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S. HRG. 112–241 

ENHANCED OVERSIGHT AFTER THE FINANCIAL 

CRISIS: THE WALL STREET REFORM ACT AT 

ONE YEAR 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE IMPACT OF THE FINANCIAL CRISIS ON AMERICAN 

CONSUMERS, INVESTORS AND THE OVERALL ECONOMY, HOW THE 

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION 

ACT HAS IMPROVED THE FINANCIAL REGULATORY FRAMEWORK, AND 

HOW THE WALL STREET REFORM ACT WILL HELP PREVENT ANOTHER CRISIS 

JULY 21, 2011 

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

( 

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

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

DREW COLBERT, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

MIKE PIWOWAR, Republican Chief Economist 

EMILY PEREIRA, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

BRETT HEWITT, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
(III) 

C O N T E N T S 

THURSDAY, JULY 21, 2011 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

WITNESSES 

Barney Frank, a Representative in Congress from the State of Massachusetts 5 

Neal S. Wolin, Deputy Secretary, Department of the Treasury .......................... 11 

Prepared statement .......................................................................................... 36 

Response to written questions of: 

Senator Shelby ........................................................................................... 137 

Senator Crapo ............................................................................................ 141 

Senator Toomey ......................................................................................... 142 

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

System ................................................................................................................... 12 

Prepared statement .......................................................................................... 45 

Response to written questions of: 

Senator Shelby ........................................................................................... 144 

Senator Crapo ............................................................................................ 149 

Senator Toomey ......................................................................................... 150 

Mary L. Schapiro, Chairman, Securities and Exchange Commission ................. 14 

Prepared statement .......................................................................................... 59 

Response to written questions of: 

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

Senator Crapo ............................................................................................ 157 

Senator Toomey ......................................................................................... 159 

Gary Gensler, Chairman, Commodity Futures Trading Commission ................. 16 

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

Response to written questions of: 

Senator Shelby ........................................................................................... 161 

Senator Crapo ............................................................................................ 163 

Senator Toomey ......................................................................................... 166 

Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance Corporation ........................................................................................................................ 17

Prepared statement .......................................................................................... 94 

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

of the Currency ..................................................................................................... 19 

Prepared statement .......................................................................................... 113 

Response to written questions of: 

Senator Shelby ........................................................................................... 168 

Senator Crapo ............................................................................................ 171 

Senator Toomey ......................................................................................... 172 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Draft of Republican Committee Members’ Regulatory Reform Principles submitted by Senator Shelby .................................................................................... 177 

Written statement of Hal S. Scott, Director of the Committee on Capital 

Markets Regulation, Nomura Professor and Director of the Program on 

International Financial Systems at Harvard Law School ................................ 180 

Letter from the Council of Institutional Investors ................................................ 203 

(1) 

ENHANCED OVERSIGHT AFTER THE FINANCIAL CRISIS: THE WALL STREET REFORM 

ACT AT ONE YEAR 

THURSDAY, JULY 21, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:06 a.m. in room SD–538 Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I would like to call this hearing to order. Today marks the first anniversary of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. 

The Wall Street Reform Act was a direct response to the worst 

financial crisis since the Great Depression. It created a sound regulatory foundation to protect consumers and investors and to help 

prevent or mitigate future crises. I am pleased to have one of the 

architects of this historic legislation, Representative Barney Frank, 

here with us today. 

I also welcome our panel of distinguished regulators to discuss 

the steps they have taken to implement the provisions of this important law to enhance their agencies’ oversight of the financial 

services industry. 

But Congress must also do its part. As Chairman of this Committee, I am committed to holding rigorous oversight of the implementation process and restoring Americans’ trust in a credible financial system. 

While it appears that many on Wall Street, and even some here 

in Washington, have already forgotten the real costs of inadequate 

financial regulations, I have not. And neither have the millions of 

Americans who lost their jobs, their homes, their savings, and who 

are still waiting for the recovery. 

Unfortunately, these reforms have been under constant attack 

since this bill was signed into law. Opponents of Wall Street reform 

continually repeat misleading claims that the new law was hastily 

conceived, will be overly burdensome, and will harm our economy. 

But the American public disagrees. In fact, a poll released this 

week by Lake Research Partners found that Americans broadly and 

strongly support Wall Street reform. They support the legislation’s 

goals of holding Wall Street accountable, making the financial system more transparent, and enhancing oversight of Wall Street 
2 

firms that have shown they could put the entire economy at risk. 

Even after hearing arguments supporting and opposing this legislation, Democrats, Republicans, and Independents support the Wall 

Street reform law. 

But we cannot take that support for granted. Since the bill’s passage, this Committee has taken its oversight responsibilities seriously, ensuring that the regulators are on the right track to implement the law’s provisions. Passing the Wall Street Reform Act was 

a monumental achievement, and while the regulators have completed many rulemakings, there is much work left to be done. This 

will take time, but we owe it to the American people to get it right. 

I thank our witnesses again for being here today, and I look forward to the testimony. 

Ranking Member Shelby, your opening statement. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

Yesterday, in a Wall Street Journal op-ed piece by Secretary 

Geithner, he claimed that financial reform was ‘‘designed to lay a 

stronger foundation for innovation, economic growth, and job creation.’’ However, for millions of Americans, the 1-year anniversary 

of Dodd-Frank provides little comfort as they continue to deal with 

the harsh economic reality marked by little to no innovation, anemic, economic growth, and virtually no job creation. 

The unemployment rate remains stubbornly above 9 percent, 

with more than 14 million Americans still out of work. Secretary 

Geithner also wrote that the Obama administration ‘‘expected 

backing from both sides of the aisle’’ when the debate over the financial reform began, implying that there was not any. The truth 

is that there was as great deal of agreement on a number of issues 

until the White House decided that the only issue that mattered 

was the creation of a massive new consumer bureaucracy. In fact, 

Chairman Dodd and I had agreed to create early on a consolidated 

banking regulator where the authorities of the Federal Reserve, 

OCC, OTS, and FDIC would be joined in a single entity. It even 

had a name: the Financial Institutions Regulatory Authority. 

There was strong agreement at that time that the current regulators had failed and radical reform was needed. Also agreed was 

to elevate consumer protection to equal status with prudential regulation. I proposed at that time giving the Consumer Protection Division equal access to Congress and to provide it with dedicated 

funding. We even agreed to permit nonbanks to be supervised and 

subject to enforcement. 

By any measure, the Republicans were willing to meet our Democratic colleagues and the Administration more than halfway on a 

number of issues, including consumer protection. Any hope for a bipartisan agreement evaporated when the word came down from the 

Administration that it was going to be their way or the highway. 

A similar dynamic was at work in the Agriculture Committee 

where Senators Chambliss and Lincoln had agreed on a bipartisan 

derivatives title until the former Senator from Arkansas was told 

that there was not going to be any compromise. 

Secretary Geithner also wrote, and I will quote: 
3 

Senior Republican negotiators on the Senate Banking Committee were unable or unwilling to define a core set of reforms they could support. 

Mr. Chairman, the first thing the Republican Members of this 

Committee did was to draft a set of core principles to guide our 

consideration of regulatory reform. I have a copy of that in my 

hand. I would like for it to be made part of the record here. 

These principles that I reference would address all of the major 

issues, including systemic risk regulation, prudential regulation, 

consumer protection, and derivatives regulation. 

Also, Republicans filed hundreds of amendments based on this 

core set of reform principles, and prior to the bill’s markup, we 

were informed, however, that not a single amendment would receive any Democratic support. Once again, it was their way or the 

highway. 

Secretary Geithner also wrote in his op-ed piece, and I will quote: 

‘‘We have already turned a profit on the TARP investments made 

in banks.’’ However, as I have said in the past, claims of TARP’s 

profitability are premature at best. Many financial institutions 

have yet to fully repay their TARP funds, and the taxpayer will 

still likely take losses on TARP’s housing and auto bailout programs. Moreover, TARP used taxpayer dollars for very risky investments. 

A proper evaluation of the returns on any investment must appropriately adjust for risk. I believe such an evaluation would show 

that taxpayers were not adequately compensated for the large risk 

the Administration took with their money. In addition, what matters most is TARP’s negative long-term impact on the overall economy, which will dwarf any so-called profit. On that basis, TARP’s 

record has not been good for American families. 

Since TARP was enacted, the unemployment rate has reached 

and stayed at record levels. Lending remains stagnant and millions 

of Americans continue to face foreclosure. Secretary Geithner took 

credit for the banking regulators having forced the largest financial 

institutions to increase their capital basis ‘‘as the most important 

step toward diminishing the risk of future crises.’’ 

For years, I have been arguing—and other Republicans here 

have, too—that capital standards have been inadequate. While 

some bank regulators, such as former FDIC Chairman Sheila Bair, 

actively sought to increase bank capital standards, others remained 

on the sideline right here. 

One of the regulators who did nothing to improve bank capital 

standards before the last crisis was the President of the Federal 

Bank of New York. The New York Fed’s supervisory responsibilities include the largest financial institutions that received the 

largest TARP bailouts during the crisis. Who was the New York 

Fed President who failed to oversee our largest banks and then 

presided over the TARP bailouts? None other than our current 

Treasury Secretary. 

Secretary Geithner further wrote that the regulators have outlined major elements of reforms to bring oversight, transparency, 

and greater stability to the $600 trillion derivatives market. 

Republicans offered a derivatives substitute amendment that accomplished all of these goals while preserving Main Street’s ability 

to hedge their business risk. Main Street businesses had nothing 
4 

to do with the financial crisis. Nevertheless, Dodd-Frank will impose huge costs on them at a time when they can least afford it. 

The Secretary failed to mention that fact. 

Secretary Geithner also said that the Obama administration has 

started the process of ‘‘winding down Fannie Mae and Freddie 

Mac.’’ Can you believe it? However, Fannie and Freddie’s market 

share is actually increasing. They now account for 75 percent of all 

mortgage-backed securities that were issued. In fact, with other 

Government programs included, the Federal Government now controls 97 percent of the market. Meanwhile, housing finance reform 

has not even begun in the Congress. 

Secretary Geithner claims that success will ‘‘depend on making 

sure that we can write sensible rules that promote the health of 

the broader economy instead of the interests of individual firms. 

However, politically connected unions and other special interest 

groups were among the bigger winners under Dodd-Frank. The Act 

contains an assortment of new corporate governance and executive 

compensation requirements that harm shareholders by empowering 

special interests in the board room and encouraging short-term 

thinking by managers. 

Fifty years ago, President Dwight D. Eisenhower famously admonished us all ‘‘to guard against the acquisition of unwarranted 

influence by the defense industry and the Pentagon.’’ I am afraid, 

however, Mr. Chairman, that his words have gone unheeded in this 

context in that the only thing Dodd-Frank has truly accomplished 

is the creation of a financial regulatory analog to the military-industrial complex. 

Dodd-Frank has created a cottage industry for Wall Street lawyers and special interest lobbyists. It has turned the financial regulatory landscape into a nightmare. 

Secretary Geithner also claims that Republicans are blocking 

nominations ‘‘so that they can ultimately kill reform.’’ However, 

Senate Republicans have been clear that the structure of the Bureau of Consumer Financial Protection needs to be properly reformed before we consider any nominee to lead it. 

We have urged President Obama to adopt three specific reforms: 

First, establish a board of directors to oversee the Bureau. Diversifying the leadership of this untested and very powerful fledgling 

bureaucracy would ensure the consideration of multiple viewpoints 

in the Bureau’s decisionmaking process. 

Second, subject the Bureau to the appropriations process to ensure that the Bureau has an effective oversight and does not engage in wasteful or inappropriate spending. 

Third, establish a safety and soundness check for the prudential 

regulators. After all, one of the best consumer protections is a safe 

and a sound bank. 

Finally, I believe that the most disturbing claim made by the 

Secretary is that Republicans formed ‘‘the forces of opposition to reform.’’ This statement reflects the unfortunate view that anyone 

who does not support their idea of reform must be against any reform. That is nonsense. 

As I have explained and reiterated many times, there were numerous areas where Republicans and Democrats could have easily 

reached an agreement. Unfortunately, the Administration decided 
5 

early on that there would be no compromise. The result was the 

bill that this hearing purports to celebrate. 

I do not believe, Mr. Chairman, that the American people are in 

the mood to celebrate yet. 

Thank you. 

Chairman JOHNSON. Representative Frank, I welcome you to the 

Senate Banking Committee today. As one of the architects of the 

Wall Street reform bill, I want to thank you again for all your hard 

work in ushering this legislation through Congress. I know that 

you have to get back to manage a bill on the House floor, so please 

begin. 

STATEMENT OF BARNEY FRANK, A REPRESENTATIVE IN 

CONGRESS FROM THE STATE OF MASSACHUSETTS 

Mr. FRANK. Thank you, Mr. Chairman, and I am glad to be here 

in this spirit of bipartisanship, and I say that because I was struck 

by the very bipartisan tone of the Ranking Member’s statement. 

For example, he was extremely critical of the Bush administration. 

I might not have anticipated that. But I say that because, as Members will remember, it was in the fall of 2008 that we were summoned by Secretary Paulson and then-Chairman Bernanke, two 

Bush appointees, and asked to do the TARP. And, in fact, it was 

a bipartisan response to that. 

The gentleman from Alabama was very critical of the TARP. I 

think he is unfair to the Bush administration in that regard, but 

I do appreciate the bipartisan nature of his criticism. 

I would note he said Secretary Geithner said they made a profit 

on the loan to the banks, and he rebutted that with reference to 

the automobiles and the foreclosures. Well, that does not rebut the 

statement. He very carefully said it was from the banks. It is true 

we have not yet recovered the money from the automobiles. What 

we have instead is a thriving American automobile industry, GM 

and Chrysler, which I think would not have happened if we had 

not intervened. And I would note that Ford, which was not seeking 

any of the funds, actively supported that for fear that if both General Motors and Chrysler had gone bankrupt and were not assisted, the supply chain would have disappeared. 

So at a time when we all talk about enhancing manufacturing in 

America, that was, I think, the single biggest thing that we did. 

Second, I would have to say, though, that the gentleman from 

Alabama’s description of the legislative process does not cover what 

went on in the House. As for the Senate, I know there was some 

discussion between him and the Senator from Tennessee, and I was 

not privy to them. But it certainly was not a case where the Administration told us to go forward. 

On the Consumer Bureau, I was one of the ones who said no. 

The solution that he talked about—namely, elevating the status 

bureaucratically of a consumer protection function within an entity 

that is primarily a bank regulator—would not work. There is a 

qualitative difference between having an independent consumer 

regulatory and having it as one of the things bank regulators do, 

because the history was clear that bank regulators did not do it. 

In fact, interestingly, the largest single chunk of authority to protect consumers that existed before this law was passed was at the 
6 

Federal Reserve, and when we questioned the Federal Reserve, 

they had had very little to do with things. 

I would note again, by the way—I was struck when the Senator 

from Alabama talked about it—that he appeared to think that Mr. 

Geithner was more important in the Bush administration than any 

of the Presidential appointees. Yes, he was President of the Federal 

Reserve. He served under Ben Bernanke, who was the appointee 

of President Bush to be Chairman of the Council of Economic Advisers and then of the Federal Reserve, and he worked with Secretary Paulson. So once again, I think if there is criticism, it goes 

to all of them. 

But to return to the Consumer Bureau, I do think it is important 

that it be independent, that it not be a second thought from the 

bank regulators, whether it was just one bank regulator or individual bank regulators. And I believe that makes a great deal of 

sense to give the consumer—the gentleman says let us give them 

equal status. The only way you do that is to make them an equal 

entity, not subject to others. 

As to the bill itself, it had a common theme. One of the criticisms 

we heard was that the bill was too big. Well, I am sorry that we 

apparently exceeded the attention span of some Members of Congress, but I guess they could wait for the movie. Maybe it will be 

coming forward. But the fact is that we are dealing with an interconnected system, and to have dealt piecemeal with an interconnected system would not have been a good idea. And there was 

a central theme there. The theme was this: that by sources of liquidity outside the banking system and by increased information 

technology, people in the financial industry had figured out a way 

to engage in lending while appearing to escape the burden of risk; 

and they appeared to be able to avoid risk themselves. 

Of course, this did not go away. It accumulated elsewhere in the 

system, and it exploded on all of us. So what we have done is to 

basically make people be responsible for their risk. And I would say 

here one very important issue that has come up—and I differ with 

some of my friends on the liberal side here—is the question of risk 

retention. I would urge people to look at Michael Lewis’ book ‘‘The 

Big Short.’’ When people make loans and have no responsibility for 

whether or not they are repaid, they will not be as prudent. And 

that is a market incentive. The alternative that I have been told— 

and this is ironic—by some of my friends in the banking industry 

is, oh, no, the regulators will be able to tell you what is a good loan 

and what is not. No, we are on the market side here. I do not want 

to depend on the regulators to be able to look at all these loans. 

Yes, we have banned the worst kind of loans, but there are still 

going to be loans that could be made, properly or not. And the 

choice is: Do you rely solely on the discretion of the regulators to 

supervise all those loans? Or do you build a market incentive in 

with risk retention? And I am told, well, then, we will not have the 

loans made. 

Well, if that is the case, I have a question, because 

securitization—I went back. There was testimony by Lew Ranieri 

before this very Committee in which he talked about securitization 

taking off. That was in 1986. So I do have this question: If 

securitization without risk retention—which is not going to rival 
7 

taxation without representation as a slogan for the ages. But 

securitization without risk retention, if that is necessary for there 

to be a housing market, what were people living in before 1986? 

Were there no loans made before 1986? 

This notion that people have got to be able to avoid risk is a 

great mistake, and I am for an exception for those loans that are 

very solid. But I think the notion that risk retention is somehow 

an impediment is a great mistake. 

The insurance industry, of course—and that is where we borrowed the concept—follows it. You cannot get reinsurance without 

some risk retention. And I think that some of my friends are falling 

into that trap once again. 

As to derivatives, the law does not mandate any requirement 

that affects people who are the users of the commodity in question. 

It gives full discretion to the regulators to make differences and to, 

in fact, focus on the kind of transactions that AIG engaged in with 

other financial institutions, not with end users. 

And I would add to this—and there may be a debate on this. One 

of these things I want to address here—and then if you want me 

to answer questions, I can do that. But one of the things we have 

done is to empower the CFTC—and if it gets the funding, then it 

would be able to do this—to deal with speculation. Now, there is 

a legitimate economic argument about whether or not speculation 

does, in fact, affect prices, and I think it is probably the case that 

30 years ago it may not have done so so much. What has happened, 

however, in the interim is there is a greatly increased amount of 

liquidity and very great sophistication in information technology. 

As somebody pointed out, if you look at the charts, individual commodities used to move in different directions. It tends to be more 

of a uniform—they used to move in the same direction. Now it is 

more individualized. 

There is a consensus now from Goldman Sachs, from Wilbur 

Ross, an investor, from people in the home heating oil business, 

from gasoline distributors, and from the facts that speculation does 

add something to the price of oil. One of the big issues here is this: 

Will the Commodity Futures Trading Commission be allowed to exercise the powers we have given it to put limits on people who are 

not end users so that we are not trying to—what we are saying, 

if you are somebody who never goes near a barrel of oil, in fact, 

you are probably somebody who does not go near oil at all because 

you have got somebody else to pump your gas for you, your chauffeur, maybe. If you are in that category, we want to limit the 

amount you can buy because we see that—we are told billions of 

dollars will be lost if they cannot trade in the financial area. Well, 

where do those billions of dollars come from? They did not come 

from the sky. They get added to the price. 

So those are two areas, whether or not we can deal with speculation and what we do about risk retention, where I intend to keep 

pressing. 

The further point I would make is this, and it has to do with the 

funding. I have talked to some business people, one of the leading 

business people of Boston in my office just last week. I understand 

people who think we have too much regulation, but I think the 

analog here is to the pharmaceutical industry where the major 
8 

pharmaceutical companies might not like some of what the FDA 

has, but they have worked to provide the FDA with enough money 

to carry it out. You might think that less regulation would be better, but clearly the worst of all worlds is to have regulations on the 

books and have regulatory authorities that are not able to deal 

with them appropriately. They cannot hire the right people and 

have the right information technology. 

So this nickel-and-diming the SEC and the CFTC I think does 

grave harm, and it is, of course, a Catch-22 to complain that they 

are not moving appropriately with the rules but then deny them 

the funding to do it. And I have to say this: For people who are 

prepared to have America stay in Iraq for a couple more years— 

and I was encouraged when my colleague from Alabama talked 

about the military-industrial complex. Let us work on cutting them 

down, too, to help. But when people tell me they want to stay in 

Iraq over the Bush administration decision to get out, and, of 

course, the billions and billions, but we cannot find $150 million for 

the CFTC, I am not impressed. And let us be clear with the SEC 

that that is an area where there is no taxpayer money. 

Finally, I do want to talk about Fannie Mae and Freddie Mac. 

I have to say here—let me be a little partisan. I am impressed with 

the on-again, off-again nature of this with my colleagues in the 

House. I do not here address the Senate. My Republican colleagues 

in the House talk very tough about Fannie Mae and Freddie Mac 

when they are in the minority. But when they are in the majority, 

something happens. They are affected by a strange kind of paralysis that comes with responsibility. I say that because last year, 

when we dealt with this bill in conference, the Republicans in the 

House offered the Hensarling bill, a total abolition of Fannie Mae 

and Freddie Mac, with no particular attention to its succession, as 

an amendment. We said no, we said it was not germane. 

We are now almost 7 months into this session with the Republicans in the majority. Mr. Hensarling is a member of the majority. 

He is a subcommittee chairman. They have not offered it. In fact, 

we had a discussion about some smaller bills to deal with this, 

which the Wall Street Journal said was a poor way to do it, and 

here is what Mr. Bachus said: ‘‘I speak for all members of all the 

subcommittee chairs. We would like a comprehensive bill.’’ This is 

on Fannie Mae and Freddie Mac. ‘‘Now, can we get a comprehensive bill? I do not know. I do not think so.’’ 

So the Republicans in power in the House are much less certain. 

The gentleman from Alabama said where are we. Well, I do not 

know. Ask your colleague from Alabama on the next plane ride 

home. 

And I will say this. Somewhat embarrassed by this failure of 

memory once he became the majority. The gentleman from Alabama blamed the Obama administration, and this is really extraordinary, and I will close with this. Of all the issues in all the 

world—I feel like Humphrey Bogart in ‘‘Casablanca.’’ Of all the 

issues in all the world, when it comes to Fannie Mae and Freddie 

Mac, the Republicans in the House cannot proceed without Obama. 

Why haven’t we seen one? Because Obama will not let them do it. 

I suppose a more recent entertainment analogy is, for those who 
9 

remember, Flip Wilson, which the Republicans in the House are 

Geraldine, and Obama is the devil who will not let them do it. 

The Chairman said, inaccurately—I am sure he misunderstood— 

that he was asked by the Obama administration to wait. I have 

checked with the Secretary of the Treasury. I have checked with 

HUD. I have checked with the Administration. He misunderstood 

them. No one in the Obama administration has asked him to wait, 

and the notion that they cannot proceed on Fannie and Freddie, 

that they have said ‘‘May I?’’ to the Obama administration and 

they have not gotten permission—I have a rule that I try to follow 

myself. I would advise this to my Republican colleagues here. No 

matter how tight the corner you are in because of problems, try to 

avoid saying something that no one will believe. It is not going to 

help you. The notion that they are not acting on Fannie and 

Freddie—oh, the gentleman from New Jersey, Mr. Garrett, said 

that it is not a simple problem, that is why they cannot act. 

So here is the deal. The Republicans in the House, here is why 

we are not acting on Fannie and Freddie. They have the 

Hensarling bill, which is opposed by everybody who deals with the 

housing market, who want to get the private market back in—the 

realtors, the mortgage bankers, the Financial Services Roundtable, 

the American Bankers Association, the home builders. That collection of radicals all disagree with the Hensarling plan, all think you 

will have to have a more comprehensive approach for what happens afterwards. But the Republicans have this problem in the 

House. Their ideology and reality are having a heck of a fight, and 

it is a draw right now. Ideologically, they are committed to the 

Hensarling bill, but everybody who cares about housing says, ‘‘Do 

not do that.’’ 

So Mr. Bachus then says, ‘‘OK, I cannot do anything until the 

Obama administration lets me.’’ That is not plausible, and I agree 

with the gentleman—I would say this, by the way. The only time 

since 1992 that the Congress has acted on Fannie Mae and Freddie 

Mac was in 2007 and 2008 when I was the Chairman and Mr. 

Dodd was the Chairman, and we got together a bill at the request 

of Secretary Paulson, which President Bush signed, which gave 

Secretary Paulson the authority to put Fannie and Freddie into 

conservatorship, which he did. And while there were serious problems before and we have to deal with this, in the current situation 

I agree with Mr. Shelby. They have too much of the market. But 

at least it is not the kind of cost on us that it was before. Fannie 

and Freddie today are behaving in a much more responsible fashion because we gave them the power to do that, and I think that 

was bipartisan at the time in 2008, and Secretary Paulson acted 

on it. 

Mr. Chairman, I appreciate this opportunity. 

Chairman JOHNSON. Thank you again, Representative Frank, for 

coming over here today. I know you need to get back to the House. 

Senator Shelby has a couple—— 

Mr. FRANK. I do feel at home here. I counted nine of my former 

colleagues up here, so I did not feel entirely isolated. Oh, 10. 

Chairman JOHNSON. Senator Shelby has a couple very quick—— 

Senator SHELBY. A few observations. I know Congressman Frank 

and I have sparred over the years on different issues, agreed on 
10 

some. Some. I do agree with Congressman Frank that there is a 

heck of a lot of difference between managing risk and speculation. 

And I think we all agree on that. That speculation will cause people to get in trouble. Managing risk will help people, and we have 

got to recognize the difference. 

Mr. FRANK. Agreed. 

Senator SHELBY. As far as Fannie Mae and Freddie Mac, the 

Congressman knows when we were in control here—I was the 

Chairman of this Committee—we pushed hard—hard—for a reform 

of Fannie and Freddie. We got it out of the Committee. We pushed 

it hard. We will continue to do that. I do not know what is going 

on in the House. As he knows, it has been 25 years since I was 

there. But I can tell you, we hope, working with Chairman Johnson, that sooner or later—the sooner the better—that we can do 

something comprehensive, something substantive dealing with 

Fannie and Freddie because they continue to hemorrhage. 

Mr. FRANK. I welcome that. 

Senator SHELBY. Yet we all recognize they are the only game in 

town right now as far as—— 

Mr. FRANK. Could I say, Senator? I agree with—first of all, two 

things. As you remember—and I remember that in 2005 and 2006 

doing a bill. But as I remember, your major opponent at that point 

was my Republican Chairman, Mr. Oxley. He had a very different 

bill, and there was a dispute. Mr. Oxley—— 

Senator SHELBY. I think he had a weaker bill. 

Mr. FRANK. Right. In fact, Mr. Oxley—— 

Senator SHELBY. You must have helped him with it. 

Mr. FRANK. No, I—— 

[Laughter.] 

Mr. FRANK. The notion that—actually, Mr. DeLay was calling the 

shots then. You know, I wanted to deal with this. People have said, 

well, I was blocking it. I was in the minority. Tom DeLay was a 

major factor in the House, and if Tom DeLay was really susceptible 

to my suggestions, we would not have gone to war in Iraq, and he 

would not have gone on the dance show. 

[Laughter.] 

Mr. FRANK. I have to say that he was not someone who listened 

to me. But I hope we can move ahead on Fannie Mae and Freddie 

Mac, but I will say that was when the Republicans were in power 

and there was an intercameral dispute. But we did work together 

in 2008. We had cooperation. And the only thing I would say to 

amend your statement is I think we stopped the hemorrhaging. 

There is still a problem. It is still too much of the market. But if 

you look at the people that President Bush put in power and since, 

they will tell you that the problem that we are facing is losses incurred before it went into conservatorship. Since then, it has been 

running in a much more conservative and responsible fashion, but 

we still need to fix it. 

Chairman JOHNSON. I will now call up our second panel of witnesses today. 

[Laughter.] 

Mr. FRANK. Thank you. 
11 

Chairman JOHNSON. I want to welcome our witnesses back to the 

Banking Committee and I will keep the introductions brief. Second 

panel, please come forward. 

[Pause.] 

Chairman JOHNSON. I will keep the introductions brief. 

The Honorable Neal S. Wolin is Deputy Secretary of the U.S. Department of the Treasury. 

The Honorable Ben S. Bernanke is currently serving his second 

term as Chairman of the Board of Governors of the Federal Reserve System. 

The Honorable Mary Schapiro is Chairman of the U.S. Securities 

and Exchange Commission. 

The Honorable Gary Gensler is the Chairman of the Commodities Futures Trading Commission. 

The Honorable Marty Gruenberg is the new Acting Chair of the 

Federal Deposit Insurance Corporation. As a former Senate Banking Committee server, I also welcome you back to a very familiar 

Senate committee room. 

Mr. John Walsh is Acting Comptroller of the Currency of the Office of the Comptroller of the Currency. 

I thank all of you again for being here today. I would like to ask 

the witnesses to please keep your remarks to 5 minutes. Your full 

written statements will be included in the hearing record. 

Secretary Wolin, you may begin your testimony. 

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, 

DEPARTMENT OF THE TREASURY 

Mr. WOLIN. Chairman Johnson, Ranking Member Shelby, Members of the Committee, I appreciate the opportunity to appear before the Committee. One year ago today, the President signed into 

law a comprehensive set of reforms to the financial system, reforms 

which are essential to making our economy stronger and more resilient. 

Those reforms were enacted in the wake of the most devastating 

financial crisis since the Great Depression. 

In the depths of the crisis, the economy lost an average of 

800,000 jobs per month. American families saw $5 trillion of household wealth erased in the last 3 months of 2008. Credit was frozen. 

Financial markets were barely functioning. 

The Administration and its predecessors put in place a comprehensive strategy to repair the financial system. As a result of 

that strategy, the U.S. financial system today is stronger, more stable, and better able to fuel growth and create jobs. 

But in order to protect our economy and create the conditions for 

long-term prosperity, we needed to put in place comprehensive reform of the financial system. 

That is why we proposed, Congress passed, and the President 

signed into law a sweeping set of reforms. 

The Dodd-Frank Wall Street Reform and Consumer Protection 

Act made important and fundamental changes to the structure of 

the U.S. financial system to strengthen safeguards for consumers 

and investors and to provide better tools for limiting risk in the 

major financial institutions and the financial markets. The core elements of the law were designed to build a stronger, more resilient 
12 

financial system, less vulnerable to crisis, more efficient in allocating financial resources, and less susceptible to fraud and abuse. 

These reforms were responsive to the many weaknesses that together nearly brought our financial system to collapse. They include: tougher constraints on excessive risk taking and leverage 

across the financial system, stronger consumer protection, comprehensive oversight of derivatives, and a new orderly liquidation 

authority to wind down a failing financial firm in a manner that 

protects taxpayers and the broader economy. 

The statute created three new institutions that fall within Treasury’s implementation responsibility: The Financial Stability Oversight Council, to identify, monitor, and respond to threats across 

the financial system; the Office of Financial Research, to enhance 

the quality and analysis of financial data available to policymakers 

and the public; and the Consumer Financial Protection Bureau, to 

help consumers make informed financial decisions and to protect 

them from abuses in the marketplace. 

We are far along in standing up these institutions and they have 

each begun to play their critical roles. 

As we move forward, we must continue to move quickly but carefully, taking the time we need to get things right. We must make 

sure our efforts are coordinated. We must make sure to take care 

to regulate firms in a manner appropriate to the risk they pose to 

the financial system. We must be sure to work to improve the efficiency and effectiveness of financial regulation as we write a new 

set of rules. We must work with our international partners to create a level playing field with a set of high global standards. And 

we must make sure regulators have the funding they need to do 

their jobs. 

A year ago, in the wake of a catastrophic financial crisis, DoddFrank was enacted to reform our financial system. These reforms 

were an obligation, not a choice. Without them, we could not build 

the financial system we need, a financial system with the stability 

and the resilience necessary to support our economy and to protect 

it in times of stress. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Secretary Wolin. 

Chairman BERNANKE. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you, Mr. Chairman, Ranking Member, for 

this opportunity to testify on the first anniversary of the DoddFrank Act. 

On this anniversary, it is worth reminding ourselves of why Congress passed the sweeping financial reforms a year ago. The financial crisis of 2008–2009 was unprecedented in its scope and severity. Some of the world’s largest financial firms collapsed or nearly 

did so, sending shock waves through the highly interconnected 

global financial system. Critical financial markets came under 

enormous stress. Asset prices fell sharply and flows of credit to 

American families and businesses were disrupted. The crisis, in 

turn, wreaked havoc on the U.S. and global economies, causing 
13 

sharp declines in production and trade and putting millions out of 

work. 

Extraordinary actions by authorities around the world helped 

stabilize the situation, but nearly 3 years later, the recovery from 

the crisis in the United States and in many other countries remains far from complete. 

In response to the crisis, we have seen a comprehensive rethinking and reform of financial regulation, both in the U.S. and around 

the world. Among the core objectives of both the Dodd-Frank Act 

and the global regulatory reform effort are, first, enhancing regulators’ ability to monitor and address threats to financial stability. 

Second, strengthening both the prudential oversight and resolvability of Systemically Important Financial Institutions, known as 

SIFIs. And third, improving the capacity of financial markets and 

infrastructures to absorb shocks. 

First, to help regulators better anticipate and prepare for threats 

to financial stability, legislatures in both the United States and 

other developed economies have instructed central banks and regulatory agencies to adopt what has been called a macroprudential 

approach to supervision and regulation. That is an approach that 

supplements traditional supervision and regulation of individual 

firms or markets with explicit consideration of threats to the stability of the financial system as a whole. 

As you know, the Dodd-Frank Act created a council of regulators, 

the so-called FSOC, to coordinate efforts to identify and mitigate 

threats to U.S. financial stability across a range of institutions and 

markets. The Council’s monitoring efforts are well underway, and 

this new organization has contributed to what has been a very 

positive atmosphere of consultation and coordination among its 

member agencies. 

The Council is also moving forward with its rulemaking responsibilities, including rules under which it will be able to designate 

systemically important nonbank financial institutions and financial 

market utilities for additional supervisory oversight, including by 

the Federal Reserve. 

For its part, the Fed has also made organizational changes to 

promote a macroprudential approach to regulation. Among these 

changes is the establishment of high-level multi-disciplinary working groups to oversee the supervision of large complex banking 

firms and financial market utilities, with a strong focus on the development side of implication for financial stability. We have also 

created an Office of Financial Stability Policy and Research to help 

coordinate our efforts to identify and analyze potential risk to the 

broader financial system and to serve as liaison with the Council. 

The second major objective of financial reform is to mitigate the 

threats to financial stability posed by the too-big-to-fail problem. 

Here, the Dodd-Frank Act takes a two-pronged approach. The first 

prong empowers the Fed to reduce the SIFIs’ probability of failure 

through tougher prudential regulations and supervision, including 

enhanced risk-based capital and leverage requirements, liquidity 

requirements, single counterparty credit limits, stress testing, an 

early remediation regime, and activities restrictions. The Federal 

Reserve and other agencies face the ongoing challenge of aligning 

domestic regulations with international agreements, including the 
14 

Basel III requirements for globally active banks. These efforts are 

going well. In particular, the Federal Reserve expects to issue proposed rules on the oversight of SIFIs later this summer, and working with other banking agencies, we are on schedule to implement 

Basel III. 

Ending too-big-to-fail also requires allowing a SIFI to fail if it 

cannot meet its obligations and to do so without inflicting serious 

damage on the broader financial system. Thus, the second prong of 

the Dodd-Frank Act’s effort to end too-big-to-fail empowers the Fed 

and the FDIC to reduce the effect on the system in the events of 

a SIFI’s failure through tools such as the new orderly liquidation 

authority and improved resolution planning by firms and supervisors. In particular, the Federal Reserve is working with the FDIC 

to require SIFIs to better prepare for their own resolution by 

adopting so-called living wills. A joint final rule on living wills is 

expected later this summer. 

Reducing the likelihood of a severe financial crisis also requires 

strengthening the resilience of our financial markets and infrastructure, a third major objective of the Dodd-Frank Act. Toward 

that end, provisions of the Act improve the transparency and stability of the over-the-counter derivatives markets and strengthen 

the oversight of financial market utilities and other critical parts 

of our financial infrastructure. We and our colleagues at the SEC, 

the CFTC, and other agencies are moving this work forward in consultation with appropriate foreign regulators and international bodies. The U.S. agencies are also working together to address structural weaknesses in areas not specifically addressed by the DoddFrank Act, such as the tri-party repo market and the money market mutual fund industry. 

To be sure, any sweeping reform comes with costs and uncertainties. In implementing the statute, the Federal Reserve is committed to the promulgation of rules that are economically sensible, 

appropriately weigh costs and benefits, protect smaller community 

institutions, and most important, promote the sound extension of 

credit in the service of economic growth and development. 

A full transition to the new system will require much more work 

by both the public and private sectors, and no doubt, we will learn 

lessons along the way. However, as we work together to implement 

financial reform, we must not lose sight of the reason that we 

began this process, which is ensuring that events like those of 2008 

and 2009 are not repeated. Our long-term economic health requires 

that we do everything possible to achieve that goal. Thank you. 

Chairman JOHNSON. Thank you, Chairman Bernanke. 

Chairman SCHAPIRO. 

STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES 

AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, thank you for inviting me to testify on 

the occasion of the 1-year anniversary of the Dodd-Frank Act. Following the biggest financial crisis since the Great Depression, Congress passed legislation that is already reshaping the U.S. regulatory landscape, reducing systemic risk, and helping to restore 

confidence in the financial system. 
15 

At the SEC, we were given broad new investor protection and 

market integrity responsibilities, and in the past year, we have 

made significant progress in our efforts to meet them. Already, we 

have proposed or adopted rules for about three-fourths, or about 

70, of the mandatory rulemaking provisions we were assigned. In 

addition, we have finalized 10 studies and reports that the Act required us to complete. 

In my prior testimony before this Committee, I outlined our efforts to establish a process to help us not only get the rules done, 

but get them done right. Among our efforts, we created internal 

cross-disciplinary working groups to coordinate the rulemaking 

process and facilitate our action. We increased transparency and 

aggressively sought input from the public. We forged and strengthened collaborative relationships with other Federal and State regulators and our international counterparts. We engaged in a substantial outreach effort, participated in scores of interagency and 

working group meetings, conducted public roundtables, met with 

hundreds of interested groups and individuals, including investors, 

academics, and industry participants, and received, reviewed, and 

considered thousands of public comments. 

All of these efforts, in addition to Congressional input and robust 

Commission debate, are helping us write rules that effectively protect investors and the financial system without imposing undue 

burdens on market participants. While some feel we are moving too 

quickly and others feel we are not moving rapidly enough, I believe 

we are proceeding at a pace that ensures that we will get the rules 

right. 

My written statement illustrates the breadth and complexity of 

the rulemaking activities that have engaged the SEC for the past 

year—activities that range from hedge fund registration to the obligations of investment advisors and broker-dealers, to implementation of the new whistleblower program. Other priorities include 

completing the specialized disclosure rules called for in the Act, 

continuing to establish a new oversight regime for the over-thecounter derivatives market, strengthening oversight of credit rating 

agencies, increasing oversight of systemically important financial 

market utilities, putting in place new oversight for municipal advisors, implementing the Act’s corporate governance and executive 

compensation requirements, engaging our foreign counterparts in 

detailed discussions aimed at limiting the potential for regulatory 

arbitrage, and making effective use of the Act’s enhanced enforcement powers to address wrongdoing. 

While the SEC has made tremendous progress over the past 

year, the provisions of the Dodd-Frank Act vastly expand the SEC’s 

responsibilities and will require significant additional resources to 

fully implement the law. To date, the SEC has proceeded with the 

first stages of implementation without additional funding, taking 

staff from other responsibilities and working without sufficient investments in areas such as information technology. While it is, of 

course, incumbent upon us to use our existing resources efficiently, 

the new responsibilities assigned to us are so significant that they 

cannot be achieved solely by wringing efficiencies out of the existing budget. Attempting to do so will hamper our ability to meet 

both new and existing responsibilities. 
16 

If the SEC does not receive additional resources, circumstances 

that contributed to the financial crisis will not be adequately addressed as the SEC will not be able to build out the technology and 

hire the expertise needed to oversee and police these new areas of 

responsibility. 

I would note that the Dodd-Frank Act requires the SEC to collect 

transaction fees to offset the annual appropriation of the agency. 

So regardless of the amount appropriated to the SEC, because it 

will be fully offset by fees that we collect, it will have no impact 

on the nation’s budget deficit. 

Though the SEC’s efforts to implement the Dodd-Frank Act have 

been extensive, we know our work continues. Thank you for inviting me to share with you our progress to date and our plans going 

forward. I look forward to answering your questions. 

Chairman JOHNSON. Thank you, Chairman Schapiro. 

Chairman GENSLER. 

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY 

FUTURES TRADING COMMISSION 

Mr. GENSLER. Good morning, Chairman Johnson, Ranking Member Shelby, and Members of this Committee. I thank you for inviting me here to testify today and I am pleased to testify on behalf 

of the Commodities Futures Trading Commission. 

On this anniversary, it is important to remember why the law’s 

derivatives reforms were so necessary. When AIG and Lehman 

Brothers failed, we all paid the price. All of your constituents paid 

the price. And what is more, the effects of the crisis continue to be 

very real, with significant uncertainty in the economy and millions 

of Americans still out of work. 

And though the crisis had many causes, it is clear that the derivatives or swaps marketplace played a central role. Swaps added 

leverage to the financial system, with more risk being backed by 

less capital. They contributed, particularly through the product 

called credit default swaps, to a bubble in the housing market and 

I believe helped accelerate problems as we went into that crisis. 

And they also contributed to a system where large financial institutions, once just thought too-big-to-fail, were all of the sudden— 

this new phrase—too interconnected to be allowed to fail. So swaps, 

which are still to this day so important in helping manage and 

lower risk for thousands of end users in this economy, also in that 

moment of crisis concentrated and heightened risk in the financial 

system and thus to the public. 

So what did Dodd-Frank do to address this? First, the DoddFrank Act broadened the scope of the oversights of the CFTC and 

SEC for the first time to cover swaps and securities-based swaps. 

Second, the Act promotes market transparency, something that 

has worked in the securities and futures markets since the 1930s, 

and that is through real-time reporting of transactions and bringing those transactions that can to a centralized place called swap 

execution facilities. Economists for decades have found that transparency reduces cost to users of the markets. 

Third, the Act lowered risk to the public and the overall economy 

by directly regulating the dealers and moving that which we can 

to central clearing. 
17 

Fourth, the Act provides important new enforcement authorities 

and reporting requirements so that regulators themselves, the 

CFTC and SEC, can better police the markets for fraud, manipulation, and other abuses. In fact, this month, the Commission finalized a rule on anti-manipulation which is very similar to what the 

SEC has had for decades, and we think it will help. 

And fifth, I note that the Ranking Member Shelby and Ranking 

Member Frank had a discussion about speculation. Congress actually mandated that the CFTC set aggregate position limits for 

physical commodities, expanding the scope to certain swaps and 

linked contracts. 

So the CFTC is working along with other regulators, particularly 

the SEC, deliberately, efficiently, and transparently to write rules 

to implement these and other provisions of the Act. This spring, we 

substantially completed the proposal phase of rulemaking, and 

then we provided the public an extra 30 days to look at the whole 

mosaic at once. And now the staff and Commissioners have turned 

toward final rules, approving eight so far. We anticipate taking up 

in August rules with regard to swap data repositories, in September, clearing, position limits, and others, October, and we will 

be moving forward continuing to finalize rules. 

But as we finalize rules, we are reaching out broadly to market 

participants, with over 21,000 comments to date, including 

roundtables and public comment periods to consider how best to 

implement this, talking to international regulators. And we are 

also looking very closely at phased implementation, which helps 

lower costs and risk. 

Before I close, I would like to just make note that the CFTC is 

taking on a significant expanded scope and mission, a market that 

is seven times the size of what we currently oversee. The Commission must be adequately resourced to effectively police this market 

and protect the public. Without sufficient funds, there will be fewer 

cops on the beat, but also, we will not really even have enough staff 

to answer the basic questions for market participants and the public on the new rules. 

In conclusion, we are working thoughtfully at the Commission to 

get these rules right based on significant public input, but it is 

more important to get it right than work against the clock and that 

is not what we are doing. We are going to get this right and move 

forward. But until the CFTC completes its rule-writing process and 

implements and enforces the new rules, the public remains unprotected. 

I thank you. I look forward to your questions. 

Chairman JOHNSON. Thank you, Chairman Gensler. 

Acting Chairman Gruenberg. 

STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Thank you, Mr. Chairman. Chairman Johnson, 

Ranking Member Shelby, and Members of the Committee, thank 

you for the opportunity to testify today on the 1-year anniversary 

of the passage of the Dodd-Frank Act. 

Chairman Johnson, if I may, thank you for your kind words at 

the outset. It does occur to me that it used to be more comfortable 
18 

for me to sit behind you all on the dais than where I am right now, 

but I am privileged to have the opportunity. 

The Dodd-Frank Act provided the FDIC with important new authorities in the areas of deposit insurance and systemic resolution 

that we believe will significantly enhance financial stability and on 

which we have made significant progress toward implementation. 

First, the Act grants the FDIC new authorities to manage the 

Deposit Insurance Fund in a way that will make it more resilient 

in a future crisis. The FDIC has already implemented provisions in 

the Act that make permanent the increase in the deposit insurance 

coverage limit to $250,000 and provide insurance on the entire balance of non-interest-bearing transaction accounts through the end 

of 2012. 

We have also implemented the changes in the assessment base 

mandated by the Act, which generally shifts the overall assessment 

burden from community banks to the largest institutions, which 

rely less on domestic deposits for funding. The change in the assessment base from deposits to assets will result in an aggregate 

decrease of 30 percent in deposit insurance assessments for insured 

institutions with assets under $10 billion. 

In addition, the Act provided the FDIC with new flexibility in 

setting the target size of the Deposit Insurance Fund. We have 

used the new authority to adopt a long-term fund management 

plan that should maintain a positive insurance fund balance even 

during a banking crisis while preserving steady and predictable assessment rates through economic and credit cycles. This will enable 

us to avoid imposing procyclical deposit insurance assessments on 

financial institutions during an economic downturn. 

The Dodd-Frank Act also provides for a new systemic resolution 

framework to be used in those rare instances when we must act to 

mitigate the systemic risk posed by the resolution of a financial 

company in bankruptcy. The framework includes an orderly liquidation authority and a requirement for resolution plans that will 

give regulators much better tools with which to manage the failure 

of large complex financial institutions. 

If the FDIC is appointed as receiver for a covered financial company under the orderly liquidation authority, we are required to 

carry out an orderly liquidation in a manner that ensures that 

creditors and shareholders appropriately bear losses while maximizing the value of the company’s assets, minimizing losses, mitigating risk, and minimizing moral hazard. 

Critical to the exercise of this authority is a clear and transparent process. The FDIC Board approved a final rule implementing the orderly liquidation authority on July 6. This final rule 

provides a framework to resolve systemically significant financial 

institutions using many of the same powers we have long used to 

manage failed bank receiverships. 

The FDIC and the Federal Reserve Board, as Chairman 

Bernanke mentioned, are also working jointly to issue regulations 

implementing new resolution plan requirements. The comment period on the Notice of Proposed Rulemaking ended on June 10 and 

we hope to issue a final rule in the near future. 

In order to carry out these responsibilities for the resolution of 

Systemically Important Financial Institutions, the FDIC has estab-
19 

lished a new Office of Complex Financial Institutions which will 

have three key functions: To monitor the condition of systemically 

important financial companies from the standpoint of resolvability; 

to oversee jointly with the Federal Reserve the development of resolution plans by these companies; and to engage with the supervisors of the foreign operations of these companies in regard to resolution planning. 

Finally, the Dodd-Frank Act contains provisions that will complement the ongoing Basel III reforms that will make capital requirements more uniformly strong across the banking system. Section 171 of the Dodd-Frank Act states that capital requirements for 

the largest banks and bank holding companies must not be less 

than the capital requirements that are generally applicable to insured institutions. The FDIC, the Federal Reserve, and the Comptroller of the Currency recently finalized a rule implementing this 

provision. 

We have made significant progress in the past year but still have 

considerable work ahead of us. Throughout this process, we have 

sought input from the industry and the public and we continue to 

report back to Congress on our progress. We have sought to make 

the process as transparent as possible. We believe that successful 

implementation of these provisions will lead to a financial system 

that is more stable and less susceptible to crises and better prepared to withstand crises if and when they develop. 

Thank you, and I look forward to answering your questions. 

Chairman JOHNSON. Thank you, Acting Chairman Gruenberg. 

Acting Comptroller Walsh. 

STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. WALSH. Thank you, Chairman Johnson, Ranking Member 

Shelby, Members of the Committee. I appreciate the opportunity to 

be here today to discuss the progress that the OCC and other regulatory agencies have made in implementing the Dodd-Frank Act in 

the year since the law was passed. 

Although we have weathered the worst financial crisis since the 

Great Depression, it will be years before we put all of its effects 

behind us. Dodd-Frank took important steps to strengthen the financial system and guard against future crises, and I think all of 

us are determined to implement those safeguards as quickly and 

effectively as possible. 

As I have said in previous testimony, the OCC is involved in 85 

individual projects stemming from Dodd-Frank, including a number of interagency rulemakings that will have a very significant impact on the financial system. Our biggest single task has been to 

integrate the staff and functions of the Office of Thrift Supervision 

into the OCC, but we have also devoted considerable effort to the 

transfer of supervisory responsibilities to the new Consumer Financial Protection Bureau, and we have participated in the early work 

of the Financial Stability Oversight Council, which has the potential to serve as an important defense against market disruption. 

Regarding OTS integration, I am pleased to report that on Monday 674 employees of the Office of Thrift Supervision reported for 
20 

duty at the OCC in offices around the country. We have worked 

very hard over the past year to ensure a smooth transition, and we 

have now succeeded in moving to a single regulator for national 

banks and Federal thrifts. We will need every bit of the talent and 

experience of former OTS staff to help fulfill our combined supervisory mission, and the men and women joining us from OTS have 

been fully integrated into policy and field units where their talents 

can best be utilized. 

We also recognize the importance of communication to the industry so that thrift executives know what to expect from the combined agency, and among our efforts we held 17 outreach meetings 

around the country and had more than 1,000 thrift executives join 

us for those meetings. 

As part of the transition, we have engaged in several 

rulemakings affecting the thrift industry. Today we posted an interim final rule that republishes as OCC rules those OTS regulations that the OCC has authority to administer and enforce going 

forward. We are continuing to review regulations—those as well as 

our own—to see where improvements may be in order. 

We also published a final rule today that addresses a number of 

areas important for continuity of supervision after July 21st, including assessments of Federal savings associations. That rulemaking, published in today’s Federal Register, also addressed the 

areas where Dodd-Frank made changes in the standard upon 

which the OCC’s rules on preemption and visitorial powers were 

based. 

The rulemaking scales back our current rules in a number of 

areas. The amendments eliminate the obstruct, impair, or condition 

preemption standard from our regulations. They eliminate preemption for operating subsidiaries of both national banks and federally 

chartered thrifts, limit Federal savings associations to the same 

standard of conflict preemption that applies to national banks, and 

expressly recognize the enhanced visitorial authorities of State Attorneys General that are provided under Dodd-Frank. We also implement new procedures for future preemption decisions, including 

consultation with the CFPB. 

Over the past year, we have provided considerable support for 

the stand-up of the CFPB and worked to ensure cooperation between the OCC and the new Consumer Bureau in our complementary supervisory roles. In addition to participating in numerous informational briefings with CFPB staff, we have assisted in developing the agency’s procurement and personnel management processes. To ensure the agency has the information it needs about the 

banks it will be supervising, we executed a memorandum of understanding that allowed us to share reports of examination, supervisory letters, information on enforcement matters, and other important confidential information. 

We have also agreed to provide transitional support for other 

CFPB functions, including consumer complaints. The OCC will continue to operate our Customer Assistance Group to handle consumer complaints about the large banks now under CFPB supervision while the Bureau builds its own capacity in this area. 

As we discussed in our last appearance before the Committee, we 

have participated in the interagency effort to create an effective Fi-
21 

nancial Stability Oversight Council as a forum for participants to 

share views, perspectives and expertise in a confidential setting on 

emerging risks across the system. The Council will be an important 

venue for averting and addressing future market disruptions. 

And, finally, Dodd-Frank also calls for a number of rulemakings, 

and we have proposed interagency rules to address credit risk retention, incentive compensation, and margin and capital requirements for covered swap entities, among others. 

Clearly, we have a great deal of work ahead in implementing the 

many important provisions of Dodd-Frank, but I am confident that 

we will get it done in a way that strengthens the financial system 

and protects it against the kinds of risks that led to the last crisis. 

Thank you, and I am happy to answer your questions. 

Chairman JOHNSON. Thank you for your testimony. 

We will now begin the questioning of our witnesses. Will the 

clerk please put 5 minutes on the clock for each Member for their 

questions? 

Secretary Wolin, I think it is important to keep in mind the damage inflicted by the crisis and what the Wall Street Reform Act will 

do to prevent or mitigate another crisis. Could you highlight in 

your opinion the greatest costs of the crisis and the most important 

benefits of the new regulatory framework? 

Mr. WOLIN. Thank you, Mr. Chairman, for that question. The 

costs which I tried to enumerate in my testimony were really extraordinary. The financial system came to the brink of utter failure—credit markets froze up. In the end our economy was enormously affected in a way that hurt all Americans with respect to 

the availability of credit, with respect to the destruction of an enormous amount of wealth, lost jobs, lost homes, and so forth. And a 

key reason for all of that, of course, is that the framework we had 

for our financial system was manifestly inadequate. It had gaps 

and weaknesses that needed to be addressed. We had no alternative really but to do that, and the Dodd-Frank statute does exactly that. It makes sure that our financial system rests on a more 

stable, more resilient foundation, requiring firms, especially those 

that are more risky and present more risk to the system, to hold 

bigger capital, to have greater liquidity standards and leverage 

constraints. It brought the derivatives markets and the swap markets out of the darkness. That was clearly an important factor that 

created or led to the crisis. And it strengthens enormously consumer protection because we know that consumers did not have information and were not put in a position to make fundamental 

choices about the kinds of credit they undertook, and that led, of 

course, to enormous amounts of credit being extended in ways that 

neither they nor the overall system could bear. 

In all of these ways, and many others, I think, the Dodd-Frank 

Act makes important strikes to put ourselves on a foundation that 

allows our financial system to contribute what it can to the economy and its growth, which is, after all the critical need we have 

as a country. 

Chairman JOHNSON. I have a question directed at Chairman 

Bernanke, Acting Chairman Gruenberg, and Acting Comptroller 

Walsh. We are all concerned about the unnecessary regulatory burden for financial institutions that did not cause the crisis. Can each 
22 

of you describe what your agencies are doing to ensure that we 

have an appropriate set of rules that work, but also that are not 

duplicative, contradictory, and overly burdensome to small businesses and small financial institutions? Chairman Bernanke? 

Mr. BERNANKE. Yes, thank you. We agree that small banks are 

critical to our financial system. They have the ability to make loans 

in a local community that large banks often do not have, including 

loans to small businesses. And so it is very important to minimize 

the burden on those banks. 

First of all, the law itself, is very focused on the largest firms 

and on the most complex activities, so the direct implications of the 

law for smaller banks is less. 

That being said, it is important for us as regulators to make 

clear to smaller banks that they are exempt and to make sure that 

they are effectively exempt. We are trying in our rules to provide 

more guidance to small banks about what applies to them and 

what does not apply to them. I think small banks will benefit to 

some extent from the fact that tougher rules on the biggest banks 

and on nonbank institutions will create a more level playing field. 

It will be of assistance to them. 

Finally, I would mention that the Fed has made a very strong 

effort to reach out to smaller institutions. For example, our Supervision Committee has a subcommittee which is focused on making 

sure that the rules that we pass do not have excessive burden on 

small banks, and we have created a Community Bank Council that 

meets three times a year with the Federal Reserve Board to give 

us maximum feedback. 

So we are taking a lot of steps to try to achieve that objective. 

I agree with you it is a very important one. 

Chairman JOHNSON. Acting Chairman Gruenberg? 

Mr. GRUENBERG. Thank you, Chairman Johnson. This is a matter of significant priority for the FDIC because we are the leading 

Federal supervisor of the majority of community banks in the 

United States, so it is a matter we take very seriously. 

One of the challenges that the community banks have told us 

about is with the number of regulations required by the DoddFrank Act. There is an issue for them simply sorting through 

which ones actually have relevance and applicability to them. 

To try to respond to that, on every financial institution letter— 

and we issue a letter for each regulation—we provide a box on the 

front that specifically summarizes the applicability of that regulation to institutions with assets under $1 billion. So they have a 

quick shorthand place to go to identify the relevance of the regulation to them. 

In addition, we have an ongoing statement of policy at the FDIC 

on the development and review of FDIC regulations and a policy 

which requires regular periodic reviews by us of our regulations 

and their impact, and that is something we are undertaking specifically in regard to the implementation of the Dodd-Frank Act. 

And, finally, I would mention we also have a Community Bank 

Advisory Committee that has been extremely helpful to us, and one 

of the recommendations they made was to conduct a review of the 

questionnaires and surveys that we require our regulated institutions to fill out. In response to that review, we have created a new 
23 

place on the FDIC Web site consolidating all of those questionnaires and surveys, so it is in a single place institutions can go to, 

and they will now be able to fill out those questionnaires and surveys online, which they were not able to do before. So this is a matter of ongoing attention for us. 

Chairman JOHNSON. Acting Comptroller Walsh, could you elaborate a bit? 

Mr. WALSH. Well, I would certainly join my colleagues in expressing the same concerns, and, in fact, the approach that we are 

taking, about 2,000 of our 2,100 institutions are community banks. 

We have substantial outreach to them. We have an Internet-based 

BankNet system that enables them to come and look at updates on 

regulation and to remain apprised of things that are happening. 

Certainly, they share the concern that there are a lot of rules, 

and they are not quite sure what affects them and what does not. 

And it is true that most of those rules are aimed at larger institutions and more complex activities. But we continue to work with 

them to understand those things that will affect them and the 

many that will not. 

Chairman JOHNSON. Thank you. 

Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman Bernanke, it seems to me that after most crises, we 

are told that if regulator only had more resources, they could have 

prevented whatever crisis it was. As a result, the standard response by Congress is to grow the bureaucracies. Dodd-Frank fits 

this pattern, it seems to me. Because of Dodd-Frank, regulators 

have seen their powers grow over the American economy and their 

budgets also grow. Dodd-Frank also will add over 4,000 new Government jobs, many of them very well paying jobs. Employees, for 

example, at the SEC and other agencies can earn up to $230,000 

a year. Meanwhile, as we all know, private sector job growth has 

been flat. 

Mr. Chairman, do we now have enough Government bureaucrats 

to protect the financial system? 

Mr. BERNANKE. Senator, let me go back to the premise of your 

question. 

Senator SHELBY. OK. 

Mr. BERNANKE. Which is I really do think that—and I believe 

there is widespread agreement—the regulatory structure before the 

crisis was inadequate. There were obviously large gaps in our coverage. There was nobody responsible for looking at the system as 

a whole. There were significant weaknesses in the structure of our 

financial system, including the shadow banking system and so on. 

I congratulate you on some of your attention early on to Fannie 

and Freddie, to capital standards, and so on. These were things 

that were inadequate. 

This is not just a pointless response. There are clearly a lot of 

things that need fixing and that we can improve, and I believe 

that, broadly speaking, the Dodd-Frank Act covers the main bases, 

with the main exception of housing finance, which was discussed 

earlier. 
24 

You need more people to carry out more regulations, write more 

regulations, and to do just in general a better job of overseeing private sector activity. 

That being said, what we want is quality more than quantity. We 

want it done well. We want to make sure that there is clarity in 

terms of the rules, that financial institutions understand what the 

rules of the game are, and so that we achieve these results at the 

least cost to the financial system. 

Let me just say that the Fed does do regular cost/benefit analyses of all our rules, and it is always our intention to try to meet 

the goals of the statute in the least cost way that we can. 

Senator SHELBY. Didn’t the Inspector General of the Fed recently 

call that into question, the cost/benefit methodology that the Fed 

was using that they claim was antiquated? 

Mr. BERNANKE. I do not believe that is correct. 

Senator SHELBY. OK. 

Mr. BERNANKE. There have been several studies, one by a group 

of the IGs, I believe, and another by the GAO which is more related to some of the programs we did during the crisis. I am sure 

you will correct me if I am wrong, but my understanding is that 

the Fed IG took a positive view of the Fed’s consistent application 

of cost/benefit principles to the rules we write. 

Senator SHELBY. It is my understanding that the Inspector General of the Federal Reserve recently revealed that the Fed’s internal written policy for rulemaking procedures is more than 30 years 

out of date and, therefore, does not adequately reflect current statutory requirements to perform cost/benefit analysis. If that is not 

right, maybe we can both review this. But if that is right, then the 

Fed needs to step up to the plate there, does it not? Assuming that 

is right. 

Mr. BERNANKE. Well, Senator, again, if that is right, that is a 

statement about written policies. 

Senator SHELBY. OK. 

Mr. BERNANKE. In actual practice we are very attentive to the 

costs and benefits. 

Senator SHELBY. OK. Chairman Gensler, I have asked you twice 

in written questions for the record for my colleagues here in the 

whole Committee how the CFTC would exercise its authority under 

Title VIII with respect to financial institutions engaged in activities 

designated under that title. In both instances you responded with 

a discussion of the regulation of financial market utilities, which 

does not answer the question. 

Let me ask you again: What are the CFTC’s plans with respect 

to financial institutions other than financial market utilities? In 

other words, I will ask it this way: What are the CFTC’s plans with 

respect to financial institutions engaged in activities that are designated by the Council to be systemically important? 

Mr. GENSLER. I thank you for clarifying. I do not think I really 

fully understood the question in written form. 

Senator SHELBY. OK. 

Mr. GENSLER. So I understand it now. 

Title VIII, I think, addressed itself to financial market utilities, 

and I think that through the Council there will be some that are 

designated. We currently oversee I think 16 clearinghouses, and I 
25 

assume some of them will be included. I do not know whether the 

Council will designate any activities, so that is why I did not envision them. Right now I would suspect we will focus on one, two, 

or three clearinghouses and then no other institutions will probably 

come under Title VIII. 

Senator SHELBY. Speaking of clearinghouses, the FSOC recently 

approved rules that laid the groundwork, as I understand it, to determine which clearinghouses will be deemed systemically important. Will the CFTC provide clarity on whether or not it will allow 

clearinghouses more time before they must decide whether to accept or reject swap trades? 

Mr. GENSLER. Well, I think that for most it is up to the clearinghouse and their risk committee. Clearinghouses will have a mandate, but it is important that they—— 

Senator SHELBY. Let them do it? 

Mr. GENSLER. Well, they—and Dodd-Frank I think addressed it. 

They are the first line. They get to decide. A mandate then only 

happens if we then also seek public comment. 

Senator SHELBY. Do you think that the ability of systemically important clearinghouses to access the Fed’s discount window makes 

it more or less likely that clearinghouses will accept riskier products? Or will you try to make sure that they do not? 

Mr. GENSLER. Well, I think it is our responsibility, each of us, to 

make sure taxpayers do not stand behind any financial institution, 

not clearinghouses—— 

Senator SHELBY. Like we have stood behind it before? 

Mr. GENSLER. I agree with you, sir. I think the perverse outcome 

of the crisis is that some might think we are do more of that, and 

I think it is important that we do everything in our rulewriting to 

ensure that the public not stand behind the clearinghouses or other 

financial institutions. 

Senator SHELBY. Thank you. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you, Mr. Chairman. 

On Tuesday, the Chamber of Commerce released a report that 

criticized Federal agencies for not keeping up with markets and 

technology, and they noted: 

A modern, well-regulated market is one in which the regulators also use 

current technologies and techniques to keep pace with market developments. 

Chairman Schapiro and Chairman Gensler, the House Appropriations Committee is proposing significant cuts which I presume 

would diametrically oppose this request that you keep up with 

markets through technology. What is your perception? 

Ms. SCHAPIRO. Thank you, Senator. Under the House appropria- tion, we would probably cut about $10 million out of our information technology budget, and the end result of that would be postponed critical investment in market surveillance technology. I have 

talked with this Committee many times about the Flash Crash of 

May of last year, the implications that had for investors and for 

public companies seeking reliable capital markets in which to raise 

money, and the fact that it took the two agencies many months to 

be able to actually diagnose what happened because of a lack of 

technology capability. 
26 

It would also mean a delay in the modernization of the EDGAR 

System, which is absolutely critical to public companies who file 

their disclosures via EDGAR, to our staff’s capability to analyze 

public company disclosure, and also to much of the information 

that we will be gathering as a result of Dodd-Frank, which filed via 

the EDGAR System; and then, of course, our ability to bring in 

data, again, for our oversight of hedge funds, over-the-counter derivatives, and in another area, the consolidated audit trail and 

large trader reporting systems as the SEC is moving forward apart 

from Dodd-Frank. All require that we have the capacity to invest 

in technology, and we have not had that, and under the House bill 

we would not have that. 

Senator REED. Chairman Gensler. 

Mr. GENSLER. Briefly, technology is very important so we can be 

an efficient cop on the beat and efficiently provide the public the 

protections they want. We spent this year about $37 million on 

technology, which is less than most of the largest financial institutions spend in 1 week. And the industry is spending $20 to $25 billion a year. It is less than they spend in a day. In 1 year that is 

what we do. 

We think it would be helpful to about double that, and we have 

only asked for about 30 percent more people. So technology is a 

way to be efficient on the people side and, of course, to oversee 

markets, which are about seven times the size. 

It is very important for this setting of aggregate position limits 

as well so that we can aggregate the data and bring it in and use 

the computers to do that which computers are good at. And the 

House appropriation bill cut us 15 percent. We obviously could not 

do any of that with the cut of 15 percent. 

Senator REED. In effect, this is almost sort of setting you up for 

not falling behind these markets we are trying to create, but eventually failing to be able to even have any transparency or any insight to the markets. 

Mr. GENSLER. I think that is right. We will complete the 

rulewriting process. It will be thoughtful. It will take longer than 

Congress had laid out. But we will finish that rulewriting process. 

But I fear that then we will not have the people to answer the 

questions, to have the transparency, to aggregate the market and 

put it out on our Web site. Public market transparency needs the 

technology and the resources. 

Senator REED. Chairman Schapiro? 

Ms. SCHAPIRO. Senator, can I add to that? I think we have said 

repeatedly we will not be able to operationalize the Dodd-Frank 

rules. We, too, will get them done. Hopefully they will be reasonable and appropriate rules. 

But the other area where we will fall behind is that we receive 

about 2,000 requests a year in the form of self-regulatory organization rule filings, requests for exemptions, and no-action letters. Our 

capacity to keep up with that kind of volume on a declining budget 

will be severely impacted. And those are things industry really 

wants from us. They need that guidance and that exemptive relief 

from time to time. And so I think everybody has a stake in these 

agencies being in a position to do their jobs. 
27 

Senator REED. It seems from your comments that the possibility 

exists of having the worse of two worlds: regulations on the books 

which will require you under Dodd-Frank, but ineffective resources 

to respond to legitimate questions of business, to interpret the regulations, to respond promptly to their requests. I would think the 

business community would be worse off in this situation because, 

again, the liabilities are here on the books, but if they cannot get 

any traction or response from the agencies. 

Ms. SCHAPIRO. I think that is right, and to follow up on what 

Chairman Bernanke said, it is in the interest of the industry to 

have expert people within the regulatory agencies who can, in fact, 

efficiently and effectively do examinations, provide guidance, provide information and assistance, as well as to enforce the law, 

which we are also charged with doing. And I think the public has 

to understand what the limitations are of a regulatory regime that 

has no compliance or enforcement behind it. 

Senator REED. Just one final point. I think the only real beneficiaries are not the rank-and-file business men and women, but 

those who deliberately will try to avoid following the law in the 

hopes they will not get discovered because of the lack of resources. 

But then the unscrupulous—and I think the vast majority of businesses will be laboring to do what they can, but getting no help or 

guidance from the regulators. 

Chairman JOHNSON. Senator Toomey. 

Senator TOOMEY. Thank you, Mr Chairman, and thanks to the 

witnesses for being back once again. I have two questions. The first 

I think I would like to direct to Ms. Schapiro. 

As you know better than anyone, last year the SEC developed a 

whole new set of rules and regulations regarding money market 

funds—tightened standards for credit quality, enhanced liquidity, 

shortened portfolio maturities, a number of very meaningful measures to basically diminish the risks and I think significantly reduce 

the risk that any kind of a run would be likely to occur or that 

there would be systemic risk from these funds. 

Nevertheless, we do hear a discussion from time to time that 

there is also an interest in moving to a floating NAV, and what 

concerns me about a floating net asset value is the complexity of 

administering this, keeping up with the paperwork, and even tax 

implications that could become very complex and onerous to what 

is a very large and important part of our financial system. 

So I guess my question is: Is imposing the net asset value rule 

still under consideration? Or is that off the table? 

Ms. SCHAPIRO. The FSOC has taken a lot of interest, appropriately so, in the money market fund issues, and as you point out, 

we did do a complete overhaul of money market fund credit quality 

and liquidity standards a year ago. I think they have been fairly 

universally appraised as being very positive, very helpful to build 

the resiliency of money market funds. We also require reporting of 

shadow NAV so that investors can become accustomed to the idea 

that, in fact, the value does fluctuate for a money market fund. 

At FSOC we have discussed the issue several times. We held a 

public roundtable at the SEC with all FSOC members in attendance and members of the industry and academia to talk about how 

to prevent runs on money market funds and what are the options 
28 

available to us. And I would say that we are actively discussing 

floating NAV as one of the ideas that has been floated and was 

raised in the President’s Working Group’s (now FSOC’s), study on 

Money Market Funds, as well as capital buffers. The industry came 

forward with the idea of a liquidity exchange bank. 

So there are a number of areas where we are having discussions. 

I would say nothing has been decided, but we continue to seek public input and our fellow regulators’ input on what we can do to ensure that we do not have a situation as we did when the Primary 

Reserve Fund broke the buck and effectively caused a run on 

money market funds, in large part because of the stable NAV. So 

on the issue we are continuing to explore. 

Senator TOOMEY. I hope we will keep in mind what seems to me 

an absence of empirical evidence that suggests that a floating NAV 

would solve a problem here and the fact that very substantial 

measures have already been taken. 

I have a separate question that I would like to address to Mr. 

Gensler and perhaps Mr. Bernanke, as well. This has to do with 

the proposed margin rules for swaps under Title VII. My understanding is that these rules would require the subsidiaries of 

American banks operating overseas and doing business with nonAmerican counterparts, that these subsidiaries would nevertheless 

be required to hold margin on behalf of their counterparts. It is 

also my understanding that the Europeans and Asians have not 

imposed a comparable requirement, and therefore, I am concerned 

that that would put our firms at a competitive disadvantage with 

respect to transactions that do not occur on U.S. soil, do not have 

an American counterpart. So are you concerned that we are in the 

process, we are heading toward putting ourselves at a competitive 

disadvantage in this area? 

Mr. GENSLER. I thank you for the question. I think not just in 

the margin area, but even more broadly, we have been working actively with international regulators because capital and risk knows 

no geographic border. It will move somewhere else. On margin, 

more specifically, we are reaching out and trying with Treasury, 

the Federal Reserve, and SEC to have an international approach 

to margin and regimes. 

On the specific, on the bank rules, I will defer to Chairman 

Bernanke because we are only setting margin for the nonbanks. 

Senator TOOMEY. Mr. Chairman? 

Mr. BERNANKE. Senator, you are absolutely correct that if those 

margin rules for foreign operations are maintained and Europeans 

and other foreign jurisdictions do not match it, that that would be 

a significant competitive disadvantage. 

I think the best solution, which we are pursuing with some assiduity, is that we get some kind of global agreement on margin 

rules for swaps and other instruments. And again, we are working 

on that. If that does not happen, we will need to think again about 

how to meet Dodd-Frank’s requirements for improved prudential 

safety, which is what margins are intended to achieve, without 

disadvantaging our banks in their foreign operations. 

So our first choice is to equalize the playing field. If that does 

not work, we will look at many of the suggestions we received in 

the comment process to think about how to address that issue. 
29 

Senator TOOMEY. I would just like to suggest, it just seems to me 

that if we do have global uniformity, then that obviates the need 

for extraterritoriality in our regulations in the first place. And second, with respect to margin requirements of end users, as we all 

know, that can be very disruptive for the ability of the end user 

to hedge risks and, therefore, very problematic, and essentially, at 

the end of the day, it is a credit decision that presumably the banking entities are qualified to make, so—— 

Mr. GENSLER. Could I just, Senator Toomey, at least in what we 

have proposed at the CFTC, the nonbank swap dealers would not 

be required to collect or receive margin from the nonfinancial end 

users, the commercial companies. 

Senator TOOMEY. OK. Great. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. Thank you to all 

the panel. 

You know, news reports came out this week from the Associated 

Press and Reuters that allege that despite the regulators’ assurances to us that the banks’ illegal robo-signing was being fixed, the 

practice is still widespread, that it is still going on for both foreclosed homes and also for homes that are not in foreclosure, which 

basically amounts to forging documents and in some cases wrongfully foreclosing on people, which is why I and 10 of my colleagues, 

including several Members of this Committee, and a dozen House 

members, as well, have written to the OCC, the Federal Reserve, 

and the FDIC urging you that you make the foreclosure reviews 

and other foreclosure-related documents fully transparent and that 

you release the results of those reviews on a bank-by-bank basis so 

the public can evaluate the performance of each bank. 

There is a tremendous interest in the public seeing these problems properly resolved, so I want to ask those three agencies—the 

Fed, the FDIC, and the OCC will you release the results of the 

foreclosure reviews on a bank-by-bank basis? Will you release the 

mortgage servicers’ action plans that respond to problems in the 

consent orders? And what about the engagement letters for the 

supposedly, quote-unquote, ‘‘independent’’ consultants who are 

hired by the banks themselves to perform the foreclosure reviews 

of the banks? 

Mr. BERNANKE. Well, Senator, we are as concerned about these 

issues as you are. As you know, we have issued cease and desist 

orders. We have told the banks that they have to engage independent consultants and we have been making sure that they are 

independent. They will be providing both supplementary diagnosis 

over and above the work we have done as well as action plans for 

the banks. And we will be both reviewing those action plans and 

the conformity of the banks to those plans. 

Our current plan is to provide a report that we will share with 

you that will explain what the findings were and what the proposals were and what the reactions were and the performance by 

the banks—— 

Senator MENENDEZ. But you are not—but, Mr. Chairman, I hate 

to interrupt you, but I only have less than 5 minutes. You are not 
30 

going to—I have a specific question. Are you going to release those 

three entities that I have asked you? 

Mr. BERNANKE. May I consult further with my legal and supervisory teams and get back to you on that? 

Senator MENENDEZ. Surely. How about the other two agencies? 

Mr. WALSH. Senator, we will certainly be, as Chairman Bernanke 

indicates, releasing more information and the—— 

Senator MENENDEZ. I have a very—I hate to interrupt you—— 

Mr. WALSH. Right. 

Senator MENENDEZ.——but I have a very specific question and I 

do not want to be played with. Are you going to release the mortgage servicers’ action plans that respond to the consent orders? Are 

you going to release the foreclosure reviews on a bank-by-bank 

basis? And are you going to release the engagement letters for the 

supposedly independent consultants? It is either yes or no. 

Mr. WALSH. We will have to evaluate the individual documents—— 

Senator MENENDEZ. OK. 

Mr. WALSH.——and see if there is anything that would be of a 

confidential supervisory nature, but certainly we will be releasing 

some information. 

Mr. GRUENBERG. Senator, the FDIC is actually not the regulator 

of any of the servicers, so it is not something within our authority 

to make that decision. 

Senator MENENDEZ. Well, let me just say, I hope you understand—I have the privilege of chairing the Housing Subcommittee 

here and I hope you understand it is incredibly difficult to create 

public trust that the companies hired by the banks to perform the 

foreclosure reviews, and those companies were the same companies 

who are already doing business with those banks and may get future business. I hope you have a little understanding that the public trust as regulators, when you are assuring us that the problem 

of the banks illegally forging documents to foreclose on homes more 

easily has been fixed when news reports allege that the problem 

has not been fixed and is still widespread. 

I am going to share with you the Congressional Research Service 

analysis that I asked for to see if you had the legal wherewithal 

to do this, because I figured I would get that as an answer, and 

their answer is, to synthesize it, is that our request, the regulators 

have the discretion to release the results on a bank-by-bank basis 

if they feel it is in the public interest and point out they can surely 

come to some middle ground when they release a report with highlevel bank-by-bank results, like a HAMP report, while still redacting loan level information that would be confidential to banks. 

You know, rarely around here do we get 10 members of the Senate to focus on a specific request for information, a dozen members 

or so of the House of Representatives. I think we need a little 

transparency in this process. If Dodd-Frank is about anything, at 

the end of the day, it is about taking and creating transparency 

and a new era of transparency and openness, and I am going to be 

like a dog on a bone on this. So I hope we get some good answers 

here, because otherwise, I am going to use every means possible, 

along with my colleagues, to get to the bottom of this. 
31 

It is not acceptable—it is not acceptable—to violate the law. It 

is not acceptable to do robo-signings. There is a clear reason why 

the law dictates a procedure before you take over someone’s most 

cherished, probably their biggest asset in their life, and that is not 

being pursued correctly. And the agencies that are responsible for 

that give us assurances that it is, and yet public reports constantly 

suggest that it is not. So I am looking forward to your responses. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Kirk. 

Senator KIRK. Thank you, Mr. Chairman, and once again, congratulations on your 97-to-2 win yesterday on the military VA bill. 

Chairman JOHNSON. It was teamwork. 

Senator KIRK. That is right. 

I want to focus on systemic risk, a central concept behind the legislation, because I am worried that while much of the crisis that 

the American people suffered from was triggered by Fannie Mae 

and Freddie Mac, in my view, because it was loaded with politically 

connected lawyers and lobbyists, the Congress did not reform it. 

The institutions pretty much with the same cast of rogues is still 

running it, even though it was triggered, and you guys were not 

allowed to touch them. 

I am worried that, so often, the Government is slow, dead, 

uninnovative, as opposed to the private sector. And also, you guys 

are politically controlled by us, by the White House, and not allowed to look at new risks. 

One of the risks that I am worried about is the Government Accounting Standards Board recently proposed that Government entities be required to fully disclose unfunded liabilities that they face, 

particularly with regard to promised pension obligations. In 2009, 

the Pew Center for the States published a trillion-dollar gap report 

outlining 21 States that had pension obligations funded at less 

than the 80 percent actuarial sound requirement that GASBI recommended. Now, this would be totally unacceptable for the public 

corporations that you are allowed to torture, and I am wondering, 

because systemic risk is now out there, for Mary, under DoddFrank and the Municipal Investment Act advisors that you have, 

would the SEC now be recommending that municipal debt issuers 

conform to the GASBI requirement? 

Ms. SCHAPIRO. Senator, I would want to make sure I am on 

strong legal ground here, but let me just say that we have brought 

some enforcement cases, as you know—— 

Senator KIRK. To New Jersey and Illinois, where you basically alleged that they were lying to their investors about their—— 

Ms. SCHAPIRO. New Jersey so far. 

Senator KIRK. Right. 

Ms. SCHAPIRO. There are a number of others that are still under 

investigation with respect to the adequacy of their disclosure while 

they were doing bond issuances. So we have approached it that 

way. We do not have the authority, although we are preparing a 

report for Congress to discuss a number of these issues, to mandate 

particular disclosure requirements for municipal issuers. 

And you may know that we have been holding a series of 

roundtables around the country to gather thoughts of municipalities, Government finance officers, investors, and others to talk 
32 

about how we might strengthen the municipal disclosure system, 

among other things. We are actually having a hearing in Birmingham, Alabama, next week, the home of Jefferson County, as 

we continue to work on these issues. I think GASB took a very important step with respect to their proposal for disclosure of unfunded pension liabilities, but, of course, not everybody is required, 

as you point out, to utilize GASB GAAP. 

Senator KIRK. Right. Thank you. I would just hope you would use 

your systemic risk authority, because I think that is your big ‘‘get 

out of jail free’’ card, to look at threats to the U.S. financial system, 

and I am worried that States are so powerful and so politically connected, you will hold back. 

Ms. SCHAPIRO. We will not hold back, but—— 

Senator KIRK. I am worried. 

Second, another central concept behind Dodd-Frank would be 

too-big-to-fail, and yet what we have seen from 2008 to 2010 is in 

2008, the top 10 banks held 48 percent of all domestic banking assets, and in 2010, while the number of banks fell by 3 percent, the 

top 10 banks’ share had grown to 53 percent. That is Bank of 

America, JPMorgan Chase, CitiBank, Wells Fargo, U.S. Bank, 

PNC, FIA Card Service, Bank of New York Mellon, HSBC Bank 

USA, and TD Bank. So they are now even bigger and less capable 

of failing than they were before Dodd-Frank. Chairman Bernanke, 

what can we do about that? 

Mr. BERNANKE. Senator, you make an obviously important observation. Some of the increase in concentration in the last few years 

was a byproduct of the events of the crisis. Several medium-sized 

firms disappeared, some others were acquired, et cetera. So it is not 

necessarily a trend that we are seeing here. 

There are a number of aspects of Dodd-Frank which help address 

too-big-to-fail. Directly, there is the Volcker concentration rule, for 

example. There is the authority of the Fed not to approve a merger 

if there are financial stability concerns. 

But I think the main issues here are that we are going to have 

much tighter oversight and prudential regulations over so-called 

SIFIs, and one thing we have noticed is that banks and other institutions do not want to be SIFIs. They consider it to be this additional burden, an oversight to constrain them. And if it was truly 

a mark of too-big-to-fail, they might prefer to be designated as 

SIFIs. 

The other thing which I think is absolutely crucial, and it is still 

a work in progress, in order to get rid of too-big-to-fail, we have to 

have ‘‘fail.’’ We have to have a way for the biggest firms actually 

to fail. And you have heard some discussion this morning about the 

Fed’s and FDIC’s work on the orderly liquidation authority, living 

wills, et cetera. I think it will be a sign of success when we see 

large firms actually getting themselves smaller to try to get out of 

some of the oversight, and if we see the costs of funding increasing 

because the backstop of the Government is not there. We are not 

there yet, but I do note that some of the rating agencies have been 

talking about downgrading large banks based on the possible absence of Government support in a crisis. 
33 

So we are not there yet. I think we absolutely must get there, 

and there are many aspects of Dodd-Frank which, if carried to 

their fruition will help us get rid of too-big-to-fail. 

Senator KIRK. Mr. Chairman, thank you. 

Chairman JOHNSON. Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. I want to 

add my welcome to the panel of regulators for our country. 

Chairman Schapiro, good to see you again. The Dodd-Frank Act 

creates the Office of Investor Advocate and it reestablishes the Investor Advisory Committee. I urge you to continue working to get 

this office and committee up and running. My question to you is 

what will be done to ensure that the past efforts of the first Investor Advisory Committee will inform and support the work of the Investor Advocate and the reestablished Advisory Committee. 

Ms. SCHAPIRO. Thank you, Senator. We are working now to create the new Investor Advisory Committee, having disbanded the 

prior one so that the new committee could meet the statutory 

standards. I expect there will be some overlap in committee members, so that will give us a certain amount of continuity. Of course, 

the new committee will be fully briefed on all the activities of the 

prior committee. The staff support for the new committee will be 

largely the same as the staff support was for the prior committee. 

So I think that we should not have any—we should not miss a beat 

in terms of transitioning to our new Advisory Committee. 

What we will not have yet is the new Investor Advocate Office 

in place. We have sought reprogramming from our appropriators 

for that. We received the Senate’s authorization for reprogramming 

just within the last week, so we are now waiting for the House. 

Once they have authorized it, we can go ahead and establish formally the Office of the Investor Advocate and appoint a person to 

that position. 

But I want to assure you that in the interim, all of the activities 

that would be engaged in by the Investor Advocate are being carried out by other staff throughout the SEC. We think of ourselves 

all as investor advocates, so that work is ongoing. 

Senator AKAKA. Thank you very much. 

Mr. Wolin, one important aspect of consumer protection that is 

sometimes overlooked is financial empowerment. Through Title XII 

of the Dodd-Frank Act, we ensured that the viable alternatives to 

high-cost products and services are developed while protections and 

oversight are strengthened. Would you please update us on the 

Treasury’s initiatives to improve access to mainstream financial institutions and services. 

Mr. WOLIN. Senator Akaka, thank you for that question and for 

your leadership on these critical issues. From our perspective, the 

financial access provisions of Dodd-Frank are critical and these are 

issues that we are spending a lot of time working on. We are busy 

continuing to develop the infrastructure for our efforts to support 

community-based efforts at financial access. 

We have been working hard at putting together a program called 

Bank On USA, which allows us to work with communities to develop programs that will enable access in the communities tailored 

to the particular circumstances in each of those places. Our efforts 

on this will, of course, require some resources which we have re-
34 

quested and we hope we receive because we think we have, on the 

basis of Title XII and of work that we have been doing in response, 

an awful lot of exciting things that we can be doing. 

I think, Senator, in addition, you will see in short order from us 

a further public expression of how we intend to organize and structure our Office of Financial Education and Financial Access, an important office within the Office of the Assistant Secretary for Financial Institutions that will be focused on the Bank On program, 

but also other efforts in the context of Title XII to continue our 

work on these critical issues. 

Senator AKAKA. Mr. Gruenberg, I have a related question for 

you, but first, I would like to congratulate you on your nomination. 

The FDIC has been a leader in working to improve financial access 

among the unbanked and under-banked. Please explain whether or 

not you believe that financial inclusion is a component of consumer 

protection, and what more can be done by the FDIC in this area. 

Mr. GRUENBERG. Thank you, Senator. The issue of financial inclusion has been a significant priority for the FDIC, both under 

former Chairman Bair and myself. We established a number of 

years ago an advisory committee on financial inclusion made up of 

community leaders, financial institutions, academics, to focus on 

this issue. 

As a starting point, if I may mention, the FDIC partnered with 

the Census Bureau on the first national survey ever undertaken by 

the Census on who is unbanked and under-banked in the United 

States, just to get a handle on the dimensions of the issue, and the 

findings of the survey were quite revealing. It found that about 7 

percent of U.S. households have no relationship with an insured financial institution and nearly another 18 percent may have an account but utilize high-cost nonbank providers of financial services, 

such as payday lenders and check cashers. Taken together, the survey found that about a quarter of U.S. households can be defined 

as unbanked or under-banked. 

So it is a substantial issue and it is a critical component both of 

consumer protection and of economic opportunity. Having an account at an insured institution is really, in many ways, a starting 

point for economic citizenship, to be able to develop a credit record, 

build savings, and really become a participant in our economy, and 

it has been a major priority for us. We have undertaken a number 

of initiatives in this area, including organizing a series of local 

partnerships around the country of financial institutions, community organizations, local government leaders to develop local strategies for expanding access to insured financial institutions. We have 

also developed model transaction and savings accounts to encourage financial institutions to provide low-cost services that are particularly suited to the needs of the unbanked. 

This has been a matter of ongoing attention to us and will certainly be a priority going forward. 

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

Chairman JOHNSON. Thanks again to my colleagues and our panelists for being here today. This hearing and the investor and consumer protection hearings we have held over the past 2 weeks 

highlight the need for an enhanced regulatory framework after the 
35 

financial crisis. As I have said before, there is still work ahead of 

us, but we are making progress and it is important that we all get 

this right. 

The hearing record will be open for 7 days for Members to submit additional materials and questions for the record. 

This hearing is adjourned. 

[Whereupon, at 12 noon, the Committee was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM NEAL S. WOLIN 

Q.1.a. A number of studies that purport to examine the tradeoff between increased bank capital and economic growth have been conducted by bankers, regulators, and academics. Some of these studies argue that increasing bank capital standards will result in substantially lower economic growth. Others argue that the tradeoffs 

are very small, and some argue that there is no tradeoff. 

Do we face a tradeoff between increased bank capital and economic growth? 

A.1.a. There is a potential tradeoff between higher bank capital requirements and economic growth. In making determinations regarding appropriate capital levels, it is critical to strike a careful 

balance. Treasury has advocated imposing heightened capital requirements to help ensure that the U.S. banking system is more 

stable and resilient. These requirements must be designed to allow 

institutions to absorb losses comparable to what the U.S. and other 

countries faced at the peak of the recent financial crisis, and still 

be able to operate without special Government support. 

But while capital requirements must be high enough to provide 

strong cushions against loss, Treasury also believes that setting 

capital requirements too high could threaten the ability of banks 

to provide credit to households and businesses, or could drive the 

reemergence of risky shadow banking systems. Furthermore, it is 

important that banks be allowed to raise capital over an appropriate period so that they can continue to perform their essential 

function of providing credit to households and businesses. 

It is also appropriate for regulators setting capital requirements 

to consider the prudential effects of other important reforms, including those required by the Dodd-Frank Act. Among these other 

reforms are the new liquidity requirements, limits on leverage, concentration limits, activity restrictions, margin rules for derivatives, 

the stronger financial cushions being built in central counterparties, and greater transparency requirements. 

Q.1.b. Which specific studies led you to that conclusion? 

A.1.b. There is a rich and varied literature on the potential tradeoff between capital requirements and economic growth, and the 

views set out above do not rely on any one study. 

Q.1.c. Several prominent academics have argued that banks could 

be required to maintain equity capital ratios as high as 15 percent, 

or even 25 percent, of total assets (not risk-weighted assets) without adversely affecting economic growth. Do you agree with them? 

Please explain. 

A.1.c. The Federal Reserve Board and other financial regulators 

have worked through the FSB and Basel Committee to put forward 

capital standards under Basel III that achieve a proper balance— 
138 

creating stronger cushions against loss, but not so high that they 

could threaten the ability of banks to provide credit to households 

and businesses, or could cause the re-emergence of risky shadow 

banking systems. 

These new Basel III standards include a core solvency ratio (Tier 

1 and Tier 2) of percent; a minimum requirement of 4.5 percent of 

common equity, and a 2.5 percent common equity capital conservation buffer. Further, countries may impose a countercyclical capital 

buffer ranging from 0 percent to 2.5 percent of common equity, according to national circumstances. 

The Basel Committee on Banking Supervision in September also 

issued a final capital surcharge framework for globally important 

banking organizations (G–SIBs), which was endorsed by the Financial Stability Board in October and the G–20 at its Cannes meeting 

on November 4th. Under the designation criteria of the framework, 

G–SIBs are required to hold supplemental buffers of common equity in addition to the minimum Basel III requirements, ranging 

from 1 percent to 2.5 percent depending on the systemic risk posed 

by a banking organization. 

We believe these new standards are appropriate and will provide 

stronger buffers against financial shocks. It also important that 

they be applied consistently across jurisdictions and we are working to ensure comparable implementation standards. 

Q.2. Along with the FHFA and HUD, each of you had a hand in 

writing the proposed risk retention rule. Dodd-Frank exempted 

FHA-insured loans from these risk retention requirements. However, the proposed QRM section of the rule does not exempt loans 

insured by private mortgage insurance. 

As private mortgage insurance and FHA are sometimes direct 

competitors, are any of you concerned that Dodd-Frank’s risk retention requirements may shift more business toward FHA at a time 

when many experts believe that it should be trying to reduce its 

market share? 

A.2. Although the Secretary of the Treasury, as Chairman of the 

Financial Stability Oversight Council (Council), is charged with coordinating the Dodd-Frank Section 941 risk retention rule, Treasury is not a rule writer. The joint rule writers are the FDIC, SEC, 

OCC, Federal Reserve Board, HUD, and FHFA. 

The Notice of Proposed Rulemaking (NPR) was released in 

March 2011 and the comment period closed on August 1, 2011. The 

rule writers currently are considering the comments received. 

Treasury agrees that a reduced Government role is important for 

the future of the housing finance system. We want to make sure 

that when the rule is finished, that the private market plays a critical role. In coordinating the agencies’ writing of a final rule, Treasury will work to ensure that the role of the private market is carefully considered. 

Q.3. Over a month ago, the Inspectors General from each of your 

agencies released reports that deepened my concern your agencies 

are not undertaking the type of economic analysis that is necessary 

to reveal how Dodd-Frank will affect our economy. 
139 

A.3. What specific steps have each of you taken, in response to the 

IG reports, to improve the amount and type of analysis that your 

agencies are conducting in implementing Dodd-Frank? 

Treasury’s Office of Inspector General (OIG) issued a report on 

June 13, 2011, regarding economic analysis by the Office of the 

Comptroller of the Currency (OCC) related to rulemakings in order 

to implement the Dodd-Frank Act. The Treasury OIG concluded 

that the OCC has processes in place to ensure that required economic analyses are performed consistently and with rigor in connection to its rulemaking authority. 

The Treasury OIG recommended that the OCC: (1) develop procedures to ensure the coordination between the groups calculating 

administrative burden for various analyses and (2) update internal 

guidance to reflect the current statutory environment governing 

the rulemaking and related economic analysis processes, and develop related written procedures. The OCC has implemented these 

new enhancements to its rulemaking procedures including the related economic analysis. 

The Treasury Secretary also has encouraged Financial Stability 

Oversight Council (Council) members to adopt the principles and 

guidelines set forth in the President’s Executive Order 13563 of 

January 18, 2011, ‘‘Improving Regulation and Regulatory Review.’’ 

Although the Executive Order does not apply to independent regulatory agencies, the Secretary encouraged all Council member 

agencies to adopt the principles and guidelines it sets forth. In addition, on July 11, 2011, the President signed Executive Order 

13579, asking the independent regulatory agencies, to the extent 

permitted by law, to follow the cost-saving, burden-reducing principles in Executive Order 13563. These priorities and guidelines 

can help strike the right regulatory balance: helping to ensure regulations improve the performance of our economy and protect consumers and investors, without imposing undue costs on society. 

Q.4. Secretary Wolin, in a recent speech by your colleague Assistant Secretary Mary Miller, she mentioned that the Financial Stability Oversight Council is coordinating Dodd-Frank rule-writing 

across agencies. 

Does the Council’s coordination of agency rulemaking include attempting to understand the cumulative costs of all the Dodd-Frank 

rules? If so, how is this being done? If it is not being done, why 

not? 

A.4. The Administration has stressed the importance of regulations 

that strike the right balance between a financial system that is 

safer and more resilient and one that is innovative and dynamic. 

The Administration is leading a Governmentwide effort to 

streamline, simplify, and review the costs and benefits of new and 

existing regulations. For example, in January, the President issued 

an Executive Order directing executive agencies to develop a plan 

to streamline regulations. In June, Secretary Geithner wrote a 

memo to members of the Council, encouraging the members that 

are independent agencies to adopt the principles and guidelines of 

the President’s Executive Order. And in July, the President encouraged all independent regulatory agencies, to the extent permitted 

by law, to follow the key provisions of his January Executive Order. 
140 

The Council does not conduct cost-benefit analyses on rules proposed by independent rulemaking agencies. However, Treasury believes that it is important for agencies to consider the economic effects of significant rulemakings. Analyzing new regulations’ costs 

and benefits, both in terms of individual rules and rules in aggregate, is an important part of getting the balance right. Because not 

all the costs and benefits of potential regulations may be quantified 

with precision, agencies must retain the ability to balance quantitative and qualitative factors as they implement their statutory 

obligations under the Dodd-Frank Act. 

Q.5. Secretary Wolin, in a Politico op-ed earlier this month, you 

stated that ‘‘For years, regulators in Washington failed to make use 

of their authority to protect the system.’’ 

• Which regulators failed to properly use their authority to prevent the financial crisis? 

• What action has the Administration taken to hold these regulators accountable for their failures? 

A.5. In the years leading up to the financial crisis, regulators failed 

to use fully the authority they had both to constrain risk in the financial system and to protect consumers. Moreover, in critical 

areas there were significant gaps in legal authority to set standards or respond to a financial shock. Because of these factors, excessive risk taking and harmful practices in consumer lending by 

financial companies, which were central to the financial crisis, were 

not effectively monitored or prevented. 

While Federal regulators had authority to better monitor risk 

taking by large financial institutions, no regulator had authority to 

comprehensively regulate the over-the-counter derivatives markets, 

or to impose tough prudential standards on companies like Lehman 

Brothers or AIG’s Financial Products unit. Before Dodd-Frank, 

each financial regulator had authority to oversee particular institutions and markets, but regulators did not have an effective forum 

to work together to understand issues such as the risks in the 

securitization of subprime mortgages, which cut across multiple 

agencies’ jurisdictions. The Financial Stability Oversight Council, 

which was created by Dodd-Frank, provides the financial regulators with a forum to coordinate across agencies and instill joint 

accountability for the strength of the financial system. 

Similarly, prior to the passage of Dodd-Frank, seven different 

Federal agencies had responsibility for Federal consumer financial 

protection. Increasing accountability by consolidating authority for 

consumer financial protection is one of the reasons for creating the 

Consumer Financial Protection Bureau. Consumer financial protection had not been the primary focus of any Federal agency, and no 

agency had effective tools to set the rules for and oversee the whole 

market. The supervisory framework for enforcing consumer protection regulations had significant gaps and weaknesses and generally 

did not cover as well as it should have the nonbank financial companies that make up a significant segment of the consumer finance 

market. 

The Administration has taken important, concrete actions to address regulatory accountability. Most notably, the Administration 

worked with Congress to enact the Dodd-Frank Wall Street Reform 
141 

and Consumer Protection Act, which reformed the supervisory 

framework by: 

• Establishing and supporting the Financial Stability Oversight 

Council, which enables unprecedented coordination between 

regulators and has responsibility to identify gaps in regulation 

that could pose risks to the financial stability of the United 

States; 

• Establishing consolidated prudential supervision of federally 

chartered depository institutions and supporting the transfer of 

the prudential responsibilities from the Office of Thrift Supervision to the Office of the Comptroller of the Currency; and 

• Establishing and supporting the Consumer Financial Protection Bureau, with the authority and accountability to ensure 

that Federal consumer financial protection regulations are 

written fairly and enforced vigorously. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM NEAL S. WOLIN 

Q.1. The SEC proxy access rule is the first Dodd-Frank rule that 

has been successfully challenged in the courts for failing to adequately analyze its economic costs and benefits. In the unanimous 

decision to vacate the rule, U.S. Circuit Judge Douglas Ginsburg 

wrote: 

The commission inconsistently and opportunistically framed the costs and 

benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial 

problems raised by commenters. 

How do you intend to ensure that the rules that your agency 

adopts under Dodd-Frank are supported by rigorous economic analysis? 

A.1. Unlike the primary Federal banking and market regulators, 

Treasury has a very limited rulemaking role under the Dodd-Frank 

Act. However, Treasury believes that it is important for Federal 

rulemaking agencies to consider the economic consequences of significant rulemakings. To that end, Treasury has a demonstrated 

history of compliance with applicable Federal requirements to consider the costs and benefits relating to significant rulemakings. 

Treasury is subject to the requirements of Executive Order 12866, 

which among other things, sets forth principles for Federal agency 

rulemaking, including that Federal agencies assess both the costs 

and the benefits of an intended regulation and, recognizing that 

some costs and benefits are difficult to quantify, propose or adopt 

regulation only upon a reasoned determination that the benefits of 

the intended regulation justify its costs. Treasury also complies 

with the requirements of the Regulatory Flexibility Act, under 

which it considers the economic impact of rules on small entities. 

Finally, Treasury is subject to the President’s January 18, 2011, 

Executive Order entitled ‘‘Improving Regulation and Regulatory 

Review’’ that reemphasizes the principles of cost-benefit analysis, 

which the Office of Management and Budget applies as part of its 

review process. 
142 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM NEAL S. WOLIN 

Q.1. I understand that the International Association of Insurance 

Supervisors (IAIS) has submitted questions to certain insurance 

companies in order to determine whether to designate them as G– 

SIFIs. Many U.S. insurers are concerned about the IAIS process, 

including confidentiality and their authority to demand such data. 

What is the United States position on the IAIS process, and how 

does the IAIS process fit within the FSOC process which also is 

charged with designating SIFIs? How will you ensure there are not 

duplicative or even inconsistent requests for data and designations? 

A.1. Treasury is working to ensure that the international process 

around designations of systemically important insurance institutions (G–SIII) does not disadvantage U.S.-based insurance companies. To that end, the Federal Insurance Office (FIO) is participating in the IAIS to help develop a consensus approach with respect to the designation process and methodology that meets the 

goals of consistency and alignment between domestic and international designation processes. As part of this process, FIO is 

working to ensure data confidentiality at both the domestic and 

international levels. Also, FIO will help streamline data requests 

by working with domestic regulators and coordinating future international efforts to collect data from U.S.-based insurers. 

Q.2.a. The Office of Financial Research (OFR) along with FSOC 

member agencies will have access to significant amounts of proprietary and other sensitive information about financial institutions. 

How do you plan to protect that information from unauthorized 

disclosures, leaks, hacking or someone who is trying to steal the 

data for competitive purposes? 

A.2.a. The Office of Financial Research (OFR) is developing robust 

plans to protect information and data. 

First, the OFR uses the best available information technology security processes for protecting against unauthorized access to information through hacking, malware or other cyber-attacks. 

1. The OFR builds on existing, secure IT infrastructure. We follow the National Institute for Standards and Technologies’ 

standards required for high confidentiality, high integrity and 

high availability. 

2. In the future, the Office of Financial Research’s information 

security architecture will allow IT/Data security personnel to 

customize access to data consistent with their sensitivity. 

3. At the individual level, OFR laptops are protected from accidental or intentional tampering. Users do not have administrative rights and all updates and changes are reviewed by IT 

security. Office of Financial Research email and system access 

is monitored at multiple levels. These controls are commonly 

audited as part of Treasury’s normal acquisition processes, 

and a maintenance audit takes place at a minimum once a 

year. 

Second, the OFR will strictly limit the scope of data and information collected to those needed to fulfill its mission. 
143 

Third, the OFR is working with FSOC member agencies to develop procedures and protocols to share data appropriately while 

limiting distribution to those who require it. Authorized participants in unique access programs or institutional agreements will 

be trained to manage the data at the level of confidentiality required by the originating agency. The OFR will avoid retaining 

records or allowing access beyond the mission needs for timely 

analysis, audits, evidentiary purposes, and in order to comply with 

records requirements. 

Finally, post-employment restrictions will reinforce the OFR’s security processes. No employee of the OFR who has had access to 

particularly sensitive data maintained by the OFR about financial 

entities required to report to the OFR may be employed by or provide advice or consulting services to a financial company for a period of 1 year after possessing access to such data or business confidential information. For employees whose access to confidential 

business information was sufficiently limited, the regulations may 

provide, on a case-by-case basis, for a shorter period of 

postemployment prohibition. 

Q.2.b. What processes are you developing to govern who has access 

to information, under what circumstances it will be shared and 

penalties for unauthorized disclosures? 

A.2.b. A robust, complete and mature data management discipline 

lies at the core of the OFR Operational Plan and will provide the 

backbone for its access policies. Data management is multifaceted. 

Proper enterprise data management entails establishing and implementing proper policies and procedures that address data through 

the entire data lifecycle—from acquisition to processing, storage, 

maintenance, validation, and finally access and distribution. 

The framework for the governance of sensitive data at the OFR 

has several aspects: 

• Proper identification of sources, 

• Understanding the technical and business processes by which 

this information will be captured, 

• Understanding the quality of these data and ensuring that information is properly ‘‘labeled’’ with correct and complete 

metadata that describes the data, 

• Storing this data in an appropriate technology platform built 

to highest possible industry specifications regarding controlled 

access, and 

• Defining the policies and procedures of entitlements—the business processes that define who in the community of the OFR 

can have access to data and through what authority, and how 

appropriate access can be made available to the designated 

oversight authorities. 

Further, OFR governance processes will provide for requirements-based and role-defined access to data. Gates will be established at multiple levels, with associated audit trails. 

The OFR will also collaborate with other FSOC members in establishing a governance framework for sharing financial information. That information sharing will be facilitated in part by the 

OFR efforts to standardize types and formats of data. The OFR is 
144 

also exploring employing a data management maturity model to 

demonstrate its adherence to best practices in information management and to encourage best practices in other financial agencies. 

The Office of Financial Research will refer suspected misuse of 

confidential information, bank secrecy information, credit information, or otherwise privileged information to Treasury’s Office of the 

Inspector General. The OFR will also refer information related to 

gaining or providing unauthorized access to protected data to 

Treasury’s Office of the Inspector General. 

Q.2.c. What processes are in place now to protect systemic risk information that the SEC and CFTC have proposed to begin collecting early next year? 

A.2.c. The SEC and CFTC are member agencies of the Financial 

Stability Oversight Council. In that capacity, the OFR will collaborate with the SEC and CFTC on data issues, including newly collected systemic risk information, where appropriate. Such information would be subject to the OFR data security and governance 

processes described above. 

Q.3. I am concerned that U.S. institutions will bear a significant 

competitive burden vis-a-vis their foreign competitors. While U.S. 

commercial banks will be subject to the full weight of Dodd-Frank’s 

heightened prudential standards and new systemic resolution regimes, large overseas competitors will be subject only to a systemic 

capital surcharge (sometimes called a G–SIFI or G–SIB surcharge) 

and the new Basel III capital requirements (both of which U.S. institutions will also have to meet). 

How have U.S. regulators accounted for the competitive impact 

of our heightened domestic requirements for U.S. banks when they 

negotiated the recent G–SIFI surcharge with foreign regulators? 

A.3. Treasury and U.S. financial regulators are working through 

international forums, such as the Basel Committee and Financial 

Stability Board (FSB), to build a global regulatory framework to 

ensure a level playing field. Recently, the FSB agreed on systemic 

capital surcharges for large banks that will help ensure additional 

loss absorbency requirements will be implemented fairly and evenly across institutions. 

U.S. banking regulators are developing enhanced prudential 

standards for U.S. financial institutions that will take into account 

Basel III capital rules and their implications for domestic firms. In 

addition, Treasury and financial regulators have worked through 

international fora to develop standards for resolution regimes, similar to our own, to be applied globally. These efforts will help ensure 

an internationally level playing field for U.S. firms. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM BEN S. BERNANKE 

Q.1. Chairman Bernanke, at the hearing I asked you about the Inspector General’s claim that the Federal Reserve Board is using an 

antiquated methodology for conducting its cost benefit analysis. 

You stated that you did not believe that to be correct. On June 13, 

2011, the Office of Inspector General, in its Response to a Congressional Request Regarding the Economic Analysis Associated with 
145 

1 Response to a Congressional Request Regarding the Economic Analysis Associated with Specified Rulemakings, Office of Inspector General, Federal Reserve Board, June 2011, p. 18. See 

also, p. 15. 2 Id., at 14–17, (questions 7A and 7B). 

Specified Rulemakings, included a recommendation ‘‘that the Board 

update the Rulemaking Procedures Policy Statement and broadly 

disseminate it to all employees involved in rulemaking activities.’’ 

This recommendation stemmed from the Inspector General’s finding that the only written policy related to economic analysis in 

Board rulemaking is more than 30 years old. If there is a more recent policy governing economic analysis in Board rulemaking, 

please provide it. If there is not a more current policy, do you agree 

that the Board should update its policy to reflect developments in 

the past three decades, including the President’s recent executive 

orders with respect to economic analysis? 

A.1. The IG’s report included a positive review of our rulemaking 

activities. For example, the report notes that ‘‘the Board conducts 

the economic analysis required by statute and the discretionary 

economic analysis necessary to support rulemaking.’’1 The IG’s discussion of the qualitative and quantitative methodologies the Board 

employs in rulemaking was also generally positive.2

The Board has long been committed to considering the costs and 

benefits of its rulemaking efforts and the policies incorporated in 

the Board’s Rulemaking Policy Statement reflect both that longstanding commitment and the principles recently enumerated in 

Executive Order 13563, issued on January 18, 2011. For example, 

like our guidance, the new Executive Order emphasizes the importance of public participation in the rule writing process, and a preference for allowing 60 days of public comment for proposed rules. 

Like our guidance, the new Executive Order also seeks to promote 

coordination among agencies, the reduction of regulatory burdens 

and an active consideration of alternatives. And like our guidance, 

the new Executive Order calls for retrospective, periodic review of 

existing regulations. Like the Executive Order, the Board’s policy 

does not incorporate a specific formulaic approach to computing 

costs and benefits, and expects that methods used to determine 

costs and benefits will reflect the technologies and data available 

at the time. 

The Board also recognizes that its policies can be improved. In 

keeping with the IG report, the Board will consider expanding its 

written procedures to include a documentation standard, and to 

provide more explanation regarding the Board’s philosophy and 

principles supporting our rulemaking activities and our preferred 

practices. We have begun to review the guidance with this suggestion in mind, will revise it if necessary, and disseminate it to all 

staff involved in rule writing. 

Q.2. Some analysts have suggested that the availability of mortgage credit is likely to be restricted as a result of Dodd-Frank. Specifically, they point to the interaction of laws and regulations such 

as the new Qualified Residential Mortgage (QRM) and Qualified 

Mortgage (QM), as well as changes to the Home Ownership Equity 

Protection Act (HOPEA) triggers. Are any of you concerned about 

how these regulations may adversely impact the availability of 
146 

credit? If so, can these difficulties be handled administratively, or 

do they require legislative solutions? 

A.2. Several provisions of the Dodd-Frank Act are intended to ensure that mortgage markets are sustainable and avoid the excesses 

and misaligned incentives that led to the housing and mortgage 

market difficulties that have been experienced over the past few 

years. In particular, the risk retention requirement, the ability-topay standards at the core of the definition of a Qualified Mortgage 

(QM), and the changes in the triggers that are established for the 

Home Ownership Equity Protection Act (HOEPA) seek to address 

some of the problems in lending practices that contributed to the 

financial crisis and the severe downturn in the housing and mortgage markets. 

Addressing incentive problems in these markets and establishing 

rules to ensure lenders carefully consider a borrower’s ability-topay in extending credit are two important goals of the Qualified 

Residential Mortgage (QRM) and QM rulemakings. Ensuring access to credit to well-qualified applicants is also an essential consideration in these rulemakings. Under the current statutory 

framework, the Board and a number of other agencies must jointly 

define the QRM triggers, and the Consumer Financial Protection 

Bureau (CFPB) must define QM. 

When developing regulations that may impact mortgage lending, 

the Board routinely considers the potential for unduly constraining 

credit supply to qualified borrowers, including through regulation. 

The Board also routinely asks for comment on the extent that proposed mortgage regulations would constrain credit supply or increase costs for borrowers. 

The Board is currently reviewing comments received on the proposal to implement QRM. There are various issues involved in developing the definition of QRM and the Board will carefully consider feedback from the public as the rulemaking moves forward, 

including comments related to costs and impact on access to credit. 

Access to credit is an area of great importance to the Board and 

issues related to both access to, and the cost of, credit will be a 

focus of the Board’s consideration of the comments and views on 

further development of the rulemaking. 

In the case of QM and HOEPA, responsibility for the rule-making has shifted from the Federal Reserve to the CFPB, which is reviewing comments received on the Board’s proposal to implement 

QM. Because the QRM cannot be broader than the QM under the 

Dodd-Frank Act, the final QM definition will have an effect on how 

the final QRM may be defined. 

Q.3.a. A number of studies that purport to examine the tradeoff between increased bank capital and economic growth have been conducted by bankers, regulators and academics. Some of these studies 

argue that increasing bank capital standards will result in substantially lower economic growth. Others argue that the tradeoffs 

are very small, and some argue that there is no tradeoff. 

Do we face a tradeoff between increased bank capital and economic growth? 

A.3.a. Bank capital standards affect economic growth in several 

ways, some positive and some negative. On the positive side, re-
147 

3See ‘‘An assessment of the long-term economic impact of stronger capital and liquidity requirements Basel III: A global regulatory framework for more resilient banks and banking systems,’’ Basel Committee on Banking Supervision, Bank for International Settlements, August 

2010, and ‘‘Assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements,’’ Macroeconomic Assessment Group, Bank for International Settlements, August 2010. The former focuses on the long-term impact, while the latter considers the shorterterm transition phase. For related work, see also ‘‘The Welfare Cost of Bank Capital Requirements’’ by Skander J. Van den Heuvel, Journal of Monetary Economics, 55, 298–320, March 

2008, and ‘‘Financial Capital and the Macroeconomy: Policy Considerations’’ by Michael T. Kiley 

and Jae W. Sim, Finance and Economics Discussion Series, 2011–28, Board of Governors of the 

Federal Reserve System. 

quiring banks to hold more capital increases their capacity to absorb losses and withstand adverse economic conditions. Moreover, 

well-designed capital standards can force banks to internalize to a 

greater extent the risks they take on, including the externalities 

associated with the failure of systemically important financial institutions. Both the increased capacity for loss absorption and the 

greater incentive to internalize risks should lead to a reduction in 

the likelihood and severity of financial instability and financial crises. At the same time, it is likely that there are also costs associated with increasing bank capital. For example, equity is a relatively expensive source of funding for banks. Unless the required 

return on bank equity falls sufficiently in response, requiring 

banks to fund themselves with more equity may both raise the cost 

of bank credit and lower the interest rate that banks pay to depositors. To the extent that the cost of bank credit rises, this is likely 

to result in lower investment by bank-dependent firms. In addition, 

to the extent that higher capital standards act as a ‘‘tax’’ on regulated financial institutions, there is a concern that financial activities could shift to the ‘‘shadow banking’’ sector, which would defeat 

the purpose of the higher standards and could have unintended 

consequences. 

Some observers have contended that these concerns are exaggerated because, as banks de-lever, their equity becomes less risky 

and investors will be satisfied with a lower rate of return. However, the conditions needed for such a benign adjustment may not 

always be present. That said, it is possible that some adjustment 

in the expectations of investors regarding required return on bank 

equity could occur and mitigate the effect of higher capital standards on the cost of credit. 

While it is difficult to know precisely what level of capital requirements would maximize the net benefits, an increase in capital 

standards relative to those prevailing before the financial crisis is 

desirable. Indeed, the reforms in Basel III strengthen capital 

standards, and promote a higher quality and quantity of capital 

across countries. 

Q.3.b. Which specific studies led you to that conclusion? 

A.3.b. The Financial Stability Board and the Basel Committee on 

Banking Supervision have published two studies examining the 

macroeconomic impact of strengthening capital standards.3 These 

studies find net long term economic benefits from increasing the 

minimum capital requirements from their pre-crisis levels, coupled 

with modest costs during the transition phase to the new standards. In addition, there are several empirical studies that directly 

examined the link between bank capital and lending. These are 
148 

4 Examples include ‘‘The Credit Crunch’’ by Ben S. Bernanke and Cara S. Lown, Brookings 

Papers On Economic Activity, 2, pp. 205–239, 1991; ‘‘Bank Capital and the Credit Crunch: The 

Roles of Risk-Weighted and Unweighted Capital Regulations’’ by Diana Hancock and James A. 

Wilcox, American Real Estate and Urban Economics Association Journal, 22, no. 1: 59–94, 1994; 

‘‘The International Transmission of Financial Shocks: The Case of Japan’’ by Joe Peek and Eric 

S. Rosengren, American Economic Review, 87, no. 4: 495–505, 1997. 5See, for example, ‘‘Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive’’ by Anat R. Admati, Peter M. DeMarzo, Martin F. 

Hellwig and Paul Pfleiderer, Working Paper, Stanford University, 2011; and ‘‘Optimal Bank 

Capital’’ by David Miles, Jing Yang and Gilberto Marcheggiano, Discussion Paper 31, Bank of 

England, 2011. 

generally supportive of the view that negative shocks to bank capital lead to lower lending.4

Q.3.c. Several prominent academics have argued that banks could 

be required to maintain capital ratios as high as 15 percent, or 

even 25 percent, of total assets (not risk weighted assets) without 

adversely affecting economic growth. Do you agree with them? 

Please explain. 

A.3.c. As described above, there remains substantial uncertainty 

about the precise magnitude of both the benefits and the costs of 

a given increase in bank capital. The studies cited above are broadly supportive of somewhat higher standards. However, some observers claim that even greater increases in capital requirements 

are desirable.5 It is difficult to know precisely at what level of capital requirements the costs of raising them further start to outweigh the benefits to economic growth. Given this uncertainty and, 

as described above, the fact that many of the idealized assumptions 

used by some of these observers do not hold in practice, the more 

modest approach taken in Basel III seems appropriate, particularly 

since implementation is occurring during a time of inadequate economic growth and financial market fragility. 

Q.4. Along with the FHFA and HUD, each of you had a hand in 

writing the proposed risk retention rule. Dodd-Frank exempted 

FHA-insured loans from these risk retention requirements. However, the proposed QRM section of the rule does not exempt loans 

insured by private mortgage insurance. As private mortgage insurance and FHA are sometimes direct competitors, are any of you 

concerned that Dodd-Frank’s risk retention requirements may shift 

more business towards the FHA at a time when many experts believe that it should be trying to reduce its market share? 

A.4. The Federal Reserve and the other agencies involved in writing the QRM section of the risk retention Notice of Proposed Rule 

(NPR) carefully considered how to define the QRM to meet the 

Dodd-Frank Act’s requirement that the definition ‘‘[take] into consideration underwriting and product features that historical loan 

performance data indicate result in a lower risk of default . . . ’’. 

Although the Dodd-Frank Act listed mortgage guarantee insurance 

as one factor that the regulatory agencies could take into account, 

we were not able to find data that supported the view that private 

mortgage insurance lowered the risk of default. Mortgage insurance has certainly protected lenders from losses when borrowers do 

default, but it does not appear to substantially lower the risk of default. Lenders, investors and other mortgage market participants 

will likely continue to value the protection offered by mortgage insurance, so even without being tied to QRM, demand for mortgage 
149 

insurance should continue. Indeed, the definition of the QRM was 

narrowly drawn with the intent that the non-QRM market would 

remain large and robust, resulting in little difference in mortgage 

rates between the QRM and the non-QRM markets. If this outcome 

is realized, the relative standing of the FHA is unlikely to be greatly influenced by the QRM definition. That said, the agencies asked 

for comment on several issues related to mortgage insurance in the 

risk retention NPR. The comment period for the NPR closed on August 1, and the Federal Reserve, along with the other agencies, will 

carefully consider all comments we received on QRM and private 

mortgage insurance. 

Q.5. Over a month ago, the Inspectors General from each of your 

agencies released reports that deepened my concern your agencies 

are not undertaking the type of economic analysis that is necessary 

to reveal how Dodd-Frank will affect our economy. What specific 

steps have each of you taken, in response to the IG reports, to improve the amount and type of analysis that your agencies are conducting in implementing Dodd-Frank? 

A.5. See the response to Question 1. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM BEN S. BERNANKE 

Q.1. The SEC proxy access rule is the first Dodd-Frank rule that 

has been successfully challenged in the courts for failing to adequately analyze its economic costs and benefits. In the unanimous 

decision to vacate the rule, U.S. Circuit Judge Douglas Ginsburg 

wrote: 

The commission inconsistently and opportunistically framed the costs and 

benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial 

problems raised by commenters. 

How do you intend to ensure that the rules that your agency 

adopts under Dodd-Frank are supported by rigorous economic analysis? 

A.1. Since the enactment of the Dodd-Frank Act, the Federal Reserve, both independently and in conjunction with other agencies, 

has made considerable progress toward adopting regulations designed to promote financial market stability, strengthen financial 

institutions, and reduce systemic risk to the financial system and 

the economy. 

The Board is committed to avoiding any disruption to the functioning of the financial system and the broader economy that might 

be caused by its rules. Each rulemaking proposal issued by the 

Board is drafted carefully to ensure that the congressionally prescribed mandates of the Dodd-Frank Act and other applicable laws 

are followed. Before issuing a final rule, the Board assesses the 

economic effects of the new rule and considers carefully the information provided by commenters through the rulemaking process. 

While this process may require significant staff resources, the 

Board values the public comment process and finds it very helpful 

in identifying and resolving issues raised by the proposed rules. 
150 

For every rule, the Board also conducts an assessment and takes 

appropriate account of the potential impact that its rule may have 

on small businesses, small governmental jurisdictions, and small 

organizations as required under the Regulatory Flexibility Act 

(‘‘RFA’’) (5 U.S.C. 601 et seq.). The Board prepares and makes 

available for public comment in the Federal Register an initial regulatory flexibility analysis for any rule that will have a significant 

economic impact on a substantial number of small entities. A final 

regulatory flexibility analysis is prepared for every rule that may 

have a significant economic impact on a substantial number of 

small entities and published in the Federal Register. 

The Board also complies with its obligation under the Paperwork 

Reduction Act (‘‘PRA’’) (44 U.S.C. 3501 et seq.) to estimate the paperwork burden (specifically recordkeeping, reporting, and disclosure requirements) imposed by the Board’s rules, and to keep this 

burden as low as possible. As required under the PRA, the Board 

seeks public comment on the paperwork burden imposed by its 

rules by providing notice in the Federal Register. The level of burden estimated under the PRA is then described, in detail, in the 

Federal Register notice for each final rule adopted by the Board, 

after taking account of the comments received during the public 

comment process. These Federal Register notices and final burden 

estimates are best evaluated in the context of each statutorily required rule and can be found on the Board’s public Web site. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM BEN S. BERNANKE 

Q.1. Under the proposed rule, loans insured by FHA are automatically exempt from the risk retention requirements. However, loans 

insured by private mortgage insurance, the private sector alternative to FHA, are not. Over the past 3 years, private mortgage insurers, using private capital, have blunted the loss of taxpayer dollars by absorbing approximately $25 billion in foreclosure losses 

that would have otherwise been borne by taxpayers. Meanwhile, 

taxpayers are on the hook for over $1 trillion in loans purchased 

by Fannie Mae and Freddie Mac and insured by FHA. Shouldn’t 

the risk retention rule be designed to minimize taxpayer exposure 

by increasing the role of private capital by including loans insured 

by private mortgage insurance in the QRM definition? 

A.1. The Federal Reserve and the other agencies involved in writing the qualified residential mortgage (QRM) section of the risk retention NPR carefully considered how to define the QRM to meet 

the Dodd-Frank Act’s requirement that the definition ‘‘[take] into 

consideration underwriting and product features that historical 

loan performance data indicate result in a lower risk of default . . . 

’’. 

While the Dodd-Frank Act listed mortgage guarantee insurance 

as one factor that the regulatory agencies could take into account, 

the agencies did not see data that supported the view that private 

mortgage insurance lowered the risk of default by the borrower on 

the mortgage, which is the standard set by the statute for defining 

QRM. The agencies asked for comment on this and several other 

issues related to mortgage insurance in the risk retention NPR. 
151 

The comment period for the NPR closed on August 1 and the 

Federal Reserve, along with the other agencies, will carefully consider all comments we received on QRM and private mortgage insurance. The agencies have received several studies during the 

comment period regarding private mortgage insurance and are 

carefully reviewing them. 

Q.2. The Office of Financial Research (OFR) along with FSOC 

member agencies will have significant amounts of proprietary and 

other sensitive information about financial institutions. 

• How do you plan to protect that information from unauthorized 

disclosures, leaks or hacking or someone trying to steal data 

for competitive purposes? 

• What processes are you developing to govern who has access 

to information, under what circumstances will it be shared and 

penalties for unauthorized disclosures? 

• What processes are in place now to protect systemic risk information that the SEC and CFTC have proposed to being collecting next year? 

A.2. The Board routinely receives highly confidential information 

from an array of sources, including market participants, regulated 

firms, and other agencies. Because the Board recognizes that the 

protection of this information is pivotal not only to the successful 

accomplishment of the Board’s mission but also to those that provide the information to the Board, information security is of paramount importance. Accordingly, the Board protects proprietary and 

other sensitive information through appropriate security controls. 

In this respect, the Board has in place specific requirements for access, handling, transmission, and storage of nonpublic information 

that vary depending on the sensitivity of the information. These requirements are consistent with the Federal Information Security 

Management Act (FISMA) (44 U.S.C. §§ 3541 et seq.), which mandates that Federal agencies provide information security protections commensurate with risk and magnitude of harm from unauthorized access, use, disclosure, modification, or destruction for 

their information and information systems. These requirements 

mean, for example, that the most sensitive confidential business information may be shared only with staff with a specific need to 

know who are on an approved access list. Further, the Board also 

ensures that its information systems, including those that store or 

process proprietary and other sensitive information, have in place 

information security controls that meet the standards set forth by 

the National Institute of Standards and Technology. In addition, 

the Board’s Office of Inspector General conducts an annual review 

of the effectiveness of the Board’s information security program. 

The Board will apply its existing processes to protect the proprietary and other sensitive information that is provided by OFR, the 

CFTC or the SEC and will modify those processes as necessary to 

ensure that information provided by these entities is appropriately 

protected. 

As for penalties for unauthorized disclosures, the protections provided by existing law also extend to information provided to the 

Board by the OFR, the SEC or the CFTC. For example, the Trade 
152 

Secrets Act, 18 U.S.C. § 1905, makes it a criminal violation for officers and employees of the U.S. Government to disclose confidential 

business information without authorization. Bank examiners are 

subject to additional requirements, including the prohibitions 

under 18 U.S.C. § 1906 that make it a crime for a bank examiner 

to disclose the names of borrowers or collateral for loans without 

authorization. Further, if confidential business information were 

stolen or misused, the person who misappropriates the information 

may be subject to prosecution under 18 U.S.C. § 641 which makes 

it a crime to, among other things, embezzle, steal, sell or knowingly 

convert anything of value of the Government to personal use without authorization. The Board would also apply its internal administrative processes and take appropriate action against any employee 

who discloses proprietary or other sensitive information without 

authorization. 

Q.3. I am concerned that U.S. institutions will bear a significant 

competitive burden vis-a-vis their foreign competitors. While U.S. 

commercial banks will be subject to the full weight of the DoddFrank’s heightened prudential standards and new systemic resolution regimes, large overseas competitors will subject only to a systemic capital surcharge (sometimes called a G–SIFI or G–SIB surcharge) and the new Basel II capital requirements (both of which 

U.S. institutions will also have to meet). 

How have U.S. regulators accounted for the competitive impact 

of our heightened domestic requirements for U.S. banks when they 

negotiated the recent G–SIFI surcharge with foreign regulators? 

A.3. While the Federal Reserve Board has been working domestically to implement the enhanced prudential standards required by 

the Dodd-Frank Act, it has (together with other U.S. Government 

regulatory agencies) also been working with the Financial Stability 

Board, the Basel Committee on Banking Supervision, and other 

international groups to harmonize and implement enhanced standards for internationally active banks. These enhanced standards 

should improve the banking sector’s ability to sustain shocks that 

may arise in a stressed environment, strengthen the stability of the 

global economy, and address competitive considerations. In seeking 

to preserve a level playing field that will continue to allow U.S. 

companies to compete effectively and fairly in the global economy, 

the Board has been a strong proponent of international alignment 

with regard to implementation of strengthened prudential requirements, such as capital standards (including capital surcharges applicable to G–SIFIs) and living wills, and strengthening cross-border resolution capabilities. 

Additionally, the enhanced prudential standards of section 165 of 

the Dodd-Frank Act not only apply to U.S. bank holding companies 

but also foreign banking organizations (FBO) that have operations 

in the United States and more than $50 billion in global assets. 

The Federal Reserve Board is still determining how to apply the 

enhanced standards of section 165 to these FBOs, but in its analysis the Board will consider the national treatment, competitive 

equality and the strength of the home country’s supervisory regime, as required by the statute. Consistent with existing U.S. 

processes for issuing regulations, the Board will issue proposed 
153 

rulemakings to solicit public comments prior to finalizing any regulatory requirements implementing section 165 of the Act. This will 

give domestic and foreign banking organizations the opportunity to 

comment on issues of cross-border competitiveness and the appropriateness of the Board’s proposed rulemaking. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARY L. SCHAPIRO 

Q.1. Along with the FHFA and HUD, each of you had a hand in 

writing the proposed risk retention rule. Dodd-Frank exempted 

FHA-insured loans from these risk retention requirements. However, the proposed QRM section of the rule does not exempt loans 

insured by private mortgage insurance. 

As private mortgage insurance and FHA are sometimes direct 

competitors, are any of you concerned that Dodd-Frank’s risk retention requirements may shift more business toward FHA at a time 

when many experts believe that it should be trying to reduce its 

market share? 

A.1. In developing the rules that will establish risk retention requirements under section 941(b) of the Dodd-Frank Act, the agencies were mindful of the statutory exemption granted by section 

941(b) to FHA-insured loans, as well as the fact that private mortgage insurance historically has served as a form of credit enhancement accepted by Fannie Mae and Freddie Mac for mortgages with 

higher loan-to-value ratios that allows such mortgages to be 

securitized through mortgage-backed securities guaranteed by the 

Enterprises. As noted in the notice of proposed rulemaking (NPR), 

the risk retention requirements are intended to help address problems in the securitization markets by requiring that securitizers, as 

a general matter, retain an economic interest in the credit risk of 

the assets they securitize, thereby providing securitizers an incentive to monitor and ensure the quality of the assets underlying a 

securitization transaction, and also helping to align the 

securitizer’s interests with those of investors. 

Section 941(b) provides that in defining a qualified residential 

mortgage (QRM), the agencies must take into consideration ‘‘underwriting and product features that historical loan performance data 

indicate result in a lower risk of default.’’. With respect to private 

mortgage insurance, the agencies carefully considered the credit 

risk mitigation effects both of this insurance and other credit enhancements obtained at the time of origination. As noted in the 

NPR, the agencies considered a variety of information and reports 

relative to such insurance and other credit enhancements. While 

private mortgage insurance protects creditors from losses when 

borrowers default, at the time the agencies issued the proposed 

rules, the agencies had not identified studies or historical loan performance data adequately demonstrating that mortgages with such 

credit enhancements are less likely to default than other mortgages, as required by section 941(b). 

The NPR includes many requests for comment on this aspect of 

the proposal, and specifically requested the public’s input on 

whether private mortgage insurance obtained at the time of origination would or would not reduce the risk of a residential mortgage 
154 

default that meets the proposed QRM criteria except for a loan to 

value ratio that is higher than the limits of the proposed requirements. The NPR also requests that commenters provide historical 

loan performance data or studies and other factual support for 

their views. 

The comment period for the proposed rule formally ended on August 1, 2011, and we are carefully considering all comments as we 

move forward with this interagency rulemaking process. As we 

work collaboratively with our fellow regulators in developing final 

risk retention rules, we will continue to take into consideration the 

role that FHA-insured loans have in the marketplace, as well as 

the concerns that demand for these loans could increase if borrowers do not have available alternatives in the private marketplace. 

Q.2. Over a month ago, the Inspectors General from each of your 

agencies released reports that deepened my concern your agencies 

are not undertaking the type of economic analysis that is necessary 

to reveal how Dodd-Frank will affect our economy. 

What specific steps have each of you taken, in response to the 

IG reports, to improve the amount and type of analysis that your 

agencies are conducting in implementing Dodd-Frank? 

A.2. After reviewing cost benefit analyses included in six of our 

Dodd-Frank Act rulemaking releases, the SEC’s Inspector General 

issued a report in June of this year. While the Office of Inspector 

General (‘‘OIG’’) is continuing to review the Commission’s cost benefit analyses, this report concluded that ‘‘a systematic cost-benefit 

analysis was conducted for each of the six rules reviewed. Overall, 

[the OIG] found that the SEC formed teams with sufficient expertise to conduct a comprehensive and thoughtful review of the economic analysis of the six proposed released that [the OIG] scrutinized in [its] review.’’ See U.S. SEC Office of the Inspector General, 

Report of Review of Economic Analyses Performed by the Securities 

and Exchange Commission in Connection with Dodd-Frank 

Rulemakings (June 13, 2011) http://www.sec-oig.gov/Reports/ 

AuditsInspections/2011/Reportl6l13l11.pdf at 43. We look forward to continuing to work with the OIG as it conducts a further 

review. 

That said, I have asked the staff to improve the process for integrating economic analysis into its decisionmaking throughout the 

course of a rulemaking. Commission staff from the division or office 

responsible for a rule already work closely with the Commission’s 

economists in the Division of Risk, Strategy, and Financial Innovation (‘‘Risk Fin’’) in identifying and analyzing the economic impacts 

of our rules. However, we can and should make even better use of 

Risk Fin’s economic expertise in our rulemaking. In fact, improving 

the agency’s economic analysis capabilities was one of my primary 

goals in creating Risk Fin in September 2009. My view continues 

to be that the goal of a revised process should be to capitalize on 

that expertise by making sure that our economic experts are included at the earliest stages of policy development. This early involvement will allow them to provide initial economic analyses to 

inform policy choices, and will better position them to perform any 

additional data gathering and analysis needed to help the Commis-
155 

sion prepare more complete economic analyses of proposed rules. In 

short, we are committed to doing what is necessary to perform robust economic analyses in furtherance of effective rulemaking for 

our pending rule proposals. 

Q.3. Chairman Schapiro, the SEC has interpreted Dodd-Frank’s 

municipal advisor registration requirement very broadly. For example, it would require banks to register even though they are already regulated by prudential bank regulators. The municipal advisor provision was intended to cover unregulated entities, not impose duplicative regulations. 

• How will applying the registration requirement to entities that 

already are regulated help investors? 

• Will dual regulation merely increase the cost of banking services for municipalities without providing any additional benefits? 

A.3. The Commission has not finalized rules delineating the application of the municipal advisor registration requirements to banks 

at this time. As you know, on December 20, 2010, the Commission 

proposed for public comment rules that would govern the registration of municipal advisors and, among other things, proposed guidance and solicited comments on the provision of traditional banking 

activities within the context of the definition of ‘‘investment strategies.’’ We have received over 1,000 comment letters on the proposal, including approximately 300 letters that address this important issue, and we are reviewing them carefully. 

The lack of a proposed exclusion from the definition of ‘‘municipal 

advisor’’ for banks is consistent with the statutory definition of 

‘‘municipal advisor,’’ which does exclude certain federally regulated 

entities, such as investment advisers, but does not exclude banks. 

That said, the proposing release does not specifically define any 

traditional bank products and services as constituting municipal 

advisory activities. For example, the proposing release notes that 

‘‘money managers providing advice to municipal entities with respect to their bank accounts could be municipal advisors.’’ (emphasis added). 

The proposing release asks numerous questions as to which, if 

any, of a wide variety of traditional bank activities and services 

would constitute municipal advisory activity. With respect to what 

extent banks should be excluded from the proposed municipal advisor registration requirements, in addition to reviewing the many 

comments received on this issue, Commission staff is consulting 

with staff at the Federal banking regulators regarding the appropriate scope of any such possible exclusion. This consultation 

should help promote a more effective and efficient implementation 

of the requirements of the Dodd-Frank Act that works to protect 

investors, municipal entities, obligated persons, and the public interest. 

Commission staff is currently preparing drafts of final rulemaking for Commission consideration that will discuss the comment letters the Commission received concerning these topics. The 

Commission will consider the costs and benefits to investors, municipal entities, obligated persons, and the public before finalizing 

the municipal advisor registration rules required by the Dodd- 
156 

Frank Act. I expect that the final rule will provide clarity on this 

issue while striking an appropriate balance between ensuring that 

parties engaging in municipal advisory activities are registered, 

without unnecessarily requiring banks and bank employees already 

under the jurisdiction of Federal and State banking agencies to 

comply with additional regulation, examination and inspection burdens. 

Q.4. Chairman Schapiro, in your testimony, you state that you 

‘‘look forward to implementing’’ the recommendations made by the 

staff in a study of the obligations of broker-dealers and investment 

advisors. Two of your fellow Commissioners have called for additional work to determine whether there is a problem that needs to 

be solved and, if there is, whether the staff’s recommended solution 

was the right one. 

• Has the staff completed this additional work? If so, please provide it to the Committee. If not, isn’t it premature to call for 

implementation of the staff’s recommendations? 

A.4. As you may be aware, in light of the Commission’s concerns 

over the potential economic impact of any rulemaking under Section 913 of the Dodd-Frank Act, I requested that a core team of 

economists from the Commission’s Division of Risk, Strategy and 

Financial Innovation study, among other things, available data pertaining to the standards of conduct in place under the existing 

broker-dealer and investment adviser regulatory regimes, including 

any data addressing Commissioners Casey’s and Paredes’ concerns. 

Since the Commission issued the study required under Section 913 

(the ‘‘Study’’), this team of economists has been studying these 

issues, and staff has been reviewing public comments and meeting 

with interested parties to discuss their concerns and request additional data to inform the staff’s economic analysis. This work will 

help to inform any future rulemaking. As you know, with any rulemaking, the Commission is required to conduct an economic analysis regarding the costs and benefits of any rules it proposes and 

consider, among other things, public comment on any such proposal, including public comment on the Commission’s economic 

analysis, before adopting any final rule. I believe investors would 

be well served by the Commission moving forward in a studied and 

measured way, taking into account the work of our team of economists and other staff, to consider a rule proposal to implement the 

staff’s recommendations to better protect investors as set forth in 

the Study. 

Q.5. Chairman Schapiro, last week, Judge Rakoff issued an opinion 

in which he questioned the SEC’s decision to litigate on ‘‘its home 

turf’’ by filing an administrative action, rather than a district court 

action, against one of the defendants in the Galleon insider trading 

cases. The SEC relied on the retroactive application of a DoddFrank provision to do so. 

• Why is the SEC retroactively applying Dodd-Frank in a manner that could compromise an important enforcement action? 

A.5. On March 1, 2011, the Commission instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of 

the Securities Act of 1933, Sections 15(b) and 21C of the Securities 
157 

Exchange Act of 1934, Section 203(f) of the Investment Advisers 

Act of 1940, and Section 9(b) of the Investment Company Act of 

1940 against Rajat K. Gupta. In these proceedings, the Commission 

sought to determine whether it was appropriate to enter a ceaseand-desist order, and to order disgorgement, civil penalties, and a 

bar against Mr. Gupta serving as an officer or director of a public 

company. The request for civil penalties relied, in part, on DoddFrank amendments to the securities laws that enable the Commission to seek civil penalties in administrative cease-and-desist proceedings. The Commission also sought civil penalties against Mr. 

Gupta, however, under other provisions of the securities laws that 

existed and authorized such penalties prior to the enactment of 

Dodd-Frank. 

On March 18, 2011, Mr. Gupta filed a lawsuit against the Commission in the U.S. District Court for the Southern District of New 

York challenging the institution of these proceedings. His complaint challenged the Commission’s action on due process grounds 

and also alleged impermissible retroactive application of the DoddFrank amendments to the securities laws. The court denied the 

Commission’s motion to dismiss Mr. Gupta’s complaint, but limited 

the theory of his complaint to one of equal protection, and ordered 

discovery and a hearing to determine whether the Commission’s attempt to apply the civil penalty provisions in Dodd-Frank retroactively amounted to a denial of equal protection. 

On August 4, 2011, the Commission announced that it had determined that it was in the public interest to dismiss the administrative proceedings against Mr. Gupta. Subsequently, on October 26, 

2011, the Commission filed a civil action in the U.S. District Court 

for the Southern District of New York against Mr. Gupta based on 

the same factual allegations as had underpinned the prior administrative proceeding. The Commission also asserted new insider trading claims against Raj Rajaratnam in the same action, based on 

material nonpublic information that Mr. Gupta allegedly provided 

to Mr. Rajaratnam. The Commission’s action against Mr. Gupta 

and Mr. Rajaratnam remains pending. 

The Commission does not believe the request for civil penalties 

based on Dodd-Frank amendments to the securities laws made in 

the original administrative proceeding against Mr. Gupta was an 

impermissible retroactive application of the new provisions, nor 

does the Commission believe it was improper for any other reason. 

Nevertheless, the issue has become moot in light of the Commission’s dismissal of the administrative proceeding and filing of a 

civil action against Mr. Gupta. Moreover, the Commission does not 

believe that the filing of the administrative proceeding compromised the enforcement action against Mr. Gupta in any way. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MARY L. SCHAPIRO 

Q.1. The SEC proxy access rule is the first Dodd-Frank rule that 

has been successfully challenged in the courts for failing to adequately analyze its economic costs and benefits. In the unanimous 

decision to vacate the rule, U.S. Circuit Judge Douglas Ginsburg 

wrote: 
158 

The commission inconsistently and opportunistically framed the costs and 

benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial 

problems raised by commenters. 

How do you intend to ensure that the rules that your agency 

adopts under Dodd-Frank are supported by rigorous economic analysis? 

A.1. When engaging in rulemaking, we analyze the direct and indirect costs and benefits of the Commission’s proposed decisions 

against alternative approaches, including, the effects on competition, efficiency and capital formation. We invite the public to comment on our analysis and provide any information and data that 

may better inform our decisionmaking. In adopting releases, the 

Commission responds to the information provided and revises its 

analysis as appropriate. This approach helps ensure a regulatory 

framework that strikes the right balance between the costs and the 

benefits of regulation. 

As you note, however, the Court of Appeals vacated the SEC’s 

proxy access rule for certain deficiencies that they found in our economic analysis of the rulemaking. We are carefully considering the 

court’s criticisms and are taking appropriate steps to respond to 

those that may bear on pending and future rulemakings. 

I have asked the staff to improve the process for integrating economic analysis into its decisionmaking throughout the course of a 

rulemaking. Commission staff from the division or office responsible for a rule already work closely with the Commission’s economists in the Division of Risk, Strategy, and Financial Innovation 

(‘‘Risk Fin’’) in identifying and analyzing the economic impacts of 

our rules. However, we can and should make even better use of 

Risk Fin’s economic expertise in our rulemaking. In fact, improving 

the agency’s economic analysis capabilities was one of my primary 

goals in creating Risk Fin in September 2009. My view continues 

to be that the goal of a revised process should be to capitalize on 

that expertise by making sure that our economic experts are included at the earliest stages of policy development. This early involvement will allow them to provide initial economic analyses to 

inform policy choices, and will better position them to perform any 

additional data gathering and analysis needed to help the Commission prepare more complete economic analyses of proposed rules. In 

short, we are committed to doing what is necessary to perform robust economic analyses in furtherance of effective rulemaking for 

our pending rule proposals. 

Q.2. SEC Commissioners Kathleen Casey and Troy Paredes issued 

a statement calling for rigorous economic analysis on the SEC staff 

study on Investment Advisers and Broker-Dealers. The two commissioners stated: 

Indeed, the study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor 

protection. 

Have you requested that the SEC staff follow-up on this request 

before considering any potential rule changes? 
159 

A.2. Yes. In light of the Commission’s concerns over the potential 

economic impact of any rulemaking under Section 913, I requested 

that a core team of economists from the Commission’s Division of 

Risk, Strategy and Financial Innovation study, among other things, 

available data pertaining to the standards of conduct in place 

under the existing broker-dealer and investment adviser regulatory 

regimes, including any data addressing Commissioners Casey’s and 

Paredes’ concerns. Since the Commission issued the study required 

by Section 913 of the Dodd-Frank Act (the ‘‘Study’’), staff has been 

reviewing public comments and meeting with interested parties to 

discuss their concerns and request additional data to inform the 

staff’s economic analysis. I believe investors would be well served 

by the Commission moving forward in a studied and measured 

way, taking into account the work of our team of economists and 

other staff, to consider a rule proposal to implement the staff’s recommendations to better protect investors as set forth in the Study. 

Q.3. One of the results of the recent securities subcommittee hearing on swap execution facilities was a bipartisan agreement that 

the SEC and CFTC need to provide greater coordination and harmonization to get the rules right. How do you intend to achieve 

harmonization between your two agencies on the treatment of request for quotes, block trades, and real time reporting? 

A.3. We are cognizant of the goal of harmonization of our rules 

with those of the CFTC in these and other areas under Title VII, 

to the extent practicable. In drafting the SEC’s rules relating to security-based swap execution facilities (‘‘SB SEFs’’) and trade reporting and dissemination for security-based swaps, SEC staff has met 

regularly with their counterparts at the CFTC. We have consulted 

extensively with CFTC staff and market participants as well, regarding Dodd-Frank Act implementation, and we continue to be 

guided by the objective of achieving consistent and comparable regulation, to the extent possible, as we move toward final rules. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM MARY L. SCHAPIRO 

Q.1.a. The Office of Financial Research (OFR) along with FSOC 

member agencies will have access to significant amounts of proprietary and other sensitive information about financial institutions. 

• How do you plan to protect that information from unauthorized 

disclosures, leaks, hacking or someone who is trying to steal 

the data for competitive purposes? 

A.1.a. The SEC has invested in technologies to protect and monitor 

proprietary and otherwise sensitive data that resides on our systems and are transmitted to and from our systems. These technologies will allow the SEC to manage access to these data, prevent 

or detect changes and maintain an audit trail. Additional technology will allow the SEC to monitor when sensitive data are being 

sent out of, or retrieved from, its systems. 

The Dodd-Frank Act contemplates that the SEC will share certain of the data it gathers with the Office of Financial Research 

(OFR), Financial Stability Oversight Council (FSOC) and members 

of FSOC, and we expect that these agencies will each have their 
160 

own information technology systems and controls for protecting 

proprietary and otherwise sensitive data. Under Exchange Act section 24(c) and rule 24c–1 thereunder, the SEC’s practice is to require ‘‘such assurances of confidentiality as the [SEC] deems appropriate’’ prior to sharing nonpublic information with other regulators. 

Q.1.b. What processes are you developing to govern who has access 

to information, under what circumstances it will be shared and 

penalties for unauthorized disclosures? 

A.1.b. Under the Dodd-Frank Act, the SEC is required to collect information from hedge fund and other private fund advisers for 

FSOC’s use in monitoring systemic risk. In a joint release with the 

CFTC, the SEC recently adopted the new Form PF, which these 

advisers will use to report information regarding the funds they 

manage. The Dodd-Frank Act established heightened confidentiality protections for this information, much of which is nonpublic. 

Reporting on Form PF will begin in the third quarter of 2012, 

though most advisers will not submit their initial reports until the 

spring of 2013. 

In advance of receiving Form PF data, SEC staff is working to 

design controls and systems for the use and handling of that data 

in a manner that reflects the sensitivity of these data and is consistent with the confidentiality protections established in the DoddFrank Act. The SEC recently announced that the Financial Industry Regulatory Authority (FINRA) will develop and maintain a filing system to receive Form PF data, and this system will be programmed with security features designed to limit access and maintain the confidentiality of these data. SEC staff is also studying 

whether multiple access levels can be established so that SEC employees are allowed only as much access as is reasonably needed 

in connection with their duties. 

The Dodd-Frank Act contemplates that Form PF data may be 

shared with other Federal agencies or with self-regulatory organizations, in addition to FSOC, for purposes within the scope of their 

jurisdiction. In each case, the heightened confidentiality protections 

that the Act establishes for these data continue to apply when the 

data are shared. 

Unlike the data that the Dodd-Frank Act contemplates the Commission will collect from hedge fund and other private fund advisers for FSOC’s use in monitoring systemic risk, data with respect 

to transactions or positions in security-based swaps (‘‘SBS’’) will be 

collected and maintained by security-based swap data repositories 

(‘‘SDRs’’) that will register with the Commission under Title VII of 

the Dodd-Frank Act. In 2010, the Commission proposed rules implementing the Dodd-Frank Act requirement for SDRs to maintain 

the privacy of SBS transaction information. In particular, the Commission’s proposed rules would require SDRs to establish and 

maintain safeguards, policies and procedures reasonably designed 

to prevent the misappropriation or misuse of confidential information, material nonpublic information, and intellectual property, including limiting access to such information and intellectual property by associated persons of SDRs. The Commission’s proposed 

rules also would require an SDR to establish, maintain, and en-
161 

force policies and procedures designed to ensure its automated systems have adequate levels of security. 

In addition, the Dodd-Frank Act authorizes SDRs, on a confidential basis pursuant to Section 24 of the Exchange Act, upon request 

and after notifying the Commission, to make available to the FSOC 

and certain other U.S. and foreign regulators all data obtained by 

the SDR, including individual counterparty trade and position 

data. The Act requires SDRs to obtain a written agreement from 

the FSOC or regulator stating that it shall abide by the confidentiality requirements described in Section 24 relating to the information on security-based swap transactions that is provided and an 

agreement to indemnify the SDR and the Commission for any expenses arising from litigation relating to the information provided 

under Section 24. Commission staff is contemplating alternatives to 

provide the FSOC (and other appropriate authorities) with access 

to SBS data collected and maintained by SDRs, subject to assurances of confidentiality as required by Section 24. 

Q.1.c. What processes are in place now to protect systemic risk information that the SEC and CFTC have proposed to begin collecting early next year? 

A.1.c. As noted above, in a joint release with the CFTC, the SEC 

recently adopted Form PF to collect systemic risk information from 

hedge fund and other private fund advisers. Reporting on Form PF 

will begin in the third quarter of 2012, though most advisers will 

not submit their initial reports until the spring of 2013. In preparation for these filings, the SEC is working with FINRA to develop 

the Form PF filing system, including programming it to reflect the 

heightened confidentiality protections created for Form PF filing 

information under the Dodd-Frank Act and allow for secure access 

by FSOC and other regulators as permitted under the Dodd-Frank 

Act. 

Certain aspects of the Form PF reporting requirements will also 

help to mitigate the potential risk of inadvertent or improper disclosure. For instance, because data on Form PF generally could 

not, on its own, be used to identify individual investment positions, 

the ability of a competitor to use Form PF data to replicate a trading strategy or trade against an adviser is limited. In addition, the 

deadlines for filing Form PF have, in most cases, been significantly 

extended from the proposal, meaning that the filings will generally 

contain less current, and therefore less sensitive, data. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM GARY GENSLER 

Q.1. Along with the FHFA and HUD, each of you had a hand in 

writing the proposed risk retention rule. Dodd-Frank exempted 

FHA-insured loans from these risk retention requirements. However, the proposed QRM section of the rule does not exempt loans 

insured by private mortgage insurance. 

• As private mortgage insurance and FHA are sometimes direct 

competitors, are any of you concerned that Dodd-Frank’s risk 

retention requirements may shift more business toward FHA 
162 

at a time when many experts believe that it should be trying 

to reduce its market share? 

A.1. The question is most appropriately answered by others on the 

panel. 

Q.2. Over a month ago, the Inspectors General from each of your 

agencies released reports that deepened my concern your agencies 

are not undertaking the type of economic analysis that is necessary 

to reveal how Dodd-Frank will affect our economy. 

What specific steps have each of you taken, in response to the 

IG reports, to improve the amount and type of analysis that your 

agencies are conducting in implementing Dodd-Frank? 

A.2. The Administrative Procedure Act (APA) requires the CFTC to 

provide notice and an opportunity to comment before finalizing 

rules that will impose new obligations on any person or group of 

persons. The CFTC considers all of the comments it receives to inform its final rulemaking. To ensure that its final rulemakings 

have reasoned bases, the CFTC and its staff review all estimates 

of costs and benefits that are received from commenters and any 

data supporting them. This enables the Commission to adopt rules 

as required by the Dodd-Frank Act while ensuring that they do not 

impose unnecessary costs on market participants and the public. 

Through meetings with industry and the public and through the 

receipt of public comments, the Commission obtained the views of 

informed parties to improve its understanding of costs and benefits 

before many of the CFTC’s more significant Dodd-Frank 

rulemakings to date were proposed. CFTC staff has hosted public 

roundtables to assist in preparation of proposed rules in line with 

industry practices. This has allowed us to mitigate compliance 

costs whenever possible, while fulfilling the CFTC’s obligation to 

promote market integrity, reduce risk and increase transparency 

under the Dodd-Frank Act. Information about each of these meetings, as well as full transcripts of the roundtables, is available on 

the CFTC’s Web site and has been factored into applicable 

rulemakings. 

On May 13, 2011, the Commission’s Chief Economist and General Counsel jointly issued guidance to CFTC rulemaking teams. 

Under that guidance, the Office of the Chief Economist (OCE) assigns a staff person to each rulemaking team to provide quantitative and qualitative input on costs and benefits of the final rulemaking. Under the guidance, the OCE representative employs price 

theory economics or similar methodology to assess associated costs 

and benefits. 

CFTC economists have been playing an integral role in the formation and analysis of cost-benefit considerations. The Commission 

is dedicated to maintaining the integrity and functioning of derivatives markets without imposing undue burdens on market participants and the broader economy. 

Q.3. Chairman Gensler, this month the CFTC has adopted a number of final rules under Dodd-Frank. Some of these rules use the 

terms ‘‘swap,’’ ‘‘swap dealer,’’ and ‘‘major swap participant.’’ DoddFrank directed the CFTC to adopt a rule further defining these 

terms. The CFTC has not done this yet. 
163 

How can you adopt final rules that apply to people and products 

that you have yet to define? 

A.3. In December 2010, the CFTC and the SEC jointly issued a 

proposed rule to further define the terms ‘‘swap dealer’’ and ‘‘security-based swap dealer’’ as well as ‘‘major swap participant’’ and 

‘‘major security-based swap participant.’’ In May, the agencies 

jointly proposed rules further defining products covered by Title 

VII of the Dodd-Frank Act. With the substantial completion of the 

proposal phase of rule-writing, the public earlier this summer had 

the opportunity to review the whole mosaic of proposed rules. The 

CFTC reopened or extended comment periods for most of our proposed rules for an additional 30 days—allowing the public to submit comments after seeing the entire mosaic at once. 

Q.4. Chairman Gensler, two of your fellow Commissioners expressed their frustration at the CFTC’s rush to get final rules done 

without a plan for getting them done in a logical manner. In your 

testimony, you state that you want public input on implementation, 

but do not mention anything about a sensible plan for finalizing 

the rules. 

Why are you ignoring the pleas of your colleagues for a public 

plan for rule adoption? 

A.4. The Dodd-Frank Act provides the Commission with ample 

flexibility to phase in implementation of requirements. The CFTC 

and SEC staff held roundtables on May 2 and 3, 2011, on this issue 

and have solicited comments from the public regarding such concerns. This important input informs the final rulemaking process. 

We’ve also reached out broadly on what we call ‘‘phasing of implementation,’’ which is the timeline for rules to take effect for various market participants. This is critically important so that market participants can take the time now to plan for new oversight 

of this industry. 

On September 8, the Commission approved two proposed 

rulemakings seeking additional public comment on the implementation phasing of swap transaction compliance that will affect the 

broad array of market participants. The proposed rulemakings provide the public an opportunity to comment on compliance schedules 

applying to core areas of Dodd-Frank reform. One proposal would 

provide greater clarity to market participants regarding the timeframe for bringing their swap transactions into compliance with 

the clearing and trade execution requirements. The second proposal 

approved on September 8 would provide greater clarity to swap 

dealers and major swap participants regarding the timeframe for 

bringing their swap transactions into compliance with new documentation and margining rules. These proposed rules will make 

the market more open and transparent while giving market participants adequate time to comply. Their purpose is to help facilitate 

an orderly transition to a new regulatory environment for swaps. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM GARY GENSLER 

Q.1. The SEC proxy access rule is the first Dodd-Frank rule that 

has been successfully challenged in the courts for failing to ade-
164 

quately analyze its economic costs and benefits. In the unanimous 

decision to vacate the rule, U.S. Circuit Judge Douglas Ginsburg 

wrote: 

The commission inconsistently and opportunistically framed the costs and 

benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial 

problems raised by commenters. 

How do you intend to ensure that the rules that your agency 

adopts under Dodd-Frank are supported by rigorous economic analysis? 

A.1. The Commission takes very seriously the consideration of costs 

and benefits of the rules it considers under the Dodd-Frank Act as 

required under section 15(a) of the Commodity Exchange Act. The 

economic costs and benefits associated with regulations, especially 

as they pertain to commenters’ concerns, are of utmost importance 

in the Commission’s deliberation and determination of final rules. 

As noted in the guidance for cost-benefit considerations for final 

rules memorandum to rulemaking teams from the Chief Economist 

and General Counsel dated May 13, 2011, the rulemakings will involve quantified costs and benefits to the extent it is reasonably 

feasible and appropriate. For rules that do not have quantifiable 

costs, the Commission seeks to explain why such costs are not 

quantifiable and to explain the reasoning and supportive explanation of its predictive judgments using qualitative measures. 

The Commission further recognizes the significance of meaningful issues raised by commenters regarding costs or benefits and 

takes those comments seriously as it is working on final rules. For 

those comments which persuade the Commission to modify its proposed rule, the Commission seeks to explain why the proposed alternative more effectively furthers the goal(s) of the statute in light 

of the section 15(a) factors, not only in the cost-benefit section but 

throughout the rule’s preamble. In contrast, for those comments 

which do not persuade the Commission to modify its proposed rule, 

the Commission seeks to explain its adoption of the proposed rule 

as the most effective means to further the goal(s) of the statue in 

light of section 15(a). The Commission seriously considers commenters’ concerns regarding costs or benefits and evaluates the alternatives presented. 

Through the Commission’s rulemaking process and its cost-benefit considerations, the agency is committed to enhancing market 

transparency, which will improve the integrity of the derivatives 

market without imposing unwarranted costs on the marketplace or 

financial system. 

Q.2.a. Chairman Schapiro testified that we must continue to evaluate carefully the international implications of Title VII. 

Rather than deal with these implications piecemeal, we intend to address 

the relevant international issues holistically in a single proposal. The publication of such a proposal would give investors, market participants, foreign 

regulators, and other interested parties an opportunity to consider as an integrated whole our proposed approach to the registration and regulation of 

foreign entities engaged in cross-border transactions involving U.S. parties. 

Do you intend to coordinate with SEC on ,this single proposal for 

the purpose of assuring regulatory consistency and comparability? 
165 

A.2.a. The CFTC’s 31 Dodd-Frank staff rulemaking teams and the 

Commissioners are all working closely with the SEC and all fellow 

regulators. CFTC staff have held more than 600 meetings with 

their counterparts at other agencies and have hosted numerous 

public roundtables with staff from other regulators to benefit from 

the open exchange of ideas. Commission staff will continue to engage with their colleagues at the SEC and other agencies as we 

proceed to develop and consider final rules and ensure harmonization among agencies. Our international counterparts also are 

working to implement needed reform. We are actively consulting 

and coordinating with international regulators to promote robust 

and consistent standards and to attempt to avoid conflicting requirements in swaps oversight. Section 722(d) of the Dodd-Frank 

Act states that the provisions of the Act relating to swaps shall not 

apply to activities outside the United States unless those activities 

have ‘‘a direct and significant connection with activities in, or effect 

on, commerce’’ of the United States. We are developing a plan for 

application of 722(d) and are hoping to seek public input this fall. 

The Commission will continue to coordinate closely with the SEC 

and fellow regulators. 

Q.2.b. Will you submit proposed rules on the application of Title 

VII rulemakings to inter-affiliate transactions, which are necessary 

for sound risk managements of global financial firms? In European 

markets, the treatment of inter-affiliate transactions may be different than the U.S. approach. How will global firms implement 

these conflicting regulatory requirements? 

A.2.b. The CFTC’s proposed rulemaking (jointly with the SEC) to 

further define the term ‘‘swap dealer’’ includes a discussion of how 

swaps between affiliates would be considered when determining if 

one of the affiliates is a swap dealer and specifically seeks public 

comment on that topic. The proposal does note that one hallmark 

of the definition that refers to holding oneself out as a dealer is 

that the entity has considerable interaction with unaffiliated 

counterparties. 

The CFTC has received comments in response to various proposed rulemakings and advance notices of proposed rulemaking 

that raise questions regarding whether and to what extent interaffiliate transactions should be subject to the clearing, trading and/ 

or reporting requirements of the Dodd-Frank Act. 

The Commission will take into account all comments it has received in determining further action. 

Q.3. One of the results of the recent securities subcommittee hearing on swap execution facilities was a bipartisan agreement that 

the SEC and CFTC need to provide greater coordination and harmonization to get the rules right. How do you intend to achieve 

harmonization between your two agencies on the treatment of request for quotes, block trades, and real-time reporting? 

A.3. The CFTC and SEC consult and coordinate extensively to harmonize our rules to the greatest extent possible. These continuing 

efforts began with the enactment of the Dodd-Frank Act. This close 

coordination will continue and will benefit the rulemaking process. 

With regard to the SEF rulemakings, the CFTC’s proposed rule 

would provide all market participants with the ability to execute or 
166 

trade with other market participants. It will afford market participants with the ability to make firm bids or offers to all other market participants. It also will allow them to make indications of interest—or what is often referred to as ‘‘indicative quotes’’—to other 

participants. Furthermore, it will allow participants to request 

quotes from other market participants. These methods will provide 

hedgers, investors and Main Street businesses the flexibility to 

trade using a number of methods, but also the benefits of transparency and more market competition. The proposed rule’s approach is designed to implement Congress’ mandate for a competitive and transparent price discovery process. 

The proposal also allows participants to issue requests for 

quotes, with requests distributed to a minimum number of other 

market participants. For block transactions, swap transactions involving nonfinancial end-users, swaps that are not ‘‘made available 

for trading’’ and bilateral transactions, market participants can get 

the benefits of the swap execution facilities’ greater transparency 

or, if they wish, choose execution by voice or other means of trading. 

In December 2010, the CFTC published a notice of proposed rulemaking regarding real-time public reporting of swap transaction 

data. The proposal would implement a new framework for the realtime public reporting of swap transactions and pricing data for all 

swap transactions. Additionally, the proposed rules address the appropriate minimum size and time delay relating to block trades on 

swaps and large notional swap transactions. 

In the futures world, the law and historical precedent is that all 

transactions are conducted on exchanges, yet in the swaps world 

many contracts are transacted bilaterally. While the CFTC will 

continue to coordinate with the SEC to harmonize approaches, the 

CFTC also will consider matters associated with regulatory arbitrage between futures and swaps. The Commission has received 

public comments on its SEF rule and is evaluating those comments 

in developing a final rule. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM GARY GENSLER 

Q.1. The CFTC recently released data showing that well over 90 

percent of daily futures trading volume in the most popular products comes from ‘‘day trading’’ accounts, not from ‘‘large traders.’’ 

For example, only 5.5 percent of crude trading volume on the New 

York Mercantile Exchange involved net changes in large traders’ 

positions. 

How will the CFTC’s proposed position limits reduce volatility in 

the markets, given that the proposed limits will only impact large 

traders and not the active day traders that are actually affecting 

the long-term equilibrium of the futures markets? 

A.1. The proposed rule would establish uniform position limits and 

related requirements for all economically equivalent derivatives for 

physical commodities. Without position limits, a leveraged market 

participant can take a very large speculative position across multiple venues. The proposed position limit framework would reduce 

the ability of such leveraged entities to take such positions. In de-
167 

veloping the CFTC’s proposed position limits rule, the agency adhered to Section 4a(a)(3) of the CEA—position limits are to address 

excessive speculation and market manipulation, while taking into 

consideration the need to protect market liquidity for bona fide 

hedgers and price discovery. However, the proposed position limit 

framework would not impose restrictions on trading activity and, 

thus, would not restrict active day traders who do not maintain 

large positions. 

Q.2. A number of market participants have expressed concerns related to the implementation of the derivative title of Dodd-Frank. 

Many experts have suggested that the lack of logical order to the 

rulemaking process and the lack of final definitions for key terms 

like ‘‘swap’’ and ‘‘swap dealer’’ have created a lack of confidence in 

the new regulatory regime being established by the CFTC. Can you 

update the Committee on how you are going to sequence these 

rules so that the market can adjust to these changes? 

A.2. The Dodd-Frank Act provides the Commission with ample 

flexibility to phase in implementation of requirements. The CFTC 

and SEC staff held roundtables on May 2 and 3, 2011, on this issue 

and have solicited comments from the public regarding such concerns. This important input informs the final rulemaking process. 

We’ve also reached out broadly on what we call ‘‘phasing of implementation,’’ which is the timeline for rules to take effect for various market participants. This is critically important so that market participants can take the time now to plan for new oversight 

of this industry. 

On September 8, the Commission approved two proposed 

rulemakings seeking additional public comment on the implementation phasing of swap transaction compliance that will affect the 

broad array of market participants. The proposed rulemakings provide the public an opportunity to comment on compliance schedules 

applying to core areas of Dodd-Frank reform. One proposal would 

provide greater clarity to market participants regarding the timeframe for bringing their swap transactions into compliance with 

the clearing and trade execution requirements. The second proposal 

approved on September 8 would provide greater clarity to swap 

dealers and major swap participants regarding the timeframe for 

bringing their swap transactions into compliance with new documentation and margining rules. These proposed rules will make 

the market more open and transparent while giving market participants adequate time to comply. Their purpose is to help facilitate 

an orderly transition to a new regulatory environment for swaps. 

Also on September 8, the Commission released an outline of final 

rules to be considered in the remainder of 2011 and next year. 

Q.3. The Office of Financial Research (OFR) along with FSOC 

member agencies will have access to significant amounts of proprietary and other sensitive information about financial institutions. 

• How do you plan to protect that information from unauthorized 

disclosures, leaks, hacking or someone who is trying to steal 

the data for competitive purposes? 
168 

• What processes are you developing to govern who has access 

to information, under what circumstances it will be shared and 

penalties for unauthorized disclosures? 

• What processes are in place now to protect systemic risk information that the SEC and CFTC have proposed to begin collecting early next year? 

A.3. The CFTC protects information from unauthorized access and 

improper use through comprehensive administrative, technical and 

physical security measures in compliance with the Federal Information Security Management Act (FISMA) and the Privacy Act of 

1974. The CFTC’s technical security measures include restricted 

computer access, required use of strong passwords that are frequently changed, encryption for certain data types and transfers, 

and regular review of security procedures and best practices to enhance security. Physical measures include restrictions on building 

access to authorized individuals and maintenance of records in 

lockable offices and filing cabinets. Administrative measures include: a strong security and privacy governance structure, policies 

and procedures for safeguarding confidential information and immediately reporting incidents of actual or suspected loss or compromise of information, annual mandatory training for all CFTC 

personnel, clearly defined roles for personnel with security and privacy responsibilities, and appropriate background checks for personnel with access to sensitive confidential information. 

CFTC information may be shared with the FSOC and OFR in accordance with Section 112(d) of the Dodd-Frank Act and the Privacy Act of 1974. Such information may be shared with the FSOC 

and OFR as necessary to monitor the financial services marketplace to identify potential risks to the financial stability of the 

United States or to otherwise carry out any of the provisions of 

Title I of the Dodd-Frank Act. The CFTC is working closely with 

the FSOC, OFR, and other member agencies to assure compliance 

with the requirements to maintain the confidentiality of data, information, and reports submitted under Title I. Penalties for unauthorized disclosure include disciplinary action, civil and criminal 

penalties. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM JOHN WALSH 

Q.1. Some analysts have suggested that the availability of mortgage credit is likely to be restricted as a result of Dodd-Frank. Specifically, they point to the interaction of laws and regulations such 

as the new Qualified Residential Mortgage (QRM) and Qualified 

Mortgage (QM) standards, as well as changes to the Home Ownership Equity Protection Act (HOEPA) triggers. 

Are any of you concerned about how these regulations may adversely impact the availability of credit? If so, can these difficulties 

be handled administratively, or do they require legislative solutions? 

A.1. The QRM and QM provisions of Dodd-Frank are related in 

that they are both designed to address problems that led to the 

mortgage crisis, albeit in different ways, and both could impact 

credit availability depending on the form of the final rules. 
169 

1Douglas W. Diamond and Raghuram G. Rajan, ‘‘A Theory of Bank Capital,’’ The Journal of 

Finance, Vol. 55, No. 6 (Dec. 2000), pp. 2431–2465. 2David VanHoose, ‘‘Theories of bank behavior under capital regulation,’’ Journal of Banking 

& Finance, 31 (2007), pp. 3680–3697. 3 Joe Peek and Eric Rosengren, ‘‘Bank regulation and the credit crunch,’’ Journal of Banking 

& Finance, 19 (1995), pp. 679–692. 

We have received comment letters on the proposed risk retention 

rules that argue that the combination of changes to mortgage 

standards required by Dodd-Frank (the QRM and QM provisions) 

and changes to HOEPA triggers and coverage may cause lenders 

to restrict their residential mortgage lending. The thrust of the argument is that, in order to avoid strict TILA liability and to be eligible for the exemption from the Dodd-Frank risk retention requirement, lenders will have a strong incentive to make only those 

mortgages that meet the criteria that satisfy both standards so the 

loan is both QRM- and QM-compliant, without becoming subject to 

HOEPA restrictions. 

The QRM and QM rules have not yet been finalized. The rulemaking agencies for the QRM standard are the OCC, Federal Reserve, FDIC, SEC, HUD and FHFA. For the QM standard, only the 

Consumer Financial Protection Bureau (CFPB) has rulemaking authority. It will be critically important that these two rulemaking 

initiatives are coordinated so that the net end result is not an unnecessary impediment to credit availability for credit-worthy borrowers. 

Q.2.a. A number of studies that purport to examine the tradeoff between increased bank capital and economic growth have been conducted by bankers, regulators, and academics. Some of these studies argue that increasing bank capital standards will result in substantially lower economic growth. Others argue that the tradeoffs 

are very small, and some argue that there is no tradeoff. 

Do we face a tradeoff between increased bank capital and economic growth? 

A.2.a. As the question indicates, there are many studies on either 

side of this issue. The tradeoff in which increases in bank capital 

beyond some level constrains economic activity and growth certainly is a complex question, but one that should not be ignored 

when setting standards for minimum regulatory capital. 

Q.2.b. Which specific studies led you to that conclusion? 

A.2.b. The possibility of a tradeoff follows from two bodies of economic research: one concluding that bank capital and capital requirements affect bank lending, and a second concluding that bank 

lending affects real economic activity. 

With regard to the first of these—the connection between capital 

and lending theoretical analyses such as Diamond and Rajan 

(2000) demonstrate that an increase in capital requirements can result in a withdrawal of credit from some borrowers and an increase 

in the price of credit for others.1 VanHoose (2007) summarizes the 

theoretical work.2 These theoretical predictions are supported by 

real-world empirical studies. For example, Peek and Rosengren 

(1995) identify a significant relationship between regulatory capital 

requirements and lending.3 They find that increases in required 

bank capital not only cause bank loan portfolios to shrink, but have 
170 

4 Bernanke, Ben S. ‘‘Nonmonetary Effects of the Financial Crisis in the Propagation of the 

Great Depression,’’ American Economic Review, Vol. 73, June 1983, pp. 257–276; Ben S. 

Bernanke and Alan S. Blinder, ‘‘Credit, Money, and Aggregate Demand,’’ American Economic 

Review, Vol. 78, May 1988, pp. 435–439. 5 Anat R Admati, Peter M. DeMarzo, Martin F. Hellwig, Paul Pfleiderer, ‘‘Fallacies, Irrelevant 

Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive,’’ 

Stanford Graduate School of Business Research Paper, No. 2065, August 2011. 6 Commentary by Mark Flannery on ‘‘Why Bank Equity is Not Expensive,’’ for International 

Journal of Central Banking, Third Financial Stability Conference, London, May 2011. 

a pronounced effect on the flow of new bank credit; they note that 

‘‘a large share of the shrinkage occurs in the bank-dependent loan 

category’’ (such as small businesses) and that ‘‘this shrinkage is not 

only statistically, but economically, significant’’ (Peek and 

Rosengren, p. 691). Note that recent proposals for a ‘‘countercyclical 

capital buffer’’ from the Basel Committee on Banking Supervision 

presume the existence of this type of connection between capital 

standards and bank credit. 

An extensive body of macroeconomic research demonstrates that 

a reduction in bank credit can affect economic activity. This literature generally addresses the role of bank credit as an important 

channel for the transmission of the effects of monetary policy, and 

includes Bernanke (1983), Bernanke and Blinder (1988), and many 

others.4 Research in this area frequently finds that the primary impact of this channel is on small firms with limited access to capital 

markets—a reduction in bank credit leaves such firms with few alternative sources of funding, and forces them to scale back, with 

negative consequences for broad measures of real economic activity. 

Q.2.c. Several prominent academics have argued that banks could 

be required to maintain equity capital ratios as high as 15 percent, 

or even 25 percent, of total assets (not risk-weighted assets) without adversely affecting economic growth. Do you agree with them? 

Please explain. 

A.2.c. It is important to note that the academic community itself 

is far from unified on this issue. A paper that has received significant popular attention is a manuscript by Admati et al (2011), arguing that banks could be required to hold much more capital with 

little economic cost.5 However, for a critical discussion of that 

paper by a leading banking scholar, see Flannery (2011); Flannery 

concludes that while Admati et al make many valid points, ‘‘the 

analysis fails to provide suitable guidance for the ongoing debate 

about how much capital is sufficient.6 Given the lack of agreement 

within academia, it would be dangerous to make significant 

changes to policy without more careful analysis and consideration 

of all available evidence. 

Q.3. Along with the FHFA and HUD, each of you had a hand in 

writing the proposed risk retention rule. Dodd-Frank exempted 

FHA-insured loans from these risk retention requirements. However, the proposed QRM section of the rule does not exempt loans 

insured by private mortgage insurance. 

As private mortgage insurance and FHA are sometimes direct 

competitors, are any of you concerned that Dodd-Frank’s risk retention requirements may shift more business toward FHA at a time 

when many experts believe that it should be trying to reduce its 

market share? 
171 

A.3. As you note, the statute itself, and not the proposed rule, exempts the FHA from risk retention, presumably because the FHA 

has the power to set its own underwriting standards to control its 

risk exposure under the FHA’s guarantee. While private mortgage 

insurers and the FHA both guarantee higher loan-to-value ratio 

loans, it is difficult to say they are direct competitors. The FHA’s 

underwriting standards cover higher loan-to-value ratios than typically are covered by private mortgage insurers at a comparable premium cost to the borrower. 

To include private mortgage insurance in the QRM criteria, the 

statute requires the Agencies to determine that it lowers the risk 

of default. Private mortgage insurance clearly has the benefit of reducing the risk of loss to investors in the event of default, but this 

is a separate question from whether it reduces the risk of default 

in the first place. The OCC will be interested in information provided by commenters on this topic, and the data they have provided. 

Q.4. Over a month ago, the Inspectors General from each of your 

agencies released reports that deepened my concern your agencies 

are not undertaking the type of economic analysis that is necessary 

to reveal how Dodd-Frank will affect our economy 

What specific steps have each of you taken, in response to the 

IG reports, to improve the amount and type of analysis that your 

agencies are conducting in implementing Dodd-Frank? 

A.4. On June 13, 2011, the Department of the Treasury’s Office of 

Inspector General (IG) issued a report on the economic analyses 

performed by the OCC with respect to three rules that implemented provisions of Dodd-Frank. The IG report was positive in its 

findings and identified a few issues that we are addressing. Specifically, the report summarized its conclusions as follows: 

In brief, we found that OCC has processes in place to ensure that required 

economic analyses are performed consistently and with rigor in connection 

with its rulemaking authority. Furthermore, we found that those processes 

were followed for the three proposed rules we reviewed. 

The report also recommended that the OCC develop procedures 

to facilitate coordination among the groups calculating administrative burden for various analyses and to update the OCC’s internal 

rulemaking guidance to reflect statutory and other changes from 

the last version. 

In response to the IG report, the OCC has updated its Guide to 

OCC Rulemaking Procedures, which provides guidance to staff involved in the rulemaking process, to assist further coordination 

among the OCC groups addressing burdens for applicable regulatory analyses. The regulatory handbook will be made available to 

all departments in the OCC that work on rulewriting projects. This 

update includes changes to reflect recent statutory amendments. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM JOHN WALSH 

Q.1. The SEC proxy access rule is the first Dodd-Frank rule that 

has been successfully challenged in the courts for failing to adequately analyze its economic costs and benefits. In the unanimous 
172 

decision to vacate the rule, U.S. Circuit Judge Douglas Ginsburg 

wrote: 

The commission inconsistently and opportunistically framed the costs and 

benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantifIed; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial 

problems raised by commenters. 

How do you intend to ensure that the rules that your agency 

adopts under Dodd-Frank are supported by rigorous economic analysis? 

A.1. The OCC currently conducts economic analyses, as applicable, 

under the Unfunded Mandates Act, Regulatory Flexibility Act, and 

Congressional Review Act. Our Policy Analysis Division has established procedures to address situations where the OCC is required 

to conduct an economic analysis. These procedures have been incorporated into revisions to the Guide to OCC Rulemaking Procedures 

and include, among other things, specific steps for preliminary impact assessments and the relevant statutory standards for review. 

These procedures also address coordination with other relevant 

OCC divisions involved in the rulewriting process. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JOHN WALSH 

Q.1. Under the proposed rule, loans insured by FHA are automatically exempt from the risk retention requirements. However, loans 

insured by private mortgage insurance, the private sector alternative to FHA, are not. Over the past 3 years, private mortgage insurers, using private capital, have blunted the loss of taxpayer dollars by absorbing approximately $25 billion in foreclosure losses 

that would have otherwise been borne by taxpayers. Meanwhile, 

taxpayers are on the hook for over $1 trillion in loans purchased 

by Fannie Mae and Freddie Mac and insured by FHA. Shouldn’t 

the risk retention rule be designed to minimize taxpayer exposure 

by increasing the role of private capital by including loans insured 

by private mortgage insurance in the QRM definition? 

A.1. As you know, the statute itself, and not the proposed rule, exempts the FHA from risk retention, presumably because the FHA 

has the power to set its own underwriting standards to control its 

risk exposure under the FHA’s guarantee. To include private mortgage insurance in the QRM criteria, the statute requires the Agencies to determine that it lowers the risk of default. Private mortgage insurance clearly has the benefit of reducing the risk of loss 

to investors in the event of default, but this is a separate question 

from whether it reduces the risk of default in the first place. The 

OCC will be interested in information provided by commenters on 

this topic, and the data they have provided. 

Q.2.a. The Office of Financial Research (OFR) along with FSOC 

member agencies will have access to significant amounts of proprietary and other sensitive information about financial institutions. 

How do you plan to protect that information from unauthorized 

disclosures, leaks, hacking or someone who is trying to steal the 

data for competitive purposes? 
173 

A.2.a. There is a Memorandum of Understanding (MOU) in place 

between the FSOC and its members to address the sharing and 

treatment of nonpublic information in connection with the DoddFrank functions and activities of the FSOC or the OFR. The MOU 

was drafted to insure the protection of the sensitive, nonpublic information that will be potentially shared with the FSOC, the OFR 

and among members of the FSOC. The MOU sets forth the following general principles: (1) any data, information or reports 

shared among the Parties in connection with the functions and activities of the FSOC or OFR are ‘‘nonpublic information;’’ (2) Any 

nonpublic information transferred from one party to another under 

the MOU shall not be disclosed by the receiving party other than 

as permitted by the MOU; (3) nonpublic information may be shared 

internally by a receiving party only on a need-to-know basis; (4) 

any official, employee or individual under the supervision of the receiving party must be advised that as a condition of their access 

to the nonpublic information, they must be advised of and bound 

by the terms of the MOU and must comply with its terms; (5) nonpublic information may not be shared by a receiving party with any 

third party without the written permission of the providing party, 

except under limited circumstances provided in the MOU; (6) the 

receiving parties must take all steps reasonably necessary to preserve, protect, and maintain all privileges and claims of confidentiality related to nonpublic information subject to the MOU; (7) the 

parties intend that sharing of nonpublic information pursuant to 

the MOU does not constitute public disclosure nor a waiver of confidentiality or any applicable privilege; and, (8) any nonpublic information provided to a receiving party under the MOU remains nonpublic and confidential even if the receiving party is no longer a 

party to the MOU or the MOU is terminated as to all parties. 

Additionally, the MOU places certain notice and cooperation requirements on the parties in the event of a FOIA request, subpoena 

or other request to a receiving party by a third party for nonpublic 

information not belonging to that receiving party. The OCC may 

share nonpublic supervisory information with the FSOC, OFR and 

member agencies pursuant to confidentiality provisions in the 

MOU. 

The OCC also has robust internal security measures already in 

place for the protection of sensitive and proprietary information. 

The OCC routinely uses and protects information that is similar to 

what the OCC may receive in the context of FSOC activities. Such 

information includes, but is not limited to documents, records, 

data, and information created or used by the OCC in the course of 

conducting official business. 

The OCC utilizes the security standards established by the Federal Interagency Security Committee (ISC) to choose the location of 

its offices and the minimum physical security posture that will be 

implemented for each facility. Access to each OCC office is strictly 

controlled with each of OCC’s primary facilities being protected by 

a combination of security guards, Homeland Security Presidential 

Directive-12 compliant physical access control systems, intrusion 

detection alarms, closed circuit television monitoring and strict 

physical security policies and procedures. 
174 

Every employee and contractor granted employee-like access to 

OCC facilities or information assets undergoes a comprehensive 

background investigation for suitability that must be favorably adjudicated. All visitors to OCC facilities are required to be escorted 

at all times and areas containing sensitive information assets or 

equipment such as file rooms or Local Area Network (LAN) rooms 

are protected by access control systems and other protective measures such as locked cages. 

The OCC maintains a comprehensive Information Security Program that was created in response to Federal and departmental directives, as well as to meet its fiduciary responsibilities to its customers to protect the confidentiality, integrity and availability of its 

information and supporting technology. In support of this objective, 

the OCC Information Security Program: Policies, Standards, and 

Required Controls document establishes comprehensive, uniform 

information security policies and standards, that are implemented 

through a combination of management, operational, and technical 

controls. The policies and standards in this handbook augment national and Treasury directives, adapt them to OCC’s specific circumstances, and where warranted, supply additional direction. 

Taken together, the policies, standards, controls, and roles and responsibilities presented in the handbook represent a comprehensive 

and uniform approach to protecting against loss, misuse, unauthorized access, and unauthorized modification of information and information systems essential to the OCC’s mission. 

The OCC prohibits unauthorized access to or use of its sensitive 

information and information resources. Only OCC-authorized users 

are allowed to access sensitive information and access to that information is only granted on a need-to-know basis. Prior to being 

granted access to sensitive information, all OCC employees and 

contractors must sign a nondisclosure statement and satisfactorily 

complete a security and privacy awareness training session. 

The OCC maintains a Computer Incident Response Center 

(CIRC) that constantly monitors OCC networks and computers to 

detect, prevent and respond to external attacks and operate antivirus systems. In addition, every OCC computer hard drive is 

encrypted to prevent unauthorized access to sensitive information 

on the drives and the OCC maintains the ability to remotely send 

a freeze signal to any OCC computer that falls into the wrong 

hands or a wipe signal to completely erase the contents of the hard 

drive. The OCC also utilizes an application that automatically 

encrypts any portable storage media, such as memory sticks or external drives that is plugged into an OCC computer to ensure the 

protection of any sensitive information transferred to the portable 

device. 

Q.2.b. What processes are you developing to govern who has access 

to information, under what circumstances it will be shared and 

penalties for unauthorized disclosures? 

A.2.b. The OCC has developed the internal security processes described above to control who has access to information. The MOU 

described above also addresses who has access to information 

shared with the OFR, FSOC or FSOC member agencies. In addition, the OCC also has robust internal policies and procedures, as 
175 

well as regulations (12 C.F.R. Part 4) in place which govern the 

sharing of nonpublic OCC information, as well as nonpublic thirdparty information in the possession of the OCC. The OCC’s delegations and policies require that the decisionmaking be made at a 

high-level when the OCC discloses or shares nonpublic information. 

Nonpublic OCC information may only be disclosed in consultation 

with the OCC’s law department and in accordance with applicable 

law, including 12 C.F.R. Part 4. Nonpublic third-party information 

in the possession of the OCC may only be disclosed with the express consent of the OCC’s First Senior Deputy Comptroller and 

Chief Counsel or her designee, and in accordance with applicable 

law (with certain exceptions where the law requires disclosure). 

Part 4 specifically prohibits the unauthorized disclosure of nonpublic OCC information by anyone who is granted access to the information, and by any OCC employee. There are numerous statutory civil and criminal penalties in place for the unauthorized disclosures of nonpublic information. Perhaps most relevant in this 

context is 18 U.S.C. § 641, which provides that, among other 

things, anyone who without authority conveys a record belonging 

to an agency of the United States may be subject to fines or imprisonment. 

Q.2.c. What processes are in place now to protect systemic risk information that the SEC and CFTC have proposed to begin collecting early next year? 

A.2.c. It is our understanding that the CFTC and SEC are currently in the process of developing rules governing data collection. 

We defer to those agencies to comment on how they are addressing 

protection of this information. 

Q.3. I am concerned that U.S. institutions will bear a significant 

competitive burden vis-a-vis their foreign competitors. While U.S. 

commercial banks will be subject to the full weight of Dodd-Frank’s 

heightened prudential standards and new systemic resolution regimes, large overseas competitors will be subject only to a systemic 

capital surcharge (sometimes called a G–SIFI or G–SIB surcharge) 

and the new Basel III capital requirements (both of which U.S. institutions will also have to meet). 

How have U.S. regulators accounted for the competitive impact 

of our heightened domestic requirements for U.S. banks when they 

negotiated the recent G–SIFI surcharge with foreign regulators? 

As I have noted in past testimony before the Senate, the OCC 

is very cognizant of the need to consider the competitive implications and the cumulative effects of the various mandates under the 

Dodd-Frank Act and the need to coordinate the implementation of 

key provisions of the Act with the capital and liquidity reforms announced by the Basel Committee. While I support strong capital, 

strong liquidity, and enhanced supervision of systemically important institutions, I have cautioned that we should not regard capital as the sole regulatory tool, nor should we set the capitals levels, including the surcharge for systemically important banks, at 

such a level that it forces banking activities into other less regulated sectors. I believe the surcharge ranges of 1 to 2.5 percent that 

the Basel Committee recently updated attempts to balance these 

considerations. 
176 

Domestically, the Federal Reserve Board is required to consult 

with the OCC as it develops and implements the heightened prudential standards for bank holding companies with total consolidated assets over $50 billion. In our discussions with the FRB, the 

OCC has stressed the need to ensure that these provisions and the 

Basel III reforms are carried out in a coordinated, mutually reinforcing manner, so as to enhance the safety and soundness of the 

U.S. and global banking system, while not damaging competitive 

equity or restricting access to credit. 
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