of the 

exposure to credit derivatives. 

Part of the Volcker Rule, section 622 of the Dodd-Frank Act, requires the Financial Stabilty Oversight Council (FSOC), of which 

your organizations are a member, to study and make recommendations concerning the effects of financial sector concentration on financial stability, moral hazard, efficiency, and competitiveness in 

the financial system. Subject to these recommendations, no company will be permitted to hold more than 10 percent of the liabilities held by all financial companies, with some significant exceptions. 

What effect does concentration in the financial industry have on 

financial stability, moral hazard, efficiency, and competitiveness? 

A.1. Financial firms can reduce risk by diversifying across product 

lines and by serving wider geographic areas. The risk reducing benefit is realized as a financial firm grows in size and is able to offer 

more products and operate in wider markets. However, once a firm 

operates across almost all available business lines on a nationwide 

basis, it has exhausted any benefit from diversification. At this 

point, the firm has a risk profile that mirrors the overall risk of 

the market and general economic conditions. Risk is further concentrated when these financial firms become important counterparties and service providers to many transactions that facilitate financial intermediation in the economy. These issues became apparent during the financial crisis when large, complex financial organizations—because they are so interconnected—contributed to instability of the financial system. 

Q.2. Given that the six biggest banks alone have about $7.4 trillion 

in liabilities, almost 53 percent of GDP, do you think this provision 

will meaningfully restrict the size of financial institutions? 

A.2. Section 622 will restrict growth through merger that would 

put the combined firm above the 10 percent limit as implemented 

by regulation. However, as this question and the preamble suggest, 

this still represents significant concentration of industry assets and 

liabilities in a handful of companies. 

As we have discussed in prior testimony, the notion of ‘‘Too-Bigto-Fail’’ (TBTF) led to a system of ‘‘privatized profits and socialized 

risks.’’ This was exacerbated by other misaligned incentives 

throughout the financial system that led to a substantial buildup 

of risks in the system and the resulting crisis. The key to addressing the concentration and moral hazard issue is not only setting 

size and market share limits, but more importantly, addressing 

market perceptions that certain institutions are TBTF. If TBTF can 

be effectively eliminated, it will realign systemically important institutions’ risk and reward framework and instill market discipline 

on investors and counterparties. 
140 

Q.3. How should this rule be implemented to address financial stability, moral hazard, efficiency, and competitiveness? 

A.3. We are in agreement that limiting a single institution’s size 

is prudent and helps reduce concentration risk to not only the deposit insurance fund but to the broader financial system. The FDIC 

and other members of the FSOC are participating in the study and 

recommendations required by Section 622 of the Dodd-Frank Act. 

The study should address many of your concerns about concentration in the financial industry including how concentration affects financial stability, moral hazard, and the efficiency and competitiveness of U.S. financial firms. The results of the study are due in 

January. 

Q.4. Can you identify any potential loopholes in the existing provision? 

A.4. Section 622 gives the FSOC wide latitude to make recommendations to the Board of Governors to issue regulations under 

the section, including definition of terms, as necessary. This allows 

the FSOC and the Board to close loopholes that may appear. 

Q.5. As I’ve made clear before, I think the largest financial firms 

in this country are just too large, and that their massive size 

threatens our economic security and puts us at risk in future crises. 

I think the rise of proprietary trading was one of the key drivers 

behind the massive growth in our largest financial institutions. 

Firms were taking on ever increasing prop trading positions, often 

with highly unstable short term financing, and when things froze 

up, the house of cards collapsed. The Volcker Rule looks to stop 

this risk. 

I know that my colleagues, Senator Merkley and Senator Levin, 

drafted section 619 of the Dodd-Frank Act to ensure broad coverage 

of the prohibition on proprietary trading by banks, and meaningful 

restrictions on the largest nonbank financial firms. Nevertheless, 

one of the concerns I have is that firms may try to evade the restrictions. Particularly, I’m concerned that if the regulators set a 

definition of ‘‘trading account’’ that is too narrow, it might not capture all of the risks of proprietary trading. These evasions could 

only happen if the regulators ignore the clear direction of the law 

to stop proprietary trading. 

Are you prepared to take a broad view on the definition of ‘‘trading account’’ and examine and prevent proprietary trading, wherever it occurs? 

A.5. Historically, regulatory capital requirements for trading positions have been lower than requirements for banking positions, 

providing firms with an incentive to take a broad view of the trading account. However, we understand that the advent of the 

Volcker Rule could realign these incentives such that firms may be 

motivated to move some proprietary trading positions outside the 

trading account. As a result, we agree that the definition of ‘‘trading account’’ should be viewed broadly. 

We believe the exemptions to the prohibition on proprietary trading—particularly the exemptions related to customer accommodation, hedging, and market-making and underwriting—present a 

more significant threat to the adoption of a meaningful ban on pro-
141 

prietary trading. We will work with the other regulators to define 

these exemptions as narrowly as possible. 

Q.6. In short, are you prepared to use the full power of the 

Merkley-Levin provisions to cut the size and riskiness of our banks 

so they get back to the business of lending to families and businesses? 

A.6. The provisions that strictly limit investments in hedge funds 

and private equity firms are important checks on the ability of 

banking organizations to increase both their size and risk profile 

through opaque structures. 

The Basel Committee on Banking Supervision set the so-called 

‘‘Basel II’’ minimum capital requirements for banks at 8 percent, 

with an additional 2.5 percent buffer. But a recent study by the 

Bank for International Settements (BIS) suggests that the optimal 

capital ratio would actually be about 13 percent. Going forward, 

the FSOC will recommend capital requirements for systemically 

important nonbank financial companies. 

Q.7. Do you favor increasing capital for systemically important financial companies above the 10.5 percent Basel III ratio, and closer 

to the 13 percent number? 

A.7. The regulatory capital requirements for banks should reflect 

the risk of the bank itself and the risk the bank poses to the broader financial system. For large systemically important banks, we 

have been working with the Basel Committee on Banking Supervision and the Financial Stability Board, as well as the other banking regulators, to develop systemic capital surcharges for systemically important banks. The total risk-based capital requirement as 

proposed by the Basel Committee is 10.5 percent. Any systemic 

surcharge would be added on top of that 10.5 percent minimum requirement. 

Q.8. Would you be comfortable establishing progressive capital requirements that increase as institutions grow larger? 

A.8. The regulators are discussing how we might apply a graduated 

surcharge for systemically important banks. It is certainly a credible option. 

Q.9. Wall Street often argues that higher capital means higher 

costs for borrowers, and BIS has estimated that for each 1 percent 

of increased capital, banks will have to raise rates by 15 basis 

points (0.15 percent). Do you believe that banks could adapt to new 

capital requirements in ways that do not pass costs on to customers 

and borrowers, for example, by cutting outsized salaries and bonuses? 

A.9. One of the very clear lessons of the recent financial crisis is 

that banks did not have enough capital or enough high quality capital. Increasing the amount and quality of capital does have a cost 

and the BIS estimate does provide a reasonable benchmark. Although the cost of capital is an element of pricing of credit, pricing 

also should reflect risk inherent in credit exposures. The financial 

crisis revealed that banks offered credit products at artificially low 

prices. As these prices are adjusted to more appropriately reflect 

risk, the cost of some credit products will increase and others may 

decrease. 
142 

Although there is not a direct correlation between compensation 

and cost of credit, the compensation issues are being addressed as 

mandated by section 956 of the Dodd-Frank Act. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM SHEILA C. BAIR 

Q.1. Section 1022(b) of the Dodd-Frank bill requires that in rulemaking, the Consumer Financial Protection Bureau shall consider 

‘‘the impact of proposed rules on covered persons, as described in 

section 1026, and the impact on consumers in rural areas.’’ 

What specific guidance and resources will the FDIC and the Federal Reserve provide to the Bureau to ensure that it can adequately 

understand the impact of proposed rules on community banks with 

assets of less than $10 billion? 

A.1. As the primary supervisor of community banks and their Federal deposit insurer, the FDIC is particularly sensitive to the regulatory environment in which community banks operate. With regard to the many consumer financial protection laws for which the 

FDIC has examination and enforcement authority, but not rulewriting authority, the FDIC has long made it a practice to convey 

detailed information or concerns to the agencies with rulemaking 

authority. The examples include, but are not limited to, the Truth 

in Lending Act, the Electronic Fund Transfer Act, the Real Estate 

Settlement Procedures Act, and Section 5 of the Federal Trade 

Commission Act relating to Unfair and Deceptive Acts or Practices. 

Under the Dodd-Frank Act, the FDIC will not have primary rulemaking authority for consumer financial protection laws; however, 

the FDIC will retain consumer protection examination and enforcement authority for institutions with assets of $10 billion or less. 

The Dodd-Frank Act will likely strengthen the consultative process 

in consumer financial protection rulemaking since the Act mandates prior consultation by the Bureau with the FDIC in many provisions (such as sections 1022(b), 1031(e), and 1015, as well as in 

various specific sections of consumer laws). It will be critically important for the FDIC to communicate to the Bureau regarding how 

proposed rules could impact the FDIC’s supervisory program and 

the affected FDIC supervised institutions. The information will be 

based on a variety of sources, including extensive research, supervisory experience, and outreach efforts. As a result, it will be a priority for the FDIC to provide input on proposed rules to the Consumer Financial Protection Bureau so that the Bureau has the benefit of the FDIC’s long experience in supervising community banks. 

Q.2. What infrastructure will the Fed and FDIC develop to ensure 

the coordination and sharing of information with the Bureau in 

cases in which the rule writing and examination and enforcement 

authority is split among agencies? 

A.2. Under the Dodd-Frank Act, an infrastructure will be in place 

to ensure coordination and information sharing at the agency principal and staff levels, as well as through the interagency process. 

First, the Director of the Consumer Financial Protection Bureau 

will be a member of the FDIC’s Board. In this role, there will be 

opportunities to communicate on rule writing, examinations, and 
143 

enforcement authority at the highest levels between the two agencies. 

Second, following enactment of the Dodd-Frank Act, the FDIC 

approved the establishment of a new division—the Division of Depositor and Consumer Protection. One of the key reasons for creating this division was to ensure that the FDIC has a strong infrastructure in place to conduct ongoing dialogue with the new Consumer Financial Protection Bureau at the staff level in order to 

provide the FDIC’s perspective as the supervisor of community 

banks. 

Finally, the Consumer Compliance Task Force of the Federal Financial Institutions Examination Council (FFIEC) has long coordinated the development of examination procedures, and rule writing 

when appropriate, among the Federal banking regulators. As a result, the Federal banking agencies already have standard operating 

procedures in place for when we need to jointly develop examination procedures or regulations. In the future, the Director of the 

Bureau will also be a member of the FFIEC. We expect that although the Bureau will have sole rulemaking authority for many 

consumer protection regulations, all of the agencies that examine 

for and enforce these laws will continue to jointly develop examination procedures through our existing collaborative process, which 

will include the Bureau. 

Q.3. The Dodd-Frank bill included provisions requiring the FDIC 

to change its insurance assessment based from domestic deposits to 

total assets less tangible equity. What is the FDIC’s timeframe for 

implementing this change, including the publishing of the proposed 

rule, comment period and implementation date of the new assessment base for financial institutions? 

A.3. As a result of the Dodd-Frank Act, an insured depository institution’s (IDI’s) assessment base will be calculated using average 

consolidated total assets less average tangible equity (with the possible exception of banker’s banks and custodial banks, which the 

Dodd-Frank Act allows the FDIC to treat differently). This change 

constitutes a substantial revision to the deposit assessment system, 

which, by statute, can only be made after notice and opportunity 

for comment. Accordingly, on November 9, 2010, the FDIC’s Board 

of Directors adopted a notice for proposed rulemaking with request 

for comment on changes to the assessment base and their anticipated effect. The proposed rulemaking has a 45 day comment period and proposes to make the changes effective April 1, 2011. 

Q.4. Can you provide me an update on your agencies progress in 

implementing the property appraisal requirements of Title XIV of 

Dodd-Frank? What process will you use to develop and implement 

these requirements? 

A.4. Title XIV contains several provisions pertaining to appraisals 

for transactions secured by a consumer’s principal dwelling. Several provisions require joint rules to be promulgated, which includes drafting the joint proposed rules, soliciting public comments, 

and finalizing those rules. Therefore, the FDIC is working closely 

with the Federal Reserve Board, the Office of the Comptroller of 

the Currency, the National Credit Union Administration, the U.S. 

Department of Housing and Urban Development, and the Federal 
144 

Housing Finance Agency to address these provisions and 

rulemakings, as appropriate. In addition, once the Consumer Financial Protection Bureau becomes operational, this agency also 

will participate in interagency efforts relating to the implementation of many of these provisions. 

In September 2010, the FDIC, along with the other agencies, established interagency working groups which are meeting to study 

and discuss key implementation issues. These groups now are identifying specific appraisal-related issues relative to transactions secured by a consumer’s principal dwelling that will need to be addressed by proposed rules or interpretive guidance. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM SHEILA C. BAIR 

Q.1. In February 2008, the FDIC began a two-year pilot project to 

review affordable and responsible small-dollar loan programs in financial institutions. Title XII of the Dodd Frank Act calls for the 

establishment of a small dollar loan program within the Department of Treasury’s Community Development Financial Institutions 

Fund. What has the FDIC learned from its pilot program that 

would be helpful for Treasury to consider as it implements its own 

small dollar loan program? 

A.1. The FDIC’s Small-Dollar Loan pilot was a two-year case study 

designed to illustrate the feasibility of banks offering small-dollar 

loans as an alternative to high-cost credit products, like payday 

loans or fee-based overdraft programs. The pilot ran from February 

2008 to February 2010, and concluded with 28 participating banks 

ranging in asset size from $28 million to $10 billion. Cumulatively, 

during the pilot, banks made more than 34,400 loans with a principal balance of about $40.2 million. While delinquencies for loans 

made under the pilot were much higher than for personal unsecured loans in general, the loans had similar default rates to the 

general population. This fact—that loans made under the pilot are 

no more likely to default than other similar loans—is an important 

takeaway from the pilot that might be helpful to the Treasury as 

it implements its program. 

Regarding other important lessons learned, a key point was that, 

as an overall program, most of the bankers did not view the smalldollar loans as a stand-alone profit generator. Rather, they indicated that long-term relationship building was the primary goal for 

their small dollar loan program. The bankers are seeking to generate long-term profits by using the small dollar product to build 

or retain multiproduct relationships. 

In terms of actual product elements, bankers indicated that loan 

terms longer than just a few pay periods were critical for loan performance in that they gave consumers more time to recover from 

financial emergencies. While some banks experimented with shorter loan terms, in all but one rather specialized case, 90 days 

emerged as the bare minimum with averages hovering much 

longer, at 9 months or more. Streamlined, but solid underwriting, 

also was considered important for mitigating defaults. 

The pilot also found that in general, small-dollar loan programs 

that emphasized savings linked to credit and delivery of financial 
145 

education tended to have lower default rates than those that did 

not. Given the limited sample size and differences in program features, it is difficult to determine whether and the extent to which 

linked savings or formal financial education directly affected performance, however, there were some indications that these could be 

factors. Another interesting finding in this area was the difference 

of opinion among pilot bankers about mandating linked savings 

and financial education. Some bankers believed that these items 

had to be hardwired into the small-dollar lending process to break 

the cycle of high-cost lending. Others believed that adding features 

for a loan complicates the small-dollar loan product and drives 

stressed consumers into the ease of the payday process. 

The best practices and lessons learned from the pilot resulted in 

the following model template of product design and delivery elements for small-dollar loans that might be of use to the Treasury. 

The template is simple and it is replicable in that it requires no 

particular technology or infrastructure investment. It also could 

help banks adhere to existing regulatory guidance that requires 

banks to monitor excessive overdraft use and offer available alternatives to qualified consumers. 
146 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM SHEILA C. BAIR 

Q.1. Regulatory Structure for Volcker Rule. As you know, the objectives of the Merkley-Levin Volcker Rule are two-fold: (1) to address 

the specific risks to our financial stability caused by proprietary 

trades gone bad, and (2) to take on the conflicts of interests in proprietary trading. 

Ensuring effective oversight will be challenging, because the 

issues are complicated. As you could see from the exchange at the 

hearing between Senator Reed and Chairman Bernanke, with 

interjections by Chairman Shapiro and Mr. Walsh, I and others are 

beginning to come of the view that there will have to be oversight 

at two levels. First, there will need to be real-time (or as close as 

practicable) monitoring and enforcement at the individual trade-bytrade level, which looks to whether any given transaction is proprietary trading. This will be necessary to ensure that the permitted 

activities are not abused. Second, there will need to be macro-level 

reviews of policies and procedures, and overall portfolio holdings. 

This will be necessary to ensure that proprietary positions and conflicts of interest are not cropping up despite the restrictions. In addition to monitoring and enforcing the proprietary trading and conflicts of interest restrictions, regulators are also tasked with setting 

appropriate capital charges, both for permitted activities, and, in 

the instances of nonbank financial companies supervised by the 

Board, capital charges for all covered activities. 

Your agencies appear to have somewhat different strengths in 

these areas, with perhaps the SEC and CFTC having greater experience policing the securities and derivatives markets for trading 

violations, and the banking regulators having greater experience 

evaluating the safety and soundness of firms and setting appropriate capital charges and levels. 

Share with me your view about the strengths you believe your 

agency brings to the oversight and enforcement of the MerkleyLevin Volcker Rule? Are you committed to working with your fellow regulators to best use your agency’s strengths in the effort to 

keep our financial system safe? 

A.1. As you indicated, the FDIC has significant experience in evaluating the safety and soundness of financial firms and specific investments, as well as setting appropriate regulatory capital requirements. We are prepared to work closely with our fellow regulators and use the skills and abilities of the FDIC to keep the financial system safe. We view the implementation of a strong 

Volcker Rule as a vital tool in this effort. 

Q.2. Data Collection. The Dodd-Frank Act requires a significant 

amount of new data collection and storage, particularly in the derivatives arena. The SEC and CFTC have made a priority of new 

data collection in a number of areas. Collection and the ability to 

automate reviews of the data will be critical to enforcing a wide 

range of mandates under Dodd-Frank, including derivatives position limits, the Volcker Rule provisions, and other parts of the bill. 

At a minimum, your staffs will need to know who’s making trades, 

the prices, how long firms hold onto their positions, and whether 

and how their positions are hedged. 
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Where is your agency in terms of thinking through the relevant 

data you will need to collect? 

A.2. Although the CFTC and SEC are responsible for establishing 

data collection requirements, the FDIC staff has developed a list of 

the relevant data fields and is in the process of communicating 

these data needs directly to these agencies. As you indicate in your 

question, these revolve around the volume of positions and the purpose of the trade (hedge, speculate, make a market). As deposit insurer, the FDIC needs to be able to identify potential risks that are 

building within the financial system as a result of derivatives concentrations. Moreover, the FDIC has a specific mission regarding 

the disposition of over-the-counter (OTC) derivatives in the event 

of the failure of an insured depository or systemically significant 

market participant. In an earlier rulemaking, the FDIC developed 

data maintenance and reporting standards for the OTC derivatives 

in troubled banks; we refer to this as the ‘‘QFC Rule.’’ Because the 

FDIC must make a decision on the disposition of the qualifying financial contracts (QFCs) one day after the appointment of the 

FDIC as receiver of the failed bank, an orderly resolution demands 

that a full understanding of the positions and the purpose of the 

trades be known in advance. 

Q.3. Are there any major challenges you see in being able to collect 

and analyze that data in real-time, so as to ensure compliance with 

these various restrictions? 

A.3. It is not clear that all of the analysis would need to be done 

in real time. Certainly, real time analysis would be needed to assure markets are functioning in an orderly manner and that violation of SEC or CFTC rules are not occurring. In general, the positions that banking organizations put on their books are not reversed during the course of one day. Moreover, data integrity is 

very important; therefore, using data that have been confirmed by 

both parties, or so-called ‘‘paired trades,’’ should be the cornerstone 

of data accuracy for data being housed in the data repositories. For 

accuracy and as it pertains to the ultimate use, position reporting 

may not need to be in real time. 

In terms of challenges, the greatest challenge likely may be obtaining accurate prices of positions in the repositories. Unlike the 

exchange-traded markets, where prices are generally set through a 

transparent market, the OTC contract values are usually markedto-model rather than marked-to-market. Particularly for the FDIC’s 

receivership responsibilities, knowledge of the market value of the 

contracts aggregated by exposure to a given counterparty (and the 

family of affiliates) and the value of collateral (and the jurisdiction 

in which it is being held) is critical. 

Q.4. How do you see the newly created Office of Financial Research 

playing into this process? 

A.4. The Office of Financial Research (OFR) will be very important 

for the analysis of the data and fostering data reporting infrastructure standardization. The OFR may be able to provide assistance 

to regulators by developing data standards. Recent public discussions by senior Treasury officials have emphasized the need to create standardized identifiers for counterparties, trade types, etc., to 

be able to analyze meaningfully the volume of information that will 
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be housed in multiple repositories. For example, the trade repositories likely will be based on asset classes, such as interest rates, 

foreign exchange, equities, etc. Without standardized identifiers, 

the ability to aggregate positions across trade repositories for a 

given banking organization will be limited. 

Q.5. Cross-border Resolution. I know FDIC and to some extent others have been working very diligently to implement the new resolution authority for our Nation’s large complex financial institutions—which owes so much to my colleagues on this Committee 

from Virginia and Tennessee. 

But one of the areas I want to keep an eye on—and on which 

I offered an amendment during financial reform to provide additional oversight of—is how to make that resolution work for large 

firms operating across multiple national borders. 

Where are we in terms of making the Dodd-Frank resolution authority work for large, systemically significant financial firms operating across borders? How cooperative have our international partners been in this effort? 

A.5. We have received good cooperation from international supervisors regarding the development of resolution plans for cross-border firms. In January and in July of this year, multiple day meetings were held with international supervisors related to crisis management planning, specifically including resolution challenges facing the FDIC. Staff-level meetings have been ongoing with the 

United Kingdom, in furtherance of and pursuant to a Memorandum of Understanding (MOU) with the Bank of England specifically related to resolutions and crisis management. The FDIC continues work with other international regulators as well to develop 

resolution and crisis management MOUs. 

Various challenges to cross-border implementation of resolutions 

have been identified and continue to exist. These relate to different 

insolvency regimes in national jurisdictions, which cause legal impediments to effectuating a cross-border resolution (e.g., differences 

in creditor rights, contractual termination rights, impediments to 

transferring assets and liabilities, data protection and disclosure 

rules), as well as operational challenges (e.g., continued access to 

payment and settlement systems, functioning of operations cross 

time zones around the world). These concerns are being discussed 

bilaterally, as well as at the multilateral level, with organizations 

such as the FSB, the International Monetary Fund and the Basel 

Committee. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM SHEILA C. BAIR 

Q.1. Chairman Bair, I cannot tell you how many times I have 

heard community banks complain about how their regulators will 

not allow them to make good, solid, small-business loans. Congress 

responded to the lending crisis by creating another TARP-like 

structure for small business lending, which I believe was a terrible 

idea. To what extent is the FDIC guilty of smothering even solid 

loans, and is the Fed or other regulators to blame? 
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A.1. The FDIC is profoundly concerned about the availability of 

small business credit. Clearly, the recession and real estate crisis 

have caused banks to curtail loan originations as they seek to preserve capital and workout an increasing level of nonperforming assets. In addition, rapid collateral value depreciation is influencing 

banks’ small business lending and loan restructuring decisions as 

loan-to-value ratios, in certain instances, have deteriorated beyond 

lenders’ internal underwriting standards. We have attempted to 

address these issues and have taken actions internally to ensure 

our supervisory practices encourage, rather than hinder, the availability of small business credit. As you know, small businesses are 

a key driver of growth in our economy and likely will be the first 

enterprises to create jobs and spur an expansion. 

In response to the great public concern over small business credit 

availability, the regulators issued the Interagency Statement on 

Meeting the Credit Needs of Creditworthy Small Business Borrowers on February 5, 2010, to encourage prudent small business 

lending and emphasize that examiners will apply a balanced approach in evaluating loans. The guidance states that examiners 

will not discourage prudent small business lending or criticize 

loans solely due to a decline in collateral value. This guidance was 

issued subsequent to the October 30, 2009, Policy Statement on 

Prudent Commercial Real Estate Workouts that encourages banks 

to restructure loans for commercial real estate mortgage customers 

experiencing difficulties making payments. This Statement applies 

appropriate and long-standing supervisory principles in a manner 

that recognizes pragmatic actions by lenders and borrowers are 

necessary to weather this difficult economic period. The FDIC believes these Statements have helped banks become more comfortable extending and restructuring soundly underwritten small 

business loans. 

The FDIC has not changed its expectations for prudent small 

business lending. We provide banks with considerable flexibility in 

dealing with customer relationships and managing loan portfolios, 

and will continue to advocate for an expansion of prudent small 

business lending at the institutions we supervise. 

Q.2. What is the total number of bank failures over the past 3 

years, and have the failures of smaller institutions contributed to 

the growing trend of financial concentration in large banks? 

A.2. Since the beginning of 2008 there have been 311 insured depository institution failures (as of November 15, 2010). There were 

25 in 2008, 140 in 2009 and 146 as of November 15. 

The failure of small insured depository institutions has not contributed to significant financial concentrations among large banks. 

Of the 311 failures over the past 3 years, 302 have been small institutions, defined as those with total assets of less than $10 billion. These smaller institutions amount to only 3.9 percent of the 

more than 7,800 insured depository institutions in existence today. 

The top 50 insured depository institutions hold 72 percent of total 

banking assets. But the top 50 institutions accounted for the acquisition of only 29 of the small failed institutions since 2008, or less 

than 10 percent of the total number. The trend toward increased 

financial concentration over the past several years has been driven 
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mainly by the acquisition by the largest financial companies of 

other large companies, in many cases involving the acquisition of 

a troubled financial company without FDIC assistance. 

Q.3. Is there anything in the Dodd-Frank law that will prevent the 

concentration of big banks, or will the fact that ‘‘too-big-to-fail’’ institutions will get both special Fed regulation and access to a new 

FDIC resolution process (with unlimited ability to get loans from 

the Treasury) actually encourage investors to leave smaller institutions and flock to the ones that are too big to fail? 

A.3. Section 622 of the Dodd-Frank Act specifically restricts mergers of large financial firms that would result in their total liabilities exceeding 10 percent of the industry’s total liabilities. The 

Council is required to complete a study on the concentration limit 

by late January 2011. There is currently in place a similar restriction on bank mergers based on domestic deposit concentrations. 

The Dodd-Frank Title II orderly liquidation authority allowing 

the FDIC to resolve large nonbank financial firms is specifically designed to impose losses on the stockholders and bond holders of 

Systemically Important Nonbank Financial Companies or Bank 

Holding Companies with no cost to the American taxpayer. These 

new authorities will level the playing field by putting large financial firm investors at risk. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM SHEILA C. BAIR 

Q.1. Dodd-Frank requires that risk retention be jointly considered 

by the regulators for each different type of asset and includes a 

specific statutory mandate related to any potential reforms of the 

commercial mortgage-backed securities market to limit disruption. 

In light of the FDIC’s unilateral decision to add an across the 

board risk retention requirement in the safe harbor rule, which the 

OCC opposed, how do you plan to coordinate and reconcile disagreements in the joint rulemaking? 

A.1. The FDIC undertook to revise its original safe harbor rule (initially adopted in 2000) in light of accounting changes that came 

into effect for reporting periods after November 15, 2009. Nothing 

in this revised safe harbor rule (the Rule) is inconsistent with the 

Dodd-Frank Act. The provisions of the Dodd-Frank Act substantively address only the risk retention requirements and, pending further regulatory action, require 5 percent risk retention. This 

5 percent level matches the level in the Rule (unless certain underwriting standards are met). Nonetheless, in order to assure consistency between the Rule as issued and any future interagency regulations that may be inconsistent, the Rule provides that automatically, upon the effective date of final regulations required by Section 941(b) of the Dodd-Frank Act, such final regulations shall exclusively govern the risk retention requirement under the Rule. 

Thus, there will not be disagreement to coordinate and reconcile 

because of this safe harbor rule. 

Q.2. Market participants highlight uncertainty related to changing 

regulations, new accounting standards, and other mandates as an 

obstacle to a resurgence of these markets. What steps are your 
152 

agencies currently taking to minimize these complications? What 

should be done collectively by regulators to limit this uncertainty 

as you look toward the joint rulemaking? 

A.2. We believe that this safe harbor rule strikes a fair balance between protecting the FDIC’s Deposit Insurance Fund and allowing 

participants to adjust to a safer, more transparent securitization 

market. 

The FDIC advocates a reestablishment of the securitization market, but in a way that is characterized by strong disclosure requirements for investors, good loan quality, accurate documentation, 

better oversight of servicers, and incentives to assure that assets 

are managed in a way that maximizes value for investors as a 

whole. The FDIC has taken and is in the process of taking other 

steps to minimize market uncertainty. 

In response to industry concerns, the FDIC did not delay, but 

took a measured evaluation of its original safe harbor rule. This 

evaluation has been in process for nearly a year, and we believe 

that the industry should have no problem adjusting. Even though 

the final regulations were adopted on September 30, 2010, application of the rule will not be effective until 2011, with the prior safe 

harbor rule extended through the end of the calendar year. All 

securitizations originated prior to January 1, 2011, will be grand 

fathered under the previous safe harbor rule. 

While it is axiomatic that different regulatory agencies have different regulatory jurisdiction, and in exercising their different responsibilities, the agencies may have to adopt rules addressing the 

same issues within their regulatory mandate, the FDIC has made 

a conscious effort to harmonize its rules with other agencies, except 

where differences are appropriate to accomplish different regulatory missions. As noted in the response to the previous question, 

the FDIC, balancing requests from the industry for expedited revisions to the safe harbor rule with the pending financial reform legislation, issued its rule with a risk retention level that will automatically apply the risk retention levels established by the interagency regulations. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HUTCHISON 

FROM SHEILA C. BAIR 

Q.1. Since the passage of the Dodd-Frank Act, I have heard from 

a number of my small banks that are tremendously concerned 

about the onslaught of new regulations on the horizon, particularly 

because they are already drowning in a sea of regulatory burden. 

In fact, over the past few months, the vast majority of community 

banks in Texas State that they are much more concerned with future compliance exams than they are about safety and soundness 

exams. The reason for their concern lies simply in ‘‘missing something;’’ that is, not properly adhering to any of the new and unfamiliar regulations. 

In addition to the amount of compliance that community banks 

will soon face, I am also hearing concern about the sheer cost, particularly for the smallest community banks with $250 million in assets or less. These banks will increasingly have more and more difficulty absorbing the additional costs to comply with the ever-ex-
153 

panding Government intervention into their business. These community banks will be forced to attract and pay for necessary staff, 

consultants, and lawyers as the regulations and new requirements 

keep piling on, something one of my bankers in Texas has described as ‘‘death by a thousand cuts.’’ Many of these small community banks have indicated that they are simply waiting for the 

value of their banks to rise as the economy improves, so that they 

can sell their banks in the near future. In my assessment, this will 

leave a number of small communities without their local community bank, the primary driver of their local economy. 

While it has been acknowledged over and over again throughout 

the debate on financial regulatory reform that community banks 

neither contributed to nor profited from the excesses that led to the 

financial crisis, community bankers in Texas, and across our country, feel that they’re paying a very dear price. 

What observations do you have? Is there a regulatory model that 

might allow these local institutions to operate in an environment 

where they can take deposits in from their communities, then lend 

out to local families and small businesses to foster economic growth 

and job creation in their respective communities, and do so without 

the economic and mental anguish of immense regulation that will 

only continue to increase as a result of the Dodd-Frank Act? 

A.1. Congress has mandated a number of financial regulations to 

protect consumers and the FDIC recognizes that banks expend significant resources to comply with these laws. The FDIC is a strong 

advocate for consumer protection and we take our responsibility for 

ensuring compliance very seriously. 

We agree with your constituents that this is an extremely challenging time for banks, and we applaud their efforts to maintain 

strong compliance programs while remediating credit quality and 

earnings issues associated with the economic downturn. Compliance with consumer protection laws requires considerable time and 

resources on the part of financial institutions, particularly during 

a period of stressed business conditions. Recent legislation should 

help level the playing field with nonbanks as they now will be required to meet the same standards as banking institutions, especially in the mortgage finance arena. However, it is clear that consumers have come to expect, and depend greatly on, insured depository institutions to design and offer fair and equitable financial 

services products. We believe the public’s significant trust in banks 

has been fostered by banking institutions’ diligence in maintaining 

effective consumer protection programs. 

We understand your constituents’ concerns and hope banks can 

continue to meet the public’s expectations for delivering responsible 

consumer financial products. At the same time, the FDIC will 

strive to maintain a streamlined examination process to help ensure bankers can focus on their core banking business and serve 

consumers on Main Street. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARY L. SCHAPIRO 

Q.1. Chairman Schapiro, a number of recent SEC initiatives have 

been approved by a split Commission. 
154 

Given the importance of implementing the Dodd-Frank legislation in a balanced manner, what steps are you taking to propose 

and adopt rules that have the support of all five Commissioners? 

A.1. Since I have become Chairman, over 91 percent of the Commission’s rulemaking actions have been approved by a unanimous 

vote. The Commission works hard to reach consensus on every 

matter, and I have rescheduled matters when additional time and 

further discussion may help us arrive at a decision that can be supported by all. 

This is not to say, however, that unanimity is the only acceptable 

outcome. Sometimes, reasonable people—acting based on their own 

informed judgment—must ultimately agree to disagree. As our experience indicates, this happens relatively infrequently at the Commission. When it does occur, the matters are typically among the 

most controversial also from a public perspective. This is to be expected, as our Commission structure and public comment process 

is designed so that strongly held differences of opinion by external 

constituents are important factors that are considered by all Commissioners. 

Q.2. Chairman Schapiro, the Dodd-Frank Act requires the SEC to 

adopt countless rules, establish new offices, and conduct a number 

of studies. A 10-page implementation schedule recently posted on 

the SEC’s Web site gives an idea of what an undertaking this will 

be. These Dodd-Frank responsibilities must be balanced with the 

SEC’s routine enforcement and oversight responsibilities. Needless 

to say, some more discretionary rulemaking by the SEC will have 

to be moved to the back burner in order to comply with the aggressive Dodd-Frank implementation schedule and address the serious 

problems with enforcement and compliance brought to light by the 

Madoff and Stanford cases. 

How do you reconcile your decision to move forward with proxy 

access, a completely discretionary grant of authority in the DoddFrank legislation, with the need to move forward with the legislation’s many other time-sensitive mandates? 

What additional discretionary items do you intend to take up in 

the next year? 

A.2. The Commission most recently proposed its ‘‘proxy access’’ 

rules on June 10, 2009, over a full year before the enactment of the 

Dodd-Frank Act. The comment period on these proposals was extended once, and ultimately closed in mid-January, 2010. Between 

that date and mid-July, 2010, the staff analyzed comments; developed a term sheet for adoption; considered Commission responses 

to that term sheet; and drafted an adopting release and regulatory 

text. Consistent with our internal processes, a fully developed 

adoption package was provided to Commissioners well before the 

Dodd-Frank Act was passed by Congress and signed into law by 

the President on July 21, 2010. Between that date and the Commission’s adoption on August 25, 2010, the remaining staff work involved responding to Commissioners’ questions, redrafting to address Commissioners’ concerns, and revising the draft release to account for the statutory language on the topic included in the DoddFrank Act. Finalizing this regulatory action did not divert any resources that are or were necessary for implementing Dodd-Frank. 
155 

The timing was driven by a hope that new rules could be in place 

for most, if not all, of the 2011 proxy season. 

As you note, Commission and staff resources are focused on 

meeting the obligations that Congress has created for us through 

Dodd-Frank as well as previous legislative actions. We believe, 

however, that certain ‘‘discretionary’’ rulemakings must continue to 

go forward—despite strained resources—to fulfill our overarching 

mandate of protecting investors, maintaining fair and orderly markets, and facilitating capital formation. At this time, while it is difficult to predict precisely which rulemaking efforts will go forward, 

non-Dodd-Frank issues I expect to bring before the Commission for 

consideration during the next year include: a variety of market 

structure rulemakings, consolidated audit trail, large trader reporting, broker-dealer financial responsibility, short-term borrowing 

disclosure, Regulation M, point of sale disclosure, proxy solicitation 

enhancements, target date funds, and 12b-1 fees. In addition, following review of the comments on our recent concept release on 

proxy ‘‘plumbing’’ issues, I expect to bring some related proposals 

before the Commission during the next year. 

Q.3. Chairman Schapiro, Section 939G of the Dodd-Frank Act, 

which eliminated the expert liability exemption for credit rating 

agencies, shut down the already weakened securitization markets 

for a brief period upon enactment. A temporary fix by the SEC 

averted the problem, but a long-term solution still is needed. More 

generally, other regulatory changes in the securitization space 

could have unintended consequences, particularly if differences 

among asset classes are not taken into account. 

What is the SEC doing to develop and implement a permanent 

solution to the credit rating agency issue? 

What is the SEC doing to ensure that the securitization rules it 

adopts avoid creating further unintended consequences in any affected asset class? 

A.3. With respect to the first question, Commission staff currently 

is discussing this issue with market participants and the credit rating agencies. In light of the significant revisions to the regulatory 

landscape currently being implemented for asset-backed securities 

and rating agencies, the staff is working on a solution that takes 

account of the new regulatory regime. 

With respect to the second question, on April 7, 2010, the Commission published for public comment proposals to amend Regulation AB to enhance the disclosure investors receive when they purchase asset-backed securities. In addition, last month we issued 

two further proposals concerning asset-backed securities to implement Sections 932, 943, and 945 of the Dodd-Frank Act. Each of 

these proposals is subject to public comment, a critical step in the 

Commission’s rulemaking process. We currently are working with 

our fellow regulators to propose risk retention requirements for 

asset-backed securities as required by Dodd-Frank, which also will 

be subject to notice and comment. As always, we will carefully consider all input we receive, including unintended consequences, as 

we formulate final rules. In addition, while we will make every effort to foresee and address unintended consequences in adopting 

final rules, whether in implementing Dodd-Frank or otherwise, the 
156 

Commission and its staff stand ready to act quickly to address any 

unintended consequences that may arise. 

Q.4. Chairman Schapiro, last year you announced the creation of 

a new Division of Risk, Strategy, and Financial Innovation, which 

combined the Office of Economic Analysis and the Office of Risk 

Assessment, and you said ‘‘By combining economic, financial, and 

legal analysis in a single group, this new unit will foster a fresh 

approach to exchanging ideas and upgrading agency expertise.’’ 

This summer, both the Chief Economist and Deputy Chief Economist, along with some other economists, left the Commission. The 

former Chief Economist was quoted in a recent news article as saying that one of the reasons he left the SEC was because he felt the 

chief economist’s role was diminished in importance under your 

chairmanship. In fact, prior to your chairmanship, the Chief Economist had reported directly to the Chairman. But, you insisted that 

the Chief Economist now report to the head of the Division of Risk, 

Strategy and Financial Innovation. 

Why have you diminished the role of economic analysis at the 

Commission? 

A.4. The importance of economic analysis to the SEC and its work 

is undiminished. Neither the creation of the new Division of Risk, 

Strategy, and Financial Innovation (RiskFin), nor our current need 

for a new Chief Economist should be viewed as reflecting any diminishment of the role of economic analysis at the SEC. On the 

contrary, as is clear in the portion of my statement quoted above, 

it was—and remains—my intention to strengthen the already significant role of economic analysis at the Commission by integrating 

it with other analytic disciplines and techniques into a single organization serving the entire Commission. In light of the SEC’s broad 

responsibilities, I continue to believe that such a comprehensive, 

synergistic analytic capability makes far better sense than permitting economic analysis to remain isolated from other, complementary analytic disciplines that are useful in understanding emerging 

market conditions, trading practices, and their implications. Even 

so, the full benefits of combining these formerly separate or novel 

analytic functions cannot be realized overnight. 

Vigorous and expert economic analysis under strong leadership is 

essential to support the Commission’s work. As noted above, 

RiskFin was designed to combine and build upon our existing analytic capabilities. Nevertheless, as part of our ongoing search for 

the Chief Economist, I have made it explicit that, ‘‘the Chief Economist will report directly to me and, on economic matters, play the 

lead role in representing the Division of Risk, Strategy, and Financial Innovation before the Commission.’’ I have made the Chief 

Economist’s primary role equally clear: ‘‘I will look to the Chief 

Economist to assist me, my fellow Commissioners, and senior Commission staff in identifying and evaluating the economic implications of potential policy options.’’ 

Q.5. Chairman Schapiro, four SEC rulemakings in the past 5 years 

have been successfully challenged in court because of the Commission’s failure to provide a sound economic justification for some of 

its arguments. 
157 

In light of these defeats, why do you insist on favoring 

unmeasurable, behavioral concepts like ‘‘investor confidence’’ as 

justifications for rulemakings over rigorous economic analysis 

based on sound theoretical arguments and solid empirical evidence? 

A.5. Economic analysis is a critical component of the Commission’s 

rulemaking process. It provides the Commission with a valuable 

framework to assist in the development of policies that best serve 

investors and the broader capital markets. For example, the Commission relies on principles of economic reasoning to understand 

and assess the likely responses of market participants to various 

regulatory alternatives. Similarly, the Commission relies on available empirical data and economic analysis to understand a potential rule’s economic costs and benefits, as well as its likely effect 

on competition, efficiency, and capital formation. 

Recognizing the importance of robust economic analysis in the 

rulemaking process, I established the Division of Risk, Strategy, 

and Financial Innovation in September 2009. A principal purpose 

of this new division is to elevate the role of economic analysis in 

the Commission’s policymaking process and to strengthen the quality of the economic analysis underlying new Commission rules. As 

the Commission undertakes rulemaking in response to the DoddFrank Act and in other areas, this new division will continue to 

provide the Commission with sound economic analysis to inform 

our policy choices. The end result, I believe, will be Commission 

rules that rest on solid economic analyses that further our statutory mission. 

Q.6. Chairman Schapiro and Chairman Gensler, the Dodd-Frank 

Act placed great emphasis on moving over-the-counter derivatives 

into clearinghouses for the purpose of reducing risk in the financial 

system. While this is a laudable goal, if not properly constructed, 

clearinghouses could be the too-big-to-fail entities at the center of 

the next crisis. The last thing the American people want to do is 

pay for another bailout. 

What is each of you doing to ensure that the rules take seriously 

the potentially disastrous consequences of a misstep in the operation or oversight of clearinghouses? 

A.6. The Commission has extensive experience with centralized 

clearance and settlement systems for securities. Since the 1975 

amendments to the Exchange Act, the Commission has had direct 

regulatory authority over the clearinghouses and securities depository that serve as the infrastructure of the U.S. securities markets. 

To date, the Commission’s authority over clearance and settlement 

in the security-based swap market has been much more limited. As 

a result of the Dodd-Frank Act, the Commission now has substantially greater authority to regulate this area. 

In the coming months, I anticipate the Commission will use this 

new authority to consider rules designed to strengthen the risk 

management and governance practices of clearing agencies. The 

Commission staff also will continue its efforts to coordinate supervisory and oversight responsibilities in this area with the staff from 

the CFTC and the Federal Reserve, including under the payment, 

clearing, and settlement provisions of Title VIII of the Dodd-Frank 

Act. Both the Commission’s rulemaking and its ongoing oversight 
158 

of clearing agencies will continue to focus on the critical role that 

clearing agencies play in our financial system and the regulatory 

principles for those agencies set forth in the Exchange Act. 

Q.7. Chairman Schapiro and Chairman Gensler, at a time when 

our economy is in terrible shape, we need to be particularly attentive to the unintended consequences of regulatory actions. Main 

Street businesses, large and small, have told us how imposing 

clearing and margin requirements on them will affect their ability 

to expand and hire. An effective, broad end user exemption is essential and completely consistent with the goals of transparency 

and mitigation of risk to the financial system. 

Are you committed to crafting a broad end user exemption that 

allows our job creators to avoid costly clearing, margin, exchange 

trading, and other obligations under the Act? 

A.7. As you note, with respect to clearing, an effective end-user exception is consistent with the policy goals of the Dodd-Frank Act. 

An end-user clearing exception that is appropriately implemented 

can facilitate the activities of end users. In the coming months, the 

Commission plans to propose rules relating to the end-user clearing 

exception, and will consider seriously the comments of all interested parties in order to help ensure appropriate implementation. 

With respect to margin, the Commission has not yet proposed rules 

under the Dodd-Frank Act provisions relating to margin requirements for noncleared security-based swaps transacted by securitybased swap dealers and major security-based swap participants for 

which there is not a prudential regulator. I am sensitive to the concerns that have been expressed about the potential impact of these 

requirements—and other provisions of the Dodd-Frank Act—on end 

users. Accordingly, I expect that the Commission will carefully consider both the scope of its authority in this area and the potential 

effects of margin requirements on the markets and market participants, including the nature and extent to which such requirements 

could impact the business of end users. Public feedback through 

the notice and comment process—including input from end users— 

also will fully inform any final rule that the Commission may 

adopt. 

Q.8. Chairman Schapiro and Chairman Gensler, Dodd-Frank mandates that both of your agencies adopt an unprecedented number 

of rules in a very short period of time. And, as you know, each of 

your agencies has a ‘‘statutory obligation to do what it can to apprise itself—and hence the public and the Congress—of the economic consequences of a proposed regulation before it decides 

whether to adopt the measure.’’ 

However, a recent news article pointed out that both the SEC 

and the CFTC have been without Chief Economists for months. 

Chairman Schapiro and Chairman Gensler, why have your Chief 

Economist positions gone unfilled for so long? 

How can you expect to adequately consider the economic consequences of all of your proposed rules with unfilled Chief Economist positions? 

A.8. The SEC’s need for sound economic analysis ranges across all 

three of its rule-writing divisions and includes the considerable litigation support our economists provide to the Division of Enforce-
159 

ment. Finding the strongest possible Chief Economist for the SEC 

is therefore a matter of considerable importance not only to me but 

to the SEC as a whole. We are conducting a broad search for the 

SEC’s next Chief Economist and I actively have participated in 

that effort. I believe the additional effort we have taken to identify 

a range of strong candidates to meet our requirements is well 

worth the time inevitably entailed. 

While we hope to recruit a Chief Economist soon, our economist 

staff in Risk Fin continues to analyze the economic implications of 

each proposed rule. The Chief Economist will provide strong and 

experienced leadership to this team of 25 PhD financial economists 

who routinely analyze the potential economic consequences of proposed regulatory actions and provide analytic support for SEC enforcement actions. They are also engaged in the more prospective 

and creative process of helping to identify the most appropriate 

regulatory approaches for new or evolving markets and products. 

Those activities continue unabated as we conduct a vigorous search 

for the SEC’s next Chief Economist. We continue to hire experts in 

financial engineering and other analytic disciplines that complement our economists’ analytic efforts. We are now in the midst 

of our annual effort to recruit new staff economists to the SEC. Attrition and replacement hiring within our staff of PhD-level financial economists is normal and can even assist in ensuring that our 

economist staff retains its familiarity with the latest analytic techniques and leading currents of thought in their fields. 

Leading our team of professional financial economists, particularly during the present, exceptionally active period of rule writing, 

will require exceptional leadership and practical skills. In seeking 

candidates to serve as the SEC’s next Chief Economist, I have, 

therefore, stressed that, ‘‘The Chief Economist will . . . play a special leadership role in guiding our staff economists and ensuring a 

uniformly high standard of analysis.’’ I personally have sought the 

assistance of a wide variety of leaders outside the SEC, including 

each of the SEC’s former Chief Economists, as we build the strongest possible list of candidates to fill this position. 

Q.9. Chairman Schapiro and Chairman Gensler, the derivatives 

title of the Dodd-Frank Act establishes new entities called ‘‘swap 

execution facilities’’ and ‘‘security-based swap execution facilities,’’ 

commonly referred to as ‘‘SEFs,’’ as alternatives to exchanges. 

Ideally, multiple SEFs will compete to give market participants 

several different choices for trading particular types of swaps. 

Given the SEC’s experience in overseeing securities markets in 

which participants have the choice of several different trading 

venues, what is each of you doing to ensure that the CFTC has the 

benefit of the SEC’s expertise in this area? 

A.9. Members of SEC and CFTC staff have collaborated extensively 

and regularly exchanged information while working to create a 

framework for the regulation of the swap and security-based swap 

markets under the Dodd-Frank Act. In particular, the two teams 

working on SEFs have sought to make sure that each agency has 

the benefit of the other’s expertise in regulating the financial markets. 
160 

Based on joint meetings with market participants and a joint 

roundtable on SEFs held by SEC and CFTC staff, I believe it is 

possible that multiple SEFs will trade the same swaps or securitybased swaps. Trading on multiple markets is a hallmark of our equity and options markets, and competition among those markets 

helps investors and market professionals obtain the best price. We 

have shared with CFTC staff our experience in regulating multiple 

trading venues under the authority of the Exchange Act and the 

national market system. 

Q.10. Chairman Schapiro and Chairman Gensler, Title VIII authorizes your agency to prescribe regulations for financial institutions engaged in designated activities for which each is the Supervisory Agency or the appropriate financial regulator governing the 

conduct of the designated activities. 

What plans do you have for exercising this authority? 

A.10. Commission staff has been working closely with the staffs 

from the Federal Reserve and the CFTC to develop a coordinated 

strategy for rulemaking and supervisory activities under Title VIII 

of the Dodd-Frank Act for financial market utilities designated as 

systemically important. In the coming months, I anticipate that the 

Commission will propose rules relating to standards for clearing 

agencies within its jurisdiction, including rules to implement the 

new ‘‘notice of material change’’ provisions applicable to designated 

financial market utilities under Title VIII. 

Q.11. The Financial Stability Oversight Council is an important 

feature of Dodd-Frank. During the conference, my amendment was 

adopted to clarify the role of the Council and the Federal Reserve. 

My amendment gave the Council responsibility for financial stability regulation. Up to that point, the legislation had colocated this 

responsibility at the Fed and the Council. The Congressional intent 

is clear that you, as members of the Council, are responsible for all 

policy matters related to financial stability. After the Council acts, 

implementation of your policy determinations will fall to the individual Federal financial regulators, including, of course, the Fed. 

With this in mind, I would like each of you to comment on your 

preparations to serve on the Council: 

Have you directed your staff to examine and study all of the 

issues that will come before you? 

Are you prepared to participate on the Council, not as a rubber 

stamp for the Chairman of the Council, but as a fully informed individual participant? 

A.11. Yes. The Council and the staff of each agency (including the 

SEC) have formed a number of interagency working teams to establish the structure of the Council itself and address its substantive responsibilities. This includes teams establishing a process 

for designating systemically important nonbank financial companies and financial market utilities for heightened supervision and 

identifying potential risks and gaps in oversight and regulation. 

The Council already has sought public comment regarding the 

Volcker Rule study (http://www.treas.gov/FSOC/docs/2010- 

25320lPI.pdf) and the proposed rulemaking for designating 

nonbank financial companies as systemically important (http:// 

www.treas.gov/FSOC/docs/2010-25321lPI.pdf). 
161 

I appreciate that the Council was designed to bring together multiple independent perspectives to these and other issues that involve potential risks to the stability of our financial system. Indeed, 

I believe that this model is one of the Council’s core strengths. 

Q.12. Secretary Geithner has argued that there is a strong case to 

be made for continuing Government guarantees of mortgage-backed 

securities. Additionally, the Federal Reserve published a paper that 

proposes Government guarantees of a wide range of asset backed 

securities, including those backed by mortgages, credit cards, autos, 

student loans, commercial real estate, and covered bonds. While 

some may believe that the Government will charge fair prices for 

Government guarantees, the history of Government run insurance 

programs suggests that things will not go well. 

Does anyone on the panel support extending or increasing Government insurance against losses on asset backed securities which, 

it seems to me, socializes risk, puts taxpayers on the hook for 

losses, and protects Wall Street against losses? 

A.12. The mission of the SEC is to protect investors, maintain fair, 

orderly, and efficient markets, and facilitate capital formation. In 

fulfilling this mission, the SEC’s role traditionally has been to regulate the disclosure that public companies provide to their investors and to enforce the Federal securities laws, except where another role is specifically mandated or authorized by Congress,. Accordingly, I do not believe that this is a topic on which it would 

be appropriate for me to take a position. 

Q.13. Please provide the Committee with an implementation schedule that includes: 

(a) a list of the rules and studies that your agency is responsible 

for promulgating or conducting under Dodd-Frank and the date by 

which you intend to complete each rule or study; and 

(b) a list of the reorganizational tasks your agency will undertake 

to fulfill the mandates of Dodd-Frank and the date by which you 

intend to complete each task. 

A.13. Attached is a list containing the approximate dates of the 

rulemakings, studies and other actions the Commission will be undertaking pursuant to the Dodd-Frank Act in the 1 year period following its becoming law. The information contained in the list also 

can be found on our Web site at http://www.sec.gov/spotlight/ 

dodd-frank/dfactivity-upcoming.shtml#11-10. This Web page is updated regularly. Currently, we have not yet set target dates beyond 

the 1-year time frame for other rulemaking actions and studies, but 

will make that information available on our Web site when those 

time frames have been developed. The Commission is on schedule 

to complete all of the required rulemakings, studies and other actions by the dates set forth in Dodd-Frank. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM MARY L. SCHAPIRO 

Q.1. As I’ve made clear before, I think the largest financial firms 

in this country are just too large, and that their massive size 

threatens our economic security and puts us at risk in future crises. 
162 

1While Section 619 establishes a broad definition of ‘‘trading account,’’ the term historically 

has been used principally in a banking context because banks generally maintain separate investment accounts and trading books (as opposed to broker-dealers, who have no such separation). 

I think the rise of proprietary trading was one of the key drivers 

behind the massive growth in our largest financial institutions. 

Firms were taking on ever increasing prop trading positions, often 

with highly unstable short term financing, and when things froze 

up, the house of cards collapsed. The Volcker Rule looks to stop 

this risk. 

I know that my colleagues, Senator Merkley and Senator Levin, 

drafted section 619 of the Dodd-Frank Act to ensure broad coverage 

of the prohibition on proprietary trading by banks, and meaningful 

restrictions on the largest nonbank financial firms. Nevertheless, 

one of the concerns I have is that firms may try to evade the restrictions. Particularly, I’m concerned that if the regulators set a 

definition of ‘‘trading account’’ that is too narrow, it might not capture all of the risks of proprietary trading. These evasions could 

only happen if the regulators ignore the clear direction of the law 

to stop proprietary trading. 

Are you prepared to take a broad view on the definition of ‘‘trading account’’ and examine and prevent proprietary trading, wherever it occurs? 

In short, are you prepared to use the full power of the MerkleyLevin provisions to cut the size and riskiness of our banks so they 

get back to the business of lending to families and businesses? 

A.1. With respect to the first question, Commission staff is working 

closely with the staff of the bank regulators to study the definition 

of a ‘‘trading account’’ under Section 620 of the Dodd-Frank Act. 1

Commission staff is considering how the definition should be applied in the broker-dealer context to best meet the goals established by Section 619 of the Dodd-Frank Act. I am mindful—as is 

the Commission staff—that the results of the study currently being 

conducted by the Financial Stability Oversight Council (FSOC) 

under Section 619 also will help inform our approach to this important issue. 

With respect to the second question, I must defer to our colleagues at the banking regulators, who are better-placed to address 

the size and riskiness of banks serving the vital function of lending 

to families and businesses. More broadly, however, there are parts 

of the Merkley-Levin provisions where our expertise can help further the goals of those provisions. For example, with respect to 

‘‘proprietary trading’’ and ‘‘market making,’’ Commission staff currently is sharing its expertise to inform the FSOC study, and I anticipate that this expertise will help reduce the risk that either activity is employed by firms to undercut the goals of Section 619 of 

the Dodd-Frank Act. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM MARY L. SCHAPIRO 

Q.1. Regulatory Structure for Volcker Rule. As you know, the objectives of the Merkley-Levin Volcker Rule are two-fold: (1) to address 

the specific risks to our financial stability caused by proprietary 
163 

trades gone bad, and (2) to take on the conflicts of interests in proprietary trading. 

Ensuring effective oversight will be challenging, because the 

issues are complicated. As you could see from the exchange at the 

hearing between Senator Reed and Chairman Bernanke, with 

interjections by Chairman Shapiro and Mr. Walsh, I and others are 

beginning to come of the view that there will have to be oversight 

at two levels. First, there will need to be real-time (or as close as 

practicable) monitoring and enforcement at the individual trade-bytrade level, which looks to whether any given transaction is proprietary trading. This will be necessary to ensure that the permitted 

activities are not abused. Second, there will need to be macro-level 

reviews of policies and procedures, and overall portfolio holdings. 

This will be necessary to ensure that proprietary positions and conflicts of interest are not cropping up despite the restrictions. In addition to monitoring and enforcing the proprietary trading and conflicts of interest restrictions, regulators are also tasked with setting 

appropriate capital charges, both for permitted activities, and, in 

the instances of nonbank financial companies supervised by the 

Board, capital charges for all covered activities. 

Your agencies appear to have somewhat different strengths in 

these areas, with perhaps the SEC and CFTC having greater experience policing the securities and derivatives markets for trading 

violations, and the banking regulators having greater experience 

evaluating the safety and soundness of firms and setting appropriate capital charges and levels. 

Share with me your view about the strengths you believe your 

agency brings to the oversight and enforcement of the MerkleyLevin Volcker Rule? Are you committed to working with your fellow regulators to best use your agency’s strengths in the effort to 

keep our financial system safe? 

A.1. We are committed to working with our fellow regulators to develop a coordinated implementation of the Merkley-Levin Volcker 

Rule (Volcker Rule) that builds on each agency’s relative strengths 

in regulating financial firms. 

Among the strengths the Commission brings to the implementation of the Volcker Rule is our regulatory experience with securities 

trading activities, as well as with the concepts of ‘‘proprietary trading,’’ ‘‘market making,’’ and ‘‘hedging.’’ For instance, the Commission staff has experience with activity that we consider to be bona 

fide market making in the equities markets. I look forward to the 

Commission and its staff using this experience as we consider—together with our fellow regulators—how ‘‘market making’’ should be 

viewed for purposes of the Volcker Rule. Another example is the 

Commission’s experience in examining and sanctioning firms with 

respect to conflicts of interests—experience that will help inform 

our understanding and ability to address some of the misconduct 

the Volcker Rule seeks to prevent. 

With respect to real-time collection of trade-by-trade data, given 

that a key goal of the Volcker Rule is addressing a firm’s risk exposure, it may be necessary to focus on the nature and scope of a 

firm’s principal trading and positions in the context of the type of 

market activity in which it is engaged. Collecting and analyzing 

trade-by-trade data on a real-time basis would require substantial 
164 

new resources given both the volume of data that would need to be 

monitored and the current lack of regulatory infrastructure for collecting and surveilling such data on a real-time basis across all relevant asset classes and firms. 

Q.2. Data Collection. The Dodd-Frank Act requires a significant 

amount of new data collection and storage, particularly in the derivatives arena. The SEC and CFTC have made a priority of new 

data collection in a number of areas. Collection and the ability to 

automate reviews of the data will be critical to enforcing a wide 

range of mandates under Dodd-Frank, including derivatives position limits, the Volcker Rule provisions, and other parts of the bill. 

At a minimum, your staffs will need to know who’s making trades, 

the prices, how long firms hold onto their positions, and whether 

and how their positions are hedged. 

Where is your agency in terms of thinking through the relevant 

data you will need to collect? 

Are there any major challenges you see in being able to collect 

and analyze that data in real-time, so as to ensure compliance with 

these various restrictions? 

How do you see the newly created Office of Financial Research 

playing into this process? 

A.2. The Dodd-Frank Act not only creates new requirements for 

data collection and analysis of security-based swaps by the SEC, 

but also underscores similar needs for markets we have long regulated. Today, the SEC collects data after the fact through a series 

of manual requests that can take days or even weeks to fulfill. This 

is not acceptable. I therefore have sought to have the Commission 

take a holistic approach—addressing issues with our current data 

requirements while at the same time designing programs for our 

new requirements that take into consideration what we have 

learned from past efforts. 

These requirements start with data collection and reporting. For 

the equities markets, challenges around data collection have led 

the Commission to propose new rules for large trader reporting and 

a consolidated audit trail. Both of these initiatives seek to address 

shortcomings in the agency’s ability to collect and monitor data in 

an efficient and scalable manner. For derivatives, the Commission 

staff is in the midst of developing new rules and reporting requirements that are designed to facilitate data collection. The staff is 

considering a range of options and issues in the derivatives space, 

including the utility of standardized formats and data elements 

and the need for robust and automated Commission access to the 

data. In addition, the Commission staff is considering standardized 

counterparty names so that derivative ownership can be tracked. 

A framework in which data is regularly collected on a daily basis 

and available to the SEC and other regulators would provide the 

Commission an opportunity for the timely analysis of specific 

issues as well as a framework for continuous, long-term study of 

the markets. In order to ensure any type of general or specific analysis accurately reflects the order and sequence of trading events, 

new systems we procure should be capable of receiving time 

stamps, and the Commission has proposed requiring data to be 

tagged with time stamps. Implementation of such initiatives would 

be a tremendous step forward. 
165 

Ensuring standardization of reporting is necessary, but not sufficient, to ensure a robust data analysis program. The Commission 

also needs to create an infrastructure for the scalable collection and 

timely analysis of such data. Again, we have started with existing 

requirements for the equities markets and are currently engaged in 

a Request for Information process with vendors who have proven 

track records in providing the types of specialized databases and 

analytical solutions required by the Commission. To help support 

and staff these initiatives with appropriate levels of expertise, the 

Division of Trading and Markets and the Division of Risk, Strategy, and Financial Innovation have been working, within the limitations of current budget constraints, to identify industry experts 

with the abilities, knowledge, and desire to help the Commission 

meet the new requirements under the Dodd-Frank Act. 

In addition to internal programs, the Commission staff has been 

working with the CFTC staff whenever data standards are to be 

shared across similar products regulated by both agencies. The 

Commission staff also has been working with the newly created Office of Financial Research on their preliminary initiatives. In particular, OFR can be an excellent conduit for disseminating common 

data standards that can be used across all regulators and market 

participants. In this fashion, data can be sourced in a more efficient manner that benefits not only regulators of specific firms and 

markets, but also the OFR itself as it seeks to aggregate summary 

information from across the marketplace. I believe OFR will provide an excellent complement to the type of work underway at the 

Commission today and look forward to continuing our active participation as they expand their efforts. 

With respect to ‘‘real-time’’ data collection and analysis, the collection of information on a regular, intraday basis would pose significant technical hurdles in markets where data is not generated 

in real-time. In addition, even if real-time collection of data may be 

feasible, it will require substantial new resources to achieve realtime analysis of the entire volume of the data that the Commission 

will seek to collect. Moreover, because much of the analysis likely 

to be performed will require careful reconstruction of events that 

also requires time, such analysis may best be accomplished in the 

context of end-of-day, or even longer, processing. 

Q.3. Cross-border Resolution. I know FDIC and to some extent others have been working very diligently to implement the new resolution authority for our Nation’s large complex financial institutions—which owes so much to my colleagues on this Committee 

from Virginia and Tennessee. 

But one of the areas I want to keep an eye on—and on which 

I offered an amendment during financial reform to provide additional oversight of—is how to make that resolution work for large 

firms operating across multiple national borders. 

Where are we in terms of making the Dodd-Frank resolution authority work for large, systemically significant financial firms operating across borders? How cooperative have our international partners been in this effort? 

A.3. The challenge of resolving a large complex financial institution 

is compounded by different regulatory regimes that may apply to 
166 

the same entity, or to affiliated entities, that operate across borders. The Commission and its staff participates in productive multilateral discussions among regulators in order to better understand the business practices and organizational aspects of global financial firms and how those practices and organizations can make 

resolution of international entities more challenging. The Commission plans to continue to work closely with the FDIC and other regulators to identify and address issues of mutual concern that arise 

in the context of the resolution of the Nation’s large complex financial institutions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM MARY L. SCHAPIRO 

Q.1. Chairman Schapiro, this summer the New York Times reported on yet another AIG outrage. As part of the deal the New 

York Fed put together that paid off AIG’s counterparties at par, 

AIG also waived its right to sue Goldman Sachs and other counterparties, even for fraud. It is interesting that you sued Goldman 

Sachs for fraud, but the New York Fed’s deal did not allow AIG to 

sue Goldman Sachs or anyone else for fraud. If AIG had been able 

to sue, that could have helped recover shareholder value and made 

the massive bailout smaller. In your opinion, was it a mistake to 

force AIG to give up its right to sue, and do you plan to investigate 

this? 

A.1. I understand your question to involve the actions of the Federal Reserve Bank of New York in November 2008 to restructure 

certain AIG credit-default swap contracts. I am not familiar with 

the considerations that factored into the decision-making process. 

As a result, I am not able to offer an opinion on particular components of the final agreements. 

You also asked whether the Commission intends to investigate 

any issues related to these events. Although I am unable to comment on the existence or nonexistence of specific law-enforcement 

investigations, I can assure you that the Commission’s Enforcement Division continues to examine the events surrounding the financial crisis and, where violations of the securities laws are uncovered, the Commission will vigorously pursue culpable entities 

and individuals. 

Q.2. As you know, this Committee held an oversight hearing last 

week on the SEC’s mishandling of the Stanford Ponzi scheme, 

which defrauded investors out of $5 billion. I asked the SEC Inspector General and witnesses from the SEC whether anyone had 

been fired over the Enforcement Division’s disturbing actions, or 

more accurately, deliberate inaction in spite of examiners begging 

them over several years to do something. None of the witnesses 

were aware of any firing. And worse, after the hearing I was informed by the Stanford Victims Coalition that exactly the wrong 

people were rewarded and punished. I was told that many of the 

very people in the Enforcement Division who were guilty of malfeasance were actually promoted. And further, the one person from 

the Examinations Division who identified the problem and doggedly tried to get employees of the Enforcement Division to do their 

job has actually been demoted, possibly out of retaliation for blow-
167 

ing the whistle. Is this true, and if so, why does the SEC reward 

employees who are guilty of malfeasance and punish employees 

who do the right thing? 

A.2. With respect to discipline of staff who worked on the Stanford 

matter, we have carefully reviewed the Inspector General’s report 

and are in the final stages of determining what, if any, personnel 

actions are appropriate. Although the Inspector General’s report 

generally is critical of the performance of Enforcement staff, it does 

not recommend discipline for any particular employee. The Inspector General’s report also did not find that the failure to investigate 

Stanford more aggressively was related to any improper professional, social, or financial relationship on the part of any current 

or former Commission employee. Moreover, the conduct that the Inspector General investigated occurred over 5 years ago, some of it 

extending back well over a decade. Many of the Enforcement employees identified in the report no longer work at the Commission, 

including the most senior people who had final decision-making authority, such as the former District Administrator and two former 

Associate District Directors for Enforcement in the Fort Worth Office. 

The Commission has not promoted or demoted any member of its 

Enforcement or Examination staff as a result of work performed on 

the Stanford matter during the time period reviewed by the Inspector General. Employees with varying degrees of involvement in the 

Stanford matter have been promoted in both programs, however, 

based on their contributions to the Commission’s overall efforts. 

You also inquire about a Fort Worth office employee who was allegedly demoted in retaliation for whistleblowing. The employee at 

issue currently is assigned to a position chairing our Southwest Regional Oil and Gas Task Force, which includes State and Federal 

regulators. The employee was not demoted and did not receive a 

decrease in pay or grade. The employee received a letter of reprimand based on conduct unrelated to Stanford that occurred prior 

to public criticism of the agency for its handling of the Stanford 

matter. 

Q.3. Chairman Schapiro, I also learned at the Stanford Ponzi 

scheme hearing that the SEC Inspector General, who is supposed 

to be an independent watchdog, is not so independent after all. Apparently, the SEC can take as much time as it wants reviewing an 

IG report before it becomes public, redact whatever it wants from 

the report and call it ‘‘proprietary,’’ and control the release date of 

the report. The SEC’s release of the Inspector General’s Stanford 

report looked suspicious because it was done on a day with other 

distracting SEC news. It is stunning that the SEC has so much 

control over the Inspector General. By contrast, I am told that the 

Treasury Department has only seven days to review reports of the 

Treasury Inspector General for Tax Administration (TIGTA). 

Treasury can recommend redactions for taxpayer confidentiality or 

other narrow reasons, but TIGTA makes the call about whether the 

information will be redacted and when the report is released. Why 

does the SEC not allow its Inspector General to be truly independent, and how many IG reports is the SEC currently sitting on? 
168 

A.3. The Commission’s Inspector General has full independence in 

determining what matters to investigate, in conducting those investigations, in drawing its conclusions and in preparing its reports. 

The process described below does not impact that independence in 

any way. 

As you may be aware, under the Inspector General Act, an Inspector General’s reports are provided to the Commission. The 

Commission determines what redactions are needed prior to the 

dissemination of those reports. The Commission strives to make 

only limited redactions to the reports and seeks to perform its review function as expeditiously as is practicable. Examples of the 

types of information typically redacted from recent reports include: 

• information the disclosure of which may harm ongoing law enforcement investigations or proceedings; and 

• names and personal identifying information (generally of persons not employed by the Commission who played peripheral 

roles in the events under investigation and of lower-level Commission employees) to protect personal privacy (in instances 

where names are redacted, we overlay replacement text which 

generally describes the job/role of that individual so that the 

substance of the report is unaltered). 

In certain instances, the Commission may disclose information 

even though it falls into a category listed above due to the public’s 

interest in the information at issue. Prior to the Commission’s approval of the release of a report, Commission staff solicits the input 

and feedback of the Inspector General’s Office on the proposed 

redactions. 

With regard to the timing of the Commission’s release of the Inspector General’s report in the Stanford investigation, the Inspector 

General found in a separate report that the act of redacting portions of the Stanford report ‘‘appeared to proceed independently of 

the timing of the SEC’s . . . action’’ against Goldman Sachs & Co. 

and that it ‘‘did not find any concrete and tangible evidence’’ that 

the filing of the Commission’s action against Goldman Sachs was 

‘‘delayed to coincide with the issuance of the OIG Stanford Report.’’ 

There are two Inspector General reports that the Commission or 

its staff currently is reviewing. We will be making those available 

as soon as possible. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MARY L. SCHAPIRO 

Q.1. Congress clearly intended, as Chairman Dodd and Chairman 

Lincoln set forth in a letter that: ‘‘The legislation does not authorize the regulators to impose margin on end-users, those exempt entities that use swaps to hedge or mitigate commercial risk . . . 

Again Congress clearly stated in this bill that the margin and capital requirements are not to be imposed on end-users.’’ 

Do you agree with the Congressional intent of the Dodd-Lincoln 

letter? 

In setting capital requirements under Title VII, do you agree 

that increases in capital requirements will be linked to the risk as-
169 

sociated with the swap, and not as a punitive mechanism to drive 

volume to central clearinghouses or exchanges? 

Please describe any and all cost-benefit analysis, particularly 

with regard to end-users, that you will undertake prior to issuing 

rules. 

A.1. The Commission has not yet proposed rules under the DoddFrank Act provisions relating to margin requirements for noncleared security-based swaps transacted by security-based swap 

dealers and major security-based swap participants for which there 

is not a prudential regulator. I am sensitive to the concerns that 

have been expressed about the potential impact of these requirements—and other provisions of the Dodd-Frank Act—on end users. 

Accordingly, I expect that the Commission will carefully consider 

both the scope of its authority in this area and the potential effects 

of margin requirements on the markets and market participants, 

including the nature and extent to which such requirements could 

impact the business of end users. Public feedback through the notice and comment process—including input from end users—will 

also fully inform any final rule that the Commission may adopt. 

The Commission also has not yet proposed rules establishing capital requirements for security-based swap dealers and major security-based swap participants. In establishing such capital requirements, the Dodd-Frank Act directs the Commission to consider 

whether they will help ensure the safety and soundness of the entity and whether the standards are appropriate for the risks associated with uncleared security-based swaps. These principles established by the statute—as well as input through the notice and comment process—will guide our consideration of capital requirements 

in this area. 

The Commission conducts a cost-benefit analysis of proposed 

rules pursuant to specific statutory requirements, including those 

set forth in the Paperwork Reduction Act and the Small Business 

Regulatory Enforcement Fairness Act of 1996. Accordingly, any 

proposed rulemaking impacting end users and other market participants will include an analysis of any costs and benefits that 

may accrue to such end users and will be subject to public comment prior to any final action that may be taken. 

Q.2. Dodd-Frank requires that risk retention be jointly considered 

by the regulators for each different type of asset and includes a 

specific statutory mandate related to any potential reforms of the 

commercial mortgage-backed securities market to limit disruption. 

In light of the FDIC’s unilateral decision to add an across the 

board risk retention requirement in the safe harbor rule, which the 

OCC opposed, how do you plan to coordinate and reconcile disagreements in the joint rulemaking? 

A.2. Under Section 941 of the Dodd-Frank Act, the Commission 

and the banking and other agencies will jointly write rules regarding risk retention, with the Department of Treasury—the Chairperson of the Financial Stability Oversight Council—coordinating 

all joint rulemaking required under the section. Staff from a number of Divisions and offices of the Commission have been meeting 

regularly and frequently with the staff from the other agencies and 

Treasury. Thus, we are working diligently with Treasury and the 
170 

other agencies to jointly consider how best to prescribe risk retention rules for the various asset classes of asset-backed securities. 

I also would note that the FDIC rule you referenced (12 C.F.R. 

360.6) provides that upon the effective date of final regulations required by Section 941(b) of the Dodd-Frank Act, such final regulations shall exclusively govern the requirement to retain an economic interest in a portion of the credit risk of the financial assets 

under the FDIC rule. 

Q.3. Market participants highlight uncertainty related to changing 

regulations, new accounting standards, and other mandates as an 

obstacle to a resurgence of these markets. What steps are your 

agencies currently taking to minimize these complications? What 

should be done collectively by regulators to limit this uncertainty 

as you look toward the joint rulemaking? 

A.3. Given the breadth of the Dodd-Frank Act’s implementation requirements, including many necessitating joint rulemakings, the 

SEC has significantly expanded its public outreach and is committed to an open and transparent notice and comment rulemaking 

process. 

Specifically, we have enhanced our public consultative process by 

expanding the opportunity for public comment beyond what is required by law. To maximize the opportunity for public comment 

and to provide greater transparency, less than a week after DoddFrank became law, we made available to the public a series of email boxes to which interested parties can send preliminary comments before the various rules are proposed and the official comment periods begin. We also are trying, given time constraints, to 

meet with anyone who seeks to meet with us on the various issues 

raised. In addition, staff is seeking to reach out as necessary to solicit views from affected stakeholders who do not appear to be fully 

represented by the developing public record on a particular issue. 

To further our public outreach effort, the Commission also is holding public roundtables and hearings on selected topics. 

Commission staff also is meeting regularly on both a formal and 

informal basis with other financial regulators, and staff working 

groups frequently consult and coordinate with the staffs of the 

CFTC, Federal Reserve Board and other prudential financial regulators, as well as the Department of the Treasury, the Department 

of State, the Commerce Department, and the Comptroller General. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM GARY GENSLER 

Q.1. Chairman Gensler, you have been very active in the CFTC’s 

implementation of the derivatives title of the Dodd-Frank Act. 

Recognizing that you are only one of five Commissioners at the 

CFTC, what steps are you taking to adopt balanced rules that can 

garner the support of all five Commissioners? 

A.1. Throughout the rulemaking development process, Commission 

staff strives to ensure that each Commissioner is apprised of issues 

involved. Staff teams consult with all Commissioners and the comments and suggestions of each are often incorporated in staff recommendations. 
171 

Q.2. Chairman Gensler, the Dodd-Frank Act gives the CFTC new 

registrants such as major swap participants and swap dealers. 

Does the CFTC intend to rely on a self regulatory organization 

to oversee these new entities, as it does for futures commission 

merchants? 

A.2. Some tasks assigned to the Commission may be delegated in 

turn to Self Regulatory Organizations (SROs) where permitted, appropriate and where the SROs are ready to assume the new tasks. 

Q.3. How will the CFTC coordinate its oversight of these entities 

with other regulators? 

A.3. Coordination with the Securities and Exchange Commission 

and the banking regulators will be required to implement the 

Dodd-Frank Act in an efficient manner and to avoid unnecessary 

duplication on registrants. The Commission is striving to coordinate its rulemaking activities with its fellow regulators through 

staff to staff contacts, and it is contemplated that these coordination efforts will continue as the agencies move past the rule-writing 

process to administering the Dodd-Frank Act. 

Q.4. Chairman Gensler, as one law firm’s commentary noted, 

‘‘major provisions of the Derivatives Legislation are either largely 

indeterminate or too broadly drafted to be implemented literally.’’ 

Chairman Gensler, how do you reconcile this assessment with 

your conclusion that the ‘‘Dodd-Frank Act is very detailed, addressing all of the key policy issues regarding regulation of the swaps 

marketplace’’? 

A.4. While the Dodd-Frank Act is detailed and comprehensive, it 

directs the financial regulatory agencies to write regulations to implement the policies Congress enacted. The rule-writing process 

will involve careful consideration of the insights of industry and 

other members of the public through meetings and written comments that may spotlight refinements that should be made before 

regulations are finalized. 

Q.5. Should we be concerned that you are not paying sufficient attention to the potential unintended consequences of the legislation? 

A.5. We are actively seeking participation in the rule-writing process from industry and other members of the public. As the rulewriting process goes forward, I am confident that concerns of industry and other members of the public about the consequences of 

rules, unintended or otherwise, will be brought to the attention of 

my fellow commissioners and myself. 

Q.6. Chairman Gensler, you have set up 30 rulemaking teams for 

the Dodd-Frank Act. Some of those teams are headed by enforcement attorneys. 

Please identify which teams are headed by enforcement attorneys 

and why enforcement attorneys are best suited to write the rules 

in the area assigned to each of those teams. 

A.6. Four of the 30 rulemaking teams assigned to draft the rules 

required by the Dodd-Frank Act are led by Division of Enforcement 

Staff. Staff from the Division of Enforcement are leading groups 

drafting rules on manipulation, disruptive trading practices, whistleblowers, and business conduct with counter parties. The Division 
172 

has 35 years experience investigating and litigating cases of manipulation, attempted manipulation, and false price reporting. Each of 

these areas is closely related to the mission of the Division. It 

should be noted that these teams are not limited to Division of Enforcement staff, but rather are composed of staff from several offices. Ultimately, the teams’ recommendations must be approved by 

the Commissioners as proposals, exposed to comments from the 

public, and adopted by the Commissioners as final rules before 

they go into effect. 

Q.7. Chairman Schapiro and Chairman Gensler, the Dodd-Frank 

Act placed great emphasis on moving over-the-counter derivatives 

into clearinghouses for the purpose of reducing risk in the financial 

system. While this is a laudable goal, if not properly constructed, 

clearinghouses could be the too-big-to-fail entities at the center of 

the next crisis. The last thing the American people want to do is 

pay for another bailout. 

What is each of you doing to ensure that the rules take seriously 

the potentially disastrous consequences of a misstep in the operation or oversight of clearinghouses? 

A.7. The Commission is in the process of proposing detailed rules 

for derivatives clearing organizations (DCOs). These proposals contain standards concerning financial resources, margin, and risk 

management with which DCOs will be required to comply. The 

Commission also conducts daily risk surveillance of DCOs, clearing 

members, and large traders and periodic reviews of DCO compliance with the Commodity Exchange Act and Commission regulations. 

Q.8. Chairman Schapiro and Chairman Gensler, at a time when 

our economy is in terrible shape, we need to be particularly attentive to the unintended consequences of regulatory actions. Main 

Street businesses, large and small, have told us how imposing 

clearing and margin requirements on them will affect their ability 

to expand and hire. An effective, broad end user exemption is essential and completely consistent with the goals of transparency 

and mitigation of risk to the financial system. 

Are you committed to crafting a broad end user exemption that 

allows our job creators to avoid costly clearing, margin, exchange 

trading, and other obligations under the Act? 

A.8. The concerns of end users are being given a great deal of attention by the Commissioners and the staff. Their concerns will 

continue to be of great importance throughout the rulemaking process. The Dodd-Frank Act was enacted to reduce risk, increase 

transparency, and promote market integrity within the financial 

system. The rulemakings are intended to implement those goals, 

all of which will benefit customers, particularly end users, using 

the market. There is no intention to unnecessarily increase burdens on end users seeking to reduce their commercial risks. 

Q.9. Chairman Schapiro and Chairman Gensler, Dodd-Frank mandates that both of your agencies adopt an unprecedented number 

of rules in a very short period of time. And, as you know, each of 

your agencies has a ‘‘statutory obligation to do what it can to apprise itself—and hence the public and the Congress—of the eco-
173 

nomic consequences of a proposed regulation before it decides 

whether to adopt the measure.’’ 

However, a recent news article pointed out that both the SEC 

and the CFTC have been without Chief Economists for months. 

Chairman Schapiro and Chairman Gensler, why have your Chief 

Economist positions gone unfilled for so long? 

How can you expect to adequately consider the economic consequences of all of your proposed rules with unfilled Chief Economist positions? 

A.9. The CFTC recently announced the appointment of Dr. Andrei 

Kirilenko as Chief Economist. Dr. Kirilenko, who received his Ph.D. 

in Economics from the University of Pennsylvania, has been with 

the CFTC since 2008. Prior to joining the agency, he worked for 12 

years at the IMF working on global capital markets issues. During 

the process of selecting a Chief Economist, the Commission’s Acting 

Chief Economist, the other economists in the Office of the Chief 

Economist, and other economists on the Commission’s staff took an 

active role in the Dodd-Frank rule-writing process. 

Q.10 Chairman Schapiro and Chairman Gensler, the derivatives 

title of the Dodd-Frank Act establishes new entities called ‘‘swap 

execution facilities’’ and ‘‘security-based swap execution facilities,’’ 

commonly referred to as ‘‘SEFs,’’ as alternatives to exchanges. 

Ideally, multiple SEFs will compete to give market participants 

several different choices for trading particular types of swaps. 

Given the SEC’s experience in overseeing securities markets in 

which participants have the choice of several different trading 

venues, what is each of you doing to ensure that the CFTC has the 

benefit of the SEC’s expertise in this area? 

A.10. I have encouraged the CFTC staff to consult with and coordinate their rule-writing efforts with the SEC staff whenever appropriate in the implementation of the Dodd-Frank Act including the 

drafting of rules to govern SEFs. As part of ongoing communications, contacts between the two staffs have included more than 100 

meetings. 

Q.11. Chairman Schapiro and Chairman Gensler, Title VIII authorizes your agency to prescribe regulations for financial institutions engaged in designated activities for which each is the Supervisory Agency or the appropriate financial regulator governing the 

conduct of the designated activities. 

What plans do you have for exercising this authority? 

A.11. The Commission issued a proposed rule that was published 

in the Federal Register of October 14, 2010, addressing the financial resources of derivatives clearing organizations (DCOs) that 

might be designated as systemically important under Title VIII. 

Q.12. The Financial Stability Oversight Council is an important 

feature of Dodd-Frank. During the conference, my amendment was 

adopted to clarify the role of the Council and the Federal Reserve. 

My amendment gave the Council responsibility for financial stability regulation. Up to that point, the legislation had colocated this 

responsibility at the Fed and the Council. The Congressional intent 

is clear that you, as members of the Council, are responsible for all 

policy matters related to financial stability. After the Council acts, 
174 

implementation of your policy determinations will fall to the individual Federal financial regulators, including, of course, the Fed. 

With this in mind, I would like each of you to comment on your 

preparations to serve on the Council: 

Have you directed your staff to examine and study all of the 

issues that will come before you? 

A.12. Yes. 

Q.13.Are you prepared to participate on the Council, not as a rubber stamp for the Chairman of the Council, but as a fully informed 

individual participant? 

A.13. Yes. 

Q.14. Secretary Geithner has argued that there is a strong case to 

be made for continuing Government guarantees of mortgage-backed 

securities. Additionally, the Federal Reserve published a paper that 

proposes Government guarantees of a wide range of asset backed 

securities, including those backed by mortgages, credit cards, autos, 

student loans, commercial real estate, and covered bonds. While 

some may believe that the Government will charge fair prices for 

Government guarantees, the history of Government run insurance 

programs suggests that things will not go well. 

Does anyone on the panel support extending or increasing Government insurance against losses on asset backed securities which, 

it seems to me, socializes risk, puts taxpayers on the hook for 

losses, and protects Wall Street against losses? 

A.14. The Commission does not have a position on this issue. 

Q.15. Please provide the Committee with an implementation schedule that includes: 

A list of the rules and studies that your agency is responsible for 

promulgating or conducting under Dodd-Frank and the date by 

which you intend to complete each rule or study; and . . . 

A.15. We identified 30 areas where rules will be necessary and assigned teams of staff to work on rulemakings for each of these 

areas. 

Following each team on the list are found the date of the Commission meeting to consider the Advanced Notice of Proposed Rulemaking (ANPR) or Notice of Proposed Rulemaking (NPR), the Final 

Rule (FR) or the anticipated date of those meetings that have been 

scheduled. 

I. Registration (NPR 11/10/10) 

II. Definitions, such as Swap Dealer, Major Swap Participant, Security-Based Swap Dealer, and Major SecurityBased Swap Participant, to be Written Jointly with SEC 

(NPR 12/1/10) 

III. Business Conduct Standards with Counterparties 

(NPR 12/9/10) 

IV. Internal Business Conduct Standards (NPR 11/10/10), 

(NPR 12/16/10), (NPR 1/13/11) 

V. Capital & Margin for Nonbanks (NPR 1/20/11) 

VI. Segregation & Bankruptcy for both Cleared and 

Uncleared Swaps (uncleared, NPR 11/19/10; cleared, 

ANPR 11/19/10) (NPR wk of 2/21/11) 
175 

Clearing: 

VII. DCO Core Principle Rulemaking, Interpretation & 

Guidance (NPR 9/30/10), (NPR 12/1/10), (NPR 12/16/10) 

VIII. Process for Review of Swaps for Mandatory Clearing 

(NPR 10/26/30) 

IX. Governance & Possible Limits on Ownership & Control 

(NPR 9/30/10), (NPR 12/9/10) 

X. Systemically Important DCO Rules Authorized Under 

Title VIII (NPR 16/10), (FR 1/19/11) 

XI. End-user Exception (NPR 12/9/10) 

Trading: 

XII. DCM Core Principle Rulemaking, Interpretation & 

Guidance (NPR 12/1/10) 

XIII. SEF Registration Requirements and Core Principle 

Rulemaking, Interpretation & Guidance (12/16/10) 

XIV. New Registration Requirements for Foreign Boards of 

Trade (NPR 11/10/10) 

XV. Rule Certification & Approval Procedures (applicable 

to DCMs, DCOs, SEFs) (NPR 10/26/10) 

Data: 

XVI. Swap Data Repositories Registration Standards and 

Core Principle Rulemaking, Interpretation & Guidance 

(Int. FR 9/30/10), (NPR 11/19/10) 

XVII. Data Record Keeping & Reporting Requirements 

(NPR 11/19/10), XVIII. Real Time Reporting (NPR 11/19/ 

10) 

Particular Products: 

XIX. Agricultural Swaps (ANPR 9/20/10), definitions (NPR 

10/19/10), (FR 1/20/11) 

XX. Foreign Currency (Retail Off Exchange) (FR 9/3/10) 

XXI. Joint Rules with SEC, such as ‘‘Swap’’ and ‘‘SecurityBased Swap’’ (NPR week of 2/7/11) 

XXII. Portfolio Margining Procedures (combined with VI 

above and other rules) 

Enforcement: 

XXIII. Antimanipulation (NPR 10/26/10) 

XXIV. Disruptive Trading Practices (ANPR 10/26/10), 

(NPR wk of 2/21/11) 

XXV. Whistleblowers (NPR 11/10/10) 

Position Limits: 

XXVI. Position Limits, including Large Trader Reporting, 

Bona Fide Hedging Definition & Aggregate Limits (large 

trader reporting NPR 10/19/10), (NPR 12/16/10), (NPR 1/ 

13/11) 

Other Titles: 

XXVII. Investment Adviser Reporting (NPR 1/20/11) 
176 

XXVIII. Volcker Rule (not scheduled) 

XXIX. Reliance on Credit Ratings (NPR 10/26/10) 

XXX. Fair Credit Reporting Act and Disclosure of Nonpublic Personal Information (NPR 10/19/10) 

Recently an additional team was created and assigned the task 

of writing conforming rules. 

A comprehensive schedule for the rulemaking process was set out 

with dates for technical conferences on many of the rules, dates to 

circulate drafts of rule proposals to Commissioners, dates for meetings to consider Advanced Notices of Proposed Rules and Notices 

of Proposed Rules and comment periods. The public, including the 

regulated industry, other businesses that may be affected, interest 

groups, and others, have been encouraged to participate in the 

process through filing writing comments. Schedules for the adoption of final rules have not been set because in large part the staff 

recommendations to the Commission and the views of the Commissioners themselves are expected to be significantly affected by the 

public comments. 

Q.16. A list of the reorganizational tasks your agency will undertake to fulfill the mandates of Dodd-Frank and the date by which 

you intend to complete each task. 

A.16. The Commission has discussed potential reorganizations; 

however, given uncertainties of funding, staffing, and other issues 

no final reorganization plans have been adopted. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM GARY GENSLER 

Q.1. Over the last 15 years, the 6 biggest banks grew from having 

assets equal to 17 percent of GDP to 63 percent of GDP. The four 

largest banks control about 48 percent of the total assets in the Nation’s banking system. And the 5 largest dealer banks control 80 

percent of the derivatives market and account for 96 percent of the 

exposure to credit derivatives. 

Part of the Volcker Rule, section 622 of the Dodd-Frank Act, requires the Financial Stability Oversight Council (FSOC), of which 

your organizations are a member, to study and make recommendations concerning the effects of financial sector concentration on financial stability, moral hazard, efficiency, and competitiveness in 

the financial system. Subject to these recommendations, no company will be permitted to hold more than 10 percent of the liabilities held by all financial companies, with some significant exceptions. 

What are effects does concentration in the financial industry 

have on financial stability, moral hazard, efficiency, and competitiveness? 

Given that the six biggest banks alone have about $7.4 trillion 

in liabilities, almost 53 percent of GDP, do you think this provision 

will meaningfully restrict the size of financial institutions? 

How should this rule be implemented to address financial stability, moral hazard, efficiency, and competitiveness? 

Can you identify any potential loopholes in the existing provision? 
177 

As I’ve made clear before, I think the largest financial firms in 

this country are just too large, and that their massive size threatens our economic security and puts us at risk in future crises. 

I think the rise of proprietary trading was one of the key drivers 

behind the massive growth in our largest financial institutions. 

Firms were taking on ever increasing prop trading positions, often 

with highly unstable short term financing, and when things froze 

up, the house of cards collapsed. The Volcker Rule looks to stop 

this risk. 

I know that my colleagues, Senator Merkley and Senator Levin, 

drafted section 619 of the Dodd-Frank Act to ensure broad coverage 

of the prohibition on proprietary trading by banks, and meaningful 

restrictions on the largest nonbank financial firms. Nevertheless, 

one of the concerns I have is that firms may try to evade the restrictions. Particularly, I’m concerned that if the regulators set a 

definition of ‘‘trading account’’ that is too narrow, it might not capture all of the risks of proprietary trading. These evasions could 

only happen if the regulators ignore the clear direction of the law 

to stop proprietary trading. 

Are you prepared to take a broad view on the definition of ‘‘trading account’’ and examine and prevent proprietary trading, wherever it occurs? 

A.1. Section 619 of the Dodd-Frank Act defines ‘‘trading account’’ 

to mean any account used for acquiring or taking positions in the 

securities and instruments described in paragraph (4) principally 

for the purpose of selling in the near term (or otherwise with the 

intent to resell in order to profit from short-term price movements), 

and any such other accounts as the appropriate Federal banking 

agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission may, by rule, determine. The 

FSOC is currently conducting its study that will provide recommendations on the Volcker Rule, and whether the definition in 

this section is adequate to enforce the Volcker Rule; however, at 

this time because this study is still underway, I believe that it is 

too early to opine on the definition of ‘‘trading account.’’ 

Q.2. In short, are you prepared to use the full power of the 

Merkley-Levin provisions to cut the size and riskiness of our banks 

so they get back to the business of lending to families and businesses? 

A.2. The CFTC is committed to using its resources to ensure that 

applicable CFTC regulated entities will be monitored to seek to ensure compliance of the CFTC promulgated rules relating to the 

Volcker Rule. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM GARY GENSLER 

Q.1. Regulatory Structure for Volcker Rule. As you know, the objectives of the Merkley-Levin Volcker Rule are two-fold: (1) to address 

the specific risks to our financial stability caused by proprietary 

trades gone bad, and (2) to take on the conflicts of interests in proprietary trading. 
178 

Ensuring effective oversight will be challenging, because the 

issues are complicated. As you could see from the exchange at the 

hearing between Senator Reed and Chairman Bernanke, with 

interjections by Chairman Shapiro and Mr. Walsh, I and others are 

beginning to come of the view that there will have to be oversight 

at two levels. First, there will need to be real-time (or as close as 

practicable) monitoring and enforcement at the individual trade-bytrade level, which looks to whether any given transaction is proprietary trading. This will be necessary to ensure that the permitted 

activities are not abused. Second, there will need to be macro-level 

reviews of policies and procedures, and overall portfolio holdings. 

This will be necessary to ensure that proprietary positions and conflicts of interest are not cropping up despite the restrictions. In addition to monitoring and enforcing the proprietary trading and conflicts of interest restrictions, regulators are also tasked with setting 

appropriate capital charges, both for permitted activities, and, in 

the instances of nonbank financial companies supervised by the 

Board, capital charges for all covered activities. 

Your agencies appear to have somewhat different strengths in 

these areas, with perhaps the SEC and CFTC having greater experience policing the securities and derivatives markets for trading 

violations, and the banking regulators having greater experience 

evaluating the safety and soundness of firms and setting appropriate capital charges and levels. 

Share with me your view about the strengths you believe your 

agency brings to the oversight and enforcement of the MerkleyLevin Volcker Rule? Are you committed to working with your fellow regulators to best use your agency’s strengths in the effort to 

keep our financial system safe? 

A.1. The CFTC has the ability to collect and analyze trade data in 

regulating and supervising the futures markets. The agency also 

has capabilities for auditing and reviewing intermediaries. These 

tools would be available to the CFTC to help enforce all aspects of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The CFTC is committed to keeping our financial system safe and 

to working with all other fellow financial regulatory agencies toward that objective. 

Q.2. Data Collection. The Dodd-Frank Act requires a significant 

amount of new data collection and storage, particularly in the derivatives arena. The SEC and CFTC have made a priority of new 

data collection in a number of areas. Collection and the ability to 

automate reviews of the data will be critical to enforcing a wide 

range of mandates under Dodd-Frank, including derivatives position limits, the Volcker Rule provisions, and other parts of the bill. 

At a minimum, your staffs will need to know who’s making trades, 

the prices, how long firms hold onto their positions, and whether 

and how their positions are hedged. 

Where is your agency in terms of thinking through the relevant 

data you will need to collect? 

Are there any major challenges you see in being able to collect 

and analyze that data in real-time, so as to ensure compliance with 

these various restrictions? 
179 

How do you see the newly created Office of Financial Research 

playing into this process? 

A.2. On November 19th the Commission held an open meeting to 

consider, among other things, requirements and duties of swap 

data repositories; real time public reporting requirements of swap 

transactions; and record keeping and reporting requirements for 

swaps entities. These proposed rules were published in the Federal 

Register in December 2010. 

The proposed rules specify minimum data fields and/or categories 

that must be reported to the public and to swap data repositories. 

The data reported to swap data repositories will allow the staff to 

identify parties involved in a trade, the prices, how long counterparties hold onto their position, among other things. The staff identified major categories of relevant data that needs to be collected 

based on the instrument type and asset-class underlying. 

The proposal requires real time reporting for swap transaction 

and pricing data to occur as soon as technologically practicable for 

trades other than trades of large notional size or block trades. 

The proposal implements the Dodd-Frank Act direction that regulators have direct access to information maintained by swap data 

repositories. We are currently in the public comment period and 

will be considering those comments before the Commission adopts 

and final rules in these areas. 

Agency staffs are meeting to coordinate data collection and analysis and to efficiently identify market interconnectedness. To 

achieve that, the Commission staff is involved in numerous consultations with various Federal Government agencies including the 

Office of Financial Research. 

Q.3. Cross-border Resolution. I know FDIC and to some extent others have been working very diligently to implement the new resolution authority for our Nation’s large complex financial institutions—which owes so much to my colleagues on this Committee 

from Virginia and Tennessee. 

But one of the areas I want to keep an eye on—and on which 

I offered an amendment during financial reform to provide additional oversight of—is how to make that resolution work for large 

firms operating across multiple national borders. 

Where are we in terms of making the Dodd-Frank resolution authority work for large, systemically significant financial firms operating across borders? How cooperative have our international partners been in this effort? 

A.3. Our role in responding to the insolvency of firms such as holding companies with a Futures Commission Merchant (FCM) subsidiary is somewhat limited, such as assisting in the transfer of 

customer funds and positions, advising the bankruptcy court with 

respect to the FCM, and exchanging information with foreign regulators concerning our respective regulated entities. We do not undertake the operational role envisioned under the Dodd-Frank Act 

for the FDIC. 
180 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM GARY GENSLER 

Q.1. Mr. Gensler, I support the concept of regulating derivatives 

because they helped cause the problem. But I do understand that 

some businesses use derivatives to manage legitimate business 

risk. How will dealers be encouraged to not pass on additional capital and regulatory costs to businesses that are end users, and how 

will the regulators know whether a derivative is being used to 

manage commercial risk? 

A.1. On December 9, 2010, the Commission issued proposed rules 

to implement the end user exception to mandatory clearing that 

was contained in Section 2(h)(7) of the Dodd-Frank Act, which were 

published in the Federal Register of December 23, 2010. This provision of the Dodd-Frank Act generally provides that a swap otherwise subject to mandatory clearing is subject to an elective exception from clearing if one party to the swap is not a financial entity, 

and is using swaps to hedge or mitigate commercial risk. A number 

of commercial end-users were concerned that mandatory clearing 

would require them to deposit cash in margin accounts. The Commission rule proposal also addresses the need to verify that swaps 

exempt from clearing and margining were entered into to mitigate 

commercial risk. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM GARY GENSLER 

Q.1. Congress clearly intended, as Chairman Dodd and Chairwoman Lincoln set forth in a letter that: ‘‘The legislation does not 

authorize the regulators to impose margin on end-users, those exempt entities that use swaps to hedge or mitigate commercial risk 

. . . Again Congress clearly stated in this bill that the margin and 

capital requirements are not to be imposed on end-users.’’ 

Do you agree with the Congressional intent of the Dodd-Lincoln 

letter? 

In setting capital requirements under Title VII, do you agree 

that increases in capital requirements will be linked to the risk associated with the swap, and not as a punitive mechanism to drive 

volume to central clearinghouses or exchanges? 

Please describe any and all cost-benefit analysis, particularly 

with regard to end-users, that you will undertake prior to issuing 

rules. 

A.1. The Dodd-Frank Act was enacted to reduce risk, increase 

transparency, and promote market integrity within the financial 

system. At the Commission’s open meeting on December 1, I stated 

that ‘‘my view is that uncleared swaps entered into between financial entities pose more risk to the financial system than those 

where one of the parties is a nonfinancial entity.’’ 

I further stated that ‘‘Interconnectedness among financial entities allows one entity’s failure to cause uncertainty and possible 

runs on the funding of other financial entities, which can spread 

risk and economic harm throughout the economy. We know from 

the AIG debacle that the interconnectedness of financial entities 

through their swap books raises the risks of bailouts. Transactions 

involving nonfinancial entities, however, do not present the same 
181 

risk to the financial system as those solely between financial entities. The risk of a crisis spreading throughout the financial system 

is greater the more interconnected financial companies are to each 

other. I think that Congress also recognized the different levels of 

risk posed by transactions between financial entities and those that 

involve nonfinancial entities, as reflected in the nonfinancial enduser exception to clearing. Consistent with this, I believe that proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions 

that involve nonfinancial end-users. I would be interested to hear 

views from the public on this issue.’’ 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM JOHN WALSH 

Q.1. Recent news reports have detailed disturbing information 

about servicers’ foreclosure processes. Allegations have ranged from 

forged documents to the signing of eviction notices without review. 

What evidence have your agencies found in regards to these 

charges? What actions have been undertaken by your agencies both 

to address this situation and to prevent future abuses? 

A.1. To date, six large national bank servicers have publicly acknowledged procedural deficiencies in their foreclosure processes. 

The lapses that have been reported represent a serious operational 

breakdown in foreclosure governance and controls that national 

banks should maintain. These lapses are unacceptable, and we are 

taking aggressive actions to hold national banks accountable, and 

to get these problems fixed. 

As soon as the problems at Ally Bank—which is not supervised 

by the OCC—came to light, the OCC directed the largest national 

bank mortgage servicers under our supervision to review their operations, to take corrective action to remedy identified problems, 

and to strengthen their foreclosure governance to prevent 

recurrences. At the same time, we initiated plans for intensive, onsite examinations of the eight largest national bank mortgage 

servicers. The Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC), are participating in these examinations. 

Our examination objectives are to independently test and verify 

the adequacy and integrity of bank self-assessments and corrective 

actions; the adequacy and effectiveness of governance over servicer 

foreclosure processes to ensure foreclosures are completed in accordance with applicable legal requirements and that affidavits and 

claims are accurate; and to determine whether troubled borrowers 

were considered for loss mitigation alternatives such as loan modifications prior to foreclosure. The scope of work to assess governance is extensive and includes an assessment of each servicer’s 

foreclosure policies and procedures, organizational structure and 

staffing, vendor management, quality control and audit, loan documentation including custodial document management, and foreclosure work flow processes. We also will test and validate the effectiveness of foreclosure governance and adequacy of the bank’s 

self-assessment including corrective actions taken and/or planned. 
182 

Examiners will also be reviewing samples of individual borrower 

foreclosure files from judicial and nonjudicial States that include 

both in-process and completed foreclosures. In reviewing these files, 

examiners will determine whether foreclosed borrowers were appropriately considered for alternative loss mitigation actions such 

as a loan modification. Examiners will also check for the following: 

• A documented audit trail that demonstrates that data and information (e.g., amount of indebtedness and fees) in foreclosure 

affidavits and claims are accurate and comply with State laws; 

• Possession and control over the underlying, critical loan documents such as original note, mortgage, and deed of trust to 

support legal foreclosure proceedings; and 

• Evidence that the affidavit and documents were appropriately 

reviewed, and that proper signatures were obtained. 

In addition to these loan file reviews, examiners will review the 

nature, volume, and resolution of foreclosure-related complaints. 

These will include complaints received by the OCC’s Customer Assistance Group as well as complaints received by the banks. 

Finally, examiners will assess the adequacy of each bank’s analysis and financial reporting for the potential adverse impact on the 

bank’s balance sheet and capital that may arise from the increased 

time and costs needed to correct any procedural errors; losses (if 

any) resulting from inability to access collateral; and expected litigation costs. We are directing banks to maintain adequate reserves 

for potential losses and other contingencies and to make appropriate disclosures, consistent with applicable Securities and Exchange Commission disclosure rules. 

As our examination work proceeds, where we find errors or deficiencies, we are directing banks to take immediate corrective action. We are also responding to the concerns that have been raised 

about the so-called ‘‘dual track’’ foreclosure process when a borrower is in a trial loan modification. We recognize that the socalled ‘‘dual track’’ process is confusing for many consumers and 

risks consumers receiving mixed or contradictory information. As a 

result, we have directed the large national bank servicers, when 

they have the legal ability to do so, to suspend foreclosure proceedings for borrowers who are in a trial modification and are performing according to the terms of the modification agreement. This 

directive is modeled on provisions that the Treasury Department 

has adopted for trial modifications made under the HAMP program. It is important to note, however, that the terms and conditions for non-HAMP modifications, and the ability of servicers to 

suspend foreclosure processes, may be significantly affected—and 

limited—by requirements imposed by the GSEs and agreements 

with private investors. 

Using our authority under the Bank Service Company Act, we 

also are conducting interagency examinations of two major 

nonbank mortgage service providers. In coordination with the Federal Reserve Board, FDIC and the Federal Housing Finance Administration, the OCC is leading an on-site examination of the 

Morlgage Electronic Registration System (MERS), which operates a 

system that electronically registers and tracks mortgage ownership 

interests and servicing rights and may serve as the mortgagee of 
183 

record as a nominee/agent of the owner of a loan (the lender or subsequent investor). A key objective of the MERS examination is to 

assess MERS corporate governance, control systems, and accuracy 

and timeliness of information maintained in the MERS system. 

We also are participating in an examination being led by the 

Federal Reserve Board of Lender Processing Services Inc. (LPS) 

which provides third party foreclosure services to banks. 

The OCC is focused on identifying and rectifying problems so 

that the basic function and integrity of the foreclosure process is 

restored; the rights of all homeowners subject to the foreclosure 

process are protected; and the basic functioning of the U.S. mortgage market is stabilized. As we move forward we will continue to 

cooperate with the many inquiries and investigations that are taking place. 

Q.2. What policies and procedures have your agencies put in place 

to ensure compliance with State laws, and when were they implemented? 

A.2. The OCC’s Mortgage Banking Handbook, which provides guidance to the industry and examiners on risks associated with mortgage banking activities, states that ‘‘a bank that originates and/or 

services mortgages is responsible for complying with applicable 

Fderal and State laws.’’ As a general matter, we expect national 

banks to know what laws apply to their business activities, whether Federal or State, to have policies and procedures for complying 

with those laws, and to have ongoing quality controls and audits 

that test compliance with these procedures. 

Q.3. Mr. Walsh, your testimony states that there appears to be an 

inconsistency in the duties assigned to the banking agencies and 

the CFPB with respect to fair lending, and that this creates confusion in responsibilities. Could you elaborate? 

A.3. Fair lending compliance and reporting requirements are contained in provisions of the Fair Housing Act, Equal Credit Opportunity Act and the Home Mortgage Disclosure Act. The DoddFrank Act provides the Consumer Financial Protection Bureau 

(CFPB) with exclusive examination and enforcement authority over 

national banks (and other insured depository institutions) with assets greater than $10 billion with respect to the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act (Secs. 1025, 

1002(12)(D), 1002(12)(K)). However, the law does not transfer to 

the CFPB the authority to examine insured depository institutions 

with assets over $10 billion for compliance with the Fair Housing 

Act. See, Sec. 1002 (defining ‘‘enumerated consumer laws’’); see, 

also Sec. 1027(s) (preserving current authorities under the Fair 

Housing Act). 

Continuing the banking agencies’ supervision of Fair Housing 

Act compliance for institutions over $10 billion in asset size will potentially result in duplication of, or overlap with, the CFPB’s supervision and in inconsistencies in supervisory approach between the 

banking agencies and the CFPB. If Congress did not intend this jurisdictional split, amendments to Title X of the Dodd-Frank Act 

would be needed. 
184 

Q.4. Mr. Walsh, your testimony identifies that Dodd-Frank requires Federal banking agencies to make capital standards countercyclical. How will that be accomplished? 

A.4. As you know, the OCC, along with the other U.S. banking 

agencies, are participating in the international efforts to revise and 

improve regulatory capital standards as part of the Basel III reform process. Throughout the development of these new standards, 

we have made a concerted effort to reduce the cyclicality of capital 

requirements. The countercyclical elements of Basel III operate 

both at the bankwide level, through the introduction of capital buffers and a new international leverage ratio, and at the exposure 

level, through the assignment of higher capital requirements to certain types of transactions and risks that proved most problematic 

during the crisis. 

Basel III will create countercyclical bank-level capital requirements through the introduction of capital conservation buffers. 

These capital conservation buffers essentially raise the capital ratios at which banks will operate. If a bank dips into the capital conservation buffer range, it faces constraints on its capital distributions including constraints on dividends and discretionary bonuses. 

The capital buffers will reduce the cyclicality of capital requirements by creating incentives for banks to hold high levels of capital 

during good times that can then be drawn down during periods of 

economic stress. This additional capital cushion will also make it 

easier for banks to lend during a downturn without fear of broaching minimum capital requirements, which will help to reduce the 

likelihood of a credit crunch. 

Basel III will also introduce an international leverage ratio that 

is intended to limit the build-up of excessive leverage and serve as 

a backstop to the risk-based capital requirements. While the 

United States already employs a leverage ratio, the international 

leverage ratio will also incorporate certain off-balance sheet elements, which will strengthen the ability of the leverage ratio to 

serve as a governor on excessive leverage. 

At the individual exposure level, Basel III will reduce the cyclicality of capital requirements for trading book exposures by requiring banks to explicitly incorporate stress periods when assigning 

capital to these positions. In contrast, the existing capital requirements only require banks to make use of recent experience, which 

during benign periods led to capital requirements that proved to be 

too low. Similarly, Basel III reforms will also require banks to consider stress periods when assessing capital for counterparty credit 

risk. By using periods of stress to assign capital requirements for 

trading book positions and counterparty exposures, the amount of 

capital required will be less variable over the business cycle, and 

more capital will be required before a downturn instead of once the 

downturn occurs. 

Basel III will also require more capital for bank exposures to certain other financial institutions, particularly large banks and highly leveraged firms such as hedge funds. By requiring more capital 

for exposures to other financial institutions, each bank under Basel 

III will be better able to withstand a negative shock to another financial institution, thereby reducing the likelihood of contagion 

that was clearly evident during the crisis. 
185 

Basel III will also significantly increase capital requirements 

under the Standardized Approach for certain bank exposures to 

asset-backed commercial paper (ABCP) programs. During the crisis, some banking organizations decided to support their ABCP programs and similar structures such as structured investment vehicles. This support required additional capital at the most inopportune time. By raising capital requirements for these programs, capital will be required to be held up front, resulting in a smoothing 

of capital requirements over the cycle. 

The enhancements under Basel III described above represent significant progress in limiting the cyclicality of capital requirements; 

however, it is worth noting that there are limits with respect to the 

extent to which capital requirements can be made less cyclical. 

Capital requirements are meant to be reflective of risk, and if risk 

increases for a bank during a downturn, one would expect capital 

requirements to also rise during a downturn. Despite this limitation, we believe the Basel III changes noted above will reduce the 

cyclicality of regulatory capital standards, and we will continue to 

work to make capital requirements less cyclical and will consider 

cyclicality in every capital rulemaking we undertake, as required 

under Dodd-Frank. 

Lastly, it is also important to note that the Basel Committee and 

the banking agencies are actively engaged in efforts to reduce 

procyclicality through changes in areas other than the capital 

rules, Specifically, the Committee and the agencies are advocating 

changes in domestic and international accounting standards that 

would promote stronger and less procyclical provisioning practices, 

Both the Financial Accounting Standards Board (FASB) and the 

International Accounting Standards Board (IASB) have proposed 

changes to the current ‘‘incurred loss model’’ of provisioning that 

would move the standards towards an expected loss (EL) approach. 

The OCC, along with the other agencies are providing input to both 

the FASB and IASB in their efforts to finalize an EL approach to 

provisioning to permit earlier-in-the-cycle provisioning that captures credit losses more transparently and results in a less 

procyclical regime than the current ‘‘incurred loss’’ approach. 

Q.5. The Financial Stability Oversight Council is an important feature of Dodd-Frank. During the conference, my amendment was 

adopted to clarify the role of the Council and the Federal Reserve. 

My amendment gave the Council responsibility for financial stability regulation. Up to that point, the legislation had colocated this 

responsibility at the Fed and the Council. The Congressional intent 

is clear that you, as members of the Council, are responsible for all 

policy matters related to financial stability. After the Council acts, 

implementation of your policy determinations will fall to the individual Federal financial regulators, including, of course, the Fed. 

With this in mind, I would like each of you to comment on your 

preparations to serve on the Council: 

Have you directed your staff to examine and study all of the 

issues that will come before you? Are you to prepared to participate 

on the Council, not as a rubber stamp for the Chairman of the 

Council, but as a fully informed individual participant? 
186 

A.5. Yes, The OCC is fully committed to the independent exercise 

of its authority and judgment in tile Council’s deliberations and actions, and there are statutory provisions that broadly protect the 

OCC’s independence. These statutory independence provisions 

would cover matters that arise in connection with the OCC’s membership on the Council. 

Moreover, the OCC has put staffing arrangements in place to ensure that the OCC’s participation on the Council is informed by 

careful staff review and analysis of the matters the Council considers. We have committed staff resources to the support of its 

Council responsibilities that are commensurate with scope and importance of the Council’s work. For example, the OCC’s Senior Deputy Comptroller/Chief National Bank Examiner serves on the 

Council’s deputies’ committee. He is supported by staff at the deputy comptroller level, specialists in various areas of supervisory 

policy, and, in the Law Department, by lawyers expressly assigned 

to support Council-related work. 

Q.6. Secretary Geithner has argued that there is a strong case to 

be made for continuing Government guarantees of mortgage-backed 

securities. Additionally, the Federal Reserve published a paper that 

proposes Government guarantees of a wide range of asset-backed 

securities, including those backed by mortgages, credit cards, autos, 

student loans, commercial real estate, and covered bonds. While 

some may believe that the Government will charge fair prices for 

Government guarantees, the history of Government run insurance 

programs suggests that things will not go well. 

Does anyone on the panel support extending or increasing Government insurance against losses on asset-backed securities which, 

it seems to me, socializes risk, puts taxpayers on the hook for 

losses, and protects Wall Street against losses? 

A.6. We believe that this is a public policy issue that is for Congress to decide. Should the Congress determine that such guarantees are in the public interest, we would incorporate this into our 

supervision of the assets. 

Q.7. Please provide the Committee with an implementation schedule that includes: A list of the rules and studies that your agency 

is responsible for promulgating or conducting under Dodd-Frank 

and the date by which you intend to complete each rule or study. 

A.7. Please see the chart attached as Appendix A [Ed.: See Page 

196], which details the rules and studies the OCC is responsible for 

under Dodd-Frank (either as primary drafter or in a consultative 

capacity) and the target dates for completion of each rule or study. 

Q.8. Please provide the Committee with an implementation schedule that includes: A list of the reorganizational tasks your agency 

will undertake to fulfill the mandates of Dodd-Frank and the date 

by which you intend to complete each task. 

A.8. The OCC is engaged in a number of tasks to plan for and accomplish the integration of the OTS’s personnel and its supervision 

of Federal savings associations into the OCC; the establishment of 

our Office of Minority and Women Inclusion; and the transfer of 

certain OCC functions and personnel to the CFPB. 
187 

In addition to the list of items below, section 327(a) of the DoddFrank Act requires the OCC, the FDIC, the OTS, and the Board 

of Governors of the Federal Reserve System (FRB) to submit an 

Implementation Plan to the Committee on Banking, Housing, and 

Urban Affairs of the Senate, the Committee on Financial Services 

of the House of Representatives, and the Inspectors General of the 

Department of the Treasury, the FDIC, and the FRB. The Plan, 

which must be submitted by January 17, 2011, will provide additional details with respect to the integration of the OTS into the 

OCC. 

OTS/OCC Integration 

• The OCC has established a transition team, headed by the 

Senior Deputy Comptroller/Chief Financial Officer, to coordinate and supervise the implementation of all issues involving 

the integration of OTS functions and personnel. 

• Pursuant to section 314 of the Dodd-Frank Act, we have designated a Deputy Comptroller for Thrift Supervision, who will 

lead the agency’s planning process for integration of OTS examination and supervision functions and staff into the OCC. 

He will report to the Senior Deputy Comptroller for Midsize/ 

Community Bank Supervision. 

• Pursuant to the Dodd-Frank Act, the Director of the OTS, the 

Comptroller of the Currency, and the Chairperson of the FDIC 

must jointly determine the number of OTS employees needed 

to perform the functions transferred and identify employees for 

transfer to the OCC or FDIC. While the final number of OTS 

employees who will transfer to the OCC has not yet been determined, senior managers from the OCC, OTS, and FDIC are 

meeting regularly to discuss the process and to identify and 

address mutual concerns and issues for resolution. 

• We also have begun the process of integrating our examination 

workforce by developing plans to enroll recent OTS hires in 

OCC national bank examiner training courses. Pursuant to the 

statute, OTS personnel coming to the OCC will be transferred 

not later than 90 days after the transfer date. 

• The OCC intends to integrate transferred employees into the 

agency’s organizational structure and pay plan as soon as possible and to maintain existing OCC human resources policies. 

• The transition team also is reviewing and comparing employee 

benefits and any related contracts, including those under the 

OTS’s Financial Institutions Retirement Fund (FIRF), which 

covers some OTS employees, and other supplemental retirement benefits. 

• OCC staff is now participating in OTS supervisory review committee presentations for problem banks, and sharing information on other institutions and supervisory strategies. The development of examination plans and supervisory strategies for 

national banks and Federal thrifts for fiscal year 2012 will be 

conducted jointly and is scheduled to begin in January 2011. 

• The OCC is working closely with the OTS to review the status 

of leased office space supporting thrift supervision, including 

the leasing decisions required over the next 2 years. This re-
188 

view includes an assessment of space needs to support thrift 

supervision staff throughout the country, as well as the continuing space requirements for more than 3,000 current OCC 

employees. 

• We have posted on our internal Web site a number of frequently asked questions and answers regarding the OTS/OCC 

integration. 

Establishment of the OCC’s Office of Minority and Women 

Inclusion 

• The OCC has moved promptly to fulfill the requirements of 

Section 342 of the Dodd-Frank Act. Shortly after passage of the 

Act, the agency’s Human Resources office, in consultation with 

senior OCC leadership, developed a job description for the position of Director and advertised the position within the OCC in 

accordance with our policies and principles for merit promotion 

and internal placement. The process for evaluating eligible 

candidates is complete and a selection will be announced shortly. 

• Once a selection is made, the Director will play an integral role 

in determining the orgranizational structure and the number 

of staff needed to successfully carry out his or her responsibilities. We expect to have the office organized and functioning on 

or before mid-January, 2011. 

Transfer of OCC Functions and Personnel to the CFPB 

• The OCC is coordinating with the Department of Treasury to 

identify personnel that could be transferred to the CFPB. This 

involves identifying those OCC employees who have both the 

skills needed by the CFPB and are interested in transferring 

to the CFPB. 

• We also have solicited expressions of interest from employees 

who may be interested in moving to the CFPB. To help keep 

OCC employees informed, the OCC has posted on our internal 

Web site a number of frequently asked questions and answers 

regarding the CFPB. In addition, on November 10, the OCC 

held an agencywide teleconference to inform OCC employees 

about developments regarding the CFPB. 

• Acting Comptroller Walsh and other senior managers at the 

OCC recently met with Treasury officials and Professor Warren to discuss issues related to the transfer of OCC personnel. 

To further the understanding of our current operations, we 

also have provided extensive materials to Treasury staff, including organizational charts describing our consumer protection functions, details about the national banks with more than 

$10 billion in assets that the CFPB will assume responsibility 

to examine, position descriptions, and FTE requirements for 

supervision. 

• In addition to assist with the organization of the CFPB, we 

have detailed employees to the CFPB and provided technical 

assistance to CFPB organizers relating to bank supervision, 

consumer compliance and consumer complaint functions, and 
189 

internal systems and issues such as payroll, procurement, and 

benefits. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JOHN WALSH 

Q.1. As I’ve made clear before, I think the largest financial firms 

in this country are just too large, and that their massive size 

threatens our economic security and puts us at risk in future crises. 

I think the rise of proprietary trading was one of the key drivers 

behind the massive growth in our largest financial institutions. 

Firms were taking on ever increasing prop trading positions, often 

with highly unstable short term financing, and when things froze 

up, the house of cards collapsed. The Volcker Rule looks to stop 

this risk. 

I know that my colleagues, Senator Merkley and Senator Levin, 

drafted section 619 of the Dodd-Frank Act to ensure broad coverage 

of the prohibition on proprietary trading by banks, and meaningful 

restrictions on the largest nonbank financial firms. Nevertheless, 

one of the concerns I have is that firms may try to evade the restrictions. Particularly, I’m concerned that if the regulators set a 

definition of ‘‘trading account’’ that is too narrow, it might not capture all of the risks of proprietary trading. These evasions could 

only happen if the regulators ignore the clear direction of the law 

to stop proprietary trading. 

Are you prepared to take a broad view on the definition of ‘‘trading account’’ and examine and prevent proprietary trading, wherever it occurs? In short, are you prepared to use the full power of 

the Merkley-Levin provisions to cut the size and riskiness of our 

banks so they get back to the business of lending to families and 

businesses? 

A.1. The OCC is fully committed to ensuring that national banks 

comply with the requirements of section 619, including the statute’s restrictions on proprietary trading. The statute requires, as a 

first step, that the Financial Stability Oversight Council conduct a 

study and make recommendations about implementation of the 

provision. The statute prescribes certain implementation objectives, 

including protecting banks’ safety and soundness, protecting taxpayers and consumers, enhancing financial stability, limiting the 

inappropriate transfer of Federal subsidies to unregulated entities, 

reducing conflicts of interest between banks and their customers, 

limiting activities that have caused or might reasonably be expected to create undue risk or loss at banks, appropriately accommodating the business of insurance, and appropriately timing the 

divestiture of illiquid assets that will be affected by the restrictions 

of section 619(a). It further provides that the study must be completed not later than 6 months after the enactment of the DoddFrank Act, that is, in January 2011. 

The Council sought public input for the required study by publishing a notice in the Federal Register on October 6, 2010. The 

public comment period closed on November 5, 2010; the Council received more than 8,000 comments in total, approximately 1,450 of 

which were unique (that is, individualized, rather than form, let-
190 

1For the Council’s Federal Register notice, see, 75 Fed. Reg. 61758 (Oct. 6, 2010). Comments 

received may be viewed on Regulations.gov at http://www.regulations.gov/search/Regs/ 

home.html#docketDetail?R=FSOC-2010-0002. 

ters). 1 An interagency staff group currently is developing a draft 

study for consideration and final action by the Council at its next 

meeting, in January 2011. As a member of the Council, the Acting 

Comptroller has been fully engaged in these implementation efforts, and OCC are actively participating in the interagency group 

that is conducting the staff work. 

Section 619 directs the OCC, the Federal Reserve Board, and the 

Federal Deposit Insurance Corporation to issue joint regulations 

implementing section 619 for banks after carefully considering the 

findings of the Council’s study, and after consultation and coordination with the Securities Exchange Commission and the Commodity 

Futures Trading Commission. These regulations are due 9 months 

after the study is completed, that is, in October 2011. We will proceed as directed by the statute, and will consider the findings in 

the Council’s study and the views of the other regulatory agencies 

in defining statutory terms and implementing the important proscriptions in the statute on proprietary trading. 

With particular respect to the size of financial firms, section 622 

of the Dodd-Frank Act imposes a concentration limit that prevents 

a financial company from acquiring, merging or consolidating with 

another company if the resulting company’s total consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. Congress directed the Council 

to study the effects of imposing this concentration limit, specifically 

the extent to which the concentration limit would affect financial 

stability, moral hazard in the financial system, the efficiency and 

competitiveness of the U.S. financial firms and financial markets, 

and the cost and availability of credit and financial services to U.S. 

households and businesses. In January, 2011, the Council must 

issue recommendations regarding modifications to the concentration limit that the Council determines would more effectively implement section 622. Following the Council’s study and recommendations, the Federal Reserve Board will issue implementing 

regulations. The OCC is actively participating in the interagency 

staff group that is drafting the study, which we expect the Council 

also will consider and act on at its January, 2011, meeting. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM JOHN WALSH 

Q.1. Can you provide me an update on your agencies progress in 

implementing the property appraisal requirements of Title XIV of 

Dodd-Frank? What process will you use to develop and implement 

these requirements? 

A.1. Title XIV provides that the appraisal rules are to be developed 

jointly by a group of agencies that includes the OCC, the FDIC, the 

Federal Reserve Board, the National Credit Union Administration 

(NCUA) the Federal Housing Finance Administration (FHFA), and 

the CFPB. Title XIV provides, in general, that the regulations it requires must be prescribed in final form before the end of the 18- 

month period beginning on the designated CFPB transfer date 
191 

which will be in July, 2011, and take effect 12 months following 

issuance of the final regulations. Since the CFPB does not yet have 

a director or permanent staff, the rulemakings in which it is required to participate have not yet commenced. Pending initiation of 

the rulemakings, OCC staff have primarily focused on evaluating 

the changes required by the legislation. 

In addition, the OCC, together with the Federal Reserve Board, 

the FDIC, the OTS, and the NCUA recently issued revisions to 

their joint ‘‘Interagency Appraisal and Evaluation Guidelines.’’ The 

revised Guidelines update the agencies’ supervisory guidance and 

clarify their expectations for institutions’ appraisal and evaluation 

programs to conduct real estate lending safety and soundly. The revised Guidelines were published in the Federal Register on December 10, 2010. 

Finally, Title XIV required that within 90 days of the enactment 

of the Dodd-Frank Act, the Federal Reserve Board issue an interim 

final rule specifiying acts or practices that violate appraisal independence requirements. Pursuant to this provision, the Board 

issued its interim final rule for comment on October 18, 2010, with 

a mandatory compliance date of April 1, 2011. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM JOHN WALSH 

Q.1. Regulatory Structure for Volcker Rule. As you know, the objectives of the Merkley-Levin Volcker Rule are two-fold: (1) to address 

the specific risks to our financial stability caused by proprietary 

trades gone bad, and (2) to take on the conflicts of interests in proprietary trading. 

Ensuring effective oversight will be challenging, because the 

issues are complicated. As you could see from the exchange at the 

hearing between Senator Reed and Chairman Bernanke, with 

interjections by Chairman Shapiro and Mr. Walsh, I and others are 

beginning to come of the view that there will have to be oversight 

at two levels. First, there will need to be real-time (or as close as 

practicable) monitoring and enforcement at the individual trade-bytrade level, which looks to whether any given transaction is proprietary trading. This will be necessary to ensure that the permitted 

activities are not abused. Second, there will need to be macrolevel 

reviews of policies and procedures, and overall portfolio holdings. 

This will be necessary to ensure that proprietary positions and conflicts of interest are not cropping up despite the restrictions. In addition to monitoring and enforcing the proprietary trading and conflicts of interest restrictions, regulators are also tasked with setting 

appropriate capital charges, both for permitted activities, and, in 

the instances of nonbank financial companies supervised by the 

Board, capital charges for all covered activities. 

Your agencies appear to have somewhat different strengths in 

these areas, with perhaps the SEC and CFTC having greater experience policing the securities and derivatives markets for trading 

violations, and the banking regulators having greater experience 

evaluating the safety and soundness of firms and setting appropriate capital charges and levels. 
192 

Share with me your view about the strengths you believe your 

agency brings to the oversight and enforcement of the MerkleyLevin Volcker Rule? Are you committed to working with your fellow regulators to best use your agency’s strengths in the effort to 

keep our financial system safe? 

A.1. The OCC is unequivocally committed to working with our fellow regulators to promote the safety of our financial system. The 

strengths we bring to this challenge include, first, a comprehensive 

and detailed knowledge about the securities and derivatives activities of the national banks we supervise and the risks presented by 

those activities. The OCC’s knowledge derives from our examination activity, which is conducted through the continuous presence 

of examiners on-site at the largest institutions. (Smaller institutions are examined on-site on a 12–18 month schedule, consistent 

with requirements for the frequency of bank examinations established by statute). The on-site examination process is complemented by extensive off-site monitoring and analyses done not 

only by examiners but also by experienced supervisory staff and 

economists. Finally, the OCC has an extensive array of supervisory 

tools that it can use to remedy problems or weaknesses that we 

identify. These tools include broad administrative enforcement authority to impose cease-and-desist remedies and assess civil money 

penalties. But, unlike some other regulators, the OCC is not solely 

reliant on formal administrative or judicial proceedings, where 

remedies may be applied only after lengthy proceedings are concluded. The OCC also can use its supervisory process to direct bank 

management to correct deficiencies identified in an examination report as ‘‘matters requiring attention’’ or MRAs—an approach that 

is especially effective because it requires a bank to fix a problem 

right away. 

Q.2. Data Collection. The Dodd-Frank Act requires a significant 

amount of new data collection and storage, particularly in the derivatives arena. The SEC and CFTC have made a priority of new 

data collection in a number of areas. Collection and the ability to 

automate reviews of the data will be critical to enforcing a wide 

range of mandates under Dodd-Frank, including derivatives position limits, the Volcker Rule provisions, and other parts of the bill. 

At a minimum, your staffs will need to know who’s making trades, 

the prices, how long firms hold onto their positions, and whether 

and how their positions are hedged. 

Where is your agency in terms of thinking through the relevant 

data you will need to collect? 

Are there any major challenges you see in being able to collect 

and analyze that data in real-time, so as to ensure compliance with 

these various restrictions? 

How do you see the newly created Office of Financial Research 

playing into this process? 

A.2. As directed by Congress, the Financial Stability Oversight 

Council is currently conducting a study on how to implement the 

Volcker Rule. As a member agency of the Council, the OCC is 

working closely with the Department of the Treasury and other 

member agencies on the study, and will carefully consider the 

study’s findings and recommendations in the Volcker Rule’s imple-
193 

menting regulations. We will be better positioned to ascertain what 

data might be required once the study and implementing regulations are finalized. 

We do not foresee major challenges in acquiring this data. The 

OCC’s supervisory authorities, as well as the Dodd-Frank Act and 

other banking statutes, provide tools adequate to collect any data 

needed to monitor compliance with the proprietary trading restrictions. 

The Office of Financial Research is still in formation, so it is too 

soon to determine how it will fulfill its duties under the DoddFrank Act. We expect the Office will support the Council and its 

constituent agencies in carrying out their respective responsibilities 

under the Volcker Rule, including, as appropriate, through data 

collection and related services. 

Q.3. Cross-border Resolution. I know FDIC and to some extent others have been working very diligently to implement the new resolution authority for our Nation’s large complex financial institutions—which owes so much to my colleagues on this Committee 

from Virginia and Tennessee. 

But one of the areas I want to keep an eye on—and on which 

I offered an amendment during financial reform to provide additional oversight of—is how to make that resolution work for large 

firms operating across multiple national borders. 

Where are we in terms of making the Dodd-Frank resolution authority work for large, systemically significant financial firms operating across borders? How cooperative have our international partners been in this effort? 

A.3. On an interagency basis with the FRB and FDIC, the OCC 

has been working as a home regulator on recovery and resolution 

planning for large, U.S.-owned, cross-border firms. Significant 

international partners (i.e., host supervisors) have been cooperative 

in seeking answers to difficult resolution issues for both U.S. and 

foreign owned cross-border firms. The U.S. agencies have conducted 

vertical (i.e., firm specific plans) and horizontal (i.e., issues across 

firms) reviews of recovery plans prepared by the U.S. firms. The 

FRB and OCC are preparing feedback to the firms on their detailed 

recovery plans. This is an iterative process which will require further work by the firms. 

As home supervisors, the OCC, FRB, and FDIC have hosted crisis management group (CMG) meetings with significant host supervisors of the large, U.S.-owned, cross-border firms. The SEC was 

also invited to participate in these meetings. The CMG meetings 

served to identify resolution issues which are being researched by 

both home and host supervisors (e.g., recognition of U.S. bridge 

bank, licensing processes, etc.). Follow up meetings are being 

planned for early 2011. CMG meetings are in addition to the supervisory colleges held for these firms. 

As the host supervisor of foreign-owned U.S. banks/branches, the 

OCC has participated in supervisory colleges and CMG meetings of 

foreign firms with significant global operations. As with the meetings for the U.S. firms, there are many resolution issues that require further research. 
194 

1 A copy of Mr. Long’s speech is available at: http://www.occ.gov/news-issuances/speeches/ 

2010/pub-speech-2010-108.pdf. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JOHN WALSH 

Q.1. Dodd-Frank requires that risk retention be jointly considered 

by the regulators for each different type of asset and includes a 

specific statutory mandate related to any potential reforms of the 

commercial mortgage-backed securities market to limit disruption. 

In light of the FDIC’s unilateral decision to add an across the 

board risk retention requirement in the safe harbor rule, which the 

OCC opposed, how do you plan to coordinate and reconcile disagreements in the joint rulemaking? 

A.1. The OCC believes that it is essential to set policy for U.S. 

securitization markets on a comprehensive, interagency basis as 

mandated by the Dodd-Frank Act. Dodd-Frank assigns several different aspects of the credit risk retention rule writing that it requires to several different combinations of agencies and assigns a 

coordination role to the Secretary of the Treasury as Chairman of 

the Financial Stability Oversight Council. Through an interagency 

group coordinated by the Treasury Department, the respective 

staffs of the OCC, the FDIC, the Federal Reserve Board, the SEC, 

the FHFA, and HUD are currently working cooperatively to draft 

the various sets of risk retention rules mandated under the DoddFrank Act. Differences among the agencies are negotiated the staff 

level with guidance from agency principals. If necessary, agency 

principals will hold direct discussions to reach closure on any unresolved issues. 

This interagency process is unaffected by the OCC’s views on the 

proposed or final FDIC safe harbor rule. At both stages of the rulemaking process, the OCC took the position that FDIC action was 

premature in light of legislation—the provisions ultimately enacted 

in section 941 of Dodd-Frank—that addressed securitizations and 

risk retention on a comprehensive basis. The FDIC final rule acknowledges that the joint agency rules promulgated pursuant to 

Dodd-Frank will ‘‘exclusively govern’’ the requirement to obtain an 

economic interest in a portion of the credit risk of the financial assets that are subject to its rule. 

Q.2. Market participants highlight uncertainty related to changing 

regulations, new accounting standards, and other mandates as an 

obstacle to a resurgence of these markets. What steps are your 

agencies currently taking to minimize these complications? What 

should be done collectively by regulators to limit this uncertainty 

as you look toward the joint rulemaking? 

A.2. We recognize that the uncertainty that has been created by 

the scope and magnitude of regulatory and accounting changes facing the financial industry can, by itself, create obstacles for bankers, their accountants, auditors, and other market participants as 

they try to make strategic business decisions. The OCC’s Senior 

Deputy Comptroller and Chief National Bank Examiner, Tim Long, 

highlighted these issues in his recent speech before the AICPA National Conference on Banks and Savings Institutions. 1 As Mr. Long 

noted in his speech, we believe it is important that regulators and 
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accounting standard-setters move as quickly as possible to give the 

industry the clarity it needs to move ahead, at a time when a 

strong and competitive financial sector is more important than ever 

to our economy. At the same time, however, we must ensure that 

our decisions are governed by a process that is deliberate, transparent, and inclusive. To that end, we believe it will be important 

to provide the industry and other interested parties sufficient time 

to review and comment on proposed rules and standards and, to 

the extent practical, allow appropriate transition periods and mechanisms to assess the impact of rule changes before they take full 

effect. The phased-in approach for strengthening capital and liquidity standards that the Basel Committee has recently announced is 

one example of such an approach. 

The myriad of rules required under the Dodd-Frank Act will also 

place a premium on interagency coordination and communication. 

As I noted in my written testimony, the Dodd-Frank Act wisely requires other financial regulatory agencies to consult with primary 

supervisors as those agencies draft studies or develop regulations 

or standards, since there may be implications for the safety and 

soundness of depository institutions. To help facilitate this collaboration, we have designated OCC experts to advise the other financial regulatory agencies about the potential impact on the institutions we supervise and their customers. 
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