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‘When Did You Bring Them to Trial?”

Posted By Guest Author On February 17, 2013 @ 7:08 am In Bailouts,Think Tank | Comments Disabled

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?

(APPLAUSE)

Anybody?

Chairman Curry?

CURRY: To offer my perspective…

WARREN: Sure.

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.

(APPLAUSE)

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

TRANSCRIPT

February 14, 2013

COMMITTEE HEARING

SEN. TIM JOHNSON

CHAIRMAN

SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS

WASHINGTON, D.C.

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

SPEAKERS:

SEN. TIM JOHNSON, D-S.D.

CHAIRMAN

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

RANKING MEMBER

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.

WITNESSES:

TREASURY UNDERSECRETARY FOR DOMESTIC FINANCE

MARY MILLER

FEDERAL RESERVE BOARD GOVERNOR DANIEL TARULLO

MARTIN GRUENBERG,

CHAIRMAN,

FEDERAL DEPOSIT INSURANCE CORPORATION

TOM CURRY,

COMPTROLLER,

OFFICE OF THE COMPTROLLER OF THE CURRENCY

RICHARD CORDRAY,

DIRECTOR,

CONSUMER FINANCIAL PROTECTION BUREAU

ELISSE WALTER,

CHAIRMAN,

SECURITIES AND EXCHANGE COMMISSION

GARY GENSLER,

CHAIRMAN,

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

coordination.

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

ourselves.

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

Dodd-Frank.

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

fixed.

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

this hearing.

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

Commission.

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

testimony.

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

Office.

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

markets.

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

markets.

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

accordingly.

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

these proposals.

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

subjects.

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

coverage ratio.

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

risk limits.

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

short-term financing.

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

wills.

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

submissions.

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

situated creditors.

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

cross-border operations.

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

of data.

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

FDIC-insured institutions.

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

presence.

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

forward.

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

new congress.

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

session.

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

significantly.

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

problem loans.

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

this environment.

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

financial crisis.

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

system.

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

been submitted.

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 future.

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

several participants.

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

forward.

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

today.

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

country.

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

mortgage market.

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

for staff.

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.

Thank you.

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

implement Dodd-Frank.

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

fund industry.

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

saves resources.

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

financial markets.

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

that exist.

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

the markets.

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

formation.

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

proceed.

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

un-cleared swaps.

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

block rules.

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

questions.

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

sounder.

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

to accomplish.

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

the intermediary.

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

three questions.

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

creditors.

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?

MILLER: (OFF-MIKE)

I think we learned from the financial crisis that the

failure of a large institution can create some systemic

risks, so…

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

financial distress.

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

externality.

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

negative externality.

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

short.

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

understanding.

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

that again.

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

derivatives.

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

this “futurization.”

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

that happen.

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

barricades.

First of all, we want no incompatibility or conflict,

but then we want to look at ways that we can make our rules

more consonant.

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

better.

REED: Let me just make a final comment because my time

is expiring.

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

Orders.

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

analysis.

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

requirements.

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,

Senator.

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.

(UNKNOWN): OK.

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

leave it.

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

saying.

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

before that.

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

raising this.

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

identified.

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

inadequate.

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

get?

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

we’ve reached.

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

situations.

MENENDEZ: But you won’t know that without a review of

their files.

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

financial harm.

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

time?

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

population.

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

right now?

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

commercial banking.

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

the crisis?

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

there are.

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

run.

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

certain amount.

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

comments.

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

your thinking.

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.

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

learns.

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

this manner?

Mr. Gruenberg?

Yes.

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

financial system.

HELLER: Yes.

It looks like you have a comment, Mr. Curry?

CURRY: Yes.

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

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?

(APPLAUSE)

Anybody?

Chairman Curry?

CURRY: To offer my perspective…

WARREN: Sure.

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.

(APPLAUSE)

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.

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

year.

(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

resolution.

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.

HAGAN: OK.

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

direction.

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

of this.

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

banks.

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

community banks.

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

happening again.

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

protections?

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

at very…

(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

particularly innovative…

(UNKNOWN): Right.

(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

markets…

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

vulnerable.

MANCHIN: (OFF-MIKE)

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.

TESTER: OK.

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

completely.

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

commissioners?

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

protections.

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

can be.

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?

(LAUGHTER)

JOHNSON: No.

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

you.

(LAUGHTER)

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.

END

Feb 14, 2013 14:25 ET .EOF

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