Manal Mehta of Sunesis Capital points out this must read transcript from Elizabeth Warren as she makes her debut on Senate Committee on Banking and these notable quotables from Sen. Tim Johnson’s Hearing on Wall Street Reform
‘when did you bring them to trial?” MUST READ – ELIZABETH WARREN MAKES HER DEBUT ON SENATE COMMITTEE ON BANKING – Notable Quotables from Sen. Tim Johnson’s Hearing on Wall Street Reform
WARREN: I want to ask a question about supervising big banks when they break the law, including the mortgage foreclosures, but others as well. You know, we all understand why settlements are important, that trials are expensive and we can’t dedicate huge resources to them. But we also understand that if a party is unwilling to go to trial, either because they’re too timid, or because they lack resources, that the consequence is they have a lot less leverage in all of the settlements that occur.
Now, I know there have been some landmark settlements, but we face some very special issues with big financial institutions. If they can break the law and drag in billions in profits, and then turn around and settle, paying out of those profits, they don’t have much incentive to follow the law.
It’s also the case that every time there is a settlement and not a trial, it means that we didn’t have those days and days and days of testimony about what those financial institutions had been up to.
So the question I really want to ask is about how tough you are about how much leverage you really have in these settlements? And what I’d like to know is, tell me a little bit about the last few times you’ve taken the biggest financial institutions on Wall Street all the way to a trial?
CURRY: To offer my perspective…
CURRY: … of a bank supervisor? We primarily view the tools that we have as mechanisms for correcting deficiencies. So the primary motive for our enforcement actions is really to identify the problem, and then demand a solution to it on an ongoing basis.
WARREN: That’s right. And then you set a price for that. I’m sorry to interrupt, but I just want to move this along.
It’s effectively a settlement. And what I’m asking is, when did you last take — and I know you haven’t been there forever, so I’m really asking about the OCC — a large financial institution, a Wall Street bank, to trial?
CURRY: Well, the institutions I supervise, national banks and federal thrifts, we’ve actually had a fairly fair number of consent orders. We do not have to bring people to trial or …
WARREN: Well, I appreciate that you say you don’t have to bring them to trial. My question is, when did you bring them to trial?
CURRY: We have not had to do it as a practical matter to achieve our supervisory goals.
WARREN: Ms. Walter?
WALTER: Thank you, Senator.
As you know, among our remedies are penalties, but the penalties we can get are limited. And we actually have asked for additional authority — my predecessor did — to raise penalties. But when we look at these issues — and we truly believe that we have a very vigorous enforcement program — we look at the distinction between what we could get if we go to trial, and what we could get if we don’t.
WARREN: I appreciate that. That’s what everybody does. And so, the really asking is, can you identify when you last took the Wall Street banks to trial?
WALTER: I will have to get back to you with the specific information, but we do litigate and we do have settlements that are either rejected by the commission, or not put forward for approval.
WARREN: OK. We’ve got multiple people here. Anyone else want to tell me about the last time you took a Wall Street bank to trial?
You know, I just want to note on this, there are district attorneys and U.S. attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds, and taking them to trial in order to make an example, as they put it. I’m really concerned that Too Big Too Fail has become Too Big For Trial. That just seems wrong to me.
If — if I can, I’ll go quickly, Mr. — Chairman
Johnson, I have one more question I’d like to ask and that’s a question about why the large banks are trading at below book value?
We all understand that book value is just what the assets are listed for, what the liabilities are and that most
big corporations trade well above book value. But many of the Wall Street banks right now are trading below book value and I can only think of two reasons why that would be so.
One would be because nobody believes that the banks books are honest or the second would be that nobody believes that the banks are really manageable. That is that they are too complex either for the — their own institution to manage them or for the regulators to manage them.
And so the question I have is what reassurance can you give that these large Wall Street banks that are trading for
below book value. In fact, are adequately transparent and adequately transparent and adequately managed.
Governor Tarullo or (inaudible).
TARULLO: So there — there’s — there’s certainly another reason we might add to your list, Senator Warren, which is investor skepticism as to whether a firm is going to make a return on equity that is in excess of what the investor regards as the — the value of the individual parts.
And so I think what — what you would hear analysts say is that in the wake of the crisis, there have been issues on
just that point surrounding first, what the regulatory environment’s going to be, how much capital’s going to be required, what activities are going to be restricted? What aren’t going to be restricted.
Two, for some time there have been questions about the — the franchise value of some of these institutions. You know the — the crisis showed that some of the so-called synergies were not very synergistic at all and in fact, there really wasn’t the potential at least on a sustainable basis to — to make a lot of money.
I — I think what, though — and — and part of it, I think, it probably just the economic — the – the environment of economic uncertainty.
I think that in some cases, we’ve — we’ve seen some effort to get rid of large amounts of assets at some of the large institutions. It is indirectly in response to just this point, that some of them I think have concluded that they are not in a position to have a viable, manageable, profitable franchise if they’ve got all of the entities that they had before.
And so, a couple of them, as I say, have actually reduced or in the process of reducing their balance sheets.
The other thing I — I would note, is you’re absolutely right about — about the — about the difference there. The difference actually is the economy has been improving and some of the — some of the firms have built up their capital. You’ve seen that difference actually narrowing in — in a number of cases as they seem to have a better position in the view of the market from which to proceed in a — in a more feasible fashion.
WARREN: Good. Well I — I appreciate it and I apologize for going over, Mr. Chairman. Thank you.
Sen. Tim Johnson Holds A Hearing On Wall Street Re.., sked FINAL
2013-02-14 19:29:44.991 GMT
February 14, 2013
SEN. TIM JOHNSON
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
SEN. TIM JOHNSON HOLDS A HEARING ON WALL STREET REFORM
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SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
HOLDS A HEARING ON WALL STREET REFORM
FEBRUARY 14, 2013
SEN. TIM JOHNSON, D-S.D.
SEN. JACK REED, D-R.I.
SEN. CHARLES E. SCHUMER, D-N.Y.
SEN. ROBERT MENENDEZ, D-N.J.
SEN. SHERROD BROWN, D-OHIO
SEN. JON TESTER, D-MONT.
SEN. MARK WARNER, D-VA.
SEN. JEFF MERKLEY, D-ORE.
SEN. KAY HAGAN, D-N.C.
SEN. JOE MANCHIN III, D-W.VA.
SEN. ELIZABETH WARREN, D-MASS.
SEN. HEIDI HEITKAMP, D-N.D.
SEN. MICHAEL D. CRAPO, R-IDAHO
SEN. RICHARD C. SHELBY, R-ALA.
SEN. BOB CORKER, R-TENN.
SEN. MIKE JOHANNS, R-NEB.
SEN. DAVID VITTER, R-LA.
SEN. PATRICK J. TOOMEY, R-PA.
SEN. MARK S. KIRK, R-ILL.
SEN. JERRY MORAN, R-KAN.
SEN. TOM COBURN, R-OKLA.
SEN. DEAN HELLER, R-NEV.
TREASURY UNDERSECRETARY FOR DOMESTIC FINANCE
FEDERAL RESERVE BOARD GOVERNOR DANIEL TARULLO
FEDERAL DEPOSIT INSURANCE CORPORATION
OFFICE OF THE COMPTROLLER OF THE CURRENCY
CONSUMER FINANCIAL PROTECTION BUREAU
SECURITIES AND EXCHANGE COMMISSION
COMMODITY FUTURES TRADING COMMISSION
JOHNSON: This committee is called to order.
Before we begin, I would like to extend a warm welcome
to Senator Crapo as ranking member, and to Senator Manchin,
Senator Warren, Senator Heitkamp, Senator Coburn, and Senator
Heller, who are joining this congress. And I would also like
to welcome back my friend, Senator Kirk.
Earlier this week, I released my agenda for this
congress, and I look forward to this committee’s continued
productivity. I’m optimistic that we can work together on a
bipartisan basis. To that end, Ranking Member Crapo and I
sent a letter yesterday to the banking regulators on the
importance of (inaudible) implementing Basel III, and I look
forward to hearing from each of you and working with the
ranking member on this issue.
Today, this committee continues a top priority,
oversight of Wall Street reform implementation. Wall Street
reform was enacted to make the financial system more
resilient, minimize risk of another financial crisis, better
protect consumers from abusive financial practices, and
ensure American taxpayers will never again be called upon to
bail out a failing financial firm.
This morning, we will hear from regulators on how their
agencies are carrying out these mandates of Wall Street
reform. Many of the law’s remaining rulemakings, like QRM and
the Volcker Rule, require careful consideration of complex
issues, as well as interagency and international
I appreciate your efforts to finalize these rules. To date, the regulators have proposed or finalized over three-quarters of the rules required by Wall Street reform. These include rules that have recently gone live in the market, such as the data reporting and registration rules for derivatives that impart new oversight of a previously unregulated market. But there is still more work to do.
JOHNSON: That is why I have asked each of our witnesses to provide a progress report to the committee, both on rulemakings, that your agency has completed, and those that your agency has yet to finalize. I ask that you craft these rules in a manner that is effective for smaller firms like community banks, so that they can continue to make — meet the needs of their customers and communities. The work does not end when the final rules go out the door. Regulators must enforce the rules, and ask that each agency inform us of how they intend to better supervise the financial system. While concerns have been raised about whether a few firms remain too-big-to- fail, Wall Street reform provides regulators with new tools to address the issue head on.
This is one of the many reasons why — why fully implementing the law remains important. Not just for our constituents, but for future generations. As we approach the five year anniversary of the failure of Bear Sterns, we must not lose sight of why we passed Wall Street reform. Congress enacted the law in the wake of the most severe financial crisis in the lifetime of most Americans.
How costly was it? I asked the GAO to study this question to better understand the impact the crisis had on our nation. In a report released just today, which I am entering in the record, the GAO concluded that while the cost — precise cost of this crisis is difficult to calculate, the total damage to the economy may be as high as $13 trillion. I say again, $13 trillion, with a T, dollars. That should urge you to consider the benefits of avoiding another costly, devastating crisis as you continue implementing Wall Street reform. I would like to make one final comment on Director Cordray and the CFPB, since he was appointed as head of the CFPB last year, Director Cordray and the CFPB have worked tirelessly to finalize many rules and policies to protect consumers in areas such as mortgages, student lending, service member rights and credit cards.
They have done good work, and I urge my colleagues to confirm Director Cordray to a full term without delay and allow the CFPB to continue this important work protecting consumers. I now turn to Ranking Member Crapo?
CRAPO: Thank you very much, Mr. Chairman. You and I have
a very good personal friendship, and have had a good working
relationship over the years, and I look forward to building
upon that, and working with you as the ranking member of the
committee this year, this Congress. One of my objectives and
hopes would be to work together on the kind of common-sense,
bipartisan solutions that we can achieve before this
committee in a number of areas that I think various members
of the committee have already identified and discussed among
We, you and I, as you indicated have already sent a
joint letter to inform the regulators of our concerns about
the impact of the proposed Basel-III requirements on
community banks, insurance companies and the mortgage market,
and so we’re off to a good start. I look forward to — to
building on that. I also want to join with you in welcoming
the new members of our committee. On our side, Senators
Coburn and Heller, and on your side, also Senators Manchin,
Warren and Heitkamp. We welcome you to the committee. Today
the committee will hear about the ongoing implementation of
Academic researchers estimate that when Dodd-Frank is
fully implemented, there will be more than 13,000 new
regulatory restrictions in the current federal regulations.
Over 10,000 pages of regulations have already been proposed,
requiring as is estimated, over 24 million compliance hours
each year. And that’s just the tip of the iceberg. Of some
400 rules required by Dodd-Frank, roughly one- third have
been finalized, about one-third have been proposed, but not
finalized, and roughly one-third had not yet been proposed.
Together the hundreds of Dodd-Frank proposed rules are far
too complex, offering confusing and often contradictory
standards, and regulatory requirements.
I am concerned that the regulators do not understand,
and are not focusing aggressively enough on the cumulative
effect of the hundreds of proposed rules. And that there is a
lack of communication among the agencies, both domestically
and internationally. That’s why it’s important for the
regulators to perform meaningful cost-benefit analysis so
that we can understand how these rules will effect the
economy as a whole, interact with one another, and impact our
global competitiveness. An enormous number of new rules are
slated to be finalized this year as a result of Dodd-Frank,
Basel-III and other regulatory initiatives, and at this
important juncture, we need answers to critical questions.
First, what are the anticipated cumulative effects of
these new rules to credit, liquidity, borrowing costs, and
the overall economy? Ultimately we need rules that are strong
enough to make our financial system safer, and sounder, but
that can adapt to changing market conditions, and promote
credit availability and spur job growth for millions of
Americans. Second, what have the agencies don to assess how
these complicated rules will interact with each other, and
the existing regulatory framework. I am hearing a lot of
concern about how the interaction of some rules will reduce
mortgage credit through the qualified mortgage rule, the
proposed qualified residential mortgage rule, and the
proposed international Basel-III risk weights for mortgages,
as an example.
And third, what steps are being taken to fix the lack of
coordination and harmonization of rules among the United
States and international regulators on cross border issues?
For example, the CFTC has issued a number of so-called
guidance letters and related orders on cross border issues.
The CFTC’s initial proposal received widespread criticism
from foreign regulators, that the guidance is confusing,
expansive, and harmful. Meanwhile the SEC has not yet issued
its cross border proposal. There is bipartisan concern that
some of the Dodd-Frank rules go too far, and need to be
A good starting point would be to fulfill a
congressional intent by providing an explicit exemption from
the margin requirements for non-financial end users that
qualify for the clearing exemption. Similar language to this
passed the House last year by a vote of 370 to 24. Federal
Reserve Chairman Bernanke has confirmed that regardless of
congressional intent, the banking regulators view the plan
language of the statute as requiring them to impose some kind
of margin requirement on non-financial end users, unless
Congress changes the statute. Unless Congress acts, new
regulations will make it more expensive for farmers,
manufacturers, energy producers, and many small business
owners across the country to manage their unique business
risks associated with their day-to-day operations.
An end user fix is just one example of the kind of
bipartisan actions that we can take to improve the safety and
soundness of our financial system without unnecessarily
inhibiting economic growth. It’s my hope that today’s hearing
is going to provide us a starter — starting point to address
these critical issues, and identify the needed reforms that
we must undertake. Thank you Mr. Chairman again for holding
JOHNSON: Thank you, Senator Crapo. This morning opening
statements will be limited to the chairman and ranking member
to allow more time for questions from the committee members.
I want to remind my colleagues that the record will be open
for the next seven days for opening statements, and any other
materials you would like to submit. Now, I would like to
introduce our witnesses. Mary Miller is the undersecretary
for domestic finance at the U.S. Department of the Treasury.
Dan Tarullo is a member of the Board of Governors or the
Federal Reserve system. Martin Gruenberg is the chairman of
the Federal Deposit Insurance Corporation. Tom Curry is the
Comptroller of the Currency. Richard Cordray is the director
of the Consumer Financial Protection Bureau. Elisse Walter is
the chairman of the Securities and Exchange Commission, and
Gary Gensler is the chairman of the Commodity Futures Trading
I thank all of you again for being here today. I would
like to ask the witnesses to please keep your remarks to five
minutes. Your full written statements will be included in the
hearing record. Undersecretary Miller, you may begin your
MILLER: Chairman Johnson, Ranking Member Crapo, and
members of the committee, thank you so much for the
opportunity to be here today. The Dodd-Frank Wall Street
Reform and Consumer Protection Act represents the most
comprehensive set of reforms to the financial system since
The Great Depression. Americans are already beginning to see
benefits from these reforms, reflected in a safer and
stronger financial system. Although the financial markets
have recovered more vigorously than the overall economy, the
economic recovery is also gaining traction.
The financial regulators represented here today have
been making significant progress implementing Dodd-Frank Act
reforms. Treasury’s specific responsibilities under the
Dodd-Frank Act include standing up new organizations to
strengthen coordination of financial regulation, both
domestically, and internationally, improve information
sharing, and better address potential risks to the financial
system. Over the past 30 months, we have focused considerable
effort on creating the Financial Stability Oversight Council,
the Office of Financial Research, and the Federal Insurance
The Financial Stability Oversight Council, known as
FSOC, has become a valuable forum for collaboration among
financial regulators. Through frank discussion, and early
identification of areas of common interest, the financial
regulatory community is now better able to identify issues
that would benefit from enhanced coordination. Although FSOC
members are required to meet only quarterly, the FSOC met 12
times last year to conduct its regular business, and respond
to specific market developments.
Much additional work takes place at the staff level,
with regular, and substantive engagement to inform FSOC
leaders. While Treasury is not a rule writing agency, the
Treasury secretary has a statutory coordination role for the
Volcker Rule and risk retention rule, by virtue of his
chairmanship of the FSOC. We take that role very seriously,
and will continue to work with the respective rulemaking
agencies as the finalize these roles.
MILLER: In addition to the FSOCs coordination role, it
has certain authority to make recommendations to the
responsible regulatory agencies where a financial-stability
concern calls for further action. An example along these
lines is a concern about risks in the short-term funding
The FSOC’s focus on this ultimately led the council to
issue proposed recommendations on money-market-fund reforms
for public comment.
The FSOC has also taken significant steps to designate
and increase oversight of financial companies whose failure
or distress could negatively impact financial markets or the
financial stability of the United States.
The Treasury has made significant progress in
establishing the Office of Financial Research and the Federal
Insurance Office. The OFR provides important data and
analytical support for the FSOC and is developing new
financial-stability metrics and indicators.
It also plays a leadership role in the international
initiative to establish a Legal Entity Identifier, a code
that uniquely identifies parties to financial transactions.
The planned launch of the LEI next month will provide
financial companies and regulators worldwide a better view of
companies’ exposures and counterparty risks.
With the establishment of the Federal Insurance Office,
the United States has gained a federal voice on insurance
issues, domestically and internationally. For example, in
2012, FIO was elected to serve on the Executive Committee of
the International Association of Insurance Supervisors and is
now providing important leadership in developing
international insurance policy.
We’re also working internationally to support efforts to
make financial regulations more consistent worldwide. By
moving early with the passage and implementation of the
Dodd-Frank act, we’re leading from a position of strength in
setting the international reform agenda.
This comprehensive agenda spans global bank capital and
liquidity requirements, resolution plans for large
multi-national financial institutions, and derivatives
We will continue to work with our partners around the
world to achieve global regulatory convergence. As we move
forward, it is critical to strike the appropriate balance of
measures to protect the strength and stability of the United
States financial system while preserving liquid and efficient
markets that promote access to capital and economic growth.
Completion of these reforms provides the best path to
achieving continued economic growth and prosperity grounded
in financial stability.
Thank you for the opportunity to testify today. I
welcome any questions the Committee may have.
JOHNSON: Thank you.
Governor Tarullo, please proceed.
TARULLO: Thank you, Mr. Chairman, Senator Crapo, and
other members of the Committee. It’s a pleasure to be with
all of you here on this Valentine’s Day.
I just wanted to make two points in these oral remarks.
First, I hope that 2013 will be the beginning of the end of
the major portion of rulemakings implementing Dodd-Frank in
strengthening capital rules.
The rulemaking process has been very time-consuming. In
some cases, it’s run beyond the deadline set by Congress,
though there have been some good reasons for that.
Joint rulemaking just takes a lot of time, and for many
of the rules, that process involves three to five independent
agencies representing between 12 and 22 individuals who have
votes at those agencies. Also, some of the rules involve
subjects that are complicated, controversial, or both.
I think there was wide agreement that it was incumbent
on the regulators to take the time to understand the issues
and to give full consideration to the many thousands of
comments that were submitted on some of the proposals.
But it’s also important to get to the point where we can
provide clarity to financial firms as to what regulatory
environment they can expect in some of these important areas
so that they can get on with planning their businesses
So it’s my hope and my expectation that with respect to
the Volcker Rule, the Capital Rules, Section 716, and many of
the special credential requirements for systemically
important firms, we will publish final rules this year.
On Volcker and on the Standardized Capital Rules in
particular, I think the agencies have learned a good deal
from the formal comments and public commentaries addressed to
Both required a difficult balance between the aims of
comprehensiveness on the one hand and the administrability at
firms and at regulators on the other.
And I think it’s pretty clear that both proposals lean
too far in the direction of complexity and I would expect a
good bit of change in the final rulemakings on these
Indeed, these examples prove the wisdom of those who
drafted the Administrative Procedure Act many years ago
whereby they set up a process that agencies issue proposals
for notice and comment, receive comments, consider the
comments, modify the regulations, and then finally put those
regulations into place.
We should also get out proposals this year to implement
two arrangements agreed internationally, the capital
surcharge for systemically important banks and the liquidity
One exception where we will be slowing down a little –
and here, “we” is the Federal Reserve, not my fellow agencies
– is the Section 165 requirement for counterparty credit
Based on the comments received and ongoing internal
staff analysis, we concluded that a quantitative impact study
was needed to help us assess better the optimal structure of
a rule that is breaking new ground in an area for which there
is a lot of hard but heretofore uncollected data. So we’re
going to need some more time on this one.
The second point I want to make is that the feature of
the financial system that is in most need of further
attention and regulatory action is that of non-deposit
My greatest concern is with those parts of the so-called
shadow- banking system that are susceptible to destabilizing
funding runs, something that is more likely where the
recipients of the short-term funding are highly leveraged,
engaged in substantial maturity transformation, or both.
It was just these kinds of runs that precipitated the
most acute phase of the financial crisis that the Chairman
referred to a few moments ago.
We need to continue to assess the vulnerabilities posed
by this kind of funding while recognizing that many forms of
short-term funding play important roles in credit
intermediation and productive capital-market activities.
But we should not wait for the emergence of a consensus
on comprehensive measures to address these kinds of funding
channels. That’s why I suggest in my written testimony more
immediate action in three areas, the transparency of
securities financing, money-market mutual funds, and
tri-party repo markets.
Thank you all for your attention.
JOHNSON: Thank you.
Chairman Gruenberg, please proceed.
GRUENBERG: Thank you, Mr. Chairman.
Chairman Johnson, Ranking Member Crapo, and members of
the Committee, thank you for the opportunity to testify today
on the FDIC’s efforts to implement the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
While my prepared testimony addresses a range of issues,
I will focus my oral remarks on three areas of responsibility
specific to the FDIC, deposit insurance, systemic resolution,
and community banks.
With regard to the deposit-insurance program, the
Dodd-Frank Act raised the minimum reserve ratio for the
Deposit Insurance Fund to 1.35 percent and required that the
reserve ratio reach this level by September 30th, 2020.
The FDIC is currently operating under a DIF Restoration
Plan that is designed to meet this deadline, and the DIF
reserve ratio is recovering at a pace that remains on-track
to — to achieve the plan.
As of September 30th, 2012, the reserve ratio stood at
0.35 percent of estimated insured deposits. That’s up from
0.12 percent a year earlier.
The Fund balance has now grown for 11 consecutive
quarters, increasing to $25.2 billion at the end of the third
quarter of 2012.
The FDIC has also made significant progress on the
rulemaking and planning for the resolution of systemically
important financial institutions, so-called SIFIs.
The FDIC and the Federal Reserve Board have jointly
issued the basic rulemaking regarding resolution plans the
SIFIs are required to prepare. These are the so-called living
The rule requires bank holding companies with total
consolidated assets of $50 billion or more to develop,
maintain, and periodically submit resolution plans that are
credible and that would enable these entities to be resolved
under the Bankruptcy Code.
Beginning on July 1st of 2012, the first group of
living-will filings by the nine largest institutions with
non-bank assets over $250 billion was received, with the
second group to follow on July 1st of this year and the rest
by December 31st. The Federal Reserve and the FDIC are
currently in the process of reviewing the first group of plan
The FDIC has also largely completed the rulemaking
necessary to carry out its systemic resolution
responsibilities under Title II of the Dodd-Frank Act. The
final rule approved by the FDIC Board addressed among other
things the priority of claims and the treatment of similarly
Section 210 of the Dodd-Frank Act expressly requires the
FDIC to coordinate to the maximum extent possible with
appropriate foreign regulatory authorities in the event of
the resolution of a systemic financial company with
In this regard, the FDIC and the Bank of England, in
conjunction with the Prudential Regulators in our
jurisdictions, have been working to develop contingency plans
for the failure of SIFIs that have operations in both the
U.S. and the U.K.
In December, the FDIC and the Bank of England released a
joint paper providing an overview of the work we have been
doing together. In addition, the FDIC and the European
Commission have agreed to establish a joint working group to
discuss resolution and deposit- insurance issues common to
our respective jurisdictions.
The first meeting of the working group will take place
here in Washington next week.
Finally, in light of concerns raised about the future of
community banking in the aftermath of the financial crisis as
well as the potential impact of the various rulemakings under
the Dodd-Frank Act, the FDIC engaged in a series of
initiatives during 2012 focusing on the challenges and
opportunities facing community banks in the United States.
In December of last year, the FDIC released the FDIC
Community Banking Study, a comprehensive review of U.S. — of
the U.S. community-banking sector covering the past 27 years
Our research confirms the important role that community
banks play in the U.S. financial system. All these –
although these institutions account for just 14 percent of
the banking assets in the United States, they hold 46 percent
of all the small loans to businesses and farms made by
GRUENBERG: The study found that for over 20 percent of
the counties in the United States, community banks are the
only FDIC- insured institutions with an actual physical
Importantly, the study also finds that community banks
have stayed with their basic model of careful
relationship-lending funded by stable core deposits,
exhibited relatively strong and stable performance over this
period and during the recent financial crisis, and should
remain an important part of the U.S. financial system going
Mr. Chairman, that concludes my oral remarks. I’d be
glad to respond to your questions.
JOHNSON: Thank you.
Comptroller Curry, please proceed.
CURRY: Thank you, Chairman Johnson, Ranking Member
Crapo, and members of the committee, it’s a pleasure to
appear before you today for this panel’s first hearing of the
I want to thank Chairman Johnson for his leadership in
holding this hearing, and I’d also like to congratulate
Senator Crapo on his new role as the ranking member of this
committee. I look forward to working with both of you on many
issues facing the banking system.
There are also a number of new members on the committee,
and I look forward to getting to know each of you better this
It has been nearly 3 years since the Dodd-Frank Act was
enacted, and both the financial condition of the banking
industry and the federal regulatory framework have changed
The OCC supervises more than 1,800 national banks and
federal savings associations, which together hold more than
69 percent of all commercial bank and thrift assets. They
range in size from very small community banks with less than
$100 million in assets, to the nation’s largest financial
institutions with assets exceeding $1 trillion.
More than 1,600 of the banks and thrifts we supervise
are small institutions with less than $1 billion in assets
and they play a vital role in meeting the financial needs of
communities across the nation.
I am pleased to report that federal banks and thrifts
have made significant strides since the financial crises in
repairing their balance sheets through stronger capital,
improved liquidity, and timely recognition and resolution of
While these are encouraging developments, banks and
thrifts continue to face significant challenges, and our
examiners continue to stress the need for these institutions
to remain vigilant in monitoring the risks they take on in
We are also mindful that we cannot let the progress that
has been made in repairing the economy and in strengthening
the banking system lessen our sense of the urgency in
addressing the weaknesses and flaws that were revealed by the
The Dodd-Frank Act addresses major gaps in the
regulatory landscape, tackles systemic issues that
contributed to and amplified the effects of the financial
crisis, and lays the groundwork for a stronger financial
Like my colleagues at the table, we at the OCC are
currently engaged in numerous rulemakings, from appraisals to
Volcker, and from risk retention to swaps. My written
statement provides details on each of these efforts, and
provides a flavor of some of the public comments that have
The OCC is committed to implementing fully those
provisions where we have sole rule-writing authority as
quickly as possible. We are equally committed to working
cooperatively with our colleagues on those rules that require
coordinated or joint action. I remain very hopeful that we’ll
soon have in place final regulations in several areas to
provide the clarity the industry needs.
Throughout this process I have been keenly aware of the
critical role the community banks play in providing consumers
and small businesses in communities across the nation with
essential financial services and access to credit. As the OCC
undertakes every one of these critical rulemakings, we are
very focused on ensuring that we put standards in place that
promote safety and soundness without adding unnecessary
burden to community banks.
I’d like to highlight one of the most significant
milestones of the Dodd-Frank Act for the OCC, which is the
successful integration of the mission and most of the
employees from the Office of Thrift Supervision into the OCC.
The integration was accomplished smoothly and professionally,
reflecting the merger of experience with a strong vision for
The final stage of this process is underway with the
integration of rules applicable to federal thrifts with those
that apply to national banks, consistent with the statutory
differences between the two charter types. An integrated set
of rules will benefit both banks and thrifts. In the vast
majority of the rulemaking activities the OCC is one of
The success of those rulemakings depend on interagency
cooperation and I want to acknowledge the work of my
colleagues at this table and their staffs for approaching
these efforts thoughtfully and productively, giving careful
consideration to all issues.
Working together, I believe we will be able to develop
rules that will be good for the financial system, the
entities we regulate, and the communities they serve going
Thank you for your attention, and I look forward to
answering any questions you may have.
JOHNSON: Thank you.
Director Cordray, please proceed.
CORDRAY: Thank you, Chairman Johnson, Ranking Member
Crapo, and members of the committee for inviting me back
My colleagues and I at the Consumer Financial Protection
Bureau are always happy to testify before the Congress,
something we have done now 30 times.
Today, we’re here to talk about the implementation of
the Dodd- Frank Wall Street Reform and Consumer Protection
Act, the signature legislation that created this new consumer
agency. Since the bureau opened for business in 2011, our
team has been hard at work. We’re examining both banks and
non-bank financial institutions for compliance with the law,
and we’ve addressed and resolved many issues through these
efforts to date.
In addition, for consumers who have been mistreated by
credit card companies we are in coordinated actions with our
fellow regulators, returning roughly $425 million to their
pockets. For those consumers who need information, or want
help in understanding financial products and services, we’ve
developed Ask CFPB, a data base of hundreds of answers to
questions frequently asked of us by consumers. And our
consumer response center has helped more than 100,000
consumers with individual problems related to their credit
cards, mortgages, student loans and bank accounts.
In addition, we’ve been working hard to understand,
address and resolve some of the special consumer financial
issues affecting specific populations: students, service
members, older Americans, and those who are unbanked or
underbanked. And we’re planning a strong push in the future
for broader and more effective financial literacy in this
We need to change the fact that we send many thousands
of our young people out into the world every year to manage
their financial affairs with little or no grounding in
personal finance education. We want to work with each of you
on these issues on behalf of your constituents.
We’ve also faithfully carried out the law that Congress
enacted by writing rules designed to help consumers
throughout their mortgage experience, from signing up for a
loan to paying it back. We’ve written loans with loan
originator compensation, giving consumers better access to
their appraisal reports, and addressing escrow and appraisal
requirements for higher priced mortgage loans.
Just last month we released our Ability to Repay Rule,
which protects consumers shopping for a loan by requiring
lenders to make a good faith reasonable determination that
consumers can actually afford to pay back their mortgages.
The rule outlaws so-called and very irresponsible “Ninja”
loans; even with no income, no job and no assets you could
still get a loan, that were all too common in the lead-up to
the financial crisis.
Our rule also strikes a careful balance on access to
credit issues that are so prevalent in the market today by
enabling safer lending and providing greater certainty to the
Finally, the bureau also recently adopted mortgage
servicing rules to protect borrowers from practices that have
plagued the industry, like failing to answer phone calls,
routinely losing paperwork, and mishandling accounts. I’m
sure that each of you have heard from constituents in your
states who have these kinds of stories to tell.
We know the new protections afforded by the Dodd-Frank
Act and our rules will no doubt bring great changes to the
mortgage market. We’re committed to doing what we can to
achieve effective, efficient, complete implementation by
engaging with all stakeholders, especially industry, in the
coming year. We know that it is in the best interests of the
consumer for the industry to understand these rules, because
if they cannot understand they cannot properly implement.
To this end we’ve announced an implementation plan. We
will publish plain English summaries, we will publish
readiness guides to give industry a broad checklist of things
to do to prepare for the rules taking next January, like
updating their policies and procedures and providing training
We’re working with our fellow regulators to ensure
consistency in examinations of mortgage lenders under the new
rules, and to clarify issues as needed. We also are working
to finalize further proposals in these rules to recognize
that, as my colleagues have said, the traditional lending
practice of smaller community banks and credit unions are
worthy of respect and protection.
So thank you again for the opportunity to appear before
you today and speak about the progress we’re making at the
Consumer Financial Protection Bureau. We always welcome your
thoughts about our work and I look forward to your questions.
JOHNSON: Thank you.
Chairman Walter, please proceed.
WALTER: Chairman Johnson, Ranking Member Crapo, and
members of the committee, thank you for inviting me to
testify on behalf of the Securities and Exchange Commission
regarding our ongoing implementation of the Dodd-Frank Act.
As you know, the act required the SEC to undertake the
largest and most complex rulemaking agenda in the history of
the agency. We have made substantial progress, writing the
huge volume of new rules mandated by the act. We have
proposed or adopted over 80 percent of the more than 90
required rules, and we have finalized almost all of the
studies and reports Congress directed us to write.
Since the law’s enactment, our staff has worked closely
with other regulatory agencies and has carefully reviewed the
thousands of comments we received to ensure that we not only
get the rules done, but that we get them done right. And I am
committed to doing both. Indeed, as long as I serve as
chairman, I will continue to push the agency forward to
While my written testimony describes in greater detail
what we have achieved, I wanted to touch briefly on just a
few of the items. Today, as a result of new rules jointly
adopted with the CFTC, systemic risk information is now being
periodically reported by registered investment advisors who
manage at least $150 million in private fund assets. This
information is providing FSOC and the commission with a
broader view of the industry than we had in the past.
Additionally, because of our registration rules, we now have
a much more comprehensive view of the hedge fund and private
WALTER: We also adopted rules creating a new
whistleblower program, and last year our program produced its
first award. We expect future payments to further increase
the visibility of the program and lead to even more valuable
tips. The program is pulling in the type of high-quality
information that reduces the length of investigations, and
With respect to the new oversight regime, Dodd-Frank
mandated over-the-counter derivatives. We have proposed
substantially all of the core rules to regulate
securities-based frauds. Last year in particular, we
finalized rules regarding product and party definitions,
adopted rules relating to clearing and reporting, and issued
a roadmap outlining how we plan to implement the new regime.
Soon, we plan to propose how this regime will be applied
in the cross-border context. The commission has chosen to
address cross- border issues in a single proposing release,
rather than through individual rulemakings.
We believe this approach will provide all interested
parties with the opportunity to consider, as an integrated
whole, the commission’s proposed approach to cross-border
security-based swap oversight.
Last year, the commission, working with the CFTC and the
Fed, adopted rules requiring registered clearing agencies to
maintain certain risk management standards, and also
established recordkeeping and financial disclosure
requirements. These rules will strengthen oversight of
securities clearing agencies, and help to ensure that
clearing-agency regulation reduces systemic risk in the
Although tremendous progress has been made, work remains
in areas such as credit-rating agencies, asset-backed
securities, executive compensation, and the Volcker Rule.
With respect to the Volcker Rule, the issues raised are
complex, and the nearly 19,000 comment letters received in
response to the proposal speak to the multitude of viewpoints
We are actively working with the federal banking
agencies, the CFTC and the Treasury, in an effort to
expeditiously finalize this important rule. With respect to
all of our rules, economic analysis is critical. While
certain costs or benefits may be difficult to quantify or
value with precision, we continue to be committed to meeting
these challenges, and to ensuring that the commission engages
in sound, robust economic analysis in its rulemaking.
It also has been clear to me from the outset that the
act’s significant expansion of the SEC’s responsibilities
cannot be handled appropriately with the agency’s current
resource levels. With Congress’s support, the SEC’s FY 2012
appropriation permitted us to begin hiring some of the new
positions needed to fulfill these responsibilities.
Despite this, the SEC does not yet have all the
resources necessary to fully implement the law. Enactment of
the president’s FY 2013 budget would help us to fill the
remaining gaps by hiring needed employees for frontline
positions, and also would permit us, importantly, to continue
investing in technology initiatives that substantially and
cost-effectively allow us to improve our ability to police
As you know, regardless of the amount appropriate, our
budget will be fully offset by fees we collect, and will not
impact the nation’s budget deficit. As the commission strives
to complete our remaining tasks, we look forward to working
with this committee and others to adopt rules that fulfill
our mission of protecting investors, maintaining fair,
orderly, and efficient markets, and facilitating capital
Thank you again for inviting me to share with you our
progress to date, and our plans going forward. I look forward
to answering your questions.
JOHNSON: Thank you. Chairman Gensler (ph), please
GENSLER (?): Thank you, Chairman Johnson, Ranking Member
Crapo, and members of the committee. I want to first just
associate myself with Governor Tarullo’s comments about
wishing you well on this Valentine’s Day, but also his
comments about the Administrative Procedures Act. I think
we’ve all benefited the CFTC by 39,000 comments that we’ve
gotten on our various rules.
This hearing is occurring at a very historic time in the
markets, because with your direction, the CFTC now oversees
the derivatives marketplace, not only the futures marketplace
that we’d overseen for decades, but also this thing called
the “swaps marketplace,” that through Dodd-Frank, you asked
us to oversee.
(Inaudible) agencies actually completed 80 percent, not
just proposed, but completed 80 percent of the rules you’ve
asked us to do. And the marketplace is increasingly shifting
to implementation of these common-sense rules of the road.
So what does it mean? Three key things. For the first
time, the public is benefiting from seeing the price and
volume of each swap transaction. This is free of charge on
our Website. It’s like a modern-day ticker tape.
Secondly, for the first time, the public will benefit
from greater access to market that comes from centralized
clearing, and the risk reduction that comes from that
centralized clearing. This will be phased throughout 2013,
but we’re not needed to do any new rules. It’s all in place.
And thirdly, for the first time, the public is
benefiting from the oversight of swap dealers — we have 71
of them that registered — for sales practice and business
conduct to help lower risk to the overall economy.
Now, these swaps market reforms ultimately benefit
end-users. The end-users in our economy, the non-financial
side, employs 94 percent of private-sector jobs. And these
benefit those end-users through greater transparency, greater
transparency starts to shift some information advantage from
Wall Street to Main Street, but also lowering risk.
And we’ve completed our rules ensuring, as Congress
directed, that the non-financial end-users aren’t required to
participate in central clearing. And as Ranking Member Crapo
said, at the CFTC, we’ve proposed margin rules that provide
that end-users will not have to post margin for those
To smooth the market’s transition to the reform, the
commission’s consistently been committed to phasing in
compliance based upon the input from the market participants.
I’d like to highlight two areas in 2013 that we still need to
finish up the rules.
One is completing the pre-trade transparency reforms.
This is so buyers and sellers meet, compete in a marketplace,
just as in a securities and futures marketplace. We’ve yet to
complete those rules on the swap execution facilities and
Secondly, ensuring the cross-border application of swaps
market reform appropriately covers the risk of U.S.
affiliates operating offshore. We’ve been coordinating
greatly on — with our international colleagues and the SEC,
and the regulators at this table. But I think in enacting
financial reform, Congress recognized the basic lesson of
modern finance and the crisis.
That basic lesson is, during a crisis, during a default,
risk knows no geographic border. If a run starts with one
part of a modern financial institution, whether it’s here or
offshore, it comes back to hurt us. That was true in AIG,
which ran most of its swaps business out of Mayfair — that’s
a part of London — but it was also true at Lehman Brothers,
Citigroup, Bear Stearns, long-term capital management.
I think failing to incorporate this basic lesson of
modern finance into our oversight of swaps market would not
only fall short of your direction to this CFTC and
Dodd-Frank, but I also think it would leave the public at
risk. I believe Dodd-Frank reform does apply, and we have to
complete the rules to apply the transactions entered into
branches of U.S. institutions offshore, or if they’re
guaranteed affiliates offshore transacting with each other,
of even if it’s a hedge fund that happens to be incorporated
in an island or offshore, but it’s really operated here.
I’d like us to turn with the remaining minute to these
cases the CFTC brought on LIBOR, because it’s so much of our
2013 agenda. Now, the U.S. Treasury collected $2 billion from
the Justice Department and CFTC fines. But that’s not the key
part of this.
What’s really important is ensuring financial-market
integrity. And when a reference rate, such as LIBOR, central
to borrowing, lending, and hedging in our economy has so
readily and pervasively been rigged, I think the public is
just shortchanged. I don’t know any way to put it.
We must ensure that reference rates are honest and
reliable reflections of observable transactions in real
markets, and that they can’t be so vulnerable to misconduct.
I’ll close by mentioning, as the same way as Chairman Walter
did, the need for resources.
I would say the CFTC has been asked to take on a market
that’s vast in size, and much larger than the futures market
we once oversaw, and that without sufficient funding, I think
the nation cannot be assured that we can effectively oversee
these markets. I thank you, and look forward to your
JOHNSON: Thank you. And thank you all for your
testimony. As we begin questions, I will ask the clerk to put
five minutes on the clock for each member.
Ms. Miller, what steps has the U.S. taken, both at home
and abroad, to complete reforms in a way that makes the
financial system safer, and its “too big to fail” bailout,
and promotes stable economic growth? And what are the
challenges to accomplish this?
MILLER: Thanks for the question. I think the most
important thing that we can do is to restore confidence in
our financial markets and our financial system. And I think
the work that has gone on, post the Dodd-Frank reforms, has
been incredibly important in strengthening our financial
institutions, making sure that they are better capitalized,
that they are more liquid, and that they have a good plan for
failure, should they not succeed.
I don’t think that our reforms are intended to prevent
failure, but I think they are intended to make us much better
prepared, and to make sure that our financial institutions
and the activities that they engage in are much safer and
So we have been working very hard, I think, in the U.S.
and abroad with our international counterparts, to make sure
that we put in place the necessary rules of the road to make
sure these things can happen.
So it’s happening at many levels in the U.S. You’ve
heard of all of the activities that these financial
regulators are engaged in. But it’s also happening in
international forums, where we’re working with our
counterparts to make sure that we have a level playing field.
As far as the challenges, this is a very comprehensive
law. It is one that addresses many parts of our financial
system. I think the number of rulemaking activities,
definitions, studies, and work that were laid out by
Dodd-Frank is quite a big workload.
When I work with these regulators here, I see the same
people in many instances working on a wide range of roles.
They’re working very hard, but they have a pretty big agenda
But I think that the spirit of cooperation is good. I
think entities like the Financial Stability Oversight Council
provide a good forum for working on these things.
JOHNSON: Mr. Cordray, congratulations on issuing a final
Q.M. rule that was well received by both consumer advocates
and the industry. What approach do they (ph) take to design
the final rule to strike the right balance?
CORDRAY: (OFF-MIKE) Thank you, Mr. Chairman. And I
appreciate those observations.
I think we tried to do three things. The first is that
we were very accessible to all parties, with all range of
viewpoints on the issues. The issues were difficult. It’s not
easy to write rules for the mortgage market right now,
because we’re in an unnaturally tight period and the data
from a few years before that was an unnaturally loose period
and we have (ph) some significant issues unresolved, in terms
of public policy. But I think that we listened very carefully
and attentively to what people had to say to us in a — in a
great deal of comments that we received.
I think, secondly, we did go back and try to develop
additional data, so that we could work through the numbers on
our own and understand what kind of effects different
potential approaches would have.
And I think, third, and this was quite meaningful, was
we consulted very closely with our fellow agencies. They have
a lot of expertise and a lot of insight on the kinds of
problems we were addressing and we will ultimately be
examining these institutions in parallel to one another and
the rules need to work for everyone.
We’ll continue to work with the other agencies on
implementation and I do think that that helped us
tremendously. I could point to any number of — of provisions
in the rules that were made better by that process.
JOHNSON: This question is for Mr. Gruenberg, Mr. Curry,
and Mr. Tarullo.
First, I want to thank Senator Hagan for all her hard
work on QRM.
Is there anything in the law that would prohibit QRM
from being defined the same as Q.M. and is that something you
are concerting now that the Q.M. rule is finalized, as Mr.
Cordray just described?
Mr. Gruenberg, let’s begin with you.
GRUENBERG: Thank you, Mr. Chairman.
I don’t believe there is any prohibition in the law, in
regard to conforming QRM with Q.M. . We actually delayed
consideration of the rule-making on QRM, pending the
completion of the Q.M. rule, and I think we’ll now have the
ability to consider the final rule-making on QRM, in light of
that Q.M. rule-making.
JOHNSON: Mr. Tarullo and Mr. Curry, do you agree?
TARULLO: Certainly, Mr. Chairman, I agree with Chairman
Gruenberg that there’s — there’s no legal bar.
And I guess I would just say — just say further that,
as you know, the two provisions had somewhat different
motivations. The Q.M. rule motivated towards protecting the
individual who buys the house and the QRM rule motivated the
risk retention associated with that mortgage and thus,
presumably trying to protect the investment for the — for
Having said that, I think, given the — given the state
of the mortgage market right now, and both you and — and
Senator Crapo have alluded to it. I think we want to be
careful here about the incremental rule-making that we’re
doing not beginning to constrict credit to middle –
lower-middle class people, who might be priced out of the
housing market, if there are — if there’s too much in the
way of duplicate or multiple kinds of requirements at the –
at the less- than highly creditworthy end.
So I think it’s definitely the case that — that on the
table should be consideration of making QRM more or less
congruent with Q.M. .
JOHNSON: Mr. Curry?
CURRY: I share the views of both Governor Tarullo and
Chairman Gruenberg with respect to the — the definition.
I also would concur with Governor Tarullo that it’s
important to look at the cumulative effect of (ph) the issue
that Senator Crapo mentioned when we’re talking about the
mortgage market, issues of competition and the ability to
have the widest number of financial institutions, regardless
of size participating it — in it is something that we’re
very concerned about and paying close attention too.
JOHNSON: Senator Crapo.
CRAPO: Thank you, Mr. Chairman.
Senator Corker has a need to get to another meeting and
I’m going to yield to him (ph).
CORKER: Thank you and I’ll be — thank you very much. I
won’t do this — I’ll do this rarely and be very brief; just
Mr. Gruenberg, we had — we talked extensively, I think,
about orderly liquidation in Title II and I know most people
thought orderly liquidation meant that these institutions
would be out of business and gone. I think, as you’ve gotten
into it, you’ve decided that you’re only going to eliminate
the holding company level.
And what that means is that creditors, candidly, could
issue debt to all the subsidiaries and know that they’re
never going to be at a loss. And I’m just wondering if you’ve
figured out a way to love that, because, obviously, that was
not what was intended.
GRUENBERG: I agree with you, Senator. And as you know,
the approach we’ve been looking at would impose losses –
actually, wiping out shareholders, imposing losses on
creditors, and replacing culpable management.
In regard to creditors, it would be important to have a
sufficient of unsecured debt at the holding company level, in
– in order to make this approach work. We have been working
closely with the Federal Reserve on this issue. Actually,
Governor Tarullo, in his testimony, makes reference to it.
TARULLO (?): Yeah.
GRUENBERG: And I’m hopeful we can achieve an outcome
that will allow us to impose that kind of accountability on
CORKER: It seems like you’d want all of your long-term
debt at the holding company level, so I — I just hope that
you all will work something out that’s very different than
the way it is right now, because creditors — creditors could
easily be held harmless by just making those loans at the
sub-level and that’s — that’s not what anybody intended.
So, secondly, with the FSOC, Miss Miller and Mr.
Tarullo, I know that you’re to identify and to respond to
threats in the financial system; any kind of systemic threat,
and I would just ask the two of you, is there any institution
in America today that, if it failed, would pose a systemic
risk? Any institution?
I think we learned from the financial crisis that the
failure of a large institution can create some systemic
CORKER: But — but you all are to eliminate that, so I’m
just wondering, if any institution in America failed, would
that create systemic risk, because your job is to ensure that
that’s not the case.
MILLER: I believe that all the work that we’ve done and
continue to do is designed to prevent that effect and to make
sure that we have in place rules and regulations that keep
firms from engaging in activities or building their business
models in ways that are going to transmit that type of
CORKER: Mr. Tarullo.
TARULLO: I think — I think, Senator, that it’s, you
know, it’s — it’s a journey and not a single point where you
can say we’ve (ph) addressed the too-big-to-fail issue. I do
think a lot of progress has been made, but I’d also
distinguish between — if I can put it this way;
resolvability without a — a disorderly major disruption to
the financial system on the one hand, and on the other that
the failure of a firm that entails substantial negative
So it’s the difference between bringing the whole system
into crisis on the one hand, not doing so on the other, but
still imposing lots of costs. And — and I do think that the
– there’s complementarity (ph) between the capital rules,
the FDIC resolution process, and the other rules, in trying
to make sure that we’re dealing both with resolvability and
CORKER: I hear what you’re both saying. I — I would
assume, though, that a big part of your role is to ensure
that there’s no institution. I know that you guys have
regulatory regimes that try to keep them healthy, but I
assume, and if I’m — if I’m wrong, that you want to ensure
that there’s no institution in America that’s operating –
that operates that can fail and create systemic risk.
I assume that’s part of your role and, if not, I’d like
a follow- up after the meeting and maybe we’ll ask that again
in — in — in written testimony. I know I — my time is
Let me just close with this. I know the Basel III rules
are — are really complicated, as it relates to capital. And
some people, Mr. Tarullo, have come out and said that we’d be
much better off with a much stronger capital ratio, some
people have said eight percent, and do away with all the
complexities that exist, because many of the — the schemes,
if you will, that lay out the risk really don’t work so well.
I’m just wondering if that wouldn’t be a better solution
to Basel III and that is just have much better ratios, much
stronger ratios, and much less complexity with all of these
rules that so many people are having difficulty
TARULLO: Well, Senator, I guess I would say — and I
know you’re not — you’re not making the — the observation
I’m about to respond to, but it’s been heard as well, the –
the idea that if you somehow don’t — don’t completely like
Basel III or think maybe more should have been done that we
shouldn’t be for Basel III.
I mean, Basel III is an enormous advancement in
improving the quantity and the quality of capital. And those
pieces of it are actually not all that complicated. You know,
making sure that the equity that’s held is real equity that
can be loss-absorbing, and getting it up to a seven percent
level, effectively, rather than as low as two percent, which
that level was pre-crisis.
So I think those are pretty straightforward. Whether
more should be done, you know, whether, as Chairman Gruenberg
would just say, for some of the largest institutions, we need
some complementary measures. We certainly think, for (ph)
systemic risk, you do. I agree with that, but I — but I
actually think it’s pretty straightforward.
And I’d also say that, in the U.S. at least, with the
Collins Amendment, we are now in a position to have a
standardized floor, with standardized risk weights, not
model-driven risk weights, but standardized risk weights,
which applies to everybody. And my hope would be that other
countries actually see the substantial merit in this, in
having a much simpler floor and then, above that, for the
biggest institutions, that’s where we have the model-driven,
supplemental capital requirement; not displacing the simple
one, just — just supplemental.
CORKER: Thank you. Thank you very much.
JOHNSON: Senator Reed.
REED: Thank you very much, Mr. Chairman.
Chairman Gensler, I understand that you recently had a
roundtable on the futurization of swaps and one of the
participants indicated that, because of the rule-making
process has not been fully completed, many people are moving
away to avoid uncertainty into the futures markets.
Can you tell us what risks might be posed by that, and
also, how you’re going to respond to finalizing these rules?
And I know you indicated your budget issue is — is probably
a — a critical factor in that. You might even comment on
GENSLER: Thank you, Senator.
I think what we’re seeing in the derivatives marketplace
is somewhat natural. The futures marketplace has been
regulated for seven or eight decades and for transparency and
risk reduction through clearing. Swaps marketplace developed
about 30 years ago, and in fact, is between 80 and 90 percent
of the market share, in a sense, of the outstanding
So as Congress dictated we bring transparency and
central clearing to the unregulated market, there’s been some
relabeling, some re-shifting, as you say. Some people call
The good news is whether it’s a future or a swap, we
have transparency after the transaction and in futures before
the transaction occurs. We have central clearing to lower the
risk and insure access.
We — we do need to finish the rules in the swaps
marketplace around these things called swap execution
facilities and the block rule.
We also, in the futures world, have to ensure that we
don’t lose something, that — that was — was once swaps
moves over, it calls itself futures, and somehow the
exchanges lower the transparency. We wouldn’t want to see
But I think whether it’s called a future or a swap,
we’re in better shape than we were before 2008. I thank you
for asking about resources. We desperately need more
resources. It’s a hard ask when Congress is grappling with
the budget deficits, I know.
REED: Commissioner Walter, this is a related question
because it’s an international market and both you and
Chairman Gensler are working on the issue of cross-border
swaps and in order to coordinate with international
regulators so that there is a consistent rule and it sort of
harps back to what Governor Tarullo said about it would be
great if there was a Collins (ph) rule across the board,
uniformity, simple uniformity helps sometimes.
Can you comment upon what you and, both, Chairman
Gensler are doing with respect to these coordination efforts,
with respect to the cross-border swaps?
WALTER: Absolutely. Thank you, Senator Reed.
It is a tremendously important issue, perhaps more
important in this market than any other because this market
is truly a global marketplace. Unlike other markets that we
regulate which only have certain cross-border aspects, the
majority of what goes on in this marketplace really does
cross national lines.
We have worked very closely not only with the — the
standard of multi-national bodies such as IASCO, the
International Organization of Securities Commissions, but we
are working very actively, both the CFTC and the SEC, with
the regulators around the globe who are in the process of
writing the same rules.
They are at somewhat different stages than we are. Some
are still at the legislative stage. Some are just entering
the rule- writing stage. But we all acknowledge the
importance of making sure that the business can take place
across national boundaries and that we remove unnecessary
First of all, we want no incompatibility or conflict,
but then we want to look at ways that we can make our rules
And we are both looking at techniques such as what we
call “substituted compliance,” where you can have an entity
that’s registered in the United States but complies with its
U.S. obligations by complying with its home-country laws.
We think this will really ease the burdens, and we’re
looking at all of it very carefully.
REED: Chairman Gensler, do you have any comments?
GENSLER: I — I just — I think we’re in far better
shape than we were two years ago if we had this hearing or
even one year ago, because Europe — the European Union now
has a law called AMIR (ph), Canada and Japan and we, so four
very significant jurisdictions between which we probably have
85 or 90 percent of this worldwide swaps marketplace.
We’re ahead of them in the rule-writing stage, but with
some developments. Last week, even Europe now got their rules
through it was a very important process through the European
Parliament. So I think that we’re — we’re starting to align
REED: Let me just make a final comment because my time
You said one of the Dodd-Frank initiatives was to take
bilateral derivative trades and make them — put them on
clearing platforms so that they’re multilateral.
That helps, but it also engenders the possibility of
systemic risk from the large concentration. That means that
the collateral rules, the — the — all the rules have to be
I — I just want to leave that thought with you that you
have, you know, that’s something that should be of concern to
both CFTC and SEC, that these central clearing platforms are
so grounded with capital, collateral, however you want to
describe it, lack of leverage, that they do not pose a
systemic risk. I think you understand that.
GENSLER: We do and we take that theory seriously and we
consult actively with the Federal Reserve and international
regulators as well on that.
REED: Thank you very much.
JOHNSON: Senator Crapo?
CRAPO: Thank you very much, Mr. Chairman.
I — I first want to get into the issue of economic
analysis. As I know you’re all aware, the president has
issued two Executive Orders requiring the agencies to conduct
economic analysis and the Office of Management and Budget has
issues directives and guidance on how to implement that.
But ironically, independent agencies such as yours are
not subject to those requirements, or to those Executive
And in — I — I know that each or your agencies has
said that you’re going to follow the spirit of those orders,
but in December of 2011, the GAO found that, in fact, in the
billmaking under Dodd-Frank, the agencies were not following
the guidances put out by OMB.
And in its December report of this year, it found that
the OCC and the SCC were getting there but that the remaining
agencies still, a year later, were not following the key
guidances in the OMB — the OMB has put out for economic
The GAO, frankly, I think, was quite critical about that
as well as the fact that it found some coordination among the
agencies but that the coordination was very informal in
nature and almost none of the coordination looks at the
cumulative burden of all the new rules, regulations, and
So my first question I really ask is of all of you. Can
I have your commitment that each of your agencies will act on
GAO’s recommendation to incorporate OMB’s guidance on
cost-benefit analysis into your proposed and final rules as
well as your interpretive guidance?
I guess I would not necessarily go through and ask each
one of you for an answer, but if there was any agency here
who will not commit to comply with the GAO’s recommendation,
could you speak up?
(UNKNOWN): I’m sorry, if — I — I — I will confess not
being familiar with the December 2012 recommendations,
I mean, and certainly we — we do economic analysis both
on a rule-by-rule basis and more generally. I — I — and
that — to that we are committed.
I don’t know that we’re committed to everything that
might be in there, and I just want — want to leave you with
that impression. So I’d prefer to be able to get back to you
after the hearing.
CRAPO: OK, well, I’ve got the report here. I’m sure you
could get a copy of it.
And what the GAO was saying is that it’s the OMB
guidances implementing the president’s executive orders on
this issue, and each of the agencies tells the GAO that their
doing — doing what you just said to me, that you’re –
you’re doing economic analysis.
The GAO is saying that you’re not doing economic
analysis the way that the OMB has directed that it be done
according to the guidance. So the request is that you commit
that you will follow the GAO recommendation, that you simply
comply with the OMB guidances.
CRAPO: All right, I’m going to take that as an agreement
that you’ll do that.
(UNKNOWN): Can I just — I’m sorry, I didn’t want to
CRAPO: I guess maybe not.
(UNKNOWN): Well, no. I just want to make sure, just as
Governor Tarullo, that we didn’t leave you with anything but
the best impressions.
We’ve issued — our general counsel and our chief
economist issued guidance to the staff on all their
rulemakings to ensure that our final rules do what you’re
I think the GAO report also is looking at some proposals
that came before, so we had to sort of, you know, address
what the recommendations were, and there were proposals
We’re also in a circumstance where our statute has
explicit language about cost-benefit considerations, and that
language we have is a little different than other agencies.
So if we look to Section 15(a), I think, of the
Commodity Exchange Act for our guidance on cost-benefit, but
I believe and I understand that our guidance to the staff is
consistent with the OMB but recognizing we have to comply
with the statute that we have.
CRAPO: I don’t think that the statute that you have,
though, stops you from honoring and meeting the OMB
guidances. GAO, as I understand it, looked at 66 rulemaking
all to get — altogether that happened among the agencies
last year, and that’s a pretty significant amount of the
rulemakings that were — were there.
Well, let — let me get at it — this in another way.
Can each of you commit that you will provide the Committee
with a description of the specific steps your agency is
taking to understand and quantify the anticipated cumulative
effect of the Dodd-Frank rules?
Any problem with that one?
(UNKNOWN): Sure, we’re using data that’s available and
where the quantification possibilities are, so absolutely.
CRAPO: All right. I see my time is up. I got some other
issues to get into with you, but I appreciate this.
And I just want to conclude by a statement. I think
GAO’s report was very clear that the kind of economic
analysis that we need is not happening. And that’s why I’m
And — and so although you can explain that you have –
have other regimes or statutory mandates, the issue here is
getting at proper economic analysis as we implement these
rules. And I think GAO’s report is — is pretty damning in
terms of the results they found on the 66 rules that they
JOHNSON: Senator Menendez.
MENENDEZ: Thank you, Mr. Chairman.
Thank you to all for your testimony.
I — Mr. Curry, I — I wanted to discuss the botched
foreclosure review process that I held a hearing on more than
a year ago in the Housing Subcommittee.
And in fairness, let me start off by saying I realize
that you were not the Controller when the foreclosure review
program was designed. But as the follow-on to that period of
time, you’re nevertheless tasked with cleaning up what I
consider to be a mess.
And basically what was done here was is that we — we
replaced the process with an $8.5 billion settlement that
won’t really determine which borrowers were wrong or not.
And despite keeping their legal rights to sue the banks,
most borrowers don’t have the financial means to litigate
their cases if they feel that the compensation was
So considering this point, isn’t it unfair to not review
the files of those turning in packages if they still want a
– a review, and would you consider mailing each borrower a
check but giving them the option to return that check in
favor of a full review of their file?
MENENDEZ: And as part of the answer, I was just giving
you the third part of it, how is it fair to tell a borrower
who had, for example, $10,000 in improper fees, a charge to
them, that they’re going to get $1,000 because that’s the
amount that all borrowers in the improper-fee category will
So I’m trying to — I’ve been at this for over a year.
And I am concerned about how we are coming to the conclusion
here. So give me some insight.
CURRY: Thank you, Senator Menendez. I share your
concerns about the entire process, and its ability to beat
its original stated objectives.
What happened here is that the complexity of the review
process was much larger than was anticipated in the
beginning. It consumed considerable amount of time with very
little in terms of results.
And our concern was that having over almost $2 billion
being spent as of November of this year, without being able
to even issue the first checks, that the process was flawed,
and that the best — or equitable result was to estimate an
appropriate amount of settlement, and to make as equitable a
distribution as possible, taking into account the level of
harm, and the borrower characteristics.
Settlement isn’t perfect, but we believe it’s the best
possible outcome under the circumstances.
MENENDEZ: On the specific questions that I asked you,
though, is it possible for those who want a review of their
files to get a review if they’re willing to forego, or at
least the check?
CURRY: That is not an element of the settlement that
MENENDEZ: So the bottom line is, they will be foreclosed
from a review?
CURRY: No. Part of the settlement is — and this was the
impetus for having the $5.7 billion worth of assistance for
foreclosure relief, as part of the settlement. We’ve made it
clear that those funds should be prioritized, and that they
should be directed towards the (inaudible) population, and
towards those individuals with the greatest risk of
foreclosure. We want people to stay in their homes.
MENENDEZ: Well, we want people to stay in their homes,
too. The question is, what recourse do they have here, other
than pursuing their own litigation?
CURRY: The way…
MENENDEZ: They have none through your process. That’s
what I want to get to.
CURRY: The way the settlement is structured, it’s — we
will try to allocate the payments to the most grievous
MENENDEZ: But you won’t know that without a review of
CURRY: We have a — done an analysis, preliminary
analysis of the level of harm in the total (inaudible)
population. We think we have a fair estimate of, overall, who
would be harmed. But we do recognize, as you’ve stated, that
certain individuals may not get fully compensated for
MENENDEZ: Well, we look forward to reviewing that with
you furthermore. Lastly, Secretary Miller, the president
called for something that both Senator Boxer and I have
promoted, and offered the Responsible Homeowners’ Refinancing
Act. I said it’s past time to do it.
Could you tell the committee the value to individuals,
as well as to the economy, of permitting refinancing at this
MILLER: Thank you for that question. The population of
homeowners who, today, are underwater on their mortgages –
we know that’s about 20 percent of all homeowners — who have
not been able to refinance in a low interest-rate
environment, is a missed opportunity we think to reach
homeowners who should be able to benefit from the spread of a
high interest-rate loan that they may hold, versus where
rates are today.
So we would very much support any assistance that you
can provide to help reach that population. We do have a
program that is reaching homeowners whose mortgages happen to
be held or guaranteed by the GSEs, it’s called HARP. And
we’ve seen very good take-up in the refinancing assistance
we’re providing to underwater loan holders in that
But it is the other group of homeowners who do not have
a mortgage held at the GSEs that have not been able to take
advantage of this. So we think that it is a priority. It
would be good for homeowners. It would be good for the
mortgage market. It would be good for the economy.
JOHNSON: Senator Coburn?
COBURN: Mr. Chairman, thank you. I’m glad to be on this
committee. I just have one question. I will submit the rest
of my questions for the record. But this is to Mr. Cordray.
You mentioned in your testimony financial literacy that
needs to be approved. I wonder if you are aware of how many
financial-literacy programs that the Congress has running
CORDRAY: I couldn’t tell you exactly, but I can tell you
that by law — I’m the vice chair of the Financial Literacy
Education Commission. And we are coordinating with other
agencies. There are, you know, 15 or 20 other agencies. And
it does feel to me that one of the issues has been a sort of
piecemeal approach to this problem.
And we have been given substantial responsibilities, as
a new consumer agency in this area. And I’d like to work with
– both with the Congress and with our fellow agencies as
we’re doing through what’s called the FLEC that I mentioned,
and also with state and local officials.
When I was a country treasurer, and then state treasurer
in Ohio, we were able to get the legislature to change the
law, such that every high school student in Ohio now has to
have personal finance education before they can graduate.
That’s something we used to do years ago through home
economics curriculum and the like.
And I’ve seen textbooks — mathematics textbooks — from
the teens and twenties, where a lot of the questions asked
were put in terms of household budgeting and the types of
financial issues that were around, particularly farming and
other communities. I think that’s something that we’ve lost.
It’s something that has weakened our society, and it’s
something that we need to focus on.
But I would agree with you, there’s a very sort of
scattered and desperate approach right now, and I think it’s
not been optimal.
COBURN: Boy, it’s pretty ironic the federal government’s
teaching Americans about financial literacy, given the state
of our economic situation. There are 56 different federal
government programs for financial literacy.
And so what I would hope you would do in your position
is really analyze this, and make a recommendation with
Congress after looking at the GAO report on this, and tell us
to get rid of them, or get one, but not 56 sets of
administrators, offices, rules, and complications, and
requirements that have to be fulfilled by people to actually
implement financial literacy.
CORDRAY: I appreciate the comment. I’d be glad to follow
up with you, and work and think about this. You know, as we
coordinate with one another, that helps minimize some of the
problem of this.
We’ve worked with the FDIC, particularly on their Money
Smart curriculum, which is a terrific curriculum. We don’t
need to be reinventing the wheel. We’re working with them now
on creating a new module for older Americans and seniors who
face some specific issues. I’m sure your office hear about
them quite a bit.
But I’d be happy to work with you on that. And I agree
with the thrust of your question.
COBURN: My only point is, with 56, if we start another
one, or another two or three, and don’t change those, we’re
throwing money out the door.
CORDRAY: I would agree with that. Thank you.
JOHNSON: Senator Brown?
BROWN: Thank you, Chairman Johnson. Governor Tarullo,
I’d like to talk to you for a moment. Three or four years
ago, in 2009, you said that, I quote, “Limiting the size or
interconnectedness of financial institutions was more a
provocative idea than a proposal.”
And you said that in the context that there wasn’t –
there weren’t particularly any well-developed ideas out.
Since then, as we’ve talked, I’ve introduced legislation to
limit the non-deposit liabilities of any single institution
relative to domestic GDP.
I’ve worked with Senator Vitter on that proposal. And we
are considering to see, I think, more bipartisan support.
Tell me how you have — what your thinking has evolved. Your
more recent statement seems like is has — tell me how your
thinking’s evolved from 2009, and why that is?
TARULLO: You’re absolutely right, Senator Brown, that my
observation back in 2009, I think, was that people would say
something like, “Break up the banks.” But there wasn’t a plan
behind it that allowed people to make a judgment as to
whether it would address the kind of problems in “too big to
fail,” and others in the crisis, and what costs associated
with it would be.
As you say, since then, a lot of people have generated a
lot of plans. And I think they’d probably fall into three
categories. The first category is really kind of a variant on
things we already do; strengthen the barriers between
intra-depository institutions and other parts of bank-holding
companies, make sure that some activities are not taking
place in the banks, make sure that there’s enough capital in
the rest of the holding company, even if they get into
trouble independently. Don’t just think in terms of
protecting the IDI itself.
Interestingly, those are a big part of the — some of
the European proposals, like the Lickenen (ph) and Victors
(ph) proposals. As I say, to a considerable extent, the U.S.
has already gone down that road. Indeed, Dodd-Frank
strengthened some of those provisions.
The second — the second set of proposals is what I’d
characterize as a functional split. So saying that there are
certain kinds of functions that cannot be done within a
bank-holding company. Obviously, Glass-Steagall was exactly
that kind of approach. It separated investment banking from
And here’s — here’s where there are some proposals out
like this now. They sort of vary. Some of them would allow –
some of them allow underwriting, but not market-making.
Others might say, you know, nothing — nothing at all other
than commercial banking.
I think there, the issue — the issues are kind of on
both sides. On the one hand, we have to ask ourselves if we
did that, would it actually address the problem that led to
As Senator Johnson was indicating in his introductory
remarks, it was the failure of Bear-Stearns, a broker dealer,
not a bunch of IDIs or relationships with IDIs that
precipitated the acute phase of the crisis.
And the second issue, obviously, is what would be lost.
Are there valuable roles played when, for example, an
underwriter also makes market in the securities which it
underwrites? And I think most people would conclude that
TARULLO: The third kind of example is — is embodied in
your legislation, and I think in some other proposals, which
focuses on the point that I tried to make at the close of my
introductory oral remarks, that what I think of as the
unaddressed set of issues; the unaddressed set of issues of
large amounts of short-term, non-deposit, runnable funding.
And I think here, speaking personally now, my view is
that’s the problem we need to address. I think your
legislation takes one approach to addressing it, which is to
try to cap the amount that any individual firm can have, and
thereby try to contain the risk of the amplification of a
There are other complementary ideas, such as, as
restricting the amounts based on different kinds of duration
risk, or having higher requirements if you have more than a
There are even broader ideas, such as placing uniform
margins on any kind of securities lending, no matter who
participants in them. I think from my point of view that the
importance of what you have done is to draw attention to that
issue of short term, non-deposit, runnable funding. And
that’s the one I think we should be debating in the context
of Too Big Too Fail, and in the context of our financial
system more generally.
BROWN: Thank you.
And Mr. Chairman, if I could, just a couple of quick
And thank you for that evolution in your thinking and
the way you explained it. When Senator Kaufman and I first
introduced that amendment on the Floor in 2010 it had
bipartisan support, but it obviously fell short. We have seen
from columnists like George Will, a Wall Street Journal op-ed
columnist, and a number of others sort of across the
political spectrum, including colleagues that are well more
conservative or way more conservative than I am on this, and
in this body, come around to looking at this pretty
favorably. So we’ve seen a lot of momentum. And I appreciate
Second, I wanted to bring up really quickly, Mr.
Chairman, and I will not end with a question. But last week,
Governor, I received the Fed’s response, the letter regarding
imposition of Basel III on insurance companies. Senator
Johanns and I sent, with 22 of our colleagues last year,
Senators Johnson and Crapo have sent a letter yesterday to
the Fed on the insurance issue. And you and other fed
officials have stated several times you believe the proposed
adequately accommodates the business of insurance. We
respectively disagree. I won’t ask for a response now, but we
will work with you on that, if we could.
Thank you, Mr. Chairman.
JOHNSON: Senator Heller? And welcome to the committee.
HELLER: Thank you very much, Mr. Chairman, and to the
Ranking Member. It’ll be a pleasure to serve with you. And
thanks for making me part of this team. And I want to thank
those who have testified today. A lot to learn. I guess
there’s two messages. This takes a team to solve these
problems that we have today. And two, I do have a lot to
I want to concentrate my comments today more on
consolidation. We’ve had massive consolidation in the banking
industry in Nevada. I come from the state with the highest
unemployment, highest foreclosures, highest bankruptcies. And
I think the health of the banking industry reflects the
health of the state in its current position. From about a
30,000 feet level looking down at this, we only have 14
community banks left in Nevada. We have — only have — 23
credit unions left in Nevada. Eighty-five percent of all
deposits are now concentrated in large banks. And 31 percent
of Nevadans are unbanked or underbanked, which is the highest
percentage in the country.
Our housing, as Ms. Miller, you mentioned, that
underwater mortgages are about 20 percent nationwide. It’s
about 60 percent in Nevada. So we’re in a tough situation
here and I’m concerned about consolidation.
My question, and I see a lot of you writing notes and I
appreciate that, but what does this consolidation do? How
does it help Nevadans get these loans. If the small banks –
one of you testified, I can’t remember which one it was –
that 50 percent of the small loans to businesses, to home
mortgages, to car loans, come from these community banks.
With the loss of community banks — and let me make one
more point before I raise the question. And that is that the
banking association feels in Nevada that if you have deposits
of less than $1 billion, that you’re probably going away.
Less than $1 billion, do you agree with that statement? And
two, how does it help Nevada? How does it help Nevada to have
this lack of financial opportunities and to consolidate in
GRUENBERG: Thank you, Senator.
Just on the final point you made in terms of needing a
certain of deposits or assets to be viable in the banking
system, this is actually one of the issues we did look at in
the study we did, looking at the experience of community
banks over the past 25 years. And we tried to look closely at
that particular issue, because there’s a lot of talk about
that sort of thing.
And for what it’s worth, based on the data that we
analyzed, we did not find a lot of economies of scale once
you get over $300 million in assets. So the notion that a
community bank has to be at $1 billion in assets, for
example, in order to be viable in the banking market at least
wasn’t proved out by the analysis we did.
And you raise, you know, important points in regard to
Nevada’s particular situation. You know, nationally Nevada
had rapid expansion in commercial real estate and that’s
really I think drove a lot of the developments there.
Hopefully, you’ve worked through the worst of that. That was
not typical of the rest of the country.
So then I think it’s fair to say Nevada was particularly
impacted there. I think for the surviving banks, one, it’s a
tribute to the work they did to manage their way through
this. And I think it’s fair to say they are deserving of
particular attention and support going forward, because there
is a particular role that community banks play in terms of
credit availability. That was the point I made earlier.
That’s important, because the particular niche for small
banks, as you know, is small business lending, which tends to
be labor intensive and highly customized. It’s the sort of
lending that the large institutions, who are interested in
standardized products that they can offer in volume aren’t
necessarily interested in providing. So the community banks
really have a critical role in filling that niche in the
It looks like you have a comment, Mr. Curry?
I’ve been a community bank supervisor at the state and
federal level for 25 years, over 25 years. And I saw first
hand in New England the importance that community banks and
their ability to help dig out of severe recession. So I share
your concerns and also your commitment to community banks.
I think as supervisors we can play a role in whether its
rulemaking or in the manner in which we actually supervise
and examine these banks to eliminate unnecessary burden. It’s
something that we’re committed to doing at the OCC where we
have over 1,600 institutions.
And the supervisory process I think for smaller banks is
– when the examiners talked to CEOs and lending officers –
is actually an ability to share best practices and help to
improve the performance at community banks.
HELLER: Thank you.
Mr. Chairman, thank you very much.
JOHNSON: Senator Warren?
WARREN: Thank you very much, Mr. Chairman. Thank you,
Ranking Member. It’s good to be here.
And thank you all for appearing. I sat where you sat.
It’s harder than it looks. I appreciate your being here.
I want to ask a question about supervising big banks
when they break the law, including the mortgage foreclosures,
but others as well. You know, we all understand why
settlements are important, that trials are expensive and we
can’t dedicate huge resources to them. But we also understand
that if a party is unwilling to go to trial, either because
they’re too timid, or because they lack resources, that the
consequence is they have a lot less leverage in all of the
settlements that occur.
Now, I know there have been some landmark settlements,
but we face some very special issues with big financial
institutions. If they can break the law and drag in billions
in profits, and then turn around and settle, paying out of
those profits, they don’t have much incentive to follow the
It’s also the case that every time there is a settlement
and not a trial, it means that we didn’t have those days and
days and days of testimony about what those financial
institutions had been up to.
So the question I really want to ask is about how tough
you are about how much leverage you really have in these
settlements? And what I’d like to know is, tell me a little
bit about the last few times you’ve taken the biggest
financial institutions on Wall Street all the way to a trial?
CURRY: To offer my perspective…
CURRY: … of a bank supervisor? We primarily view the
tools that we have as mechanisms for correcting deficiencies.
So the primary motive for our enforcement actions is really
to identify the problem, and then demand a solution to it on
an ongoing basis.
WARREN: That’s right. And then you set a price for that.
I’m sorry to interrupt, but I just want to move this along.
It’s effectively a settlement. And what I’m asking is, when
did you last take — and I know you haven’t been there
forever, so I’m really asking about the OCC — a large
financial institution, a Wall Street bank, to trial?
CURRY: Well, the institutions I supervise, national
banks and federal thrifts, we’ve actually had a fairly fair
number of consent orders. We do not have to bring people to
trial or …
WARREN: Well, I appreciate that you say you don’t have
to bring them to trial. My question is, when did you bring
them to trial?
CURRY: We have not had to do it as a practical matter to
achieve our supervisory goals.
WARREN: Ms. Walter?
WALTER: Thank you, Senator.
As you know, among our remedies are penalties, but the
penalties we can get are limited. And we actually have asked
for additional authority — my predecessor did — to raise
penalties. But when we look at these issues — and we truly
believe that we have a very vigorous enforcement program –
we look at the distinction between what we could get if we go
to trial, and what we could get if we don’t.
WARREN: I appreciate that. That’s what everybody does.
And so, the really asking is, can you identify when you last
took the Wall Street banks to trial?
WALTER: I will have to get back to you with the specific
information, but we do litigate and we do have settlements
that are either rejected by the commission, or not put
forward for approval.
WARREN: OK. We’ve got multiple people here. Anyone else
want to tell me about the last time you took a Wall Street
bank to trial?
You know, I just want to note on this, there are
district attorneys and U.S. attorneys who are out there every
day squeezing ordinary citizens on sometimes very thin
grounds, and taking them to trial in order to make an
example, as they put it. I’m really concerned that Too Big
Too Fail has become Too Big For Trial. That just seems wrong
If — if I can, I’ll go quickly, Mr. — Chairman
Johnson, I have one more question I’d like to ask and that’s
a question about why the large banks are trading at below
We all understand that book value is just what the
assets are listed for, what the liabilities are and that most
big corporations trade well above book value. But many of the
Wall Street banks right now are trading below book value and
I can only think of two reasons why that would be so.
One would be because nobody believes that the banks
books are honest or the second would be that nobody believes
that the banks are really manageable. That is that they are
too complex either for the — their own institution to manage
them or for the regulators to manage them.
And so the question I have is what reassurance can you
give that these large Wall Street banks that are trading for
below book value. In fact, are adequately transparent and
adequately transparent and adequately managed.
Governor Tarullo or (inaudible).
TARULLO: So there — there’s — there’s certainly
another reason we might add to your list, Senator Warren,
which is investor skepticism as to whether a firm is going to
make a return on equity that is in excess of what the
investor regards as the — the value of the individual parts.
And so I think what — what you would hear analysts say
is that in the wake of the crisis, there have been issues on
just that point surrounding first, what the regulatory
environment’s going to be, how much capital’s going to be
required, what activities are going to be restricted? What
aren’t going to be restricted.
Two, for some time there have been questions about the
– the franchise value of some of these institutions. You
know the — the crisis showed that some of the so-called
synergies were not very synergistic at all and in fact, there
really wasn’t the potential at least on a sustainable basis
to — to make a lot of money.
I — I think what, though — and — and part of it, I
think, it probably just the economic — the — the
environment of economic uncertainty.
I think that in some cases, we’ve — we’ve seen some
effort to get rid of large amounts of assets at some of the
large institutions. It is indirectly in response to just this
point, that some of them I think have concluded that they are
not in a position to have a viable, manageable, profitable
franchise if they’ve got all of the entities that they had
And so, a couple of them, as I say, have actually
reduced or in the process of reducing their balance sheets.
The other thing I — I would note, is you’re absolutely
right about — about the — about the difference there. The
difference actually is the economy has been improving and
some of the — some of the firms have built up their capital.
You’ve seen that difference actually narrowing in — in a
number of cases as they seem to have a better position in the
view of the market from which to proceed in a — in a more
WARREN: Good. Well I — I appreciate it and I apologize
for going over, Mr. Chairman. Thank you.
JOHNSON: Senator Hagan?
HAGAN: Thank you, Mr. Chairman and Mr. — Chairman
Johnson, I appreciate your comments on QRM earlier and I — I
did want to talk briefly about that issue.
For — for the U.S. housing market to continue on its
path to recovery, consumers, lenders and investors need
clarity regarding the boundaries of mortgage lending. And the
recent action by the CFPB to finalize rules implementing the
ability to repay provisions of Dodd- Frank was, I think, an
important step towards certainty and access.
And now that the CFPB has successfully finalized its
work on the qualified mortgage definition, I urge you work
quickly to finalize the QRM definition in a way that ensures
responsible borrowers have an ongoing access to prudent,
sustainable mortgages that for decades have been the
cornerstone of a stable and strong U.S. housing market.
And earlier this week, we saw data showing that home
loans that would be exempt from the ability to repay
requirements and the proposed risk retention standard. Even
with a 10 percent down payment requirement made up less than
half the market in 2010. And importantly, it should also be
noted that these loans rarely went into default.
Now that Q.M. is finalized, can you assure me that
you’re agencies will work diligently to complete a QRM rule
in a manner consistent with that legislative intent?
And Mr. Curry, Gruenberg, Tarullo, Walter, Miller,
anything to — to add on that? I’d love your thoughts.
(UNKNOWN): Senator Hagan, we view the QRM rule making
risk retention rule, making process an important one with
Q.M. in place, we’re looking forward to — to adopt the
appropriate regulation as quickly as possible.
HAGAN: Quickly as possible is defined as when?
(UNKNOWN): I think Governor Tarullo mentioned earlier,
we expect to wrap up most of the Dodd-Frank rule making this
(UNKNOWN): Oh, I — would hope on that one would be
sooner than the end of the year.
HAGAN: The sooner the better.
(UNKNOWN): Because — because the Q.M. — Q.M. coming
out, Senator, really now does allow us to go, I think, in
just — and finish it. there — most of the — most of the
other issues, you know, the way these processes work is at a
– at a staff level people go through all the various issues
and they try to either work them through or present them to
the — the — the — their commissioners or governors for a
There — most of that process is already proceeded so
there are like a couple of things that are going to have to
be considered by the people at this table and our colleagues
in our various agencies. But it — it really was having Q.M.
final which — which lets us now go to completion.
Under — Secretary Miller, at the request of the FSOC,
the OFR has been studying the asset management industry. And
this study is intended to help the FSOC to determine what
risk, if any, this industry poses to the U.S. financial
system and whether any such risk are best addressed through
designation of asset managers as non-back — bank SIFIs (ph),
obviously, systemically important financial institutions.
My question is can you talk about the transparency of
the process and will the results of the analysis be made
public and will interested parties be provided the
opportunity to comment formally on the results?
MILLER: Thank you.
As you are away, the FSOC has some responsibilities to
designate nonbank financial institutions. In the course of
doing that in April of 2011, we published some criteria for
exactly how that activity would proceed.
At the time, we said that asset managers are large
financial institutions but they appeared different than some
of the other financial institutions we are looking at and we
took that off the table to go off and do some additional
work. So the OFR has been doing that work, has been working
with the market participants as well as members of the FSOC
to complete that.
I expect that if there is an — if there is a plan to go
forward with designation on an asset manager or an activity
of an asset manager, there would have to be further
publication of the criteria for doing that and — and the
terms of which that would be considered. So we have been
clear that we would be transparent and public about that.
But when you said we took it off the table, what did you
mean by that?
MILLER: We meant that we set it aside from the criteria
that were established at the time for nonbank financial
institutions to say that we wanted to study the asset
management industry further to learn more about the
activities and risk that they might present.
HAGAN: And will the FSOC provide the public with an
opportunity to comment on any metrics and thresholds relating
to the potential designation of asset management companies as
nonbanks systemically important financial institutions prior
to the — if — if you went to the point prior to any
designation of — of such company?
MILLER: Well, I can’t speak for all the members of the
FSOC and what they would want to do, but I think that that
would be a reasonable course if — if we move forward in that
HAGAN: Thank you Mr. Chairman.
JOHNSON: (OFF-MIKE) Senator Manchin?
MANCHIN: Thank you, Mr. Chairman.
And first I want to say — start by saying how excited
about being a new member of the Senate Banking Committee with
all my colleagues and look forward to working with you all.
And I want to thank both you, Chairman Johnson and Ranking
Member Crapo, my — my good friend for allowing me to be part
And I would like to start out by saying in West
Virginia, you know we have an a lot of community banks that
– that have basically really stable and done a good job. But
they’re caught up in this, if you will, the whole banking
changes and regulations.
And with that being said, I know there’s been some
things that have helped by the Dodd-Frank, but most — I
think most of the community banks believe this has been very
onerous on them.
Federal Reserve Board Governor, Elizabeth Duke, recently
gave a speech in favor of the community banks where she said
that one-size- fits-all regulatory environment makes it
difficult for community banks and at hiring compliance
experts (inaudible) put an enormous burden on the small
She also went on to say, hiring one additional employee
would reduce their return on assets by 23 basis points.
Now her end quote for many small banks, in other words,
13 percent of the banks with assets less than $50 million,
these are the banks that did not cause this problem that we
got into in 2008. But they’ve been lumped in with all the bad
actors, if you will, and all the bad practices.
And what we’re saying is on that, how are you all –
because you all, if I look across this and me being brand new
to the committee, you pretty much have every aspect of
regulations, how are you dealing with that?
And anybody can start, but Mr. Gensler?
GENSLER: Well I’d just say Congress gave us the
authority to exempt what Congress said was small financial
institutions, anything less than $10 billion in size from the
central clearing requirement. We went through a rule making
and we — we did just that, we exempted…
MANCHIN: I’m saying…
GENSLER: … about 15,000 institutions from that. Now we
don’t oversee the banks, but we did our share on the
MANCHIN: And the only thing I can say that is — that
you — you could, but they’re just saying to comply with the
massive amount of paperwork regulations and they people they
would have to hire to do that when they were not at fault and
I think every — they’re saying this across the board.
GENSLER: I was just saying what the CFTC did, we just
exempted them from the one provision that, you know, Congress
gave us the authority.
MANCHIN: Anybody else? Have you — anybody else feel
like exempting them? Senator?
I’d be happy to mention, so on the mortgage rules that
we just completed they qualified mortgage rule and our
mortgage servicing rules are the most significant substantive
rules. We were convinced as you say, and I’ve said it many
times, that the smaller community banks and credit unions did
not do the kinds of things that caused the crisis and
therefore, we should take account of that and protect their
lending model as we now regulate to prevent the crisis from
On the servicing rules, we exempted smaller services
from having to comply with big chunks of that rule in
consultation with — with people. And on the qualified
mortgage rule, we’ve done a reproposal that would allow
smaller banks that keep loans in portfolios, many of them do,
to be deemed qualified mortgages and I think that that’s
quite important. It’s been well received and we’re looking to
finalize that proposal.
MANCHIN: Thank you.
Since my time is short, I’d like to ask this question
too and maybe people haven’t — Glass-Steagall was put in
place in 1933 to prevent exactly what happened to us. It was
in place, I think for approximately 66 years until it was
repealed. Up until the ’70s, it worked pretty well. We
started seeing some changes in chipping away with new rules
that took some powers away from Glass-Steagall. And then we
finally repealed in 1999, and the collapse of 2008. How do
you all — I mean the Volcker Rule, and I know it doesn’t do
what the Glass-Steagall does, but why wouldn’t we have those
And if it worked so well for so many years, why do you
all not believe it’s something we should return to, or look
(UNKNOWN): Let me — let me take a shot at that,
Senator. I think you — you’ve put your finger on the
timeframe at which what had been…
(UNKNOWN): … a quite safe, pretty stable, not
(UNKNOWN): … financial system began to change. One of
the big reasons it began to change was that commercial banks
were facing increasing competition on both asset, and
liability sides of their demand sheet — of their balance
sheet. You’ve got — you had on the one hand, and this is
essentially a good development, the growth of capital
MANCHIN: Where was the competition coming from?
(UNKNOWN): Well, I was about to say, the growth of
capital markets, public capital markets that were allowing
more, and more corporations to issue public debt, to issue
bonds, so they didn’t rely as much on bank lending as — bank
borrowing as they used to. And on the other side, you saw the
growth of savings vehicles like money market funds, which
provided higher returns than a insured deposit, one of those
institutions. So the banks felt themselves squeezed on both
sides by what, in some respects were very benign, very good
developments, which is to say, more options for people. Where
I think — I think…
MANCHIN: So we changed the rule basically to allow them
to get into risky ventures?
(UNKNOWN): Well, it — it — in some cases it was risky
ventures, that’s right. There definitely was a — a
deregulatory movement in bank regulation beginning about in
the mid-’70s for an extended period of time. And I — and I
guess what I’d say is that it would — if I had to identify a
collective mistake, by that, the country as a whole, it was
not in trying to preserve a set of rules and structures which
were just being eroded by everything that was going on in the
unregulated sector. I would say the mistake lay in not
substituting a new, more robust set of structures and
measures that could take account of the intertwining of
conventional lending with capital markets.
And that — that — that process of pulling away old
regulation, but not putting in place new, modernized
responsive regulation, I think that’s what left us
JOHNSON: Senator Tester?
TESTER: Thank you, Mr. Chairman. I want to thank the
ranking member, and you for your service on this committee,
and I look forward to working with you both on issues of
consequence here. And I want to thank everybody that’s on the
committee. And I’m going to start out with some questions to
Chairman Walter if I might. Investor protection was clearly
one of the most significant issues complimented by –
contemplated by Dodd-Frank, including direction to the SEC to
examine the standards of care for broker/dealers and
investment advisers in providing investor advice.
The SEC released a study on the subject that recommended
that the commission exercise its rulemaking authority to
implement uniform fiduciary standards, while preserving
investor choice. It has been two years since that study was
released. In your testimony, you mention that the SEC is
drafting a public request for information to gather more data
regarding this provision. I guess first of all, do you
anticipate the SEC will move forward on this issue? And when?
WALTER: I — I expect that the request for comment that
is referenced in my testimony, will go out in the near
future, in the next month or two.
WALTER: With respect to the substance of the issue,
speaking only for myself, I would love to move forward on
this issue as soon as possible. Opinions at the commission
vary a great deal in terms of the potential costs it imposes.
My own personal view is that it is the right thing to do, and
we should proceed. And that we should then go on, or perhaps
at the same time take a very hard look. And there is, I think
more support for this at the commission at the different
rules that are applicable to the two different professions;
the investment adviser, and the broker/dealer profession, to
see where they should be harmonized, and where in fact the
differences in the regulatory structures are justified.
TESTER: Well, first of all, I appreciate your position
on this issue. I would encourage the commissioners to make
this a priority, because I think there’s absolute benefit to
investors. And if — if — if you can help push it, you know
I — I don’t speak for the chairman or ranking member, but if
we find it is a priority, maybe we can help push it. But I
think it’s — I think it’s very, very important.
WALTER: I appreciate that, and I agree with you
TESTER: Thank you. I had another question. It deals with
the JOBS Act that was signed about 10 months ago where — and
a few — a few of those positions were — provisions were
effective immediately. The SEC has really blown by most of
the statutory deadlines for rulemaking, and have yet to be
proposed. The SEC I think put out one proposed rule on
general solicitation in August with a comment period that
closed in October. Since then there hasn’t been much talk
about finalizing the rule, or the rest of the rulemaking
requested by that act.
I am troubled by rumors I’ve heard suggesting that
implementation of the portion of the bill that the commission
has dubbed as regulation A-plus may not be a priority for the
SEC, and I appreciate you do have a lot on your plate. I
understand that, in the way of rulemaking, but we need the
SEC to make progress so that small businesses that this law
was intended to benefit, can better access capital markets.
Can you outline the commission’s timeline for JOBS Act
implementation, including regulation A-plus? Including when
you anticipate the SEC staff will present draft rules to the
WALTER: Our rulemaking priorities start with Dodd-Frank
and the JOBS Act. And then beyond that, we see what else we
can accomplish at the same time. So we are looking very
closely now, particularly on how to proceed with the general
solicitation provisions of the law, which received rather
interesting comment, rather divided comment. And we have to
make a decision as to whether to proceed with lifting the ban
on general solicitation in a stark way, or whether to
accompany it with a number of protections that were offered
by various commenters, including unanimously by our Investor
Advisory Committee, with respect to — with respect to
suggestions as to how to implement the additional investor
That is actively at the top of our plate right now.
Following closely behind that, we are — we are working in
the next few months on putting together a crowd funding
proposal. I will say, although we very much regret not
meeting the statutory deadlines, we have learned a lot by
meeting with people, both from this country, and from abroad
who have engaged actively in crowd funding in the — in the
securities sphere. And I think that will help to illuminate
our proposal and — and to make it the best proposal that it
TESTER: Well, I just — I just have to say, I mean the
– the JOBS Act was — was — was said by some to be the most
important jobs bill we’ve done in a while, as far as actually
creating jobs. I can tell you in my state if Montana, which
is incredibly rural, folks are hungry to — to get going. And
I think we’re holding the process out. And I know you — like
I said, I know you — you’re pushed in a lot of different
directions, and you’re very, very busy, but I — I would
certainly hope that once again, we can get some things out
very, very quickly. Because I don’t think we get the full
benefit of the act until we do.
And I assume since I’m the last questioner, I can just
keep going? Right, Mr. Chairman?
TESTER: I have more questions, but I just want to say
thank you all for what you do. And just because I didn’t ask
you a question, doesn’t mean I don’t still love you. Thank
JOHNSON: Thank you all for your testimony and for being
here with us today. I appreciate your hard work in
implementing these important reforms, and also Senator Crapo
has additional questions he would like to submit.
This hearing is adjourned.
Feb 14, 2013 14:25 ET .EOF
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