U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

81–795 PDF 2013

S. HRG. 113–42 

THE FINANCIAL STABILITY OVERSIGHT COUNCIL 

ANNUAL REPORT TO CONGRESS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

REVIEWING THE FINANCIAL STABILITY OVERSIGHT COUNCIL’S ANNUAL 

REPORT, DISCUSSING FSOC’S EFFORTS, ACTIVITIES, OBJECTIVES, AND 

PLANS, AND CONTINUING ITS OVERSIGHT OF THE IMPLEMENTATION 

OF DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 

MAY 21, 2013 

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

( 

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

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

LAURA SWANSON, Deputy Staff Director 

GLEN SEARS, Deputy Policy Director 

MIKE PIWOWAR, Republican Chief Economist 

HOPE JARKOWSKI, Republican Senior Counsel and SEC Detailee 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

TUESDAY, MAY 21, 2013 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2 

WITNESS 

Jacob J. Lew, Secretary, Department of the Treasury ......................................... 4 

Prepared statement .......................................................................................... 34 

Responses to written questions of: ..................................................................

Chairman Johnson .................................................................................... 223 

Senator Crapo ............................................................................................ 226 

Senator Menendez ..................................................................................... 229 

Senator Merkley ........................................................................................ 233 

Senator Shelby ........................................................................................... 236 

Senator Vitter ............................................................................................ 236 

Senator Coburn ......................................................................................... 239 

(III)

(1) 

THE FINANCIAL STABILITY OVERSIGHT 

COUNCIL ANNUAL REPORT TO CONGRESS 

TUESDAY, MAY 21, 2013 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:15 a.m., in room 538, Dirksen Senate 

Office Building, Hon. Tim Johnson, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I call this hearing to order. 

I would like to start by saying that my thoughts and prayers are 

with the families of Moore, Oklahoma, and our colleague here on 

the Committee, Senator Coburn. It is a difficult time as families 

mourn the loss of loved ones and begin rebuilding their community. 

Today, we welcome Secretary Jack Lew to the Committee for the 

first time since he was confirmed. 

While this Committee lacks jurisdiction over the IRS, I must personally express my sincere disappointment and anger regarding the 

recent revelation that some IRS employees were targeting political 

organizations. Democrats and Republicans agree that politics has 

no place at the IRS, and I commend Secretary Lew and President 

Obama for taking swift action last week. As should be the case, the 

DOJ is looking into whether any laws have been broken and the 

appropriate Senate committees of jurisdiction are holding hearings 

so that we can get to the bottom of this. 

With that said, this Committee has the duty to oversee efforts to 

strengthen U.S. financial stability, especially in light of the costly 

crisis our economy continues to recovery from. So today, Secretary 

Lew will focus on the Financial Stability Oversight Council’s Annual Report to Congress, as required by the Wall Street Reform 

Act. 

I am pleased that this year’s FSOC report notes progress in key 

areas that this Committee has devoted attention to over the last 

year, including money market funds, the tri-party repo market, the 

housing market, LIBOR, and the economic situation in Europe. The 

report also highlights emerging operational risks for financial companies like cybersecurity attacks, new technologies in the equity 

markets, and financial services preparedness for natural disasters. 

Furthermore, the FSOC has made important recommendations in 

many of these areas to further safeguard our economy that should 

be considered. 
2 

All indicators point to a well-coordinated FSOC, and I will note 

that since the last report, the Senate has confirmed the first Director of the Office of Financial Research, a key position and office 

that is assisting FSOC with critical research and analysis. 

But more needs to be done to improve our Nation’s financial stability, and some high-priority rules await completion by potential 

regulators. These include enhanced prudential standards for large 

systemic firms required by Wall Street Reform, the Basel III agreements, and the Volcker Rule. FSOC itself also continues to work 

on the nonbank SIFI designations. We also expect additional reforms and action from the regulators on money market funds, the 

tri-party repo market, and other proposals to curtail systemic risk 

and ensure no firm is too-big-to-fail. 

While it is always important to get the rules right, the 3-year anniversary of Wall Street Reform becoming law and the 5-year anniversary of the financial crisis are fast approaching. The remaining 

pieces of Wall Street Reform must be finalized soon so that Congress can appropriately assess whether it is necessary to do more. 

Mr. Secretary, I look forward to hearing your testimony and 

learning what specific steps you are taking as FSOC’s chair to 

strengthen financial stability and seeing to it that key Wall Street 

Reform rules are completed in the next few months, not the next 

few years. 

With that, I will turn to Ranking Member Crapo for his opening 

statement. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman, and before moving on 

to my opening statement, I, too, want to join with you in extending 

my deepest condolences to the families of those who were killed 

yesterday as a result of the devastating tornadoes in Oklahoma. All 

of us keep the people of Oklahoma in our hearts and in our prayers, and I appreciate your mentioning that. 

Today, Secretary Lew comes before the Committee to testify in 

his first hearing as the Secretary of the Treasury. The Secretary 

of the Treasury wears many hats. He is responsible for formulating 

and recommending a number of domestic and international financial, economic, and tax policies for the Administration. As FSOC 

Chairman, he is required to appear before this Committee annually 

to testify on the activities of the Council and to answer questions 

concerning the Council’s most recent annual report. 

The Council’s 2013 Annual Report covers many areas of the 

Council’s activities and lists a number of potential emerging 

threats to the financial stability of the United States. I want to 

focus my opening statement on one particular area, Mr. Lew, that 

needs your personal attention. 

The U.S. capital markets must remain the preferred destination 

for investors throughout the world. Capital is the lifeblood of U.S. 

businesses, which, in turn, are the engines of job creation and economic growth. And, unfortunately, infighting among U.S. financial 

regulators and their overseas counterparts is causing investors to 

look elsewhere for productive investment opportunities. 

The list of problematic cross-border issues that need to be addressed is growing, and the frustration from foreign regulators over 
3 

the lack of international coordination on financial reform measures 

has reached an unprecedented level. After the so-called Volcker 

Rule was proposed in 2011, a number of foreign regulators submitted a letter to the Treasury Department expressing concerns 

that the proposed rule could reduce the liquidity of the sovereign 

bonds and damage international cooperation efforts. 

More recently, a number of foreign regulators have weighed in on 

the Federal Reserve’s proposed rule to implement enhanced prudential standards for foreign banking operations. For example, the 

European commissioner in charge of financial regulation, Michel 

Barnier, warned in a letter to Federal Reserve Chairman Ben 

Bernanke that the Fed’s proposed rules affecting European banks 

doing business in the United States will duplicate work already 

done in Europe and create additional cost. Commissioner Barnier 

also warned that the Fed’s proposal could risk a protectionist backlash and threaten the global economic recovery. 

The frustration reached a new level when nine finance ministers 

wrote to Secretary Lew expressing their concerns about the lack of 

progress in developing workable cross-border rules as part of reforms of the OTC derivatives market. They warned that without 

clear direction from regulators working together, derivatives markets will recede into localized and less efficient structures. Derivatives end users will find it more difficult to manage risk and suffer 

from burdensome regulatory conditions. 

I look forward to hearing from you, Secretary Lew, about the specific steps you intend to take to avoid these cross-border conflicts 

and the unnecessary costs imposed by them. 

Finally, although this hearing is focused on Secretary Lew’s role 

as Chairman of the FSOC, I would be remiss if I did not take this 

opportunity to question him about the recent IRS scandal. We are 

literally conducting an investigation into the IRS circumstances 

about three floors below us in this building at this moment as we 

meet, and I may need to step out, Mr. Chairman, to get down to 

that hearing on an occasion or two here. 

The largest bureau within the Treasury Department is the Internal Revenue Service. Last week, the Treasury Inspector General 

for Tax Administration issued a report that documents a number 

of troubling and disturbing actions regarding the targeting of conservative groups by the IRS. These actions should never be tolerated. President Obama has directed Secretary Lew to make sure 

that all of the Inspector General’s recommendations are implemented quickly. I look forward to hearing how the Secretary will 

carry out this Presidential directive. I also look forward to hearing 

what additional steps Secretary Lew is taking to ensure that no future income tax audits will be conducted in such a discriminatory 

manner ever again. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Crapo. 

In order to get to Secretary Lew’s testimony and Member questions, opening statements will be limited to the Chair and Ranking 

Member today. I want to remind my colleagues that the record will 

be open for the next 7 days for opening statement and any other 

materials you would like to submit. 
4 

Today’s witness is the 76th Secretary of the U.S. Department of 

Treasury. Secretary Lew, welcome to the Committee. 

Before you begin your statement and the FSOC Annual Report, 

there is understandably a lot of concern regarding previous actions 

at the IRS. If you would like to say a few words on that matter, 

please do that before you begin your testimony. You may begin. 

STATEMENT OF JACOB J. LEW, SECRETARY, DEPARTMENT OF 

THE TREASURY 

Mr. LEW. Thank you, Mr. Chairman. 

I would like to begin by expressing my own condolences to the 

people of Oklahoma who are suffering so much today and to say 

that the families are in our thoughts and prayers as they go 

through the recovery from the devastating tornado in Oklahoma 

City. 

Chairman Johnson, Ranking Member Crapo, Members of the 

Committee, thank you for the opportunity to testify today on the 

Financial Stability Oversight Council’s 2013 Annual Report. 

Before I address the report, I would like to say a few words about 

the Treasury Inspector General for Tax Administration’s report last 

week that showed that some employees at the IRS used outrageous 

methods to determine if certain groups qualified for tax-exempt 

status. 

As the Inspector General’s report indicates, while this conduct 

was not politically motivated, it was unacceptable and inexcusable. 

Administering the tax code without any hint of bias is a solemn obligation that must be carried out with the highest of standards. 

That is why I moved quickly to take steps to restore confidence in 

the IRS. Within 24 hours of the report coming out, I asked for and 

received the resignation of the Acting Commissioner. And within 24 

hours later, the President appointed a new Acting Commissioner. 

He is a person of high integrity and he has earned the confidence 

of Democrats and Republicans for his professionalism. 

I have directed incoming Acting Commissioner Daniel Wuerffel 

to carry out a thorough review of this conduct and to take action 

on three specific things. First, making sure that those who acted 

inappropriately are held accountable for their actions. Second, examining and correcting any failures in the system that allowed this 

behavior to happen. And, third, taking a forward-looking view and 

determining whether the IRS has systemic problems that need to 

be addressed. 

The Acting Commissioner will hit the ground running on 

Wednesday. That is tomorrow. He is going to take actions as they 

are needed, and he will report back to me on his progress within 

30 days so that we can report back to the President. And we are 

going to make sure that nothing like this ever happens again. 

I would like to turn to the Council’s Annual Report, which is the 

subject of this hearing. This report represents extensive collaboration among Council members, agencies, and staff. And it gives us 

a chance to provide the Congress and the public with the Council’s 

assessment of significant financial market and regulatory developments, potential emerging threats to financial stability, and recommendations to strengthen the financial system. 
5 

I want to point out that the strength of our financial system depends greatly on the strength of our economy. Now, there is no 

doubt that we have made significant progress recovering from the 

worst economic crisis since the Great Depression. The economy has 

grown for 15 consecutive quarters. The private sector has been creating jobs for 38 straight months. The housing market is healing. 

Our deficits are falling at the fastest rate in decades. But there is 

more work to do. We need to keep our foot on the accelerator, and 

economic growth and job creation need to be more rapid. 

The President has put forward a comprehensive jobs and growth 

plan. His path forward strengthens the recovery by making needed 

investments in manufacturing, innovation, infrastructure, and 

worker training while taking a balanced approach to restoring our 

long-term fiscal health. This strategy will not only help grow our 

economy now and well into the future, it will replace the sequester 

with sensible deficit reduction measures. 

Since the Council’s last Annual Report, our financial system has 

grown stronger in a number of ways. Capital and liquidity levels 

for the largest financial institutions have increased. Regulators 

have taken additional steps toward improving transparency and 

risk mitigation in derivatives and other markets. And the implementation of the Dodd-Frank Act and international coordination on 

G–20 reform priorities have brought significant progress toward establishing a more resilient and stable financial system, both domestically and globally. 

On the topic of Dodd-Frank implementation, the Council and its 

member agencies continue to put reforms in place. It is important 

to note that while additional work remains, we are much closer to 

the end of the process than we are to the beginning. We have seen 

a good deal accomplished recently, including progress on the Council’s evaluation of an initial set of nonbank financial companies for 

potential designation. Progress on a new framework for the consolidated supervision of large financial institutions, progress on a new 

framework for the orderly liquidation authority, progress on implementing provisions relating to living wills, progress on reducing 

risk and increasing transparency in the derivatives markets, and 

progress on enhancing protections for borrowers and other participants in the mortgage markets. 

Despite these positive developments, there are still risks to U.S. 

financial stability. The Council’s report identifies those risks and 

makes specific recommendations to mitigate them. For instance, it 

is our judgment that the market participants and regulators need 

to take steps to reduce vulnerabilities in wholesale funding markets; that Government agencies, regulators, and businesses need to 

address operational risks posed by technology failures, natural disasters, and cyber attacks; and that reforms are needed to address 

the reliance on self-reported reference interest rates, like LIBOR. 

Mr. Chairman, I want to thank the other members of the Financial Stability Oversight Council and all the staff involved with the 

2013 Annual Report for their hard work and dedication. This is an 

ongoing effort and we look forward to continuing to work with you, 

this Committee, and Congress to make sure we have a more resilient and stable financial system. 
6 

With that, I thank you and look forward to answering your questions. 

Chairman JOHNSON. Thank you very much for your testimony. 

As we begin questions, I will ask the Clerk to put 5 minutes on 

the clock for each Member. 

Mr. Secretary, the Wall Street Reform Act provides regulators, 

including FSOC, a number of tools to enhance financial stability. 

Do you believe Wall Street Reform provides the needed tools to not 

only strengthen our financial system, but also to end too-big-to-fail? 

Mr. LEW. Mr. Chairman, I think that the Wall Street Reforms 

enacted in the Dodd-Frank legislation provide powerful tools for 

the regulators, and by creating FSOC, which I chair. I think that 

the policy of Dodd-Frank was very clear, that too-big-to-fail is an 

unacceptable policy and it had to end and it provided the tools so 

that it could end. 

As I indicated in my testimony, we have made substantial 

progress in the implementation of Dodd-Frank, but there is still 

more progress to be made. I think that there are a number of 

issues where the different agencies are still determining how to set 

the levels in various areas so that, in the end, we will be able to 

say that too-big-to-fail has ended. 

But one of the principles that I think is very important is we 

must implement Dodd-Frank, and we need to do it quickly, but we 

are also going to need to take an ongoing look at the system. One 

of the problems between the Great Depression and the financial 

crisis of 2008 was that too long a period went by when the markets 

evolved and the regulatory authorities did not evolve with the markets and we lost our ability to see what was going on and to regulate it effectively. 

So one of the things that, as we implement Dodd-Frank, we need 

to do is make the resolve, the determination to keep asking the 

question, as we finish implementing it and going forward, whether 

we still have the tools we need or whether we need more. 

Chairman JOHNSON. What are you, Mr. Secretary, and FSOC 

doing to ensure key rules that strengthen financial stability and 

end too-big-to-fail are completed as soon as possible? Will we see 

final rules later this year? And when should we expect to see SIFI 

designations made? 

Mr. LEW. Mr. Chairman, I have been Secretary for just under 3 

months and I have had three meetings of FSOC, and in between 

the meetings, I have had numerous conversations and meetings on 

various matters that are still outstanding to implement the DoddFrank legislation. I have made clear to all of the members of FSOC 

that it is a matter of enormous priority that we complete the rules 

to make the rulemaking process one where all the participants in 

the market know what the policy is and where we have taken the 

steps that we have the tools to use now to protect the public from 

another financial crisis. 

I think that there will be progress this year. We have indicated 

at the last public meeting that we are making progress on the 

nonbank designations. I am hoping that we are soon going to be 

in a position to make a final determination in that area. I think 

that there is ongoing work in all the areas that I mentioned in my 

opening statement, and one of the things that I see as my role as 
7 

Chairman of the FSOC is to make sure that we do not measure our 

progress in months and years, but we start to measure our 

progress in weeks and months. 

Chairman JOHNSON. How soon do you see SIFI designations 

made specifically? 

Mr. LEW. Well, I do not want to jump ahead of a decision that 

requires a vote of the Council, but we have substantial staff work 

going on between meetings. We have another meeting scheduled 

the week after next. And we are trying to get this matter up for 

a decision as quickly as possible. 

Chairman JOHNSON. Mr. Secretary, international coordination 

and cooperation is important for successful financial reform. Are 

there specific areas regarding cross-border resolution, enhanced 

prudential standards, insurance, or derivatives where more can be 

done to strengthen coordination with our global counterparts? 

Mr. LEW. Mr. Chairman, I actually think we have seen a substantial improvement in international cooperation as we have gone 

through this process. The G–20 is working hard on trying to coordinate in this area. There are informal groups of regulators and central bankers and finance ministers coordinating on this. And these 

are tough issues. They are tough issues for each of us within our 

borders. They are tough issues between countries. 

And one of the principles that we are making paramount is that 

our mandate is to protect the U.S. taxpayer and the U.S. economy 

by setting standards at the level that we think is appropriate. We 

are trying very hard in the international community to make it a 

race to the top, not a race to the bottom. If we can all agree on 

high standards, a lot of these issues are resolved by having compatible high standards. And I think we are making a lot of progress 

in that regard. 

I know that these are going to be challenging times for competition in the financial markets. It is important to us that the United 

States remain a competitive financial market, but it is equally important to us that it remain a competitive financial market where 

we have the safeguards to protect against having taxpayers left in 

the position they were in after the economic crisis in 2008. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

And, Secretary Lew, I would like to start with a few questions 

about the IRS situation. When did you first become aware of the 

allegations that the IRS was targeting conservative groups? 

Mr. LEW. Senator, I first became aware that there was an audit 

underway on March 15, when I had a meeting with the Inspector 

General. It was in my early weeks at the Treasury Department. It 

was a process of really having initial getting-to-know-you meetings. 

The Inspector General flagged a number of items without going 

into great detail. He mentioned that there was an audit of 501(c)(4) 

activity, told me that there might be troubling findings, did not describe them in detail. I then did not learn any more about it until 

it became public. 

Senator CRAPO. So, that was my next question. When did you 

first receive confirmation that those allegations were, in fact, true? 

Mr. LEW. Well, the first I heard was when it was publicly reported a week ago Friday. I was actually at the G–7 meetings in 
8 

the United Kingdom and I was outraged at the time. I did not yet 

have the IG report. I did not actually get the IG report until Tuesday, and I was—when I got the report, my immediate reaction was 

to take the steps that I noted in my opening statement, to ask for 

and receive the resignation of the Acting Commissioner, to help as 

the President made the decision to appoint a new Acting Commissioner, and then to charge the new Acting Commissioner with the 

responsibilities that I described. 

Senator CRAPO. As I am sure you are aware, in Congressional 

testimony last week, the Acting IRS Commissioner admitted that 

the agency planted a question at the American Bar Association 

Conference in order to reveal its actions before notifying Congress. 

Were you personally involved in that decision? 

Mr. LEW. No. 

Senator CRAPO. Do you believe that was an appropriate way to 

make the information public? 

Mr. LEW. You know, Senator, as the news reports overnight indicated, there were some conversations at a staff level between 

Treasury and IRS. It was the discretion of the IRS to decide how 

to manage this matter. The guiding principle for the Treasury Department in IRS investigations is to not interfere in any way, to 

not interfere with the IG’s ability to find facts, to interview people, 

to find records, and in no way to color the outcome. So I am not 

aware of any action that was taken at the Treasury Department 

that is inconsistent with that well-established practice. 

You know, I was not asked about this. I would have advised 

against doing that. But it was a decision for the IRS to make. 

Senator CRAPO. Thank you. And my time is quickly running out 

and I probably will not get to the questions on FSOC in this round, 

but one last point with regard to the Internal Revenue Service. As 

revelations about actions of different Federal agencies come forward in any administration, it is clear to me why revelations of the 

type we are seeing relating to the IRS bring such concern to the 

American public, because there is a very real and, I think, justified 

perception among the people of the United States that the Internal 

Revenue Service is in many real ways the prosecutor, the judge, 

the jury, and the executioner. 

Now, I understand that there are legal points in the process of 

the IRS exercising its activities at which people can get some review. But there is a very real concern, in my opinion, that the IRS 

has such incredible power that abuses at the IRS are viewed by the 

American public with great concern. 

And my question to you is, given the fact the President has directed you to quickly implement the Inspector General’s nine requests, or nine recommendations—— 

Mr. LEW. Recommendations. 

Senator CRAPO.——what additional steps have you taken to restore public trust in the integrity of the IRS and the Treasury Department and, frankly, to ensure that no future income tax audits 

will ever again be conducted in this kind of a manner? 

Mr. LEW. Well, Senator, first, I cannot say strongly enough how 

unacceptable this behavior was and how outraged I was when I 

learned about it. I think that the IRS process or tax administration 

system has to be beyond politics. 
9 

Now, there is a certain distance between Treasury and the IRS 

in the administration of the tax system for proper reasons. The IRS 

has a semi-independent character because there is the concern that 

in past decades, there was political interference in the IRS. 

I will take every step that I can to make sure that in the management structure and in the way the IRS conducts its business 

that it is set up in a way to prevent this from happening in the 

future. I have already had that conversation with the new Acting 

Commissioner, who takes over tomorrow, and he has a very short 

period of time to help identify who should be held accountable, how 

we get to the bottom of how the management and communication 

systems broke down to permit this to happen, and to look systemically at what other steps need to be taken. 

The thing I will not do, I will not cross that line into the administration of the tax system because the cure could be worse than 

the disease. We need to make sure that there is no political involvement in the administration of the tax system, and the management of the IRS is very much the responsibility of the Treasury 

Secretary. The administration of the tax system has to be within 

the IRS and apart from politics. 

Senator CRAPO. Thank you. I see my time is up. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. Thank 

you, Mr. Secretary. 

Mr. Secretary, one of the issues raised by the FSOC’s report is 

the systemic risk potentially caused by the default of broker-dealers that were relying on tri-party repos. They urge, and your report 

urges, that the markets respond to this. Which specific policies or 

regulatory tools does the Council suggest be employed to deal with 

this potential systemic risk? 

Mr. LEW. Senator, this is a serious systemic concern and it is 

part of a broader set of systemic concerns that have to do with 

wholesale funding, the short-term funding for longer-term obligations, because there is a very real risk that if the short-term funding ceases to be available and it is not well collateralized, that 

there begins an unraveling process that could become systemically 

very, very damaging. 

The regulation in this area is kind of—is in different parts because it is—tri-party repo is three different parties. I believe the 

Fed, Federal Reserve Board, is looking at the rules that govern the 

banks that do the short-term lending to the broker-dealers and it 

is looking at the adequacy of collateral and other issues to try and 

make sure that they are taking prudential steps in this area. 

I think the FSOC report identified this along with money market 

funds as a source of real concern, and I must say, it is something 

that I have put a fair amount of attention into as Treasury Secretary as Chair of the FSOC. 

Senator REED. Thank you, Mr. Secretary. 

Following on, in some respects, the Chairman’s discussion of the 

SIFIs, in Section 171 of Dodd-Frank, there were enhanced capital 

requirements for the bank-holding companies. In fact, Senator Collins of Maine was, I think, instrumental in getting this very sensible piece of legislation included in the legislation. But as you look 

at SIFIs, you go beyond the typical notion of the bank-holding com-
10 

pany that may have deposit-taking activities, commercial lending, 

even investment banking activities, and get into the realm of, 

frankly, some large insurance companies. Have you given any 

thoughts to the applicability of this section with respect to the insurance companies, in particular? 

Mr. LEW. Senator, I think that the first step is to make the determination as to whether or not these nonbanks should be designated because they are significant, and the standard is whether 

they—the material distress in those institutions is a threat to U.S. 

financial stability. 

So we have been going through the process in a very orderly way 

of reviewing the potential designations against that standard. If 

the designation is made, the regulation—the authority to regulate 

will go to one or another institution. The Federal Reserve Board 

would have a substantial responsibility in this area. I know that 

there are questions that have been raised as to whether or not the 

tools are perfectly fitting for nonbanks and I think that is an issue 

that they will look at and we will look at if designations are made. 

Senator REED. Thank you. You have already indicated in the report and in your public comments that the LIBOR, because it is a 

self-reporting and highly subjective measure, probably has to be replaced. Any thoughts about, in the short run and the long run, how 

we should replace it and how quickly they have to move to replace 

it? 

Mr. LEW. Senator, the urgency that the FSOC report notes is the 

need for there to be a replacement, because, frankly, there is not 

a ready replacement. LIBOR is something that the markets selfdesignated and it is contractually something that parties have 

signed onto, and there is not an immediate substitute that would 

be available. 

There is an international process that involves regulators from 

multiple nations and market participants from multiple nations, 

and the FSOC report, I think, properly noted the urgency of developing an alternative so that if there is a transition, there can be 

an orderly transition, because LIBOR is a reference rate that is included in millions of contractual agreements, and if there is a move 

to another rate, it will have to be pursuant to those contractual 

terms. 

So I think there is a great deal of importance that that process 

move speedily and that a reference rate as an alternative be available in the event that there is a need to move. 

Senator REED. Just a quick follow-up question, Mr. Secretary. It 

is there. It is ubiquitous. It is in every contract—most every contract. 

Mr. LEW. Yes. 

Senator REED. This is being regulated very loosely, I presume, by 

the British authorities, and are they being very aggressive in ensuring, even though it is subjective, that it is less subjective than 

before? 

Mr. LEW. Well, Senator, obviously, there were cases of manipulation that were totally unacceptable. I think the British authorities 

have recognized that that was an unacceptable set of events and 

they are determined to not let that be repeated. 
11 

I think the challenge is that the rate is an inherently uncertain 

one because it is referenced to overnight lending between banks at 

a time when there is much less overnight lending between banks, 

which is one of the reasons there needs to be a reference rate that 

is less susceptible to manipulation. 

Senator REED. Thank you, Mr. Secretary. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

Mr. LEW. Good to be here. 

Senator SHELBY. Mr. Secretary, it is my understanding that the 

set up at the Treasury Department is the IRS Commissioner reports to the Treasury Secretary through the Deputy Secretary of 

the Treasury. Is that correct? 

Mr. LEW. That is correct. 

Senator SHELBY. Who was the Deputy Secretary of Treasury in 

2012? 

Mr. LEW. The current Deputy Secretary, Neal Wolin. 

Senator SHELBY. Neal Wolin. Have you talked to him about the 

IRS situation? 

Mr. LEW. Yes, I have. 

Senator SHELBY. Did he relate to you any knowledge that he may 

have had about what was going on in Cincinnati, where the IRS 

was targeting these conservative groups? 

Mr. LEW. He and I both received the IG’s report at the same time 

last Tuesday, and we have had numerous conversations about it 

since then. 

Senator SHELBY. OK. But you also testified that you met with 

the Inspector General in March, several months back, shortly after 

taking office, and that the Inspector General presented a list of ongoing investigations, including the IRS targeting of conservative 

groups, is that correct? 

Mr. LEW. Well, what he indicated to me was that there was an 

audit taking place of the 501(c)(4) Determination Unit, and he did 

indicate that there were potentially—— 

Senator SHELBY. Did you pursue that? Did you ask him, why 

would they do such a thing—— 

Mr. LEW. Senator—— 

Senator SHELBY.——or anything? What did you do? 

Mr. LEW. Senator, the practice at Treasury, quite appropriately, 

is when you are notified of an IG investigation, you allow the IG 

to do their work. You do not get in the way. You make sure that 

they have access to whatever they need access to to complete their 

audit. And that is what Treasury was doing. I do not think he expected me to take any action at that time because I was awaiting 

his report, which I received last Tuesday. 

Senator SHELBY. Before you were named Secretary of the Treasury and confirmed and in your present job, you were the Chief of 

Staff at the White House, correct? 

Mr. LEW. Correct. 

Senator SHELBY. And when did you become the Chief of Staff at 

the White House? 

Mr. LEW. In January 2012. 
12 

Senator SHELBY. Twenty-twelve. So when this was going on in 

Cincinnati, you were the Chief of Staff at the White House? 

Mr. LEW. Correct. 

Senator SHELBY. And you had no knowledge whatsoever of anything amiss dealing with the IRS approval, disapproval, delay, or 

anything of specific groups? 

Mr. LEW. I was not aware of this audit until I met with the Inspector General on March 15, 2013. 

Senator SHELBY. Had you heard anything at the White House regarding—— 

Mr. LEW. I was not aware of any specific facts. You know, I know 

the questions had been raised. The fact is, this audit was a publicly 

posted audit in October 2012. So the fact that an audit was going 

on was a matter of public record. I had no specific knowledge. 

Senator SHELBY. Do you believe that someone at the Cincinnati 

office would just, on their own, start targeting the conservative 

groups, slowing them down, or is that part of a culture at the 

Obama White House? 

Mr. LEW. Senator, I think—I have read the IG report quite carefully and I think it is very important to note that there is no suggestion of any political interference with the process of making 

these determinations. There is unacceptable behavior that happened at the IRS. That has to stop, and it cannot happen again. 

But there was no suggestion of any political intervention. And, 

frankly, the way we manage IG reports is meant to keep politics 

out of any review and to make sure that IGs have complete freedom to find whatever facts they find. 

When I met with the IG and he raised the list of concerns with 

me, I said to him what I have said to every auditor I have ever 

worked with. You have my support. If there are problems, I want 

to know about the problems and I want to fix them. 

Senator SHELBY. Is the IG report complete now? Is that finished? 

Mr. LEW. Well, the audit is complete. 

Senator SHELBY. The audit. So could the IG, if he saw fit, recommend to the Justice Department possible prosecution of people 

that were abusing the public trust and abusing IRS regulations 

and, perhaps, laws? 

Mr. LEW. Well, the IGs do have the power to make recommendations. I am not aware of any recommendation in this case, though 

I am aware that the Attorney General has indicated that they will 

investigate whether or not there has been any criminal activity. 

Senator SHELBY. As Secretary of Treasury, do you have the 

power to recommend things to the Justice Department for possible 

prosecution of people who abuse the IRS for political reasons? 

Mr. LEW. Senator, I believe in this and all matters that nobody 

is above the law. So I think the first question that we have is who 

is responsible and holding people accountable for their actions. 

We started the day after the report was made public by asking 

for and receiving the resignation of the Acting Commissioner. We 

will continue, as the new Acting Commissioner takes over tomorrow, to hold people accountable for their actions because it was unacceptable and we have to restore confidence in the IRS and the 

IRS has to be free of any bias. 
13 

Senator SHELBY. Are you concerned at all from your position as 

Secretary of the Treasury that some of this criteria that was used 

in Cincinnati to target conservative political groups could have 

been explicitly or implicitly endorsed by individuals higher up in 

this Administration? 

Mr. LEW. Senator, I have seen no suggestion of any political involvement at all. What I have said and what I believe is that it was 

unacceptable and whoever is responsible should be held accountable. 

Senator SHELBY. But you do not think it just happened out of 

thin air. There was something triggering all this. Was it either a 

culture or somebody pushing it inside? Do you not think that happened? 

Mr. LEW. Senator, what I think is that the Cincinnati office exercised very poor judgment and used criteria that are unacceptable, 

and we have made it clear that the IRS has to be beyond any suspicion of bias. 

Senator SHELBY. The IRS should be above suspicion, period. 

Should it not? 

Mr. LEW. Yes. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, and I appreciate your answers with 

reference to the IRS. I think they are pretty forthright and determined to make sure we have an agency the American public can 

have faith and confidence in. 

I want to call to your attention as an element of that something 

that I am concerned about which talks about the more broader 

structure and how the agency pursues their determinations. You 

know, in April, the Citizens for Responsibility and Ethics in Washington filed a petition with the Treasury Department and the IRS 

looking for a revision in their regulations which they believe would 

clean up the mess we are dealing with today, because the statute 

that Congress passed for eligibility says civil leagues or organizations not organized for profit but operated exclusively—exclusively 

for the promotion of social welfare are eligible for 501(c)(4)s. The 

IRS regulation for the statute, however, says an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some ways the common good and 

general welfare. 

I do not think that Congress meant ‘‘primarily’’ when they passed 

a statute that says ‘‘exclusively.’’ And so that is an example of how 

an agency gets away from the Congressional intent, and something 

I hope that when we are looking at the totality of this problem, we 

are pursuing, as well. 

Mr. LEW. Senator, one of the recommendations that the IG’s report made was to take a look at this very issue, which is something 

that will be going on immediately with the new Acting Commissioner coming in. 

Senator MENENDEZ. Now, with reference to what this hearing is 

about, which is the FSOC, let me ask you and follow up on something Senator Reed talked about, which I have raised in previous 

hearings on FSOC, which is the LIBOR interest rate. And I heard 
14 

your response, but I want to get a sense of how much effort are 

we putting into finding alternatives here, because even you noted 

that in referencing the LIBOR, you said, quote, ‘‘It diminishes market integrity and will be unsustainable in the long run.’’ 

So, how much effort are we putting in seeking alternatives to the 

LIBOR, because if it is not sustainable in the long run, we should 

be starting to deal with that challenge now. 

Mr. LEW. I totally agree, Senator. There is an enormous amount 

of effort being put into it. The Chair of our Commodities Futures 

Trading Commission has been working with international regulators on this for some time. I have been at several international 

meetings where finance ministers and central bank heads have discussed it. There is a common sense that there is an urgency to develop an alternative, because any transition has to be orderly. The 

fact that there is a problem is one part of the analysis. There has 

to be a solution. And at the moment, there is not an easy alternative, which is why it is so critical, and as the FSOC report noted, 

a matter of high priority to develop a reference rate that could be 

used as an alternative to LIBOR. 

Senator MENENDEZ. I am looking forward to that, because I am 

seriously concerned about LIBOR interest rate manipulation and 

the consequences it has in ensuring the integrity of interest rates. 

That affects everybody, consumers, businesses, and communities. 

Second, more broadly, I am also interested in whether any of the 

Federal Reserve or Financial Stability Oversight Council projections are based in whole or in part on surveys or estimates made 

by institutions with a financial stake in the outcome. In other 

words, are the projections about inflation and other trends in the 

economy that the Fed uses to take monetary policy decisions, or 

that FSOC uses to make decisions about risk to the overall economy, susceptible to the same risks of manipulation as LIBOR? 

Mr. LEW. Senator, I would actually have to take that question. 

I read the Federal Reserve Board’s economic projections. They have 

a very talented team of economists that work there and they, I 

know, consult all of the major forecasts as we do when we do our 

economic forecasts. What specific forecasts they use, I would have 

to check. 

Senator MENENDEZ. Well, I would like to hear back from the Department on that because it makes me concerned that if, you know, 

those who have an interest at the end of the day are giving the information that makes the determination, it raises the question as 

to a bit of is this the fox guarding the chicken coop. So if we are 

going to have transparency and greater confidence in our financial 

institutions, we want to have that across the spectrum. 

Mr. LEW. Yes, and Senator, I can tell you, from the point of view 

of the Administration’s economic assumptions, we do our own economic assumptions and we then compare them to the blue chips. 

We compare them to the CBO economic assumptions. We test them 

against the Fed’s economic assumptions. So the general practice is 

you do your own economic projections and you see where they fit 

on the spectrum of others, because if there is an outlier estimate, 

that suggests there are questions that you would like to ask. 

Senator MENENDEZ. And, finally, I would like to just call your attention to two things. One, which has been endorsed by the Admin-
15 

istration, is Senator Boxer and my Responsible Homeowner Refinancing Act. We think we could help millions of families unlock 

economic potential, as well, and we hope that this will be an advocacy point because the window is only open for so long as interest 

rates remain historically low and, as well, the whole question of 

our efforts, which I have mentioned to you before, on making sure 

that we unlock the potential, which the Administration also has acknowledged, in FIRPTA. Those are things that actually will not 

cost the Federal Government money at the end of the day and have 

a tremendous potential to help us move this economy and help 

homeowners. 

Mr. LEW. Senator, I have to strongly agree that opening the opportunity to refinancing to more homeowners who are creditworthy 

is an urgent matter. The window will not remain open forever. We 

do not know exactly when interest rates will go up, but when you 

are at historically low interest rates, the thing you know for sure 

is that, over time, interest rates will go up, and it would be just 

profoundly unfair if middle class working Americans who, through 

no fault of their own, are either underwater or have lost some of 

the value in their home because of the financial crisis while they 

are still creditworthy are unable to refinance at lower interest 

rates. It would be hugely beneficial to them in terms of the affordability of their housing. It would be hugely important to the economy in terms of promoting economic growth. And it is something 

that we do believe legislation like yours would help fix and we 

would very much like to work with you to get that enacted. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and Mr. Secretary, 

thank you for being here today. 

I may surprise you in that I am going to mostly stick to the subject at hand today. 

I do want to say on the IRS issue, it is my understanding when 

the FBI comes to a company that is accused of corrupt practices, 

a lot of times, they will go to the top, even though they may not 

have known specifically of the activities, and, in essence, engage 

them because of the culture that they have created there. And, 

therefore, they end up being culpable for some of the activities at 

the lower levels. 

I know that you have not been at the Treasury long. I do want 

to say that the indignation that you showed on the front end, to 

a degree, is kind of laughable in that when you have the President 

of the United States and the Vice President and other leading folks 

in our Administration using the type of language to describe the 

folks that were targeted, demonizing, villainizing, I think you 

would expect that bureaucrats at lower levels are going to act in 

a way that they acted. It is reprehensible what happened, but it 

will be interesting to see as this goes about whether this culture— 

really, where it came from. 

And again, I know that you have not been there long, but I do 

think that the demonizing and the type of language that was used 

probably caused these bureaucrats to feel empowered to go out and 

do the things that they did, which really offend all of our sensibilities, including yours, as you stated on the front end. 
16 

Mr. LEW. Senator, I have to say that the President’s reaction to 

this was exactly the same as mine. It was outrage—— 

Senator CORKER. I am just saying, it should not have been a surprise. 

Mr. LEW. He has taken no step, ever, to condone this kind of behavior—— 

Senator CORKER. I understand. 

Mr. LEW.——and would never. There has been no political action 

that I am aware of. 

Senator CORKER. I understand. It is the culture that is created 

when you demonize enemies like that. 

Mr. LEW. And the issue that we are dealing with is whether or 

not the IRS engaged in unacceptable behavior in screening applications for—— 

Senator CORKER. I know exactly what we are—— 

Mr. LEW. We are not discussing the merits of the activities of the 

organization. That is a separate issue. 

Senator CORKER. I understand. 

Mr. LEW. It is irrelevant. There should be no bias in the review 

of applications. 

Senator CORKER. I could not agree more, but I think when people, just like in a corporation, when they hear the CEO saying 

things, it affects people on down lower levels. That is typically 

what happens in a case against a company. And I am not trying 

to implicate. I am just saying, people should not be surprised that 

bureaucrats at lower levels took it upon themselves to do what they 

did when, at the highest levels, people were being demonized and 

villainized in the way they were. 

So, let us move on to the subject at hand. I wrote a letter to the 

FSOC on March 12 and asked about Section 121, and the question 

is—I have not received a response—do you believe that the FSOC 

has the ability to break up a company that is healthy but one that 

they believe could pose systemic risk because of the kind of activities or the size that they are? I have not received a response and 

I am wondering if you might do so. 

Mr. LEW. Senator, I have not seen the letter. I apologize. I will 

make sure that I do see the letter. You know, the authorities that 

the FSOC has are to coordinate the activities of the different agencies that make up the membership of the Council. There are some 

limited areas where there is the authority to take actions, such as 

the nonbank designations. You know, I am happy to look at your 

letter and get back to you. 

Senator CORKER. I appreciate that. 

One of the things—Title II in Dodd-Frank talked about orderly 

liquidation, and I think that most of us thought that when a company failed, they were going to be liquidated. And I think that the 

FDIC, and I understand for good reason—I had a lot of conversations with them about this—they have realized these organizations 

are so complex that you really cannot orderly liquidate. And so 

they have decided, or at least as they sit today, you cannot orderly 

liquidate them. So they have come up with a single point of entry 

where what they are going to do is basically attack the shareholders and the creditors, rightfully so, at the holding company 

level. 
17 

One of the things we have been pursuing is making sure that 

there is enough long-term credit held at the holding company. We 

still have not received a response, but I think that—I would just 

love to hear your thoughts on that. I think, obviously, what people 

are going to do is start loaning to the subsidiaries, knowing that 

they are going to stay intact, and not at the holding company level 

if something does not change, and I just wondered if you would address that issue. 

Mr. LEW. Senator, the orderly liquidation authority and the single point of entry is a huge improvement in terms of our ability to 

manage any future crisis or problems that develop. I totally agree 

that there has to be adequate capital available in order for that to 

work. In general, raising capital standards has been a big part of 

the activity of the last couple of years. It is a combination of the 

things, the combined looking at capital, what the content of investment activities are, how much leverage there is. 

But the creation of a single point of entry will only work if there 

is the ability to attach the assets that are in the equity and the 

credit, and we would be happy to follow up and work with you on 

that. 

Senator CORKER. And I know that, right now, this is not your 

most expert area, if you will. But you would agree, generally speaking, that we need to have a certain amount of capital at the holding 

company level. Otherwise, the single point of entry will not be useful. 

Mr. LEW. There needs to be sufficient capital at the point when 

there is a liquidation in order for the process to work, and how it 

gets there and how it is maintained is something that they are 

working through right now. 

Senator CORKER. And just one more question. I know some other 

people have gone over slightly. We talked a little bit in our office, 

and I was a little disappointed by the meeting, about trying to 

make our financial regulation work a little bit better. The community banks around our country are dealing with Basel III. It is very 

complex. And there has been some discussion about just a minimum capital ratio for our community banks. We still have not resolved that, but I know it is a big issue to them and it, candidly, 

could make them far more secure if we just had a simpler capital 

ratio. I think many of us would like to see them raised even at 

other levels. But is that something that you would consider doing, 

is bifurcating Basel III from the smaller community banks around 

our country and allowing them to have a simplified capital ratio 

that would be better for them to operate under and, candidly, better for our country? 

Mr. LEW. Senator, I have met with representatives of the smalland medium-sized banks. I have listened to their concerns, as 

many Members of this Committee have. And I have shared the concerns that I have heard with the regulators who have the direct responsibility to take action in that area. I think that they share the 

concern. They have listened, as they finalize their regulations, looking for ways to make appropriate distinctions to have the burdens 

be commensurate with the risk and not have small institutions 

that are not a source of risk be treated the same as large institutions that have a great deal of risk. 
18 

One thing I would be cautious about is history did not begin in 

2008. We had a financial crisis in the 1980s, which was a savings 

and loan financial crisis. So I think all of the regulators have to 

make sure that they are looking ahead and taking prudential steps 

that address all of the potential sources of systemic risk. And there 

is not a one-size-fits-all approach. There are many, many provisions, both of law and of rule, that reflect the differences between 

large and small institutions, between money center banks and community banks. 

And I have shared my concern with the regulators. I have heard 

that they share those concerns. And I think we have to leave them 

with a little bit of time to complete the process. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, and welcome, Mr. Secretary. 

I want to make a couple comments on the remarks just a second 

ago from Senator Corker. Our legislation, Senator Vitter’s and my 

legislation, Brown-Vitter, addresses a lot of that. It sets capital 

standards at 15 percent for the banks over $500 billion. For those 

over 50, it sets it at 8 percent. That is why community banks support this legislation. It also pulls us out of Basel III, so it deals 

with a lot of those issues in a way that I want to ask Secretary 

Lew about. 

FSOC’s Annual Report cites risk taking at large interconnected 

banks, what we would call the too-big-to-fail banks, those that—the 

six banks over $500 billion in assets. It cites risk taking as a threat 

to our economy. The report says, and I will quote, ‘‘Market participants may continue to perceive that some institutions receive special treatment by virtue of their size.’’ You acknowledged at your 

confirmation hearing that this perception gives the megabanks a 

funding advantage to the capital markets. That is pretty clear. The 

FSOC report shows that the large megabanks get a one or two 

notch up, if you will, boost in their credit rating. 

Standard and Poors said that Brown-Vitter, our legislation, 

which calls for higher capital requirements, will, in fact, eliminate 

the too-big-to-fail funding advantage they get. Dodd-Frank requires, as you know, FSOC to make recommendations in its annual 

report to promote market discipline. 

So my question, Mr. Secretary, is why has FSOC failed to meet 

this requirement by recommending higher capital requirements for 

these six largest too-big-to-fail banks? 

Mr. LEW. Well, Senator, I think that a number of the issues that 

you have raised or that are raised in your legislation are issues 

that the regulators are working on right now. The capital standards have not been finally set. The Basel III rules at the Fed have 

not been finalized. Basel III is a floor. It is not a ceiling. There are 

a number of regulatory approaches that would considerably raise 

the cost of being a large bank, and I think we have to see where 

that process ends in order to be able to answer the question whether we have fully solved the problem. 

It is certainly the objective to be able to say at the end that we 

have ended too-big-to-fail and that we have eliminated any subsidy 

that might exist. The fact that the market implies a subsidy when 

we have said as a matter of policy that too-big-to-fail is not our policy is a bit of a challenge, and we are saying it as often as we can, 
19 

but we are going to have to demonstrate it with the rules we put 

in place that make it quite costly to be a large bank in terms of 

the requirements that are put in place. 

You know, the one issue that I would like to kind of take a little 

bit of issue with is in replacing Basel III. I worry that—Basel III 

is a floor, not a ceiling, but for a lot of the world, it becomes an 

aspirational goal and we are trying to encourage the world to race 

to the top, not race to the bottom. And Basel III is actually working 

to pull a lot of other countries up. 

Right now, when we look at the sources of financial risk, one of 

the things that we worry about, given the global interconnection of 

our financial institutions, is the risk that is presented to the 

United States from undercapitalized institutions around the world. 

So I think we have to get a balance in the approach and we look 

forward to working together—— 

Senator BROWN. Mr. Secretary, you are a sophisticated guy, and 

to make that statement that if we back out of Basel III but build 

8 percent capital standards for mid-size banks and 15 percent for 

large banks when Britain is doing what it is doing, and, I mean, 

London and New York have incredible influence, Basel III aside, I 

mean, incredible influence—but you said something else, that the 

market implies that too-big-to-fail may still be around. It is more 

than implying. It does not really matter what Jack Lew or Sherrod 

Brown or David Vitter thinks about this. It is what the markets 

think, and the markets continue to say that too-big-to-fail is alive 

and well. 

Several members of FSOC have agreed that too-big-to-fail banks 

should have more capital. A recent Huffington Post report said the 

U.S. Treasury has avoided publicly weighing in on this debate. This 

is not really a question, it is more sort of a summary statement. 

But your legal responsibility as FSOC Chairman is to promote 

market discipline and eliminate the perception. The perception is 

still there. 

Dodd-Frank—as I said, you are a sophisticated guy. You have 

seen what has happened when one of the leading bank lobbyists 

after the legislation was signed said, this is halftime, and then put 

an even larger, more powerful legion of lobbyists on ways to weaken these standards at the same time Basel III may be better than 

now, but with what it has done with risk adjustment and risk assessment and all, you know that Basel III is not going to be very 

strong capital standards. It is minimal compared to what the market says we should do. And I just hope you take this legal responsibility as Chair of FSOC to promote market discipline and eliminate 

that perception of too-big-to-fail. 

Mr. LEW. I want to emphasize things that I think we are agreeing on, and I think if you look at the statements made by many 

of the regulators, what I am saying is consistent with the statements made by Fed Governor Tarullo, for example. 

We, as the final rules are put in place, need to set adequate capital standards and put other requirements in place that meet our 

standard so that we can fulfill the obligation of ending too-big-tofail. I totally agree with that. 

What the market is assuming is partially a political judgment. 

It is a political judgment that the Government would jump in again 
20 

if there is a problem. Our job is to make sure that there is a thick 

enough layer of capital and that there is no need to even get to 

that point. And we are committed to making that happen. 

Senator BROWN. But the market understands what Basel III is 

about, and the market assumes Basel III will go into effect, likely, 

and that probably Brown-Vitter will not any time in the next few 

months, minimally, and the market still says—Bloomberg says $83 

billion. Lots of other analysts have said 70, 80, 90 basis points advantage. We are seeing the incredible concentration, $2 trillion 

among the largest banks, increase in assets. The largest six banking institutions in this country have 60 percent of assets. You know 

these things. The market sees these. Again, it does not matter 

what you and I and Senator Vitter think. It matters what the market is seeing. Their fears are not allayed in this and their worst 

nightmares may be realized if we do not act on this. 

Mr. LEW. Well, the only thing I would respond by saying is that 

we are not yet completed in the process. We should make more 

progress this year. We need to make substantially more progress 

this year. And the challenge be, when we have completed—when 

all the rules are completed, can I sit here and have this discussion 

saying that we have made the progress—— 

Senator BROWN. Well, but the market has also seen how long 

this has taken to implement these rules—— 

Chairman JOHNSON. Senator Heller. 

Senator BROWN.——and the weakening of these rules and the dilution of them as they are being made. 

I am sorry, Mr. Chairman. Thank you. 

Senator HELLER. Thank you, Mr. Chairman. 

Mr. Lew, thank you for being here. Could you repeat the tag line 

that you explained to Mr. Shelby about when you had knowledge 

of the IRS issues and when you had discussions with the auditor? 

Mr. LEW. Senator, I had one conversation with the Inspector 

General. It was on March 15. It was a session that was one of 

many meetings I had to meet with senior officials at the Department soon after becoming Secretary. I then saw the results of the 

report when they became public. 

Senator HELLER. Were you curious to ask, when you talked to 

the Inspector General, about what the impact of that may have 

been? 

Mr. LEW. Senator, what I said to the Inspector General was, you 

have my full support. I want to know the findings when you have 

them and I am going to take actions to fix any problems you find. 

Senator HELLER. What did the Inspector General say specifically, 

though, that caught your attention? 

Mr. LEW. Senator, it was a very brief conversation on this matter. It was noting that there was an audit underway, suggesting 

that there might be troubling findings, and that was it. 

Senator HELLER. And you did not ask any additional questions? 

Mr. LEW. Senator, you know, the IG process is one where a head 

of an agency ought not to be in any way getting in between—— 

Senator HELLER. See, I disagree with that. 

Mr. LEW.——the Inspector General and their work. 

Senator HELLER. I have been through a number of audits in my 

political career through Government agencies, and any time—and 
21 

you always have preliminary findings and you sit down and talk 

to them before they issue their final report. And I am just surprised that you had no additional questions if there were troubling 

findings. 

Mr. LEW. Senator, I think that there is a well-established practice at the Treasury Department of not bringing audit findings to 

the Secretary until they are final. Audit findings in preliminary 

form change frequently. They change in direction. They change in 

degree. They are not actionable until they are final. At the moment 

they are final—— 

Senator HELLER. I understand—— 

Mr. LEW.——they come to the Secretary. 

Senator HELLER.——but I would think you would be curious 

enough to ask additional questions and want to know more if there 

are troubling findings. 

Mr. LEW. Senator, I said to the IG what I have said to every 

auditor I have ever worked with, which is you need to complete 

their work. If there is a problem, you have my commitment of support and we will fix anything that is wrong. 

Senator HELLER. Why is Sarah Hall Ingram still employed with 

the IRS? 

Mr. LEW. Senator, the individual you are describing is not working in the area that is certainly at issue. 

Senator HELLER. She was at the time. 

Mr. LEW. Well, the chronology matters, and she was at the time 

assigned to work on the implementation of the Affordable Care Act, 

which she has been doing since. So she was actually not working 

on this, to the best of my knowledge. 

Senator HELLER. That is not—— 

Mr. LEW. I can say this, Senator, that any individual who is responsible will be held accountable, but we also have to wait until 

the facts are clear. 

Senator HELLER. Yes, but she testified in 2011 that she was the 

Commissioner of the Tax-Exempt and Government—while all this 

was going on. She also said in 2012 testimony before the Senate 

Finance Committee on Indian Tribes that she was Tax-Exempt 

Status. So she has testified over the last couple years, up until recently, that she was the Commissioner over this. 

You know, you named some employees. Will she be held accountable? 

Mr. LEW. Senator, what I have said is our policy. Anyone whose 

actions are such that they should be held accountable will be held 

accountable. There will be a new Acting Commissioner as of tomorrow. His first order of business is to make the factual determinations of who is to be held accountable. 

Senator HELLER. Thank you. You know, we are talking financial 

security here. This is what this is all about, is financial security. 

You know, there is probably spent more time around the kitchen 

table talking about their finances between Mom and Dad and the 

grandparents than any single issue, and probably more so in Nevada, where the highest unemployment, highest foreclosures, highest bankruptcies. So you can imagine the kitchen table talk that 

is going on. And there is not any agency in America that probably 
22 

has more control or more input on your ability to win or lose, your 

ability to have financial security or not have financial security. 

I just did a tele-town hall meeting recently, over 6,000 calls. This 

was last week. And we asked the question about hiring 16,000 new 

IRS agents after everything—by the way, the adjectives in this 

tele-town hall meeting was that the IRS is biased, they are corrupt, 

they are politicized, and they are eager to attack White House adversaries. This is coming out of my State. 

In essence, I believe the IRS has violated the trust of the American people, and when you ask them a question, should we hire 

16,000 new IRS agents, 61 percent say, absolutely not. So I am concerned. If you cannot trust them, if you cannot trust them with 

your own taxes, if every businessman that comes up to me that 

gets audited is wondering if the IRS is doing it for political reasons 

or for reasonable steps and following their own regulations, that is 

a difficult question for me today to answer. 

Mr. LEW. Senator, I have said, the President has said, that the 

actions here were unacceptable. But I think it is important to note, 

there is nothing in the Inspector General report to suggest in any 

way that there was any political direction or political pressure 

brought to bear. 

These actions were unacceptable. They have to be corrected. 

They cannot be allowed to happen. We have to restore confidence 

in the IRS. The IRS has to be beyond any suspicion of bias. 

Senator HELLER. Do you oppose a Special Counsel? 

Mr. LEW. Senator, there are a lot of investigations going on right 

now. I have made clear—— 

Senator HELLER. Do you think the IRS is good enough to police 

themselves? 

Mr. LEW. I think that we—there are many committees of Congress now looking at it. The Justice Department is looking at it. 

And we have a new Acting Commissioner coming in who is going 

to do a top-to-bottom review beginning tomorrow. 

Senator HELLER. For the record, let me just be very clear that 

I want my name in those who are asking for a Special Counsel for 

the IRS. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair, and thank you, Mr. 

Secretary. 

When Senator Shelby asked a question about the IRS, you replied—this is more or less accurate—‘‘I believe in this and all matters that no one is above the law.’’ And as you said that, I was 

thinking about the situation with HSBC, where, essentially for 10 

years, they laundered money repeatedly. They were admonished to 

stop doing it. The money laundering was related to countries where 

we have basically embargoes because of their policies to acquire nuclear weapons, Iran specifically. These were terrorist organizations 

which put at risk our men and women around the world, our companies around the world. These were drug organizations in Northern Mexico, and some 40,000 people have died from the operations 

of those drug operations. This money laundering took place continuously after multiple efforts to stop it and our AG decided not 

to prosecute. 
23 

When you think about your statement that no one should be 

above the law and you look at what HSBC did, are you deeply disturbed that this prosecution free zone has been created for HSBC 

and other large financial institutions? 

Mr. LEW. Senator, there were civil penalties that the Treasury 

Department was responsible for that were brought to bear. 

Senator MERKLEY. Well, let us pass that, the civil side, because 

I am talking—these were criminal activities. 

Mr. LEW. It is not my responsibility as Treasury Secretary to 

make decisions on criminal matters. I can tell you my view is that 

no one is above the law, and where there is criminal wrongdoing, 

investigations are appropriate and prosecutions are appropriate. I 

cannot speak to the prosecutorial decisions that were made. I was 

not at Treasury at the time, obviously. But it is also not—it is not 

in my area of responsibility to make criminal—— 

Senator MERKLEY. Is it your sense that when a major organization is engaged in such longstanding money laundering—which 

they have admitted to, so that is not the question, it is not a question of the facts—and they are given a free pass on criminal prosecution, that that draws into question whether or not, in fact, there 

are organizations that are above the law, and what does that convey to ordinary Americans? 

Mr. LEW. Senator, I have testified on a number of occasions that 

my view is no one is above the law. I can state it again, but I cannot comment on specific prosecutorial—— 

Senator MERKLEY. OK. Well, I would encourage you to weigh in, 

because your world is a world involving large financial institutions, 

so there is an overlap between your world and the AG’s world in 

this regard. 

I wanted to turn to the IG’s report regarding the IRS, and Senator Menendez noted that we have this unusual situation where 

the statute of the law says that with a 501(c)(4), donations will be 

used exclusively—the word is ‘‘exclusively’’—for charitable activities. But the IRS regulation says, and this is the most bizarre thing 

I have encountered in public life, that the word ‘‘exclusively’’ means 

‘‘primarily.’’ 

Now, the IRS has not identified what percentage is associated 

with ‘‘primarily,’’ but mathematically, that is considered 50.1 percent, if you will. And so how is it acceptable that an IRS regulation 

completely ignores and overturns the 100 percent standard set in 

the law? 

Mr. LEW. Senator, as I responded to Senator Menendez, this is 

one of the issues coming out of this matter that is going to have 

to be reviewed. It is something that we would look forward to working with Congress on as we look at it, because this is a controversial area. Any action one takes one way or the other to change the 

policy is something that really requires careful consideration. 

Senator MERKLEY. Well, let me be clear. Congress has already 

written the law and it says ‘‘exclusively.’’ It is the IRS regulation. 

That is under your jurisdictions. 

Mr. LEW. I understand, and what I am saying is the process of 

reviewing that policy will begin immediately and we will consult as 

we go through it. 
24 

Senator MERKLEY. OK. It has been noted by many that we have 

a political organization under the law called 527. We have a charitable organization called 501(c)(3). We have another charitable organization, 501(c)(4), but in that case, the IRS regulation has created enormous confusion about what can be done, because once you 

say ‘‘primarily,’’ it means half your activity can be noncharitable 

activity, contrary to the clear language of the law. That confusion 

has now sown enormous problems, and is it not important in your 

leadership and oversight of the IRS to end that confusion and make 

the regulation consistent with the law for the benefit of all concerned? 

Mr. LEW. Senator, there is no doubt that there is confusion in 

this area and it is something that we are now going to need to look 

at, and I will be in a position to respond after there is a review. 

Senator MERKLEY. Thank you. 

Chairman JOHNSON. Senator Kirk. 

Senator KIRK. Mr. Secretary, I would like to take you back to 

something—— 

Chairman JOHNSON. Turn your microphone on. 

Senator KIRK.——which is Iran’s progress toward a nuclear 

weapon and sanctions that Steve on my staff has put together a 

chart showing the effect of the Kirk-Menendez Amendment. I do 

not think I have ever seen actions by the U.S. Senate that have 

been so effective against a rogue nation. This shows the value of 

the Iranian currency, which is called the rial, against the dollar, 

a 74 percent drop since Menendez-Kirk passed the Senate on December 1, 2011. 

I would just like to add on that we have a next step for you, to 

follow a Dutch initiative to restrict access to Iranian Euro-denominated accounts which would cost the Iranians about $30 billion. I 

hope that you could help the Senate move on to take that next 

step, which is to adopt the Manchin-Kirk legislation, S. 892. We already have 21 Senators and several Members of this Committee on 

this legislation. 

If you look at what has happened to the rial, if you look at the 

details, you will see that Iran has lost 50 percent of their oil purchasing power, meaning we have significantly impacted the purchasing power parity of the mullahs in Iran. 

Mr. LEW. Senator, you and I have discussed this on a number of 

occasions and I agree with you that our sanctions policies and the 

implementation of them on a unilateral and multilateral basis has 

had an enormous impact on the economy of Iran and it is making 

life very hard in Iran. Now—— 

Senator KIRK. I have a subset question for you, which is what 

you can do to support the Dutch initiative to cutoff Iranian access 

to Euro-denominated accounts. 

Mr. LEW. So, Senator, I was actually going to say that I have 

raised the issue of access to Euro-denominated accounts with many 

of my counterpart finance ministers in Europe. 

Senator KIRK. Thank you. 

Mr. LEW. I think that after you and I talked about this and I 

brought that to their attention, it actually heightened the level of 

awareness of the issue. It is largely an administrative problem in 

Europe. The law is a strong law and I think we have asked them 
25 

to get that into place where it is working better and I would look 

forward to working with you on it going forward. 

Senator KIRK. I very much hope we back our Dutch allies on this 

EU initiative. 

Mr. LEW. Yes. I am not familiar with the specific Dutch initiative 

you are describing, but I will become familiar with it. 

Senator KIRK. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman, and Secretary Lew, 

it is a pleasure to have you here. 

In your written testimony, you made reference to the housing finance system. Much attention has been paid in recent months to 

the question of how to return private capital to the market and 

how to resolve the conservatorship of Fannie Mae and Freddie 

Mac. In fact, just last week, Senator Tester and Senator Johanns 

held a hearing on this topic in the Securities and Investment Subcommittee. Can you talk about the FSOC’s recommendation for 

how to phase in a return of private capital to the housing market? 

Mr. LEW. Senator, this is obviously an area where there is considerable need for action. We in FSOC have identified it as an area 

that requires attention. It is obviously not a place where FSOC has 

put a specific plan out there. The Administration has laid out some 

broad principles in this area and we would look forward to working 

on a bipartisan basis to go forward with that. 

I think that the issue of winding down the conservatorship is 

going to take a while. We are making progress. We are determined. 

We are determined that we will get taxpayers as much of their 

money back as we possibly can for having bailed out Fannie and 

Freddie. It is going to take a while, but we are making considerable 

progress there. I think we are looking right now at a housing finance sector which is too dominated by Government-issued or Government-guaranteed mortgages. We need to get private capital 

back into the market. 

One of the things that I do think we need to do is finalize the 

rules that are in the qualified mortgage area so that banks know 

what the rules of the road are. I have heard from quite a number 

of bankers that we want to be in the space, we are willing to do 

our part, but we have to know how much it is going to cost us, 

what the capital requirements will be, what the risks will be. Those 

rules are being finalized. 

Going forward, I think we do need to move ahead on next steps. 

The FHFA has taken some steps to bring into place some common 

utilities for follow-on entities to use. But there are some big policy 

issues that we are going to have to grapple with and we are going 

to be continuing to work on that going forward. 

Senator HAGAN. Do you have a figure as to how much the public 

has spent on Fannie and Freddie? 

Mr. LEW. I would be happy to get back to you with the exact 

number. 

Senator HAGAN. Many Dodd-Frank rulemakings still need to be 

completed. What rulemakings—you mentioned QM and QRM— 

need to be completed to start this process? Do you have any sort 

of timeframe? 

Mr. LEW. Well, I think that—— 
26 

Senator HAGAN.——because QRM Rulemaking has been going on 

for quite a while. 

Mr. LEW. You know, it has been going on for quite a while. Obviously, I have been Secretary for just under 3 months. 

Senator HAGAN. I understand. 

Mr. LEW. I have made it a matter of enormous priority for me 

personally to be driving this process. I think we also have to look 

at what was going on in the first 2 years of Dodd-Frank’s existence. 

There was an enormous effort to repeal Dodd-Frank. There was an 

effort to put every delay in the way of implementing the rules that 

you could imagine. 

I think, since November, that has changed. What I am hearing 

now is there is a desire for things to settle down, for there to be 

certainty. There is an acceptance that Dodd-Frank is the law of the 

land and it is not going anywhere. 

Now, I have actually stepped on the accelerator. I have gone to 

all the regulators and said, you know, this is more than just a 

question of implementing Dodd-Frank. This is a question of public 

trust in the Government’s ability to implement important policy 

that it said it is going to implement. And I am going to, at the risk 

of becoming tiresome, keep this at the top of the agenda of all the 

agencies that are part of FSOC. 

Now, I do not have the ability to direct specific action in every 

case. This is more a question of coordination and kind of moral suasion. But I will use every tool that I have to get decisions made 

in these areas. 

Senator HAGAN. Thank you for that. We will be following up. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Manchin. 

Senator MANCHIN. Thank you, Mr. Chairman, and thank you, 

Secretary Lew, for coming in the job that you have been put into 

at a most appropriate time. 

With that being said, a lot of the questions have been asked and 

talked. I would like to talk more or less about just the whole 

premise of what is going on with the American people in West Virginia, how we feel. Government should be your ally and should be 

your partner, and I think people believe in West Virginia, Government has become the adversary relationship and it is basically not 

your friend anymore. It could be your enemy. 

And the IRS has always been the elephant in the room, if you 

will, and the gorilla, and just seeing how it has gotten to the level 

that we have gotten to now, thinking that people could be targeted. 

I am not taking this. I have got individuals that believe they have 

been targeted, and they might be on the same political—or they did 

not have anything political. They thought it was just a pervasive 

attitude of the institution that has gotten so large and how this 

whole was permeated. 

And I guess in saying that—and I am not talking just about the 

IRS. I am talking about Government, in general. If anybody—and 

I do not know how you would feel about this, if you would even 

want to comment about it—anybody in any agency that would use, 

for their own personal agenda or a political agenda against a class 

of people or an individual, should not be maybe losing their job, losing the benefits they have accrued, and even facing jail time. I do 
27 

not know how—you know, right now, we are just hitting on the 

IRS, but it is all through Government. 

Mr. LEW. Senator, I have tried to state in the clearest terms that 

I possibly can how unacceptable it is for this behavior to have happened. 

Senator MANCHIN. Sure. 

Mr. LEW. I have spent most of my career in public service. I hold 

myself and everyone that I work with to a very high standard. 

There is no place, no place for bias in the implementation of our 

tax laws or our other laws. We have to be implementing the law 

fairly and equally. 

I would be reluctant to go beyond the facts that are in front of 

us now and assume any broader issue. I think that it is a bad 

enough set of facts that we are looking at, that we need to understand them, take the actions to fix them, look in the IRS and make 

sure that if there are systemic problems, we fix them. 

But I would not—I would be reluctant to accept the notion that 

this is a pervasive problem unless presented with facts to that effect. We have to be vigilant to make sure it does not ever become 

that. We have to be a Government of laws. We have to be observing 

standards of neutrality in the way we implement the laws and fairness. And that is what I believe in and it is what I have always 

tried to accomplish. 

Senator MANCHIN. Well, I would like to, with your leadership, if 

especially the Treasury Department could work more as my partner—— 

Mr. LEW. I would look forward to it. 

Senator MANCHIN.——and my friend, I would appreciate very 

much. I know the citizens of West Virginia would be very appreciative of that. 

With that being said, in the late 1980s and early 1990s, we investigated the Keating Five, if you recall in history, for the savings 

and loan crisis. That crisis may not have been as big as our 2008 

collapse that we had, but it was far-reaching and it cost the Federal Government billions of dollars. We not only investigated bank 

executives, we investigated U.S. Senators. And I think the people 

are looking back now, saying, why are we not—why has it gotten 

so big? Has it gotten to the point to where these banks are getting 

so large that they are a protected class or species, and the people 

that are involved in those at the highest level cannot be touched 

because we are afraid of a collapse? 

Mr. LEW. Senator, I have indicated today and on many previous 

occasions—— 

Senator MANCHIN. Sure. 

Mr. LEW.——that I do not believe that anyone is above the law 

and I do not think that there should be any acceptance of that 

principle. 

Senator MANCHIN. Well, a bank that is too-big-to-fail, if the bank 

gets that big, and that is the pervasive thought, should it not be 

you all’s recommendation that we should not let banks get to the 

size that they are that they get in that position? 

Mr. LEW. So, I think there is a question of how you make sure 

that we have ended too-big-to-fail. One approach is to say there is 
28 

a certain limit or you can divide up what activities can be held, 

take place in any one institution. 

Another approach is you use the tools that we have in DoddFrank and in other regulatory authorities to make it more expensive to be big and it becomes a market determination that limits 

the size. 

Senator MANCHIN. So the bill that Senators Brown and Vitter 

are working on, basically with capital requirements, is something 

that you are looking at? 

Mr. LEW. Well, as I said to Senator Brown, I think we have to 

see where the rules end up when Dodd-Frank is fully implemented 

to see if it solved the problem. 

Senator MANCHIN. You can understand the citizens’ concerns, basically, that there is a protected—the people that caused the problem, and now the community banks and the regional banks are 

feeling the fallout of that and seem to be getting hit the hardest 

putting capital back on the streets to get the economy. But the people that caused the problem are the people that benefited the most 

from the turn of the economy. 

Mr. LEW. Well, Senator, in the aftermath of the financial crisis, 

Congress took bold action in passing powerful tools, which we are 

now using, and we are determined to be—— 

Senator MANCHIN. I appreciate your explanation, also why it has 

taken us so long to get Dodd-Frank implemented, because there is 

a lot of criticism about why are we sitting on our hands, and this 

political toxic atmosphere that we live in every day is probably the 

reason that it has been. I hope it stops. Thank you, sir. 

Chairman JOHNSON. Senator Warren. 

Senator WARREN. Thank you very much, Mr. Chairman and 

Ranking Member Crapo. Thank you for having this hearing. 

I also want to say, thank you both very much and thank you, 

Secretary Lew, for starting out and taking time to remember the 

families in Oklahoma. I just want to add that I will hold them all 

in my prayers. It is a terrible catastrophe there, and thank you for 

mentioning it publicly. 

Thank you for being here, Secretary Lew. I want to start by talking about a different Brown Amendment, and that is you may remember that Senator Brown joined with Senator Kaufman back 

during the Dodd-Frank debates to introduce an amendment that 

would have broken up the country’s largest banks. The amendment 

had bipartisan support behind it, but it did not pass, and we all 

know what has happened since then. 

The four biggest banks, banks that were considered too-big-to-fail 

before the crisis, are now 30 percent larger than they were just 5 

years ago, and there have been huge scandals, some of which have 

been mentioned today—the LIBOR scandal, the infamous London 

Whale, the deliberate foreclosure fraud. It has been one scandal 

breaking on top of another. And Attorney General Holder has said 

that the Justice Department cannot consider litigation against Wall 

Street banks without factoring in potential systemic economic impact that could result. And while we all know there are parts of 

Dodd-Frank that are there to address the problem, even Federal 

Reserve Chair Bernanke has admitted that too-big-to-fail is not yet 

over. 
29 

So, I know you were elsewhere in the Obama administration during the Dodd-Frank debate and that Treasury’s attention is now 

elsewhere, but I would like to read you a quote from a New Yorker 

article from that time. This is what a senior Treasury official said 

about the Brown-Kaufman too-big-to-fail amendment. ‘‘If we,’’ 

meaning the Treasury Department, ‘‘had been for it, it probably 

would have happened. But we were not, so it did not.’’ 

So, Mr. Secretary, the Treasury Department said its opposition 

to breaking up the big banks is an important reason that my colleague, Senator Brown’s, amendment did not pass. The question I 

want to ask now is has the Treasury Department’s position 

changed or are you still opposed to capping the size of the largest 

financial institutions? 

Mr. LEW. Senator, I have tried to indicate in my response to 

other questions today that ending too-big-to-fail is our policy and 

we are determined to do it—— 

Senator WARREN. And let me just focus you in here, though, Mr. 

Secretary. The question is not, are we all trying to aim toward ending too-big-to-fail. My question is specifically about capping the size 

of the largest financial institutions. It was an amendment that 

nearly passed. It had bipartisan support. The Treasury opposed it, 

and according to the Treasury’s own folks, it was the Treasury opposition that killed off breaking up the big banks, and I want to 

know if Treasury has changed its position. 

Mr. LEW. As you noted, I was not at Treasury at the time—— 

Senator WARREN. Fair enough. 

Mr. LEW.——so I cannot speak to the exact decisions that were 

made there. I think we are on a path now which is the right path, 

which is to implement Dodd-Frank and to then take stock when we 

are done implementing Dodd-Frank. I think that there have been 

a lot of calls for legislation in this area and I have said the same 

thing to people who wanted very different kinds of changes, that 

our job right now is to implement a very important law with very 

powerful tools and then to take stock of whether or not there are 

other actions that are required, and I think that this is not the 

time to be enacting big changes to Dodd-Frank or to the regulatory 

system. We need to implement the law. 

Senator WARREN. But the question is, though, Secretary Lew, 

this was about concentration. We all said back in 2008, 2009, the 

problem that caused the financial crash, in part, was concentration 

in the banking industry, and what do we see now? We see more 

concentration. One of the tools considered for Dodd-Frank was a 

way to end that concentration. 

So let me try the question a different way. How big do the biggest banks have to get before we consider breaking them up? They 

are 30 percent bigger now than they were 5 years ago. Do they 

have to double in size, triple in size, quadruple in size, before we 

talk about breaking up the biggest financial institutions? 

Mr. LEW. Senator, there are many changes that have taken effect 

since the passage of Dodd-Frank. We have better capitalized banks. 

We have better visibility into the banks. We have the derivatives 

being traded in a way where we can see what is going on and understand it. So there were many things going on that contributed 
30 

to the financial crisis and we are making good progress. We still 

have more progress to make. I—— 

Senator WARREN. So, are you saying, Mr. Secretary, that if we 

have increasing concentration in the banking industry, if the biggest banks double in size, that that does not worry you? 

Mr. LEW. I think that what I am worried about is have we taken 

into account the measures that prevent systemic risk from being 

the kind of threat it was in 2008. Size is one factor, but size is not 

the only factor, and—— 

Senator WARREN. Fair enough that it is not the only one, but size 

is one that is growing and size is one that is powerfully important. 

Mr. LEW. And I think if we look at what happened from 2008 

until now, part of the reason that some of those institutions grew 

is that there were other institutions that failed that had to be reorganized, and it was an unusual period of time where we were seeing, ironically, a shrinking of the number of players because of the 

failures of institutions. 

So there are many things going on, and I am not trying to avoid 

addressing the question of too-big-to-fail. I am not trying to—I am 

trying to address quite clearly that that is an unacceptable policy. 

But I think we have to take into account all the factors that together add up to systemic risk. 

Senator WARREN. Fair enough, Secretary Lew, but I really think 

the evidence suggests that concentration is one of those factors and 

that when we see the largest financial institutions getting bigger 

and bigger, that it tells us that we are not clearly on the path to 

resolving too-big-to-fail—— 

Mr. LEW. But in fairness, we have not yet seen the capital surcharges that will be the responsibility of larger firms fully in effect, 

and as—— 

Senator WARREN. Fair enough. 

Mr. LEW.——it gets more expensive, I suspect it will change—— 

Senator WARREN. But what we have also seen is one scandal 

after another in these largest financial institutions. It is clear they 

have not changed their risk-bearing practices, nor have they decided that they are suddenly going to start following the law. So 

I think, at best, we have evidence going both ways. And we are 

playing with the U.S. economy here, the worldwide economy. 

I apologize, Mr. Chairman, for running over in this exchange. 

Chairman JOHNSON. Mr. Secretary, the Ranking Member and I 

have a brief follow-up question. 

Mr. Secretary, the FSOC report highlights the growing 

cybersecurity threat to the financial sector, including the recent attacks. What can FSOC and each of its members do to ensure that 

the financial sector remains vigilant in guarding against cyber 

threats? 

Mr. LEW. Senator, I think cybersecurity is an enormous threat 

and it is something that is, unfortunately, going to be with us as 

a threat going forward. So it is not an issue where we can take an 

action and say we have solved it because there are bad forces out 

there that are always trying to get a step ahead of any protections 

that are put into place. 

I think that the first thing we have to do is to make sure that 

we have the kind of coordination where threats are well understood 
31 

and communicated and where there is collaboration within the industry and between the regulators and the industry. In my first 

weeks in office, I met with bank executives to make that point and 

to make it clear that we needed them to step forward and participate and we needed to be part of that process. 

I think that if you look at the Executive Order that the President 

issued last year, he has gone about as far as we can go with administrative authority to put in place the tools to deal with this. It 

would be very helpful to get legislation that would make it even 

more likely that firms would do the kind of cooperative work that 

is needed to be as vigilant as we can possibly be. 

One of the things that I particularly am concerned about is large 

institutions have the capacity to do more on their own than small 

institutions do, and I think we have to be very concerned that the 

risks are not just to the big money center banks. The risks are 

much broader than that and the risks are faced by institutions that 

need the kind of collaboration and cooperation that we are talking 

about to have the full capacity to respond should there be a threat. 

But the short of it is, we are going to have to remain committed 

and vigilant, using all of the tools that we have, both to detect and 

address these issues, and it is going to take real cooperation between the financial services sector and the Government officials. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman, and Mr. 

Secretary, I had just two questions to follow-up on, one on the IRS 

and one on FSOC. 

I will start off with the IRS. You had indicated in your response 

to Senator Heller, I believe, that the Inspector General’s finding indicated that there was not a political motivation to the IRS’s activities—— 

Mr. LEW. I said no political pressure was brought to bear. 

Senator CRAPO. And you may have noticed, I had to step out for 

a few moments. That was to go down to the Finance Committee, 

and I had an opportunity to ask some questions of the Inspector 

General at that time, and a couple of very important things came 

out there. 

First of all, he made it clear that the report does not make a 

finding that there was no political pressure or political motivation. 

It was that they were not able to find it. And I asked them what 

they looked into. He said, we asked the IRS employees who we interrogated, or interviewed, whether they had a political motivation. 

He said none of them admitted to having such. I asked him if they 

were under oath. He said no, that he had taken no testimony or 

information under oath, and that it was his opinion that—I think 

he said to me that he thought further investigation was necessary 

into this. 

It seems to me that at this point, what we have is a coalition of 

targeting certain politically grouped individuals or organizations, 

and I will go over again, I mean, we have the, as I said earlier, 

an agency that is perceived by many in America to be the prosecutor, the judge, the jury, and the executioner in major parts of 

their lives who is setting up criteria to look for those who are involved with the tea party, who use the word ‘‘patriots,’’ who use the 

words, ‘‘make America a better place to live,’’ or criticize how the 
32 

country is run, and then later expanding this search or this what 

they call a BOLO list, a ‘‘be on the lookout list,’’ for those who want 

to educate on the Constitution and the Bill of Rights or who are 

focused on addressing social economic reform in the United States. 

The question I have to you is, are you or is the IRS taking the 

position that, somehow, this coalition of audits that focused on people from these political perspectives just happened accidentally or 

statistically came about in a way that was not driven by a decision 

that was aimed at this particular political philosophy? 

Mr. LEW. Senator, I am aware of no evidence that suggests any 

political interference in any way. There is a sharp wall between the 

Treasury Department and the IRS on the administration of the tax 

system. There is—you know, it is a well, well respected line. And 

no evidence has been brought to bear. I read the report. The report 

said that there was no evidence of any political pressure. People 

can ask questions more and more, and I am not discouraging they 

ask those questions. But there is no evidence. So we should be 

clear. There is no evidence. 

Senator CRAPO. And the extent of the evidence at this point is 

interviewing those who were implementing the BOLO list and asking them if they were politically motivated. 

Mr. LEW. Senator, we have said that anyone who is accountable 

should be held accountable, but there has to be evidence to hold 

people accountable. 

Senator CRAPO. Do you believe the lack of evidence means that 

there is no political, or—— 

Mr. LEW. Senator, I am not going to speculate on facts that I 

cannot see and evidence I do not have. 

Senator CRAPO. OK. Just one other real quick question, Mr. 

Chairman, please, on the FSOC. 

You had indicated that you thought there was quite a bit of 

progress being made in resolving the cross-border issues, and I just 

wanted to follow up, because on April 18, you received a letter from 

nine foreign ministers of different countries—— 

Mr. LEW. Yes. I know—— 

Senator CRAPO. These are not regulators. These are—— 

Mr. LEW. No, no. I know they are counterparts. 

Senator CRAPO. Yes. 

Mr. LEW. I have spoken with many of them about it. I, frankly, 

think the letter was ill-informed, that there were conversations 

going on between the SEC and the CFTC making real progress on 

that. I am not going to speculate about the reasons that other political officials write letters, but I did say to them quite directly that 

it was not a helpful way to promote conversations with these two 

independent regulatory agencies, to write a letter like that that did 

not even reflect the state of affairs. So I would not read too much 

into that letter. 

The question is, where are they going to end up? They are making progress. They are not finished yet. But they have been working quite effectively to try to deal with this and I think that letter 

was something that did not reflect where this situation was at the 

time. 

Senator CRAPO. All right, thank you, and thank you, Mr. Chairman, for that extra time. 
33 

Chairman JOHNSON. Secretary Lew, I thank you for your testimony today and your continued focus on matters important to a 

civil financial system. 

This hearing is adjourned. 

[Whereupon, at 12:02 p.m., the hearing was adjourned.] 

[Prepared statement and response to written questions supplied 

for the record follow:] 
34 

PREPARED STATEMENT OF JACOB J. LEW 

SECRETARY, DEPARTMENT OF THE TREASURY

MAY 21, 2013 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for the opportunity to testify today regarding the Financial Stability 

Oversight Council’s (Council) 2013 annual report. 

My testimony today will describe the conclusions and recommendations made by 

the Council in its third annual report. The report represents extensive collaboration 

among staff of Council members and member agencies to provide Congress and the 

public with the Council’s assessment of significant financial market and regulatory 

developments, potential emerging threats to financial stability, and recommendations to strengthen the financial system. The annual report is a key way that the 

Council can share its collective perspective and provide information on its activities 

to Congress and the public. 

Since the Council’s last annual report, our financial system has grown stronger 

in a number of ways: 

• Bank capital has increased significantly in terms of both quality and quantity. 

This substantial amount of additional capital gives these companies a much 

stronger ability to withstand a future downturn. 

• Companies’ liquidity and funding profiles have strengthened dramatically as 

well. As higher liquidity and funding requirements are implemented in the 

United States and elsewhere, the financial system will be much less vulnerable 

to the destabilizing runs that we experienced during the crisis. 

• Progress on comprehensive reform of the over-the-counter derivatives market 

has reduced risks in the system, increased transparency, and strengthened investor protections. Collectively, these measures help make financial institutions 

and the financial system as a whole safer and stronger. In March, mandatory 

central clearing of certain swap transactions began. More categories of swaps 

and an expanded universe of financial institutions will be subject to central 

clearing requirements as the year progresses, reducing risks to the financial 

system and to the financial institutions engaging in these transactions. 

• We are seeing continued strengthening of the equity, fixed income, and housing 

markets. And implementation of the Dodd-Frank Act and international coordination on G–20 reform priorities have achieved significant progress toward establishing a more resilient and stable financial system, both domestically and 

globally. 

On the topic of Dodd-Frank implementation, the Council and its member agencies 

continue to steadily put reforms in place. The Council will soon complete its initial 

evaluation of nonbank financial companies for potential designation, which would 

lead to supervision by the Federal Reserve Board (Federal Reserve) and enhanced 

prudential standards. The Council has already designated eight systemically important financial market utilities for similar increased oversight. 

The Federal Reserve issued a new framework for the consolidated supervision of 

large financial institutions in December. The Federal Deposit Insurance Corporation 

(FDIC) continued to implement the new framework for the orderly liquidation authority. The Federal Reserve and the FDIC are implementing provisions related to 

living wills by the end of this year. Further, U.S. regulators are continuing to make 

significant progress on implementing the Basel III accords to set internationally 

agreed heightened capital and liquidity standards, which are expected to be fully 

phased in by 2019. 

The Securities and Exchange Commission (SEC) and the Commodity Futures 

Trading Commission (CFTC) continue to fill in the remaining pieces of a new comprehensive oversight framework for derivatives that will reduce risk and increase 

transparency. The Consumer Financial Protection Bureau finalized new mortgage 

rules that provide additional protections for borrowers. And the Federal Housing Finance Agency (FHFA) has taken steps to facilitate increased participation by the 

private sector in the mortgage markets, including the recent announcement of an 

effort to develop a common securitization platform that will facilitate a more efficient and sustainable housing finance infrastructure. 

Despite these positive developments, there are still risks to U.S. financial stability. The Council’s report identifies those risks and makes specific recommendations to mitigate them. The Council’s 2013 report focuses on seven areas in particular: 
35 

• First, market participants and regulatory agencies should take steps to reduce 

vulnerabilities in wholesale funding markets that can lead to destabilizing fire 

sales. 

• Second, significant reform in the housing finance system is still needed. 

• Third, Government agencies, regulators, and businesses should take action to 

address operational risks from internal control and technology failures, natural 

disasters, and cyber-attacks, which can cause major disruptions to the financial 

system. 

• Fourth, as recent developments with the London Interbank Offered Rate 

(LIBOR) have demonstrated, reforms are needed to address the reliance on voluntary, self-regulated, and self-reported reference interest rates. 

• Fifth, financial institutions and market participants should be cognizant of interest rate risk, particularly given the historically low interest rate environment 

of the past few years. 

• Sixth, long-term fiscal imbalances that have potential economic and financial 

market impacts should be addressed. 

• Finally, regulators need to continue to keep a close eye on potential threats to 

U.S. financial stability from adverse developments in the global economy. 

I would now like to go into each of these areas in more depth. 

Key Areas of Focus of the 2013 Annual Report 

Wholesale Funding Markets 

The Council remains concerned that vulnerabilities in wholesale funding markets 

could lead to destabilizing fire sales. Specifically, run-risk vulnerabilities related to 

money market mutual funds (MMFs), which became apparent during the financial 

crisis, still remain, despite an initial set of reforms implemented in 2010. In November 2012, the Council issued proposed recommendations for public comment to implement structural reforms of MMFs to reduce the likelihood of runs. Council members should also examine whether similar reforms are warranted for other cash 

management vehicles. 

Vulnerabilities to fire sales also remain in the tri-party repo market, particularly 

with respect to borrowers such as securities broker-dealers. The Council’s report recognizes the positive steps that have been taken in the last year to reduce the reliance on discretionary intraday credit, but recommends coordinated efforts by market 

participants and financial regulatory agencies to address the risks associated with 

the tri-party repo market, notably by better preparing investors and other market 

participants to deal with the consequences of the distress or default of a dealer or 

other large borrower. 

Housing Finance Reform 

The housing finance system requires significant reform to enhance financial stability and facilitate the proper functioning of residential lending markets. The residential mortgage market still relies heavily on Government support, while private 

mortgage activity remains muted. The Administration has long called for winding 

down the GSEs as part of comprehensive housing finance reform and remains focused on bringing back private capital into the market. Although progress was made 

in 2012, including finalization of some key mortgage rules, the completion of additional reforms is needed to add clarity to the market and attract more private capital. Specifically, the Council recommends that the FHFA continue to pursue 

changes such as a common securitization platform, model legal agreements, improvements to the mortgage recordation and title transfer system, and an improved 

compensation system for mortgage servicers. 

Operational Risks 

The Council remains concerned about operational risks stemming from certain 

types of trading activities, natural disasters, and cybersecurity threats. Trading activity is becoming more dispersed and automated, raising concern among Council 

members about operational failures. The extremely high speeds at which markets 

operate can compound the overall impact of even small operational failures. In 2012, 

equity markets experienced a number of control problems, including those related 

to the initial public offerings of BATS and Facebook, and losses by Knight Capital. 

The SEC has moved to strengthen the automated systems of important market participants, and the Council recommends that regulators continue to monitor the adequacy of internal control and corporate governance processes of financial institutions 

and market utilities. 
36 

Additionally, Superstorm Sandy tested the financial infrastructure, including critical financial utilities, demonstrating the need for regulators to assess their policies 

and guidance in the area of contingency planning. Cybersecurity also continues to 

be a central concern, with financial institutions subject to frequent and varied cyber 

attacks. The Council recommends that senior management at financial institutions 

remain engaged on these issues, improve communication within and between firms, 

and that Government agencies enhance information sharing between the public and 

private sectors. However, only so much can be done without comprehensive 

cybersecurity legislation that allows for enhanced information sharing while addressing legitimate privacy and liability concerns. I am hopeful that continued bipartisan engagement will produce legislation that addresses these critical issues. 

Reference Interest Rates 

Over the past year, the Council has actively monitored developments related to 

LIBOR and other reference interest rates and their potential impact on financial 

stability. The combination of a weak governance structure and a small number of 

actual transactions in the unsecured, interbank lending market underpinning 

LIBOR reduce market integrity and raise financial stability concerns. 

Investigations by regulators and law enforcement agencies across the globe concerning manipulations and false reporting of LIBOR and similar rates have exposed 

the structural vulnerabilities of these benchmarks, which provide significant incentives for misconduct. 

The Council recommends that U.S. regulators cooperate with foreign regulators, 

international bodies, and market participants to promptly identify alternative interest rate benchmarks that are anchored in observable transactions and are supported 

by appropriate governance structures, and to develop a plan to transition to new 

benchmarks. The Council recommends that steps be taken to promote a smooth and 

orderly transition to alternative benchmarks, with consideration given to issues of 

stability and to mitigation of short-term market disruptions. 

Interest Rate Risk 

Yields and volatility in fixed-income markets are very low by historical standards, 

which may be providing incentives for market participants to ‘‘reach for yield’’ by 

investing in lower-grade credit, investing in longer-maturity assets, or increasing leverage. 

Yield-seeking behavior is apparent in several markets. The issuance of high-yield 

bonds reached a historical high in the fourth quarter of 2012. While underwriting 

standards remain conservative in many markets, there are some examples of loosening standards. In particular, certain real estate investment trusts, which are 

highly exposed to a rise in interest rates, have grown considerably in recent years. 

The report makes specific recommendations to regulators and risk managers of 

banks, broker-dealers, insurance companies, and pension funds to be vigilant and 

scrutinize how potential changes in interest rates could adversely affect their risk 

profiles. 

Impacts of Fiscal Policy 

The strength of our financial system ultimately depends on the strength of our 

economy. Over the last several years, political fights over fiscal policy in Washington—including the debt ceiling crisis in 2011 and failure to come to bipartisan 

agreement on a balanced package to replace the sequester as required by the Budget Control Act—have hurt confidence, which is a key driver of economic activity. The 

sequester that went into effect earlier this year was intended to be a policy so painful and mutually disagreeable that it would ensure bipartisan action to replace it, 

but instead, the harsh and indiscriminate across-the-board spending cuts were triggered, creating a self-inflicted drag on economic growth and job creation. According 

to the nonpartisan Congressional Budget Office, sequestration will shave off more 

than half a percent of economic growth in 2013 and cost as many as 750,000 fulltime equivalent jobs. To guard against future threats to our economy and financial 

stability, policymakers should avoid using last-minute resolutions to fiscal policy 

matters such as the debt ceiling and deficit reduction as a negotiating tactic. 

It is important to note that since 2011 the President and Congress have ultimately been able to come together to enact a series of agreements that have resulted in historic reductions to our budget deficits. Taken in combination, these bipartisan reforms—not counting the effect of sequestration—have locked in more 

than $2.5 trillion in deficit reduction over the next 10 years, with more than twothirds of that reduction coming from spending cuts. And today, because of these 

policies and other factors, the deficit is falling at the fastest rate in decades. Now, 

while more can and should be done to reduce the risk of long-term fiscal imbalances 
37 

through sensible measures, shrinking the budget deficit cannot be the only focus of 

fiscal policy. Job creation and economic growth have to be a top priority. 

Global Economic and Financial Developments 

Although external financial threats appear to have decreased over the past year, 

they remain a risk to U.S. financial stability and economic activity. Global demand 

has slowed and the euro area economy is on course to contract for the second year 

in a row. In the advanced economies, there is a need to recalibrate the pace of fiscal 

consolidation to promote economic growth and employment. Fiscal sustainability remains a concern, but is much easier to achieve in a growing economy. The lack of 

demand rebalancing also remains a risk to the U.S. economy. China, for example 

has avoided an abrupt slowdown, but concerns persist about its ability to transition 

away from its export and investment-driven growth model toward increased domestic consumption. Nevertheless, Council members and member agencies will continue 

to monitor global economic and financial developments to respond to any threats 

that may arise. 

In addition to those seven key areas that the Council has focused on, I would now 

like to spend a little time describing the Council’s work over the last year and the 

progress that has been made on financial reform. 

Activities of the Council 

Since its 2012 annual report, the Council has continued to fulfill its core mission. 

The Council met 12 times in 2012 to discuss and analyze emerging market developments, threats to financial stability, and financial regulatory issues. There were 

public sessions at three of those meetings. Through regular meetings of the Council 

and its staff committees, the Council plays an important role in facilitating coordination among Federal and state financial regulators. 

The Council is working to evaluate nonbank financial companies for potential designation for supervision by the Federal Reserve and enhanced prudential standards. 

The Council publicly announced that, in September and October 2012, it advanced 

an initial set of nonbank financial companies to the third and final stage of the evaluation process. The Council discussed its ongoing analysis at its most recent meeting on April 25, and it expects to vote on proposed designations of an initial set of 

nonbank financial companies in the near term. 

The Council is also authorized to issue recommendations to a regulatory agency 

when financial activities and practices are creating risk for U.S. financial markets. 

In November 2012, the Council issued for public comment proposed recommendations to the SEC with three alternatives for reform to address the structural 

vulnerabilities of MMFs. The Council is currently considering the public comments 

on the proposed recommendations. If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its process, the Council expects 

that it would not issue a final recommendation to the SEC. However, if the SEC 

does not pursue additional reforms that are necessary to address MMFs’ structural 

vulnerabilities, the Council should use its authorities to take action in this area. 

Finally, the Council has authority to designate systemically important financial 

market utilities for enhanced risk-management standards. The Council designated 

eight systemically important FMUs last summer, and those entities are now subject 

to increased oversight by the SEC, CFTC, and Federal Reserve. 

Progress on Financial Regulatory Reform 

The annual report also discusses the significant progress that Council members 

and member agencies, both individually and collectively, have made implementing 

Dodd-Frank Act reforms. As a result of these activities, consumers have access to 

better information about financial products and are benefiting from new protections. 

Financial markets and companies have become more transparent. And regulators 

have become better equipped to monitor, mitigate, and respond to threats to the financial system. 

Since the Council’s 2012 annual report, Dodd-Frank Act implementation included 

further strengthening of supervision, capital, and risk-management standards for financial institutions and financial market utilities; procedures for stress tests of financial institutions; rulemakings related to the orderly liquidation authority; regulation of the derivatives markets to reduce risk and increase transparency; new 

standards to protect mortgage borrowers and reduce risks in the mortgage market; 

and other measures to enhance consumer and investor protection. 

Nevertheless, important work remains to complete the implementation of financial reform. The Council, its members, and its member agencies will continue to 

strengthen coordination of financial regulation both domestically and internationally. In developing and implementing the international financial regulatory reform 

agenda, the Council members support the development of policies that promote a 
38 

level playing field, mitigate regulatory arbitrage, and address regulatory gaps primarily through members’ engagement with the G–20 and the Financial Stability 

Board (FSB). In particular, the Council is focused on: 

• Strengthening the regulation of large, complex financial institutions. The Council supports global efforts led by the FSB, to impose consistent standards on 

large, complex financial institutions across jurisdictions. 

• Developing an international framework to resolve global financial institutions. 

Effective cross-border cooperation will be essential to implementing the FDIC’s 

orderly liquidation authority under Title II of the Dodd-Frank Act. The United 

States has substantially satisfied the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and continues to work with international counterparts to ensure robust resolution coordination. 

• Increasing the transparency and regulation of over-the-counter (OTC) derivatives. The Council encourages continued development of these reforms, as they 

are essential to increase transparency and to mitigate risk, including cross border spillovers, that could arise from the OTC derivatives market. The FSB has 

been critical to facilitating international coordination on this issue. 

• Data resources and analytics. The Council continues to recommend that improvement in data standards should be a high priority for financial firms as 

part of their risk management process and for the regulatory community—not 

just in the United States, but globally. The Council recommends that the Office 

of Financial Research continue to work with the Council’s member agencies to 

promote data standards for identification of legal entities, financial products, 

and transactions, and to improve access to standardized, aggregate data by the 

regulators. The Council also recommends that cross-border exchange of supervisory data among supervisors, regulators, and financial stability authorities 

continues to be facilitated in a manner that safeguards the confidentiality and 

privacy of such information. 

Conclusion 

The actions of the Council and its member agencies have made the financial system more stable and less vulnerable to future economic and financial stress. The 

Council will continue to focus on the risk areas I have discussed today, while remaining vigilant to new risks, to promote financial stability and strengthen the U.S. 

financial system. 

I want to thank the other members of the Financial Stability Oversight Council, 

as well as the staff of the members and their agencies, for the work they have done 

over the past year and their efforts in preparing the 2013 annual report. 

We look forward to working with this Committee, and with Congress as a whole, 

to continue to make progress in creating a more resilient and stable financial system. 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 
61 
62 
63 
64 
65 
66 
67 
68 
69 
70 
71 
72 
73 
74 
75 
76 
77 
78 
79 
80 
81 
82 
83 
84 
85 
86 
87 
88 
89 
90 
91 
92 
93 
94 
95 
96 
97 
98 
99 
100 
101 
102 
103 
104 
105 
106 
107 
108 
109 
110 
111 
112 
113 
114 
115 
116 
117 
118 
119 
120 
121 
122 
123 
124 
125 
126 
127 
128 
129 
130 
131 
132 
133 
134 
135 
136 
137 
138 
139 
140 
141 
142 
143 
144 
145 
146 
147 
148 
149 
150 
151 
152 
153 
154 
155 
156 
157 
158 
159 
160 
161 
162 
163 
164 
165 
166 
167 
168 
169 
170 
171 
172 
173 
174 
175 
176 
177 
178 
179 
180 
181 
182 
183 
184 
185 
186 
187 
188 
189 
190 
191 
192 
193 
194 
195 
196 
197 
198 
199 
200 
201 
202 
203 
204 
205 
206 
207 
208 
209 
210 
211 
212 
213 
214 
215 
216 
217 
218 
219 
220 
221 
222 
(223) 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM JACOB J. LEW 

Q.1. Last year, FSOC used its Wall Street Reform powers to propose money market fund reform recommendations to the SEC. It 

is expected that the SEC will take action on money market funds 

the week of June 5th. Does FSOC expect to do more regarding 

money market funds? 

A.1. As noted in the Council’s Proposed Recommendations Regarding Money Market Mutual Fund Reform, the SEC, by virtue of its 

institutional expertise and statutory authority, is best positioned to 

implement these reforms. We commend the SEC for continuing the 

work to address remaining vulnerabilities to our financial system 

presented by MMFs. I don’t want to prejudge the outcomes of the 

administrative procedures process, and I encourage public comment 

on the proposals. 

Q.2. Regarding the low interest rate environment, what steps are 

FSOC and its member agencies taking with regulated entities to 

ensure that the appropriate risk management controls are in place 

if there is a sudden rise in rates or a widening of credit spreads? 

A.2. The Council’s 2013 annual report makes a number of recommendations to regulators and risk managers of banks, brokerdealers, insurance companies, and pension funds to be vigilant and 

scrutinize their risk management practices concerning interest rate 

risk. With respect to banks and broker-dealers, the report recommended that regulatory agencies and private sector risk managers should scrutinize whether potential sudden changes in interest rates could adversely affect the risk profiles of financial firms. 

For insurance companies, the report said that the Federal Insurance Office and State insurance regulators should continue to monitor the interest rate risk of insurance companies, and State insurance regulators should continue to ensure that the interest rate 

risk scenarios run by insurance companies are sufficiently robust 

and appropriately capture these and other economic risks. The 

Council also recommended that the appropriate authorities continue to examine how a prolonged period of low interest rates has 

affected risk management practices and preparedness of pension 

funds in the event of a sudden reversal of these historic trends. 

The Council’s Systemic Risk Committee, as part of its ongoing 

work, will continue to work with its members to monitor this 

threat in addition to the activities undertaken in response to the 

Council’s recommendations. 

Q.3. The 2012 FSOC annual report identified the euro area crisis 

as one of the major threats to financial stability, with large U.S. 

financial institutions being highly interconnected with euro area 

banks and bearing a high degree of exposure to European markets. 

The report noted that such interconnectedness exposed U.S. finan-
224 

cial institutions to contagion and spillover effects from a systemic 

event in the euro area. The 2013 FSOC annual report does not 

identify the euro area crisis as a major threat to financial stability 

noting that such threats decreased in 2012, but the euro area crisis 

is far from resolved. Why does the FSOC view the euro area crisis 

as less of a threat to U.S. financial stability? What measures has 

FSOC or individual agencies taken to reduce such exposures of 

U.S. institutions to contagion from a systemic event in the euro 

area? 

A.3. Europe is in a more stable position today because the European Central Bank and euro area leaders have demonstrated their 

shared commitment to stand behind the euro, and have put in 

place a powerful set of financial tools in support of member states 

undertaking difficult reforms. Nonetheless, risks remain in some 

eurozone countries where unemployment is high and reforms will 

take some time to complete. 

As our largest economic partner, Europe is an important source 

of investment and jobs for the United States, and our recovery has 

been affected by headwinds from the euro area. Europe’s financial 

crisis has curbed demand for exports from the United States, reduced foreign direct investment (FDI) at home, and adversely affected the retirement savings of American workers. Direct U.S. financial sector exposure to the countries in the euro area with IMF 

programs, such as Greece, is limited, although it is difficult to estimate all possible exposures to the euro area more broadly. 

As a result of the significant actions we took after the crisis, particularly ensuring that our banks have strong capital bases and improving our regulatory systems, our financial system is better prepared to handle a Europe-driven financial shock or shocks from 

other external sources. Furthermore, many U.S. financial institutions, including our major banks and money market funds, have 

substantially reduced their exposure to the European economies 

most under pressure. Direct money market exposure to banks in 

peripheral Europe has been effectively eliminated. Finally, U.S. 

regulators are in active dialogue with U.S. financial institutions to 

not only ensure that financial exposures to Europe are being monitored appropriately, but to also improve their ability to withstand 

a variety of possible financial contagion stress scenarios emanating 

from Europe. 

The Financial Stability Oversight Council (FSOC) and its member agencies will continue to carefully monitor the potential risks 

that could emerge from the peripheral European sovereign debt crisis. 

Q.4. The 2013 FSOC report noted progress on two of the three key 

vulnerabilities in the tri-party repo market—intraday credit and 

risk management. It also highlights fire sales in the aftermath of 

a broker-dealer failure as a major vulnerability. What steps are the 

FSOC and its member agencies planning to take to address and 

mitigate risks from fire sales? 

A.4. The Council’s 2013 annual report recognizes that a major 

broker-dealer’s default could threaten financial stability as the 

broker-dealer’s creditors liquidate the collateral pledged against 

their tri-party repo lending. The fire sales of this collateral could 
225 

destabilize financial markets and amplify the negative consequences of such a default. Reforms made since the financial crisis, such as higher capital and liquidity requirements, a significant 

reduction in intraday credit provided to broker-dealers by clearing 

banks, and other operational improvements, have reduced the risk 

of a dealer default. However, the Council urged continued coordinated efforts by market participants and financial regulatory agencies with relevant authority to address the remaining risks associated with the tri-party repo market, particularly a potential fire 

sale of sizable collateral by lenders in reaction to the default of a 

large broker-dealer borrower. The report recommended better preparing investors and other market participants to deal with the 

consequences of a dealer’s or other large borrower’s distress or default. 

Q.5. Please discuss FSOC’s analysis of the short-term wholesale 

funding market as a potential systemic risk. Is there inter-agency 

coordination of rules and reforms underway, such as MMF reform, 

tri-party repo reform, enhanced capital & liquidity requirements, 

and others, to help mitigate the risks if it is a concern? 

A.5. The Council’s 2013 annual report explains how, although 

many of the least-stable funding structures that failed in the crisis 

have disappeared, important risks associated with wholesale funding markets remain. In particular, run risks in sectors such as 

money market mutual funds (MMFs) and broker-dealers continue 

to persist. 

In the past year, the Council took concrete steps in supporting 

the implementation of structural reforms to reduce the likelihood 

of run risks of MMFs by issuing proposed recommendations for reform under Section 120 of the Dodd-Frank Act. 

On June 5, 2013, the SEC approved a notice of proposed rulemaking for MMF reform that contained elements of the Council’s 

recommendation. The Council will actively monitor the SEC’s 

progress implementing these necessary reforms to determine 

whether further Council action may be necessary to adequately 

mitigate the run risk described in the Council’s 2013 annual report. 

Similarly, there has been some progress in reforming the triparty repo market and increasing the resiliency of that market. 

The reliance on intraday credit extended by the clearing banks has 

begun to decline, and as additional changes are made to the settlement process this reliance should be largely eliminated by the end 

of 2014. 

The Council’s work related to wholesale funding markets is a 

good example of the Council’s collaborative approach, as it works 

with its members and member agencies to implement and coordinate reforms to short-term funding markets. 

Q.6. Please describe how the Office of Financial Research is fulfilling its analytical support role for FSOC as envisioned by the 

Wall Street Reform Act. 

A.6. The OFR has been active in providing key data and analysis 

that have supported the Council’s work. These activities have included and will continue to include: 
226 

• Supplying data and analysis for the work of the Council and 

its Nonbank Financial Company Designations committee, including calculation and analysis of threshold metrics for Stage 

1 of the Council’s nonbank financial company designations 

process, and analysis of the asset management industry; 

• Supporting the Council’s Systemic Risk Committee by reporting regularly on developments in financial markets and activities, in financial stability measures, and in macroeconomic indicators; 

• Acquiring, managing, protecting, and securely making available to the Council and to its own researchers data needed for 

assessing and monitoring threats to financial stability; 

• Leading meetings of and supporting the Council’s Data Committee and associated work regarding data gaps and data 

standards; 

• Providing data, analysis, and staff support for producing the 

Council’s 2013 annual report; and 

• Conducting in-depth analysis and reporting on risks related to 

short-term funding markets, money market funds, credit default swaps, and other areas. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JACOB J. LEW 

Q.1. In a September 2012 report, GAO recommended that the Secretary of Treasury take 10 specific actions to improve the accountability and transparency of the FSOC. As the FSOC Chairman, 

what specific steps have you taken to address GAO’s recommendations? 

A.1. The GAO’s report made a number of constructive recommendations on ways in which the Council could further enhance 

its transparency, including improving the Council’s Web site. Subsequently, the Council’s Web site was reintroduced, in December 

2012, to improve transparency and usability, to improve access to 

Council documents, and to allow users to receive email updates 

when new content is added. Additionally, the Council will continue 

to refine the appropriate approach in balancing its responsibility to 

be transparent with its central mission to monitor emerging 

threats to the financial system. Council members frequently discuss supervisory and other market-sensitive data during Council 

meetings, including information about individual firms, transactions, and markets that require confidentiality. In many instances, regulators or firms themselves provide nonpublic information that is discussed by the Council. Continued protection of this 

information, even after a period of time, is often necessary to prevent destabilizing market speculation or other adverse consequences that could occur if that information were to be disclosed. 

The Council also took into account the GAO’s recommendations 

during the drafting of the Council’s 2013 annual report, including 

by more clearly articulating the Council’s intent to assign responsibility for acting on recommendations to specific member agencies. 

Where applicable and appropriate within the Council’s authority, 

timeframes were also included. 
227 

The GAO also recommended that the Council adopt a more formal and quantitative approach to identifying risks to financial stability. The Council’s Systemic Risk Committee has worked with the 

OFR to develop a monitor of key financial and economic data and 

to highlight areas of potential concern. 

The Council will continue to examine and refine, as appropriate, 

its governance and other processes to ensure it is operating efficiently and effectively. 

Q.2. The FSOC 2013 Annual Report states ‘‘The SEC, by virtue of 

its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that money market funds present to the economy.’’ It is my understanding that the 

SEC is likely to propose additional money market fund reforms this 

summer. At that time, how will the FSOC make it clear that it will 

take no further action on money market funds? 

A.2. We commend the SEC for continuing the work to address remaining vulnerabilities to our financial system presented by 

MMFs. We don’t want to prejudge the outcomes of the administrative procedures process, and we encourage public comment on the 

proposals. If the Council elects not to issue a final Section 120 recommendation, it will consider what, if any, public comment is appropriate at that time. 

Q.3. GAO has recommended that FSOC prioritize the threats to 

the financial system that are identified in its annual reports. However, none of the FSOC annual reports provide any such 

prioritization. As FSOC Chairman, what do you believe are the top 

two or three threats to U.S. financial stability? 

A.3. In its 2013 annual report, the Council organized its recommendations around a framework of seven specific themes that 

require attention. First, market participants and regulatory agencies should take steps to reduce vulnerabilities in wholesale funding markets that can lead to destabilizing fire sales. Second, significant reform in the housing finance system is still needed. Third, 

government agencies, regulators, and businesses should take action 

to address operational risks from internal control and technology 

failures, natural disasters, and cyber-attacks, which can cause 

major disruptions to the financial system. Fourth, as recent developments with the London Interbank Offered Rate (LIBOR) have 

demonstrated, reforms are needed to address the reliance on voluntary, self-regulated, and self-reported reference interest rates. 

Fifth, financial institutions and market participants should be cognizant of interest rate risk, particularly given the historically low 

interest rate environment of the past few years. Sixth, long-term 

fiscal imbalances that have potential economic and financial market impacts should be addressed. Finally, regulators need to continue to keep a close eye on potential threats to U.S. financial stability from adverse developments in the global economy. 

These seven themes represent the risk areas most in need of attention in the coming year, based on the Council’s collective judgment. 

Q.4. The final rule describing the procedures that the Council intends to follow when making nonbank SIFI determinations states 
228 

that the Office of Financial Research (OFR) is analyzing the extent 

to which there are potential threats to U.S. financial stability arising from asset management companies. Will you commit to making 

that analysis public and allowing public comment before FSOC 

takes any action based on the results of that analysis? 

A.4. The Council, its member agencies, and the Office of Financial 

Research (OFR) are analyzing the extent to which asset management companies may present potential threats to U.S. financial 

stability. As part of this analysis, OFR staff have met with market 

participants, including asset managers, to learn more about their 

activities and business models. This work is ongoing and the Council has not yet determined the extent to which the research may 

be made public. However, were the Council to determine that it 

would be appropriate to develop additional metrics that would be 

used to identify asset management firms for further evaluation and 

potential designation, it intends to provide the public with an opportunity to review and comment on any such metrics and thresholds, in accordance with past practice. 

Q.5. Does FSOC plan to make any recommendations to the Federal 

Reserve for tailoring the prudential standards for nonbank financial firms, such as asset managers, insurance companies and 

broker-dealers? Do you believe that a Basel III capital standard is 

a proper standard to be applied to nonbank financial firms? 

A.5. The Council is responsible for designating nonbank financial 

companies for Federal Reserve supervision and enhanced prudential standards. Section 165 specifically permits the Federal Reserve 

to take into account differences among nonbank financial companies under its supervision when prescribing prudential standards. 

We expect that the Federal Reserve will consider this discretionary 

authority when finalizing its rulemaking. 

Q.6. If the lack of international coordination on financial reform 

measures leads to a protectionist backlash, does this present a 

threat to the financial stability of the United States? 

A.6. Strong global coordination on financial reform is occurring in 

the G–20, Financial Stability Board (FSB), standard setting bodies, 

and among nations. The United States has taken a leading role in 

an extensive international effort to improve financial regulation 

around the globe, and Federal banking and markets regulators are 

playing an important part in coordinating this effort globally so 

that implementation across national authorities is consistent and 

timely. 

We support existing efforts by major financial centers in Europe 

and Asia to adopt strong measures similar to our Dodd-Frank Act 

and encourage further progress where needed to help maintain a 

level playing field for U.S. firms and to reduce the opportunity for 

regulatory arbitrage, while raising standards globally. Without 

international consensus, we risk a race to the bottom. 

Just as we have international standards for capital requirements 

for banks, we have proposed establishing global standards for margin requirements for over-the-counter derivatives, and this work is 

underway among the G–20. Uniform margin requirements will provide buffers against future shocks, while supporting a level playing 

field. 
229 

A protectionist backlash could lead to reduced cross-border capital flows and less than optimal economic growth. International coordination is essential to avoid this outcome. 

Q.7. While you were at the White House, you had the opportunity 

to look into the Department of Labor’s (DOL’s) Employee Benefit 

Security Administration’s (EBSA’s) proposed change to the definition of fiduciary. DOL is currently working on its planned re-proposal. Among the items lacking in the original proposal was a comprehensive cost-benefit analysis. In addition, the rule proposal by 

the EBSA has significant ramifications for all Individual Retirement Accounts (IRAs), including those that are not employee benefits. As you know, the IRA is a retirement tax account overseen by 

the IRS. As Treasury Secretary, will you cede IRS authority and 

oversight of IRAs to DOL in light of the fiduciary rule proposal? As 

FSOC Chairman, how will you ensure that any DOL re-proposal 

contains cost-benefit analyses for the new rule proposal as well as 

any class exemptions issued in conjunction with the rule that includes an assessment of the impact on the availability and cost of 

investment advice, particularly in rural areas? How will you ensure 

that any DOL re-proposal contains a cost-benefit analysis that includes an assessment of the impact on the Securities and Exchange 

Commission’s ability to fulfill its mission as the primary regulator 

charged with protecting investors? 

A.7. The Department of Labor (DOL), not the Treasury Department, has the authority to define who is a fiduciary with respect 

to retirement plans and IRAs. This definition applies to both the 

ERISA Title I provisions enforced by DOL and to the Internal Revenue Code. Accordingly, Treasury and DOL have engaged in discussions regarding some aspects of the DOL’s original proposal. 

The two agencies will continue to be in contact with one another 

regarding any re-proposal with respect to the fiduciary definition, 

including any issues within IRS’s jurisdiction. My understanding is 

that DOL will continue to coordinate with the Securities and Exchange Commission, the Commodity Futures Trading Commission, 

and others as well to ensure that rulemakings relating to investor 

protection are not inconsistent or unduly burdensome. Questions 

concerning the details of that coordination are best addressed to 

DOL. 

We also understand that DOL, in connection with its effort to assess the costs and benefits of re-proposed regulations, requested information from the financial services industry and received somewhat limited data in response, and that it has been in the process 

of assessing costs and benefits using all available data. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ 

FROM JACOB J. LEW 

Q.1. I was pleased to hear the HARP program was extended an additional 2 years, through 2015. However, many of my constituents 

are left out of the program because of the HARP eligibility cutoff 

date of June 2009. The deadline has already been changed once 

from March 2009 back to June 2009, and I would say that the program extension itself represents a substantive change that nullifies 

any perceived, ‘‘Covenant with Investors’’. Can you explain the im-
230 

pact that an extension of the HARP eligibility date would have on 

homeowners, investors, and the overall housing market? Do you 

think leaving the cutoff date as is, makes it appear that the FHFA 

weighs investors? interests above borrowers, who contractually are 

equals? What would be the benefits to the overall economy if we 

let millions of responsible homeowners take advantage of today’s 

historically low interest rates by removing barriers to HARP refinancing? 

A.1. The enhancements to HARP have made a significant impact. 

These changes were designed to simplify eligibility and valuation 

requirements, make deeply underwater borrowers (above 125 percent LTV) eligible for refinancing, lower the fees associated with refinancing, harmonize representation and warranty standards, and 

resolve mortgage insurance concerns. Since the program’s inception 

in 2009, nearly 2.5 million homeowners have lowered their monthly 

payments by refinancing through HARP. The continued high volume of HARP refinances is attributed to record-low mortgage rates 

and the program enhancements implemented in 2012. 

The Administration is committed to ensuring that all responsible 

homeowners have the opportunity to refinance and take advantage 

of today’s low interest rates. As you know, the President has called 

for broad-based refinancing to provide access for all borrowers who 

are current on their payments to refinance without the many barriers currently faced by homeowners including underwater borrowers. Since many borrowers who purchased their homes within 

the past 4 years have built up positive equity, they should be able 

to refinance without a program such as HARP that was designed 

to help underwater borrowers. 

Q.2. In April, I held a hearing on the foreclosure abuses that have, 

and continue, to go on. I was pleased to see the CFPB adopted new 

rules on mortgage servicing standards in January 2013. I have long 

advocated for increasing consumer protections on borrowers before 

foreclosures, encouraging loan modifications, eliminating dual 

tracking, placing limits on foreclosure fees, and creating an appeals 

process for those denied loan modifications as well as a mediation 

program. In the FSOC report, you note that this rulemaking, along 

with others, is critical to improving mortgage origination. Can you 

explain how these mortgage servicing standards impact the housing market, mortgage originations, and the overall economy? 

A.2. As you know, in its 2012 Annual Report, the FSOC recommended that ‘‘the FHFA, HUD, CFPB, and other agencies, as 

necessary, develop comprehensive mortgage servicing standards 

that require consistent and transparent processes for consumers 

and promote efficient alternatives to foreclosure where appropriate.’’ 

In January 2013, the Consumer Financial Protection Bureau 

(CFPB) issued mortgage-servicing standards for bank and nonbank 

mortgage servicers. Some of the changes were specifically mandated by Dodd-Frank, but many were a response to improper, and 

in some cases illegal, default-servicing practices, observed following 

implementation of the Administration’s foreclosure prevention efforts in early 2009. The CFPB standards were modeled in part on 

the standards set by Treasury’s Making Home Affordable Program, 
231 

which also served as a basis for the National Mortgage Settlement 

standards. 

The national mortgage servicing standards being implemented by 

CFPB and prudential banking regulators will align incentives and 

provide clarity and consistency to borrowers and investors. 

Q.3. As you know, in April, I held a Subcommittee hearing on the 

settlements that stemmed from the major mortgage servicer foreclosure abuses. It seems as though the consumers are getting the 

short end of the stick, while the major banks are continuing to see 

record profits. We know the Independent Foreclosure Review was 

a failure, and there are reports that homeowners are not getting 

the ‘‘consumer relief’’ that the regulators anticipated with the National Mortgage Settlement. Can you tell me what you will do to 

ensure these borrowers are finally placed at the front of the line? 

What do you plan to do get more money into the hands of these 

borrowers? 

A.3. Treasury shares your commitment to ensuring that all Government foreclosure prevention programs reach eligible borrowers 

in need of assistance. Toward that end, we recently extended the 

Making Home Affordable Program (MHA) until December 31, 2015, 

and continue to work with States in Treasury’s Hardest Hit Fund 

program to make sure relief is provided while the need is still 

great. 

Treasury supports the objectives of the National Mortgage Settlement and the Independent Foreclosure Review; however, we are 

not involved in monitoring the compliance or implementation of 

these programs. While Treasury did provide technical assistance on 

MHA mortgage servicer compliance during the negotiations of the 

National Mortgage Settlement, Joseph Smith, the Monitor of the 

National Mortgage Settlement, is responsible for compliance, monitoring, and enforcement of the agreement. 

Q.4. What can be done to improve the Financial Stability Oversight 

Council’s identification of both the financial risks facing the American people and solutions to lessen those risks? 

A.4. The Council’s assessment of threats to the financial system is 

a collaborative process, driven by review of the best information 

available from the markets, institutions, industry, academia, and 

expertise from Council members and their respective agencies and 

staffs. Council members have been and continue to be highly engaged in assessing emerging threats and vulnerabilities. 

The Council committee structure includes a standing Systemic 

Risk Committee established to identify, analyze, and monitor 

vulnerabilities in the financial system and emerging threats to stability. This committee, which is composed of staff of Council members and their agencies with supervisory, examination, data, surveillance, and policy expertise, gathers information from Council 

members and their agencies to assess risks that affect financial 

markets and institutions. The Systemic Risk Committee is responsible for interagency coordination and information sharing regarding issues that could affect financial stability, and reports to the 

Council’s Deputies Committee. Also, as noted above, the Council’s 

annual report is a product of the Council’s risk-monitoring func-
232 

tion. It reflects the ongoing work of the Systemic Risk Committee 

and the collective judgment of the members of the Council. 

The Council is also supported by the Office of Financial Research 

(OFR), which was created by the Dodd-Frank Act to improve the 

quality of financial data available to policymakers, and to develop 

better tools and analysis to understand the risks in the financial 

system. The Council’s Systemic Risk Committee has worked with 

the OFR to develop a monitor of key financial and economic data 

and to highlight areas of potential concern, and it continues to be 

refined. The monitoring tool, now known as the OFR Markets Monitor, is shared across Council members and member agencies and 

provides a systematic approach to sharing key financial risk indicators. 

The Council continually seeks ways to improve how it identifies 

and acts on risks to financial stability. 

Q.5. In October, Superstorm Sandy hit the coast of New Jersey, 

eventually leaving nearly 6 million people in 16 States without 

power, and taking the lives of many Americans. As a result of the 

storm, your report identified a few areas of improvement to 

strengthen business continuity and resiliency. You found that clear 

communication between market participants, at all levels, is essential to strengthening resiliency. You also found that the proper 

planning and testing of contingency systems, key operations, and 

personnel would enhance the reliability of our markets. Can you 

detail some of the deficiencies that were found, and what role you 

play in ensuring these recommendations are followed? 

A.5. The 2013 FSOC Annual Report identified several areas where 

further improvements in the resiliency and business continuity of 

individual financial institutions would strengthen the financial system. The sector would benefit from further development and coordination of protocols for determining if and when to open or close 

markets and if and when to deploy the use of back-up sites. Similarly, institutions should continue to develop and implement business continuity plans that take personnel considerations into account. Expanded planning and testing, involving major market participants as well as financial market utilities and providers of services from other sectors, would enhance reliability and market-wide 

confidence in back-up systems. Continual assessment of cross-industry and cross-sector interdependencies will further ensure reliable redundancy. The Treasury, in its capacity as the Sector-Specific Agency for the Financial Sector and as Chair of the Financial 

and Banking Information Infrastructure Committee, will continue 

to engage with industry and government partners to address these 

necessary improvements. Additionally, the Federal financial regulators are working with financial institutions to increase the resiliency of the sector. 

Q.6. The National Housing Trust Fund was authorized in 2008, 

and the law called for the Trust Fund to be funded by contributions 

from Fannie Mae and Freddie Mac (the GSEs). However, the GSEs 

went into conservatorship shortly after the Trust Fund was authorized, and FHFA temporarily suspended the contributions due to the 

financial conditions experienced by the GSEs at the time. The 

GSEs have reported profits for several consecutive quarters. Given 
233 

this return to profitability, will FHFA be directing the GSEs to 

start making contributions to the National Housing Trust Fund? If 

not, why not? Do you have the legal authority to continue suspending the payments considering that the GSEs are now profitable? 

A.6. It is more appropriate for FHFA to answer this question. 

FHFA is an independent regulator, and, as conservator of Fannie 

Mae and Freddie Mac, is exclusively responsible for making decisions related to their operations, including whether to fund the National Housing Trust Fund. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM JACOB J. LEW 

Volcker Firewall 

Q.1. Nearly 3 years since Dodd-Frank became law, the Volcker 

Firewall and many other key reform provisions are still not final 

and in effect. 

Please provide an update on your coordination activities relating 

to the Volcker Firewall and identify any obstacles to issuing a final 

rule in the near term. 

A.1. Since the issuance of the Council’s study on the Volcker Rule 

in January 2011, Treasury has been working hard to fulfill the 

statutory mandate to coordinate the regulations issued under the 

Volcker Rule. Although not a rule-writing agency, Treasury has 

been focused on achieving a consistent rule across the five rulemaking agencies. Treasury is working with the rulemaking agencies to review the 18,000 public comments and finalize the rules. 

As I have said publicly, the Volcker Rule is a particularly important priority to complete this year. I will continue to push for swift 

completion of a rule that keeps faith with the intent of the statute 

and the President’s vision. 

Trade 

Q.2. Recent news reports indicate that some are pressing trade negotiators in the United States and Europe to include financial regulation as a major topic of upcoming trade negotiations between the 

United States and Europe. 

Considering the important work already underway at the Financial Stability Forum, the Basel Committee, and other international 

financial regulatory cooperation venues, do you believe that trade 

agreements should be used for the international coordination of financial regulations and regulators, or remain focused on the traditional matters of market access for trade in goods and services? Are 

you committed to ensuring that any provisions included in a trade 

agreement do not undermine the independence and high standards 

of U.S. financial regulation and regulators, including their ability 

to make determinations regarding substituted compliance of foreign 

regulatory systems or to establish prudent regulation of foreign institutions operating in the United States? 

A.2. The United States and European Union have launched negotiations on a Transatlantic Trade and Investment Partnership 

(TTIP). In these negotiations, as in all our free trade agreements, 
234 

the Administration intends to pursue robust market access commitments for financial services. 

Prudential and financial regulatory cooperation should continue 

in existing and appropriate global fora, such as the Financial Stability Board (FSB), the Basel Committee on Banking Supervision, 

and the International Organization of Securities Commissions, as 

well as through the G–20. We will continue this ongoing, intensive 

process toward regulatory and prudential convergence with ambitious deadlines, alongside the TTIP negotiations. Our objective is 

to achieve consistent, robust international standards similar to 

those embodied in our own financial laws and regulations. 

International 

Q.3. During the financial crisis, 10 of the top 20 banks that received Federal Reserve emergency lending assistance were foreign 

financial institutions. Similarly, many of the beneficiaries of the 

rescue of AIG were foreign financial institutions. At the same time, 

the losses relating to AIG’s Financial Products unit and 

JPMorganChase’s ‘‘Whale’’ demonstrated how quickly risks from 

overseas activities can flow back to the United States. The collapse 

of Long-Term Capital Management demonstrated similar lessons. 

Do you believe that it is important for the United States to maintain a strong regulatory floor for U.S. financial institutions operating globally and for foreign financial institutions operating in the 

United States, as well as work with foreign regulatory counterparts 

to prevent weaknesses emerging in foreign markets that could flow 

back to the United States? Should this regulatory floor include the 

ability to safely wind down failed financial firms? 

A.3. Since finance is inherently borderless, strong and consistent 

regulations at home and in foreign jurisdictions are important to 

prevent regulatory arbitrage, and to protect against vulnerabilities 

emanating from outside our borders that could flow back to the 

United States. 

The Dodd-Frank Act gives U.S. regulators the tools they need to 

maintain strong prudential standards for U.S. financial institutions 

and foreign financial institutions operating in the United States. 

Further, international financial regulatory reform commitments 

made by the members of the G–20 and international peer reviews 

on implementation of these mutually agreed reforms by the FSB 

mitigate financial vulnerabilities emanating outside our country 

that could flow back to the United States. 

There is broad international agreement on the need to be able to 

safely resolve large financial institutions that operate internationally, and the United States has taken a strong lead in this area by 

putting in place the Orderly Liquidation Authority as part of the 

Dodd-Frank Act. The FDIC, other regulators, and Treasury staff 

are closely engaged with their foreign counterparts to build the capacity, mutual trust, and strong communication networks necessary to make resolution of large internationally active financial 

institutions possible. This effort seeks to address all institutions, 

whether those institutions are U.S. banks based domestically and 

also operating overseas, or foreign banks that maintain significant 

operations within our borders. 
235 

Emerging Systemic Risks 

Q.4. Identifying emerging financial risks is one of the most important obligations that Congress gave the FSOC. Given that the regulators apparently only became aware of trading losses and model 

manipulation in the London Whale case from public news reporting, are you satisfied with the level of insight FSOC and the regulators have into financial institutions and financial markets, especially related to their trading activities? 

In my view, one of the important aspects of the proposed Volcker 

Rule regulation is the data collection requirements that will give 

regulators a view into the granular trading risks that firms are 

taking firm-wide. Isn’t it critical that regulators get access to that 

data and knit together risks across markets? 

A.4. It is critically important that regulators have the data and analytical tools to understand and mitigate the risks faced by institutions and by the financial system and economy as a whole. Regulators will receive significantly more and better data as they continue to implement provisions of the Dodd-Frank Act related to living wills, derivatives, the Volcker Rule, and hedge fund activity, 

among others. This is also one of the goals of the Office of Financial Research (OFR), which is acquiring and making available to 

regulators and to the public, more and better financial data. With 

better data and a more substantial commitment of resources to research and analysis, we can not only improve how supervisors do 

their jobs, but also improve market discipline. The Council and its 

members, supported by the work of the OFR, will continue to identify areas where better data and more research offer the best return. 

Cost-Benefit Analysis 

Q.5. Mr. Lew, given the slow pace of rulemaking coming out of the 

agencies, are you concerned that agencies are increasingly being 

subjected—by industry comments, by some at the agencies, and ultimately by the courts—to cost-benefit analysis that is so burdensome that it effectively strangles necessary financial reforms? Are 

you committed to ensuring that independent agencies have the necessary independence and judicial deference to do the jobs that Congress directed them to do in the Dodd-Frank Act and other legislation? 

A.5. The costs of financial reform must be considered relative to 

the cost of another financial crisis. It is important to remember 

how close the financial system came to collapsing 5 years ago, the 

trillions of dollars of wealth destroyed, and the millions of jobs and 

homes that were lost. 

The financial regulators have made important strides in issuing 

proposed and final rules for some of the most important financial 

reforms. As required under the Administrative Procedure Act, 

agencies solicit and review comments from the public in order to 

fully understand a rule’s impact. In going through this process, regulators analyze and think through the implications and dynamics 

of new rules. 

The President has issued executive orders requiring executive 

agencies to engage in an analysis of the costs and benefits of eco-
236 

nomically significant regulations, and encouraging the independent 

regulatory agencies to do the same. At the same time, the independence of our financial regulators is an important feature of our 

regulatory system. Consistent with this independence, the individual agencies are best placed to conduct the appropriate economic 

impact analyses that are consistent with their legal mandates. We 

understand from OMB that while independent agencies attempt to 

quantify costs and benefits wherever possible, when this is not possible, this is explained in qualitative terms. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM JACOB J. LEW 

Q.1. How many applications for nonprofit status were approved 

and how many applications were denied for conservative-leaning 

groups between January 2010 and December 2012? 

Q.2. How many applications for nonprofit status were approved 

and how many applications were denied for liberal-leaning groups 

between January 2010 and December 2012? 

Q.3. What was the average time it took for the Determinations 

Unit to complete processing applications for nonprofit status that 

conservative-leaning organizations submitted to the IRS between 

January 2010 and December 2012? 

Q.4. What was the average time it took for the Determinations 

Unit to complete processing applications for nonprofit status that 

liberal-leaning organizations submitted to the IRS between January 2010 and December 2012? 

A.1.–A.4. As a general matter, Treasury oversees the IRS with respect to matters of broad management and tax policy. Treasury’s 

longstanding practice, spanning administrations of both political 

parties, is not to be involved in the details of tax administration 

and enforcement. 

With respect to your specific questions, a series of independent 

reviews began in the weeks following the release of the TIGTA May 

14 report. The purpose of those reviews is to determine exactly 

what happened at the IRS, and those reviews are ongoing. A number of Congressional oversight committees—including the Senate 

Committee on Finance, the Senate Permanent Subcommittee on Investigations, the House Committee on Ways and Means, and the 

House Committee on Oversight and Government Reform—have initiated investigations. Those Committees have held several hearings 

and received a substantial amount of public testimony on some of 

the very same questions that you raise. Additional hearings are 

scheduled, and Treasury and the IRS have received and are responding to document requests. In addition to Congress, TIGTA is 

now conducting a formal investigation of the IRS, and the United 

States Justice Department is conducting a criminal investigation. 

Treasury fully supports the ongoing investigations. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JACOB J. LEW 

Q.1. Secretary Lew, as a member of the Financial Stability Board 

(FSB), what has been your involvement regarding the designation 
237 

of G–SIBs (global systemically important banks) and in determining what nonbanks meet the G–SIFIs (global systemically important financial institutions) distinction? What will the process be 

for a firm who is not designated a SIFI under FSOC but then gets 

labeled as such by the FSB? Do you anticipate there being any discrepancies between a domestic designation and a global one? 

A.1. Treasury has been actively involved in the global systemically 

important financial institution (G–SIFI) designation process— 

which encompasses both G–SIBs and global systemically important 

insurers (G–SIIs)—through its representation on the FSB. Both the 

FSB and national authorities, in consultation with the relevant 

global standard setters, determine which nonbanks are designated 

as G–SIFIs, as well as which banks are designated as G–SIBs. It 

is up to national authorities to implement FSB recommendations, 

and they have several years to do so. 

Treasury is taking a constructive leadership role in shaping the 

international designation process for G–SIFIs. Through the G–20, 

FSB, and global standard setting bodies, we are working with our 

international counterparts to promote alignment of the Council and 

international G–SIFI identification and designation processes such 

that they remain consistent, in both the timing of the decisions and 

the key substantive judgments made in each process. We aim to set 

a high regulatory standard and to provide a level playing field that 

will both protect the United States and allow U.S. financial companies to compete fairly around the world. 

Q.2. Secretary Lew, much attention has been given to the insurance industry and the possibility that several of the largest insurers could be designated systemically significant, despite the fact 

that their capital structure is wholly different from banks. How do 

you establish an identical regime for all SIFIs, both banks and 

nonbanks, which include minimum capital and liquidity standards, 

in addition to counterparty credit exposure limits? 

A.2. The Council’s responsibility to consider whether a nonbank financial company could pose a threat to U.S. financial stability and 

should be subject to Federal Reserve supervision and enhanced 

prudential standards is set forth in Section 113 of the Dodd-Frank 

Act. The Federal Reserve Board is responsible for promulgating 

rules, such as enhanced prudential standards, applicable to designated nonbank financial companies. Section 165 of the DoddFrank Act authorizes the Federal Reserve to take into account differences among nonbank financial companies under its supervision 

when prescribing prudential standards. We expect that the Federal 

Reserve will consider this discretionary authority while finalizing 

its rulemaking. 

Q.3. Secretary Lew, wouldn’t it be prudent to establish stress tests 

for insurance company SIFIs under a unique (as opposed to bank) 

set of standards? 

A.3. The Council is responsible for designating nonbank financial 

companies for Federal Reserve supervision and enhanced prudential standards. Section 165 of the Dodd-Frank Act authorizes the 

Federal Reserve to take into account differences among nonbank financial companies under its supervision when prescribing pruden-
238 

tial standards. We expect that the Federal Reserve will consider 

this discretionary authority while finalizing its rulemaking. 

Q.4. Secretary Lew, since this Committee is currently considering 

the nomination of Fred Hochberg to be Chairman of the Ex-Im 

Bank, and given the response to my question for the record for 

Fred Hochberg’s confirmation hearing below, what assurances can 

you give this committee that you and Chairman Hochberg will 

work together to actually begin discussions with the European Export Credit Agencies to substantially reduce or eliminate export 

credit financing for wide body aircraft? Can you please explain to 

us what your plan is to comply with the requirement in the 2012 

Reauthorization Act, especially as the Administration begins its 

wider discussions with the EU on an U.S.-EU Free Trade Agreement? 

Vitter QFR to Hochberg and Hochberg Answer: 

Q. The last Ex-Im Bank reauthorization required the Department of the 

Treasury to begin negotiations with the European Export Credit Agencies 

supporting Airbus to ‘‘substantially reduce or eliminate’’ export credit financing for wide body aircraft. The first report on this—which Congress received in November—was far from a report on negotiations and more of a 

history of Export Credit financing. How will you push these required negotiations moving forward and what kind of substantive reports can we expect 

to see on the negotiations from the Administration moving forward? 

A. In Ex-Im Bank’s 2012 Reauthorization, Congress mandated that Treasury initiate and report on the negotiations described in the question, therefore, Ex-Im Bank is not in a position to comment on the content of future 

Treasury reports. Separately, Ex-Im Bank will continue to play an important role in supporting Treasury and Administration efforts in the International Working Group on Export Credits, which represents an important 

effort to bring China and other emerging economies into a multilateral 

rules-based framework for official export credits. Ex-Im Bank agrees with 

Treasury and the Administration that getting all of the major providers of 

official export credits to negotiate and ultimately abide by a common set of 

international guidelines is the first step in the process of reducing, with the 

ultimate goal of eliminating, trade distorting export financing programs, 

and will help ensure that official export credit support complements market 

financing, rather than crowding it out. 

A.4. Over the years, Treasury has actively worked to make the 

international guidelines on official export financing as market-oriented as possible. For aircraft, Treasury has sought to reduce official export credit financing; for example, most recently Treasury 

negotiated the 2011 Aircraft Sector Understanding (ASU) to include terms and conditions that are more market-oriented, thereby 

helping to ensure that such support is used only when market financing is not available and thus complementing rather than 

crowding out the market. Since the 2011 ASU was negotiated, 

Treasury has continued to engage regularly with the European Airbus-supporting governments to discuss possible limitations on the 

provision of official export financing support for aircraft. Reducing 

U.S. financing support for aircraft exports alongside concurrent reductions by the European governments would be necessary to help 

ensure our objective of maintaining a level playing field for all U.S. 

stakeholders. 

Moreover, with many major emerging market countries, such as 

China, providing more and more official export financing support, 

Treasury launched last year the International Working Group on 

Export Credits. The working group is a multilateral effort to nego-
239 

tiate a common rules-based framework that is a necessary first 

step in the process of reducing, with the ultimate goal of eliminating, trade distorting export financing support in a manner that 

does not disadvantage U.S. stakeholders. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN 

FROM JACOB J. LEW 

Q.1. While the annual report identifies the symptom of recent central bank policies, a prolonged period of unusually low interest 

rates, did the Council have any discussions or have any recommendations for handling the continued proactive role central 

banks have assumed in the global economy? Moreover, did the 

Council have any discussions on the inflation threat that the continuance of massive asset purchases by central banks or the adverse impacts of an eventual exit without marked recovery have on 

financial stability? 

A.1. The Council’s annual report included a discussion of risks 

posed by the low interest rate environment. Among the factors explaining the current low level of yields is the market expectation 

of future short-term interest rates, which is driven primarily by 

monetary policy expectations. Globally, central banks have been 

easing monetary policy in order to aid the recovery from the global 

financial crisis, and the Federal Reserve has provided explicit 

short-term rate guidance tied to economic conditions. The annual 

report makes a number of recommendations to regulators and risk 

managers of banks, broker-dealers, insurance companies, and pension funds to be vigilant and scrutinize their risk management 

practices concerning interest rate risk. With respect to banks and 

broker-dealers, the report recommended that regulatory agencies 

and private sector risk managers should scrutinize whether potential changes in interest rates could adversely affect the risk profiles 

of financial firms. For insurance companies, the report said that 

the Federal Insurance Office and State insurance regulators should 

continue to monitor the interest rate risk of insurance companies, 

and State insurance regulators should continue to ensure that the 

economic scenarios run by insurance companies are sufficiently robust and appropriately capture interest rate and other economic 

risks. 

Q.2. The implementation of Basel III to enhance capital standards 

to support the soundness of financial institutions utilizes riskweighting standards. Do you believe the existence of any security 

or instrument with a zero risk weighting for capital standards promotes a sound global financial system? 

A.2. The use of risk-weightings promulgated under Basel III is an 

important part of the effort to promote and monitor the safety and 

soundness of financial institutions. Risk-weighting assets allows 

regulators and supervisors to account for differences in the risk 

presented by particular assets. For example, you would not want 

to have a regime in which the same amount of capital is held 

against a U.S. Treasury security as against a highly risky asset. Of 

course, risk-weighting should not be the only tool supervisors use 

to determine capital requirements, and the U.S. banking agencies 
240 

have a series of tools for that purpose, including the leverage ratio 

and stress testing. 

Q.3. GAO found a lack of transparency with the public as an issue 

the Council should address, suggesting keeping detailed records of 

closed-door sessions and developing a communication strategy with 

the public. What steps has FSOC and the Office of Financial Research (OFR) taken to increase transparency and accountability to 

the public since the September 2012 findings? 

A.3. GAO’s report made a number of constructive recommendations 

on ways in which the Council and the OFR could further enhance 

their transparency and accountability, including improving their 

Web sites. Subsequently, both Web sites were reintroduced in December 2012, to improve transparency and usability, to improve access to Council documents, and to allow users to receive email updates when new content is added. The OFR has also assembled 

dedicated staff to support effective communications with the public, 

as well as outreach to industry and other key partners. Continued 

enhancements to promote further transparency are expected over 

time. However, the Council must continue to find the appropriate 

balance between its responsibility to be transparent and its mission 

to monitor emerging threats to the financial system. Council members frequently discuss supervisory and other market-sensitive 

data during Council meetings, including information about individual firms, transactions, and markets that require confidentiality. In many instances, regulators or firms themselves provide 

nonpublic information that is discussed by the Council. Continued 

protection of this information, even after a period of time, is often 

necessary to prevent destabilizing market speculation or other adverse consequences that could occur if that information were to be 

disclosed. 

Q.4. In its September 2012 report, GAO found that FSOC has not 

identified a forward-looking process for emerging threats. To what 

extent is FSOC capable of anticipating potential threats to financial stability and what capabilities does the organization have to 

eliminate or mitigate looming threats? What tools does FSOC have 

that the regulators did not leading up to the 2007–08 crisis? 

A.4. The Council’s assessment of threats to the financial system is 

a collaborative process, driven by review of the best information 

available from the markets, institutions, industry, and academia, 

and expertise from Council members and their agencies and staffs. 

Council members have been and continue to be highly engaged in 

assessing emerging threats and vulnerabilities. 

The Council committee structure includes a standing Systemic 

Risk Committee established to identify, analyze, and monitor 

vulnerabilities in the financial system and emerging threats to stability. This committee, which is composed of staff of Council members and their agencies with supervisory, examination, data, surveillance, and policy expertise, gathers information from Council 

members and their agencies to assess risks that affect financial 

markets and institutions. The Systemic Risk Committee is responsible for interagency coordination and information sharing regarding issues that could affect financial stability, and reports to the 

Council’s Deputies Committee. Also, as noted above, the Council’s 
241 

annual report is a product of the Council’s risk-monitoring function. It reflects the ongoing work of the Systemic Risk Committee 

and the collective judgment of the members of the Council. 

The Council is also supported by the Office of Financial Research 

(OFR), which was created by the Dodd-Frank Act to improve the 

quality of financial data available to policymakers, and to develop 

better tools and analysis to understand the risks in the financial 

system. The Council’s Systemic Risk Committee has worked with 

the OFR to develop a monitor of key financial and economic data 

and to highlight areas of potential concern, and it continues to be 

refined.