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80–873 PDF 2013

WHO IS TOO BIG TO FAIL? 

GAO’S ASSESSMENT OF THE 

FINANCIAL STABILITY OVERSIGHT 

COUNCIL AND THE OFFICE 

OF FINANCIAL RESEARCH 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MARCH 14, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–7 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

PATRICK T. MCHENRY, North Carolina, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

SEAN P. DUFFY, Wisconsin 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

AL GREEN, Texas, Ranking Member 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

CAROLYN B. MALONEY, New York 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 14, 2013 ................................................................................................. 1 

Appendix: 

March 14, 2013 ................................................................................................. 57 

WITNESSES 

THURSDAY, MARCH 14, 2013 

Berner, Hon. Richard, Director, Office of Financial Research, U.S. Department of the Treasury ........................................................................................... 7 

Clowers, A. Nicole, Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 10 

Gerety, Amias M., Deputy Assistant Secretary, Financial Stability Oversight 

Council, U.S. Department of the Treasury ........................................................ 9 

APPENDIX 

Prepared statements: 

Berner, Hon. Richard ....................................................................................... 58 

Clowers, A. Nicole ............................................................................................. 65 

Gerety, Amias M. .............................................................................................. 89 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Berner, Hon. Richard: 

Written responses to questions submitted by Representative Heck ............ 94 

Written responses to questions submitted by Representative Maloney ...... 95 

Gerety, Amias M.: 

Written responses to questions submitted by Representative Heck ............ 97 

(1) 

WHO IS TOO BIG TO FAIL? 

GAO’S ASSESSMENT OF THE 

FINANCIAL STABILITY OVERSIGHT 

COUNCIL AND THE OFFICE 

OF FINANCIAL RESEARCH 

Thursday, March 14, 2013 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2128, Rayburn House Office Building, Hon. Patrick McHenry 

[chairman of the subcommittee] presiding. 

Members present: Representatives McHenry, Fitzpatrick, Duffy, 

Grimm, Fincher, Hultgren, Ross, Wagner, Barr; Green, Cleaver, 

Ellison, Perlmutter, Maloney, Delaney, Sinema, Beatty, and Heck. 

Ex officio present: Representatives Bachus and Waters. 

Also present: Representative Garrett. 

Chairman MCHENRY. The subcommittee will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

This hearing today of the Subcommittee on Oversight and Investigations is entitled, ‘‘Who is Too Big to Fail? GAO’s Assessment of 

the Financial Stability Oversight Council and the Office of Financial Research.’’ It is the first meeting of this subcommittee in this 

Congress. I want to welcome the new ranking member of this subcommittee, Mr. Green of Texas. We both came in, in the same 

class, and it is an honor that we have risen together. 

Today, we have distinguished witnesses, and after we recognize 

Members for opening statements, we will introduce the witnesses. 

I now recognize myself for 5 minutes for the purpose of an opening statement. With that, you can start the clock. 

In the summer of 2009, a year before the passage of the DoddFrank Act, President Obama announced his vision of financial regulatory reform. From the East Room of the White House he described a Council that would, ‘‘bring together regulators across 

markets to coordinate and share information, to identify gaps in 

regulation, and to tackle issues that don’t fit neatly into an organizational chart.’’ 

He said, ‘‘We are going to bring everyone together to take a 

broader view and a longer view to solve problems in oversight before they become a crisis.’’ This was a moment where the urgency 

2 

of passing financial regulatory reform and these necessary changes 

became very urgent in order to prevent another crisis. 

Two and a half years after the enactment of Dodd-Frank, however, fewer than half of the mandated rules have been finalized. In 

fact, significant pieces of Dodd-Frank have yet to be promulgated, 

such as the Volcker Rule, the over-the-counter-derivatives regulation, the Qualified Residential Mortgage (QRM) rule, and the definition and designation of systemically significant non-bank financial companies. 

Granted, Dodd-Frank issued a huge mandate requiring collaboration and consistency across several agencies, but there was a promise made in the creation of the Financial Stability Oversight Council (FSOC). It was a promise of coordination and an effort to thwart 

a future crisis. 

However, after reviewing the GAO audit, the GAO being responsible for overseeing the Executive Branch putting best practices 

and principles like private enterprises do with hiring consultants, 

the GAO is our consultant to review that and they do a yeoman’s 

task of that. The GAO audit of the Council and the Office of Financial Research (OFR) indicates that these entities are far from delivering on that promise made by the President over 4 years ago. 

First, GAO’s examination of the Council’s transparency policies 

and its process to designate non-bank financial institutions for supervision by the Federal Reserve illustrates the fact that it has not 

provided the marketplace with a clear, rules-based framework 

within which to work. 

Second, by examining FSOC’s efforts to coordinate regulatory action among agencies and to identify systemic risks, including OFR’s 

efforts in aid of those functions, it seems that neither of these 

agencies are presently equipped to discover potential future threats 

to the financial system and to proactively mitigate them. I find it 

especially disconcerting that after 21⁄2 years, GAO has found that 

the Council lacks systemic processes to identify future threats to 

the financial system in its annual reports; that it fails to distinguish future from current threats; and that it has failed to 

prioritize those threats that it has identified. 

I think it is important to point out that as a part of the GAO 

review process, the entity under review is given 60 days prior to 

publication of the report to issue a response letter addressing the 

GAO’s findings. This is what it does with all agencies across the 

government. 

I thought it interesting that after 60 days, the response letter included in this report came from Assistant Secretary of the Treasury 

Mary Miller, acting on behalf of the Treasury Secretary, and not 

as an official acting on behalf of the Council itself. 

This begs the question: If it is not even possible for the Council, 

at the Council level, to come to some level of consensus and agreement on a GAO report that is 63 pages long, how exactly do we 

expect the Council to coordinate actions across these existing regulators, and to act nimbly in anticipating systemic-wide financial 

threats? 

The GAO has offered 10 recommendations in its review of the Financial Stability Oversight Council and the Office of Financial Research. I look forward to hearing from today’s witnesses on whethVerDate Nov 24 2008 19:06 Aug 20, 2013 Jkt 080873 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\80873.TXT TERRI
3 

er it is possible for the OFR and FSOC to work collaboratively with 

the institutions that currently exist. It is clear at the outset of 

reading the report that the FSOC, as currently designed, isn’t getting the job done. 

So with that, I recognize for 5 minutes the gentleman from 

Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

And this is my first opportunity to sit as ranking member. I 

think it appropriate that I take this opportunity to thank the many 

persons who made it possible for me to have this opportunity, and 

I want to assure all that I take this opportunity seriously. 

And I also want to let those who are consumers know that I understand that consumers have rights, and those who are in the financial services community understand that I am very much aware 

that members of the financial services community have needs. And 

it is our responsibility, our duty, to balance the needs and the 

rights, the rights of consumers and the needs of those in the financial services community. And I am honored to have this opportunity to do so. 

I also want to thank the chairman. 

Mr. Chairman, thank you so much for the amiable, amicable way 

that we have been able to work thus far. For those who may be 

interested, he and I had dinner together. It was most enjoyable, I 

must tell you. And we plan to have dinner again, assuming that 

our schedules can match up, and I believe that we can do this. 

Chairman MCHENRY. And I certainly appreciate you purchasing 

the dinner as well. 

Mr. GREEN. Thank you. 

Chairman MCHENRY. It was very kind of you, and I will buy next 

time. 

Mr. GREEN. This is why we are having dinner again. 

I also would like to thank you, Mr. Chairman, for your opening 

statement, and the sense of while you and I may not agree in our 

opening statements, you have stayed to the topic that you called to 

my attention for this hearing today. And I think it is exceedingly 

important that we do our very best to stay on target, stay on focus. 

If we do this, while I am sure this hearing will be exciting to a 

good many of us, it may be boring to a lot of other people, because 

it really deals with a report that we have received from GAO, 

which contains recommendations. And we understand that a newly 

instituted organization of the magnitude and size of FSOC has to 

have time to get up to speed so that it can work efficaciously. 

The truth be told, if you go back to 1933 and you look at the 

FDIC, which is probably the forerunner to what we have today, it 

is a quite similar paradigm. If you go back, you will find that it 

took years for the FDIC to get up and running to the extent that 

it was as effective as it ultimately has been. And it has been quite 

effective. 

So today, we have this opportunity to look at FSOC. We will also 

look at the Office of Financial Research, and we will look at the 

recommendations that have been made. I am going to ask my colleagues to do as best as we can to pay as much attention to what 

is being said and to take seriously the recommendations of GAO. 

4 

But I am also going to look closely at what FSOC and the Office 

of Financial Research have by way of responses. 

I have had an opportunity to peruse the report and I don’t find 

anything in that report which is exceedingly detrimental. The truth 

is, they have made some recommendations that we have to take seriously. And I look forward to our working with the two entities 

and with the other members of this committee to make sure that 

we find a good way to move forward with an institution that is 

dearly needed for the benefit of consumers and the financial services community. 

With a minute and 28 seconds left, let me just share one final 

thought. These are not easy times, they are not the worst of times, 

and they are not the best of times. But these are the times that 

will enable persons who mean well and who want to work across 

lines to work together. 

I am going to do all that I can to work with the chairman and 

members across lines so that we can work together for the benefit 

of the American people. While we may have opinions that will differ, it is my belief that there is so much more that we can agree 

on and we ought to try to find the things that we agree on and 

work together. 

With that, I will yield back the balance of my time, Mr. Chairman. And thank you very much for convening the hearing. 

Chairman MCHENRY. I thank the ranking member. 

The Chair will now recognize for 2 minutes the vice chairman of 

the subcommittee, the gentleman from Pennsylvania, Mr. 

Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. And I look forward 

to the panel discussion here this morning. 

I look forward to learning more about the steps that FSOC and 

the Office Of Financial Research plan to take to increase transparency. Transparency is a pillar of representational government. 

And the important work of the FSOC should be submitted to vigorous public scrutiny, so we expect to see how we can all improve 

in that area. 

I am also concerned about the FSOC’s expansive authority to 

designate non-bank institutions as systemically important financial 

institutions (SIFI). A SIFI designation is likely to have affects on 

the markets and the economy as a whole, but the GAO report 

states that the FSOC has no plans to examine that impact. I hope 

that they will quickly correct course and adopt policies and procedures to measure the impact of their designations. 

And finally, I plan to ask the witnesses about coordination between the FSOC and its member agencies. Although the GAO report found that collaboration has been lacking, I actually find it 

troubling that the FSOC appears to be inserting itself into deliberations at the SEC with regards to money market funds. If an 

agency is continuing to consider a matter and it has the expertise 

to give it proper contemplation, then I question the need to have 

yet another agency subvert that process. So I look forward to the 

testimony in considering the answers to some of these questions. 

And I yield back. 

Chairman MCHENRY. I thank the gentleman. 

Mrs. Maloney of New York is recognized for 2 minutes. 

5 

Mrs. MALONEY. Thank you, Mr. Chairman, and thank you, Ranking Member Green. 

And welcome to the witnesses. I thank you all for your service. 

The Financial Stability Oversight Council and the Office Of Financial Research were two key pillars of the Dodd-Frank reforms 

that we passed and the President signed into law. They are a direct 

result of the work we did to fill in the gaping holes in regulatory 

oversight that led to an estimated $22 trillion in losses to the U.S. 

economy. 

They are a response to the realization that our regulators did not 

have the ability to look across the financial system and to detect 

financial instability before it ballooned out of total control. 

The FSOC is simply a council of regulators who meet and coordinate regulatory and oversight efforts, and it is dependent upon 

data that it receives from the Office of Financial Research to help 

them do this job. 

The OFR was created to spot trends within the financial services 

industry through the collection and analysis of near-time financial 

industry data. Dodd-Frank details specific information that the office is supposed to collect from the financial services institutions. 

The language was specific in saying, ‘‘The office shall collect data 

using the same protocols the industry does.’’ 

The reasoning behind this was to get the office up and running 

in the quickest possible fashion so that we can continually assess 

the overall health of the U.S. financial markets, spot trends, or an 

oversaturation of a particular financial instrument—we all remember the credit default swaps. And it was supposed to proactively 

alert and work with the effective brokers in an orderly fashion, 

proactively dealing with any problems that may arise so that that 

we don’t experience another run on the markets and near failure, 

like we had in 2008. 

So, I look forward to your testimony and your responses to the 

GAO report. Thank you. 

My time is up. 

Chairman MCHENRY. The gentleman from Missouri is recognized 

for 3 minutes. 

Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I appreciate you and the ranking member for calling this hearing 

together. 

And I would like to join my colleagues in welcoming the witnesses to this Subcommittee on Oversight and Investigations hearing on the Financial Stability Oversight Council and the Office Of 

Financial Research today. I look forward to this hearing. I look forward to hearing your comments. 

Both FSOC and OFR are a relatively new part of our regulatory 

framework created by Dodd-Frank. The Council provides, for the 

first time, comprehensive monitoring to assure the stability of our 

Nation’s financial system. 

Years without accountability for Wall Street and big banks 

brought us the worst financial crisis since the Great Depression: 

the loss of 8 million jobs; failed businesses; a drop in housing 

prices; and wiped-out personal savings. 

6 

The process we had in place for previous problems was insufficient, to say the least. The Council is charged with nothing short 

of seeing the next crisis coming down the road and helping regulators find ways to stop it from arriving at our doorstep. 

Together with OFR, the Council identifies threats to the financial 

stability of the United States, promotes market discipline, and responds to emerging risk to the stability of the United States’ financial system. 

Today’s testimony reminds us that FSOC and OFR can improve 

and augment the existing efforts. Key FSOC missions—to identify 

risk and respond to emerging threats to financial stability—are, at 

a fundamental level, inherently challenging, in part because risks 

to financial stability do not develop in the same way in successive 

crises. 

The GAO has identified several areas in which these key organizations can better fulfill their mission. 

I look forward to hearing more from the GAO, the FSOC, and the 

OFR today as we work together to ensure fulfilling our mission. 

Members of the panel, thank you for your testimony today. 

I yield back. 

Chairman MCHENRY. The gentleman from Florida, Mr. Ross, is 

recognized for 3 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

And being from Florida, where sunshine is very important, sunshine and the—arena has to do with transparency. And I note that 

the GAO report found that the public cannot easily monitor FSOC’s 

progress toward fulfilling its statutory purpose because it does not 

maintain sufficiently detailed records of its meetings and has not 

implemented a satisfactory policy to disclose those records. 

For example, FSOC’s many important committees, which consider policy matters before presenting such matters to FSOC’s 

council of voting and non-voting members, keep neither transcripts 

of their meetings nor minutes. 

The Council also does not transcribe its meetings, though it does 

keep certain meeting minutes. However, the minutes do not provide meaningful insight into the perspectives and insights shared 

at Council meetings due to vagueness. 

In addition, the Council does not publish a public agenda prior 

to each meeting, and FSOC’s one-and-a-half-page transparency policy is completely silent on the matter of public notice. 

Finally, the public generally cannot monitor the Council’s activities in person because it has historically conducted approximately 

two-thirds of its meetings in private in executive session, even 

though it is required to hold public meetings whenever possible. 

The Council’s meeting minutes do not provide a basis to determine whether the Council met in executive session consistent with 

FSOC’s transparent policies. 

With that, I yield back, Mr. Chairman. 

Chairman MCHENRY. I thank the gentleman. 

We will now welcome our distinguished set of witnesses for 

today. 

We have, for his first appearance on the House side of the Capitol, the Honorable Richard Berner, the Director of the Office of Financial Research (OFR). Prior to his confirmation as the OFR DiVerDate Nov 24 2008 19:06 Aug 20, 2013 Jkt 080873 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\80873.TXT TERRI
7 

rector, Dr. Berner served as a Counselor to the Secretary of the 

Treasury with a responsibility for standing up the OFR. He has 

held various positions in the public and private sector and on the 

public sector on the research staff of the Federal Reserve Board. 

He has a Ph.D. from the University of Pennsylvania, and has an 

undergraduate degree from a place called Harvard. 

Thank you, Dr. Berner, for being here. 

Mr. Amias Gerety is the Deputy Assistant Secretary for the Financial Stability Oversight Council. He previously worked for private consulting firms, as well as a Washington group, the Center 

for American Progress. He also has an undergraduate degree from 

Harvard University. 

And Ms. Nicole Clowers is the Director of the Financial Markets 

and Community Investment Division of the Government Accountability Office. She has been with the GAO for 14 years. She has 

a bachelor’s degree from Virginia Tech and a master’s in public administration from the University of Georgia—thank you for being 

the southern representative on the panel—and is a 2009 recipient 

of the Arthur S. Flemming Award for outstanding public service. 

Thank you all for your service to our people and within our government. 

Each of you will be recognized for 5 minutes. We have a lighting 

system that is very similar to what you see on the roads today. I 

hope you will recognize these lights more than we do those other 

lights on the public roads. There will be no red light cameras, but 

we ask you to summarize your statements. And for the record, your 

opening statements will be included in the record. 

And like the roads, green means go, yellow means hurry up, and 

red means stop, so you will have 1 minute to go when the yellow 

light comes on. 

With that, we will begin with Dr. Berner. 

STATEMENT OF THE HONORABLE RICHARD BERNER, DIRECTOR, OFFICE OF FINANCIAL RESEARCH, U.S. DEPARTMENT 

OF THE TREASURY 

Mr. BERNER. Chairman McHenry, Ranking Member Green, and 

members of the subcommittee, thank you for the opportunity to appear today on behalf of the Office Of Financial Research. 

In my remarks this morning, I will provide an overview of the 

OFR’s major accomplishments and priorities. I will also describe 

actions the OFR has taken in response to a report by the Government Accountability Office in September 2012. 

My written testimony provides more details on the significant 

progress that the OFR has made in fulfilling its primary data and 

research responsibilities, as well as in enhancing its transparency 

and accountability. 

As you know, Congress created the OFR through the Dodd-Frank 

Act to improve the quality of financial data available to policymakers, and to develop better tools and analyses to understand the 

risks in the financial system. 

The OFR supports the activities of the Financial Stability Oversight Council—also known as the Council. The OFR, the Council, 

and Council member organizations have complementary mandates, 

and our different perspectives are mutually beneficial. They enable 

8 

us to conduct comprehensive assessment and monitoring of threats 

to financial stability while avoiding duplication through regular collaboration and coordination. 

The OFR has built a new organization from the ground up, assembling a talented workforce and developing a technology infrastructure with the highest level of security. The Office is still a 

young organization, but it is now delivering on its mission in concrete ways. 

For example, the OFR is reporting regularly to the Council 

through its Systemic Risk Committee on developments in financial 

markets and activities, on financial stability measures, and on 

macroeconomic indicators. The OFR is also providing data and 

analysis to inform the work of the Council’s non-bank designation 

committee, including analysis of the asset management industry. 

And the OFR is providing data and staff support for the Council’s 

2013 annual report. Last July, the OFR published its first annual 

report, and will release its second one later this year. 

Many of the OFR’s early accomplishments involve collaboration 

on research and on data standards. In addition to its mandate to 

serve the needs of the Council, the OFR is required by statute to 

cultivate a network of academics, researchers, data scientists, and 

others to enrich and expand OFR capabilities. 

We are collaborating with the research and data communities 

through our research working paper series, our seminars and conferences, and our financial research advisory committee. 

We are also collaborating internationally on data standards 

which improve the quality of financial data and help reduce the reporting burden for industry. These standards facilitate our analysis 

of interconnections among financial firms and their counterparties, 

and help us to understand the transmission and amplification of 

stress across the financial system. In particular, the OFR has 

played a central role in the international initiative to establish a 

global legal entity identifier, a code that uniquely identifies parties 

to financial transactions and links their basic business card information. 

As we pursue the OFR’s agenda, we are committed to the highest 

level of transparency and accountability to the Congress and the 

public. We strongly support the GAO’s important oversight function 

and appreciate its constructive work in conducting its review. 

In response to the GAO report, the OFR has improved its communication with the public, further developed its strategic planning and performance management, and worked with the Council 

to assure a coordinated approach to achieving our shared mission. 

Chairman McHenry and other members of the subcommittee, 

thank you again for the opportunity to appear today. We welcome 

the oversight of this subcommittee, and we look forward to working 

with you and your staff to continue the critical task of promoting 

the stability of this Nation’s financial system. 

I would be happy to answer your questions. 

[The prepared statement of Dr. Berner can be found on page 58 

of the appendix.] 

Chairman MCHENRY. Thank you, Dr. Berner. 

Mr. Gerety? 

9 

STATEMENT OF AMIAS M. GERETY, DEPUTY ASSISTANT SECRETARY, FINANCIAL STABILITY OVERSIGHT COUNCIL, U.S. 

DEPARTMENT OF THE TREASURY 

Mr. GERETY. Thank you. 

Chairman McHenry, Ranking Member Green, and members of 

the subcommittee, thank you for the opportunity to appear here 

today to discuss the Financial Stability Oversight Council’s role in 

implementing key reforms of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act. 

This month marks the 5-year anniversary of the failure of Bear 

Stearns and the start of the financial crisis, and the biggest recession our country had experienced since the Great Depression. 

Those events in turn led to President Obama signing the most comprehensive set of financial reforms in 80 years into law in the summer of 2010. 

One of the Dodd-Frank’s key reforms was the creation of the Financial Stability Oversight Council, the first Federal entity vested 

with clear responsibility for comprehensive monitoring of the stability of our Nation’s financial system. 

The Council’s statutory mission is to identify risks to the financial stability of the United States, promote market discipline, and 

respond to emerging threats to the stability of the U.S. financial 

system. Since its creation, the Council has worked to fulfill this 

mission and promote coordination among its members. 

To that end, one of the Council’s first actions was the development of an organizational structure that fostered open and frank 

discussion, collaboration, and coordination. Through the creation of 

standing interagency staff committees, the Council’s work draws 

upon the collective policy and supervisory expertise of its members. 

The Council has convened 28 times, has published 2 annual reports and 6 additional studies or reports, and has designated 8 financial market utilities as systemically important. 

The Council has also played an active role in coordinating the 

regulatory response to significant events, such as Superstorm 

Sandy. The Council is also firmly committed to operating in an 

open and transparent manner. At its first meeting, the Council 

adopted a transparency policy which provides that Council meetings will be open to the public whenever possible and not less than 

twice each year. The Council has had 9 open sessions in its first 

21⁄2 years. 

The Council’s annual report is also a key accountability mechanism that provides transparency to the public and to Congress 

about the Council’s activities over the previous year and its forward-looking assessment of the Council’s priorities. 

The Council’s rulemakings on designations of non-bank financial 

companies and financial market utilities also demonstrate its commitment to transparency. Although these rules were not statutorily 

required, the Council believed it was important to provide the public with insight into how the Council intended to evaluate these potential designations. 

The Council is now in the final stages of evaluating an initial set 

of non-bank financial companies for a potential designation which 

will subject them to enhanced prudential standards and supervision by the Federal reserve, closing an important regulatory gap. 

10 

During the past 21⁄2 years, the Council staff has also been 

pleased to work with a number of teams from the Government Accountability Office as they have conducted multiple reviews of the 

Council’s activities. 

The GAO report published in September 2012 highlighted a 

number of examples of how both the Council and the OFR have 

demonstrated transparency and accountability while carrying out 

their respective missions to safeguard the stability of our financial 

system. 

The reports also made a number of recommendations to further 

enhance the progress that each organization has made in these important areas. The Council and the OFR provided a joint response 

to Congress and the GAO outlining the actions taken and planned 

in response to each recommendation, described in more detail in 

my full written testimony. 

The Council remains firmly committed to promoting transparency and accountability in connection with its activities, and 

takes the GAO’s recommendations seriously. 

I appreciate the invitation to appear here to provide this update 

on the Council’s responses to the GAO report, and I look forward 

to your questions. 

Thank you. 

[The prepared statement of Mr. Gerety can be found on page 89 

of the appendix.] 

Chairman MCHENRY. Ms. Clowers, you are recognized for 5 minutes. 

STATEMENT OF A. NICOLE CLOWERS, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. CLOWERS. Good morning, Chairman McHenry, Ranking 

Member Green, and members of the subcommittee. Thank you for 

the opportunity to be here today to discuss our work on FSOC and 

OFR. 

As you know, the Act established FSOC and OFR to address regulatory weaknesses highlighted by the recent financial crisis, 

namely the lack of an agency responsible for monitoring risk across 

the financial system and a shortage of timely information to facilitate that oversight. 

Although Congress set up some accountability mechanisms for 

FSOC and OFR, Members of Congress have questioned whether 

more needs to be done to ensure FSOC and OFR use their authorities as Congress intended. 

In my comments today, I will discuss three issues: first, the challenges that FSOC and OFR face in carrying out their missions; second, the steps the entities have taken to carry out their responsibilities; and third, GAO’s recommendations to FSOC and OFR. My 

comments are based on our September 2012 report. 

First, FSOC and OFR face several challenges as they work to 

achieve their missions, namely the Dodd-Frank Act left most of the 

fragmented regulatory structure in place. As a result, FSOC’s ability to provide a more comprehensive view of the threats to financial 

stability hinges on the collaboration among its many members, almost all of whom have their own independent regulatory viewpoint. 

11 

Second, despite this and other challenges, FSOC and OFR have 

taken steps to carry out their responsibilities. For example, FSOC 

established multiple standing committees to carry out the business 

of the Council. One of the committees, the Systemic Risk Committee, is responsible for monitoring risk for the Council. OFR participates on this committee. OFR is also building capacity to monitor threats to financial stability. 

The third and final topic that I would like to discuss today is the 

recommendations from our September report. We made 10 recommendations to FSOC and OFR, and I would like to briefly highlight a few of those recommendations that are related to the agencies’ core missions: transparency; and accountability. 

To better position FSOC to achieve its core missions, we recommended that FSOC develop a systematic approach to help identify potential threats to financial stability. While the Systemic Risk 

Committee may help FSOC analyze known risk, it does not take 

full advantage of member agency resources to identify new threats. 

In addition, we found that FSOC does not have a process for consistently identifying new threats, separating them from well-known 

threats, or prioritizing them. As a result, policymakers and market 

participants do not have the information they need to develop effective and timely responses. Therefore, we recommended that FSOC 

develop more systematic, forward-looking approaches for reporting 

on emerging threats. 

Related to transparency, we recommended, among other things, 

that FSOC keep detailed records of closed-door meetings. While no 

specific level of detail is required in FSOC minutes, the limited 

documentation of the discussions makes it difficult to assess 

FSOC’s performance. For instance, the meeting minutes typically 

describe agenda items for the meetings, and information on the 

presenters for each agenda item, but lack additional detail. As a result, the Congress and the public receive limited information on the 

FSOC’s decision-making. 

Finally, related to accountability, the Congress intended that the 

designation of the financial companies for enhanced supervision 

would lead to greater financial stability. The designations will likely have other significant benefits and costs for the designated companies as well as potentially the Nation’s economy. 

Given these potential impacts, we recommended that FSOC 

should comprehensively evaluate whether the designations, once 

made, are having their intended impact. 

In conclusion, Mr. Chairman, although fully addressing our recommendations may take time, doing so will help FSOC and OFR 

shed more light on their decision-making and allow the Congress 

to hold them accountable for results. 

Furthermore, addressing our recommendations can help FSOC 

and OFR to enhance collaboration among its FSOC members, 

which is critical to their ability to achieve their missions. 

We will continue to monitor the entities’ progress in implementing our recommendations, and we stand ready to assist Congress as it continues its oversight. 

Chairman McHenry, Ranking Member Green, and members of 

the subcommittee, this completes my prepared statement. I would 

be happy to answer questions at the appropriate time. 

12 

Thank you. 

[The prepared statement of Ms. Clowers can be found on page 65 

of the appendix.] 

Chairman MCHENRY. Thank you all for your testimony. 

I now recognize myself for 5 minutes. 

The GAO report was issued in September of last year. The FSOC 

has met 8 times since then. 

Mr. Gerety, has the GAO report been discussed at the Council 

level? 

Mr. GERETY. Thank you, Mr. Chairman. 

The GAO report has been discussed at length among the staff 

committees, in particular among the deputies’ committee, but has 

not been discussed by the Council members itself, as our minutes 

suggested. The Council is aware of the oversight, and so we presented on that topic more generally, rather than the specifics of 

this report. 

Chairman MCHENRY. At the subcommittee level. How many subcommittees are there? 

Mr. GERETY. In particular, the deputies’ committee has discussed 

this topic as it has discussed a significant number of topics before 

this. 

Chairman MCHENRY. Is there a transcript I could find of those 

discussions? 

Mr. GERETY. The Council does not keep transcripts of staff meetings. 

Chairman MCHENRY. Is there an agenda of those staff meetings 

that I could find? 

Mr. GERETY. Congressman, the Council endeavors to— 

Chairman MCHENRY. Is the answer no? 

Mr. GERETY. We do not publish agendas of staff meetings. 

Chairman MCHENRY. Okay. Now, at the full FSOC committee, 

there are 10 recommendations from the GAO on a very important 

agency. Two and a half years after Dodd-Frank was passed, we still 

don’t have the ability, we have the minutes that are typically two 

to five pages, one is actually a page-and-a-half if you include the 

number of attendees. Do you have any intention of providing transcripts of the FSOC meeting? 

Mr. GERETY. Congressman, I can’t speak on behalf of the Council. The Council is actually made up of its members and— 

Chairman MCHENRY. Certainly. But you are here on behalf of 

the Chairman of that Council at the direction of the FSOC. 

Mr. GERETY. That is correct. What I can say is with respect to 

the issue of transparency, and I think that the recommendations 

that the GAO made are ones that we take seriously, and we have— 

Chairman MCHENRY. How do we know that you take them seriously if we have no documentation you have had these discussions? 

Mr. GERETY. Sir, for example, in the Council’s letter to the Congress and to the GAO, we talk about the steps already taken and 

additional steps. For example, one of the GAO’s recommendations 

was about the transparency of our Web site. In December of 2012, 

the Council made a number of steps to improve that Web site to 

make it more navigable, to provide updates that people can sign up 

for e-mail updates based on— 

13 

Chairman MCHENRY. I appreciate that. That is nice. And that is 

a nice step. To your point about the Mary Miller letter on behalf 

of the Treasury Secretary, the Assistant Secretary of the Treasury, 

the response to the GAO report, that 60 days that I acknowledged 

in my opening statement, I find it peculiar that it was on behalf 

of the Treasury Secretary. Was there a vote of the FSOC for this 

response by a Treasury official? 

Mr. GERETY. Sir, this response was prepared in consultation with 

all of the FSOC members. 

Chairman MCHENRY. Okay. Where can we find documentation of 

that consultation? 

Mr. GERETY. Congressman, the consultation process is consistent 

with a very collaborative and open framework among the Council 

members, so the natural process of course is to circulate drafts, collect comments, and then to produce that. 

Chairman MCHENRY. And this is what the GAO has designated 

as a problem area within the 10 recommendations, that there is not 

transparency within FSOC to the public or the regulated communities. This is what is so deeply disturbing about the intention of 

FSOC to mitigate the next financial crisis when you can’t even disclose the meeting minutes, like the Federal Reserve does, the transcripts of your meetings. When the Federal Reserve is a greater 

discloser of information than you at the FSOC, I think that is a 

major concern. 

Now, Ms. Clowers, is it fairly typical that the regulated agency, 

when you give a report, actually have consultation on your report? 

Ms. CLOWERS. Yes. When we provide a report for comment, typically the agencies will respond within 30 days. And in doing so, 

they will have consulted with people within their agency. 

Chairman MCHENRY. Does the fact that a Treasury official has 

to respond for the FSOC raise some of your concerns within your 

report? 

Ms. CLOWERS. Who signs the report can vary by agency and the 

topic at hand. So the fact that Ms. Miller signed for the chairperson is not that unusual. But I think that it does reflect some 

of the issues we raised in the report in terms of the Council and 

the decision-making, trying to reach consensus on certain issues. 

Chairman MCHENRY. Okay. Thank you for your testimony. 

This highlights the fact that the current FSOC measure of disclosure is simply not working, as the GAO report highlights and as 

my questions illuminate. 

I now recognize the ranking member for 5 minutes. 

Mr. GREEN. It is our tradition to recognize the ranking member 

of the full committee whenever the ranking member is present. So 

I will yield to the ranking member of the full committee, Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Green. 

FSOC and OFR are central to the overarching objectives of Wall 

Street reform, and I want to have you further expound on the work 

that your standing committees are undertaking to assist in the 

Council’s goals and objectives. 

How do these committees collaborate and facilitate communication between individual member agencies? 

Mr. GERETY. Thank you, Congresswoman. 

14 

I think this is an important topic, and one of the first actions of 

the Council was to create an open and collaborate framework 

through these interagency staff committees. In particular, the 

FSOC’s deputies’ committee meets biweekly. It covers a range of 

topics. Most importantly, it covers topics related to coordination, 

the Council’s agenda, and how to address issues before the Council. 

In addition, the deputies’ committee helps facilitate the work of 

the other staff committees that are dedicated to particular topics. 

The Systemic Risk Committee—which we have already mentioned 

this morning—meets monthly and creates a framework for all of 

the supervisory and market expertise of the regulatory members of 

the FSOC. The non-voting members come together and discuss 

risks to the financial system, trends in financial markets, and macroeconomic indicators, and use that process to develop and understand potential threats to financial stability. Those processes obviously build into a really important accountability document, which 

is the FSOC’s annual report. The FSOC’s annual report is a comprehensive document. It looks at significant financial market developments, significant regulatory developments, and it tries to identify potential emerging threats and to make recommendations. 

In addition, each of the members of the Council is required to 

sign a statement to Congress identifying the recommendations that 

they believe are necessary to promote our financial stability. And 

over the past 2 years, each of those members has signed a statement, along with the FSOC’s annual report, saying that those recommendations are the most important to promote financial stability. 

Ms. WATERS. The GAO expressed concerns with FSOC and OFR’s 

lack of transparency in its decision-making process. While the GAO 

report makes good recommendations, I am concerned about how 

FSOC will balance transparency with its responsibility to maintain 

the confidentiality of market-sensitive information. 

Can you discuss how FSOC has attempted to strike the right balance? 

Mr. GERETY. Yes, Congresswoman. 

I think this is an important issue, which is the balance between 

the confidentiality of supervisory information, the confidentiality of 

market sensitive analysis, and the importance of being transparent 

and accountable. I think the GAO has recommended a number of 

areas where we can improve that transparency and accountability. 

I think we have already taken some steps, and I think on the 

basis of this conversation and the continuing dialogue with the 

GAO, there are certainly more steps that we can consider over time 

and revisit that transparency and policy over time to make sure 

that balance is struck correctly. 

However, I would also note that on a number of the topics that 

have been discussed here today, there has been tremendous pressure on the other direction. For instance, in the non-bank financial 

company designations process, the companies have expressed, and 

market participants have expressed deep concern about the nature 

of confidential information and the nature of those deliberations. 

And so in striking that balance the Council has always tried to 

strive to protect confidential supervisory information so that we 

have an open dialogue within the regulatory community, while also 

15 

publishing and getting public input on decisions made by the Council through a notice and comment process, which we have done in 

significant studies in the past. 

Ms. WATERS. Thank you very much. 

In testimony before the Senate, Fed Governor Dan Tarullo expressed concerns with areas of systemic risk that remain a challenge for the Fed on financial stability. Can you discuss OFR’s research and analysis of the tri-party repo market, as well as current 

proposals to address the clearing of banks’ significant exposure to 

credit risk? 

Mr. BERNER. Thank you, Congresswoman. 

That is an important issue, our work on the tri-party repo market and on short-term funding markets in general are extremely 

important for the analysis of financial stability. Those issues have 

been discussed at length in both FSOC annual reports and in our 

OFR annual report that was published in July of last year. 

We continue to do work on those issues. As you know, steps have 

already been taken to mitigate some of the risks in the tri-party 

market. In the United States, however, there are three parts to the 

repo market. And the other two parts—namely the bilateral or socalled DVP market, and the GTF market—are less widely discussed, but they may contain their own risks. 

In seeking to analyze and to measure the risks in those markets, 

we are working with other Council member agencies, in this case 

specifically the Federal Reserve, to improve the quality and scope 

of data on those markets, to analyze the data that are available, 

which as far as we know have not yet been analyzed. And— 

Chairman MCHENRY. The gentlelady’s time has expired. 

If you can summarize? 

Mr. BERNER. Sure. And we plan to do further work in that area 

for the benefit of the Council and for the Fed. 

Ms. WATERS. Thank you very much, Mr. Chairman. I yield back. 

Chairman MCHENRY. Let the record reflect that the time was not 

appropriately recognized. This was the gentlelady’s time, not the 

ranking member of the subcommittee’s time. I just want that to be 

reflected, and without objection, that is so ordered. 

We will now recognize the chairman emeritus of the full committee, the gentleman from Alabama, Mr. Bachus. 

Mr. BACHUS. Thank you. 

Director Clowers, coordinating or facilitating coordination between the agencies for rulemaking and supervision enforcement actions and reporting requirements as part of FSOC’s explicit duties, 

if you were to assess FSOC’s ability to coordinate agency rulemaking as of the time you completed your recent study, what 

would your assessment be? 

Ms. CLOWERS. This was related to one of the recommendations 

that we did make for FSOC, that we have seen steps that they 

have taken to promote collaboration and coordination, including development of the road map and the consultation framework. But we 

thought more could be done. 

And in fact, in 2011 we recommended that FSOC develop a formal policy that would outline when coordination should take place, 

who should be involved, and what to do when you have conflicting 

views. 

16 

We think that there is a greater role for FSOC to play in coordinating the many Dodd-Frank rulemakings. FSOC has told us that 

they lack the authority to force members to coordinate. The regulators have also expressed some concerns about maintaining their 

independence. 

But we think that the balance can be struck in both maintaining 

a regulator’s independence and still have FSOC play a greater role 

in this area. 

Mr. BACHUS. All right. 

Deputy Secretary, could you write to the committee and tell us 

what you think your lack of authority is? Because I think you will 

agree that coordinating between the agencies is—if you don’t, you 

are going to have a fragmented market. And you are also going to 

have migration of certain activities to unregulated areas, like you 

had in 2006, 2007, and 2008. 

Would you do that? 

Mr. GERETY. Congressman, I would be glad to respond in more 

detail. 

However, I would note that there is a distinction between the responsibilities that the Council has, which are to collaborate and coordinate across its member agencies, and the authority that it may 

have— 

Mr. BACHUS. Yes, and I am just saying, lay out in your letter 

what you think your duties are, what you think you lack, and what 

you say that the Director has said that some of the agencies have 

expressed a pushback against you. We would like to know the specifics. 

Mr. GERETY. Importantly, the Dodd-Frank Act, when creating 

the Council, did not change the fundamental statutory independence of the regulatory agencies that make up the Council’s membership. 

Mr. BACHUS. Yes, but you were actually designated by statute to 

coordinate that rulemaking. So just tell us what your limitations 

are, what you need, or why you can’t. 

A follow up to that is if they fail to coordinate rulemaking, both 

internally with domestic regulators and with foreign regulators, 

and I know the E.U. has expressed some real concerns in this regard, could that lead to disruptions in the U.S. economy? Director 

Clowers, for instance, with the CFTC rulemaking on derivatives, I 

think it has already, according to The Wall Street Journal and others, led to some fragmentation. 

Ms. CLOWERS. Right. We have done a series of reports looking at 

the importance of coordination among agencies, both in their normal activities as well as rulemaking. And when agencies aren’t appropriately coordinating, it can lead to conflicting rules, duplication, or even potential gaps. 

Mr. BACHUS. Thank you. 

Do you agree with that, Deputy Secretary? 

Mr. GERETY. Congressman, I think the importance of coordination across the implementation of Dodd-Frank is crucially important. 

I would note on the issue that you raised, it was an issue the 

Council takes seriously and was discussed by the Council members 

in December of last year. 

17 

Mr. BACHUS. Sure. And issuing no-action letters is not a solution. 

You understand that? 

Mr. GERETY. Congressman, I think what you are referring to are 

actions by the CFTC. 

Mr. BACHUS. Yes. But you would agree that is not what is intended? 

Mr. GERETY. Congressman, I don’t think I can comment on the 

specific regulatory actions by the CFTC. But I think the important 

points that you raised about the importance of regulatory coordination, both domestically and internationally, are central to the 

Council and to the Treasury as well. 

Mr. BACHUS. Yes. Would you be willing to sit down with the subcommittee chair, Chairman McHenry, and staff and our committee 

Chair, and tell us what you believe we can do, or if there are failures in the Act or the statute, let us know what those are? 

Mr. GERETY. Congressman, we would be glad to work with you 

or with your staff to talk about challenges in implementation of the 

Act. I think that there is a lot of good work being done and most 

importantly, I think there is a lot of evidence that regulators are 

working through the issues that you are raising. 

Mr. BACHUS. Thank you. 

Chairman MCHENRY. I thank the former chairman of the full 

committee, and I will now recognize the ranking member of the 

subcommittee, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

Let me start with our representative from GAO. You have indicated that some things ‘‘can lead to,’’ but you did not say ‘‘have led 

to,’’ nor have you said they ‘‘will lead to.’’ And I want to use this 

moment to clarify, because this coordination issue is something 

that is important, but it is not something that has led to anything 

that is negative. Is this a correct statement? 

Ms. CLOWERS. I would give one example of where better coordination in terms of the sequencing and timing could have been improved. Specifically, FSOC put out its rule on designating non-bank 

financial companies before the Federal Reserve had defined what 

it means to be predominantly engaged in financial activities. 

And so, that is an example of where we heard from the industry 

this isn’t helpful in terms of the sequencing. 

Mr. GREEN. I understand. 

But the point is that nothing has been done that has led to an 

adverse impact on the economy. That was what the question had 

to do with when you addressed it. Is this a fair statement? 

Ms. CLOWERS. This is a fair statement. 

Mr. GREEN. Okay. 

And you have also indicated that some good things have been 

done with FSOC. Reiterate, if you would, some of the good things 

that have been done. 

Ms. CLOWERS. Certainly. One example, as Mr. Gerety has talked 

about already, is the committee structure that FSOC set up in 

terms of interagency makeup of those committees and the work 

that gets done at the committee level. 

In addition, FSOC has met all its mandated study requirements 

and issued two annual reports that are comprehensive and contain 

information for the public. 

18 

OFR has been working to stand up an agency while fulfilling its 

mission, which is a challenge, and they have been working to hire 

and retain top talent. 

In addition, OFR has developed a working paper series to examine critical issues facing the Nation. 

Mr. GREEN. And while you have some recommendations, is it fair 

to say that you did not and your report does not connote or denote 

any fatal flaws? 

Ms. CLOWERS. We identified a number of areas where we think 

improvements could be made— 

Mr. GREEN. I understand improvements, but you haven’t identified any fatal flaws. 

What I am trying to do is make the record clear as to your—you 

have recommendations, but you have not concluded that there are 

fatal flaws in this process and that they will take some time to 

work out the recommendations that you have called to our attention. Is this a fair statement? 

Ms. CLOWERS. Yes. 

Mr. GREEN. Thank you. And the truth is that with new startups 

the size of FSOC and OFR, it takes some time to develop systems 

and techniques and methodology. Is this true? 

Ms. CLOWERS. Yes. 

Mr. GREEN. And is it true that while you have given your recommendations, you also understand that as time progresses, they 

will have greater opportunities to do greater things. And when you 

re-examine, conceivably these things can be remedied. Is that a fair 

statement? 

Ms. CLOWERS. We believe all the recommendations we have 

made could be implemented and would improve both agencies. 

Mr. GREEN. Now, let me go quickly to the representative from 

FSOC. 

You indicated that you have issued two annual reports. You have 

designated two entities as significantly important. And you have 

had nine open session meetings. Is that correct? 

Mr. GERETY. That is correct. 

Mr. GREEN. Can you just elaborate a little bit on how you work 

with the various entities to produce the work product that you 

have called to our attention? 

Mr. GERETY. Thank you, Congressman. I think that the work 

products process that we have established, as Ms. Clowers identified, is primarily through interagency standing committees. 

The Council has 15 members—10 voting members, 8 of whom are 

independent regulatory agencies, plus the Treasury Secretary and 

an independent member with insurance expertise. In addition, 

there are three members from the State regulatory community, as 

well as Dr. Berner and the Director of the Federal Insurance Office. 

So we have a very wide diversity of views and we have benefited 

greatly from an open and collaborative process that runs through 

committees that allow all 15 members of the Council to engage, 

even on topics that are a little bit outside of their natural expertise. 

And we think that is very important, because one of the key lessons of the crisis is that sometimes things that are happening in 

19 

one area of the financial system could have impacts in other areas 

of the financial system. 

One of the great examples of this, in terms of the Council’s recent history, is in Superstorm Sandy. And what you saw is that the 

Council met at the principal-level 2 times in 2 days. 

And what we really saw in that instance was the benefit of having Federal regulators, both securities and banking, on the same 

phone call together, and also the benefit of State regulators, so we 

were able to get the State banking commissioner perspective on the 

operational challenges in New York, New Jersey, and other affected 

areas, as well as preliminary loss estimates, both at the Federal 

and State levels. 

I think we have seen that this open and collaborative approach 

allows that vast expertise of the membership of the Council to really contribute on a range of issues that come before the financial 

system. 

Chairman MCHENRY. The gentleman’s time has expired. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman MCHENRY. I thank the ranking member. 

Now, we will recognize the vice chairman of the subcommittee, 

Mr. Fitzpatrick, for 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

As I indicated in my opening statement, the FSOC is currently 

considering subverting at least one lawful deliberative decision that 

the Security and Exchange Commission is making or is in the process of making regarding rulemaking and money market funds. 

So my question is to you, Mr. Gerety—and I would ask that any 

of the panelists consider responding if you agree or disagree—do 

you believe that an FSOC designation of money market funds for 

enhanced Fed supervision is an appropriate and adequate alternative to the SEC changing the rules that apply to these funds? 

Mr. GERETY. Congressman, I think that you raised an important 

issue, which the Council has discussed on a number of occasions 

and in its annual report, which is the question of further reforms 

to address structural vulnerabilities in money market funds. 

I think the points that you make are important, for the following 

reasons: One—and the Council has recognized this repeatedly, the 

SEC has clear statutory and regulatory authority to address money 

market funds. 

The second thing that I think I would highlight in the Council’s 

actions is that the Council has worked very closely with the SEC 

staff and SEC Chairman Schapiro and now Chairman Walter on 

the consideration of these reforms. 

Moreover, what the Council did last fall was not an action that 

would subvert the process of the SEC but rather encourage a public 

dialogue on the reforms that the SEC has considered and is considering. 

We thought that by putting forward public recommendations consistent with Section 120 of the Dodd-Frank Act about an issue that 

relates specifically to money market funds from a regulatory perspective, but could have broader impacts on the financial system, 

we were able to get public comment, public input, and also create 

a more public dialogue about these reforms under consideration. 

20 

Obviously, the first choice is for the SEC to take action. That is 

something that the Council has made clear. 

Mr. FITZPATRICK. The SEC process at this point, would you call 

it deliberative, the process that agency is engaged in? 

Mr. GERETY. As I understand it from the conversations with SEC 

staff, and with Chairman Walter and Chairman Schapiro, they are 

engaged in collaborative and a deliberative process within the SEC. 

Mr. FITZPATRICK. Certainly, it is lawful, correct? 

Mr. GERETY. That is my understanding— 

Mr. FITZPATRICK. And it is currently in process, isn’t that right? 

Mr. GERETY. That is correct. 

Mr. FITZPATRICK. So is it appropriate to recommend that an 

agency take a particular action under Section 120 of Dodd-Frank 

in cases where the agency is still considering the matter and is still 

in deliberation? 

Mr. GERETY. Under the authority in Dodd-Frank, the recommendation authority under Section 120 authorizes the Council 

to make recommendations to an agency when it feels that there is 

an issue that could pose a threat to financial stability. The proposed recommendation that the Council put out is precisely to 

make a proposed recommendation and to engage in a public dialogue and get public comment on that issue of concern. 

Mr. FITZPATRICK. Does the FSOC have greater expertise in an 

area regarding SEC’s deliberation more so than that latter agency? 

Mr. GERETY. Congressman, as I mentioned earlier, the Council 

staff both at the Treasury and in other member agencies worked 

closely with SEC staff and with Chairman Schapiro to have the 

benefit of their expertise. But this issue, while directly related a 

particular matter of money market funds, also has broader implications for short-term funding markets and the stability of the financial system. 

Mr. FITZPATRICK. Nothing further. I yield back. 

Chairman MCHENRY. If the gentleman would yield? 

I certainly appreciate the gentleman yielding. 

So it is an intention of FSOC to make regulations that sometimes 

get bottled up in other regulatory—independent regulatory agencies? 

Mr. GERETY. Mr. Chairman, if I may, the Council’s action was to 

make recommendations not regulations. 

Chairman MCHENRY. Okay. 

So you made recommendations on money market funds. FSOC 

made recommendations on money market funds because the SEC 

could not come to what the FSOC thought was an appropriate conclusion. 

Mr. GERETY. The Council’s action was to make a proposed recommendation. It is an issue that has been highlighted in two previous annual reports and an issue that on which we have consulted 

closely with SEC staff and with Chairman Schapiro. 

Chairman MCHENRY. Is this interference by the FSOC? 

Mr. GERETY. The authority that I think you are referring to is 

a Section 120 authority. It was created by the Dodd-Frank Act. 

And what the essence of the authority says is that where there are 

issues that relate to financial stability, the Financial Stability 

Oversight Council should go through a public dialogue to make— 

21 

Chairman MCHENRY. Is this an example of FSOC using the SIFI 

designation as a threat? 

Mr. GERETY. Mr. Chairman, I think it is important to distinguish 

between two different things. One is the Section 120 authority, 

which the Council has done, has made a proposed recommendation, 

engaged in a public dialogue about further reforms to money market funds. The second thing that you are referring to is a question 

about how the Council may use its non-bank designation authority. 

Certainly, the Council has the authority to designate any nonbank financial company whose material financial distress would 

pose a threat to financial stability. The Council has not decided 

whether to use that authority in that instance. The Council has not 

decided whether to use that authority in any instance at this point. 

We have laid out a rulemaking process and guidance on that. 

And I would further say that the statute makes clear that any nonbank designations must be firm-specific rather than to the industry 

as a whole. 

Chairman MCHENRY. All right, but those two powers wouldn’t be 

mixed? No one would mix two powers? 

We will just yield to the gentleman from Missouri for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Let’s stay on the non-banks. I want to actually—all three of your 

comments, but maybe Mr. Gerety and Mr. Berner more so. 

Do you believe that non-banks should be declared systemically 

important financial institutions, Mr. Berner? 

Mr. BERNER. Congressman, thanks for your question. 

It is really up to the Council to decide on this process, as Mr. 

Gerety indicated. That is firmly embedded in the rulemaking process for the Council. 

Mr. CLEAVER. Okay. Maybe the question is—maybe we have to 

go back to go forward. I am thinking AIG, which is a non-bank. We 

sat on this committee after the failures began with Lehman Brothers and we—whether we had a lot of time to think about it or not 

is irrelevant at this point. I am thinking about what we did, because we thought that this was the end of the world coming when 

George Bush sent over his Secretary of the Treasury, Fed Chairman Bernanke, and SEC Chairman Cox, sitting right there at that 

table telling us what they saw coming. 

So it important, at least to me, to find out whether you think 

there was a contagious run or whether there was a connectivity 

that could have rippled and continued to do devastation to the 

economy. 

Mr. GERETY. Congressman, I think the issue that you are raising 

is really central to one of the authorities that was given to the 

Council in Dodd-Frank. I think there are three really important 

points to make about the non-bank designations. 

First, we generally believed that the institution that posed the 

largest risk should be subject to the toughest standards. 

Second, we have to understand that the institutions that posed 

such risk may or may not be structured in a way that they would 

be prudentially regulated. They may or may not be banks or bank 

holding companies. 

And third, we have to recognize that the financial system is naturally going to change over time. When you put those three things 

22 

together, what you realize is that—and what, I think, is embedded 

in Dodd-Frank, is a perspective that the Council must have the authority to regulate firms based on the risk that they pose and not 

the corporate form that they choose. 

So when going through the non-bank designations process, what 

the Council is deliberating on is which firms pose significant risk, 

and therefore should be subject to tougher liquidity, tougher capital, and tougher supervision by the Federal Reserve. And that is 

the nature of the designation. It is not some sign one way or another. But what it says is that firms which pose a significant risk 

should be subject to tough standards. 

Mr. CLEAVER. Thank you. 

Ms. Clowers? 

Ms. CLOWERS. GAO has recognized that risk can come from all 

sectors of the financial system, including non-banks. 

Mr. CLEAVER. Thank you. 

With my little time remaining, I am concerned because, unfortunately, there is a lot of bashing of Federal employees that goes on. 

You can always get an ‘‘attaboy’’ if you say something negative 

about Federal employees. And I would like to know from you, Mr. 

Gerety, whether or not you think that you have the capacity to go 

out and compete with the private sector to get the very best people 

possible to work with the Federal Government, realizing that they 

could make much, much more in the private sector? 

And do you think that when we disparage the workers in the 

public sector, and then constantly say you can’t get any pay increases, that is in any way helpful to the country or to your operation, Mr. Gerety? 

Mr. GERETY. Congressman, we have had success attracting very 

talented people, but I agree that the payscale of Federal Government employees is lower than what comparably talented people 

would achieve in the private sector. 

But the passion that people bring to public service is something 

from which we benefit. 

Mr. CLEAVER. That is exactly what I expected you to say. And 

it is also something that is troublesome to me. 

Just continuing to see what you didn’t address, and I understand 

why you didn’t do it, the kind of battering that you take. 

Thank you, Mr. Chairman. 

Chairman MCHENRY. Thank you. 

And we will now go to Mr. Ross, of Florida. 

Mr. ROSS. Thank you, Mr. Chairman. 

Mr. Gerety, I want to address an area of non-bank financial companies with you, specifically with regard to insurance companies. 

Even though they are regulated by State pursuant to the 

McCarran-Ferguson Act, it is your understanding and, of course, 

FSOC’s appreciation that they are systemically important financial 

institutions, correct? 

Mr. GERETY. Congressman, I wouldn’t say the Council has made 

that determination. 

Mr. ROSS. But it is true in your example that you just had there 

that you coordinated it with Hurricane Sandy in dealing with the 

solvency, I guess, of these institutions, being able to meet their risk 

23 

when they had the issues in the Northeast with the catastrophe of 

Hurricane Sandy. 

Now, my concern is that you probably have at least two companies, insurance companies, that may be considered SIFIs, is that 

true? 

Mr. GERETY. Congressman, the Council has made a decision not 

to comment on specific companies until final determination. 

Mr. ROSS. Do you think that insurance companies at all are considered systemically important financial institutions? 

Mr. GERETY. Congressman, I think that, as I mentioned a moment ago, the issue is not whether the— 

Mr. ROSS. Wait a second now—but you also talked about risk. 

And there is a different element of risk with regard to insurance 

companies. They base on risk-based capital in terms of what their 

long-term risk is going to be as opposed to just statutory accounting principles that apply to most financial institutions. 

So my question to you is, if you have insurance people on the 

Council, is it your testimony today that insurance companies are 

not going to be considered systemically important financial institutions? 

Mr. GERETY. I would make a distinction between the importance 

of insurance in the financial system, which is undeniable— 

Mr. ROSS. Would that be why the GAO report, then, explains 

that there is insufficient staff support for these insurance people 

who are on the committee? 

Mr. GERETY. The Council has three members with insurance expertise— 

Mr. ROSS. But you agree that the GAO report indicated that they 

have insufficient staff support? Is that true? 

Mr. GERETY. So— 

Mr. ROSS. Ms. Clowers, is it true that your report indicates that? 

Ms. CLOWERS. Right—in our report we note that the insurance 

representative, for example, doesn’t have the entire agency as the 

other member agencies would have to draw on those resources. 

Mr. ROSS. Mr. Gerety, has the Council gone out to the National 

Association of Insurance Commissioners to ask for advice and guidance as recommended by Dodd-Frank? 

Mr. GERETY. The Council has on its membership, as you know, 

three— 

Mr. ROSS. I know it has the membership, but has it gone out? 

Has it reached out to the public? Has it reached out to any associations with expertise for guidance in terms of trying to determine 

whether insurance companies are going to be systemically important financial institutions? 

Mr. GERETY. Congressman, it has reached out, both to the public 

and to insurance experts— 

Mr. ROSS. Are there any records of that? 

Mr. GERETY. Yes, sir, absolutely. The— 

Mr. ROSS. Are there just minutes or are there records? 

Mr. GERETY. The non-bank designations process took—made an 

affirmative decision to go through a rulemaking and get public 

comment, not just on an ANPR, an advanced notice of proposed 

rulemaking, but on two separate proposed rulemakings. 

24 

And in addition, we have started, with the help of Director Huff, 

who sits on the Council, to create information-sharing agreements— 

Mr. ROSS. So this is—most likely, they are going to be SIFIs. But 

let me move on to another issue, and that is the Volcker Rule. I 

firmly agree that banks should not be involved in proprietary trading when they are using insured deposits. There is no question 

about that. When we are talking about making markets, it gets a 

little bit more difficult. But where we are running into real difficulty is the diversity of opinions from agencies as to what and 

when the Volcker Rule will apply. 

And I direct your attention to a letter of December 20th from the 

Bipartisan Policy Center—and I believe you may have a copy of 

this—but their concern is that the adoption of the Volcker Rule 

should be consistent among all agencies. Would you not agree? 

Mr. GERETY. Congressman, I think that is an important point, 

and the Treasury has a statutory coordination rule on the Volcker 

Rule. I think one thing that is key to note in the experience that 

we have seen so far—although the statute doesn’t require substantively identical rules— 

Mr. ROSS. But the impact of not having a consistent rule is going 

to be devastating on the financial industry. Would you not agree? 

There has to be some consistency, in not only interpretation, but 

also the application of the Volcker Rule. And I think that is what 

this letter requests. 

But more importantly, I understand that just the other day, 

Mary Miller indicated that she thought it would be best if there 

was a joint rule delivered. Would you not agree that a joint rule 

of all the agencies, the SEC, everybody involved on the Volcker 

Rule be given? 

Mr. GERETY. We agree that a consistent Volcker Rule would be 

very important. 

Mr. ROSS. Would you commit the FSOC to making sure that a 

joint rule is issued with regard to the Volcker Rule? 

Mr. GERETY. I can’t commit on behalf of the Council, and more 

importantly, I can’t—there are statutorily independent agencies 

that are given the authority to write rules. 

However, I would note that in the proposed rule stage, all five 

of those agencies, notwithstanding their statutory independence, 

did deliver substantively identical proposed rules. So there is, I believe, evidence of a commitment to the point that you make about 

a consistent Volcker Rule. 

Mr. ROSS. And do you believe that there will be a joint rule then? 

Mr. GERETY. I can’t predict the future. 

Mr. ROSS. Mr. Chairman, I will yield back my time. 

Chairman MCHENRY. On that note of not being able to predict 

the future, we now recognize the gentleman from Colorado, Mr. 

Perlmutter, who I predict will have a good series of questions. 

[laughter] 

Mr. PERLMUTTER. I am not sure your prediction will come true, 

Mr. Chairman, but I thank you for the time. 

And I appreciate Mr. Ross’ questions. To the panel, it is like you 

are in a deposition. We are going to say, ‘‘Isn’t it true that,’’ 

‘‘Wouldn’t you agree that.’’ 

25 

So, Ms. Clowers, I will start with you. 

Isn’t it true that Section 112(c)(5) requires that much of what the 

FSOC does has to remain confidential? 

Ms. CLOWERS. Correct. 

Mr. PERLMUTTER. Okay. So just going back to your transparency 

piece, your transparency recommendation is more on general principles and not so much in the regulatory arena where they are saying to an institution or to a group of institutions, ‘‘We have trouble 

here,’’ but it is more, ‘‘We think these might be emerging threats,’’ 

or, ‘‘We are worried about a bubble over here.’’ 

Where do you think the transparency needs to be more—where 

does it need to be clearer? Where do their records need to be clearer? 

Ms. CLOWERS. We think the records could be improved at the 

principals level, for example. Again, the minutes taken at those 

meetings are very limited. Often, it will just provide information on 

who presented, what the agenda item is, and then it will say, ‘‘The 

agenda—the issues were discussed and questions were’’— 

Mr. PERLMUTTER. But in the accounting arena—and I appreciate 

the desire for more information. 

Ms. CLOWERS. Yes. 

Mr. PERLMUTTER. But you would admit that they have to balance 

between confidentiality of the information they might receive from 

an institution or a group of institutions versus making that open 

and declaring it to the world. 

Ms. CLOWERS. Yes, and anyone dealing in the financial markets 

arena—any of the regulators recognize the importance of maintaining confidential information and the impact that releasing certain 

information could have on the markets. And we recognize that in 

our report, as well. 

We think there is a balance that could be struck, and we point 

out the other entities such as the Federal Reserve, the Federal 

Open Market Committee. The way they release information could 

be a model for FSOC. 

Mr. PERLMUTTER. Okay, thank you. 

Mr. Gerety, just sort of going back to basics, before the crash of 

2008, when, in my opinion, the Bush Administration allowed the 

regulators to turn a blind eye to a number of bubbles that were appearing in the economy, the different regulators sort of operated in 

silos, and weren’t really speaking to one another or collaborating, 

as is described in the statute, or you have described in your testimony. 

How many meetings—you said there have been eight meetings 

since the September report of FSOC? 

Mr. GERETY. I believe that is correct. I don’t have the exact number at the top of my head. 

Mr. PERLMUTTER. About how many meetings overall have they 

held since the passage of Dodd-Frank? 

Mr. GERETY. The Council has met 28 times at the level of the 

principals. 

Mr. PERLMUTTER. Okay. So that alone, in my opinion, having sat 

through the testimony and the trauma of the crash of 2008, is a 

huge step in the right direction so that these agencies are speaking 

to one another so that they can, Ms. Clowers, determine from their 

26 

conversations whether a bubble is developing, whether a threat is 

emerging. 

So to you two, I would ask, what would you suggest they do differently to pinpoint emerging threats? 

And maybe, Ms. Clowers, I will start with you. 

Ms. CLOWERS. In the report, we describe the current processes 

that FSOC uses, which is through the Systemic Risk Committee in 

which the agency members come together and identify potential 

issues and pass them up through the deputies and to the principals. 

What we had recommended is they take a more systematic and 

comprehensive approach using both quantitative and qualitative 

tools to look across all the sectors. Because again, going to your 

point, that is what was missing before the crisis—that we were too 

siloed. The current process that they use at the committee level 

could result in the silos again if agency members bring only what 

they identify as risk and then discuss amongst themselves. 

We want them to be more horizontal in their reviews. 

Mr. PERLMUTTER. Okay. 

Mr. Gerety, do you have any comment on what she just said? 

Mr. GERETY. Sir, I think what Ms. Clowers has just described is 

actually consistent with the processes that the Council has adopted. And certainly on the basis of that recommendation, things that 

we strive to do more and more so. 

I think in response to the question of how do we make sure we 

have a horizontal review, that is actually one of the great benefits 

of the Systemic Risk Committee. We have a member from the National Credit Union Administration. We have a member from the 

FDIC. We have staff coming from the insurance and other sectors 

to make sure they are sharing a perspective from any group, and 

also comparing across. 

And in addition, one of the things we work closely with the Office 

of Financial Research on is to develop some more systematic sharing of financial stability and other macro economic factors— 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

And I thank the witnesses for your testimony. 

Chairman MCHENRY. The gentlelady from Missouri, Mrs. Wagner, is recognized for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

And thank you to our witnesses for coming here. 

I am not an attorney, I am just married to one, so I will be very 

direct. 

Mr. Gerety, would you agree that uncoordinated action by multiple regulatory agencies imposes a cost on the financial system of 

the United States? 

Mr. GERETY. Congresswoman, I think what’s important is that 

agencies coordinate as they implement their independent statutory 

duties. 

Mrs. WAGNER. I was interested in Ms. Clowers’ testimony and 

some of the recommendations that were given in your GAO report 

that talked about meeting a cost-benefit analysis. 

Could you comment on that? 

Mr. GERETY. I think that the issue raised is the question of how 

do we make sure that the implementation of Dodd-Frank is effecVerDate Nov 24 2008 19:06 Aug 20, 2013 Jkt 080873 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\80873.TXT TERRI
27 

tive, but also needs to be considered in the context of the financial 

crisis that we just experienced and the tremendous costs it imposed 

on the economy. 

Mrs. WAGNER. Have you studied—FSOC, OFR—what the potential costs of non-coordination are, sir? And if so, how much would 

that be? 

Mr. GERETY. I think the issue of coordination is very important, 

but as we go through the implementation of Dodd-Frank, I think 

there is plenty of evidence of very significant coordination among 

the financial regulatory community, and the importance that they 

value making sure that the rules are consistent. 

Mrs. WAGNER. But you have not looked at the costs regarding 

this? 

Mr. GERETY. We accept that the importance of coordination is 

very high and that is why we are very focused on making sure 

that— 

Mrs. WAGNER. Is the answer yes or no on the cost-benefit analysis? 

Mr. GERETY. Congresswoman, I think what you are asking about 

is the importance of coordination. We think it is very important, 

and we are working to promote that coordination between agencies. 

Mrs. WAGNER. Let me go back to a comment that you made earlier, then, sir. I believe your testimony was that you could not comment on the actions of other regulatory agencies, like the CFTC. 

Sir, wasn’t that why you were created? 

Mr. GERETY. Congresswoman, I was speaking for myself. I can’t 

speak to the specific decisions made by the CFTC in terms of how 

they promote their international regulatory approach. 

Mrs. WAGNER. I will move on. 

Ms. Clowers, how has FSOC coordinated agency rulemaking to 

this point in time? 

Ms. CLOWERS. We had made a recommendation in 2011 that we 

thought FSOC could play a greater role in coordinating the rulemaking process. We recommended that they develop a formal policy 

that would indicate when coordination should take place, who 

should be involved, and how to reconcile conflicting views. We 

think there is a role for FSOC to play as a traffic cop, so to speak. 

Mrs. WAGNER. How did FSOC fulfill its very specific statutory 

duty to facilitate coordination during the process that led to the 

proposal of the Volcker Rule in 2011? 

Ms. Clowers? 

Ms. CLOWERS. In working through our audit on FSOC, we saw 

that a lot of the coordination takes place at the committee level in 

terms of working through specific issues. I don’t have an answer 

on the specifics on the Volcker Rule, but I can get back to you. 

Mrs. WAGNER. I would appreciate that. And I believe that the report indicated that there was significant room for improvement. Is 

that correct, ma’am? 

Ms. CLOWERS. That is correct. 

Mrs. WAGNER. Okay, thank you. 

Next, Dr. Berner, and then Mr. Gerety, can you describe to what 

extent FSOC and OFR have developed comprehensive and systematic mechanisms for identifying and monitoring systemic risk? 

Mr. BERNER. Thank you, Congresswoman. 

28 

We are working hard in the OFR, in collaboration with the Council and its member agencies, in order to do just exactly that. As Mr. 

Gerety mentioned, we work through the Systemic Risk Committee 

to develop risk hypotheses to try to identify emerging risks, not 

just those risks that have occurred in the past. And we try to do 

that by looking at structural vulnerabilities in the financial system, 

such as the ones that have been discussed here today. 

It was referred earlier to risks in the tri-party repo market and 

short-term funding markets generally, in money funds and other 

areas, as well as cyclical risks that may emerge, such as the buildup of leverage or maturity transformation in the financial system. 

Mrs. WAGNER. Thank you, sir. 

Mr. Gerety, could you answer that question, please? 

Mr. GERETY. The Council has developed a number of processes 

to make sure that we have very strong interagency collaboration 

and identification of issues. In addition, the Council’s annual report 

is a comprehensive document that looks systematically across the 

financial sector, both in terms of significant financial market developments, financial regulatory developments, and then also uses 

that as a basis to develop hypotheses about potential recommendations— 

Mrs. WAGNER. If I may interject here, I believe that the GAO report indicated, however, that in fact FSOC lacked a systematic 

process to identify future threats. And that perhaps it had failed 

to distinguish future from current threats. 

If you could respond to that? 

Mr. GERETY. Congresswoman, the approach that we have taken 

in the annual report is to identify developments, to identify 

vulnerabilities, and to identify potential shocks that could interact 

with those vulnerabilities and create threats. In that sense, I think 

we have a very systematic approach to identifying issues that the 

financial regulatory community and market participants need to 

address. 

Mrs. WAGNER. I think my time has expired. I appreciate the 

Chair’s indulgence. 

Chairman MCHENRY. Ms. Clowers, did you have a response to 

that? 

Ms. CLOWERS. Yes. We did report in our September report that 

we thought FSOC could do a better job in identifying and reporting 

on both current and emerging threats in its annual report. At 

times, it is commingled together, so it is difficult to determine what 

is a current threat versus an emerging threat. An example would 

be the eurozone crisis that was talked about in the annual report 

as an emerging threat, when in general most market participants 

have known about eurozone issues for a number of years. 

Mrs. WAGNER. And the prioritization of those threats. 

Ms. CLOWERS. Absolutely. They have identified a number of 

threats each year, and we believe prioritizing those threats could 

help better focus policymakers as well as market participants on 

the key issues. But when everything is a priority, nothing is. 

Mrs. WAGNER. Correct. 

Chairman MCHENRY. Mr. Ellison, from Minnesota, is recognized 

for 5 minutes. 

29 

Mr. ELLISON. Thank you, Mr. Chairman, and Ranking Member 

Green. I appreciate you calling this hearing. 

Sometimes when we discuss these issues about Dodd-Frank and 

the legislation that came as a result of it, including FSOC, the discussion sort of makes me think that there wasn’t a financial crisis, 

that we didn’t see 4 million foreclosures, that we didn’t see leading 

financial institutions either collapse or have to be consolidated. All 

of these crises didn’t happen. It almost feels like we are pretending 

Congress just passed a bunch of regulations for no good reason. 

Anyway, we have had the GAO report which made some recommendations and observations. And I guess my question is for 

Mr. Berner and Mr. Gerety. 

Mr. Gerety, your organization was fully staffed just this past 

year. Mr. Berner, you were just confirmed in January, and according to your office, your staff is only half of what it will be in the 

coming year. I think that you are doing okay. 

Where would you say you are in terms of building the infrastructure you need and the tools that you need to carry out your mandate? And does the sort of embryonic nature of the work you are 

doing explain part of the analysis that GAO may have done? 

Mr. BERNER. Congressman, thank you for your question. 

We are well along in the standing up of our office. As you indicate, however, it is a challenge both to build an organization from 

scratch, as well as to fulfill the mandates with which we are 

charged. We hope that we are doing a good job on both of those. 

I indicated in my written testimony some dimensions of both of 

those things. And in response to the report, which we very much 

appreciate, and appreciate the engagement with the GAO, we are 

taking steps to implement many of the recommendations that the 

GAO has given us. 

I would point to my written testimony, for example, to set a performance metric that we have developed in response to that need. 

We are committed to transparency and accountability in the performance of our obligations. 

Moreover, I would say that we are really starting to deliver on 

our mandate. For example, just last night we published the 6th 

working paper in our working paper series that deals with issues 

that go across the financial system, not just focused on one part of 

it. But as Mr. Gerety indicated, and I indicated earlier, that kind 

of horizontal approach to look across the financial system is extremely important for carrying out our mandate. 

Mr. ELLISON. Thank you. 

Mr. Gerety? 

Mr. GERETY. Congressman, I would add that the points you make 

are important, and I think the engagement that we have been able 

to have with the GAO has been very helpful. In the example of the 

Council’s annual report, we certainly are learning as we go, becoming more effective in considering a wide range of reports, and providing even more transparency and accountability into our analysis 

of that. 

We are working through and drafting this year’s report as we 

speak. And so, I think the GAO’s recommendations in that area are 

going to be something we take very seriously as we work to improve that product. 

30 

Mr. ELLISON. Thank you. 

Would you like to respond, Ms. Clowers? 

Ms. CLOWERS. Certainly. I would agree with you that the agencies face challenges. And as we recognized in our report, for the 

OFR in particular, trying stand up an organization while carrying 

out their mission is challenging. FSOC is tasked with an inherently 

difficult job of identifying and monitoring risks. And so, we recognize those challenges. And the recommendations that we make are 

designed to improve these important institutions. 

Mr. ELLISON. Thank you. 

I think it is just important to point out that your recommendations are not indictments; they are designed to help. 

Ms. CLOWERS. Correct. 

Mr. ELLISON. Yes. And with the short time I have remaining, 

could you all identify what challenges you think the sequester 

might present to you carrying out your mission? 

Mr. BERNER. Congressman, I would just respond by saying that 

the Financial Research Fund, which funds both the FSOC and the 

OFR, is subject, according to OMB, to the sequester. And so, that 

has resulted in some cut in our ability to fulfill our mission—to 

spend money to fulfill our mission. 

Mr. GERETY. We are working with OMB to develop a plan for 

how to operate consistent with the sequester. It certainly will affect 

us, and we are developing a plan to make sure that we are as effective as we can be, given the loss. 

Mr. ELLISON. It might be helpful to us to know how it is going 

to affect you. If you all can just communicate with the committee 

and my office on problems such as: we are going to have reduce 

this number of staff; what it is going to actually mean in terms of 

your ability to deliver on the mandate.Thank you. 

I yield back, Mr. Chairman. 

Chairman MCHENRY. The gentleman’s time has expired. 

And if I might concur with the gentleman, we would certainly appreciate your response to the committee on those effects from OFR 

and from FSOC as well. 

Mr. Berner, in particular, I know you operate through an industry assessment that funds your operations in large part. It is a different funding mechanism so you have slightly different processes 

on getting your budget, and so to detail that would be helpful as 

well, and the challenges associated with that. 

With that, we now recognize a new member of the committee, 

Mr. Barr of Kentucky. 

Mr. BARR. Good morning. 

And thank you, Dr. Berner, Mr. Gerety, and Ms. Clowers for 

your testimony here today and for your efforts in providing oversight and contributing, hopefully, to the financial stability of our financial system. 

Mr. Gerety, in February, or last month of this year, the Bipartisan Policy Center issued a report on housing reform which specifically requested the President to work with the Secretary of the 

Treasury to appoint an adviser to force coordination of the rules related to mortgages. 

I know forcing coordination is inconsistent with Secretary 

Geithner’s analysis of the authorities of the Council. But given the 

31 

fact that this Bipartisan Policy Center issued a report advocating 

for more coordination on rules related to mortgages, and given the 

fact that facilitating coordination is one of the statutory duties of 

the Council, will you commit to coordinating the release of new 

mortgage regulations? 

And will you use Dr. Berner’s organization, the OFR, to help 

evaluate the impact of the flurry of mortgage rules emerging from 

Dodd-Frank, including but not limited to the Qualified Mortgage 

rulemaking coming out of the CFPB? 

Mr. GERETY. Congressman, I can’t commit on behalf of the Council. Obviously, that is up to the Council members. 

But I can say that the importance of housing-related rules, mortgage-related rules is a topic that has been very important and central to the Council’s work in its analysis of the financial system 

and in its thinking about the implementation of rules under the 

Dodd-Frank Act. This has actually been a topic that the Council 

has discussed a number of times and has made public recommendations about the importance of in the Council’s annual report. 

I think that the points you make are things that are already very 

central to the Council in terms of focusing on reforms to the housing market in a way that work together and that work effectively 

to promote the safety and soundness of that market. 

Mr. BARR. Ms. Clowers, can you respond to Mr. Gerety’s testimony a little bit, specifically on what benefits could we anticipate 

and what unintended consequences could be avoided if these 

rulemakings on mortgages were better coordinated? 

Ms. CLOWERS. We have done a body of work on the importance 

of coordination among agencies, not only in looking at coordination 

at the FSOC level, but also at particular Dodd-Frank rulemaking. 

And what we have found is that although the regulators are coordinating, especially when Dodd-Frank requires that they coordinate on certain rules, much of the coordination is ad hoc and informal. 

And while that could be sufficient in some circumstances, we recommended that the agencies develop formal policies for coordination, because in the press of business, if things are just ad hoc or 

informal, that is when coordination can break down. Or if there are 

conflicting views, that is when coordination can break down if it is 

ad hoc and informal. 

Thus, we recommended more formal policies to guide this coordination. 

Mr. BARR. Mr. Gerety, I hope that you take seriously the GAO’s 

concerns regarding the ad hoc nature of the coordination. 

But let me ask you another question, Mr. Gerety, really quickly. 

Does the Council internally prioritize the significance of current 

and emerging threats to the economy which are listed in its annual 

report? 

And does the Council devote staff and budgetary resources accordingly to that important effort of prioritization? 

Mr. GERETY. The Council’s annual report is a record of the issues 

and recommendations that the Council members feel are necessary 

to promote financial stability. That is the language of the statute 

and that is the threshold by which the Council prioritizes. So I 

32 

think what we see in this is there is a large membership among 

the Council. They each have statutory responsibilities and capabilities to address issues. 

And so, while the number of recommendations and the number 

of issues is large, it reflects the importance and the dynamics within the financial system. 

And I think that is how the Council thinks about this problem, 

is to make sure that across the regulatory community, issues are 

identified and that agencies and market participants work to address them. 

Mr. BARR. I am not sure I heard an answer in that to the specific 

question of how does the Council prioritize the emerging threats. 

It seems to me your answer was, we identify emerging threats. 

The question was, how does or does the Council at all prioritize 

those emerging threats that you do identify? 

Mr. GERETY. Congressman, the language of the statute—and 

when you think about threats in the financial system, it is not always possible to identify which threat is likely to emerge sooner 

rather than later. 

We have seen over the course of the last few years, at certain 

times global growth has been a larger concern. At certain times, 

issues in Europe have been larger concerns. 

So in that sense, what the Council aims to do and what the statute suggests the Council needs to do is to identify the broad range 

of threats that could pose a threat to financial stability and then 

to work to address them. 

And I think that is the standard by which the Council operates. 

Chairman MCHENRY. The gentleman’s time has expired. 

Mrs. Maloney, from New York, is recognized for 5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

And I thank all of the panelists. 

Dr. Berner, the Dodd-Frank statute requires you to develop tools 

for risk management and monitoring. So, what criteria are you 

using to identify systemic risk? 

Mr. BERNER. Thank you, Congresswoman. 

We are using a variety of criteria to identify threats to financial 

stability. As I indicated earlier, we are working in the context of 

the Systemic Risk Committee of the Council to develop a product 

and several products that will look at those various measures of 

risk. 

Some of them are well-known. Some of them are, for example— 

Mrs. MALONEY. But what are they? Can you list them? 

Mr. BERNER. Some of them are reflective of indicators that we 

listed in our annual report. There were 31 there. Measures such as 

the so-called CoVaR, which illustrates the joint contribution of a financial institution’s contribution to a threat to financial stability. 

Others that have been developed in the academic community which 

are known variously as MES or SCS. 

Mrs. MALONEY. But can you tell me what they are? I don’t know 

what MES is or SCS. 

Mr. BERNER. Sure. 

Mrs. MALONEY. What, specifically, is it? What are the systemic 

risk indicators that you are looking at, in plain English? 

33 

Mr. BERNER. Sure. These indicators attempt to measure empirically what the shortfalls might be, and the losses that might be accumulated by an institution under stress and how that might 

spread across the financial system. 

These are— 

Mrs. MALONEY. Such as? Are you going to identify these risks to 

see how they go over the financial system? What are they? Is it 

capital? What, specifically, are you looking at to identify systemic 

risk? 

Mr. BERNER. Congresswoman, capital might be a remedy for 

some of those risks, but the metrics that we use attempt to identify 

whether there is excessive leverage in the system, whether there 

is a buildup of maturity transformation, whether low volatility is 

leading to the buildup of those two things in the financial system 

or in the part of a group of financial companies, wherever they 

might be located in the financial system— 

Mrs. MALONEY. If you could get to the committee the list of the 

31 and more specifics in this area, I would like to study it more. 

But I want to know if the technology that you are developing, 

will it allow or does it allow for adjusting this criteria to reflect the 

changes in the market over time or incorporate best practices or 

lessons learned as the project matures? 

Because one of the criticisms during a financial crisis is that regulation did not keep up with innovation and with the new—will 

you be flexible in changing this in the technology that you are developing? 

Mr. BERNER. That is a really important question that you raise, 

Congresswoman. The evolution of the financial system and financial innovation means that the system is ever-changing. It means 

that the metrics can’t be considered as always reliable from the 

past as they might be in the future. 

Mrs. MALONEY. So are you incorporating technology to adjust? 

Mr. BERNER. We are constantly looking at innovations in financial markets and financial institutions to try to take account of 

whether or not these indicators are reliable. 

Mrs. MALONEY. The statute also asks for you to collect the data 

that then goes to FSOC for them to look at. And I have asked for 

this before, maybe it came into my office, but I don’t recall seeing 

it. What specific data elements are you collecting? And could you 

get it to the committee, so we can all look at it? 

And how many have you already collected, are you giving to 

FSOC? What is the list that you would like to get? And very importantly, where are you getting it from? Are you getting it from other 

agencies? Are you getting it from a financial institutions? Where 

are you getting it? 

That is an in-depth, longer question, but I do want to talk about 

the Legal Entity Identifier (LEI) project, which some have described—one of my constituents described it as the ‘‘black hole 

project’’ that will never be completed. 

So I want to know, what is the projected timeline for the implementation of the Legal Entity Identifier within the financial industry? 

Mr. BERNER. Congresswoman, the Legal Entity Identifier project 

is very important because it uniquely helps us to identify parties 

34 

to financial transactions. That is an important part of standardizing data in the global financial system. 

Mrs. MALONEY. But my question was, what is the timeline for 

implementation and completion? 

Mr. BERNER. That timeline actually involves a launch of the system this month. There are some issues to wrap up before— 

Mrs. MALONEY. You mean the project is completed then? You are 

going to launch it? It is completed? 

Mr. BERNER. I would describe the process as a process. The implementation and diffusion through the financial system has 

begun. The CFTC, for example, has— 

Mrs. MALONEY. My time is almost up. What is the estimated— 

Chairman MCHENRY. The gentlelady’s time is— 

Mrs. MALONEY. Could you get that to the committee, the estimated cost of the project? 

Thank you. 

My time is up. 

Chairman MCHENRY. As I pledged to the witnesses, you do have 

time to answer—I will give you time to answer the question. 

Dr. Berner, what is the estimated time of completion of the LEI? 

Is there a date? 

Mrs. MALONEY. And, Mr. Chairman, also the cost to both government and the private sector. 

Chairman MCHENRY. That was not what the gentlelady asked, 

but we will be happy—is there a date you have for completion? 

Mr. BERNER. Congressman, we don’t have a specific date for completion— 

Chairman MCHENRY. Do you have a year? 

Mr. BERNER. This is an ongoing— 

Chairman MCHENRY. Do you have a year? 

Mr. BERNER. This is an ongoing process. The project is well— 

Chairman MCHENRY. Do you have a hope for a date of completion? 

Mr. BERNER. I wouldn’t describe, Congressman, that there is a 

specific date for completion— 

Chairman MCHENRY. Okay, thank you. And that suffices. 

I will be following up, and I pledge to follow up with my colleague from New York on this question of— 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Chairman MCHENRY. With that, I will now recognize the gentleman from Tennessee, Mr. Fincher. 

Mr. FINCHER. Thank you, Mr. Chairman. 

Dr. Berner, these questions are going to be geared, I guess, toward you. 

With transparency being consistent, the OFR has been asked by 

FSOC to conduct a comprehensive study on the asset management 

industry and analyze if these firms could pose systemic risk. Can 

you tell us the process that OFR is using to examine asset managers? 

Mr. BERNER. Yes, Congressman. Thank you for your question. 

We are taking a comprehensive look at the asset management industry and its activities. The process involves engagement with the 

industry to learn about its practices and business models and the 

mix of businesses in that industry. 

35 

The process also involves looking at data on that industry to try 

to understand empirically both the size and scope of those activities 

in the industry. 

And last, the process involves full engagement with Council 

member agencies to get their views on how the asset management 

industry and its activities, from their perspective, might be analyzed. 

So this is a great example of coordination across the Council. 

Mr. FINCHER. Can you tell me specifically who you have met with 

and what you have learned from the meetings so far? 

Mr. BERNER. We have met with a number of asset managers, 

Congressman. I can get you the list of— 

Mr. FINCHER. Would you please do that? 

Mr. BERNER. But I just want to say, Congressman, if I may, that 

in the process of engagement with the industry, we have welcomed 

the opportunity to engage with any and all who want to meet with 

us. So we have engaged both with industry groups as well as with 

specific firms. 

Mr. FINCHER. Are there specific activities that you are looking for 

engaged by the asset managers that you are really concerned about 

that may pose systemic risk? 

Mr. BERNER. Congressman, the analysis is not yet complete, but 

in looking at activities, we look back to the fundamental services 

in the financial system and where there might be evidence of a 

build-up of risk in those activities, specifically a build-up of maturity transformation, connectedness across the financial system so 

that we look at those activities not just as the origin of any threat 

to financial stability but for the possibility that it might transmit 

or amplify a threat to financial stability. 

Among those would include reliance on short-term funding, along 

with a portfolio of longer-term assets. Among those would be other 

evidence of those kinds of activities that might pose a threat. 

Mr. FINCHER. How long is it going to take to complete the study? 

Mr. BERNER. Congressman, we don’t have a specific date to complete the study because it is, in the work that we are doing to 

study the industry, the process is well under way, and it is being 

discussed within the committee. 

Mr. FINCHER. General framework—how long has the process 

been? 

Mr. BERNER. The process has been ongoing, Congressman, for 

about a year, and we hope to complete it in the next few months. 

Mr. FINCHER. But before the end of the year? 

Mr. BERNER. Before the end of the year. 

Mr. FINCHER. Okay. Good deal. 

I yield back the balance of my time. 

Thank you, Mr. Chairman. 

Chairman MCHENRY. Will the gentleman yield? 

Mr. FINCHER. I will yield. 

Chairman MCHENRY. To follow up with Dr. Berner on the question my colleague from New York had on the cost of the LEI, that 

process, do you have any analysis you could give us, any estimate? 

Mr. BERNER. Congressman, we don’t have a specific estimate of 

the cost of the LEI project at this point in time. But what I would 

36 

say is that the benefits to industry and to regulators, in my judgment, far exceed the cost. And I think the evidence for that is— 

Chairman MCHENRY. How do you know that the benefit will exceed the cost if you do not yet know the cost? 

Mr. BERNER. The industry has told us that the benefits are likely 

to exceed the cost. 

Chairman MCHENRY. And what if the industry said that everything is fine and hunky-dory, do you even need to collect data if 

they just tell you that? 

You understand the question arising out of this? How do you 

know how much to request from the industry to fund your office 

on a program for which you don’t know the cost. 

Mr. BERNER. Congressman, the project is a global project. We 

have full global engagement around the world with global regulators under the auspices of the Financial Stability Board. And so 

the cost have been spread across all those agencies and— 

Chairman MCHENRY. Do you know the cost for your agency? 

Mr. BERNER. Congressman, I can get back to you and tell you the 

resources that we have used in prosecution of the— 

Chairman MCHENRY. And would you also disclose your anticipated resources that you will need for the remainder of this year 

and next year? 

Mr. BERNER. Congressman, I can do that. 

Chairman MCHENRY. Thank you. 

With that, I now recognize Mr. Delaney of Maryland. 

Mr. DELANEY. Thank you, Mr. Chairman. 

I have two questions. My first relates to data and information 

that you are tracking to determine whether institutions that are 

designated as systemically important are actually getting benefits 

in the market for that designation from a cost of capital or access 

to capital perspective. 

So I am not sure who would be the best to—either Mr. Gerety 

or— 

Mr. GERETY. Congressman, I think the question that you are 

asking is a question about perception, how do market participants 

think about risks of firms? 

Mr. DELANEY. Yes. 

Mr. GERETY. What I can say is from the perspective of DoddFrank and the actions taken in Dodd-Frank, that perception that 

the government will prevent the failure of any firm is incorrect, 

and Dodd-Frank is very clear that no taxpayer losses shall be incurred in the use of the Orderly Liquidation Authority (OLA) and 

that no financial firm, no matter how large or complex, will be prevented from failure— 

Mr. DELANEY. But firms which have that designation have emergency funding available to them should there be a crisis, is that 

correct? 

Mr. GERETY. That is not correct, sir. The designation of a nonbank financial company does not give that company access to any 

emergency funding. In fact, what it does is it imposes significant 

capital liquidity and enhanced supervision on that company. 

Mr. DELANEY. What about a bank that is designated systemically 

important? 

37 

Mr. GERETY. The Council doesn’t designate any banks or bank 

holding companies as systemically important. The Dodd-Frank Act 

in its terms on the statute imposes heightened standards on any 

bank holding company with a larger than $50 billion balance sheet. 

Mr. DELANEY. And so, there is no emergency funding available 

to financial institutions which are designated systemically important to manage their liquidation? 

Mr. GERETY. Congressman, I think we have to separate— 

Mr. DELANEY. Right. 

Mr. GERETY. —two distinct authorities. The question that you 

are asking, I think, is related to the Council’s authority to designate a non-bank financial company. 

Mr. DELANEY. Yes. 

Mr. GERETY. The action of that designation is simply the imposition of enhanced supervision by the Federal Reserve. 

Now, separately, Dodd-Frank created an Orderly Liquidation Authority for financial companies, both non-bank financial companies 

and bank holding companies. The designation is actually not required for the use of that Title II authority. 

Mr. DELANEY. Right. 

Mr. GERETY. So there is no direct statutory link between designation and the use of Title II. 

Importantly, what the statute makes very clear is that taxpayers 

cannot bear losses and that liquidation cannot be prevented 

through the use of government funds. 

Mr. DELANEY. Right. But do you track any data to determine if 

the market perception is actually becoming reality, and firms have 

enhanced access to capital either at lower rates or just greater 

depth of market because of various designations? 

Mr. GERETY. Congressman, I think the question is an important 

one. There is actually a lively academic debate about how to measure what that looks like, and where it is going. I think the evidence 

is in some ways mixed. 

Importantly, if you just look at the simple measures of risk before the crisis and post-crisis, what you see is that the market is 

pricing much more significant risk and that is reflected in a number of metrics in the financial system. 

Mr. DELANEY. But I am talking about relative; I am not talking 

about absolute risk. Obviously, they are pricing risk differently 

than they did before the crisis. But on a relative basis, do you track 

firms which receive various designations within the government 

and their access to capital versus similarly situated firms which do 

not to see if there is any reinforcing market perception based on 

designations? 

Mr. GERETY. The most important thing from the perspective of 

the Council is that that perception as it exists is incorrect, and that 

the action of Dodd-Frank is to prevent any firm from having a— 

Mr. DELANEY. Whether they are making it correctly, because to 

some extent, if the market assumes that, it becomes reality. So putting aside how they should interpret the actions, do you track 

whether they do actually interpret the actions the way the academics think they should determine the actions? 

Mr. GERETY. Congressman, there is a very wide range of academic opinion and other studies on this matter. We are certainly 

38 

aware of that debate. But the thing that I think is important to 

note is that the action of Dodd-Frank does not allow that perception to become reality. The action of Dodd-Frank is to prohibit in 

law the use of any taxpayer losses to prevent the liquidation of any 

firm. 

So whether that perception exists or not in the market, it is incorrect. 

Mr. DELANEY. But doesn’t it also by law require the industry to 

set aside funds to be available for institutions during their orderly 

liquidation? 

Mr. GERETY. Congressman, I think what you are asking about is 

whether firms themselves need to plan for their liquidation, and 

that is true both in terms of capital and liquidity standards and in 

terms of the creation of what are commonly called ‘‘living wills.’’ 

Mr. DELANEY. Right 

Mr. GERETY. So firms being required to plan for their resolution 

in bankruptcy is the standard Dodd-Frank imposes on that. 

Mr. DELANEY. But industry-wide, funded by industry financing 

that is available through a liquidation, you are saying does not 

exist? 

Mr. GERETY. Dodd-Frank does not create an industry assessment 

to fund liquidation. 

Chairman MCHENRY. The gentleman’s time has expired. 

It is done through the FDIC. And if the FDIC runs out of funds, 

it can tap the Treasury. 

Mr. DELANEY. No, I am not talking about— 

Chairman MCHENRY. On a technical basis, the gentleman is correct in his answer. But I understand the point, and I would love 

to have further conversations with the Member. 

And now, we will recognize the gentleman from Wisconsin, Mr. 

Duffy. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Mr. DUFFY. Per Dodd-Frank, a non-bank SIFI designation must 

meet the definition of ‘‘predominantly engaged in a financial activity.’’ That definition in Dodd-Frank was set forth in Section 4(k) of 

the Bank Holding Company Act. 

That was also the Pryor-Vitter amendment in the Senate that 

came forward. 

Now, the Fed has come out with a proposed rule that potentially 

expands the definition of ‘‘predominantly engaged in financial activities,’’ expanding that definition of Section 4(k), as it was set 

forth in Dodd-Frank. My concern is that the Fed’s definition of 

‘‘predominantly engaged in financial activity’’ is going to cast potentially a far wider net and grab, maybe, large manufacturers and 

retailers in the country. 

FSOC is in the final stages of evaluating an initial set of nonbank SIFI designations. Is it possible, Mr. Gerety, that those designations can take place before the Fed submits its rule and definition? 

Mr. GERETY. I don’t believe the statute requires that rule to be 

complete before designations. However, we are working very closely 

with the Federal Reserve. They have consulted with the Council on 

that rule. And we expect them to finalize that. 

39 

Mr. DUFFY. My question: Is it possible that FSOC will come out 

with its non-bank SIFI designations before the Fed submits its 

final rule and definition? 

Mr. GERETY. Congressman, I can’t speak for the Council’s timing 

in its decision, but— 

Mr. DUFFY. Is it possible? 

Mr. GERETY. —there is no statutory— 

Mr. DUFFY. But is it possible? 

Mr. GERETY. There is no statutory— 

Mr. DUFFY. I know. But is it possible? You are the representative 

of Treasury. Is it possible that those designations may come out before the Fed’s rule? 

Mr. GERETY. The definitions require a two-thirds majority vote of 

the Council. I can’t speak for two-thirds of the Council. 

Mr. DUFFY. Okay. So let’s talk about it maybe in a little different 

way. Are you committed that if FSOC comes out with these nonbank SIFI designations—are they committed to using the rule as 

set forth in 4(k) for Dodd-Frank? Or are they potentially going to 

use the rule that might be expanded from the Fed? 

Mr. GERETY. The Fed has the authority to interpret the definition of ‘‘predominantly engaged in financial activity’’ as you have 

identified. Section 4(k), which you are referring to, is in the Bank 

Holding Company Act— 

Mr. DUFFY. That is right. 

Mr. GERETY. The Federal Reserve has the statutory authority to 

interpret that section of the Bank Holding Company Act as it relates to the definition of ‘‘predominantly engaged in financial activity.’’ 

Mr. DUFFY. I don’t know if you have seen the letter that was sent 

by Senators Vitter and Pryor, basically setting forth that it was 

quite clear what the intent of their amendment was, which was to 

strictly follow Section 4(k). 

And now, the Fed is going to potentially expand that rule. Are 

you saying that FSOC is not going to follow the will of Congress, 

but potentially an expanded interpretation by the Fed? 

Mr. GERETY. Congressman, the Federal Reserve has the authority to interpret the Bank Holding Company Act. It is given the 

rulemaking authority under Dodd-Frank. And so, I anticipate that 

we would follow the Federal Reserve’s rule as it interprets the statute. 

Mr. DUFFY. So when there is a conflict between what the directive of Congress was and then its interpretation by the Fed, FSOC 

will go forward with the interpretation of the Fed, as opposed to 

what Congress has specifically delineated in Dodd-Frank. 

Mr. GERETY. Congressman, I can’t speak to the—a commitment 

that I think you are asking on behalf of the Council. But I can say 

that my understanding is the Federal Reserve has the authority to 

interpret the Bank Holding Company Act and write rules in that, 

as given by Dodd-Frank. 

Mr. DUFFY. Let’s try another way. Can you assure Congress that 

FSOC will not designate any non-bank an SIFI that doesn’t meet 

the definition as set forth in Section 4(k)? 

Mr. GERETY. Congressman, as I understand it, you are asking if 

the FSOC will consider the statutory standard, which is that any 

40 

company needs to be a non-bank financial company predominantly 

engaged in financial activity, and we intend to follow that standard 

in our designation. 

Mr. DUFFY. You understand the concern? Congress was very focused and very concerned about an expansion of this law to encompass companies that have nothing to do with the financial sector. 

There are retailers and manufacturers. And if you expand it, basically FSOC can have some impact on all of these large companies 

across the country. And that was our concern. 

And now we see this—the Fed expanding the rule that can go far 

beyond the intent of Congress. That is our concern. 

Mr. GERETY. Congressman, if I can just respond briefly, two 

points. First, the statutory standard is at 85 percent of revenue— 

Mr. DUFFY. That is right. 

Mr. GERETY. —or 85 percent of assets are financial in nature, as 

defined as we have just been discussing. 

And second, that is only the limit of what the Council can do. 

The Council has set up a very robust process to assure that any 

non-bank financial company designated by the Council is one that 

poses risk to the financial markets. 

Mr. DUFFY. My point is that Congress was clear in what we 

wanted. And it is being expanded. I want to know that FSOC will 

follow the directive of Congress, not an expanded definition by the 

Fed. 

Chairman MCHENRY. The gentleman’s time has expired. 

We will now recognize Mrs. Beatty for 5 minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman, and Mr. Ranking Member. 

Let me first thank you for being here today, and for taking the 

time to go over how you operate and also in such a short period 

of time being able to respond to the many things that not only we 

have put on you, but what have come up in the report. 

As I have listened to the dialogue today, as we talk about whether it is strategic planning or whether we are talking about how you 

meet all of the standards, I guess many of the things I was going 

to ask have been addressed. 

So let me pose this question to you. When we look at the FSOC 

and the OFR, they are central to the overarching objectives of the 

Wall Street Reform. And they must—I believe you must also be 

given the opportunity to redefine—the research we talked about, 

the rulemaking, and certainly a deliberative process. Can you share 

with the committee what you have done so far to establish a working relationship with some of your foreign counterparts, or can you 

talk about any of the metrics established in your new roles with 

what you are doing with FSOC or the OFR as you employ or monitor measures of systemic risk? 

Mr. GERETY. Congresswoman, let me address the international 

coordination issue first. The statute gives the Council the responsibility to coordinate domestically and suggests that the Treasury 

Secretary should coordinate on behalf of the Council internationally. 

The Council has been very active in discussing amongst itself the 

international developments, whether they be on derivatives regulation, whether they be through the Federal Insurance Office and in 

41 

collaboration between Treasury and the State insurance commissioners on progress in the international dialogue on insurance. 

So those are the types of topics that the Council has really made 

sure that it uses its domestic conversation to be coordinated with 

the international activities of U.S. regulators, whether they be the 

market regulators, the insurance community or the banking regulators. 

So I think we have been very active in using the Council to facilitate a dialogue about the importance of and the progress of international coordination on regulatory issues. 

Mrs. BEATTY. Thank you. I appreciate that. 

Mr. BERNER. Congresswoman, thanks for your question. As I 

mentioned in my testimony, we are taking steps to coordinate 

internationally. 

First, data standards is one area where I talked about that. The 

coordination globally on the data standards is extremely important. 

The standard would not be a standard without global coordination 

in the Legal Entity Identifier and other related projects. 

Second, we do regularly coordinate with our counterparts globally under the aegis of the Council, in order to exchange information and the way that we approach looking at information and filling gaps in data. That is extremely important for all of us, because 

some of those gaps exist on a global basis. 

So we regularly compare our work with that of other central 

banks and with other macro prudential, if I can use that term, 

agencies in Europe and Asia and around the world. 

That is an important part of our work. It has only begun, and 

we have a lot more to do in that area. 

Mrs. BEATTY. Let me ask one other thing. My colleagues have 

asked you a lot of questions about how you will respond to whether 

it is an administrative rule or how you will respond to Congress. 

Is there anything that you have not shared with us that you would 

like to add that would let us know how you will notify Congress 

and the public about potential threats to the financial system and 

to the economy? 

Mr. GERETY. Congresswoman, I think that the issue you raised 

is an important one. Although there are some regular ways for the 

Council required in Dodd-Frank to report to Congress on its activities, and to publicly state its view about both its activities and its 

priorities with respect to risk, we also have to recognize that risks 

may not arise on a natural calendar-year cycle. 

I think in light of that, what you have seen in the work of both 

the Council and the OFR is a determined effort to address risks as 

they arise, to meet on those risks, and if necessary, to make public 

recommendations or public proposals for recommendations, as you 

saw last fall with money market funds. 

Mrs. BEATTY. Okay. Thank you. 

Chairman MCHENRY. I thank the gentlelady, for her promptness, 

especially. 

Thank you. 

We will now recognize Mr. Grimm of New York for 5 minutes. 

Mr. GRIMM. Thank you, Mr. Chairman. 

And I want to thank you all for testifying today. I appreciate 

your time. 

42 

Just to follow up, Mr. Gerety, you were just mentioning derivatives regulations and the coordination internationally and how important it was and how you had been very active, the Council has 

been very active. 

So, given that the FSOC’s role to promote this international competitiveness, I wanted to ask about Basel III. The Basel III implementation specifically related to derivatives, since you mentioned 

that. 

It is my understanding that the international Basel III agreement introduced a new derivatives capital requirement, the credit 

valuation adjustment (CVA), which is intended to minimize 

counterparty exposure for uncleared swaps. 

But it is also my understanding that the E.U. recently proposed 

in its implementation to Basel III, I think that is CRD IV, that 

based on that proposal it would create an exemption to CVA capital—the capital mandate for European banks transacting with 

corporates, sovereigns, pension funds. 

So, obviously, U.S. proposals reflecting Basel III that include 

CVA, it looks like the E.U. wants to exempt a lot of that. So the 

question is, has the FSOC done any analysis on the impact of this 

inconsistency? Would both U.S. firms at home and abroad, and 

U.S. businesses that use derivatives be at a disadvantage, and has 

the FSOC looked at that? 

Mr. GERETY. Congressman, I am not specifically aware of the 

particular exemptions that you are talking about in the E.U. proposals, but I think the general point is an important one, which is 

Basel III, as you know, is not binding in its agreement itself. It is 

promulgated through rules in the United States, and then in rules 

around the world. 

Therefore, the question about how that agreement is interpreted 

and implemented in a consistent way is very important, both to the 

competitiveness issues that you talked about, but also to the financial stability issues, which is, if the aim of these international 

agreements is to assure a level playing field, both on risk and on 

competition, then it is very important that the financial system is 

adequately protected in each area. 

Mr. GRIMM. I have limited time. You are basically just regurgitating the purposes. We all get that. My question is—and if you 

don’t have it with you, if you could please submit it to the committee—has the FSOC specifically looked at it? The E.U. has come 

out with their proposals and said, ‘‘We are carving out an exemption.’’ And I think I listed pension funds is one example. 

Sovereigns, another. Corporates, another. 

That would certainly put U.S. entities at a big competitive disadvantage, so I would ask that you submit that to us to see if 

FSOC is—if they haven’t looked at it, if they intend on looking at 

it, what analysis—the impact that it would have. 

If U.S. financial firms have a mandated capital charge that is 

separate from margin. I want to be clear about that. It is the new 

CVA—effectively impacting the pricing that they can extend clients. Would you agree that if the E.U. does this exemption, it 

would limit the competition in services for U.S. businesses in an 

undesirable way? 

Is that something you would agree with? 

43 

Mr. GERETY. Congressman, I don’t want to comment on a specific 

exemption. I am not totally familiar with the point that you raise. 

However, I do think the general point of the consistency, both in 

terms of risk and in terms of competition, is something we value. 

Mr. GRIMM. You don’t need to know the exact exemption, but 

would you at least say that if the rules are not consistent, that it 

is certainly going to put U.S. institutions at a disadvantage? Is that 

fair to say, which is what the FSOC is trying to avoid? Isn’t that 

your whole purpose? 

Mr. GERETY. To the issue of consistent rules, it is certainly something that we take very seriously. And I think working across a 

whole range of issues, not just the specifics that you are raising, 

consistency has been something that the Council has discussed. 

How is Basel III implementation going and what is going to be the 

impact, both domestically and internationally. 

Mr. GRIMM. Okay. So, I would like for you to submit to the committee some type of analysis of the impact that, if the E.U. is, in 

fact, going to exempt—have a major exemption to CVA, that impact 

on the U.S. institutions. Can you do that? 

Mr. GERETY. Congressman, I am glad to get back to you and your 

staff with more on this issue. 

Mr. GRIMM. Is that a ‘‘yes?’’ 

Mr. GERETY. I am glad to get back to you on this issue. 

Mr. GRIMM. You hate the words ‘‘yes’’ and ‘‘no?’’ Okay. 

I yield back. 

Chairman MCHENRY. The gentleman from Washington, Mr. 

Heck, is recognized for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

I just want to make an observation about Reverend Cleaver’s 

question and concern earlier about, have recent congressional actions, with respect to Federal employee compensation, deterred or 

harmed our ability to attract and retain a sufficient caliber of talent in order to undertake this very important task. I share that 

concern, but based on your respective presentations here today, I 

am sleeping better tonight, and I thank you for your public service. 

Mr. Gerety, I have had the great privilege to spend a great deal 

of my career in both the public sector and the private sector, and 

I find that the public sector elevates certain process values pretty 

consistently. And the GAO report, frankly, is exhibit A: transparency; accountability; and collaboration. 

In the private sector, we elevate certain other values: clarity; and 

the value of time. And in that spirit, I kind of went looking for 

some indication of when FSOC would designate non-bank financial 

institutions—SIFIs. I couldn’t find it, so can you either disabuse me 

of it, or alternatively, indicate as specifically as you can when that 

might happen? 

Or, lastly, if you cannot do that, at least give us a range, or an 

estimate as to when that designation will occur. Because it matters. 

Mr. GERETY. Personally, I think it is an important question. 

While I can’t speak on behalf of the Council, as I mentioned earlier, 

the designation standard is that a two-thirds majority vote of a 

Council vote, I can say that we expect those proposed designations 

to happen in the next few months. 

44 

Mr. HECK. Thank you. 

My second and last question—I am fascinated by this question 

of living wills. And I guess we have the experience of the first 

tranche of that over on the big, big, big, big banks. I am wondering 

if you have had any feedback or input or questions or conversations 

with potential non-bank financial institutions about that requirement, which, I believe, would be associated with their designation 

as an SIFI, and what kinds of concerns you are hearing, and what 

particular challenges you would anticipate for them in that regard, 

especially given that the business models of the non-banks is so 

fundamentally different in many cases than bank financial institutions. 

What are you hearing? What wisdom can you share with us? 

And, lastly, just how long is it going to be before you think we are 

at the point where we have really good living wills that make sense 

and fulfill the statutory objective? 

Mr. GERETY. Congressman, on the question of how non-bank financial companies have thought about the living will requirements 

specifically, I think that actually has been less of a significant area 

of concern. One of the best public records of this is the comment 

processes that we have gone through in the non-bank financial 

companies. 

We did an Advance Notice of Proposed Rulemaking, our first proposed rule. We actually, based on that comment, did a second proposed rule, and then finally, finalized the rule. 

So we did get a very wide range of input from industry academics and others on how non-bank financial companies were 

thinking about designation. In particular, they were very focused, 

as you note, on the differences in business model and making sure 

that when the Fed applies enhanced credential standards, it does 

so in a manner that respects and reflects those different business 

models. 

I think within that, the living will requirement is a significant 

requirement, but it asks the firms to design on the basis of their 

operation how they would go through an orderly liquidation in 

bankruptcy, and therefore, I think that requirement can be applied 

to a very wide range of business models. So we haven’t heard a significant concern about that requirement, but rather, more on the 

general imposition of enhanced prudential standards and making 

sure they respect and reflect the differences in business models 

across the wide range of non-bank financial companies. 

Mr. HECK. Thank you. I yield back the balance of my time. 

Chairman MCHENRY. We will now recognize Mr. Hultgren of Illinois for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

I want to return to FSOC’s responsibility under Section 112 to 

enhance the competitiveness of U.S. financial markets and to ‘‘facilitate information-sharing and coordination’’ between member 

agencies. Despite repeated assurances of coordination, we are beginning to see regular breakdowns in joint rulemakings, guidances, 

and definitions between the CFTC and the SEC—the Volcker Rule, 

what is a U.S. person, extraterritoriality rules, swap execution facilities. 

45 

Mr. Gerety, what steps is FSOC taking to ensure these agencies 

are properly coordinating their Dodd-Frank rulemakings, specifically with SEFs? 

Will the FSOC commit to ensure that the SEC’s and CFTC’s proposals are substantially similar and released at the same time? 

Mr. GERETY. Congressman, I think the Council has been very active in coordinating with the SEC and the CFTC and discussing 

their progress on on rulemakings as well as rulemakings more generally. 

Mr. HULTGREN. So do you think they will—is there a commitment that those will be released at the same time and be substantially similar? 

Mr. GERETY. Congressman, when it comes to the SEC or the 

CFTC, which are independent agencies, the Council cannot determine their rulemaking processes or their rulemaking timeline, so 

I can’t make that commitment. 

But I can say that there is lots of evidence of the SEC and the 

CFTC working very closely together, and we think that coordination is very important. 

Mr. HULTGREN. Ms. Clowers, I wonder if you could follow up on 

this? Are you concerned that regulatory uncertainty and undue 

complexity will result if the FSOC fails to coordinate important 

rulemaking, like the SEF rules? 

Ms. CLOWERS. In our report, we discuss the importance of coordination. And certainly, those are potential outcomes if rules are not 

properly coordinated. 

Mr. HULTGREN. So, you have some concern on that? 

Mr. Gerety, Federal Reserve Chairman Bernanke has warned 

that the U.S. derivatives regulation has to be coordinated internationally or we risk ‘‘a significant competitive disadvantage.’’ 

The CFTC and the SEC were instructed to coordinate internationally, but I heard testimony from foreign regulators in the Agriculture Committee that concerned me. 

What steps has the FSOC taken to ensure that none of its member agencies issue regulations that run counter to the ‘‘establishment of consistent international standards?’’ 

Mr. GERETY. Congressman, I think the importance of coordination and consistent rules is one that the Council has spent energy 

on. However— 

Mr. HULTGREN. What steps have they taken? I recognize it is important to them. What steps have been taken? 

Mr. GERETY. The Council has discussed this issue on a number 

of occasions. At the staff level, we are in very frequent conversation, both with the SEC and the CFTC and together. And I know 

that those agencies themselves are in near constant contact on the 

coordination of those rulemakings. 

Mr. HULTGREN. So the steps would be just really the contact that 

has happened? There is nothing beyond that? 

Mr. GERETY. With respect to coordination, I think what you can 

expect from regulatory agencies pursuing their independent statutory authorities is that they work very, very closely together to try 

and promulgate consistent rules. 

46 

Mr. HULTGREN. Do you agree that substantive differences in 

rulemaking and interpretation between the SEC and the CFTC 

could increase compliance costs and hurt U.S. competitiveness? 

Mr. GERETY. I think, Congressman, this is an area that is quite 

complex, but, nonetheless, I think the importance of substantively 

consistent rules, consistent also with the statute, is something that 

we would think is very important. 

Mr. HULTGREN. So you would say yes? 

Mr. GERETY. Congressman, I think— 

Mr. HULTGREN. Substantial differences in rulemaking and interpretations could increase compliance costs. Yes, it could, or no, it 

couldn’t? 

Mr. GERETY. Congressman, I think we have to look at compliance 

cost in relation to the statutory language. And both the SEC and 

the CFTC are working very hard to coordinate with each other— 

Mr. HULTGREN. The reason they would be coordinating is because they would see compliance costs hurting U.S. competitiveness if they don’t coordinate. Is that right? 

Mr. GERETY. I think not just competitiveness, but also from a 

risk perspective, we want rules to be consistent. That is something 

that the regulatory community has been very straightforward on, 

which is an important value. 

Mr. HULTGREN. My time is winding down. You clearly have both 

a coordination and a competitiveness mandate. Do you or do you 

not acknowledge that this disruption which really is right before 

our eyes—certainly it is reported in The Wall Street Journal—Republican and Democratic Commissioners at the CFTC and the SEC 

have raised concerns, and foreign regulators came to Congress to 

cry foul and warn about the impact to U.S. institutions. 

Again, I wonder if you could comment on this, then, what—if you 

can’t comment on this, what specifically is your role? 

Mr. GERETY. The role of the Council I think, as you identified, 

is a broad role of coordination, information-sharing, and to facilitate that among regulators. 

What I think you are asking about is the Council’s role with respect to specific regulatory priorities of the SEC and the CFTC in 

the specific conduct of those rulemakings. 

I would note I think in the issues that you have raised, these are 

not final. And so, my understanding is that the regulators are 

working very closely together to take in these comments and to try 

to work— 

Mr. HULTGREN. My time is up. But just to clarify, my concern is 

the confusion and lack of coordination is leading to hurting U.S. 

competitiveness and leading to uncertainty. And I think that is a 

real problem. 

My time has expired. I yield back, Mr. Chairman. 

Chairman MCHENRY. And, without objection, Mr. Garrett is recognized for 5 minutes for the purpose of asking questions. 

Mr. GARRETT. I thank the chairman. 

I was going to go down one road, but Mr. Hultgren’s questions 

lead me to follow up with Mr. Gerety on the—so, you believe that 

there has been substantial coordination between the SEC and the 

CFTC on the promulgation of the rules? 

47 

Mr. GERETY. Congressman, I do believe that the Council—that 

the Commission staff both at the SEC and the CFTC have been in 

very frequent, near constant contact on the coordination of these 

rulemakings. 

Mr. GARRETT. Does constant contact also mean that they are actually running on the same timeline? 

Mr. GERETY. Congressman, I can’t speak to the rulemaking 

timelines of the CFTC or the SEC. 

Mr. GARRETT. So it would not be—in order to have coordination, 

wouldn’t one have to come out not before the other? Why has one 

agency come out today and then the other one comes out a year 

from now and say that we have done so in a coordinated manner? 

How can the market respond to that? 

How can that be called coordinated? 

Mr. GERETY. Congressman, I think what you are identifying is 

an issue between the nature of the process—is it a coordinated 

process, are people working together— 

Mr. GARRETT. And when it is not coming out at the same time, 

would you say that is—I would say that is uncoordinated. Wouldn’t 

you? 

Mr. GERETY. I think what we can recognize in the process we 

have seen to date is staff working together, the Commissions having joint public roundtables, the Commissions working together, 

the Council helping to facilitate dialogue in this area and information-sharing in this area. 

Mr. GARRETT. So what you are saying is that you are looking at 

the process, but not at the end result. And so, as long as there is 

process that is going in the right direction, in other words everybody is having a meeting once a week or talking every so often, 

that is satisfactory. But if the end result is an uncoordinated 

timeline or an uncoordinated result, that is something you don’t 

care about. Is that what you are telling me? 

Mr. GERETY. I think that the Council and the Treasury believe 

very firmly that it is important for the rules to be consistent at the 

level of substance as well. 

Mr. GERETY. However, I would note that the SEC and the CFTC 

are independent regulatory agencies. Each of those Commissions 

needs to make decisions about their rulemaking. 

Mr. GARRETT. And so in this area, you are saying that your authority—the Council’s authority is limited. 

Mr. GERETY. The Council’s authority is limited. It cannot determine the rulemaking decisions of independent regulatory agencies. 

Mr. GARRETT. Absolutely no authority in that area. 

Mr. GERETY. The Council I think—I wouldn’t say—I think the 

question that you may be referring to is the Council does have authority to make recommendations in that area. And I think we 

have taken that and used that authority in some instances. 

But with respect to changing the independence of the SEC or the 

CFTC, the Council does not have authority. 

Mr. GARRETT. So do you look at it from a risk basis, that if they 

operate on a different timeframe and end up with different—end 

up with basically different rules, that you could have arbitrage as 

far as which way companies will go, based on different rules? 

48 

Mr. GERETY. Certainly, Congressman, the issue of consistency, 

both in terms of timing and of substance, is one that we think is 

important. 

Mr. GARRETT. And if that was the case, and if you found that 

regulatory arbitrage was going to potentially be the State, because 

they are coming out on an inconsistent basis and they are coming 

out on an inconsistent timeline, wouldn’t that give you authority to 

act in that case? 

Mr. GERETY. Congressman, I think we need to make a distinction 

between what the Council’s actions can be. The Council, as you 

know, is made up of its members. The SEC Chair and the CFTC 

Chair sit on the Council, so we work very closely with them on the 

progress of Dodd-Frank implementation generally. 

And also, in terms of the Council’s authority, the Council has authority to make recommendations to independent regulatory agencies with respect to issues that could relate to financial stability. 

Mr. GARRETT. So, in other words, the timeframe is really not a 

factor for you, as far as trying to assess the risk assessment of the 

matter. As long as they come out with a final product that is satisfactory, then it is okay. 

Mr. GERETY. Congressman, I think the timeframe may be important. We certainly are working closely with the regulating community— 

Mr. GARRETT. Does that explain why you became involved with 

the SEC in the money market fund situation, that you were not 

satisfied with the timeframe there, and you decided to insert your 

influence in that area, but you decide, where there could not be any 

regulatory arbitrage, but here is an area where you could have regulatory arbitrage, and some would suggest that you would already 

see it, as industry begins to, in anticipation of the rules, with one 

agency moving at a breakneck speed, and another agency moving 

at a more thoughtful manner, that you could see the arbitrage occurring now. 

Does that explain why you take two different approaches to this? 

Or why do you take two different approaches to it? 

Mr. GERETY. I think with the issue that you identify in money 

market funds, what the Council saw is the SEC not being able to 

take an action to have a public dialogue about the risks and structural vulnerabilities in money market funds. 

And the Council saw that as an issue and decided to put out for 

proposed recommendation a number of possible reforms to the— 

Mr. GARRETT. Wait a second. Isn’t that what you just said was 

the role of the regulator, that you are not—you don’t have the authority to get into there? 

Isn’t that what the SEC had said that they wanted to do as a 

regulator? Isn’t that the SEC who wanted to do a study? 

And all of a sudden, you decided, as a Council, to interfere in 

that area by moving forward? 

But in this other area, much more—very complex other area that 

really is ripe for consistency, you decided to have a hands-off approach. I see that as being inconsistent from your perspective, and 

they are potentially causing risk to the market. 

But, with that, I believe my— 

49 

Chairman MCHENRY. Yes, your time has expired. I appreciate 

the chairman of the Capital Markets Subcommittee. 

I will now recognize the vice chair of the subcommittee, Mr. 

Fitzpatrick, for 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Mr. Gerety, does your transparency policy include any requirements about giving public notice of your Council meetings? 

Mr. GERETY. Congressman, I don’t think that our transparency 

policy speaks specifically to the public notice of Council meetings. 

However, I would note that the Council has established a process 

whereby when possible, the Council notices public meetings 7 days 

in advance. 

Mr. FITZPATRICK. What does that mean, ‘‘when possible?’’ 

Mr. GERETY. For example, there were a number of instances 

when the Council has had conference calls in relation to specific 

market events or other concerns, and those meetings had not even 

been scheduled 7 days in advance, so it wasn’t possible to notice 

those meetings 7 days in advance. In that instance, such as during 

Superstorm Sandy or in response to the downgrade of U.S. debt in 

August of 2011, the Council, obviously, did not provide public notice 7 days in advance. But the general practice that we have tried 

to adopt as we become more mature is to provide a week’s notice 

for meetings. 

Mr. FITZPATRICK. Were there instances where you had public 

meetings but you didn’t provide public notice of it during the 

superstorm? 

Mr. GERETY. During the course of the Council’s development, I 

can’t recall off the top of my head when we started this practice 

of noticing meetings 7 days in advance, but I can tell you that the 

general practice we have adopted is to—and I think we will continue going forward—is to notice meetings 7 days in advance. 

Mr. FITZPATRICK. And what is the rationale for explicitly excluding any reference to a requirement for noticing public meetings in 

advance in the policy? 

Mr. GERETY. Congressman, I can’t speak specifically to that rationale. I think at the time, the transparency policy was trying to 

address the transparency of the Council’s operation. 

As we have gone through the 21⁄2 years of the Council’s existence, 

as we have had dialogue with both public market participants, and 

others like the GAO, we have looked for ways to improve our transparency and our accountability, and I think this is one of the steps 

that we have taken to try and improve our processes and be more 

transparent in noticing public meetings on a regular basis. 

Mr. FITZPATRICK. So under the policy as currently drafted and as 

it is being followed, are there any circumstances in which FSOC is 

actually required to give public notice of a meeting? 

Mr. GERETY. Congressman, I don’t think the policy speaks to 

public notices, but I can tell you what the practice is. We have 

adopted the practice of—and I think our records show that we are 

following that practice of noticing meetings 7 days in advance. 

Mr. FITZPATRICK. Why doesn’t FSOC transcribe the minutes of 

the meetings, the specifics other than what was referenced earlier 

in the hearing here? That you might have a public meeting and the 

50 

entire minutes are a page-and-a-half, including the attendees. Why 

don’t you transcribe them? 

Mr. GERETY. Congressman, I can’t speak to the Council’s decision 

about how to record and whether to transcribe minutes. I can say 

that we have heard that recommendation from the GAO and we 

are looking broadly at ways to continue to improve transparency 

and accountability, and we will consider that as go forward. 

Mr. FITZPATRICK. Wouldn’t you agree that a transcription of a 

meeting is a much better record of the meeting rather than a very 

sparse page-and-a-half of minutes? 

Mr. GERETY. Congressman, I think the question that you are 

raising is a question about how to balance the goals of keeping confidential information, market sensitive discussions confidential 

while also providing sufficient transparency and accountability to 

the public. And I think that is a balance that the Council is working to strike. 

Mr. FITZPATRICK. Director Clowers, in your audit did FSOC articulate a reason that justifies its failure to transcribe the minutes 

in the meetings? 

Ms. CLOWERS. It was similar to what Mr. Gerety has offered in 

terms of protecting confidential information and looking to strike 

the right balance in providing the information and that transparency in protecting information. 

But, again, we have noted the importance of transparency in all 

the decision-making, and we point to the Federal Reserve, Federal 

Open Markets Committee, which provides more information. Even 

3 weeks after the meeting, they will provide more detailed minutes 

and then later will release transcripts. 

Mr. FITZPATRICK. So this is how FSOC compares to the Federal 

Reserve? You are saying the Federal Reserve is much more transparent, provides more information, including a transcription? 

Ms. CLOWERS. Correct. 

Mr. FITZPATRICK. Director Clowers, is FSOC subject to the Sunshine Act? 

Ms. CLOWERS. This is a question that I have talked to our attorneys about, and it is my understanding that it goes to the definition of ‘‘agency.’’ And we haven’t been able to find any type of definitive court rulings about whether FSOC would be defined as an 

agency. But it is my understanding that they would not. 

Mr. FITZPATRICK. Mr. Gerety, can you agree that the Council 

would subject itself to the Sunshine Act? 

Mr. GERETY. Congressman, I can’t commit on behalf of the Council— 

Mr. FITZPATRICK. Would you agree that it would be a good thing 

to be subject to the Sunshine Act? Would you agree that it would 

be a good thing for the Council to be subject to the provisions of 

the Sunshine Act? 

Mr. GERETY. Congressman, the Council operates consistent with 

law. The Sunshine Act is a law. And I think the way that we have 

operated is consistent with the spirit. Certainly, in terms of public 

notices, we have adopted that practice, as we just discussed. But 

I can’t speak to or commit to the Council’s decisions. 

Mr. FITZPATRICK. Thank you. 

Chairman MCHENRY. I appreciate that. 

51 

And I want to announce as a procedural piece here, in consultation with the ranking member, there was agreement to go into a 

second round, to not exceed 10 minutes per side. It was a failure 

of the Chair to not announce that. 

And by unanimous consent, that is so ordered. 

So with that, I will recognize myself for 5 minutes. 

Ms. Clowers, is the Attorney General a member of the FSOC? 

Ms. CLOWERS. The Attorney General? No. 

Chairman MCHENRY. The Attorney General is not. 

The Attorney General said in December, ‘‘The impact on the stability of the financial markets around the world is something we 

take into consideration. We reach out to experts outside of the Justice Department to talks about what are the consequences of actions that we might take,’’ meaning Justice, ‘‘that would be—and 

what would be the impact of those actions. We want to make particular prosecutive decisions or determinations with regard to particular institutions.’’ 

Mr. Gerety, has the FSOC been consulted by the Justice Department as it relates to financial institutions? 

Mr. GERETY. My understanding is that the Justice Department 

reached out to Treasury but not to the Council as a whole. 

Chairman MCHENRY. To the Treasury Secretary? 

Mr. GERETY. I am not personally aware of the officials within the 

Treasury who engaged with the Department of Justice on this 

question. I can say that my understanding is that the Treasury 

was not able to offer a meaningful assessment of the impact. 

However, I think the issue that you raise— 

Chairman MCHENRY. Were you directly or indirectly contacted 

by the Justice Department in regard to this matter? 

Mr. GERETY. Personally, I was not engaged in those conversations, but I— 

Chairman MCHENRY. Mr. Berner, were you? 

Mr. BERNER. No, sir. 

Chairman MCHENRY. Were any members of your staff? 

Mr. BERNER. No, sir. 

Chairman MCHENRY. Mr. Gerety, are you the designated staff 

person within Treasury as it pertains to the FSOC? 

Mr. GERETY. There are— 

Chairman MCHENRY. It is not a trick question. It is simply yes 

or no. 

Mr. GERETY. I do run an office within Treasury that supports the 

Council’s activity. 

Chairman MCHENRY. And your title is what? 

Mr. GERETY. I am the Deputy Assistant Secretary for the Financial Stability Oversight Council. 

Chairman MCHENRY. All right, I am not trying to be tricky with 

you. 

And you were not contacted by the Justice Department or any individuals within the Justice Department about potential prosecutions against institutions or individuals within financial institutions? 

Mr. GERETY. I was not personally contacted. 

Chairman MCHENRY. Okay. 

52 

Dr. Berner, has OFR done any analysis about what the impact 

would be of a prosecution of an individual or a financial institution? 

Mr. BERNER. No, the OFR has not done any such analysis. 

Chairman MCHENRY. Is the OFR planning any such data collection and analysis? 

Mr. BERNER. The OFR is not planning any such analysis. However, if the Council directed us to look at any question related to 

financial stability, that would be the way in which we would undertake any analysis. 

Chairman MCHENRY. Okay. 

The Attorney General testified on March 6th before the Senate 

Judiciary Committee and said, ‘‘I am concerned that the size of 

some of these institutions becomes so large that it becomes difficult 

for us to prosecute them when we are hit with indications that if 

you do prosecute, if you do bring a criminal charge, it will have a 

negative impact on the national economy, perhaps even the world 

economy. And I think that is a function of the fact that some of 

these institutions have become too large, and I think it has an inhibiting influence and impact on our ability to bring resolutions 

that I think would be appropriate.’’ 

Let me ask once again. Dr. Berner, have you provided any data 

or information to the Justice Department about potential impacts 

of prosecutions of individuals and financial firms or financial firms? 

Mr. BERNER. No, we have not. 

Chairman MCHENRY. Okay. Ms. Clowers, I know you are not a 

Justice Department official, but you are a financial services expert. 

Is this capacity within the Justice Department? 

Ms. CLOWERS. We have not examined the Justice Department to 

make this type of determination. 

Chairman MCHENRY. Do you examine institutions that have financial services expertise within government? 

Ms. CLOWERS. Yes, we do. 

Chairman MCHENRY. And you have not done any analysis within 

the Justice Department? 

Ms. CLOWERS. That is correct. 

Chairman MCHENRY. Not to say the Justice Department lacks 

that authority or expertise, but you are simply not aware of that 

expertise? 

Ms. CLOWERS. I am not aware of that expertise, correct. 

Chairman MCHENRY. Okay. 

Mr. Gerety, is there any intention by your office and your staff 

to do this analysis that I have asked Dr. Berner about? 

Mr. GERETY. Congressman, I think the question you are asking 

is, would the— 

Chairman MCHENRY. The question, I will repeat, is, do you have 

any plans to conduct an analysis at this moment? Do you have any 

plans? 

Mr. GERETY. The Council is not taking up this matter specifically. However, I think the broader issue about how to deal with 

the risks of large, complex financial institutions is addressed comprehensively in the Dodd-Frank Act. 

Chairman MCHENRY. Okay. And, therefore, the Attorney General 

is wrong in his analysis? 

53 

Mr. GERETY. I think the Attorney General is speaking to prosecutorial decisions. Those are his decisions to make. And more generally, I think the point that bears repeating is that no firm—no 

institution is above the law. 

Chairman MCHENRY. Thank you. My time has expired. 

Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. 

Let me start with our GAO representative. 

Does your report in any way contain any information related to 

the subject matter that was just called to your attention? 

Ms. CLOWERS. Did the issue of— 

Mr. GREEN. Did you audit in any way the Attorney General or 

any of the concerns raised by the Attorney General? 

Ms. CLOWERS. No. 

Mr. GREEN. And what is the style of this hearing today, as you 

understand it? 

Ms. CLOWERS. I am sorry, the style? 

Mr. GREEN. The style—the topic—the title? 

Ms. CLOWERS. The title—the focus was on our report on FSOC 

and OFR. 

Mr. GREEN. And did you come prepared today to talk about the 

Attorney General and inquiries that he may have made to certain 

agencies? 

Ms. CLOWERS. No. 

Mr. GREEN. Is this something that is totally unexpected as it relates to you and your purpose for being here today? 

Ms. CLOWERS. Certainly over the past few months, we have seen 

this in the press, in addition to talking about it. 

Mr. GREEN. But I am talking about as it relates to your report, 

is this something that is totally unexpected as it relates to your report? 

Ms. CLOWERS. Correct. 

Mr. GREEN. Are you afraid to say this is something that is totally 

unexpected— 

Ms. CLOWERS. Oh, it is not related— 

Mr. GREEN. —as it relates to your report? 

Ms. CLOWERS. —to our report. 

Mr. GREEN. All right. So this is beyond the scope of your report? 

Ms. CLOWERS. Yes, it is outside of our scope. 

Mr. GREEN. You say this without hesitation, reservation, or 

equivocation? 

Ms. CLOWERS. Yes. 

Mr. GREEN. Now, let’s talk to our representative from FSOC. 

Do you have a mandate that requires you to supervise in some 

way—well, do this. Give us the entities that come under the purview of your jurisdiction. 

Mr. GERETY. Congressman, the Council is created among its 

members to address a broad range of risk related to financial stability that is embodied within the non-bank designation— 

Mr. GREEN. Can you pull the microphone a bit closer, please? 

Mr. GERETY. —Sure—that is embodied within the non-bank designations authority within a variety of recommendation authorities. 

So in that sense, the Council has a broad mandate to facilitate inVerDate Nov 24 2008 19:06 Aug 20, 2013 Jkt 080873 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\80873.TXT TERRI
54 

formation-sharing and coordination on issues in the financial system that could relate to financial stability. 

Mr. GREEN. And as it relates to the Attorney General, do you 

have any supervisory authority over the Attorney General? 

Mr. GERETY. The Attorney General is not a member of the FSOC 

and the Attorney General’s decisions on prosecutorial matters are 

up to the Attorney General and the Department of Justice. 

Mr. GREEN. What did you come prepared to talk about today? 

Mr. GERETY. Congressman, I was prepared to speak to the GAO 

report, and also to broad matters that are before the Council. 

Mr. GREEN. Let’s talk to our member from the Office of Financial 

Research. 

What were you prepared to talk about today, sir? 

Mr. BERNER. Congressman, I came here prepared to talk about 

the role of the Office in serving the needs of the Council, as well 

as the recommendations from the GAO with respect to our mandate. 

Mr. GREEN. And finally, do this for me. Clarify, if you would, liquidity versus solvency. There was some information accorded, and 

I don’t think clarity was provided. Can you make it as 

transpicuously clear as possible, please, in terms of liquidity versus 

solvency? Include clawback in there, if you would, such that people 

will understand that taxpayers have no money that will be at risk 

in the final analyses. 

Mr. GERETY. Congressman, I think the most important statements in the Dodd-Frank Act with respect to solvency and the actions taken in a crisis are really in Title II, which bears on the Orderly Liquidation Authority. And Title II makes it very clear that 

no taxpayer funds shall be used to prevent the liquidation of any 

financial company under the title. 

What that means is that no financial firm will be protected from 

its own mistakes by actions of government or the use of taxpayer 

funds. 

There is, I think, more broadly in the financial system, an understanding that in certain instances, like the discount window, the 

Federal Reserve is able to provide a lender of last resort function 

to banks. 

But the important action of Dodd-Frank is to make clear that 

taxpayers can bear no losses in the liquidation of any firm, and 

that the government cannot prevent the liquidation of any financial 

firm, no matter how large or complex. 

Mr. GREEN. Mr. Chairman, I believe that pursuant to our agreement, the time has expired. And if this isn’t true—the agreement 

that we have—I would ask that you move to sound the gavel and 

call this meeting adjourned. 

Chairman MCHENRY. I certainly appreciate the ranking member, 

and I certainly appreciate the testimony of the witnesses today. 

Mr. GARRETT. Mr. Chairman, even though I am not a member of 

the committee, I will seek unanimous consent for an additional 5 

minutes. 

Mr. GREEN. Mr. Garrett knows that I love him dearly, but unfortunately, I have an appointment with the President of the United 

States of America. We have a meeting with him. You have already 

55 

had yours, so I am going to have to step away and respectfully decline the— 

Mr. GARRETT. Would it be of any assistance if I told you we had 

a 2-hour meeting and not very much came out of it so that— 

[laughter] 

Mr. GREEN. Well, not everybody who looks at Mount Rushmore 

sees Presidents. So it depends on your perspective, I suppose. 

Mr. GARRETT. I understand that, thank you. I yield back. 

Chairman MCHENRY. The Chair notes that some Members may 

have additional questions for this panel, which they may wish to 

submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written 

questions to these witnesses and to place their responses in the 

record. Also, without objection, Members will have 5 legislative 

days to submit extraneous materials to the Chair for inclusion in 

the record. 

And with that, I do want to close by thanking the witnesses for 

their service in our government. Thank you for answering the questions, and we certainly appreciate your willingness to respond to 

the written questions that we will certainly have as a follow-up. 

Thanks so much. And without objection, this hearing is adjourned. 

[Whereupon, at 12:43 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

March 14, 2013 

58 


80873.001

Testimony of Richard Berner, Director of the Office of Financial Research, 

U.S. Department of the Treasury 

House Financial Services Subcommittee on Oversight and Investigations 

Hearing on "Who is Too Big to Fail? GAO's Assessment ofthe Financial 

Stability Oversight Council and the Office of Financial Research" 

March 14,2013 

The views expressed in this testimony are those of Richard Berner, Director of the Office of 

Financial Research, and do not necessarily represent the views of the President. 

Introduction 

ChaiIman McHenry, Ranking Member Green, and other members of the subcommittee, thank 

you for the opportunity to discuss the role of the Office of Financial Research (OFR) in 

supporting the Financial Stability Oversight Council (Council) and its member organizations. As 

we work to fulfill the mission of the OFR, we are fully committed to being transparent and 

accountable to the Congress and the public. 

As we discussed when I last testified before this subcommittee, Congress created the OFR 

through the Dodd-Frank Wall Street Reform and Consumer Protection Act (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 OFR's independent data-and-research work supports the activities of the Council, which is 

responsible for identifying risks to the financial stability of the United States, promoting market 

discipline, and responding to emerging threats. The complementary mandates of the OFR, the 

Council, and its member organizations enable us comprehensively to assess and monitor the 

stability of the financial system. The OFR's regular collaboration and coordination with them 

enables us to work toward achieving our shared mission, while avoiding duplication. 

The OFR is committed to the highest level of transparency and accountability in pursuing our 

agenda. We publish the results of our work on our website, in our Annual Report, in six 

published working papers, and in press releases and blogs documenting important developments. 

We have hosted two conferences jointly with the Council, and numerous workshops and 

seminars to exchange ideas with other researchers and data scientists. We have created the 

Financial Research Advisory Committee to advise the OFR and, as required under the Federal 

Advisory Committee Act, the Committee holds open meetings and makes public its 

recommendations. With speeches and participation in panels, OFR officials regularly engage in 

public events and meetings with stakeholders in industry, and the research, data, and global 

regulatory communities. 

The Office reports regularly to Congress and others charged with oversight. In December, as 

required under the Dodd-Frank Act, the Office issued its 2012 Annual Report to Congress on 
59 


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Page 2 of7 

Human Capital Planning, the second in the series. The Office routinely communicates with 

Congressional offices and committees, and OFR officials have testified before this and other 

committees. The Office also engages regularly in audits with inspectors general and the 

Government Accountability Offiee (GAO). 

In my testimony today, I will describe the OFR's major accomplishments and key priorities. As 

you requested, I will also describe actions the OFR has taken in response to a report by the GAO 

in September 2012 entitled, "New Council and Research Office Should Strengthen the 

Accountability and Transparency of Their Decisions." 

OFR Accomplishments 

The OFR has made significant progress in fulfilling its primary data-and-research 

responsibilities. 

Data and Analysis to Support the Council: The OFR has been active in providing key data and 

analysis that have informed the Council's work. These activities have included and will continue 

to include: 

• Supplying data and analysis for the work of the Council's nonbank designation 

committee, including analysis of the asset management industry; 

• Providing data and staff support for producing the Council's 2013 Annual Report; 

Acquiring, managing, protecting, and securely making available to the Council and to its 

own researchers the data needed for assessing and monitoring threats to financial 

stability; 

• 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; and 

• Conducting research and analysis, and monitoring risks related to short-term funding 

markets, money market funds, hedge funds, credit default swaps, and other areas. 

Legal Entity Identifier: To improve the quality of financial data, the OFR is working to 

establish standards for data collection and usage. Standards enable us to aggregate and compare 

data on an apples-to-apples basis. Standards also facilitate our analysis of interconnections 

among financial firms and their counterparties, and help us to understand the transmission and 

amplification of stress across the financial system. 

For industry, these standards also have benefits, enabling firms to report the same data to 

regulators as they use to manage risks and to run their management information systems, thereby 

reducing reporting burdens. Standards also reduce industry costs for collecting, cleaning, and 

aggregating data. 

The OFR has played a central role in the international data-standards initiative to establish a 

global Legal Entity Identifier (LEI), a code that uniquely identifies parties to financial 

transactions and links to their basic "business card" information. The OFR's Chief Counsel was 

recently selected as the first Chair of the Regulatory Oversight Committee, which was formed to 
60 


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Page 3 of7 

lead and direct the LEI implementation under a mandate from the Group of20 leading global 

economies. 

We plan to extend our collaborative work on data standards by developing best practices for the 

hierarchies that map the relationships among entities or products. For example, legal entity 

hierarchies define the relationships, such as ownership and control, among legal entities engaged 

in financial transactions. 

Organizational Build-Out: To accomplish its mission, the OFR needs a talented workforce and 

a world-class and secure technology infrastructure. 

Workforce - The OFR employs 140 staff-an increase of27 percent since the GAO report was 

issued. That number is expected to roughly double to 275-300 by FY2014-2015, when we plan 

to reach a steady-state staffing level. The OFR has also filled seven of its nine senior 

management positions at the Director, Deputy Director, and Chief levels, and in December 

issued its 2012 Annual Report to Congress on Human Capital Planning. 

The OFR has created a Fellowship Program, through which experts from academia, state 

regulatory agencies, non-profit organizations, and other federal agencies may spend up to two 

years at the OFR performing research and conducting advanced training of OFR employees. The 

Fellowship Program facilitates the sharing of new methods and approaches to identifying and 

analyzing threats to financial stability. The OFR's first Executive Fellow is a Professor of 

Economics at Johns Hopkins University. 

Technology Infrastructure - The Office has put in place a short-term analytical environment for 

its researchers, as well as agreed-on processes and a collaboration environment for the secure 

exchange of data with other Council member organizations. To log, track, and follow-up on 

responses to requests to the OFR for data and services, the OFR is establishing an online service 

desk. The Office is currently building upon its foundational infrastructure to create a long-term 

secure analytical environment, leveraging advances in current technologies related to data 

management. 

No OFR goals are more important than safely and securely collecting data and safeguarding the 

data we hold. The Office is governed by Treasury information security standards, and our Chief 

Information Security Officer works closely with his Treasury counterpart to assure that our 

policies and procedures meet or exceed the standards of the Treasury Department, as well as the 

standards of Council member organizations. As required by the Federal Information Security 

Management Act, the Office has established an information security program policy and data 

handling procedures for proper safekeeping of information at the highest level ofthe Federal 

Information Processing Standards. 

First Annual Report: The OFR's first Annual Report, released on July 20,2012, included a 

framework for evaluating threats to financial stability, a comprehensive exploration and 

identification of current risks, and thorough discussions ofOFR's activities. The report also 

described the OFR's agenda related to data and research, and the types and sources of data that 

the OFR will need to fill data gaps and fulfill its mission. In addition, the report contained a 
61 


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Page 4 of7 

selection of OFR research and a primer on data standards. The report is on the OFR's website at 

http://www.treasury.gov/ofr. 

Working Paper Series: Thc OFR has released six working papers, including four new papers 

published this year, focusing on topics such as systemic risk analytics, best practices in risk 

management, agent-based modeling, and hedge fund contagion. The Working Paper Series 

makes accessible the OFR's in-depth work to analyze and measure threats to financial stability. 

These papers, some developed in partnership with national experts, are intended to promote 

discussion among researchers and subsequent feedback that helps the OFR fine-tune its research. 

The papers are all available on the OFR's website at http://www.treasury.gov/ofr. The OFR 

plans to continue to increase its output of important, timely, and innovative research on financial 

stability topics as its research staff continues to grow and its network of partnerships with outside 

researchers and academics continues to mature and expand. 

Seminars and Conferences: The OFR has hosted a number of conferences, workshops, and 

seminars to engage with experts from academia, industry, and elsewhere in government on 

questions related to financial stability. Specifically: 

• Since 2011, the OFR has hosted more than 60 seminars as part of its Research Seminar 

Series, a forum in which OFR staff can exchange ideas with thought leaders in 

economics, finance, and other fields. 

• The OFR and the Council have co-sponsored two conferences: "The Macroprudential 

Toolkit: Measurement and Analysis" in early December 2011 and "Assessing Financial 

Intermediation: Measurement and Analysis" in early December 2012. 

• The OFR convened a workshop in August 2012 for academic researchers, financial 

market participants, and financial policymakers to evaluate stress-testing approaches and 

future research. 

• Last month, the OFR co-hosted with other Council member organizations the third 

annual Regulatory Data Workshop. Experts from federal regulatory agencies discussed 

advances and challenges in financial data management and technologies, and identified 

areas for collaboration. It is notable that the first Regulatory Data Workshop helped 

launch initial u.S. work on the LEI. 

Financial Research Advisory Committee: In November 2012, the OFR announced the 

membership of the Financial Research Advisory Committee, a group of30 distinguished 

professionals in economics, finance, financial services, data management, risk management, and 

information technology. These experts provide advice to the OFR on best practices for data 

management, data standards, and research methodologies. The Committee first met in December 

2012; minutes of that meeting are posted on the OFR website. At their next meeting, members 

will review the work of the panel's subcommittees, which are focused on research, data and 

technology, and financial services and risk management. 

OFR Actions in Response to the GAO Report 

The subcommittee's invitation letter asked me to address a September 2012 GAO report that 

reviewed the progress of the Council and the OFR in achieving their missions. The report 
62 


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PageS of7 

concluded that the Council and the OFR have made progress in establishing their operations and 

approaches for monitoring threats to financial stability, developing mechanisms for 

accountability and transparency, and enhancing collaboration among Council member 

organizations. The report also recommended steps to improve communication with the public, to 

develop the OFR's strategic planning and perfonnance management system, and to clarify 

responsibilities between the Council and the OFR. 

The Office strongly supports GAO's important oversight function and appreciates its 

constructive work in conducting its review. We have been pleased to work with Nicole Clowers 

and her team. Their willingness to engage with us and their valuable suggestions are helping us 

improve our effectiveness, transparency, and aecountability. 

In the following three sections, I will describe the progress the OFR has made in responding to 

GAO's recommendations. 

Improving Communication with the Public: The OFR has greatly improved its ability to 

provide infonnation on its work to the public since the issuance of the GAO report. The OFR 

has redesigned its website (www.treasury.gov/ofr) to make it more user friendly, timely, and 

proactive. Launched in November 2012, the new website design and enhanced OFR capabilities 

offer several improvements: 

• Easier navigation and better organization of Web content. 

Significantly expanded online content. For example, we routinely post on the OFR 

website our reports, research papers, assessment infonnation, data standards updates, 

research papers, conference materials, news releases, Congressional testimony, and other 

infonnation. 

• Increased transparency including through a home page "slideshow" that highlights key 

new content and links to it. 

• E-mail update alerts that flag new content; currently more than 2,000 subscribers receive 

the notifications. 

• Analytical tools to monitor the number and timing of website visits and page views. 

• Ability to update our own Web content through the site's content management system for 

more timely infonnation. 

To foster enhanced communication and outreach, the OFR will further enhance the website and 

has created a new position for a Chief of External Relations, who will lead a team responsible for 

communications, Congressional affairs, and outreach with industry and academia. 

The OFR has also sought to demonstrate transparency and accountability in its communications 

by: 

• Testifying at Congressional hearings and responding to Congressional inquiries; 

• Providing briefings and attending meetings with members of Congress, their staffs, and 

the staffs of Congressional committees; 

• Making routine notifications to key Congressional offices and committees about 

significant OFR activities and initiatives; 
63 


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Page 6 of7 

• Publishing the OFR Annual Report and Annual Report to Congress on Human Capital 

Planning; and 

• Engaging in, and responding to, audits conducted by GAO, inspectors general, and 

others. 

Further Developing Strategic Planning and Performance Management: The OFR's Strategic 

Framework, published in March 2012, described the OFR's long-tcrm stratcgic goals, objectives, 

and implementation priorities for FY 2012-FY 2014. The framework also detailed the OFR's 

organization, workforce plan, governance, transparency, and oversight. The GAO report called 

the framework an important step but recommended that the Office further develop its strategic 

planning and performance management system by linking OFR activities to its goals, and using 

publicly-available performance measures to monitor its progress. 

In response, the OFR has finalized a set of performance measures for each of its strategic goals 

(see Table I). These measures will be included in the FY 2014 budget submission to Congress, 

along with specific targets for FY20 13 and FY2014. 

Center of Excellence for Research 

Public Infonnation 

Building the OFR 

• Number of research products published 

• Number of research products coauthored 

collaboration with outside researchers, Q",'errlme,nt 

assessed 

OFR goals and objectives continue to drive its budget and its strategies for planning, project 

management, and human capital. This work is reflected in documents that the OFR uses to 

manage its day-to-day work, as well as in congressionally-mandated reports. The forthcoming 

President's Budget will provide additional details on the budget projections of the OFR. 

ClarifYing Council-OFR Responsibilities: The GAO report acknowledged that there does not 

appear to be overlap in the work of the OFR and the Council, which have complementary 

mandates, or among the work of the Council member organizations. However, the report 

recommended that, to ensure comprehensive identification and analysis of threats to the financial 

system and to minimize duplication, the Council and the OFR clarify their respective 

responsibilities for monitoring threats to financial stability, as well as the roles of Council 

member organizations. 

The OFR and the Council have strengthened steps to assure a coordinated approach to achieving 

their shared mission and to minimize duplication. By drawing on the collective expertise of its 
64 


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Page 7of7 

member organizations and the OFR, the Council and its committees facilitate comprehensive 

monitoring and analysis of trends and emerging risks to the U.S. financial system. The Deputies 

Committee of the Council serves as a coordinating entity to monitor any overlap among Council 

member organizations. Additionally, senior leaders of the OFR meet weekly with the Council 

staff to coordinate ongoing activities and to prevent duplication of effort. 

The OFR and the Council also take great care not to duplicate the work of federal financial 

regulators, which continue to collect the data they need to monitor the financial institutions they 

supervise. To provide the connective tissue between the efforts of other Council member 

organizations and to complement their work, the OFR collaborates with them to identify and fill 

gaps in data and knowledge about the financial system. To that end, the OFR has conducted an 

inventory of data held by those organizations. By statute, the OFR must consult closely with 

them before collecting data from any firm, and works to collaborate on any data gathering 

activities beyond simple procurements. 

The OFR is also fostering Council-wide collaboration on data issues through the Council's Data 

Committee. The Committee coordinates among Council member organizations on matters 

pertaining to data standards and collection. The Committee has formed working groups to 

address topics, such as establishing protocols for sharing data among Council member 

organizations and identifying data hierarchies needed for analysis. 

Conclusion 

Chairman McHenry, Ranking Member Green, and other members of the subcommittee, thank 

you again for the opportunity to appear before you today. We welcome the oversight of this 

subcommittee in helping to ensure that, in carrying out its mission, the OFR is fully transparent 

and accountable to the Congress and the public. We look forward to working with you and your 

staff to continue the critical task of promoting the stability ofthis nation's financial system. 

I would be happy to answer your questions. 
65 


80873.008

GAO 

For Release on Delivery 

Expected at 10:00 am. EDT March 14,2013 

GAO-13-467T 

United States Government Accountability Office 

Testimony 

Before the Subcommittee on Oversight 

and Investigations, Committee on 

Financial Services, House of 

Representatives 

FINANCIAL STABILITY 

Continued Actions Needed 

to Strengthen New Council 

and Research Office 

Statement of A. Nicole Clowers, Director 

Financial Markets and Community Investment 

GAO 

Accountability .. Integrity * Reliability 
66 


80873.009

Highlights of GAO-13-46Tf, a testimOflY 

before the Subcommittee on Oversfght and 

Investlgatll?os, Committee on Financial 

ServIces, House of R:epre'S~ntatlves 

Why GAO.Did This Study 

In 2010, the Dodd,Frank Wall Street 

Reform andCohsuiner Protection Act 

created FSOC t",idenlify and address 

threats to financial stability and OFR to· 

support FSOC and Congress bX 

providing financial research and data. 

:rhi~'~estiTqriY primarily d!~cusses 

findings from·.a September 2012 GAO 

repo(! andaddressesfour1opics 0) 

ch"lIeng". FSOC and OFR face in 

::7~~R~~~~~Xs,:s=~~~ii;~ FSOC's 

management mechanisms, (3) Fs6c's 

and OFR'sactivitles for supporting 

collaboration among their members 

anq <lXtema! sla~ehold"rs, anel (4) 

FSOC's rules for a,esigna,~fng m;mbi:mk 

financial filmS .that pose threats to 

financial stability. 

For Ihis. testimony, GAO updated some 

in~orma~jor ,of1 the ~n~itie~' re~ponse to the recom"\endations In it~ September 

2012 report:. 

What GAO R~eo:mniends 

In its Septemoor 2012 repot!, GAO 

made 10 recommendations to FSOC 

and OFR, which among otherthlnQs, 

recommends' ways to improve the 

tr<:lnsparency and accOuntability of lheir 

decistons. ,~ri response to G!,O's 

report. Treasuf)i' s,aid, ?s, Chaitperson, 

that the council and OFR had 

considered: the recommendations. In 

March 2013 Tie,astlry and OFR 

officials described steps that "pch 

entity was considering ?f Jaking to 

address some althern. . 

View GA0<13-461T. PO!: more jm6fmatlon, 

conlactA J'llcole t:1qwers at (202;) 51Z"86~8 

or clo~rsa@gM.gl)V 

'MmilG-NE 

FINANCIAL STABILITY 

Continued Actions Needed to Strengthen New 

Council and Research Office 

What GAO Found 

The Financial Stability OverSight Council (FSOC) and Office of Financial 

Research (OFR) face challenges in achieving their missions. For example, 

collaboration among FSOC members can be challenging, as almost all members 

represent independent agencies that retain existing authorities. Additionally, OFR 

faces the challenge of building a world-class research organization while meeting 

shorter-term responsibilities. 

FSOC and OFR have developed some management structures to carry out their 

missions and taken steps to promote collaboration among their members and 

stakeholders. For example, FSOC established several standing committees 

composed of members' and member agendes' staffs to support the council in 

carrying out its business. FSOC also issued rules on the process for designating 

nonbank financial firms for additional oversight. However, GAO reported in 

September 2012 that these efforts could be strengthened to conform to key 

standards and practices and made 10 recommendations. 

• FSOC should develop a systematic approach to help identify potential threats 

to financial stability that includes collecting and sharing key financial risk 

indicators. FSOC's Systemic Risk Committee, which is responsible for 

identifying risks to financial stability, has procedures to facilitate risk analysis 

but does not have a systematic approach or comprehensive information. 

FSOC member agendes on their own may not be well pOSitioned to judge 

which potential threats wi!! benefit from interagency discussions. 

• FSOC should develop more systematic approaches that are forward looking 

and help prioritize threats to the financial system in its annual reports. To date, 

FSOC's annual reports have not reflected a forward-looking process for 

identifying emerging threats. 

• To improve transparency, (1) FSOC should keep detailed records of closeddoor sessions and (2) both FSOC and OFR should develop a communication 

strategy to improve communications with the public. Currently, public 

information on FSOC's and OFR's decision making and activities is limited. 

• OFR needs to further develop its strategic planning and performance 

management system to include some leading practices. OFR issued a 

strategic framework in March 2012 that did not, among other things, link 

activities to strategic goals and performance measurement systems. 

• FSOC should identify an agency or agencies to monitor or implement each 

recommendation from its annual reports within specified time frames. FSOC's 

annual reports have not consistently identified which entities should monitor or 

implement the identified recommendations. 

• FSOC should (1) develop policies to clarify when formal collaboration or 

coordination should occur, (2) more fully incorporate key practices for 

successful collaboration, and (3) clarify with OFR responsibility for 

implementing requirements to monitor risks to the financial system. 

• FSOC should develop a comprehensive framework for assessing the impact 

of its deSignation decisions. For example, FSOC has issued rules on 

processes for designating nonbank financial entities for additional oversight, 

but it has not developed plans to comprehensively evaluate whether the 

designations are having their intended impact. 

_____________ United States Government Accounlability Office 
67 


80873.010

United States Government Accountability Office 

Washington, DC 20548 

Chairman McHenry, Ranking Member Green, and Members of the 

Subcommittee: 

Thank you for the opportunity to be here today to discuss the Financial 

Stability Oversight Council (FSOC) and the Office of Financial Research 

(OFR). As you know, the 2007-2009 financial crisis focused attention on 

weaknesses in the U.S. regulatory structure, including the lack of an 

agency or mechanism responsible for monitoring and addressing risks 

across the financial system and a shortage of timely information to 

facilitate that oversight. In response to the crisis, Congress passed the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) in July 2010, which provided for a broad range of regulatory 

reforms. 1 Among other things, the act established FSOC to monitor the 

stability of the U.S. financial system and take actions to mitigate risks that 

might destabilize the system. 2 The Dodd-Frank Act also created OFR to 

support FSOC and Congress by providing financial research and data. 3 

Congress gave FSOC a number of significant authorities to help it 

execute its broad mission, including to designate nonbank financial 

companies for heightened supervision by the Board of Governors of the 

Federal Reserve System (Federal Reserve) and to require financial 

companies to provide data to OFR Although Congress set up some 

specific accountability mechanisms for FSOC and OFR, some members 

of Congress have questioned whether more needs to be done to help 

ensure that FSOC and OFR use their authorities as Congress intended. 

My testimony today will address four topics: (1) the challenges FSOC and 

OFR face in fulfilling their missions; (2) FSOC's and OFR's efforts to 

establish management structures and mechanisms to carry out their 

missions and attain their goals; (3) FSOC's and OFR's activities 

supporting collaboration among members and external stakeholders, 

including international bodies and regulators; and (4) FSOC's rules for 

'Pub. L. No. 111-203,124 Stat. 1376 (2010). 

2The provisions of the Dodd-Frank Act dealing with FSOC are contained primarily in 

subtitle A 01 title I, §§ 111-123, codified at 12 U.S.C. §§ 5321-5333, and title VIII, codified 

at 12 U.S,C. §§ 5461~5472. The following sections of this testimony describe FSOC's 

specific functions in detail. 

3The provisions dealing with OFR are contained primarily in subtitle B of title I, §§ 151~ 

156, codified at 12 U.S.C. §§ 5341-5346. 

Page 1 GAO·13467T Financial Stability Entities 
68 


80873.011

Background 

designating nonbank financial companies that pose threats to financial 

stability. 

My remarks are primarily based on our September 2012 report on FSOC 

and OFR. 4 For that report, we reviewed our prior reports on financial 

reform and the 2007-2009 financial crisis, statements by government 

officials and academic experts, and agency documents, including 

information on the entities' budgeting, staffing, and planning. In addition, 

we analyzed FSOC policies, procedures, and products to determine 

whether and how their collaboration practices compared with key 

elements of effective collaboration we have previously identified and to 

determine processes FSOC used to issue products. 5 We also interviewed 

FSOC and OFR staff; officials from FSOC's member agencies; and 

external stakeholders, including foreign officials, industry trade groups, 

and academics. In March 2013, we interviewed Treasury and OFR 

officials to obtain updates on the progress FSOC and OFR had made in 

implementing our recommendations. The work on which this statement is 

based was conducted from November 2011 through September 2012 and 

in March 2013 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

FSOC consists of 10 voting members and 5 nonvoting members (fig. 1). 

The 10 voting members include 9 federal regulators and an independent 

insurance expert. The 5 nonvoting members include state-level 

representatives from bank, securities, and insurance regulators and 

directors of OFR and the Federal Insurance Office. As the chairperson of 

FSOC, the Secretary of the Treasury has certain powers and 

responsibilities related to FSOC's meetings, rulemakings, 

recommendations, and reports and testimony to Congress. The 

Financial Stability: New Council and Research Office Should Strengthen the 

Accountability and Transparency of Their Decisions, GAO-12-886 (Washington D.C,: 

Sept. 11, 2012). 

5GAO, Results-Oriented Government: Practices That Can Help Enhance and Sustain 

Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct 21, 2005). 

Page 2 GAO-13467T Financial Stability Entities 
69 


80873.012

Figure 1: FSOC Membership 

Director 

Federal 

!nsurance 

Off", 

Director 

Offieaof 

Financial 

Research 

Secretary, in consultation with the other FSOC members, is also 

responsible for regular consultation with the financial regulatory entities 

and other appropriate organizations of foreign governments or 

international organizations. FSOC has established seven standing 

committees that are generally composed of staff of FSOC members and 

member agencies to help carry out the council's business. 6 

State 

Banking 

Supervisor 

D Nonvoting members 

~ Voting members 

... Chairperson of FSOC 

Source GAO analysrs of Dodd-Frank Act 

The Dodd-Frank Act established OFR to serve FSOC and its member 

agencies by improving the quality, transparency, and accessibility of 

financial data and information; conducting and sponsoring research 

related to financial stability; and promoting best practices in risk 

Deputies Committee, SystemiC Risk Committee, Designation of 

Nonbank Financial Companies Committee, Designation of Financial Market Utilities 

Committee, Heightened Prudential Standards Committee, Orderly Liquidation Committee, 

and Data Committee. 

Page 3 GAO~13"467T Financial Stability Entities 
70 


80873.013

FSOC and OFR Face 

Challenges Achieving 

Their Missions 

management. The act requires OFR to set up a data center and a 

research and analysis center to, among other things, 

collect and provide data to FSOC and member agencies; 

standardize the types and formats of data reported and collected; 

perform applied and essential long-term research; 

develop tools for risk measurement and monitoring; and 

make the results of its activities available to financial regulatory 

agencies. 

FSOC and OFR face several challenges as they work to carry out their 

responsibilities and achieve their missions. First, FSOC's missions-to 

identify risks to U.S. financial stability and respond to emerging threats to 

stability-are inherently challenging, for several reasons. Identifying risks 

to financial stability is challenging because (1) key indicators, such as 

market prices, often do not reflect threats to financial stability; (2) such 

threats do not develop in precisely the same way in successive crises; (3) 

financial innovations are not well understood; and (4) according to 

experts, effectively monitoring and mitigating systemic risk is both vast 

and procedurally complex. In addition, actions to preemptively mitigate 

emerging threats may appear unnecessary or too costly at the time they 

are proposed or taken. 

Second, although the Dodd-Frank Act created FSOC to provide for a 

more comprehensive view of threats to U.S. financial stability, it left most 

of the fragmented and complex arrangement of independent federal and 

state regulators in place and generally preserved their statutory 

responsibilities. As a result, FSOC's effectiveness in providing for a more 

comprehensive view of threats to U.S. financial stability hinges to a large 

extent on collaboration among its many members, almost all of whom 

have their own independent regulatory responsibilities. In testifying on the 

coordination of Dodd-Frank rulemakings assigned to specific FSOC 

members before the U.S. House Financial Services Committee in 

October 2011, the chairperson of FSOC recognized this challenge. 

However, he also noted that certain agencies were working much more 

closely together than before FSOC's creation. The federal financial 

regulators have also emphasized the importance of maintaining their 

independence while serving as members of FSOC. For example, several 

member agencies noted in our prior work on Dodd-Frank rulemakings 

Page 4 GAO-13-467T Financial Stability Entities 
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FSOC and OFR Could 

Strengthen 

Mechanisms to Fully 

Ensure Accountability 

and Transparency 

that any effort to coordinate rulemakings assigned to specific agencies 

through FSOC would need to be balanced against the statutory 

requirements of the independent agencies involved. 7 Regulators have 

also pointed to their differing statutory requirements to explain why they 

have differing views on policy issues. During the Basel II deliberations 

prior to the financial crisis, for instance, U.S. bank regulators-the 

Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and the 

Office of the Comptroller of the Currency (OCC}-each had a different 

view of various aspects of those requirements. a The regulators traced 

their differences back to their specific statutory responsibilities. 

Third, OFR faces the challenge of trying to build a world-class research 

organization from the ground up, including acquiring staff with the needed 

skills, while meeting its short-term responsibility to support FSOC. The 

researchers who supported the creation of OFR suggested that it would 

take many years for the new entity to provide the insights that would 

ultimately be expected of it. Though OFR now has a confirmed director, 

these researchers had also noted that the long absence of a director for 

the organization had slowed this process. 

FSOC and OFR have taken steps toward meeting the challenges they 

face. For example, they have taken steps to build mechanisms to identify 

potential threats to financial stability, provide information to the public 

about their activities and progress, and establish management and 

planning structures. However, additional actions could strengthen the 

accountability and transparency of these efforts. As we have reported in 

the past, agencies can manage or mitigate many of the challenges of 

Dodd-Frank Act Regulations: Implementation Could Benefit from Additional 

Analyses and Coordination, GAO-12-1S1 (Washington, D.C.: Nov. 10,2011). 

8Baselll is a risk-based capital framework for banks that is based on an international 

accord. For more information on Basel II adoption in the United States, see GAO, RiskBased Capital: Bank Regulators Need to Improve Transparency and Overcome 

Impediments to Finalizing the Proposed Basel II Framework, GAO-07 -253 (Washington, 

D.C.: Feb. 15,2007) and Risk-Based Gapital: New Basel II Rules Reduced Garlain 

Competitive Concems, but Bank Regulators Should Address Remaining Uncertainties, 

GAO-08-953 (Washington, D,C,: Sept. 12,2008), 

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Identifying Potential Risks 

and Emerging Threats to 

Financial Stability 

setting up new organizations by developing strong management 

structures and control mechanisms. 9 

FSOC has taken steps to meet its statutory responsibilities related to 

identifying risks and potential emerging threats to U.S. financial stability 

but has not yet developed comprehensive and systematic mechanisms to 

realize these goals. These steps include setting up the Systemic Risk 

Committee-one of the seven standing FSOC committees-that is 

responsible for systemic risk monitoring and plays a key role in reviewing 

sources of systemic risk. The committee is operating under draft 

procedures, with member agency staff suggesting risks or threats that, in 

their view, may benefit from interagency coordination. 10 According to 

FSOC policy staff, if there is agreement that an issue warrants further 

examination, an agency is assigned to develop it, including identifying 

vulnerabilities in the financial system. When the committee determines 

that the issue is sufficiently developed, it presents the issue to the 

Deputies Committee. According to the draft procedures, if issues are 

elevated beyond the Deputies Committee to FSOC members, agencies 

may respond with a variety of actions, including enhanced monitoring, 

additional analysis, the development of potential policy responses, or the 

implementation of a particular policy response. Potential threats to 

financial stability are also discussed at FSOC meetings; for example, 

9GAO, Millennium Challenge Corporation: Progress Made on Key Challenges in First Year 

of Operations. GAO-05-625T (Washington, D.C.: Apr. 27. 2005) and Troubled Asset Relief 

Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and 

Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008). Such mechanisms include: 

GAO, Internal Control: Standards for Internal Control in the Federal Government, 

GAO/AIMD-OO-21.3.1 (Washington, D,C.: November 1999); and Internal Control 

Standards: Internal Control Management and Evaluation Tool, GAO-01-1008G 

(Washington, D.C.: August 2001). For the importance of objectives and performance 

measures in determining accountability and efficiency, see, for example, GAO, ResuftsOriented Government: GPRA Has Established a Solid Foundation for Achieving Greater 

Results, GAO-04-38 (Washington, O.C.: MaL 10,2004) and Govemment Performance' 

GPRA Modemization Act Provides Opportunities to Help Address Fiscal, Performance, 

and Management Challenges, GAO-11-466T (Washington. D.C .. Mar. 16.2011). 

10FSOC officials noted that the procedures were marked ~draft" because the process was 

new and the committee expected to change the procedures based on its initial experience. 

Page 6 GAO-13-467T Financial Stability Entities 
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FSOC officials noted that a teleconference was convened to discuss MF 

Global's bankruptcy." 

OFR participates in the Systemic Risk Committee and is building capacity 

to monitor the financial system for threats to financial stability. OFR has 

developed the Financial Stability Monitor, a collection of metrics and 

indicators related to financial stability that is to be continuously updated, 

according to OFR and Treasury officials. According to these officials, 

OFR began sharing the Financial Stability Monitor with the Systemic Risk 

Committee and FSOC member agency staff in February 2012. OFR is 

also assessing options for analyzing risks to financial stability and 

produced a working paper in collaboration with outside researchers, 

published in January 2012 to survey existing approaches." In addition, 

OFR and FSOC sponsored conferences in December 2011 and 

December 2012 to discuss a range of issues related to risks to financial 

stability. 13 OFR staff said that they were evaluating a range of metrics and 

methods for measuring and analyzing financial markets and systems and 

were in the early stages of developing network maps and other tools to 

assess financial stability. For example, OFR evaluated 11 measures 

against a series of crises over time and reported on some of these efforts 

in its 2012 Annual Report." 

However, FSOC and OFR have not developed a comprehensive, 

systemic approach to identifying and addressing threats to the financial 

system. Without a more systematic approach and comprehensive 

information, FSOC member agencies on their own may not be well 

111n October 2011, MF Global, the third largest independent broker dealer in the United 

States, filed for bankruptcy. MF Global Holdings Ltd. and MF Global Finance USA Inc. 

filed on a consolidated basis for reHef under Chapter 11 bankruptcy protection. The jointly 

registered broker-dealer and futures commission merchant, operating as MF Global Inc. , 

entered liquidation proceedings under the Securities Investor Protection Act. A series of 

events, including increased exposure to European sovereign debt securities, preceded the 

bankruptcy filing. 

120imitrios Bisias, Mark Flood, Andrew W, La, and Stavros Valavanis, A Survey of 

Systemic Risk Analytics, Office of Financial Research Working Paper #0001 (Washington, 

D.C.: Jan. 15,2012). 

13The Macroprudential Toolkit Measurement and Analysis, Conference held in 

Washington, DC, December 1~2, 2011, and Assessing Financial Intermediation: 

Measurement and Analysis. Conference held in Washington, DC, December 6,2012. 

140ffice of Financial Research, 2012 Annual Report {Washington, D.C.: July 2012). 

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positioned to judge which potential threats will benefit from interagency 

discussions. FSOC and OFR could improve their efforts to identify risks 

and threats by collecting and sharing a common set of financial 

indicators. 15 Systematic collection, analysis, and sharing of financial 

indicators of key risk factors such as leverage, liquidity, concentrations, 

underwriting standards, collateral quality, and delinquencies should 

provide insight into vulnerabilities affecting particular types of financial 

intermediaries or reveal patterns occurring across the financial system. 

OFR, through a mechanism such as the Financial Stability Monitor, could 

playa role in collecting, analyzing, and reporting on these indicators. To 

improve FSOC's approaches for monitoring threats to financial stability, 

we recommended that FSOC develop an approach that included 

systematic sharing of key financial risk indicators across FSOC members 

and member agencies to assist in identifying potential threats for further 

monitoring or analysis. 

In addition, FSOC does not have sufficient processes for identifying or 

prioritizing potential emerging threats to U.S. financial stability for its 

annual reports. FSOC's annual reporting process is an ongoing 

responsibility which, in the absence of a strategic plan, functions as its 

major strategic planning document and method for communicating with 

Congress and the public, especially regarding potential emerging threats 

to U.S. financial stability. FSOC's 2011 and 2012 annual reports generally 

addressed the subjects mandated by the Dodd-Frank Act. These reports 

also provided extensive information about the current economy and 

complex issues, such as high-frequency trading and the MF Global 

bankruptcy. In addition, the reports contained extensive discussions of 

current known threats, such as those associated with money market 

funds and the European sovereign-debt crisis, and made some 

recommendations to address them. However, FSOC has not developed a 

structure that supports having a systematic or comprehensive process for 

identifying potential emerging threats. In particular, FSOC does not have 

processes for consistently identifying such threats, separating them from 

more current threats, or prioritizing them. For instance, certain potential 

threats related to U.S. debt are not in the 2011 Annual Report. However, 

the 2012 Annual Report identifies the U.S. debt as a potential threat but 

does not explain what has changed since the 2011 report. Similarly, the 

15Such a data-sharing exercise is akin to what the International Monetary Fund proposes 

with its Financial Soundness Indicators. See International Monetary Fund, Financial 

Soundness Indicators: Compilation Guide (Washington, D.C.: March 2006). 

PageS GAO-1J..467T Financial Stability Entities 
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2011 or 2012 annual reports identify risks, such as those associated with 

the European sovereign debt crisis or money market funds, which are 

ongoing or have previously been identified as potentially emerging. 

Further, FSOC identifies a large number of threats without explicitly 

prioritizing them. In contrast, other entities, such as the International 

Monetary Fund and European Central Bank, issue reports that explicitly 

prioritize potentially significant threats. Treasury and FSOC officials and 

staff noted that FSOC's annual reports have a different purpose and 

implicitly prioritize the threats in the recommendations sections of the 

reports. As a result of FSOC's limited processes for identifying and 

prioritizing potential emerging threats to financial stability in its annual 

reports, policymakers and market participants do not have the information 

they need to develop effective and timely responses to those threats. We 

recommended that FSOC develop more systematic approaches for 

identifying emerging threats to financial stability that are forward-looking 

and help prioritize such threats in annual reports. 

Although FSOC and OFR have adopted communication methods to 

provide information on their activities to the public and Congress, some of 

their methods could be strengthened. For example, both entities have 

web pages on Treasury's website. FSOC's web pages include minutes of 

the council's meetings, annual reports, frequently asked questions, and 

information on FSOC rulemakings. OFR has also posted key documents 

on its web pages, including its annual report, strategic framework, and 

updates on recent developments, such as the status of the legal entity 

identifier. 

However, FSOC does not keep detailed records of deliberations or 

discussions that take place at the council's meetings or at the committee 

level. While no specific level of detail is required for FSOC minutes, the 

limited documentation of their discussions makes it difficult to assess 

FSOC's performance. For instance, the minutes typically describe agenda 

items for the meetings and information on the presenters for each agenda 

item but lack additional detail even when the information being discussed 

is not likely to be market sensitive or limit the quality of deliberations. As a 

result, the public receives little information about FSOC's activities and 

deliberations, limiting its understanding of these activities. 

FSOC policy officials recognized the need for transparency but also noted 

that certain information was protected from disclosure under various 

statutes and could not be released. FSOC staff also noted the need to 

balance the desire for transparency with the need to provide an 

Page 9 GAO~13-467T Financial Stability Entities 
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80873.019

Management Structures 

and Strategic Planning 

environment that allows for open discussion and deliberation of issues 

and policy options. However, similar bodies, such as the Federal Open 

Market Committee, publish minutes that provide greater detail, and the 

Federal Open Market Committee voluntarily releases transcriptions of its 

meetings 5 years after a meeting occurs. As we have previously reported, 

transparency is a key feature of accountability even when there is a need 

to safeguard certain sensitive information to protect the marketplace. We 

recommended that FSOC keep detailed records of closed door sessions 

of key meetings." According to Treasury officials, the Deputies 

Committee has reviewed FSOC's existing transparency policy in light of 

this recommendation and may be positioned to make a recommendation 

to the Council on addressing our recommendation in the coming weeks. 

In our September 2012 report, we also recommended that both entities 

develop a communication strategy to improve communications with the 

public, which could include more fully developing their websites. 

According to Treasury and OFR officials, both entities have taken steps to 

improve their websites. In November 2012, a Treasury official noted that 

OFR was actively engaged in redesigning its website but had still not 

posted some information that would show the progress the agency was 

making in standing up its operations. While the updated website includes 

a copy of OFR's organizational chart, that chart does not include the 

names of its top managers or indicate which positions are filled, as we 

noted in our report. In comparison, the Consumer Finance Protection 

Bureau, which was also created by the Dodd-Frank Act, has for some 

time had its own domain name, an easily identifiable website that includes 

a detailed organizational chart, and online services that provide regular 

updates to interested parties. 

FSOC's management structures include a dedicated policy office within 

Treasury's Office of Domestic Finance and an executive director. 17 FSOC 

has also implemented bylaws, a transparency policy, and a consultation 

framework, and members have signed a memorandum of understanding 

16See, GAO Troubled Asset ReHef Program: Continued Stewardship Needed as Treasury 

Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM, 

GAO-l0-151 (Washington, D.C.: Nov. 2, 2009). 

17FSOC's policy office within Treasury's Office of Domestic Finance has been led by a 

Deputy Assistant Secretary. More recently, on December 13, 2012, the Council also 

approved the appointment of an executive director. 

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(MOU) on sharing confidential information to govern FSOC activities and 

promote accountability and transparency. OFR has also taken steps to 

set up needed management structures. It has developed an 

organizational structure that is built around a Data Center and a Research 

and Analysis Center-the two programmatic units established by the 

Dodd-Frank Act. 

FSOC is subject to the Government Performance and Results Act of 1993 

(GPRA), as amended, which requires agencies to periodically produce 

strategic plans, annual performance plans, and performance updates. 

FSOC has begun planning how it can satisfy these requirements but may 

request an exemption from some. Treasury's strategic plan for fiscal year 

2012-2015 does not include information on FSOC's goals or describe 

how it will measure FSOC's progress in achieving them. 

OFR, which is not independently subject to GPRA, received limited 

discussion in Treasury's 2012-2015 strategic plan and has begun its own 

strategic planning process. OFR issued a strategic framework in March 

2012 to cover fiscal years 2012-2014 that lists five strategic goals, 

including: 

supporting FSOC through the secure provision of high-quality financial 

data and conducting the analyses needed to monitor threats to 

financial stability; 

developing and promoting data-related standards and best practices; 

establishing a center of excellence for research on financial stability 

and promoting best practices for financial risk management; 

providing the public with key data and analyses while protecting 

sensitive information; and 

establishing OFR as an efficient organization and world-class 

workplace. 

OFR's framework also highlights a number of objectives under those 

goals and lays out implementation priorities for fiscal year 2012.'8 

However, OFR acknowledges that it has not yet put other key elements of 

18 The framework. also notes the importance of transparency and indicates that OFR is 

subject to oversight from the Treasury Office of the Inspector Genera! (DIG) and GAO, 

which have both exercised that authority during OFR's first 2 years, and that the Dodd~ 

Frank Act requires that the OFR Director testify before Congress annually on OFR's 

activities, 

Page11 GAO~13--467T Financial Stability Entitles 
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80873.021

performance management in place, including linking programmatic, 

human resources, and budgetary decision making to its strategic goals 

and developing a performance measurement system. To support the 

growth of OFR into a viable and sustainable entity, we recommended that 

OFR build on its strategic framework by further developing its strategic 

planning and performance management system so that it linked its 

activities to its goals and used publicly available performance measures 

to measure its progress. OFR officials said that they had developed 

performance measures and planned to describe these in their fiscal year 

2014 budget submission." 

In the absence of a strategic plan, FSOC's annual reports serve as a key 

accountability document FSOC staff noted that its annual reports 

provided Congress and the public with a description of FSOC's activities, 

its views on potential emerging threats to U.S. financial stability, and 

recommendations to enhance the integrity, efficiency, competitiveness, 

and stability of U.S. financial markets. They added that the chairperson 

was required to testify annually before Congress on the report, an activity 

that served as another accountability mechanism. 

When discussing accountability, FSOC members have noted the 

importance of the statement contained in the front of the reports (and 

signed by each member) that FSOC is taking reasonable steps to ensure 

financial stability and mitigate systemic risk. FSOC members have also 

acknowledged the need to follow up on the report's recommendations, 

and FSOC staff noted that recommendations would be monitored by 

FSOC as a whole. However, the annual reports do not specify how FSOC 

will conduct this monitoring. For example, they do not conSistently 

designate an FSOC member or members to monitor or implement the 

recommendations or establish time frames for certain actions, such as 

reporting to the council on the status of recommendations. Treasury 

officials noted that the Dodd-Frank Act did not give the chairperson or 

council authority to require that independent regulators take action or 

impose time frames on member agencies. However, they noted that 

some recommendations in the 2012 Annual Report were made to specific 

agencies and put greater stress on more immediate action than others. 

For example, the 2012 report emphasized the importance of a 

190FR's budget submission will be included as part of the President's fiscal year 2014 

budget submission. 

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FSOC and OFR Have 

Taken Steps to 

Collaborate but Could 

Enhance Their Efforts 

recommendation to the Securities and Exchange Commission (SEC) to 

take action to address money market fund risks by noting that wholesale 

short-term funding markets were a critical component of a well-functioning 

financial system. FSOC continues to be focused on structural 

vulnerabilities in money market funds that could disrupt these markets 

and has proposed specific recommendations for addressing these. 

However, SEC has not taken further action, and FSOC does not have the 

authority to require that its proposals be implemented. 

To improve FSOC's accountability, we recommended in September 2012 

that FSOC should make recommendations in the annual report more 

specific by identifying which FSOC member agency or agencies, as 

appropriate, were recommended to monitor or implement such actions 

within specified time frames. In March 2013, Treasury officials told us that 

FSOC had begun the development process for the 2013 annual report 

and that our recommendations about the annual reports were provided to 

the team assigned to pull together this year's annual report for their 

consideration. 

Title I of the Dodd-Frank Act directs FSOC to facilitate information sharing 

and coordination among its member agencies and other federal and state 

agencies regarding domestic financial services policy development, 

rulemaking, examinations, reporting requirements, and enforcement 

actions. 20 The Dodd-Frank Act encourages collaboration between FSOC 

and external stakeholders, especially state regulators and international 

entities. It also specifies a number of duties for OFR that require 

collaboration with FSOC members and others. In particular, OFR must 

collect data on behalf of FSOC, provide the data to FSOC and member 

agencies, and standardize data collection among the agencies. 21 These 

activities require collaboration not only with FSOC member agencies but 

also with commercial data providers, publicly available data sources, and 

the financial industry. 

2012 U.S.C. § 5322(a)(2)(E). 

21The Dodd-Frank Act provides that member agencies, in consultation with OFR, must 

implement regulations promulgated by OFR to standardize the types and formats of data 

reported and collected on behalf of FSOC. However, it also explicitly notes that this 

provision does not supersede or interfere with the independent authority of a member 

agency under other laws to collect data in the format that the agency requires. 

Page 13 GAO~13-467T Financial Stability Entities 
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80873.023

FSOC and OFR have taken steps to enhance collaboration among FSOC 

members. Members' staffs told us that FSOC's organizational and 

committee structures helped support collaboration among FSOC 

members both on a formal and informal basis. In addition, FSOC is 

working to standardize data reporting systems among FSOC member 

agencies. OFR officials noted that the agency had begun a three-stage 

process to assemble an inventory of data collected by FSOC member 

agencies as a first step toward standardizing data, reducing duplication, 

and eventually lowering costs for industry and regulators. 

FSOC and OFR have taken some actions to collaborate by leveraging the 

expertise of external stakeholders and coordinating U.S. activities 

internationally. In particular, FSOC and OFR held joint conferences in 

December 2011 and 2012 to discuss a range of issues related to risks to 

financial stability. OFR has also initiated a working paper series in which 

OFR researchers have collaborated with outside academics to catalog 

systemic risk monitoring systems and ways to improve risk management 

at financial institutions. In addition, OFR created the Financial Research 

Advisory Committee in November 2012 to solicit advice, 

recommendations, analysis, and information from academics, 

researchers, industry leaders, government officials, and experts in the 

fields of data and technology. Moreover, OFR is working with industry, 

foreign government entities, and international bodies to create a legal 

entity identifier, which OFR describes as an emerging global standard 

that will enable regulators and companies around the world to quickly and 

accurately identify parties to financial transactions. 

However, FSOC could do more to promote collaboration and coordination 

and apply key practices for successful collaboration that we have 

previously identified, such as leveraging resources, agreeing on roles and 

responsibilities, and establishing mutually reinforcing or joint strategies. 

For example, FSOC has not taken advantage of opportunities to leverage 

resources through its authority to appoint technical and professional 

advisory committees. Industry representatives have commented on the 

benefits of having industry input through such committees, but to date 

FSOC has not established such committees. Moreover, while FSOC 

members from federal regulatory agencies are able to draw on staff from 

across their agencies, the independent insurance member and state 

representatives have limited support structures-a shortcoming that could 

be remedied by having other state regulators participate through advisory 

councils. 

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In addition, FSOC and OFR have not defined their roles and 

responsibilities for monitoring risks to the financial system. As noted 

earlier, FSOC is tasked with monitoring the financial services marketplace 

to identify potential threats to U.S. financial stability, and OFR must 

develop and maintain metrics and reporting systems for risks to U.S. 

financial stability as well as monitor, investigate, and report on changes in 

systemwide risk levels. These responsibilities overlap somewhat, but this 

overlap is not unexpected given OFR's primary mission of supporting 

FSOC. The Dodd-Frank Act defines certain responsibilities for FSOC and 

OFR, but the lack of clear responsibility for implementation can lead to 

duplication, confusion, and gaps in their efforts. This risk is further 

compounded by the fact that many FSOC member agencies have risk 

analysis and data collection functions associated with their supervisory 

responsibilities. Some of these functions are explicitly focused on risks to 

financial stability, and some member agencies have created their own 

programs to examine them. To the extent that these programs provide 

unique information to FSOC, they will be contributing to the overall effort. 

However, if not properly coordinated, these separate efforts could be 

duplicative, resulting in wasted time and resources. We recommended 

that FSOC and OFR clarify responsibility for implementing requirements 

to monitor threats to financial stability across FSOC and OFR, including 

among FSOC members and member agencies. 

Further, although FSOC has taken action to belter coordinate members' 

rulemakings, additional action is needed. In October 2010 it issued an 

integrated implementation road map for the Dodd-Frank Act that included 

a list of the rules regulators were required to promUlgate, provided a time 

line for those rulemakings, and identified the agencies responsible for 

each one. FSOC has also developed a consultation framework for the 

agencies involved in rulemakings. In a November 2011 report, we noted 

that although FSOC's road map and consultation framework were a 

positive development in facilitating coordination, they had limited 

usefulness. 22 For example, the consultation framework does not provide, 

nor according to FSOC staff is it intended to provide, any specifics about 

staff responsibilities or processes to facilitate coordination. It also does 

not describe when interagency coordination is required or what happens 

when rules conflict with or duplicate each other. We recommended that 

FSOC work with federal financial regulators to (1) develop formal 

22GAO-12-151. 

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FSOC Has Not Yet 

Designated Nonbank 

Financial Companies 

for Enhanced 

Supervision 

coordination policies that would clarify issues such as the timing of 

coordination, the process for sOliciting and addressing comments, and 

FSOC's role in facilitating coordination and (2) more fully incorporate the 

key practices for successful collaboration that we have previously 

identified. 

The Dodd-Frank Act gave FSOC the authority to designate financial 

market utilities (FMUs) as systemically important if FSOC determines that 

the failure of an FMU or a disruption in its functioning could threaten U.S. 

financial stability. Similarly, the Dodd-Frank Act provided FSOC with the 

authority to designate nonbank financial companies for supervision by the 

Federal Reserve under its enhanced prudential standards. 23 The act 

stipulates that FSOC may designate these companies if material financial 

distress at that company, or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of the company could pose a 

threat to U.S. financial stability. While individual designations are not 

made through rulemakings, in an effort to be more transparent FSOC has 

issued rulemakings for designating FMUs as systematically important and 

designating nonbank firms for Federal Reserve supervision. FSOC issued 

final rules, which explain the processes and criteria FSOC intends to use 

in making the individual designations, in July 2011 and April 2012, 

respectively. 

Each rule, with any accompanying interpretive guidance, outlines a 

multistage process that FSOC intends to follow in designating these 

entities. For example, the interpretive guidance that accompanies the rule 

for designating nonbank financial companies for Federal Reserve 

supervision includes a number of thresholds that a firm must meet to 

move beyond the first stage of the process. Financial companies must 

meet a size threshold of $50 billion in assets and one of five other 

thresholds, including measures of leverage and debt. In its 2012 Annual 

Report, FSOC reported that it had designated eight FMUs as systemically 

important. However, FSOC is still engaged in its process for designating 

Dodd-Frank Act also subjects large bank holding companies with total consolidated 

assets of $50 billion or more to enhanced supervision and prudential standards. No FSOC 

designation is required for these bank holding companies to be subjected to enhanced 

supervision and standards. In addltion, some potential nonbank holding companies that 

may be designated are already subject to some Federal Reserve oversight because they 

are thrift hOlding companies. The Dodd-Frank Act transferred the oversight of these 

companies from the Office of Thrift Supervision to the Federal Reserve. 

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80873.026

nonbank financial companies, and therefore no company has yet been 

designated. 

FSOC is subject to laws and executive orders that require certain 

regulatory analyses as part of its rulemaking processes, including the 

Paperwork Reduction Act and the Regulatory Flexibility Act, as well as 

Executive Orders 12866 and 1356324 However, FSOC was required to 

consider costs and benefits of its FMU and nonbank financial company 

rules only as they related to the Paperwork Reduction Act. FSOC did not 

conduct a benefit-cost analysis for the rules designating FMUs or 

nonbank financial companies because the Office of Management and 

Budget determined that these rules were not economically significant. 

Treasury officials noted that the rule did not impose substantive 

requirements on specific entities but only laid out the process by which 

they could become subject to other rules and regulations. In addition, 

FSOC member staff noted that the costs and benefits of the designation 

were not among the factors that the Dodd-Frank Act directed FSOC to 

consider when making a designation. 

Nonetheless, the designations were intended to address certain risks to 

financial stability posed by these entities and have the potential to confer 

other benefits and costs on the wider economy as well as on the 

individual entities designated. For example, some research has shown 

that certain large, interconnected financial institutions considered too big 

to fail may have lower borrowing costs than would otherwise be 

warranted. But being designated would impose a significant regulatory 

burden on the designated companies according to some of those who 

commented on the nonbank financial company rule during the rulemaking 

process. FSOC has some limited processes in place to review its 

designations of nonbank financial companies, including an annual review 

of material changes for a designated company and a review of the stage 

one thresholds stated in dollar terms at least every 5 years. However, it 

has not set up processes to conduct a comprehensive assessment of the 

overall impact of the designations and to determine whether they are 

achieving the intended result. 

24A regulatory action is determined to be "economically significanf if the Office of 

Management and Budget determines that it is Ilkely to have an annual effect on the 

economy of$1oo million or more or to adversely affect in a material way the economy, a 

sector of the economy, productivity, competition, jobs, the environment, public health or 

safety, or state, loca!, or tribal governments or communities. 

Page 17 GAO~13~461T Financial Stability Entities 
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Doing a comprehensive analysis to assess whether designations are 

having their intended impact of providing greater financial stability and the 

extent of any other impacts will be challenging, but FSOC is uniquely 

positioned to address that challenge. Establishing a baseline from which 

to evaluate the overall impact of various rules will likely be complex 

because the impact of being designated will depend on the application of 

a number of rules being written by multiple independent regulatory 

agencies-Commodity Futures Trading Commission (CFTC), FDIC, the 

Federal Reserve, and SEC-and issued over a span of time. 25 For 

example, the Federal Reserve has not issued final rules on the enhanced 

prudential standards that designated nonbank financial companies will be 

subject to, but other final rules that will apply to these entities have been 

issued. These rules include one on resolution plans or "living wills" that 

was jointly issued by the Federal Reserve and FDIC and that will require 

designated nonbank financial companies to prepare resolution plans. 

Treasury has also issued a rule that establishes an assessment schedule 

for the Financial Research Fund, which finances OFR and FSOC under 

the Dodd-Frank Act. 26 Moreover, not all of these agencies are required to 

conduct cost-benefit analyses that might be useful in establishing a 

baseline. Finally, while some regulatory agencies may conduct periodic 

retrospective reviews of their rules, these reviews tend to focus only on 

the rules issued by their agency. 

Because FSOC is responsible for designating FMUs and nonbank 

financial companies and its member agencies are responsible for writing 

the rules that will impact these designated entities, it has certain 

advantages in conducting a comprehensive analysis. Moreover, FSOC 

can rely on OFR for some data collection and analysis. However, FSOC 

GAO-12-151 we note the importance of setting up baselines early to support later 

retrospective reviews of individual rules. In addition, we reported that in light of its various 

statutory requirements, FSOC plans to assess the future impact of significant Dodd-Frank 

rules. Given these plans, we previously recommended that FSOC direct OFR to begin 

collecting the necessary data to carry out these analyses. 

280ther Dodd-Frank provisions impose additional requirements on large bank holding 

companies and nonbank financial companies deSignated by FSOC. These include a 

requirement that the Federal Reserve subject deSignated nonbank financial companies 

that engage in proprietary trading to additional capital requirements, the authority of CFTC 

to impose limitations on the ability of those companies to control derivative clearing 

organizations and exchanges, and the ability of FDIC to impose risk~based assessments 

on large bank holding companies and designated nonbank financial companies if 

necessal)' to repay any obligations issued by FDIC to Treasury under the orderly 

liquidation authority, 

Page 18 GAO-13-467T Financial Stability Entities 
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Concluding Remarks 

members would need to collaborate on such an assessment, because 

FSOC policy and OFR staff, who are Treasury employees, may not have 

access to all of the needed information. In addition, collaboration is 

needed because, according to Treasury officials, it would be inappropriate 

for FSOC staff to review rules drafted by independent agencies unless 

those agencies agreed to participate in the comprehensive 

assessment. Without such an assessment, decision makers may not 

have the information they will need to determine whether designating new 

entities for enhanced supervision and other requirements and restrictions 

is addressing a perceived gap in the regulatory system and improving the 

stability of the financial system or whether policy changes should be 

considered. To strengthen the accountability of FSOC's decisions, FSOC 

should establish a collaborative and comprehensive framework for 

assessing the impact of decisions for designating FMUs and nonbank 

financial companies on those entities and the wider economy. 

Over the past 2 Yz years, FSOC and OFR have made progress in 

establishing their operations and approaches for monitoring threats to 

financial stability. Both entities have also worked to establish 

accountability and transparency mechanisms and promote collaboration 

among FSOC members and with external stakeholders. However, as we 

reported in September 2012, continued efforts are needed. We made 10 

recommendations to FSOC and OFR to strengthen the accountability and 

transparency of their decisions and activities as well as enhance 

collaboration among FSOC members and with external stakeholders. 

In its November 2012 response to our report and recommendations, 

Treasury noted that FSOC and OFR had considered the 

recommendations. In March 2013, Treasury officials described steps that 

each entity was considering or taking to address some of the 

recommendations, such as reviewing FSOC's transparency policy and 

updating the websites. Although fully addressing the recommendations 

will likely take time, doing so will help FSOC and OFR shed more light on 

their decision making and activities and allow Congress to hold them 

accountable for results. Furthermore, addressing our recommendations 

can help FSOC and OFR enhance collaboration among FSOC's 

members and with extemal stakeholders, activities that are critical to their 

ability to achieve their missions. We will continue to monitor FSOC's and 

OFR's progress in implementing our recommendations and stand ready 

to assist Congress as it continues its oversight of these entities. 

Page 19 GAO~13~467T Financial Stability Entities 
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GAO Contact and 

Staff 

Acknowledgments 

(250721) 

Chairman McHenry, Ranking Member Green, and Members of the 

Subcommittee, this completes my prepared statement. I would be 

pleased to respond to any questions that you may have at this time. 

For questions regarding this testimony, please contact A. Nicole Clowers 

at (202) 512-8678 or clowersa@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this statement. Other individuals who made key contributions to this 

testimony statement include Kay Kuhlman (Assistant Director), Nancy 

Barry, Emily Chalmers, Christopher Forys, Michael Hoffman, and Rachel 

Siegel. 

Page 20 GAOM13M 467T Financial Stability Entities 
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80873.031

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89 


80873.032

Written Testimony of 

Amias M. Gerety 

Deputy Assistant Secretary for the Financial Stability Oversight Council 

United States Department of the Treasury 

Before the House Financial Services Subcommittee on Oversight and Investigations 

March 14,2013 

Chairman McHenry, Ranking Member Green, and members of the Committee, thank you for the 

opportunity to appear here today to discuss the Financial Stability Oversight Council's (Council) 

role in implementing key reforms of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). 

This month marks the five-year anniversary of the failure of Bear Stearns and the start of the 

financial crisis and the biggest recession our country had experienced since the Great 

Depression. Those events in turn led to the passage of the Dodd-Frank Act that President Obama 

signed into law in the summer of 20 1 0 - the most comprehensive set of reforms to our financial 

system in 80 years. 

The Dodd-Frank Act was a comprehensive response to a financial regulatory system that was too 

weak to prevent or effectively monitor risks in the financial system and that lacked the tools to 

respond effectively to a financial crisis that inflicted devastating damage on the U.S. economy 

and American families. 

One of the key failures that contributed to the financial crisis was a lack of accountability for the 

overall stability of the financial system. The Dodd-Frank Act addresses this gap in the financial 

regulatory framework by creating the Financial Stability Oversight Council, which is the first 

federal entity vested with clear responsibility for comprehensive monitoring of the stability of 

our nation's financial system. The Council's three statutory missions are to identify risks to the 

financial stability of the United States, to promote market discipline, and to respond to emerging 

threats to the stability of the U.S. financial system. To support the activities of the Council and 

its member agencies, the Dodd-Frank Act also created the Office of Financial Research (OFR), 

within the Treasury Department, to collect and improve the quality of financial data and develop 

tools to evaluate risks to the financial system. 

These complementary statutory mandates of the Council and the OFR facilitate a comprehensive 

approach to monitoring and analyzing emerging risks to, and trends in, the U.S. financial system. 

The two organizations work closely toward their common goals while minimizing duplication of 

efforts. OFR leadership and Council staff meet on a weekly basis to coordinate their activities 

and discuss current priorities. 

Since the enactment of the Dodd-Frank Act, the Council has moved quickly to achieve its 

statutory mission while also promoting collaboration and coordination among its members. To 

that end, one of the Council's first activities was to build an open operational framework that 

included the creation of standing committees composed of staff of all of the Council members. 

The participation on these committees draws upon the collective policy and supervisory expertise 

1 
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80873.033

of the Council members and institutionalizes opportunities for open and frank discussion, 

collaboration, and coordination. The Council's Deputies Committee, which meets bi-weekly, 

coordinates the activities of the Council and monitors for overlap and opportunities for 

collaboration among Council member agencies. Additionally, the Council has developed 

protocols for statutorily required consultations regarding certain Dodd-Frank Act rulemakings. 

The Council is also firmly committed to operating in an open and transparent manner. At its first 

meeting, the Council adopted a transparency policy which states that Council meetings will be 

open to the public whenever possible and not less than twice each year. In fact, the Council has 

held nine open sessions in its first two and a half years. Council member agencies, including 

Treasury, have also voluntarily disclosed meetings with the public related to Council activities. 

For example, Treasury has disclosed on its public website hundreds of meetings related to the 

implementation of the Dodd-Frank Act. 

The Council's annual report, which summarizes the Council's activities over the previous year 

and provides a forward-looking assessment of its future priorities, is a key accountability 

document that provides transparency to the public and to Congress. Additionally, the Council 

has demonstrated its commitment to transparency by actively seeking public comment on a 

number of key issues under the Council's consideration, including the Council's study on 

effective implementation of the Volcker Rule, its proposed recommendations for money market 

mutual fund reform, and its rule and interpretive guidance related to the designation of nonbank 

financial companies. In particular, the Council's rules and guidance on nonbank financial 

company designations and on the desif,'I1ation of financial market utilities were not statutorily 

required, but the Council believed it was important to provide the public with insight into how 

the Council intended to evaluate these firms for potential designation. Finally, Council members 

have also informed both the Congress and the public of Council activities through a large 

number of public testimonies, briefings, and speeches. 

Although the Council is a relatively young organization, it has quickly assumed a central role in 

financial regulatory reform and in addressing risks to the financial system. Since its 

establishment, the Council has convened 28 times, has published two annual reports and six 

additional studies or reports on matters including concentration limits on financial companies 

and contingent capital, and has designated eight financial market utilities as systemically 

important. 

In 2012 alone, the Council convened 12 times to conduct its regular business and respond to 

specific market developments including issues such as the sovereign fiscal developments in 

Europe and the United States, the trading losses of JPMorgan's ChiefInvestment Office, and the 

state of mortgage foreclosures in the United States. When superstorm Sandy ravaged the East 

Coast, the Council convened twice in two days to monitor market conditions and closures, 

discuss the effects on financial infrastructure, assess operational challenges facing banks, thrifts, 

and credit unions, and receive information on preliminary state and federal insurance loss 

estimates as a result of the storm. 

The Council is also in the final stages of evaluating an initial set of nonbank financial companies 

for potential designation, which will subject them to enhanced prudential standards and 

2 
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80873.034

supervision by the Federal Reserve, closing an important regulatory gap. Over the last year, 

Council member staff has participated on interagency teams to review public data, engage with 

an initial set of companies to gather additional information, and coordinate with the companies' 

regulators to develop thorough assessments. Moreover, the Council has laid out a process in its 

final rule and guidance to reevaluate any designated companies each year, consistent with the 

statutory standards, to determine if the company continues to meet those standards. 

During the past two-and-a-halfyears, the Council staff has also been pleased to work with a 

number of teams from the Government Accountability Office (GAO) as they have conducted 

multiple reviews of the Council's activities. In particular, we have worked elosely with Nicole 

Clowers and her staff and appreciate their important suggestions for the continued improvement 

of the Council's effectiveness. 

*** 

The Committee's letter asked me to address a GAO report issued in September 2012 that 

examined the progress of the Council and the OFR in achieving each organization'S mission. 

This report reinforced that the work ofthe Council and the OFR is critical to safeguarding the 

stability of our financial system and highlighted examples of how both organizations have 

demonstrated transparency and accountability while carrying out their respective missions. The 

report also made a number of recommendations to further enhance the progress that each 

organization has made in these important areas. 

Enhanced Transparency 

As Treasury emphasized in its comment letter included as an appendix to the GAO's report, the 

Council is firmly committed to promoting transparency and accountability in connection with its 

activities. In November 2012, the Council and the OFR jointly provided a response to Congress 

and the GAO with a description ofthe actions planned and taken in response to each of the 

recommendations in the report. 

Specifically, the report made a number of constructive recommendations on ways in which the 

Council could further enhance its transparency, including improving the Council's website. 

Subsequently, the Council's website was reintroduced, in December 2012, to improve 

transparency and usability, to improve access to Council documents, and to allow users to 

receive e-mail updates when new content is added. Continued enhancements to promote further 

transparency are expected over time. We also expect the Council's Deputies Committee to 

review whether to recommend any further changes to the Council's transparency policy. 

The Council is firmly committed to holding open meetings and closes its meetings only when 

necessary. However, the Council must continue to find the appropriate balance between its 

responsibility to be transparent and 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 

3 
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80873.035

nonpublic infonnation that is discussed by the Council. Continued protection of this 

infonnation, even after a period of time, is often necessary to prevent destabilizing market 

speculation or other adverse consequences that could occur if that infonnation were to be 

disclosed. 

Enhanced Collaboration 

The Council and its committees are key forums for coordination among regulators. 

The Council has developed protocols for the statutorily required consultations regarding certain 

Dodd-Frank Act rulemakings. Collaboration and coordination beyond these statutory 

consultation requirements are inherent in the work of the Council, and occur routinely through 

the work of the Council members, Council committees, and member agency staff. For example, 

the Council has engaged in extensive consultation with the Federal Reserve Board on its 

proposed enhaneed prudential standards, and Council members have frequently engaged in 

discussions on key regulatory issues, such as the international coordination of derivatives rules. 

Additionally, this eollaborative approach is evideneed by the Couneil's ongoing work related to 

short-tenn funding markets, including working with the Federal Reserve Board on refonns to 

strengthen the tri-party repo markets, as well as the Council's recently proposed 

recommendations regarding money market mutual funds reforms. 

The Council's framework for regulatory coordination has supported a broader and more 

collaborative approach than existed before the Dodd-Frank Act, and it illustrates that a more 

rigid approach to interagency coordination could constrain the open and collaborative 

environment that exists today. Additionally, Congress did not provide the Councilor its 

Chairperson with authority to require the independent member agencies to coordinate in all 

cases, nor did the Dodd-Frank Act change the statutory independence of the Council's member 

agencies. Nevertheless, the Council will continue to seek to identify ways to further enhance 

collaboration through the Council's committees and working groups. 

Enhanced Accountability 

The Council's annual reports serve as key accountability documents. Two of the GAO's 

recommendations relate to ways in which the Council can improve the content oftbese reports. 

Work on the Council's 2013 annual report is underway, and we will consider the GAO's 

recommendations as the Council works to refine its approach to communicating key 

recommendations regarding financial stability in the report. 

As with the Council's 2012 annual report, future annual reports will continue to articulate any 

intent by the Council to indicate when a particular member agency is responsible for addressing 

an identified risk, such as the Council's 2012 recommendation that the SEC and CFTC consider 

error control and risk-management standards for exchanges, clearing finns, and other market 

participants that are relevant for a high-speed trading environment. Appropriate timeframes will 

also be included, where applicable. At the same time, the Council's annual reports may contain 

4 
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80873.036

recommendations that are directed to market participants or other entities. 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. 

This information is now presented every month by OFR staff to the Council's Systemic Risk 

Committee and assists the Council and member staff in identifying potential risks. 

Enhanced Public Outreach 

Since the GAO issued its report in September, the Council and the OFR have leveraged outside 

expertise in several ways. In December 2012, the OFR and the Council co-hosted a second 

annual conference on key analytical and data needs regarding financial stability, bringing 

together industry experts, academics, advocacy groups, Congressional staff, and staff of Council 

members. In November 2012, Treasury announced the members of a new Financial Research 

Advisory Committee, which will work with the OFR to recommend ways to develop and employ 

best practices for data management, data standards, and research methodologies. The Committee 

is made up of 30 distinguished professionals in economics, finance, financial services, data 

management, risk management, and information technology. In addition, we continue to actively 

seek engagement with a wide range of experts outside of government. Further, in November the 

Council issued proposed recommendations regarding money market mutual fund reform in order 

to solicit feedback from market participants, academics, and others on this important issue. 

The Council members and its committees also continue to help the Council benefit from the 

expertise of, and facilitate coordination with, outside parties. For example, the Council's state 

banking, insurance, and securities members were instrumental in coordinating outreach to state 

authorities during superstorm Sandy and have facilitated valuable information sharing with state 

regulators. 

*** 

We strongly support GAO's important oversight function, and we appreciate the constructive 

input and feedback received during our interactions. I also appreciate the Committee inviting me 

herc to provide this update on the Council's responses to the GAO report, and I look forward to 

working with the GAO in the future. 

Thank you. 

5 
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80873.037

Denny I-leek Question for the Record 

March 14,2013 Oversight and Investigations subcommittee hearing entitled "Who is Too Big to 

Fail? GAO's Assessment of the Financial Stability Oversight Council and the Office of 

Financial Research" 

In April 2012, the FSOC stated that it had asked the Office of Financial Research (OFR) 

to conduct a study of the asset management industry, to determine what risks, if any, the 

industry poses to the financial system and whether any such risks were best addressed 

through designation or some other means. Will the results of the analysis be made public 

and to what extent and in what form? What policies does OFR plan to follow for 

publishing research going forward? 

The OFR is providing the results of the analysis to the Council and the Council will decide if 

they will move forward with this analysis. 

The OFR believes that puhlishing offundamental research to encourage public debate is 

essential. Consistent with Dodd-Frank, the OFR will continue to publish the Annual Report, the 

Working Paper series and will continue to look for ways to share information with the public and 

Congress. 
95 


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Congresswoman Maloney Questions for the Record: 

1. Standardizing key reference data like the Legal Entity Identifier is one of the OFRs 

objectives in supporting data analysis and systemic risk management for FSOC. While 

OFR does not yet gather data, what is the Office doing to bcgin to move standardization 

in the right direction by ensuring all the US regulatory agencies use the agreed 

International Organization for Standardization (ISO) LEI standard for all entity 

identification in emerging and existing regulatory reporting? Does the OFR have a 

timeframe for completion of the LEI system? 

The OFR considers it critical that the LEI emerge as the common standard for entity 

identification for reporting in the US and abroad. With regard to US reporting 

requirements, as you may know, the Securities and Exchange Commission has issued 

rules related to LEI reporting for investment advisors and private funds, and a proposed 

rule relating to security-based swaps and the Commodity Futures Trading Commission 

has issued a final rule relating to swaps. In addition. the National Association of 

Insurance Commissioners is requiring LEI use in reports that it collects. Beyond existing 

requirements, the OFR is working through the Financial Stability Oversight Council Data 

Committee and bilaterally with regulators to embed the LEI in reporting requirements 

across the domestic financial regulatory community. 

The global system will grow over time as new jurisdictions issue requirements to use the 

LEI and new utilities become available to issue LEis. but signiiicant operational 

milestones have already been reached, and others are coming this summer. Earlier this 

year, the governance of the Global LEI System was established with the formation of the 

Regulatory Oversight Committee (ROC). Prefixes have been issued to seven different 

entities so that they may begin operational preparations to issue precursors to the LEI, or 

pre-LEIs. These pre-LEIs are expected to become LEIs after the Central Operating Unit 

of the global system hecomes operational. In the US, well over 50,000 pre-LEis have 

already been issued, and in Europe a new registrar began issuing pre-LEIs in early April. 

These pre-LEIs comply with the ISO standard, have been issued by pre-Local Operating 

Units (LOUs) that are sponsored by authorities that have joined ROC. and the pre-LEIs 

are expected to be honored by swaps regulators in the US and Europe for reporting 

purposes, regardless of which pre-LOU issued the pre-LEI. 

Given the ultimate goal of complete coverage of all iinancial market participants 

anywhere on the globe. the concept of a "completion date" is a difficult one. However, 

we fully expect to have a pre-LEI mutual acceptance regime in place in the coming 

months that will allow reliance on pre-LEIs that are compliant with the agreed global 

standard. Also in the coming months, we expect to have the private-sector central 

operating unit up and running. and increasingly taking responsibility for operational 

decisions for the global system. 

2. The purpose of the Global LEI initiative - in which the OFR plays an important 

leadership role - is to ensure that in today's complex global markets, firms can be 

identified through a unique global identifier, that will facilitate the ability of regulators 
96 


80873.039

and firms to better understand risk in the financial system, thereby enhancing financial 

stability. Consequently, it is critical for the OFR and the glohal regulatory community to 

make sure that LEIs that exist today are used in cun-ent and emerging reporting, and not 

changed or removed from the system. Can you please tell us what steps the OFR is 

taking to ensure the integrity and value of the LEI system? 

The OFR fully agrees that it is critical that the glohal regulatory community make certain 

that the pre-LEis that are being issued today can be used in cun-ent and emerging 

reporting without alteration once the system becomes more fully operationaL As Chair of 

the Regulatory Oversight Committee (ROC) and in its position supportingithe Council, 

the OFR is working vigilantly to make this happen. Those steps include confirming, on a 

multilateral basis, that duc diligence is taken and adequate representations are made 

regarding pre-LEIs isslled abroad so that the CFTC and other domestic regulators will be 

able to rely on those pre-LEIs issued abroad, and visa-versa. More broadly, the ROC, 

under the leadership of the Chair, is constructing a path toward global acceptance or prcLETs issued by LOU, that are sponsored by Roe members. To that end, the ROC has 

already issued public guidance identifying six steps that issuers of pre-LEI s must take to 

ensure compatibility with the global LEI system. And. as noted in thal guidance, the 

ROC is further refining these requirements to gain greater certainty for regulators. LEI 

issuers, and LEI users that these pre-LEIs will be globally compatible and will seamlessly 

transition into the global LEI system. 

3. What is the OFR doing to ensure the existing eICI (CFTC Interim Compliant Identifiers) 

codes are integrated into the global LEI system? 

As noted above, the ROC has already issued guidance aimed at assuring that pre-LEIs 

issued now can be globally compatible, and continues to refine its guidance to create 

greater certainty for a seamless transition Irom pre-LEI to LEI without change. Notably, 

this work involves input from authorities on the ROC, including those with reporting 

rules pending or passed and those sponsoring utilities that issue pre-LEis, and input from 

a Private Sector Preparatory Group composed of experts from these pre-LOUs and other 

users. 
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80873.040

House Financial Services Subcommittee on Oversight and Investigations 

Hearing entitled "Who is Too Big to Fail? GAO's Assessment of the Financial Stability Oversight Council and the 

Office of Financial Research" 

Questionsfor the Recordfor Amias Gerety, Deputy Assistant Secretary, FSOC 

March 14, 2013 

REPRESENTATIVE DENNY HECK (D-WA): 

Question 1: 

March 14,2013 Oversight and Investigations subcommittee hearing entitled "Who is Too 

Big to Fail? GAO's Assessment of the Financial Stability Oversight Council and the Office 

of Financial Research" 

In April 2012, the FSOC stated that it had asked the Office of Financial Research (OFR) to 

conduct a study of the asset management industry, to determine what risks, if any, the 

industry poses to the financial system and whether any such risks were best addressed 

through designation or some other means. Will the results of the analysis be made public 

and to what extent and in what form? What policies does OFR plan to follow for 

publishing research going forward? 

The Council is reviewing generally the activities of asset management companies and their 

impact on the U.S. financial system. The Council has asked the OFR to supply data and analysis 

to inform the Council's review. As part of this analysis, Council and OFR staff have met with 

market participants, including asset managers, to learn more about their activities and business 

models. 

The Council's work is ongoing. 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 for potential designation, I expect that the Council would provide the public with an 

opportunity to review and comment on those metrics, in accordance with past practice. As 

demonstrated by the Council's multiple requests for public comment on its rule and interpretive 

guidance regarding nonbank financial company designations, the Council values the input of all 

interested parties, stakeholders, and the public. 

With regard to the OFR's policies for publishing research, I respectfully refer you to the OFR. 

o