[Senate Hearing 111-879]
[From the U.S. Government Publishing Office]
S. Hrg. 111-879
IMPLEMENTING THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION
ACT
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE MAJOR ASPECTS OF THE DODD-FRANK ACT
__________
SEPTEMBER 30, 2010
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PRINTING OFFICE
64-796 WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Amy S. Friend, Chief Counsel
Beth Cooper, Professional Staff Member
Drew Colbert, Legislative Assistant
Mark Oesterle, Republican Chief Counsel
Andrew J. Olmem, Jr., Republican Counsel
Dawn Ratliff, Chief Clerk
Brett Hewitt, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
THURSDAY, SEPTEMBER 30, 2010
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 3
Senator Johnson
Prepared statement....................................... 55
Senator Akaka
Prepared statement....................................... 55
WITNESSES
Neal S. Wolin, Deputy Secretary, Department of the Treasury...... 6
Prepared statement........................................... 56
Responses to written questions of:
Senator Shelby........................................... 101
Senator Brown............................................ 114
Senator Tester........................................... 116
Senator Kohl............................................. 118
Senator Crapo............................................ 118
Ben S. Bernanke, Chairman, Board of Governors of the Federal
Reserve System................................................. 8
Prepared statement........................................... 61
Responses to written questions of:
Senator Tester........................................... 119
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation.. 11
Prepared statement........................................... 62
Responses to written questions of:
Senator Shelby........................................... 121
Senator Brown............................................ 139
Senator Tester........................................... 142
Senator Kohl............................................. 144
Senator Merkley.......................................... 147
Senator Bunning.......................................... 149
Senator Crapo............................................ 151
Senator Hutchison........................................ 152
Mary L. Schapiro, Chairman, Securities and Exchange Commission... 13
Prepared statement........................................... 71
Responses to written questions of:
Senator Shelby........................................... 153
Senator Brown............................................ 161
Senator Merkley.......................................... 162
Senator Bunning.......................................... 166
Senator Crapo............................................ 168
Gary Gensler, Chairman, Commodity Futures Trading Commission..... 14
Prepared statement........................................... 80
Responses to written questions of:
Senator Shelby........................................... 170
Senator Brown............................................ 176
Senator Merkley.......................................... 177
Senator Bunning.......................................... 180
Senator Crapo............................................ 180
(iii)
John Walsh, Acting Comptroller of the Currency, Office of the
Comptroller of the Currency.................................... 16
Prepared statement........................................... 83
Responses to written questions of:
Senator Shelby........................................... 181
Senator Brown............................................ 189
Senator Tester........................................... 190
Senator Merkley.......................................... 191
Senator Crapo............................................ 194
IMPLEMENTING THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION
ACT
----------
THURSDAY, SEPTEMBER 30, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Christopher J. Dodd, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order.
Let me welcome our distinguished panel of witnesses this
morning. I cannot recall the last time we gathered in such a
setting with all the representatives of the major financial
regulatory bodies with us. Obviously, with the adjournment vote
last night and when we planned this hearing some weeks ago, we
were under the impression we were going to be in session at
least, I think, another week. Obviously, the agenda changed.
But, nonetheless, I thought this hearing was so important that
I said to Richard that we wanted to move ahead with you. So I
do not know how much participation we will actually get from
Members, but I do not want you to believe that is a reflection
of any feelings about any of you here this morning.
Senator Shelby. They will probably like that.
Chairman Dodd. Yes, fewer questions here from Members. But
if we do get a quorum--and my hope is we do. I have discussed
this already with Senator Shelby. We are going to move to
executive session very quickly on a couple of housing measures
that I believe have been agreed to. We have worked on them, and
I think we can deal with them fairly quickly. So if that
happens, we will interrupt the hearing, and I will apologize to
whoever is speaking at that moment for the interruption when
that moment occurs. But in the meantime, I am going to make
some opening comments here. I will turn to Senator Shelby for
any opening comments, and Jack is here with us, and since there
are few of us here, if any other Members have additional
thoughts they would like to express this morning, we will do
that as well. And then we will go into a question period.
I am going to make the question period not 5 or 6 minutes
but 10 minutes each Member because to try and have--even 10
minutes is not a great deal, but given the representation of
our witnesses here, it will give each Member a chance maybe to
get into a little more depth than you are probably able to in 5
or 6 minutes, if that is OK with you.
All right. Well, anyway, the hearing this morning is
implementing the so-called ``Dodd-Frank Wall Street Reform and
Consumer Protection Act.'' And, again, we are very grateful for
the presence of our witnesses.
I took over the chairmanship of this Committee nearly 4
years ago, in January of 2007, and over that time we have
witnessed the near collapse of the American economy, a crisis
that cost us millions of jobs, wiped out trillions of dollars
in wealth and at long last provided the impetus for fundamental
reform of our financial system. That reform should have
happened a long time ago. Many could make that case.
For nearly 3 years, this Committee has held hearing after
hearing identifying and examining gaps, overlaps, and
shortfalls in a regulatory system that had not been updated
since the 1930s.
Today I believe we can say, thanks to the hard work of
Democrats and Republicans on this Committee--and I include
every Member of this Committee who was involved in this
effort--and with the sage counsel of our witnesses, many of
whom are here today and whose perspectives we have considered
carefully, we have delivered the reform our financial system
needed and provided the American people with the economic
stability that they deserve. We have put an end to too-big-to-
fail bailouts and to an era in which executives on Wall Street
felt free to gamble with other people's money in the belief
that American taxpayers would be there for them if they lost.
Now, Americans and executives alike know with certainty
that if a company puts itself in a position to fail, fail is
exactly what it will do.
We have increased transparency and accountability in our
markets, bringing the $600 trillion derivatives market into the
open and preventing shady dealers from operating in the
shadows.
We have established an early warning system so that we
never again find out that a financial product or practice is
unsafe only after it has already undermined the stability of
our economy. And we have established an independent consumer
financial protection agency to provide Americans with the clear
and accurate information that they need to make good financial
decisions as well as with the security that comes with knowing
that someone is watching out for your interests and your
interests alone.
But as you will notice, there is no ``Mission
Accomplished'' banner hanging behind me here this morning in
this Committee room. The work is not done at all. Hardly a
mission accomplished. I have heard critics say that the new law
leaves too much up to the regulators. But it was never my
intention to have the U.S. Senate, the House of
representatives, or the Congress as a whole do the job of
regulators. Indeed, I do not think anyone wants the Senate or
the Congress writing detailed prescriptions that require
technical, expert knowledge. Nor could we afford to tie the
regulators' hands with rigid legislative requirements that
cannot be adapted to changing circumstances.
What we have done with this legislation is to eliminate the
gaps, the overlaps, and the shortfalls that allowed some
financial actors to game the regulatory structure and some
parts of our financial system to go unregulated entirely.
The Glass-Steagall Act of 1933, which established the
Federal Deposit Insurance Corporation, was 37 pages long. The
Securities and Exchange Act of 1934 was 29 pages long. Those
two acts laid the foundation for nearly 75 years of growth and
innovation in our financial sector and prosperity for
generations of Americans. But it took competent, energetic
regulators to make those laws work.
Our bill is some 848 pages long, when you get just the
actual text of the bill, because times have changed. Our
financial system is far more complex than it was 80 years ago,
and we are competing in a global marketplace, which was not the
case almost a century ago. We were asked to reform the entire
financial system, and that cannot be done in a handful of
pages. But like the Glass-Steagall Act and the Securities and
Exchange Act, it will require very good, competent, energetic
regulators.
Now, I wish I could write a law that prohibits a trader
from gambling away his firm's bottom line or an executive from
putting short-term gains above long-term stability. But we
cannot legislate morality, and goodness knows we cannot
legislate wisdom. All we can do is establish a comprehensive
framework and a clear path forward, and that is what we have
tried to do with this legislation.
The regulators will have to interpret and enforce the law,
and those who profit from the innovation and flexibility that
define our financial system will have to remember that evading
the rules of the road, in letter or in spirit, hurts all of us.
This new law gives our President the ability to walk into the
G20 meetings as a representative of a world leader in financial
services with a framework for the rest of the world to follow.
When we first warned of the flaws in our system back in
January of 2007, few thought we would end up on the path that
we have traveled since. After all, if we are making money, what
better proof of the soundness and stability of a system could
there possibly be?
Well, I believe that our economy will grow again. People
will make money, and policymakers will be tempted to forget the
lessons of this crisis. But mark my words here this morning.
There will be another crisis as certain as we are sitting here.
Greed and recklessness will rear their heads again. And I can
tell you with confidence that when that day comes, we have
provided regulators with the tools they need to see it coming
and to put a stop to it in time before it wrecks the economy as
this crisis nearly did. But whether they will actually do so
largely depends upon the foundation laid by those of you who
are before us today and the jobs you do in the coming weeks and
months to lay that foundation within your respective regulatory
bodies.
With that, let me turn to my colleague from Alabama,
Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman, and welcome to all
of you. It is not the first time you have been here. I hope it
will not be the last.
For millions of Americans, the passage of Dodd-Frank
provides little comfort as they confront a harsh economic
reality. The unemployment rate now stands at 9.6 percent.
Economic growth is anemic. Bank lending remains depressed. And
housing values continue to fall in many areas. Not since the
Carter administration has the Nation's economy performed so
poorly.
The response of the Administration and Democrats in
Congress has been to enact a slew of new laws to expand the
size and the scope of the Federal Government. With the stimulus
bill, bank bailouts, Obamacare, and now Frank-Dodd, the
Democratic majority has clearly articulated----
Chairman Dodd. Dodd-Frank.
[Laughter.]
Senator Shelby. Dodd-Frank. Interchangeable.
[Laughter.]
Senator Shelby. Frank-Dodd, Dodd-Frank. You know, I think
Frank would like that, Chris.
Chairman Dodd. Let us wait and see how it works.
[Laughter.]
Senator Shelby. I will call it Dodd-Frank. I do not think
it is going to work. I hope it does.
With the stimulus bill, bank bailouts, Obamacare, and now,
according to the Chairman, Dodd-Frank, the Democratic majority
has clearly articulated its vision for the future: more
Government, higher taxes, and greater control over the economy.
For millions of Americans, however, the Democrats' vision has
produced an unfortunate reality: higher unemployment, less
access to credit, and trillions of dollars of Government debt
on the shoulders of our children and our grandchildren.
Today we will examine the implementation of one of these
bills, the recently enacted legislation known here as Dodd-
Frank. Rather than address the core issues that produced the
financial crisis, I believe the Dodd-Frank legislation adheres
to the worn-out Washington theory that more is better--more
regulation, more agencies, more bureaucrats, and more spending.
To make matters worse, the bill has delegated to
bureaucrats the authority to devise dozens, if not hundreds, of
new rules for our financial system. The law itself provides no
specific guidance in any number of areas, including
derivatives, consumer protection, and systemic risk. In many
instances, Dodd-Frank has outsourced this Committee's
responsibilities to unelected bureaucrats.
Typically, an implementation hearing involves Congress
making sure that regulators are following the law as
prescribed. Today, however, the roles will be reversed. We will
be asking regulators to tell us what rules that they will be
prescribing. Consequently, for all intents and purposes, the
real authors of Dodd-Frank will be the bureaucrats in our
financial regulatory agencies.
Let us remember that nearly all of the major financial
institutions that failed were regulated institutions. Let us
also remember that the regulators failed to use their already
broad authorities to take the necessary steps to prevent the
crisis. And, finally, let us remember that conflicting agency
rules created opportunities for regulatory arbitrage.
By ignoring these failures and adding another level of
bureaucracy to our already cumbersome financial structure,
Dodd-Frank could potentially create an even more complex and
dysfunctional system.
For example, Dodd-Frank instructed the SEC and the CFTC to
jointly devise rules on derivatives. In doing so, the
legislation intensifies the decades-long turf battle between
the two agencies that we are quite familiar with. This likely
ensures that the final rules will be more about protecting
bureaucratic fiefdoms than protecting the overall financial
system. Thus, rather than addressing the regulatory arbitrage
in derivatives that we know AIG exploited, this bill
exacerbates the problem. Additionally, by delegated the major
policy decisions, and therefore most of the real work, to the
regulators, the Dodd-Frank legislation undermines the
effectiveness of our regulators by asking them to do too much.
For example, the Federal Reserve has approximately 70
rulemakings and studies it must complete over the next 18
months. How can we expect the head of any agency to properly
devise and implement so many complex rules while also
effectively discharging its existing responsibilities?
The recent financial crisis painfully demonstrated that
errors, limitations, and conflicts of interest among regulators
often play a key part in causing a systemic breakdown. The
majority has promised the American people that Dodd-Frank will
make our financial system safer and will help revive the
economy. As time passes, however, I believe that it will become
clear that neither is true. By extending the Government safety
net over a much larger segment of our financial system, the
stage, I believe, has been set for more severe economic crisis.
Under current law, the responsibility rests largely with
the regulators to avoid future difficulties. Congress, however,
can continue to exercise its oversight authority by having
hearings such as this one today and also, when necessary,
revisit the law and make changes consistent with our findings
and the demands of the electorate. In this particular instance,
change is not only a good thing; I believe it is inevitable.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Does anyone else want to be heard on this matter before we
turn to our witnesses?
[No response.]
Chairman Dodd. Well, very good. Welcome to our witnesses,
and I will be brief in our introductions because you are all
well known to those of us on the Committee.
Neal Wolin is the Deputy Secretary of the U.S. Department
of the Treasury, prior to that served in the Obama
administration as Deputy Assistant to the President. We thank
you, Neal, for being with us once again.
Chairman Ben Bernanke, as we all know, of the Federal
Reserve, we thank you, Mr. Chairman, for being here this
morning.
Sheila Bair, of the FDIC, has been before this Committee on
numerous occasions over the last 3 or 4 years, and, Sheila, we
thank you for your service--longstanding service, by the way.
Of course, many of us knew Sheila when she was legal counsel to
Bob Dole here in the Senate, so she knows very much what it is
like to be on this side of the dais as well, so we thank you.
Mary Schapiro is Chairperson of the U.S. Securities and
Exchange Commission, and, Mary, we thank you for being with us
this morning, and we thank you for the work that you are doing.
Gary Gensler is Chairman of the Commodity Futures Trading
Commission and, again, longstanding service to our Government
and in the private sector as well. And, Gary, we thank you.
And John Walsh is the Acting Comptroller of the Currency.
He assumed that position on August 15th, having previously
served as Chief of Staff for Public Affairs for the OCC. We
thank you very much, John, for being with us as well.
I would ask you to begin in the order I have introduced
you, Neal. And if you can, try and keep it down to 5 to 6
minutes or so. And, again, all documentation or supporting
materials that you think would be worthwhile for us to have as
part of this hearing, we look forward to.
And let me just say, by the way, in response to Senator
Shelby, without going into the details of his statement here,
obviously with my departure in a few weeks from here, this
Committee will have to continue its job, obviously, of the
oversight function. And Bob Bennett and I will be on the
outside watching as this all unfolds here. But, obviously, it
will be very important. We did not----
Senator Shelby. Corker will be here.
Chairman Dodd. Well, we know Corker, and Tim Johnson will
be here, with the gavel in his hand, we hope.
[Laughter.]
Chairman Dodd. I know you were. I could not resist the--
anyway, put that aside for a second. But the point being that
what we did not write into the law--and you cannot, obviously,
and that is, the job on this side of the dais, and that is, to
have the oversight consistently on how this is all working. And
that will be a very, very important function in addition to the
other jobs that the Committee will assume come January. But I
underscore that point very strongly. It will be very important
to see how this is working and how we are performing.
So, with that, Neal, thank you again for being with us, and
we will begin with your testimony. And, by the way, as I have
said to Members, as soon as we have--I think we are getting
close. Are we one away? Then we are going to interrupt to do a
quick markup of two bills.
Neal.
STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, DEPARTMENT OF THE
TREASURY
Mr. Wolin. Mr. Chairman, Ranking Member Shelby, Members of
the Committee, thank you very much for the opportunity to
testify about Treasury's role in implementing the Dodd-Frank
Act.
Mr. Chairman, 2 months ago, against tough odds, Congress
enacted historic financial reform. Passing the Dodd-Frank Act
was a major accomplishment for this country, and it would not
have happened without your strong commitment and that of your
colleagues.
Congress stood on the right side of history and with the
millions of Americans who have lost their jobs, homes, and
businesses as a result of a crisis caused by basic failures in
our financial system.
Chairman Dodd. Neal, I want to congratulate you. You have
brought us a quorum.
[Laughter.]
Mr. Wolin. Success.
Chairman Dodd. So let me move us into executive session, if
I may. Without objection, we will go into executive sessions.
[Whereupon, at 10:20 a.m., the Committee proceeded to other
business.]
[Whereupon, at 10:22 a.m., the Committee was reconvened.]
Chairman Dodd. We are back to regular session. Neal, go
ahead.
Mr. Wolin. Thank you, Mr. Chairman.
But the work required to make reform a reality, as you
noted, Mr. Chairman, in your opening, is far from done. We now
face the task of implementation.
I know this process can seem remote or distant to many
Americans. It is enormously complex and involves unavoidably
dense topics. So before providing you with an update on our
efforts, I want to list our guiding principles. These are the
basic things all Americans should know about how we are
implementing reform.
We are moving as quickly and as carefully as we can. We are
establishing full transparency.
Wherever possible, we will streamline and simplify
Government regulation. We will create a more coordinated
regulatory process. We will build a level playing field here at
home and around the world for financial firms. We will protect
the freedom for innovation that is absolutely necessary for
growth. And we will keep Congress fully informed of our
progress on a regular basis.
Mr. Chairman, Ranking Member Shelby, since passage,
Treasury has been hard at work implementing reform. We
immediately put in place a governance structure. We established
teams dedicated to Treasury's four main responsibilities. Those
responsibilities include helping to establish the Financial
Stability Oversight Council, laying the groundwork for the
Office of Financial Research, launching the Consumer Financial
Protection Bureau, and creating a Federal Insurance Office.
In my written testimony, I have provided a detailed update
on where we are with each office. But let me just say a few
words about two of them: the Financial Stability Oversight
Council and the Consumer Financial Protection Bureau.
Tomorrow, the Council will hold its first meeting. As
Chair, Treasury respects the critical independence of
regulators to fulfill their responsibilities. We are working
with other Members to develop an approach that maintains that
independence while maximizing the coordination required for the
Council to fulfill its collective responsibility of promoting
financial stability.
Tomorrow, I expect that the Council will take important
first steps. It will consider draft bylaws. It will consider a
proposal to seek public comment on the criteria to designate
large, interconnected nonbank financial companies for
consolidated supervision. And it will consider a proposal to
seek public comment to inform recommendations the Council will
make on how to implement the Volcker Rule.
Treasury has also made important progress standing up the
Consumer Protection Bureau. Upon passage, we set up a staff
implementation team with a clear division of responsibilities.
They have focused on building the necessary infrastructure,
such as human resources and IT and on the Bureau's key
functions, including research, preparing for the supervision of
financial institutions, and working with the various transferor
agencies.
Mr. Chairman, let me just conclude by saying that Treasury
and all the agencies involved in this process have and will
continue to put enormous effort toward implementation and the
ultimate goal of making our financial system safer and our
economy stronger.
Chairman Dodd. Thank you very much, Mr. Wolin. I appreciate
it.
Chairman Bernanke, thank you.
STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Mr. Chairman.
Before I turn to my testimony, I would like to thank you
and Senator Shelby and the rest of the Committee for helping
get Senate confirmation of Janet Yellen and Sarah Bloom Raskin
to the Federal Reserve Board. As you know and as I am going to
discuss in my testimony, we have a great deal of work before
us, and having them on the Board will help us enormously in
carrying out the responsibilities that we have.
In the years leading up to the recent financial crisis, the
global regulatory framework did not effectively keep pace with
profound changes in the financial system. The Dodd-Frank Act
addresses critical gaps and weaknesses of the U.S. regulatory
framework, many of which were revealed by the crisis. The
Federal Reserve is committed to working with the other
financial regulatory agencies to effectively implement and
execute the act, while also developing complementary
improvements to the financial regulatory framework.
The act gives the Federal Reserve several crucial new
responsibilities. These responsibilities include being part of
the new Financial Stability Oversight Council, supervision of
nonbank financial firms that are designated as systemically
important by the Council, supervision of thrift holding
companies, and the development of enhanced prudential standards
for large bank holding companies and systemically important
nonbank financial firms designated by the Council. In addition,
the Federal Reserve has or shares important rulemaking
authority for implementing the so-called ``Volcker Rule
restrictions'' on proprietary trading and private fund
activities of banking firms, credit risk retention requirements
for securitizations, and restrictions on interchange fees for
debit cards, among other provisions.
All told, the act requires the Federal Reserve to complete
more than 50 rulemakings and sets of formal guidelines, as well
as a number of studies and reports, many within a relatively
short period. We have also been assigned formal
responsibilities to consult and collaborate with other agencies
on a substantial number of additional rules, provisions, and
studies. Overall, we have identified approximately 250 projects
associated with implementing the act. To ensure that we meet
our obligations in a timely manner, we are drawing on expertise
and resources from across the Federal Reserve System in areas
such as banking supervision, economic research, financial
markets, consumer protection, payments, and legal analysis. We
have created a senior staff position to coordinate our efforts
and have developed project reporting and tracking tools to
facilitate management and oversight of all of our
implementation responsibilities.
The Federal Reserve is committed to its longstanding
practice of ensuring that all its rulemakings be conducted in a
fair, open, and transparent manner. Accordingly, we are
disclosing on our public Web site summaries of all
communications with members of the public--including banks,
trade associations, consumer groups, and academics--regarding
matters subject to a proposed or potential future rulemakings
under the act.
In addition to our own rulemakings and studies, we have
been providing technical and policy advice to the Treasury
Department as it works to establish the Oversight Council and
the related Office of Financial Research. We are working with
the Treasury to develop the Council's organizational documents
and structure. We are also assisting the Council with the
construction of its framework for identifying systemically
important nonbank financial firms and financial market
utilities, as well as with its required studies on the
proprietary trading and private fund activities of banking
firms and on financial sector concentration limits.
Additionally, work is well under way to transfer the
Federal Reserve's consumer protection responsibilities
specified in the act to the new Bureau of Consumer Financial
Protection. A transition team at the Board, headed by Governor
Duke, is working closely with Treasury staff responsible for
setting up the new agency. We have established the operating
accounts and initial funding for the Bureau, and we have
provided the Treasury detailed information about our programs
and staffing in the areas of rulemaking, compliance
examinations, policy analysis, complaint handling, and consumer
education. We are also providing advice and information about
supporting infrastructure that the Bureau will need to carry
out its responsibilities, such as human resource systems and
information technology.
Well before the enactment of the Dodd-Frank Act, the
Federal Reserve was working with other regulatory agencies here
and abroad to design and implement a stronger set of prudential
requirements for internationally active banking firms. The
governing body for the Basel Committee on Banking Supervision
reached an agreement a few weeks ago on the major elements of a
new financial regulatory architecture, commonly known as Basel
III. By increasing the quantity and quality of capital that
banking firms must hold and by strengthening liquidity
requirements, Basel III aims to constrain bank risk taking,
reduce the incidence and severity of future financial crises,
and produce a more resilient financial system. The key elements
of this framework are due to be finalized by the end of this
year.
In concordance with the letter and the spirit of the act,
the Federal Reserve is also continuing its work to strengthen
its supervision of the largest, most complex financial firms
and to incorporate macroprudential considerations into
supervision. As the act recognizes, the Federal Reserve and
other financial regulatory agencies must supervise financial
institutions and critical infrastructures with an eye toward
not only the safety and soundness of each individual firm, but
also overall financial stability. Indeed, the crisis
demonstrated that a too narrow focus on the safety and
soundness of individual firms can result in a failure to detect
and thwart emerging threats to financial stability that cut
across many firms.
A critical feature of a successful systemic or
macroprudential approach to supervision is a multidisciplinary
perspective. Our experience in 2009 with the Supervisory
Capital Assessment Program--popularly known as the bank stress
tests--demonstrated the feasibility and benefits of employing
such a perspective.
The stress tests also showed how much the supervision of
systemically important institutions can benefit from
simultaneous horizontal evaluations of the practices and
portfolios of a number of individual firms and from employment
of robust quantitative assessment tools. Building on that
experience, we have reoriented our supervision of the largest,
most complex banking firms to include a quantitative
surveillance mechanism and to make greater use of the broad
range of skills of the Federal Reserve staff.
A final element of the Federal Reserve's efforts to
implement the Dodd-Frank Act relates to the transparency of our
balance sheet and our liquidity programs. Well before
enactment, we were providing a great deal of relevant
information on our Web site, in statistical releases, and in
regular reports to the Congress. Under a framework established
by the act, the Federal Reserve will, by December 1st, provide
detailed information regarding individual transactions
conducted across a range of credit and liquidity programs over
the period from December 1, 2007, to July 20, 2010. This
information will include the names of counterparties, the date
and dollar value of individual transactions, the terms of
repayment, and other relevant information. On an ongoing basis,
subject to lags specified by the Congress to protect the
efficacy of the programs, the Federal Reserve also will
routinely provide information regarding the identities of
counterparties, amounts financed or purchased and collateral
pledged for transactions under the discount window, open market
operations, and emergency lending facilities.
To conclude, the Dodd-Frank Act is an important step
forward for financial regulation in the United States, and it
is essential that the act be carried out expeditiously and
effectively. The Federal Reserve will work closely with our
fellow regulators, the Congress, and the Administration to
ensure that the law is implemented in a manner that best
protects the stability of our financial system and strengthens
the U.S. economy.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Chairman Bernanke. And
I should say, by the way--I did not say this at the outset;
that is my failure--I want to thank all of you, by the way. We
have had tremendous cooperation from all of you over the last
several years as we worked our way through all of this, and
particularly you, Chairman Bernanke, going back obviously to
the very difficult days in the early fall of 2008. In my view,
history will record that your involvement and your
participation helped save this country, and so I appreciate
very, very much what you did, and we are grateful to you for
your service.
Sheila.
STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Ms. Bair. Chairman Dodd, Ranking Member Shelby, and Members
of the Committee, thank you for the opportunity to testify on
the FDIC's efforts to implement the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
Let me say at the outset what a pleasure it has been to
work with you, Mr. Chairman, on this historic legislation, as
well as on many other matters over the years. This is a
bittersweet moment for me, as I am sure it is for many of us,
in appearing before you for what may be my last time. I wish
you well as you take on new challenges outside the Senate.
Chairman Dodd. Thanks.
Ms. Bair. I would also like to say farewell to Senator
Bennett. It has been a pleasure to know you for many years, and
this will probably be the last time I will be appearing before
you, but I do not think there is anyone in the Senate who
understands financial services better than you do, and your
measured, balanced approach to these issues will be very much
missed. I wish you well, as well.
As Chairman Dodd said, I believe it was 6 a.m. in the
morning shortly after the final vote: ``We have done something
that has been badly needed, sorely needed for a long time and
we hope will protect our country, create the kinds of jobs and
wealth and optimism and trust once again in our financial
system that has become so missing.''
Senator Dodd, I can report to you this morning that at the
FDIC, we are well on our way to putting this, ``badly needed''
Dodd-Frank Act into effect.
With the U.S. financial system now stable and healing, we
are moving ahead with some initial rules to implement the
orderly liquidation process created under the Dodd-Frank Act
for systemically important financial companies.
To restore greater market discipline, it is essential that
the liquidation rules make clear to equity shareholders and
unsecured creditors that they, not taxpayers, are at risk when
their company fails. We hope to publish this preliminary set of
rules in the near future.
To more effectively carry out our new resolution
responsibilities, we created a new Office of Complex Financial
Institutions. This office will focus on monitoring risk at
large complex institutions, reviewing their required resolution
plans, and developing strategies to execute those plans should
it become necessary. This office will also handle the staff
work in connection with the new Financial Stability Oversight
Council, of which the FDIC is a member.
To ensure that we have the information necessary to carry
out the new orderly liquidation authority, we are working on
implementing our new back-up examination and enforcement
authority as granted by the Dodd-Frank Act. This authority will
likely play a key role in planning for any potential
liquidation of a systemically important financial company. Our
Board also recently strengthened our existing Memorandum of
Understanding with the other primary Federal regulators with
respect to our back-up authority for insured depository
institutions.
As part of ending ``too big to fail,'' the Dodd-Frank Act
also calls for the largest and most systemically important
banks to meet higher capital requirements. These requirements,
in concert with the new international leverage ratio and other
Basel III standards, are a major step in strengthening the
safety and soundness of the financial system and ensuring that
credit is available.
Other important provisions in the Dodd-Frank Act that have
not received as much public attention concern changes made to
our authority as manager of the Deposit Insurance Fund. The
FDIC has long held the view that the deposit insurance
assessment system should cushion the impact of economic cycles
on insured institutions. However, in practice, the opposite has
tended to occur.
The FDIC Board will soon consider a long-term strategy for
managing the Deposit Insurance Fund so that the fund can remain
positive through a crisis without the need to impose sharp
swings in the assessment rates. Our Board will look at
assessment rates, a target reserve ratio, and a dividend policy
consistent with long-term FDIC goals and statutory
requirements, including the new minimum 1.35 percent reserve
ratio.
We know the last two crises will eventually fade from
public memory and the need for a strong fund will become less
apparent. Therefore, actions taken now under the Dodd-Frank Act
should make it easier for future FDIC Boards to resist pressure
to reduce assessment rates or pay larger dividends at the
expense of the long-term stability of the fund.
Finally, the FDIC is actively supporting the new Consumer
Financial Protection Bureau established under the Dodd-Frank
Act. We are working with the Treasury Department and other
banking agencies to ensure a smooth transition and strong
coordination as the CFPB is established. Further, the FDIC has
taken internal steps to strengthen consumer protection by
reorganizing our supervisory functions and creating a new
Division of Depositor and Consumer Protection. This new
division will direct our supervisory resources more effectively
while maintaining the necessary coordination and information
sharing between consumer protection and safety and soundness.
In conclusion, let me say the success of the Dodd-Frank Act
will rise or fall depending on the commitment and enthusiasm of
the various agencies to fully implement it in a timely manner.
Thank you for the opportunity to testify on the FDIC's
efforts in implementing the Dodd-Frank Act, and I would be
happy to answer any questions. Thank you.
Chairman Dodd. Thank you very much, Chairman Bair, and
thank you again for your tremendous involvement over these
many, many months. We thank you immensely.
Chairman Schapiro, we thank you for being with us this
morning. We thank you, as well, for your strong leadership of
the SEC. It has been welcome.
STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES AND
EXCHANGE COMMISSION
Ms. Schapiro. Thank you very much. Chairman Dodd, Ranking
Member Shelby, and Members of the Committee, thank you for
inviting me to testify today on behalf of the Securities and
Exchange Commission regarding our implementation of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. And let
me add my thanks to you, Senator Dodd, to those of my
colleagues for your leadership of the Committee and for
shepherding regulatory reform through the legislative process.
The pace and scope of SEC rulemaking over the next year as
we work to meet the Act's requirements will be unprecedented in
our history. Given the scope and importance of the Act, we are
taking great care to implement its many provisions effectively
and on schedule and to do so in a transparent manner that
incorporates significant public input at every step.
We believe that the successful execution of this landmark
legislation depends in large part on receiving detailed
comments from stakeholders across America's financial system.
Thus, we began by immediately establishing a process for public
comment that exceeds legal requirements, creating a series of
e-mail boxes to which the public are invited to send
preliminary comments, even before rules are proposed and the
official comment periods begin. The response, with thousands of
comments received on 31 different topics, has been
extraordinary.
We recognize that the process of establishing regulations
works best not only when all stakeholders are engaged, but when
the discussions and meetings are transparent. Therefore, we ask
those who request meetings with SEC staff to provide an agenda,
which is posted on our Web site, along with the names of
individuals participating in these meetings and copies of any
written materials distributed.
In addition, SEC staff is committed to reaching out as
necessary to solicit views from affected stakeholders who do
not appear to be adequately represented by the public record on
a particular issue and our Web site provides detailed
information on our schedule for all rules and studies required
by Dodd-Frank through July of 2011.
Our consultative efforts include close collaboration with
our fellow regulators, as well. We are consulting and
coordinating with the CFTC, the Federal Reserve Board, and the
Departments of Treasury, State, and Commerce, and other
agencies. Our Office of International Affairs is meeting weekly
with our rule-writing staff to ensure appropriate coordination
with our foreign counterparts. Our goal is to establish a
seamless and effective framework that crosses agencies and
borders and which encompasses the full spectrum of financial
regulatory issues.
Since the July signing of the Act, the SEC has issued
interim rules requiring the registration of municipal advisors,
approved exchange rules eliminating broker discretionary voting
on executive compensation, and revised Regulation FD to remove
the exemption for NRSROs, or credit rating agencies. We have
sought formal comments regarding the study we will conduct of
the obligations of brokers, dealers, and investment advisors,
and on the definitions of certain terms fundamental to
derivatives regulation, including swap, securities-based swap,
swap dealers, and others. And in recent weeks, the SEC has held
three joint roundtables with the CFTC to inform our over-the-
counter derivatives rulemaking.
Yet our work is just beginning. In October, we expect to
release at least six new packages of proposed rules for public
comment. These will include proposals that would, among other
things, establish ownership limitations and governance
requirements for security-based swap clearing agencies,
enhanced due diligence disclosure in the asset-backed
securities market, and require that corporate executive
compensation and golden parachutes be subject to advisory
shareholder votes. Also in the next month, we will adopt an
interim final rule for reporting on pre-Act security-based
swaps.
By the end of October, we will have also completed our
administrative process of establishing each of the five new
offices created by the legislation. We expect to appoint the
heads of these new offices during the months of October and
November.
Also in November, we expect to issue an additional nine new
packages of proposed rules. These will include three separate
derivatives rulemaking releases regarding antimanipulation
rules, data repository registration, record keeping, and real-
time reporting, and jointly with the CFTC, definitions and
jurisdictional provisions to guide our OTC derivatives
oversight.
By the end of the year, we will have proposed all rules
required to restructure the derivatives market and to implement
changes in investment advisor oversight.
By January, 6 months after passage, we will have completed
and submitted several studies and reports to Congress,
including one regarding the obligations of broker-dealers and
investment advisors and one looking at ways to improve investor
access to advisory and broker-dealer registration information.
By then, we expect the broad SEC organizational review to have
been completed and conveyed to Congress, as well.
In conclusion, we are engaged in a comprehensive effort to
implement the Act. Indeed, we will write more than 100 rules
and conduct more than 20 studies. And while we will undoubtedly
encounter some bumps in the road, we are currently on track to
meet the goals, mandates, and deadlines. We are ensuring that
our process is fully transparent and that the full spectrum of
views on every issue is heard and considered. And as we proceed
with implementation, we will continue to work closely with
Congress, consult with our fellow regulators, and listen to
members of the financial community and the investing public.
Thank you for the opportunity to be here and I look forward
to answering your questions.
Chairman Dodd. Thank you, Chairman Schapiro, very, very
much. I appreciate your diligent work. And let me make sure
that in the case of all of you, your respective staffs and
others who have been working so hard are recognized, as well,
for their diligence.
Mr. Gensler, how are you? Thank you for coming.
STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING
COMMISSION
Mr. Gensler. Good. Doing well. Thank you, Chairman Dodd.
Good morning, Ranking Member Shelby, Members of the Committee.
I thank you for inviting me to speak here today on the
implementation of the Dodd-Frank Act, or the Frank-Dodd Act.
Chairman Dodd. Wait until you go over to the House to make
that comment.
[Laughter.]
Mr. Gensler. I am honored to appear here today alongside my
fellow regulators with whom we are working so closely to
implement the Act and I am pleased to testify on behalf of the
Commission and thank my fellow Commissioners. There are five of
us each who are independent, Senate-confirmed, and will come
and bring their views to these really crucial matters.
Before I move into the testimony, I do want to thank you,
Chairman Dodd, for your leadership of the Banking Committee and
in the Senate. On a personal note, I think we first met about
13 years ago when I was asked to serve in the Treasury
Department, but also worked so closely with you on what became
Sarbanes-Oxley, and it is bittersweet, and also Senator Bayh
and Senator Bennett. I remember many private meetings and
public meetings, so I thank you. As Sheila said, it is a bit
bittersweet.
The Dodd-Frank Act requires the CFTC and the SEC working
with our fellow regulators to write rules with regard to the
derivatives area within 360 days. That means, if one is not
counting, we have 289 days to go.
We set up 30 rule teams at the CFTC and publicly put this
out, and we have two principles really guiding us. One is the
law itself, not to over-read it, not to under-read it, but to
do exactly, as best we can, what Congress intended to do and
wrote in the 840 pages that the Chairman referred to.
Second is to have broad consultation, heavily both with
fellow regulators and the public and the Congress, as well. We
are working very closely with the SEC and the Federal Reserve
particularly, but also all of my fellow regulators here today.
Within 24 hours from the bill signing, we had 20 team leads
over at the SEC for a joint meeting, and with the Federal
Reserve and other regulators the following week. In fact, to
date--we added it up--we have had 146 individual meetings of
staffs or chairman-to-chairman level between the CFTC and
fellow regulators. That is about 100 with the SEC and about 45
with all the other regulators to date.
We are also actively consulting with international
regulators. I just returned yesterday from a 3-day trip to
Brussels, where I met with all the different senior regulators
there. I know my other regulators are doing the same. Two weeks
ago, the European Commission put out their proposal on
derivatives and it is very similar and consistent with the
Dodd-Frank Act. Both have strong clearing requirements. Both
have covering financial entities and have a commercial end user
exception. Both use data repositories and have strong risk
lowering standards for the dealers. And so we are working to
harmonize to make sure as we go forward with the rule writing
we are consistent with what they are doing internationally.
We are also soliciting broad public comments, as our other
agencies are. We want to engage the public as best we can. We
have had 3 days of roundtables with the SEC, and we have also
had many public meetings which we, too, list on our site. I
think we now have a list of 170 meetings on our site with all
the details and participants and the major topics discussed.
We plan to actively publish rules starting tomorrow is our
first public meeting, publishing proposals through the middle
of December. We have coordinated that schedule mostly with the
SEC, but we have shared that schedule with all of the fellow
regulators and Treasury here today to try to coordinate with
the FSOC.
So the next year of rule writing will test certainly the
talented staff of the CFTC and my fellow Commissioners and me.
Though we do have the resources to publish the rules and move
forward on the rules, we do recognize we would need
significantly more resources about a year from now to actually
implement these.
With that, I look forward to taking any questions.
Chairman Dodd. Thank you very much, Chairman Gensler.
Mr. Walsh, thank you for joining us and thank you for
taking on the responsibilities at the OCC.
STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE CURRENCY,
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Walsh. Thank you, Mr. Chairman. Chairman Dodd, Senator
Shelby, Members of the Committee, it is an honor to testify
before this Committee where I used to work as staff to Senator
John Heinz under Senator Bennett's predecessor, Senator Jake
Garn, and a privilege to testify before you, Mr. Chairman, on
the Dodd-Frank Act as your service in the Senate draws to a
close.
The Committee asked me to discuss our progress in
implementing the Dodd-Frank Act, our plans for integrating the
OTS staff and functions into the OCC, our plans for identifying
employees to transfer to the Consumer Bureau, and our views
about how Basel III furthers the objectives of the Act. My
written statement also describes a few challenges we have
encountered thus far in implementing the Act that may benefit
from legislative clarification.
To meet the law's objectives, the OCC is drafting a number
of new rules, some jointly with other agencies and some on a
coordinated basis. The rules cover a broad range of issues,
including regulatory capital, proprietary trading, derivatives
margin requirements, and appraisals. The law also requires us
to revise many of our existing regulations, and as the Office
of Thrift Supervision is integrated into the OCC, we are
charged with reviewing and republishing all OTS rules.
We have worked quickly to identify each of our rulemaking
obligations and have established teams of agency experts to
lead our work and to coordinate with interagency efforts, as
appropriate. A group of senior managers is directing and
coordinating this mammoth effort. My written statement also
details specific tasks we have initiated, including support we
have provided to the Financial Stability Oversight Council and
an Advanced Notice of Proposed Rulemaking we have issued on the
requirement to end reliance on credit ratings. We have begun
work on an interagency basis to implement risk retention
requirements for securitization and to limit excessive or
inappropriate compensation, among other projects. We are still
in the early stages of work on these projects and we have
encountered some challenges detailed in my statement.
One of the most important tasks ahead for the OCC involves
the transfer of most functions from the Office of Thrift
Supervision. The OCC will take on the task of supervising
Federal thrifts and writing rules for all savings associations,
while responsibility for State chartered thrifts and thrift
holding companies will go to the FDIC and the Federal Reserve,
respectively.
Most OTS employees will transfer to the OCC and we are
focused on ensuring the orderly and effective transfer of these
functions and staff. The OTS employees transferring to the OCC
have essential skills and knowledge of the thrift industry that
will be important to the OCC in carrying out this new mission.
I believe they will find the OCC a supportive and rewarding
place to continue their careers, and we are looking forward to
welcoming them to our agency.
We are mindful of the importance of communicating about the
transition process, both with OTS employees and the thrifts
they supervise. I recently wrote to all Federal thrift chief
executive officers about the transition and I plan to continue
reaching out to the industry. We are participating in industry
events that provide opportunities to interact with thrift
executives and we are developing an outreach program to provide
information about the OCC's approach to supervision and
regulation.
We also have an obligation to work with Treasury to
identify OCC employees who have the skills to support the
rulemaking, supervision, and examination functions that will
transfer to the CFPB and who are interested in working for the
new agency. We have been participating in planning for the new
Bureau, and as the CFPB organization takes shape, we are
committed to providing necessary support to that organization.
Finally, with respect to Basel III, we believe these
capital and liquidity reforms which seek to improve the ability
of banks to absorb shocks from economic stress advances the
objectives of the Act. The Dodd-Frank Act addresses many of the
same issues as Basel III, which seeks improvements to quality
of capital, addresses systemic risk concerns, mitigates
procyclicality, limits excessive leverage in the banking
system, and establishes minimum liquidity standards. We think
the Basel III framework strikes an appropriate balance by
setting requirements for higher quality capital and liquidity
while allowing the banking system to continue to perform its
essential function of providing credit to households and
businesses. Further, the extended transition period minimizes
any short-term disruptions in financial services while the
economy recovers.
Thank you for the opportunity to testify today. I would be
happy to answer any questions.
Chairman Dodd. Thank you very much. Thank you very much for
your testimony.
What I am going to do if I can here is give a little more
time to Members this morning, given the range of witnesses we
have with us from the various regulatory agencies, so I will
ask the Clerk to put a 10-minute time on. We will try and focus
on that.
Let me pick up on the point, Secretary Wolin, you raised at
the very outset of your remarks, the very good news that the
Financial Stability Oversight Council will be meeting tomorrow
to work on a number of issues. The substantive functions you
have identified, others have, as well, including designating
certain nonbank financial companies for supervision by the
Federal Reserve, recommending heightened prudential standards
for large interconnected financial companies, and several
others that will be the job of this oversight council.
I am interested in hearing briefly from each of you--you
have touched on this already--on, one, who will represent your
organization at the Council, who will actually be there, who
you are designating so we have a good idea of who that is, and
what is your view of the key substantive priorities of the
Council. There is a lot to take on here, but I would love to
get some sense of how you prioritize those issues, at least in
your view of who will be doing it.
And as I say this, let me also editorialize a bit here,
because I--and again, a couple of you have raised this and I
applaud you for doing so. We certainly expect the members of
the Oversight Council to share information and to cooperate and
to create an atmosphere where any agency is free to contribute
in all of this. This organization is not intended to be a top-
down but rather a collective fathering of equal partners in all
of this, and I would expect no one to hide behind the work of
the Fed or the Treasury, nor to be intimidated by it, and I say
that respectfully, but obviously Treasury and the Fed have been
very dominant players in all of this, but what I want to have
happen here is that level of cooperation where each of you have
a responsibility to bring your designated knowledge and
expertise to the table and that that information is shared,
creating a new culture.
One of the problems in the past has been I cannot legislate
culture. None of us can here. But unless that culture changes
on how we operate, that sharing of information that
particularly an oversight council is going to need in order to
succeed, if it is really going to work, that has to be a part
of this. And again, we can designate responsibilities, but
beyond that, it ultimately depends upon the leadership of the
respective agencies to create that culture. And so I am
interested in having you comment briefly on this, as well.
So let me run down with you, Neal, if I can, who is going
to be at that table tomorrow and what are your priorities.
Mr. Wolin. Thank you, Mr. Chairman. Secretary Geithner will
be at the table chairing the meeting tomorrow for Treasury. I
think the points that you made, Mr. Chairman, with respect to
the cultural issues of the Council are critically important,
because while on the one hand, the Council members have clearly
their own independent regulatory authorities and those need to
be respected, getting the information sharing and the sort of
collaborative effort to make sure that the Council acquits its
collective responsibility in the right way is also very, very
important. So that is something we will be focusing on, I
think.
In terms of priorities beyond getting that basic rhythm
right, clearly, the Council has by statute four studies that it
needs to do that are important, two relating to the Volcker
provisions and one relating to risk retention in the
securitization area, a final one having to do with the overall
economic effect of this regulatory framework. Beyond that, the
Council, I think, should and will prioritize the question of
which nonbank financial institutions ought to be designated as
systemic, and beyond just firms, also utilities.
So I think those are the core things beyond keeping abreast
in a range of ways of the various members' views about what
systemic risk exists in the system and how we are addressing
them and how they ought to be addressed.
Chairman Dodd. Let me just quickly say that I appreciate
that Secretary Geithner will be at tomorrow's meeting. I am
going to be as interested in who shows up at the following
meetings. Too often, what happens is, again, this gets
relegated to some very good people, I am sure, but it takes on
less of a priority. And I do not expect the Secretary of the
Treasury to show up at every meeting, but I would really like
to know that there is someone, particularly someone who might
happen to be coming before this Committee to be confirmed, that
within that structure has the responsibility, whether it is the
member of a commission that someone has designated, that that
is the person who will be there so we in this Committee in the
coming years will be able to have someone that comes before us
from your respective agencies that we can talk to about this so
it does not end up being, and I say this respectfully, of some
staff member who has been just given the job to be there and we
see this culture begin to return to where it has been.
I do not expect you to necessarily answer that question
right now unless you know. Do you----
Mr. Wolin. Well, let me say, Mr. Chairman, the Secretary
has been very, very engaged in these implementation issues to
date----
Chairman Dodd. Right.
Mr. Wolin. ----and he does absolutely expect to be very,
very engaged in them, in the work of the Council on an ongoing
basis, not just tomorrow. He will personally be very much
involved, whether that means every single meeting, but I think
that is his expectation. And a number of his senior staff,
myself included, will continue to stay fully engaged, as well.
So I think the basic answer is Secretary Geithner expects that
he will be chairing these meetings on an ongoing basis.
Chairman Dodd. All right. Well, that is good, and again,
this is for all of you here, but I would recommend, because you
will set the tone for years to come. Long after all of--
certainly I am gone and you are gone, as well, who your
successors are and how you set up this and begin to move this
will become sort of the standard. And so it is very important
how this starts, in a way.
Chairman Bernanke, do you have any thoughts on this?
Mr. Bernanke. Yes, Mr. Chairman. I will be attending the
meeting along with Governor Tarullo, who has been a point
person for us on bank supervision and regulation, and I intend
to be the regular representative for the Federal Reserve.
The Dodd-Frank Act provides for a Vice Chairman for
Supervision at the Federal Reserve, which has not yet been
nominated, but that person obviously would also play an
important role going forward. I think this Council is very
important. Given all these overlapping responsibilities,
coordination is going to be extremely important. And in
particular, many of the aspects required to set up this regime,
designating systemically critical firms and utilities, for
example, comes from the Council, and so that needs to be put in
place that we can begin to implement the basic structure of the
Act.
Chairman Dodd. Great.
Ms. Bair.
Ms. Bair. Yes. I will be attending, and, as long as I am
Chairman, I will be representing the FDIC. I think it is very
important that all the principals fully engage with this
important effort.
In terms of priorities, I certainly agree with Deputy
Secretary Wolin. Certainly, from the FDIC's perspective, a top
priority should be the designation of nonbank systemic firms.
This is closely related to our ability to be prepared, because
that triggers a living will resolution planning requirement,
and so early identification of those entities which the Council
feels are systemic is very important.
Also, I hope that the Council will be forward-looking,
identifying not just systemic institutions but systemic
practices and emerging risks. We see some emerging risks now,
and being forward-looking and proactive--to try to get ahead of
them, identify them and deal with them before they become big
problems--I think is a very important focus for the Council.
Certainly, coordination is an important function, too, but
I think people of good will will work collaboratively together
and share information and respect each other's respective
spheres of expertise to get this work done. I think if we all
start trying to rewrite each other's rules, though, this
Council will become an impediment, not a way to facilitate
reform. It is very important to get the balance right, and I
think we all are committed to working together to make sure
that happens.
Chairman Dodd. Thanks very much.
Chairman Schapiro.
Ms. Schapiro. Thank you. I will represent the Securities
and Exchange Commission and I would certainly expect to be at
every meeting of the Council.
Obviously, everyone has said designation of the nonbank
financial institutions is really a critical and a high priority
item. I would also say that from my perspective, because we
have much to do to implement rules to fulfill the Volcker Rule
requirements under the Act, we will be particularly interested
in launching a study that predates the rule writing in that
area and getting comment and getting the background that we
need to do that in a thoughtful way.
Chairman Dodd. Thanks.
Mr. Gensler. Chairman Dodd, I expect to be there and at
every meeting. I am not even sure under the Commodities and
Exchange Act I could send somebody else to vote for me there,
so I think that is pretty clear.
I would also compliment Treasury. I think they have been
excellent. I mean, we are all sort of learning a new thing
here, this Council----
Chairman Dodd. Right.
Mr. Gensler. ----but they have been excellent, seeking the
advice. We are sort of at this end of the table. I would
associate myself more with Senator Reed or my Senators from
Maryland. Like the Senate, there are small States, they are
middle States and large States, but the Treasury has been
excellent in taking all of our views into being.
In terms of priorities for us, at least, one thing that we
see over the many months ahead is to designate some
clearinghouses to be systemically relevant. We currently
oversee 14 clearinghouses. We think that might grow to 20 or
so. But some small handful would be so important under Title
VIII of the statute, the Council would designate them, and I
hope tomorrow to at least highlight that we will do that. But
it would certainly come months from now before that happens.
Chairman Dodd. I appreciate that.
John.
Mr. Walsh. The basic operating rule is principal plus one.
I expect to be there. I assume the Comptroller that is
nominated by the Administration will be there. Our Chief
National Bank Examiner is the support for our participation.
I think the key challenge over time is going to be figuring
out how to assess systemic risk across the entire financial
system. We need to gather the data that is available in the
agencies and the private sector to begin mapping risk across
the system. We need agencies to bring issues to the Committee
and I think that will be the kind of challenge as it develops
its work. And the overall challenge is getting consistent
policy across a number of independent agencies. That is not so
much a challenge for the FSOC, but the challenge we all face.
Chairman Dodd. Right. Well, I will come back to that, and
again, time is up. But let me ask just one quick question of
you, Chairman Schapiro and Gensler--other questions I have
would require participation by more, so I will wait for the
next round.
And you touched on this, Chairman Gensler, on the
derivatives market and the reaction internationally. It is not
only obviously vast, but it knows no geographic boundaries
obviously and poses some issues. The European Commission
recently released its proposals it talked about, which will be
debated and finalized to the European Union legislative process
in the coming months.
Just again, you suggested this to be the case. Maybe
develop it a little further, and Chairman Schapiro as well,
based on what you know. And I know you were planning to be
there, but for today's hearing. So I am grateful to you for
being here today, but urge you to get over there quickly as
well, given the importance. I know you cannot be two places at
once.
[Laughter.]
Chairman Dodd. Is the European approach consistent with
where we are going on this? We have sort of a sense of that,
but I do not want to put words in your mouth. That is very
important to me, this harmonization idea, that we have a
consistent set of rules to the extent we can around the world.
Mary, do you want to go first on that?
Ms. Schapiro. I am happy to. I think Gary said it actually
very well in his opening statement.
I think the European Union direction is broadly consistent
with Dodd-Frank: mandatory clearing of all eligible contracts,
reporting of OTC derivatives, strict capital and
collateralization or other requirements when contracts remain
between two counter-parties, where they are bilaterally
cleared. There is a regulatory framework they will put in place
for trade repositories, very similar to what we are doing here.
So I think there will obviously be details, but in broad
scope it is quite surprisingly almost, in my way of thinking,
consistent with the approach that we have taken in the United
States.
Chairman Dodd. You know we were told that this is the fact,
and again I think we surprised a lot of people, but the fact
that the Administration, we up here, led on this issue has an
impact on what Europe has done. Is that a fair assessment?
Ms. Schapiro. Oh, I do not think there is any question
about it, that when we lead as the largest market in the world
other countries look very carefully at what we have done, and
we often look to other countries when they have led, to see if
we can be consistent. I think there is broad appreciation among
international regulators that while in every jurisdiction all
the rules will not be identical, that it is in fact important
to get them as close as possible, so that we do not see
business migrate for the wrong reasons.
Mr. Gensler. And I would just add I mean Commissioner
Barnier, Michel Barnier, who is the European commissioner who
has oversight of all of this and recommends to the parliament,
and Sharon Bowles who sort of has either your or Chairman
Frank's role in the parliament, we have been talking to them
really since last summer and fall. And Treasury and the Federal
Reserve have in addition to us. It has been an excellent
partnership.
The clearing mandates are very similar--the idea that
financials would come in and nonfinancials were out. They sort
of have a clearing threshold, so some nonfinancials would have
to come in, where we do not have that. They have these trade
repositories and so forth.
The one distinct thing is they have said on the trading
requirement they are going to take that up in about six or 7
months in a different legislative package. So there is some
timing delay, and we will have to wait to see where that it is.
Chairman Dodd. Thank you very much.
Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Bernanke, as you well know, one of the goals of
the Dodd-Frank legislation was to end Government bailouts. The
FDIC was granted vast new powers under that legislation to
resolve financial institutions, so that no one institution
would be, as I understood it, too big to fail.
If the market still thinks that the Fed, the Federal
Reserve, will rescue failing firms, it will continue to provide
large financial institutions with below-market financing,
perpetuating our already severe too-big-to-fail problem. With
the passage of this legislation, Dodd-Frank, can you, or would
you, categorically state that the Federal Reserve will never
again rescue a failing financial institution such as AIG, for
example?
Mr. Bernanke. Senator, I can say that because Dodd-Frank
has eliminated the authority that we used to address AIG, which
was the ability to lend to an individual firm, so that whatever
any future chairman may wish to do that authority is no longer
available, first of all.
Senator Shelby. Do you agree with that?
Mr. Bernanke. I do agree.
Senator Shelby. OK.
Mr. Bernanke. And I supported that throughout, that
eliminating that authority was entirely appropriate if we were
able to develop a regime that would allow for an orderly wind-
down of a firm, and Chairman Baer and the FDIC have been
working very hard to develop a set of rules to govern that
process.
I just may add I think the most important additional thing
we need to do is to keep coordinating with our international
colleagues because these firms are typically multinational and
we would want to be able to work closely with foreign
regulators as well.
Senator Shelby. How important is it for this message and
the legislation that we have passed that is going to end
bailouts, how important is that to people running financial
institutions?
Mr. Bernanke. Well, it is extremely important, Senator. I
know from a political point of view that American taxpayers do
not want to be on the hook for these kinds of bailouts in the
future.
Senator Shelby. Do you blame them?
Mr. Bernanke. I certainly do not blame them.
Senator Shelby. OK.
Mr. Bernanke. But from a financial regulatory point of view
the other important aspect is that we want to have market
discipline. We want to lenders to, large firms to believe that
they can fail and therefore to take due care to make sure that
the firms they are lending to are not taking excessive risks.
Senator Shelby. What is your judgment on Basel III at the
moment? Just sum it up.
Mr. Bernanke. I think it is moving in a very productive
direction. It has strengthened capital, raised capital
requirements, improved the quality of capital which is very
important. It has created an international leverage ratio. It
has introduced liquidity requirements. It has addressed some
cyclicality issues. So I do think it makes some very
substantial progress on providing stability for our banking
system. There is still work to do be done though.
Senator Shelby. Chairman Schapiro, what is the SEC doing
now to develop and also to implement a permanent solution to
the credit rating agency that is deep and with us? I know it is
complicated.
Ms. Schapiro. It is complicated. And as you know, since
2006 when the Credit Rating Agency Reform Act passed, the
agencies engaged in quite a lot of rulemaking with the very
able assistance, I should say, of your former staff and
Commissioner Kathy Casey. But under the new law we have a
number of additional requirements that will go into place. So
we have communicated with the rating agencies immediately that
a number of the provisions take effect upon enactment of the
law, do not require SEC rulemaking. So they need to change
their governance, for example, and those efforts are underway.
We are also staff----
Senator Shelby. How important is that to, say, every
bringing back the securitization market?
Ms. Schapiro. The role of credit rating agencies is one
that is particularly important in the securitization market.
The law repeals Section 436(g) which would no longer allow the
use, or the reliance upon--it requires a credit rating agency's
consent to their ratings being included in offerings. They will
not consent thus far, and it is not clear whether
securitizations on what basis will continue to go forward until
we reach some kind of an accord with the rating agencies.
We have issued a no action letter to effectively remove the
requirement from our rule that credit ratings be included where
the offering is dependent upon the rating.
So we are working through those issues with the credit
rating agencies. We are also establishing our credit rating
agency office that the law requires, that will report directly
to me. We are employing the examiners that will be necessary to
put credit rating agencies on an annual examination cycle,
which is particularly important and required under the law as
well.
There are a number of rulemakings that will have to go
forward relating to due diligence and other issues, reps and
warranties in the asset-backed securities markets as well, that
require the role of the rating agencies and the SEC to write
rules.
Senator Shelby. I hope it works.
Ms. Schapiro. So do we. And Senator, I am sorry, I should
just add that the law also requires us to evaluate all of our
existing regulations and to remove reliance upon credit rating
agencies in all of those rules, and that process is also well
underway. We had already proposed that in the asset-backed
securities markets for the use of shelf registration.
Senator Shelby. Chairman Gensler, I want to get into your
area if I can. You publicly argued against an end-user
exemption from the clearing requirements in the derivatives
title that we passed, and you have argued repeatedly for
keeping any exemption as narrow as possible. What steps are you
taking to ensure that your personal aversion to the end-user
exemption does not interfere with your agency's mandate to
carry out the Dodd-Frank legislation? What are you doing here
and how will it affect the end user?
Mr. Gensler. Senator Shelby, a very good question, but I
took an oath of office and Congress writes the law. So we are
going to adopt exactly what you have.
There is a clear end-user exception for anyone who is
hedging or mitigating a commercial risk for nonfinancial firms,
and I think that was a balance, to take that sort of 9 or 10
percent of the market out. Completely what we are going to do
is comply with the law, and I think that was a balance that
Congress appropriately made.
Senator Shelby. OK. Thank you.
Secretary Wolin, each of the regulators charged with
rulemaking under the legislation, Dodd-Frank, has publicly
committed to specific steps to provide transparency during
their respective processes. You are familiar with that. Will
Treasury follow this lead and post on its Web site, or
otherwise make public, the names and affiliations of
individuals who meet with Treasury officials, including Special
Assistant to Secretary Geithner, Ms. Elizabeth Warren? Will you
do that? Will there be transparency there?
Mr. Wolin. Senator Shelby, we will be, I think, in very
short order publishing a transparency policy that will be
similar to what you ask about and making clear that people can
know who it is, senior officials at the Treasury.
Senator Shelby. Going back to you, Chairman Schapiro, the
SEC's experience in overseeing securities markets in which
participants have the choice of several different trading
venues, each of you, what are you doing to ensure that the CFTC
has the benefit of the SEC's expertise in this area, and vice-
versa maybe?
Ms. Schapiro. I will let Chairman Gensler speak to this as
well, but we do have a very different kind of a model in the
U.S. equity markets. They are quite dispersed. There are
multiple venues, exchanges, electronic communications networks
and even internalization of securities transactions. And we
think there is a lot of virtue, and there are some downsides as
well, but a lot of virtue to that competitive model.
And we have spent a lot of time talking with the CFTC about
the extent to which the exchange trading or swap execution
facilities that will handle both security-based swaps and
commodity swaps could benefit from understanding what has
worked well in the equity markets, understanding they are not
perfectly analogous.
Senator Shelby. Gary, do you want to?
Mr. Gensler. It has been tremendous cooperation, over 100
meetings with the SEC, and it feels a lot are around these
trading venues.
I would add, not to muddy up the hearing, within the next
couple days I think we will put out this May 6 supplemental
report. There are a lot of lessons from there too, and our
joint staffs. And we have a joint advisory committee of outside
experts that are going to give us a lot of advice too which
would address your point, and lessons from May 6 can apply even
to the derivatives marketplace.
Senator Shelby. Secretary Wolin, I want to get into the
question with you. The Treasury Department, I believe on
September the 21st, conducted a mortgage disclosure forum with
consumer advocacy groups and others. In a press release
surrounding the forum, Secretary Geithner stated in regard to
the Dodd-Frank legislation, I quote, and he said: ``Wherever
possible, we are committed to expediting completion of the
law's requirements ahead of statutory deadlines.''
Earlier in the month, Secretary Geithner stated in his
speech at New York University, and I will quote him again, and
he says: ``We want to move quickly to give consumers simpler
disclosures for credit cards, auto loans and mortgages, so that
they can make better choices, borrow more responsibly and
compare costs.'' Those are his words.
These are laudable goals, but seem to require rule-writing
authority which I do believe the new Consumer Financial
Protection Bureau will not have until a director is appointed
and confirmed by the Senate. Do you believe the Treasury has
the writing authority without a confirmed director, and if so,
why?
Mr. Wolin. Senator Shelby, I think there is limited rule-
writing authority, but it is constrained until such time as
there is a confirmed director.
But I think in the meantime there is plenty of work to be
done to get these various disclosures ready. It is an important
piece of the legislation and an important part of the mandate
of this new bureau. As you know, the mortgage disclosure
example, the statute says it has to be done a year after the
transfer date which would be July 21, 2012, and so we are keen
to make sure that this new bureau is ready to move forward with
its mandates and its focus, important focus on disclosure as
quickly as it can do. So it is the Secretary's responsibility
under the statute to stand this bureau up, and we want to give
it as much of a running start as we can, consistent obviously
with authorities.
Senator Shelby. With the law.
Well, let me ask all of you this. First, it has been
brought to my attention the Securities and Exchange Commission
has posted its rulemaking agenda on its Web site. Will each of
you do the same thing? We are interested in transparency and
what is going on.
Anybody against that? The SEC is already doing it.
Mr. Gensler. We did on the day the bill passed. We put the
30. We put them in buckets, but 30 teams. It was on our Web
site.
Senator Shelby. So you are willing to do that?
Mr. Gensler. Oh, absolutely. I think we have, but we can do
more.
Senator Shelby. What about you, the Treasury?
Mr. Wolin. Insofar as we have rulemakings, Senator Shelby,
we will be transparent.
Senator Shelby. What about at the Fed and rulemaking?
Mr. Bernanke. We are going to be as clear as we can. We are
in discussion with the others.
Senator Shelby. What does that mean when you say ``clear as
you can''?
Mr. Bernanke. Well, we have the following issue which we
are working on very hard, which is that many of our rulemaking
authorities are joint or consultative, and we just want to make
sure that we are coordinated with the other agencies.
Senator Shelby. Sure.
Mr. Bernanke. And we have not yet quite got all those ducks
in a row quite yet, but we will certainly try and make that
information available.
Senator Shelby. Let us know what you are doing.
Mr. Bernanke. OK.
Senator Shelby. Thank you, Mr. Chairman.
Senator Reed [presiding]. Thank you, Senator Shelby.
Thank you for your testimony.
Secretary Wolin, in response to Senator Dodd's question
about the systemic council, I think every respondent talked
about the need for analytical evaluations, looking ahead, which
raises the question of the Office of Financial Research. You
and the President and Secretary Geithner have really the
opportunity and obligation to create not just an organization
but a culture which I hope is analytical and apolitical, which
attracts the best minds that are looking across the system and
forward. Can you give us an update as to where you all are in
the process of appointing a head and getting that staffed?
Mr. Wolin. Senator Reed, thank you. First of all, thank you
for your leadership in creating the Office of Financial
Research. It is, I think, a very important opportunity for the
council and for the Federal Government in general to have a
much better handle on data and data analysis that can make sure
that it is in a good position to fulfill its various regulatory
responsibilities and systemic risk responsibilities
appropriately.
We are hard at work in trying to begin setting up the
structures that the statute requires. We want to do it
consultatively with the other regulators, to make sure we know
what data are already being collected and how they are being
collected, so that we can move forward smartly on creating data
standards and making sure that we do not duplicate efforts,
either public sector or private sector efforts at data
collection.
The President, I think is reviewing possibilities for who
might be the first head of the OFR. We are very much focused on
making sure that it is someone who has real experience and
capacity in data collection, data analysis and its application
in these important contexts.
And of course we want to make sure that the office, when it
is stood up, has the independence that the statute intends for
it. It is a part of the Treasury, but with independent
leadership and budget capacity and so forth. And that is an
important element so that the work of this office provides a
clean, unbiased, unvarnished look at the issues which I think
are critical and which give the Government, for the first time,
a real set of potential tools that it has not had.
Senator Reed. Thank you, Mr. Secretary.
Chairman Bernanke, in a similar vein, Title 9 of the bill
requires, as you mentioned in your comments, the appointment of
a Vice President or a Vice Chair for Regulatory Supervision at
the Fed. Do you have any notion of when that might happen?
Mr. Bernanke. I do not have any precise information. I know
it is the Administration's responsibility. I know they are
considering alternatives, but I have no specific information.
Senator Reed. Switching gears, one of the provisions in the
legislation in terms of the Volcker Rule allows an exemption
for roughly 3 percent for an institution to continue
proprietary trading. I must say Senator Levin and Senator
Merkley were really the key people pursuing a much tighter
regime. But nevertheless, can you give us an idea of how much
additional capital an institution like that, if they have their
proprietary trading operation continue, would have to carry? Is
that something you have considered already?
Mr. Bernanke. I am sorry, that the bank would have to
carry?
Senator Reed. That the bank would have to carry. Or, let me
put it another way. Would you require additional capital as one
of the sort of prudential ways in which you could protect the
system from proprietary trading if an institution uses the 3
percent?
Mr. Bernanke. Well, first of course, as you stated,
Senator, there is a 3 percent of capital limit that a bank can
dedicate to that.
Senator Reed. Right.
Mr. Bernanke. But, in addition, we have already in fact
begun implementation of new rules for capital requirements for
trading books, for trading of securities and those sorts of
things.
Senator Reed. So, essentially, you were already beginning
to think about if one chooses this option to have additional
capital even beyond what is required by the minimum rules?
Mr. Bernanke. Well, on the Volcker Rule specifically we are
of course engaged in the study, that we are working with the
council to develop the study, and we will be working
expeditiously to put in rules to implement the intent and to
figure out what the appropriate exemptions and so on are.
On a separate track, the Basel II international capital
requirements have already significantly increased the capital
required against risky trading of all types that would be
market-based trading as opposed to loans on the banking book.
Senator Reed. Let me ask another question too. As you go
forward monitoring these operations, will you have on a
frequent basis, perhaps even daily basis, actual knowledge of
the positions that these trading units will be taking and also
what units the clients of the bank are taking? Will you have
that detailed constant information?
Mr. Bernanke. We do not have that information on a daily
type basis now. We mostly operate via rules and policies,
assuring that the bank or the bank holding company has a set of
risk management tools that it is applying consistently, and
then we check to make sure that is happening.
I think an open question is whether the Office of Financial
Research will be gathering more detailed position information
and the like, and that is certainly something that we may want
to look at because that may be the only way in which to
identify, across the system, crowded trades or other risks that
might not be visible from the perspective of an individual
institution.
Senator Reed. I appreciate the systemic approach, but in
just looking back it seems to me that the approach of looking
at the risk assessment and evaluating it and seeing that they
were doing what they said they were doing did not seem to be
particularly helpful in many circumstances in the past. And if
that is the approach that you choose to take, it very well may
be ineffectual going forward. If these major institutions are
going to have, under this exemption, a proprietary trading
operation I would say, do you not think you need to know a lot
more than just their risk policies and whether on a periodic
basis they are doing what they say they are doing?
Mr. Bernanke. We certainly do need to test what they are
doing and to evaluate their positions, but realistically we
cannot duplicate their entire operation.
Senator Reed. I understand that.
Mr. Bernanke. We are going to have to assess based on
sampling and based on spot-checks and the like.
Senator Reed. I think Chairman Schapiro has a comment.
Ms. Schapiro. I was just going to add that since we have to
define market-making and underwriting activities that are
permissible under the Volcker Rule, one of the things that we
will be looking to is a new large trader reporting system that
we have proposed in the consolidated audit trail. That should
help provide us with much more granular information about
trading activities that we would hope we could then share with
fellow regulators, to make a determination whether market-
making has been exaggerated and goes beyond what is permitted
under the rule and has become speculative or proprietary
trading. So we are intent on working very closely with our
colleagues on that.
Senator Reed. Let me just say, both to Chairman Gensler and
Chairman Schapiro, the comments this morning reflect a
collaboration and cooperation that is recent, but is very
commendable.
Just specifically, I know, Chairman Gensler, you are going
to propose a rule tomorrow or in the next few days about
clearing platforms.
Can you both comment on the collaboration that you have
entered into in terms of making sure this rule is truly
reflective of both your equities in the business of clearing
derivatives?
Mr. Gensler. The three things we are taking up tomorrow and
all that we are taking up all the way through December, we are
sharing not only drafts, but we share preliminary term sheets,
and we try to collaborate.
On the governance rule tomorrow, I think Chair Schapiro can
talk. They are about 10 days behind us. We could not quite get
our commissioners' schedules lined up. As of now, I think they
are nearly identical, the actual text and so forth. Now those
10 days may change something, but that is what our goal is on
each one of these--to be, if not identical, nearly there. That
is certainly.
And I think Mary and I have such a relationship. I know
future chairs might not, but we have been benefited, and we
want to use that.
Senator Reed. Chairman Schapiro, do you have comments on
that?
Ms. Schapiro. No. I would agree completely. I think the
cooperation really has been unlike anything I have ever seen in
my all years in Government, and I think it is very positive.
Even where we have had slightly different approaches, which I
expect we will on some issues going forward, we are committed
to asking questions about each other's approaches in our
proposals, so that we can, even if we do not propose exactly
the way, bring them back as close together as we can at final.
Senator Reed. Mr. Walsh, please.
Mr. Walsh. Just on this thought about risk management
systems, I think the recent experience showed in some cases
that large, complex institutions thought they were managing
particular portfolios and risks and lines of business in an
effective way, but did not really capture all exposures and all
risks across lines of business and across activities. Improving
their internal MIS to capture risk positions across the whole
firm is part of that effective risk management that Chairman
Bernanke was referring to, and that is an emphasis going
forward.
Senator Reed. Now I think we have made progress, but my
sense was, not specific to one regulator, is that there were
these elaborate risk procedures and that you reviewed them. And
if they made sense, sure, they were OK. And if you occasionally
spot-checked them, that was great. But as you indicated, they
did not seem to work.
I do not have a magic answer, but I think there has to be a
much more textural or granular approach, even periodically.
Otherwise, I think we will find ourselves right back where we
were, and that would be unfortunate.
Thank you.
Chairman Dodd. Thanks very much, Jack.
I appreciate, Chairman Gensler, you talked about how the
two of you--you cannot speak for future people who sit in these
chairs. All the more reason why you need to institutionalize a
lot of this so that it does not become just a question of two
people at this particular moment in time have that
relationship. It will be very important in the years to come
that that relationship between the CFTC and the SEC be a
continuation of what you are doing. So anything you can do to
institutionalize that so that people do not drift away, as they
are apt to do in the coming years, would be very, very helpful
as well.
Mr. Gensler. I agree with that, and I am personally
dedicated to figure that out.
Chairman Dodd. And I want to just mention--Jack is
finished. I did not say it earlier, but I am very grateful to
all the Members of this Committee who worked so hard on all of
this. And even though we did not end up with the kind of votes
necessarily on this, an awful lot of this bill reflects an
awful lot of work by a lot of Members of this Committee, not
the least of which was the person I am about to introduce, and
that is Bob Corker. So I would not want the moment to pass.
That whole Title I, Title II that you and Mark worked on in
large part is your effort and Mark's, so I thank you immensely
for it.
Senator Corker. Thank you, Mr. Chairman. I appreciate the
way you have conducted this Committee for the entire time I
have been on it. Thank you very much, and I will talk about
that later.
And I appreciate each of you coming today, and nice to hear
everybody is playing well with each other at the moment.
[Laughter.]
Senator Corker. Secretary Wolin, the CFPB, the issue of
consumer protection, I think there has been some discrepancy
about whether it actually has rulemaking authority between now
and July of 2011. You seem to indicate you think there is
limited rulemaking ability. I wonder if you would expand upon
that, because I think a lot of us think that during this
transition there absolutely is no rulemaking authority until it
is actually transitioned.
Mr. Wolin. Thank you, Senator Corker. I think, you know,
the Secretary has by statute a series of authorities to stand
this Bureau up, and I think that those include, of course,
working with the other regulators that are transferring both
authorities and people as well as getting the Bureau ready to
undertake its rulemaking and its supervision and enforcement
authorities as of the transfer date next July.
I think the rulemaking authority is circumscribed, but I
think the Secretary probably does have the capacity to do the
things that I just talked about, getting these authorities and
people transferred over----
Senator Corker. But not real rules across the financial
industry, then.
Mr. Wolin. I think that is probably right. It is quite
limited there. I think that is right, Senator.
Senator Corker. So let me make sure I understand. So there
are some abilities to stand the organization up, but I think
what you are stating today is there is absolutely zero ability
to make rules as it relates to consumer protection that relate
to the financial system.
Mr. Wolin. Well, again, Senator, you know, absolutely
zero--I think that the Bureau, the Secretary on behalf of the
Bureau in this transition phase as he is standing it up has the
capacity to do the sorts of things we did last week: have fora,
get on top of the issues, hear from people about what they
think, and so forth.
Senator Corker. Right.
Mr. Wolin. I think the authority to actually issue a rule
that would bind private parties, for example, in the mortgage
area is a tough one until such time as there is a confirmed
director.
Senator Corker. Let me just--a tough one. That is a vague
word. What I would like for you, if you would--I know we have
had a good relationship. If you ever think that you have the
ability to actually make a rule, would you make sure we all are
aware of that?
Mr. Wolin. Absolutely.
Senator Corker. At present, it is my understanding, as I
leave here today, that you do not have that authority until the
organization is stood up in July of 2011.
Mr. Wolin. Before we do any such thing or----
Senator Corker. Well, before even thinking about doing----
Mr. Wolin. ----comes to you.
Senator Corker. ----thing, I hope that you will talk with
us.
[Laughter.]
Mr. Wolin. Fair enough.
Senator Corker. Because I assume we would have a Senate-
confirmed type of person in that position before you all
started making rules.
Mr. Wolin. The President obviously intends to nominate
someone. He is reviewing candidates for that role right now, I
think committed to making sure he gets the best candidate he
can, and I believe that he hopes to be in a position to make a
nomination on this role soon. And as I said, I think the
rulemaking authority, insofar as you are talking about it, I
think, Senator, depends on that process moving forward.
Senator Corker. And being completed.
Mr. Wolin. And being completed.
Senator Corker. OK. I understand that the Treasury is going
to be presenting a GSE proposal around January the 1st, and
just--because I think like a lot of things we did over this
last year, many of us will start working together on both sides
of the aisle to try to figure out the most pragmatic way of
doing that. Do you still plan on having something that is very
tangible on January the 1st?
Mr. Wolin. The statute requires it in January, and we
intend to certainly meet the terms of the statute. We are hard
at work on this topic, as I think you know, Senator, and we
will come forward with an approach before that time.
Senator Corker. And I assume you are involving other
banking agencies and entities in that process.
Mr. Wolin. We are, Senator. We are consulting broadly
within the Government and without.
Chairman Dodd. Let me make a suggestion to you as well. You
are trying to involve people up here, and I think in this
process of conversing about it, my recommendation would be, as
someone who will not be here, there are a lot of people
interested in this subject matter, you would be well advised to
invite people to be a part of that discussion. You might find
yourself on a better track when we come forward. Just a
thought. Sorry to interrupt.
Senator Corker. Yes, and I think--and I appreciate your
intervening there? I think would be a good idea. I actually
think there are a number of people on both sides of the aisle
that want to solve the problem, and I think it would be good to
have a little bit of discussion along the way. I know we are
spending a lot of time in our office, and I know others are,
too. So it is an issue that we all together have got to figure
out a way to deal with. I cannot imagine anybody likes it the
way that it is today, and so I would hope you would do that,
and I thank you.
Do you have any idea about the criteria that the FSOC, I
guess, as we are calling it now, is going to use to define a
systemically important entity? I imagine there are a lot of
companies around the country that are wondering if they are
going to be in the sights or not. Do you have any indication as
to what that criteria might be?
Mr. Wolin. So let me first, just if I could, Senator, go
back on the GSEs. We had a fantastic working relationship with
you, Senator, and with all the Senators on this Committee on
the Dodd-Frank legislation. We fully intend to have a similar
relationship on GSEs. We look very much forward to working with
you and others on the Committee and across Congress on what is
clearly a critical issue on which we are going to have to work
together.
On the matter of FSOC designations, I should say in the
first instance this is really a question for the FSOC
collectively to work through. As I said in my opening
statement, I expect that tomorrow at its first meeting the FSOC
members will consider a proposal to seek public comments on
what those designation criteria ought to be so that we have,
again, a robust conversation about that before the FSOC lands.
But I think not for me to make a judgment, ultimately before
the full range of the FSOC membership on the basis of whatever
input it receives--and its own analysis, clearly--to make
judgments about what those criteria ought to look like.
Senator Corker. Chairman Bair, it is good to see you again.
It has been a long time since you were meddling in all our
affairs.
[Laughter.]
Senator Corker. I am just kidding you, of course.
The interagency working group was going to set up, I guess,
the risk retention standards and safe harbor. I know you sort
of jumped out in advance of everybody in that regard, and I am
just wondering if you have had any input from the other
agencies. I know the OCC opposed that, and I wonder if you
might just expand a little bit on that. And I really appreciate
your input. I was not trying to be----
Ms. Bair. If I could review the history of that. A number
of members of the industry came to us late last year in
anticipation of the new accounting rules, FAS 166 and 167, that
changed the accounting treatment for securitized assets. It
made it much tougher to get what we call true sale accounting
where you have a clean sale and can move that off balance
sheet.
We had a safe harbor that determined whether we would try
to claw assets back that had been securitized if the bank
fails, and we had relied on achieving true sale accounting to
provide for that safe harbor.
The concern was that securitizations would no longer meet
the true sale standard of the new accounting rule. So we
provided some temporary safe harbor relief for everybody
retroactively. But going forward, we thought, given all the
problems in the securitization market, the incentives for lax
lending, the losses that had been created for banks, the
problems we were seeing with resolution activity with failed
banks, that we should impose some conditions on the safe
harbor. In addition to requiring risk retention, we worked very
closely with the SEC on more granular loan level disclosure.
This is something we had heard from the investment community
that they wanted very much.
We tackled servicing issues, too. We have had a lot of
problems with servicing, including lack of servicer oversight,
and an inability to restructure loans because of restrictions
in pooling and servicing agreements.
So we addressed what we thought were key issues in the
conditions, and went out for two sets of comments on this.
Consequently this has been going on for nearly a year. A 5-
percent risk retention requirement is part of the, which is
consistent with the SEC's proposal. The disclosure requirements
are synched up with the SEC, to try to have one standard for
everyone.
Yes, we decided to go ahead with the safe harbor rule that
was expiring at the end of this month. It is important for
people to understand we had to do something. If we did not do
something, we would have disrupted the securitization market,
especially all the outstanding securitizations currently in
existence. We think what we did was prudent.
In addition, we put an auto-conform provision in our rule
so that once the agencies do get together and define what a
qualified residential mortgage (QRM) is, the 5-percent risk
retention provision will no longer apply. And we are very eager
to engage in that process. We hope that, to some extent, this
will be an action-forcing event so those interagency rules can
be done on a very timely basis. It is a 270-day timeframe that
is provided by Dodd-Frank. We hope that is met. We would like
to see it sooner than that.
Senator Corker. And that is the timeframe to actually
define a qualified residential mortgage?
Ms. Bair. That is right. But pending interagency rules we
presently do not have underwriting standards, and, frankly, we
do not have a securitization market right now. Nothing is
happening. I think a lot of it is because investors just do not
have confidence to start it up again.
Senator Corker. Why did the OCC object to the rule?
Mr. Walsh. A fairly straightforward thought that we have
held the position since this was in a Notice of Proposed
Rulemaking that it would be preferable to have a single policy
on securitization across all markets and all securitizers. And
we did not see any great downside to just extending the safe
harbor for the 270 days and then having a set of rules in each
venue that conform to one another. So it is a fairly
straightforward point.
Ms. Bair. And if I could just say----
Senator Corker. Well, Mr. Chairman, I sense a slightly less
playing well together than appeared. I think that these are the
kind of things that are going to take a lot of oversight down
the road. But if you want to respond.
Ms. Bair. Well, thank you, Senator. The 5-percent risk
retention is the law in Dodd-Frank. It clearly states that you
have 5-percent risk retention unless the mortgages comply with
new underwriting standards that will be developed by the
agency. So we think we were quite consistent with the clear
language of what the law is now under Dodd-Frank.
And, again, we hope this happens in 270 days. My experience
with interagency rulemaking is that sometimes those deadlines
are missed. The SAFE Act required simply that we do interagency
rules to register mortgage originators. It was a 1-year
timeline, and it took us 2 years.
FCRA is another example where the agencies overshot the
statutory deadlines by a significant amount. So we think it is
only prudent to have the 5-percent risk retention in place
until these underwriting standards are developed, and if this
can help facilitate a timely process, we welcome that, and we
think that is very consistent with what is in the letter of the
law now.
Senator Corker. Mr. Chairman, thank you for letting me go a
minute forty over, and I want to thank each of you for your
testimony. This whole issue of securitization was one that I
think we were all trying to understand how this 5-percent
retention would work, and I do look forward to talking to each
of you. This is obviously--especially in the commercial side. I
mean, there is nothing happening right now.
Ms. Bair. It does apply to commercial and to all other
securitizations.
Senator Corker. No. I understand that. I understand that.
But as it relates to the securitization business in general, I
mean, there are a lot of problems there, and I do look forward
to working with each of you to try to deal with that. It looks
like you want to say one more thing.
Ms. Bair. The one private label securitization that I am
aware of, did have a risk retention of 5 percent vertical and
horizontal slice. So the one that was done did have this
feature in it.
Senator Corker. Well, there is a wealth of knowledge
sitting at the table there, and we certainly look forward to
working with you over the next couple of years.
Thank you.
Chairman Dodd. Thank you very much.
Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman. Thank you for
having this hearing, and thanks to all of you for coming
together. It is fun to have you in one place.
I think I would like to start with you, Chairman Bernanke
and Chairman Bair, if you have got thoughts about this, too.
You know, among ending the TARP and Basel III and setting up
the infrastructure for the resolution authority, I wonder if
you could tell the Committee what actual changes your agencies
have been able to discern in behavior at the largest, most
interconnected financial institutions. Is there less leverage,
those kinds of things? What are you actually seeing? And,
Chairman Bernanke, I was, as always, curious on the
quantitative surveillance mechanism you talked about, whether
you could describe that. Is that something that is up now? And
how are you going to use it? What are the inputs going to be?
So those are my first two questions.
Mr. Bernanke. Well, we are certainly seeing movement in the
right direction in our banking system. Capital has been
increased significantly. One of the results of our stress test
was to not only increase capital but to increase the quality of
capital, to have more common equity. All of the banking
agencies are pushing the banking organizations to improve their
management information, their risk management systems. Some of
the banks were not as able as they should have been or we
should have insisted they had been to identify risks on an
enterprise-wide basis running into the crisis. And so progress
is being made on those lines as well.
Obviously, this is a period where, given that we have just
come through a crisis, banks are not, generally speaking,
taking excessive risks. In fact, many of the portfolios are
quite conservative, and so we will have to see how things
evolve as the economy normalizes. But I do think things are
moving in the right direction.
At the Fed we are moving toward a more, as I said,
macroprudential and multidisciplinary approach. We are in the
process of establishing a staff Office of Financial Stability
which will draw on staff resources from a wide range of
disciplines--economics, finance, payment systems, accounting,
legal, et cetera--which in turn will provide inputs and
analysis to other parts of our operation.
So, in particular, for example, we have revamped our
supervisory organization to take a more multidisciplinary
approach and, for example, to do stress tests which are based
on alternative macroeconomic or financial scenarios. This
Office of Financial Stability is responsible for generating the
scenarios and their implications as an input into that stress
test analysis. And so we are linking together these different
parts of our expertise.
As you mentioned, we have a quantitative evaluation--sorry.
Senator Bennet. Let me stop you there before you do that.
Had what you are describing been in place precrisis, what are
the things that you think--the macroeconomic trends that you
think you might have picked up that were not picked up by the
Fed?
Mr. Bernanke. Well, I think we would have identified some
of the broad-based risks that were occurring, the broad-based
leverage. Our Office of Financial Stability, besides providing
inputs into bank supervision, is going to provide general
monitoring functions looking across a range of markets and
institutions and funding markets and the like, trying to
support our membership in the FSOC and in our collaboration
with other agencies.
So we plan to take a much more holistic viewpoint. I do not
think people appreciate how much that, prior to the crisis,
agencies were very focused narrowly on individual markets and
institutions, and there were very significant gaps. And I think
it is important for all of us to work together to make sure
that those gaps and emerging risks are identified, and this is
our intellectual framework for approaching that.
Senator Bennet. And I am sorry, before I interrupted you
were about to talk about the quantitative surveillance
mechanism.
Mr. Bernanke. Yes. So we are combining with our traditional
bank supervision, which goes and looks at the books of
individual banks, sort of offsite analysis which looks, for
example, at real estate trends and housing trends and house
price trends, mortgage delinquency trends and the like and
tries to make broader assessments based on market variables and
on macro variables--you know, what some of the risks might be
to the banking system. And interaction between those kinds of
analyses and the supervisory analyses I think is very helpful.
In particular, it was a very helpful addition to our stress
tests that we did a little over a year ago that we were able to
supplement the bank's assessment of the value of their mortgage
with a model-based econometric analysis that drew on
information about individual housing markets and the
relationship of house prices to macroeconomic developments and
the like.
Senator Bennet. That sounds to me like a big step in the
right direction, and I am wondering how you are planning on
sharing the results with the public. Or are you?
Mr. Bernanke. We are considering how best to do that.
Obviously, the first step is to make sure that our supervisory
process is comprehensive and macroprudential, and that is what
this is all about. But I think that we ought to think
collectively, the people at this table as part of the Financial
Stability Oversight Council, about what kinds of reports we
would like to provide. I think Dodd-Frank requires a regular
report from FSOC about financial stability and risks to
financial stability. And one natural thing would be for our
analysis to be part of the input to our collective reports to
the Congress and to the public about the stability of the
financial system.
Senator Bennet. Thank you.
Chairman Bair, do you have anything you want to add to the
first part?
Ms. Bair. Well, I think we are engaged in parallel efforts,
and as the backup supervisor and insurer, we obviously rely
heavily on the primary regulators, including the Fed,
obviously, for holding company data where we just recently were
given new authorities.
We have focused a lot, though, as had the Fed, on liquidity
monitoring and annually reporting on liquidity profiles on an
ongoing basis, including having consistent reporting and
horizontal analysis to be able to identify outliers.
I think your original question was what has changed,
really. I think the good news is underwriting standards have
gotten a lot better, and I would like for the supervisors to
take credit for that. I think that is as much to do with the
market and all of this coming home to rest. But that has gotten
significantly better, and I do think large financial
institutions, at least insured depositories and their holding
companies, are in much better shape now, are much more stable.
I think the SCAP results with the increased capital at that
time served us well.
And so I think this is giving us more time to put these new
systems in place, but there is a lot of work to do. I think we
just went too far in the other direction in assuming that the
market would always correct without providing vigorous
oversight. But there is a lot of groundwork to be done.
Senator Bennet. We are--and I know it is not the subject of
this hearing, but just for the record, still in places like
Colorado facing incredible challenges with small businesses'
access to credit. And I do not think all of that is loan
demand, but I am going to----
Ms. Bair. Well, I would not disagree with you on that. I
think there is a particular problem with small business credit,
and I think we have tried to take a very balanced supervisory
approach, telling our banks we want them to lend. For smaller
banks, frankly, the loan balances are stronger than they are
for the larger institutions.
Part of the problem, though, is a lot of the small business
lending went through home equity lines or was collateralized by
commercial real estate. Those values have gone down so
significantly, the collateral just is not there anymore. That
is a key part of the problem.
Senator Bennet. I think unleashing that again is obviously
so critical to our economic recovery, and both anecdotally and
also just in the broader trends that I am seeing, we are still
not there.
I wanted to come back, Chairman Schapiro, to something that
was of a lot of interest to me when we were doing this bill,
which you talked about earlier with the Ranking Member, about
what we are doing to minimize the conflicts of interest at the
rating agencies. There was one provision in particular that had
to do with the composition of the boards of directors of those
agencies and having independent directors. And I was not sure
in your answer to the Ranking Member whether that was
happening. Are they complying with that? Are we on track there?
Ms. Schapiro. We are monitoring it very closely. Right
after the bill was signed, we sent a letter to all of the
credit rating agencies informing them that all the provisions
in the law that took effect upon enactment as opposed to
waiting for the SEC to write rules, and that is one of them. So
we are checking in on them on a regular basis. We would be
happy to provide more specific information about where they
are.
Senator Bennet. I would appreciate that. That would be
tremendous.
Ms. Schapiro. Sure.
Senator Bennet. Thank you. And the last question--and I am
the last person who wants an unhappiness to break out here, but
I wanted to ask you, Chairman Gensler, and you, Chairman
Schapiro, about one particular rule that you are going to be
writing, which is to determine what types of entities are
considered major swap participants. How are you working
together? What process is that going to look like to get to a
result? Because part of also what I am hearing out there and
just as a general matter, not related only to Wall Street
reform, is just a sense of lack of predictability about things.
What are the rules of the road? We need to understand that.
By the way, I think that is a sensitivity that everybody
ought to have as you think about publishing the rules and
publishing the notices of the meetings, that there are a lot of
people out there that are feeling like they have got a complete
lack of clarity about what the future is going to bring, which
is important for us to hear and attend to. But in this specific
case, what is the process going to look like?
Mr. Gensler. I think you have raised two very good points,
trying to lower regulatory uncertainty so that businesses out
there can understand where we are. We are going to put out
proposed joint rules on definitions like major swap
participant. I think our current hope is to do that in the
middle of November right before Thanksgiving. We are human. We
may slip. But I think Congress really spoke to this. This
category of major swap participant in the statute should be
very small. Why is that? Because it is somebody who is not a
swap dealer but has some systemic relevance. I think there were
three prongs to it, but all three of them really speak that it
has to have some--if it fell apart or defaulted, had to have
some systemwide effect on the economy or the financial system.
So I think the majority, I would even say the vast
majority, of end users I would envision--again, it is ten
Commissioners between our two Commissions will have to comment
on this. But I would envision it would be a very small set of
companies because Congress really has spoken to this in that
way.
Ms. Schapiro. I would agree with that. I think the three
criteria that are set out in the statute make it clear that
this is not intended to be an enormous category of market
participants.
The other thing we have done, though, because we recognize
this is of such enormous interest, is we put out an Advanced
Notice of Proposed Rulemaking to solicit comment on how should
we define a number of things, including in this particular
area. So that I think will help guide us as well. And it is
important as well because a whole regulatory regime attaches to
it, and that will be new for many market participants who might
fall into this category.
So this is an area where I would expect we would get an
enormous amount of comment, and we will listen to it very
carefully.
Senator Bennet. Thank you very much. Thank you all for
being here.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator. You have been very
helpful down at the end of that table down there, but you have
been very, very supportive and helpful in this process over the
last couple years, and I personally want to thank you for it.
Senator Johanns, you, as well, have been a good friend. I
appreciate your work.
Senator Johanns. Thank you, Mr. Chairman. Let me just say
before I get started here, Mr. Chairman, it has been a pleasure
working with you. I think you have handled your chairmanship
and working with majority and minority in just a very, very
fair way. I want to say that publicly and tell you how much I
appreciate it as one of the new people here.
Let me, if I might, turn to, I think, the best people to
ask this to would be Chairman Schapiro and Gensler. As you
know, there was discussion about retroactivity of this
legislation relative to derivatives in contracts that had
already been entered into and I want to make sure that the
record is clear in this hearing. Do you see any part of this
legislation at all applying retroactively to derivative
contracts that were entered into before the effective date of
the legislation?
Mr. Gensler. Senator, I think it is a very good question. I
can only speak for myself, because again, five Commissioners,
five Commissioners and other regulators, also, as the Federal
Reserve and the prudential regulators have a very big role in
setting capital and margin. But I think where this has come up
the most and people have raised it in public and private
meetings with me is whether, for instance, contracts that
existed before the Act stand, and I think the Act is very clear
they do.
But also some people have raised, what about clearing
requirements or margin requirements and so forth, and I am just
sharing one Commissioner's view. I think that we should look
that that should be prospective, not retrospective in that
regard, and I know that is something that a lot of people have
raised, but I--this is a whole rule-writing process and a lot
of Commissioners and fellow regulators.
Ms. Schapiro. I would really agree with that. We have heard
the issue most frequently in connection with whether margin
requirements should now apply. We also appreciate, though, that
legal certainty is absolutely critical in this area. So while
my Commission has not dealt with this issue specifically, I
think we would be hard pressed to suggest that there ought to
be retroactive application of margin, but it is an issue we
will discuss extensively and also continue to take public
comment on.
Senator Johanns. Does anyone else want to weigh in on that?
Let me now go in maybe a bit of a different direction for
each of you, actually. Having served as a cabinet member and
attended meetings like this where you have a complex piece of
legislation that involves a lot of various areas, I have to
tell you that, quite honestly, I see conflict as somewhat of a
positive thing, and I will just give you an example.
Sheila Bair, if we wanted your boss to be Tim Geithner, we
could do that, but we do not want that. We like a certain
amount of independence. The same way with Ben Bernanke. If we
wanted your boss to be Tim Geithner, we could do that, also. I
mean, the words do exist in the English language to make that
occur if you can find the votes. But a decision has been made
that you operate independently and that independence is
important to the functioning of our financial system and your
regulatory responsibilities, et cetera.
So I appreciate the spirit in which you come here, which is
to try to say, well, we are getting along. I have sat through
those meetings, and I did not want the EPA running the USDA, so
if they attempted to, I pushed back. So I need to know, because
I think this is very important for oversight responsibility,
and I want to go right down the table here, I want to know very
specifically the areas of conflict that have arisen and the
area of conflict that you anticipate arising as you implement
this legislation. I will start at this end, Mr. Secretary.
Mr. Wolin. Senator, I think that just to sort of say
generally, the independence of the regulator's point is
obviously a critical one that I have mentioned already. Having
said that, at least in the Financial Stability Oversight
Council, having a cooperative spirit, establishing a rhythm to
accomplish the collective responsibility of the Council itself
is also important, and I suspect that in that context there
will be plenty of good debates with people, as you say, as they
should, taking different perspectives and offering different
views. I think the important thing is that it be done in a way
in which information is shared and that the group understands
that the ultimate role of that Council is distinct from the
individual independent responsibilities of the regulators as
regulators is something that is also important.
The Council has not had its first meeting yet, so I think
it is too early to tell, really, how that all is going to work
out. It is in early days. I think that as we at Treasury feel
like we have tried to convene representatives of all the
members of the FSOC in creating a governance structure and a
set of bylaws by which the Council can govern its affairs, it
has been a conversation that has been very helpful. People have
approached it in a very cooperative spirit. They have not
always agreed on exactly----
Senator Johanns. What are you not agreeing upon? You know,
we might want to weigh in here, and we have a responsibility to
provide oversight. We want this implemented right. Even though
I did not support it, I want it implemented right. So----
Mr. Wolin. You know, I do not think, Senator, there are
disagreements as such, meaning sort of clear fault lines. I
think on the question of what should be the appropriate
transparency policy of the Council, what should be, you know,
the structure by which votes are taken, all those things,
people have different views and they express those views, but I
do not think I am in a position to say there has been
controversies or fault lines. It has been a good, cooperative
effort in that respect. You know, that may change. The Council
is in its nascence and we will see how it does in its first
meeting tomorrow. But I think from this point, from the point
of enactment to the cusp of the first meeting, it has been
quite collegial and people have been approaching it as they
have said here at this table, and there are others, of course,
who are members not at this table, in a very helpful way.
Senator Johanns. Chairman Bernanke.
Mr. Bernanke. So I will not take time agreeing with you
about independence. I think it is very important for a lot of
good reasons.
One of the strategic decisions in the bill is to have a lot
of shared responsibilities, so for supervision, oversight of
utilities, of banks, of large complex institutions and the
like, in many cases, there are multiple regulators who have
responsibilities shared and the like. I think that was the
right decision because these are complex entities and different
viewpoints, multiple sets of eyes are good. But I think,
inevitably, there will be some disagreements or frictions at
some point.
But I have to tell you honestly, and I am not just trying
to put a happy face here, is that in terms of the substance of
the rule writings that we have so far addressed, I do not see
any deep or principled controversies at this point, just an
issue here on the margin. So the Federal Reserve in particular
is working with everybody on this table and we have found it to
be very productive.
I would say there is some pressure arising from the fact
that there is so much to do so quickly, and so it is sometimes
a challenge to make sure that everybody has been appropriately
consulted and all the input has been taken and still meet all
the deadlines. So there are some challenges here. But I do not
see any--at this point, I do not see any deep conflicts or
differences in point of view that are going to threaten the
implementation of this Act.
Senator Johanns. Chairman Bair.
Ms. Bair. Well, I think there are a lot of different
perspectives in a lot of different areas, and I agree with you,
I think that is not an unhealthy thing. I think that is a
healthy thing. You come together and try to find the right
solution based on different perspectives.
And I would echo what Chairman Dodd said at the beginning,
that I think we should all come together collegially. I think
it is a dangerous dynamic if one or two players try to drive
everything else, and I do not think that will happen.
I think in just about all the major areas, we bring
different perspectives to the table. I do not think that it is
a bad thing and I certainly do not see anything that would rise
to the level where it would need a legislative fix. We are
honored that you gave us so much flexibility and authority and
that you defer to our hopefully good expertise and wise
judgment in writing these rules and implementing this law, and
so I think we all are committed fully to doing that. But there
will be differences and we will need to overcome them, but I do
not think that that is really an unhealthy thing.
Senator Johanns. Chairman Schapiro.
Ms. Schapiro. I think I, needless to say, believe deeply in
the independence of the SEC, and I know every agency up here
feels that way. But you should not take the fact that we are
here in agreement on many things at this early stage as a sign
that we have not had lots of rigorous debate behind the scenes
about very specific issues. Where we can resolve those issues
among us, we want to do that. Where we cannot, we will
sometimes present the public through the comment process with
options and alternatives for ways to address issues where we
are not all perhaps entirely synced up to see what the experts
and the public think might be the right answer on a particular
issue.
So there is lots of debate and discussion. There are very
different perspectives that are being brought to bear on each
and every one of these issues. But I think there is also
tremendous commitment to try to get to the right answer for the
American people in every single thing we do. Where we cannot,
we might have some differences and agencies will have to go
forward doing what they believe is the right thing under their
statutory mandates.
But I think so far, it is actually working the way you
would want, with that healthy tension yet a spirit of
collaboration.
Mr. Gensler. I would echo the thoughts about independence,
which are very important, but the collaboration. I mean, I
think it is what the American public expects of us. I think
with nearly 10 percent unemployment, they even expect it more,
and this was the worst financial crisis, where the regulatory
system failed, as well. It was not just the financial system
that failed.
You asked where there have been disagreements. I will say
in the clearing area, one area that we are supposed to oversee,
and it might be sort of selfish of the CFTC, we want to have
clearing standards that are rigorous enough that the Federal
Reserve and the bank regulators think they can withstand the
test of time, but also that international regulators will find
our clearinghouses equivalent and they will stamp them that the
international regulators will allow the U.S. clearinghouses. So
there is also a selfish goal, in a sense, for American commerce
that these things have that.
We did have a little bit of an arms race on transparency.
These four agencies and now maybe Treasury, I mean, we all sort
of, how we could be voluntarily, not do more than the law on
transparency and the rule writing. I think that was healthy.
I do foresee some debates in the future on how the SEC and
CFTC take on this swap thing, because futures regulation and
securities regulation is not always aligned. We are trying, and
Mary and I have been committed to avoid regulatory arbitrage,
but does that mean this new swaps regulation should be more
aligned with securities regulation, more aligned with futures
regulation, or somewhere in the middle? And so that is where we
will have a healthy debate, no doubt.
Senator Johanns. I have some colleagues that--I have gone
over my time, and so I hate to cut it off here, and maybe there
will be an opportunity for you to offer your thoughts, but Mr.
Chairman, again, thanks for your leadership on this. It has
been a pleasure being on this Committee with you.
Chairman Dodd. That is a great question to ask, Mike, on
this, because for years, in fact, it was the independence and
sort of the stovepipe approach that created it. It seemed to
almost not only enshrine independence, which we want, but also
seemed to enshrine conflict without the ability to sit together
and come to some common answers where you could. So the very
idea of this oversight council is designed to perpetuate the
independence, but also to take, as Chairman Bernanke pointed
out, the collaborative multiple sets of eyes to look at a
situation that one set of eyes or one perspective might not see
as clearly.
So this is obviously going to be an experiment. There has
been nothing like it before. It is going to require a lot of
hard work. So I was very pleased to hear that so many of the
principals intend to stay involved in this process, because
what can happen too often is it gets related to people down the
line and then it begins to fracture and fall apart and does not
succeed with that goal of getting the cooperation necessary.
So it is a great question and goes to the heart of whether
or not this is going to work. You and I cannot legislate that.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman. I, too,
want to add my thanks to you for your hard work here on the
Dodd-Frank Wall Street Reform and Consumer Protection Act, and
I want to thank the Committee, too, for all the hard work to
ensure that the Act makes a strong and clear commitment to the
protection and education and empowerment of our investors and
consumers.
Now that we have enacted this historic legislation, I am
committed to ensuring that the provisions of the Act will
provide tangible assistance and protection to hard-working
Americans are soundly implemented. I worked to develop many of
the Act's provisions to increase financial literacy and empower
hard-working Americans and promote informed financial decision
making, and so I want to go to that ladder and work on one part
of it.
Secretary Wolin, Title 12 of the Dodd-Frank Act will help
unbanked and underbanked families by increasing access to bank
and credit union accounts. It will also establish programs to
develop small dollar loan alternatives to high-cost and
predatory financial products. These provisions are particularly
important to me personally because I grew up in an unbanked
family. What is being planned to increase access to mainstream
financial institutions and services?
Mr. Wolin. Thank you, Senator Akaka, and thank you for your
leadership on this extremely important set of issues. We are
very focused on implementing Title 12 and to continuing our
work on the unbanked. As you know, I think we are staffing up
in this area at the Treasury. We have been working to really
survey the landscape. We have had some pilot projects, I think
you know, focusing on the unbanked and providing opportunities
to access, working with private sector entities. There has been
a lot of excellent work that has been going on in the States
and among a pretty wide range of cities. So we are gearing up.
We are, of course, looking forward to being funded in this
area, which is important for us to really take advantage fully
of the important opportunities that Title 12 presents. We are
very excited to work on this set of issues because we believe
that it is critical to the engagement of a wide range of
Americans in our economy and allowing them to do the kinds of
things that they need and want to do to meet their own
aspirations.
So we are hard at work. We will continue to be hard at work
and we very much look forward to continuing to work with you as
we move forward.
Senator Akaka. Thank you. Chairman Bernanke, consumers that
sent portions of their earnings to family members abroad can
experience serious problems in these remittance transactions.
The Dodd-Frank Act requires meaningful disclosures of the
remittance transaction costs and establishes an error
resolution process to protect consumers. The Act also instructs
the Federal Reserve and Treasury to expand the use of ACH,
Automated Clearinghouse System, for remittance transfers to
foreign countries.
My question to you is, why is it important to provide these
remittances protections and make greater use of the ACH system?
Mr. Bernanke. Senator, this has been an area of interest
for me personally and for the Federal Reserve for a long time.
Remittances are an important contact point between many
unbanked, particularly immigrant families and the financial
system, and it is often an entree into the normal mainstream
financial system. And so we want to make that as safe and
inviting as possible.
The Federal Reserve, as part of its payment systems
responsibilities, has been involved for a long time in the
transmission of remittances, for example, agreements we have
done with Mexico and other countries. And we will continue, of
course, to look for ways to reduce the cost and increase the
efficiency of remittances via ACH as required by the bill.
I would like to say a world in particular about disclosures
and error corrections. As you mentioned, because of language
and other issues, people who use remittances are particularly
vulnerable to disclosure problems, and so it is very important
that they understand the services that they are receiving and
what the terms of that service are.
So we are already undertaking, already hard at work
implementing the disclosure requirements of Dodd-Frank, and one
thing in particular that we are doing, which we have used a lot
in our consumer protection efforts in the last few years, is
using consumer testing; that is, we actually either directly or
engage an outside organization to try different disclosures on
real-life consumers and then see how well they understand, how
much they get the information, how accurately they understand
what the disclosure is trying to provide. And we found this to
be very successful in the past, and I am hopeful that the new
Bureau will adopt these consumer-testing practices because we
think they are very constructive.
So we are doing that now, and we are looking forward to
developing proposed rules along the schedule that the act
requires.
Senator Akaka. Thank you for what you are doing on that.
Chairman Bair, I comment the FDIC for working to improve
financial literacy, develop affordable financial products, and
improve access to mainstream financial institutions. I know
that these issues are important to you, and I respect your
perspective on them.
What must be done to ensure that the Dodd-Frank Act's
economic empowerment activities are implemented in a meaningful
way?
Ms. Bair. Well, I think there are a number of new and
important tools that are provided in Title 12, and some build
off of programs we have already, especially in the small-dollar
loan area. We initiated a pilot a few years ago to try to get
some brave banks to try to come up with an economically viable
small-dollar loan product that would provide a low-cost
alternative to payday loans. And it was quite successful. We
were very pleased and are actively trying to get other banks to
start offering that type of product.
As you know, our Money Smart curricula has been very
successful, and we have issued the high school version of it as
well. It is used quite extensively.
Also we have set up our own advisory committee on economic
inclusion. When I became Chairman, that was one of the first
things I did. The committee has a lot of good minds from the
banking sector and the community sector, to try to help bring
more people into mainstream financial services--products and
services that are appropriate for them, and not ones that can
end up costing a lot of money.
These new tools will be very important, and certainly the
new Consumer Financial Protection Bureau will also put an added
focus on this area. I am hoping that one of the outgrowths of
this crisis is that we will get back to more traditional
banking services. There was an article in the papers today
about how more banks are now offering small-dollar loans,
seeing it as an economically viable alternative, because such
loans are clearer to understand than credit cards and are a
one-shot deal that are perhaps easier for folks to manage.
There may be actually some positive things coming out of
this in terms of banks getting back to basics, consumers
understanding they need to have their eyes open, and then
certainly the new Consumer Financial Protection Bureau
providing better, consistent rules and disclosures. I think
these will all be very helpful things.
Senator Akaka. Thank you very much.
Chairman Schapiro, I am pleased that the Dodd-Frank Act
will significantly improve investor problems. The act
establishes the Office of Investor Advocate within the
Commission. It provides the Commission with the authority to
require more meaningful presale disclosures. The Commission
will also conduct the studies on investor financial literacy
and on obligations of broker-dealers and investment advisers.
Can you please update the Committee on the Commission's
work to implement these provisions and explain how they can
improve investor protection?
Ms. Schapiro. I would be happy to, and you and I have had
many conversations over the years about the importance of
investor literacy.
I will say we are benefited in all these initiatives that
we are undertaking now by the fact that we have really
revitalized our Office of Individual Investor Education and
Advocacy. As just an example of that, for the first time, we
brought a large group of high school teachers to the SEC this
summer to train them in how to impart education about financial
matters throughout their course work, and also in specialized
courses. And it is a program that was enormously successful and
we will continue.
We do have the investor literacy study that you mentioned.
We are in the project planning stage right now. It will focus
on the current levels of literacy in this country, how to
increase particularly, as you mentioned, transparency of fees
and expenses so investors can understand what they are paying
for the product that they are buying and can compare products
in a simpler way because they will understand the fees and
expenses.
We are also looking at what have been the most effective
private and public sector efforts so that we can model our own
SEC investor literacy efforts on ones that have been
successful. And we are looking at investing goals and behaviors
as part of this study as well. We will report to Congress
within the 24-month period.
We are also in the process of standing up the Office of the
Investor Advocate which will report directly to me and will
have a role throughout the agency in ensuring that while we
believe we always have investors in the forefront of everything
we do, particularly in the rulemaking process, this will be a
focal point to help ensure that the retail investor voice is
heard as we engage in many of our Dodd-Frank and other
rulemakings going forward.
Senator Akaka. Thank you very much for your responses.
My time has expired, Mr. Chairman, and I want to wish you
well and thank you for your work as Chairman of this Committee.
Chairman Dodd. Thank you, Senator, very much. And let me
just say thank you as well for your insistence over the years
on financial literacy. I was speaking to the Economic Club of
Washington last evening, and I talked about the financial
literacy and the importance of it, beginning at the elementary
school level. Getting people familiar with just basic math
techniques and balancing a checkbook and doing other things can
contribute significantly to this. And no one has done more
consistently over the years to advocate on that than Senator
Akaka of Hawaii. So we all owe you a debt of gratitude. There
were not many applause lines in the speech last night, but that
was one of them, on financial literacy.
Evan, thank you, by the way. We will be leaving together in
January, and I thank you for your friendship and support on
this Committee. You have been a great Member of this Committee
and a great member of the Senate, so thank you.
Senator Bayh. Well, thank you, Mr. Chairman. All 12 years I
have been privileged to serve in this body, we have served
together in the Banking Committee. Have you considered
establishing an alumni group?
[Laughter.]
Senator Bayh. We can be charter members. And I would like
to thank all of our witnesses today for your contributions.
It occurred to me, Mr. Chairman, that while those of us on
this side of the dais may have been the architects of this
legislation, these men and women will be the builders who will
be responsible for taking abstract concepts and turning them
into a reality that will really deliver for the American
people. And so I want to thank you for your dedication to
making that process successful.
Chairman Gensler, I was really heartened to hear about the
sort of tension about more transparency. Very often tension
leads to, you know, sort of the lowest common denominator kind
of decision making, but maybe we are having a race to best
practices here. That would be a happy outcome, indeed. So I
congratulate you for that, and the others. I guess some of the
reports of some tension have been exaggerated, and that is a
good thing. Reconciling independence and consensus building is
not always easy, but I am confident that all of you at the
table here can get that job done.
Mr. Wolin, let me start with you, and I want to follow up
on something that Senator Corker raised, and that is with
regard to the new consumer protection entity. As I understood
your testimony, you are allowed to stand up this agency and do
some practical things and gather information, sort of laying
the predicate for rulemaking, but really cannot get into the
meat of rulemaking absent a confirmed head of the entity. Is
that a fair summary of your interaction with Senator Corker?
Mr. Wolin. Yes, I think--Senator Bayh, I appreciate the--
thank you, Mr. Chairman. I thank you, Senator Bayh, for the
opportunity to comment on this further.
I think there are a range of rulemaking authorities that do
hinge importantly on there bring a Director confirmed. There
are authorities that the Secretary has under Section 1066 of
the bill that will allow him to do the business of transferring
and so forth and to make sure that the rulemaking and the
supervision and so forth that the new Consumer Bureau receives
from the various other Federal agencies from whom they are
receiving those authorities can go forward. So that would
include rulemaking but in that context----
Senator Bayh. Well, I think we could agree that--and I
understand all that, and you do not want to get unduly
constrained here.
Mr. Wolin. Right.
Senator Bayh. That is a job for the lawyers to kind of work
through. But I think we would all agree that there appears to
be some significant area of rulemaking that will be impacted if
there is not a confirmed head of the agency. Is that a fair
statement?
Mr. Wolin. I think it is important for the Bureau to have
its full authorities for there to be a confirmed Director.
Senator Bayh. Well, my question to you, what would be the
practical implications if no one was confirmed for a
considerable period of time?
Mr. Wolin. I am not sure, Senator, exactly what those would
be. We are continuing to sort of work those true. There is an
awful lot of work to do between now and then. The statute
explicitly contemplates that work. Once the various agencies
that are contributing authorities that will become the Bureau's
authorities as of next July 21st, there will still be a lot of
room for the agency, the new Bureau, to do its work as it goes
forward.
You know, the President is committed to putting forward a
nomination for a Director for the Senate to consider, and
hopefully to confirm, and I think that, as I said earlier, I
believe he will be doing that soon.
So I think there are a lot of things that the Bureau is
seized with currently and will continue to be seized with.
Senator Bayh. The reason for my question--and, Chairman, if
you were raising your hand, please feel free to jump in. The
reason for my question was the crisis uncovered some
significant areas where enhanced consumer protection is
important, in spite of best efforts. And so some of us have,
you know, reasonable hopes for this Bureau. And yet I do not
have to tell all of you, including you, Chairman, how difficult
it is to get people confirmed under the current environment up
here, even in fairly noncontroversial, fairly straightforward
situations. It is a practice I refer to as hostage taking for
unrelated reasons. It is unfortunate, but it is a fact of life.
Who knows what is going to happen in November? It is entirely
possible that getting confirmations done in a new Congress may
be even more difficult, particularly for a Bureau as
significant and complex as this one. So it is a call for the
President, but it seems to me that somewhere in the calculus
confirmability is going to be a factor that has to be weighed.
And, of course, sometimes people--you know, you can also just
decide to have a fight even if confirmability may be unlikely.
Mr. Bernanke. Senator, I just want to assure you that there
will be no lacuna in rulemaking for consumer protection. Until
such time as that authority is transferred, the Federal Reserve
will aggressively pursue its responsibilities, and we are, in
fact, working very hard on the mortgage rules that are in Dodd-
Frank, for example, and we will continue to do that at the same
time as we work with the Treasury and the new Bureau to make
sure there is a smooth transition at the appropriate time.
Senator Bayh. That is an excellent point. I had breakfast
this morning with Dan Tarullo, and we were going over some of
this, and he was informing me about the progress that was being
made. So I want to compliment you on that.
I am just kind of thinking beyond the horizon posttransfer
about how, you know, vital the new entity will be, and it seems
that having someone in there who is confirmed is going to be an
important part of that. Thank you both for your responses with
regard to that.
Secretary Wolin, again, something for you. This involves--
and perhaps, Chairman, you as well--the Volcker Rule. Only
Congress could come up with a situation like this where you
have to give your recommendations about implementation of the
rule, and, indeed, it has to be put into effect in some form.
But then there is a 9-month study period, and these timelines
are not, you know, contemporaneous.
And so my question to you is: Since you have got to opine
in some ways about how to implement this rule, in fact, go
forward with implementing some iteration of the rule, what
weight, if any, will this study have in the decisions that are
ultimately made since the study may be completed after some of
the decisions have been required to have been made?
Mr. Bernanke. Well, there is a study which the Council has
to complete by January 21st, and the Federal Reserve is very
much engaged in working with the Council in doing that. It will
be a considerable time after that before any of these rules are
actually implemented. In particular, I think there is a 9-month
period----
Senator Bayh. A 9-month lag time, right.
Mr. Bernanke. Lag time, and then even once the rules are in
place, there is a 2-year conformance period, which could even
be extended further, if necessary. So I do not think that there
will be any situation where rules will be put in place and then
rescinded because we decided they were not such a good idea.
Senator Bayh. Well, the reason for the study, as I recall,
was that many of us understood that there was a potential risk
here that probably had to be dealt with, but we were concerned
we were taking a ready-fire-aim approach to handling this. So
we wanted to make sure that, you know, all of you with
authority here sat down, really analyzed what the risk was,
what the most effective way to go about handling it was, and
then we would ultimately put into place whatever that mechanism
might be. That was really the heart of my question, to kind of
make sure that whatever we end up doing, it is informed by your
analysis rather than put into place and then the analysis comes
out later and may have led to a different result if we had
known about it beforehand.
Mr. Wolin.
Mr. Wolin. Senator, I think that is exactly the intention.
The FSOC is meant to do the studies the Chairman noted on the
Volcker Rule set of issues that will then provide
recommendations to the regulators who have to make rules in
this area, will inform that work, so it will be sequenced, I
think, in the proper way.
Senator Bayh. This very brief question, you do not have to
jump in, but it might go to all of you. Those of us up here on
the Hill like to think when we are finalizing these things and
the cake has been sufficiently baked that it really cannot be
changed a whole lot. We agree to engage in colloquies on the
floor of the Senate, and these will carry some significant
weight when historians and others look to divine congressional
intent in analyzing legislation.
I am curious. Will you grant some weight to congressional
colloquies where we take the opportunity to say for the record
what our intent was? Or is that in the legal realm of what the
lawyers would refer to as an advisory opinion, interesting but
not granted a whole lot of weight?
Ms. Bair. Well, as a former Senate staffer, I take this
very seriously. Yes, committee reports, floor statements,
colloquies, yes, absolutely carry weight. I think the Collins
amendment, for instance, is something that is of key interest,
and we strongly support it. The legislative history there and
floor colloquies were quite informed and informative, as was
the case in a number of other areas.
So, yes, I think we absolutely need to make sure we are
adhering to both the letter and the spirit of Congress' intent,
and the legislative history is quite important in that regard.
Senator Bayh. Thank you, Chairman Bair, and I would not
expect any of you to come up here and say, ``Well, no, Senator
we are not paying any attention to what you had to say when
this was enacted.'' But there were some colloquies with regard
to Volcker, and some--OK.
[Laughter.]
Senator Bayh. Well, unfortunately, mental telepathy is not
a part of my toolkit. No psychic abilities on the panel.
I do think it is important with regard to Volcker and some
of these other things that you look at what was said, give it,
you know, fair consideration in trying to make the ultimate
determinations about what Congress intended and so forth. So
enough said. But there are some in this area that I would
recommend to your consideration.
My last question--and, Chairman, if I could go over by a
minute or two, I might just have another brief one.
Chairman Dodd. No problem at all. Go ahead.
Senator Bayh. Chairman Gensler, this involves you. It is
great to see you again. You have been a friend for many years,
and I congratulate you on the excellent work you have done,
and, indeed, you were somewhat clairvoyant back in the day
about what might have happened with regard to the crisis, and
now you are in a position to do something about it going
forward. So it is good to see you, and I am grateful for your
leadership.
These are somewhat technical. What is your view on whether
regulators have the authority to impose margin requirements on
end users? And, again, I am talking about the end users
themselves, not the transactions.
Mr. Gensler. I thank you for that compliment. I do not
think anybody was clairvoyant. But the Dodd-Frank Act does say
that to lower risk of the swap dealers and to lower risk of the
financial system as a whole, various regulators sitting here
would have an authority to set capital margin on these dealers.
If they are banks, it is the bank regulators, and nonbanked we
get involved as well with the SEC. And this is an area where
Congress has spoken very clearly. There is a letter--even
Chairman Dodd and Chairman Lincoln wrote a letter on this right
as the bill was going forward, but there were many colloquies.
So we are all taking that together.
If I might say, as I understand the intent, it was that a
certain group of end users, the nonfinancial end users, are out
of clearing and then, as Chairman Dodd put in his letter, would
be considered to be out of this margin requirement.
So we are taking all of that together and taking it very
seriously, the intent of Congress that the financial system,
about 90 percent of the swaps transactions are between
financials and financials, and it is only about this 9 or 10
percent that is----
Senator Bayh. Well, that gets to my next to the last
question, which does involve end users. And I have discussed
the importance of, to the extent we can, the harmonization of
global standards to prevent forum shopping and all that kind of
thing. Basel is dealing with that in his arena. As I understand
it, the EU has moved forward with regard to end users and have
taken their approach. You know, you are now going to look at
what we are doing, and I would ask you what kind of effort we
will make to harmonize these things and, to the extent that
there is some disparity, what implications that will have on
our competitiveness if the Europeans have taken on approach and
we take perhaps a more restrictive approach?
Mr. Gensler. I, after 3 days overseas--I just returned
yesterday--am very optimistic. They put forward their proposals
2 weeks ago. Their clearing requirement, for instance, on this
end user issue aligns very similarly. Financial companies would
have to use the clearinghouses. Nonfinancials would have, you
know, a choice. They do not have to use it, unless they meet a
certain clearing threshold, a certain size. We do not have
that. Congress has spoken clearly. If you are mitigating a
commercial risk, you are out of the clearinghouse.
But I think it is very aligned. Swap data repositories are
very aligned. They say they are going to take up the trading
mandate later in what they call MiFID review, which is about 6
months away.
Senator Bayh. Good. Well, I would encourage you to keep an
eye on that because to the extent that they are not harmonized,
they can lead to some consequences that could hurt us
commercially.
Mr. Gensler. And if I might say, Senator, also, we are
taking it to heart in our proposed rules. So in our memos up to
our fellow Commissioners and the harmonization with the SEC,
where Congress has left this discretion--in many ways Congress
has decided, but if they have left this discretion, we want to
harmonize with the international--where we think the Europeans
will end up on this, and the other regulators.
Senator Bayh. Thank you.
Chairman, if I can have just 1 minute with Chairman
Bernanke?
Chairman Dodd. Yes, certainly.
Senator Bayh. We have talked before about the Basel
process. You talked about it here today, and I am delighted to
hear your opinion that it is moving in a positive direction,
capital requirements, quality of capital, liquidity and so
forth. I understand some of our European friends have some
domestic challenges that they have got to address. We need to
be realistic about that.
So my question to you is: Were you satisfied with the
progress that has been made with regard to quality of capital,
those things that will be counted and those things that perhaps
will not? Are we moving sufficiently, are they moving
sufficiently that this will harmonize in a way that is good for
the global financial system?
Mr. Bernanke. Yes, I think we have made a lot of progress.
There is now a much larger focus on common equity as the
principal source of loss absorption. There is very restricted
ability to use other types of assets. No more than 15 percent
can be noncommon. And in negotiating that, we particularly
limited some of the types of capital that Europeans had used,
minority interest and things of that sort that we did not feel
were particularly good forms of capital.
So we really have made substantial progress, and I think it
was a very important achievement. And the FDIC and the OCC
joined the Federal Reserve at the meeting in Basel, and we all
worked together, I think, to get a good international
agreement.
Senator Bayh. Good. Well, let me thank each of you again
for your public service. It has been a privilege for me to work
with you, and, Chairman Dodd, with you as well.
Chairman Dodd. Thanks. Thanks, Evan, very much.
Chairman Bernanke, I did not ask you the question, but I
presume I will get the same answer, and that was: Was the fact
that we moved when we did here, with the legislation, was that
helpful in terms on the derivatives section, for instance in
your view, or not?
Mr. Bernanke. Well, I am less informed about the
derivatives than Chairman Gensler and Chairman Schapiro.
Chairman Dodd. Well, on the capital.
Mr. Bernanke. But broadly speaking, on capital and on many
of the issues there is absolutely great interest in what we
have done around the world, and we have moved first, and we
have set an important and high bar, and I think it has been
very well received internationally.
Chairman Dodd. Let me ask you. I am not going to submit a
lot of questions because you have a lot of work to do, and the
last thing I want you to do is answer a lot of questions here
while the efforts get underway, but just a couple of things
come to mind.
Let me ask, and I want to give you a chance to jump in
because Mike Johanns asked a question. He got down as far as
you and did not give you a chance to respond, and I want you to
do that.
But in doing so, Title 3 of our bill transfers the safety
and soundness functions, personnel, property and funds of the
OTS, primarily the OCC, but also the FDIC and the Fed. And let
me parenthetically say that I have great respect and admiration
for the people who worked at OTS. I mean this is not an
indictment of this decision to close down that regulatory body,
and this is awkward, and it is difficult.
It is very important to me that this be done well and that
the people who worked at the OTS be treated with a lot of
respect and understanding. I just want to know how that is
going. This is a difficult time for everybody in the Country,
and to do something like this can be tremendously disruptive
obviously to a family and their concerns.
I know we tried to accommodate that in the bill, but I
wonder if you might just give me a quick answer as to how we
are doing on that, and then if you want to respond to the Mike
Johanns question.
Mr. Bernanke. Well, I mean we are working hard at it. I
have had a number of meetings with Acting Director Bowman. Our
management teams have met. In fact, they are meeting this
afternoon in New York to kind of start talking about how we are
going to integrate the supervisory staffs and functions
together.
Tremendous effort being made to ensure that we find the
right places and the right fit for people at OTS in the agency.
They clearly have skills and abilities that we need. We need
the people to come and do the work. There is going to be about
a 50 percent increase in the number of institutions we are
called upon to supervise, and we cannot do that without the
talent and contribution of OTS staff. So we are working very
hard to encourage them to look to a career in the combined
agency.
It would be very bad to have them go elsewhere. So we are
working very hard.
Chairman Dodd. I am going to ask you to keep the Banking
Committee staff informed as to how that is going, the progress.
Mr. Bernanke. Absolutely.
Chairman Dodd. So we have a good understanding of it and
how it is functioning.
Mr. Bernanke. Absolutely.
Chairman Dodd. So they know someone is also working with
you and watching carefully.
Mr. Bernanke. Right, and we have to report to Congress at
the end of 6 months.
Chairman Dodd. I knew that, but even during this time
period I would like to know how it is going.
Mr. Bernanke. Yes. OK.
Chairman Dodd. Anything you want to respond to Mike Johanns
at all? I saw you wanted to say something, and then we cut you
off.
Mr. Bernanke. Well, I mean the only thing I would say is
that there is always some tension in the interagency process. I
think it essentially has less to do with people's interests and
goals being aligned than with kind of differences in mission
and approach and agencies, and that sort of thing.
But we are an independent agency within the Treasury. We
participate in a lot of interagency discussions. We do
interagency rulemaking with the other banking agencies.
Congress has kind of endorsed, even expanded, the need for that
kind of coordination, but you know there are policy
differences. We work those out. You know. I mean it is a
process that can sometimes be torturous, but it does work, and
it will work again.
Chairman Dodd. Good. Chairman Bernanke, let me thank you
for your comments about the residential, the mortgage issues,
and the Fed is working on those.
And underscore Evan Bayh's question. Look, this is
important as well, and you had Bob Corker raise it. I know the
Administration is working on this, and I have raised the issue.
You have got to have a confirmable nominee, and we have got to
get someone in place.
Otherwise, we are going to be--look, this is a
controversial section of the bill. I do not have any illusions.
Regardless of the outcome of the election in November, they are
going to moving to try to get rid of this bureau, and it is
going to be a lot easier to get rid of it has not gotten up and
gotten started, and demonstrating the value and the importance
of it.
So it is at risk in my view until we get someone in,
running the place and demonstrating what it can do and the kind
of rules it is going to develop. And believe me, there will be
people out to get rid of it. So be confident of that
conclusion.
But let me ask, if I can, ask both Sheila Bair and Chairman
Bernanke. Headlines this morning were in the Washington Post--I
do not know if in the other papers--about JPMorgan and
foreclosure issues. We had the problems with the mortgage
servicing company called Ally, formerly GMAC, regarding certain
improper actions by its employees and foreclosing on people's
homes. Those stories are very troublesome.
Obviously, I guess I congratulate JPMorgan this morning for
making the decision it did. I did not read the whole story.
But I wonder if you might comment, both of you, on this
situation. I know it is not exactly the subject matter here,
but I would be remiss if I did not raise it with you, given
attention that is going on. And the numbers of foreclosures, I
mean this last month or so we have seen actually those
increases.
Ms. Bair. Well, we are still learning about it ourselves.
The OCC might have something to add on this as well, as the
primary regulator of these large institutions.
I think it is troubling, and it is just a further
indication of how wrong we went with the mortgage origination
process and securitization process, which was deeply tied to
some of the breakdown in what would ordinarily be expected in
terms of underwriting standards--in terms of documentation, in
terms of perfecting title. So it is troubling.
So we will learn more about it, but I think it underscores
that going forward we need to be very careful. We want to bring
the securitization market back. We want to bring it back in the
right way. We want a GSE exit strategy, but we want to make
sure the alternative promotes stability in the mortgage market.
It just is another indication that too many things went
wrong in the mortgage origination process, leading into this
crisis.
Also, as you know, Chairman Dodd, we have been longtime
proponents of trying to rework mortgages as an alternative to
foreclosure where it makes economic sense, and it frequently
does make sense. So I think we continue to push and advocate
for that in various venues.
But this is very unfortunate, and we are still learning
more. I would also defer to the Federal Reserve.
Chairman Dodd. Mr. Walsh, do you want to make any comments
at all?
Mr. Walsh. Well, just to say that obviously when evidence
emerges, and has emerged in this case, of deficiencies in the
process of reviewing and approving these individual cases, we
immediately went and talked to people both at JPMorgan Chase
and at the other half-dozen large servicers where we are
dealing, and instructed them to go back once again.
I mean we have been to them a number of times to make sure
they were ramping up processing to keep pace both in particular
with the mortgage modifications that we were all hopeful would
increase, as they have done, but not obviously to anyone's
satisfaction, but asked them to go back and look at those
processes again. There are State laws that require quite
specific requirements for the review and approval of cases, and
they must comply with those laws and have clearly had
deficiencies in processing.
We both want to see that they fix the processing problems,
but also to look to see whether there is specific harm that has
been caused in individual cases. So we will be looking both for
the procedural improvements, but also any evidence of harm to
consumers.
Chairman Dodd. Chairman Bernanke, any comments on this?
Mr. Bernanke. Only that it has been a managerial challenge
to the banks to deal with these foreclosures, modifications, et
cetera.
Chairman Dodd. Right.
Mr. Bernanke. And they have not always met that challenge,
and we continue to press them through guidance and supervision
to ramp up and to make sure they have the people and that they
are responding quickly to borrowers, and the like.
Unfortunately, that has not always happened.
Chairman Dodd. Yes. Sheila, I know that Ally is regulated
by the FDIC.
Ms. Bair. Well, actually that was in the holding company.
The insured depository institution was not involved in the
mortgage activities. It was not in the bank.
Chairman Dodd. Well, listen, again I think it is one of
these areas that I am sure the Committee will want to be kept
informed, even during this period. We are not in session here
as these stories are breaking. The staff, I know, and I would
appreciate it if you would keep us posted as to how this matter
is resolving itself.
With that, again I thank all of you. I am very impressed,
by the way, at the amount of work being done. I mean there is
always that given the time and all the other issues you have to
grapple with. The fact that all of you seem to be working very,
very hard, and your staff are, to fulfill the commitments of
the legislation. That is very good news.
So I am very grateful to all of your being here this
morning and sharing your testimony with each other, and we look
forward to working with you.
We are going to have a couple of hearings in the lame duck
session when we come back after the elections. So I will look
forward to seeing some of you then. In the meantime, I thank
you all again for your service and your contribution to this
effort.
The Committee will stand adjourned.
[Whereupon, at 12:52 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Thank you Mr. Chairman for holding this hearing today. First, I
want to thank you for your leadership. Without your hard work, we would
not have passed the historic Dodd-Frank legislation. Second, given the
extensive scope of the Dodd Frank legislation and the fact that much of
it is subject to regulatory interpretation and rulemaking, our work is
certainly not finished, and I look forward to today's hearing.
There is obviously a lot of ground to cover with our witnesses
today, but I think it is important to begin these conversations, and
today's hearing certainly provides us with an opportunity to identify
important issues that will need more attention. I suspect as we further
identify these areas, there will be many more oversight hearings in the
future.
As both the regulators and industry proceed with the initial stages
of Dodd-Frank implementation it is important for us to hear from the
regulators on the priorities they are making, and the potential
challenges they are facing. I know I am hearing from constituents in my
State who are concerned about this stage of implementation, and I thank
the witnesses for being here today to talk about these concerns.
I believe there are some issues, including derivatives, the
``Volcker Rule,'' market making, insurance and capital standards, to
name a few, where it is going to be vitally important that we get the
rules right, ensure that we harmonize these rules internationally, and
guarantee that our Nation's consumers and investors continue to be
protected.
Additionally, as we create the new agencies and entities mandated
by Dodd Frank, we must do it thoughtfully and carefully. Strong
systemic risk regulation, common sense consumer and investor
protection, certainty and having Federal and international expertise on
insurance are all key to a stable economy and a strong financial
services sector. We need to put the right people and resources in place
to ensure that these agencies and council succeed.
Last, I want to commend all of today's witnesses for their hard
work. This is not a simple task, and I hope that you will come to this
Committee with your concerns and that your doors will be open for our
questions and concerns.
Thank you.
______
PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA
Mr. Chairman, thank you for convening this hearing today on the
implementation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. I thank my fellow Members on the Committee for working
with me to ensure that the Act makes a strong and clear commitment to
the protection, education, and empowerment of investors and consumers.
Now that we have enacted this historic legislation, I am committed to
ensuring that the provisions in the Act that will provide tangible
assistance and protection to hard-working Americans are soundly
implemented.
Most Americans participate in the financial system by accessing
credit to meet short-term household needs or relying on financial
products to achieve personal goals, such as purchasing a home,
supporting family members living abroad, planning for retirement, or
financing a child's education. I worked to develop many of the Act's
provisions to increase financial literacy, empower hardworking
Americans, and promote informed financial decision making.
I developed Title XII of the Act together with my friend, Senator
Herb Kohl of Wisconsin, to improve access to mainstream financial
institutions. Too many low- and moderate-income families are forced to
rely on costly and predatory financial products to meet their
households' financial needs. Title XII will establish grant programs to
bring more Americans into the financial mainstream by providing access
bank and credit union accounts. A small dollar loans program will also
be established to make available safer alternatives to predatory
financial products.
The Consumer Financial Protection Bureau will have the authority to
restrict predatory financial products and unfair business practices in
order to prevent unscrupulous financial services providers from taking
advantage of consumers. An Office of Financial Education is established
within the Bureau and the Director of the Bureau will become the Vice
Chairman of the Financial Literacy and Education Commission. The Bureau
should be established and operate in accordance with these functions
and responsibilities in order to provide essential consumer protections
and encourage coordination and improvement of all Federal financial
literacy activities.
Investors will greatly benefit from improvements within the
Securities Exchange Commission and the additional investor protection
responsibilities that are provided to the Commission under the Dodd-
Frank Act. I am pleased that the Office of the Investor Advocate will
be created within the Commission. The Investor Advocate is exactly the
kind of external check, with independent reporting lines and
independently determined compensation that could not be provided within
the existing structure of the Commission. The Commission will also be
required to conduct a study of financial literacy among investors and
develop a strategy based on its results. The Dodd-Frank Act also
provides the Commission with the authority to require meaningful
disclosures be provided to retail investors prior to the purchase of a
financial product or service.
I commend the Commission and the other Federal agencies represented
here today for moving expeditiously to implement the Dodd-Frank Act.
Already, the Commission requested public comment for a study on the
obligations of brokers, dealers, and investment advisers. There is a
harmful and unnecessary regulatory gap in the regulatory standards of
care which investment advisers, brokers, and dealers must adhere to.
Investment advisers are held to a fiduciary standard that imposes
strong and meaningful obligations on them to investors. Yet, brokers
and dealers are only held to an inferior and inadequate suitability
standard. Investors are entitled to reliable and accurate investment
advice from these financial professionals. It is important to the
protection of investors that a fiduciary duty be uniformly applied to
investment advisers, brokers, and dealers.
The Dodd-Frank Act also includes landmark consumer protections for
remittance transactions. It will require simple disclosures about the
cost of sending remittances to be provided to the consumer prior to and
after the transaction. A complaint and error resolution process for
remittance transactions will also be established. These improvements
will provide essential protection to the many people in Hawaii and
across the country who send significant portions of their income to
relatives who live abroad.
We enacted this legislation to address inadequacies in the
financial regulatory system and make necessary improvements to the
safeguards that protect investors and consumers. Now, it is important
that the Act is implemented in a sound and timely manner. I applaud the
respective agencies for promptly beginning their respective
implementation processes, and I look forward to each of the witnesses'
testimonies today. Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF NEAL S. WOLIN
Deputy Secretary, Department of the Treasury
September 30, 2010
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for the opportunity to testify about the progress Treasury
has made in implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act).
Introduction
Two months ago, against tough odds, Congress enacted the strongest
set of financial reforms since those that followed the Great
Depression. The Dodd-Frank Act will ultimately reshape our financial
system and will affect us all in a number of important ways.
The Act builds a stronger financial system by addressing major gaps
and weaknesses in regulation that helped cause the financial crisis
that led to the recession. It puts in place buffers and safeguards to
reduce the chance that another generation will have to go through a
crisis of similar magnitude. It protects taxpayers from bailouts. It
brings fairness and transparency to consumers of financial services.
And it lays the foundation for a financial system that is pro-
investment and pro-growth.
Mr. Chairman, passing this bill was no easy task. It would not have
happened without your strong commitment and that of your colleagues to
make sure that meaningful reform became a reality.
You stood on the right side of history and with the millions of
Americans who have lost their jobs, homes and businesses as a result of
a crisis caused by basic failures in our financial system.
But the work is far from done. Enacting financial reform was just
the beginning.
Guiding Principles
Implementing the Dodd-Frank Act is a complex undertaking.
Effectively describing the process requires terms that are often
unavoidably dense, making reform seem distant to many. So before
outlining the steps we have taken to date, I want to detail the broad
principles guiding our efforts.
First, we are moving as quickly and as carefully as we can.
Wherever possible, we are quickly providing clarity to the public
and the markets. But the task we face cannot be achieved overnight. We
have to write new rules in some of the most complex areas of finance;
consolidate authority spread across multiple agencies; set up new
institutions for consumer protection and for addressing systemic risks;
and negotiate with countries around the world. In getting this done, we
are making sure to get it right.
Second, we are bringing full transparency to this process.
As we write new rules, we will be consulting a broad range of
groups and individuals. And as we seek their input, the American people
will be able to see who is at the table. Draft rules will be published.
Everyone will be able to comment. And those comments will be publicly
available.
Third, wherever possible, we will streamline and simplify
Government regulation.
Over the years, our financial system has accumulated layers upon
layers of rules, which can be overwhelming. That is why alongside our
efforts to strengthen and improve protections through the system, we
will avoid duplication and seek to eliminate rules that do not work.
Fourth, we will create a more coordinated regulatory process.
Ahead of this crisis, gaps and inconsistencies between regulators
proved to be a major failure. Gaps allowed risks to grow unattended and
inconsistencies allowed an overall race to the bottom. Better
coordination will help prevent a recurrence.
Fifth, we will build a level playing field.
A level playing field must exist not just between banks and
nonbanks here in the United States, but also between major financial
institutions globally. We are setting high standards at home while
working tirelessly to persuade the international community to follow
our lead. We welcome the agreement just reached in Basel. It
substantially raises the level of capital major banks must hold whether
they operate out of New York or London or Frankfurt.
Sixth, we will protect the freedom for innovation that is
absolutely necessary for growth.
Our system allowed too much room for abuse and excessive risk. But
as we put in place rules to correct for those mistakes, we have to
achieve a careful balance and safeguard the freedom for competition and
innovation that are essential for growth.
Seventh, we are keeping Congress fully informed of our progress on
a regular basis.
Implementation Update
Treasury has been working hard to implement the sweeping reforms of
the Dodd-Frank Act since enactment.
Immediately after passage, we put in place a governance structure
that oversees Treasury's role to implement financial reform. The bulk
of the work is being done by teams dedicated to our core
responsibilities such as helping to establish the Financial Stability
Oversight Council (Council); laying the groundwork for the Office of
Financial Research (OFR); launching the Consumer Financial Protection
Bureau (CFPB); and creating a Federal Insurance Office (FIO).
These teams provide an update to a steering committee of senior
Treasury officials who meet every day and consider options, make
decisions, push implementation forward, and, where appropriate, make
recommendations for the Secretary.
Let me now discuss in greater detail our actions around each of our
core responsibilities.
The Financial Stability Oversight Council
With respect to the Council, we are focused on three things:
approach, structure and execution.
First, the Council has a clear statutory mandate and overarching
responsibility to identify risks to financial stability, respond to any
emerging threats in the system and promote market discipline. This is a
mandate that previously did not exist. In the lead-up to this crisis,
the regulatory framework focused regulators narrowly on individual
institutions and markets, which allowed gaps to grow and
inconsistencies to emerge that allowed arbitrage and weakened
standards. Before the Dodd-Frank Act, no single institution had
responsibility for monitoring and addressing risks to financial
stability. The Act fixes that through the creation of the Council.
To carry out its mandate, the Council has been given an important
role in several consequential regulatory decisions. These include which
major nonbank financial and critical financial market utilities firms
will be subject to heightened supervision, and what prudential
standards should be applied to those firms. The Council will also
closely monitor the financial system as a whole, looking out for any
emerging threats and, where they exist, make recommendations on how to
address them.
As Chair, Treasury respects the critical independence of regulators
to fulfill their responsibilities. We must develop an approach that
maintains that independence while maximizing the coordination required
for the Council to achieve its mission of financial stability. The
Dodd-Frank Act makes agencies collectively accountable for this
mission. While each agency has authority and mandate for a specific
part of the financial sector or for certain aspects of its functioning,
we need to develop an approach for the Council and its members of
collective accountability for financial stability. This approach will
promote the coordination, cooperation, and information sharing
necessary for success.
Our second focus is on structure.
Tomorrow, the Council will have its first meeting. In advance of
that meeting, senior officials from each member agency have been
looking at how best to set up the Council's governance structure. They
have drafted bylaws, and I expect those will be considered tomorrow.
Member agencies have also discussed setting up a committee
structure to promote shared responsibility and make the best use of
each member's expertise. This plan would entail forming committees
around the Council's various statutory responsibilities, and around
core issues that relate closely to systemic risk where more than one
agency has a significant interest.
For example, we have proposed committees for designating certain
nonbank financial firms and financial market utilities, for drafting
recommendations for heightened prudential standards, and for monitoring
and reporting on threats to financial stability. The Council members
and their deputies would set the priorities for each of the committees,
which will draw upon the expertise of each member agency and be chaired
by one or more members.
Our third focus is on execution.
While we settle on structure, the Council has already begun its
work because its duties commenced immediately upon enactment. Member
agencies have already formed staff working groups to begin taking
action. And, thanks to significant, joint work by staff of the member
agencies, we expect that the Council will be in a position to take
important steps toward fulfilling several of its core responsibilities
at its meeting tomorrow.
At that meeting, in addition to adopting organizational documents,
I expect the Council to consider a resolution to seek public comment on
the criteria for designating nonbank financial companies for heightened
supervision.
I also expect the Council will consider tomorrow a resolution to
seek public comment to inform recommendations the Council will make on
how to implement statutory restrictions on banking institutions'
proprietary trading and investments in private funds (the ``Volcker
Rule''). In addition to that study, the Council must also study and
make recommendations for implementing the concentration limit; study
the macroeconomic effects of risk retention requirements; and study the
economic implications of financial regulation. Work on those reports is
also underway.
The Office of Financial Research
In drafting the Dodd-Frank Act, Congress recognized that better
information and analysis will be critical to the success of the Council
and its member agencies. In the lead-up to this crisis, financial
reporting failed to adapt to an ever evolving financial system. Both
supervisors and market participants lacked data about the buildup of
leverage in the rapidly growing shadow banking system. Policymakers and
investors responded to the crisis with inadequate information about the
interconnectedness of firms and associated risks. That is why the Dodd-
Frank Act created the Office of Financial Research.
As the statute requires, the OFR will have a Data Center to set
standards for financial reporting and improve the quality of data that
supervisors and market participants rely to manage risk.
These standards will make it easier to spot emerging threats. For
example, more consistent and complete reporting of derivatives will
make it easier to track how they redistribute risk through the system.
Data standards will also improve market discipline as individual firms
will be better able to assess their own risks, and standardization may
lower firms' costs over the long run.
In addition to standards, the Data Center is required to develop
and publish key reference data that identify and describe financial
contracts and institutions. Regulators and supervisors as well as
private firms and investors rely on such reference data to analyze
risk. Gaps and inconsistencies in existing reference sources inhibit
meaningful analysis. The OFR will seek to close gaps and increase
consistency to improve risk analysis and strengthen market discipline.
To help the Council fulfill its role, the Dodd-Frank Act mandates
that the OFR have a Research and Analysis Center. Although no analytic
effort, no matter how thoughtful, can anticipate all risks, the OFR can
help identify undue concentrations of risk such as took place at AIG
before the crisis. And the OFR can help ensure that when the next
crisis begins to emerge the Government has the information and
analytical tools it needs to respond appropriately.
The OFR will be headed by a director nominated by the President and
confirmed by the Senate. The director will have an independent
obligation to report to Congress on threats to the financial system. We
envision a director who combines the capacity to lead a cutting edge
research program with experience both in managing data systems and in
risk analysis.
Until there is a confirmed Director, the Treasury staff team
working on creating the OFR has been hard at work planning its
functions and gathering input from regulators and private parties. Our
OFR team will continue to coordinate closely with other members of the
Council.
We will move quickly to complete a census of existing data
standardization initiatives and existing sources of reference data. The
OFR will work to maximize the effectiveness of existing private sector
efforts.
The OFR must not duplicate existing Government data collection
efforts or impose unnecessary burden. That is why we are working with
the regulators to catalogue carefully the data they already collect to
ensure the OFR relies on their data whenever possible, as the Act
requires. The OFR will help Government get the most out of existing
data by facilitating sharing among agencies. We are also identifying
existing private data sources to improve risk monitoring without
imposing new burdensome data collection mandates.
When we have finished assessing existing public and private data
initiatives, we will move quickly to draw up detailed plans for OFR to
facilitate and advance these initiatives without duplication or
unnecessary burden. We also are developing organizational structure,
hiring procedures and pay structures, information technology, and other
requirements.
Our efforts to establish the OFR will stay focused on ensuring that
the OFR protects private information and trade secrets. The Act
provides strict protections for data security and confidentiality and
we take seriously our obligation to implement these protections fully.
In the coming months our OFR team will be developing confidentiality
policies and procedures for the OFR and its data centers that meet the
highest data security standards.
We will in all these efforts continue to seek advice and expertise
from the private sector, academia, and Congress. Working with the
Council we will seek to formalize our outreach by establishing advisory
committees. The lessons and information we take back will be built into
the foundations of the OFR.
The Consumer Financial Protection Bureau
The CFPB will be an independent bureau of the Federal Reserve with
the mission of ensuring transparency in consumer financial products and
services and protecting consumers from abuse and deception. It will
consolidate existing rulemaking authorities for consumer financial
products and services. And it will consolidate agencies' existing
functions for supervising the very largest banking institutions for
compliance with consumer financial protection laws. It also will
supervise many nonbank financial firms that sell consumer financial
services, an entirely new Federal function.
The Act charges the Secretary with standing up the CFPB. Under his
leadership we set up a staff implementation team with a clear division
of responsibilities right after enactment. The team has working groups
focused on setting up key functions of the CFPB such as research,
preparing for the supervision of financial institutions, and working
with the transferor agencies. Other working groups are focused on
building the CFPB's supporting infrastructure (e.g., finance and
budget, records management, legal services, human resources,
information technology, procurement, and other operations).
Elizabeth Warren is leading Treasury's effort to create the CFPB as
the Secretary's Special Advisor. She will chair a steering committee of
senior Treasury officials dedicated to overseeing CFPB implementation
and reporting to the Secretary.
The team is tracking and projecting the CFPB's expenses, working
with GAO to build audit requirements for FY2011, and developing a
budget model. The team is also analyzing and aligning salary structures
of agencies transferring staff to the CFPB, and building a pay and
compensation system that fulfills the unique requirements of the Act.
Initial privacy protocols are being developed and data management
systems are being built.
The Secretary has designated July 21, 2011, as the date on which
the CFPB will assume existing authorities of seven agencies (OCC, OTS,
FDIC, NCUA, FRB, FTC, and HUD). Six of these agencies will also
transfer staff to the CFPB. We are developing protocols with these
agencies for determining how many people will transfer and for
determining how the agencies will jointly identify which specific
employees will transfer.
We have made substantial progress preparing the CFPB to incorporate
staff and assume authorities from other agencies. We have begun
planning and preparations for certain rules mandated by the Dodd-Frank
Act so the CFPB can meet statutory deadlines. We have met with the
agencies that will transfer rulemaking authority to coordinate and
ensure a smooth transfer. We are coordinating fulfillment of certain
rule-writing mandates under the Dodd-Frank Act with the Federal Reserve
Board to speed clarity for the market and meet statutory deadlines.
We are also hard at work to ensure a smooth transfer of consumer
compliance supervision for banks, thrifts, and credit unions with
assets exceeding $10 billion. Senior experts in consumer compliance
supervision of large banks--detailed to Treasury from the banking
agencies--are laying plans for staffing, training, and information
systems. We will make sure to coordinate examination schedules with
prudential regulators to avoid unnecessary burden.
Federal Insurance Office
FIO will provide the Federal Government for the first time
dedicated expertise regarding the insurance industry. The Office will
monitor the insurance industry, including identifying gaps or issues in
the regulation of insurance that could contribute to a systemic crisis
in the insurance industry or the United States financial system. The
director of FIO will advise the Council on these matters as a nonvoting
member. FIO may receive and collect data and information on and from
the insurance industry and insurers; enter into information-sharing
agreements; analyze and disseminate data and information; and issue
reports.
Under the Act, the director of this office must be a senior career
civil servant, and we are committed to finding a top caliber person to
fill the job. Last week we posted a vacancy notice and we will move as
fast as the civil service hiring process allows. Meanwhile, existing
Treasury staff has started the work of FIO.
We will make every effort to ensure a cooperative and collaborative
relationship with the National Association of Insurance Commissioners
(NAIC). Senior Treasury officials and staff are engaging frequently
with the NAIC as well as other interested parties. We are establishing
with NAIC a framework within which FIO and the States, as the
functional regulators, can work hand-in-hand.
And we are also making plans for a system that will provide FIO
with industry and insurer data and information, including data to
monitor access to affordable insurance products by traditionally
underserved communities and consumers, minorities, and low- and
moderate-income people.
We are working to engage effectively with representatives of other
countries on insurance prudential issues. We will also be working
closely with the United States Trade Representative.
Conclusion
This economic crisis was caused by fundamental failures in our
financial system. And over the past few years, those failures have cost
us dearly--millions of lost jobs, trillions in lost savings, thousands
of failed businesses, homes foreclosed, retirements delayed, educations
deferred.
Financial reform addresses those failures so no future generation
has to pay such a price. But it also rebuilds our financial system so
that it can once again be an engine for economic growth.
For much of the last century our financial system was the envy of
the world. From London to Shanghai, it was analyzed and even emulated
for its creativity and efficiency in finding innovative ways to channel
savings towards credit and capital, not just for the biggest companies
but also for the individual entrepreneurs who had a good idea and a
solid plan.
The Dodd-Frank Act will help ensure that our financial system
becomes safer, stronger and, just as in the past century, the world
leader.
Thank you.
______
PREPARED STATEMENT OF BEN S. BERNANKE
Chairman, Board of Governors of the Federal Reserve System
September 30, 2010
Chairman Dodd, Ranking Member Shelby, and other Members of the
Committee, thank you for the opportunity to testify about the Federal
Reserve's implementation of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act).
In the years leading up to the recent financial crisis, the global
regulatory framework did not effectively keep pace with the profound
changes in the financial system. The Dodd-Frank Act addresses critical
gaps and weaknesses of the U.S. regulatory framework, many of which
were revealed by the crisis. The Federal Reserve is committed to
working with the other financial regulatory agencies to effectively
implement and execute the act, while also developing complementary
improvements to the financial regulatory framework.
The act gives the Federal Reserve several crucial new
responsibilities. These responsibilities include being part of the new
Financial Stability Oversight Council, supervision of nonbank financial
firms that are designated as systemically important by the council,
supervision of thrift holding companies, and the development of
enhanced prudential standards for large bank holding companies and
systemically important nonbank financial firms designated by the
council (including capital, liquidity, stress test, and living will
requirements). In addition, the Federal Reserve has or shares important
rulemaking authority for implementing the so-called ``Volcker Rule
restrictions'' on proprietary trading and private fund activities of
banking firms, credit risk retention requirements for securitizations,
and restrictions on interchange fees for debit cards, among other
provisions.
All told, the act requires the Federal Reserve to complete more
than 50 rulemakings and sets of formal guidelines, as well as a number
of studies and reports, many within a relatively short period. We have
also been assigned formal responsibilities to consult and collaborate
with other agencies on a substantial number of additional rules,
provisions, and studies. Overall, we have identified approximately 250
projects associated with implementing the act. To ensure that we meet
our obligations in a timely manner, we are drawing on expertise and
resources from across the Federal Reserve System in areas such as
banking supervision, economic research, financial markets, consumer
protection, payments, and legal analysis. We have created a senior
staff position to coordinate our efforts and have developed project-
reporting and tracking tools to facilitate management and oversight of
all of our implementation responsibilities.
The Federal Reserve is committed to its long-standing practice of
ensuring that all its rulemakings be conducted in a fair, open, and
transparent manner. Accordingly, we are disclosing on our public Web
site summaries of all communications with members of the public--
including banks, trade associations, consumer groups, and academics--
regarding matters subject to a proposed or potential future rulemaking
under the act.
In addition to our own rulemakings and studies, we have been
providing technical and policy advice to the Treasury Department as it
works to establish the oversight council and the related Office of
Financial Research. We are working with the Treasury to develop the
council's organizational documents and structure. We are also assisting
the council with the construction of its framework for identifying
systemically important nonbank financial firms and financial market
utilities, as well as with its required studies on the proprietary
trading and private fund activities of banking firms and on financial-
sector concentration limits.
Additionally, work is well under way to transfer the Federal
Reserve's consumer protection responsibilities specified in the act to
the new Bureau of Consumer Financial Protection. A transition team at
the Board, headed by Governor Duke, is working closely with Treasury
staff responsible for setting up the new agency. We have established
the operating accounts and initial funding for the bureau, and we have
provided the Treasury detailed information about our programs and
staffing in the areas of rulemaking, compliance examinations, policy
analysis, complaint handling, and consumer education. We are also
providing advice and information about supporting infrastructure that
the Bureau will need to carry out its responsibilities, such as human
resource systems and information technology.
Well before the enactment of the Dodd-Frank Act, the Federal
Reserve was working with other regulatory agencies here and abroad to
design and implement a stronger set of prudential requirements for
internationally active banking firms. The governing body for the Basel
Committee on Banking Supervision reached an agreement a few weeks ago
on the major elements of a new financial regulatory architecture,
commonly known as Basel III. By increasing the quantity and quality of
capital that banking firms must hold and by strengthening liquidity
requirements, Basel III aims to constrain bank risk-taking, reduce the
incidence and severity of future financial crises, and produce a more
resilient financial system. The key elements of this framework are due
to be finalized by the end of this year.
In concordance with the letter and the spirit of the act, the
Federal Reserve is also continuing its work to strengthen its
supervision of the largest, most complex financial firms and to
incorporate macroprudential considerations into supervision. As the act
recognizes, the Federal Reserve and other financial regulatory agencies
must supervise financial institutions and critical infrastructures with
an eye toward not only the safety and soundness of each individual
firm, but also overall financial stability. Indeed, the crisis
demonstrated that a too narrow focus on the safety and soundness of
individual firms can result in a failure to detect and thwart emerging
threats to financial stability that cut across many firms.
A critical feature of a successful systemic or macroprudential
approach to supervision is a multidisciplinary perspective. Our
experience in 2009 with the Supervisory Capital Assessment Program
(popularly known as the bank stress tests) demonstrated the feasibility
and benefits of employing such a perspective. \1\ The stress tests also
showed how much the supervision of systemically important institutions
can benefit from simultaneous horizontal evaluations of the practices
and portfolios of a number of individual firms and from employment of
robust quantitative assessment tools. Building on that experience, we
have reoriented our supervision of the largest, most complex banking
firms to include a quantitative surveillance mechanism and to make
greater use of the broad range of skills of the Federal Reserve staff.
---------------------------------------------------------------------------
\1\ See, Ben S. Bernanke (2010), ``The Supervisory Capital
Assessment Program--One Year Later'', speech delivered at the Federal
Reserve Bank of Chicago 46th Annual Conference on Bank Structure and
Competition, held in Chicago, Ill., May 6, www.federalreserve.gov/
newsevents/speech/bernanke20100506a.htm; and Daniel K. Tarullo (2010),
``Lessons from the Crisis Stress Tests'', speech delivered at the
Federal Reserve Board International Research Forum on Monetary Policy,
Washington, March 26, www.federalreserve.gov/newsevents/speech/
tarullo20100326a.htm.
---------------------------------------------------------------------------
A final element of the Federal Reserve's efforts to implement the
Dodd-Frank Act relates to the transparency of our balance sheet and
liquidity programs. Well before enactment, we were providing a great
deal of relevant information on our Web site, in statistical releases,
and in regular reports to the Congress. Under a framework established
by the act, the Federal Reserve will, by December 1, provide detailed
information regarding individual transactions conducted across a range
of credit and liquidity programs over the period from December 1, 2007,
to July 20, 2010. This information will include the names of
counterparties, the date and dollar value of individual transactions,
the terms of repayment, and other relevant information. On an ongoing
basis, subject to lags specified by the Congress to protect the
efficacy of the programs, the Federal Reserve also will routinely
provide information regarding the identities of counterparties, amounts
financed or purchased and collateral pledged for transactions under the
discount window, open market operations, and emergency lending
facilities.
To conclude, the Dodd-Frank Act is an important step forward for
financial regulation in the United States, and it is essential that the
act be carried out expeditiously and effectively. The Federal Reserve
will work closely with our fellow regulators, the Congress, and the
Administration to ensure that the law is implemented in a manner that
best protects the stability of our financial system and strengthens the
U.S. economy.
______
PREPARED STATEMENT OF SHEILA C. BAIR
Chairman, Federal Deposit Insurance Corporation
September 30, 2010
I appreciate the opportunity to testify on the priorities of the
Federal Deposit Insurance Corporation (FDIC) for implementing the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-
Frank Act). I also want to thank the Committee Members and staff for
their hard work to enact this landmark legislation. With new resolution
powers for nonbank financial companies, the establishment of the
Financial Stability Oversight Council and the creation of the Consumer
Financial Protection Bureau (CFPB), the Dodd-Frank Act provides
financial regulators with the tools that are needed to protect against
future financial crises.
In addition to specific requirements to strengthen our financial
system, there are important areas where the Dodd-Frank Act establishes
broad policy direction while leaving the details of implementation to
financial regulators. Implementing the Dodd-Frank Act in a way that
will enhance the stability of our financial system as Congress
intended, and not just as a regulatory compliance exercise, is a
responsibility that the FDIC views with utmost importance.
The Dodd-Frank Act assigns the FDIC a large number of
responsibilities for implementing reform. The FDIC is authorized to
write 44 rulemakings--some of which are discretionary--including 18
independent and 26 joint rulemakings, new or enhanced enforcement
authorities, new reporting requirements and numerous other actions.
Implementation will require extensive coordination among the regulatory
agencies and will fundamentally change the way we regulate large
complex financial institutions.
It is imperative that regulators work together, with both speed and
openness in the implementation of the Dodd-Frank Act in order to dispel
uncertainties and foster a smooth transition by the industry. To
achieve this end, the FDIC has already taken several steps to enhance
the transparency of our rulemaking process. First, we announced that we
would hold a series of public roundtables with external parties to
discuss particular aspects of implementation and to provide input on
draft regulations to carryout the Act. To date, we have held two
roundtables. The first focused on the new orderly liquidation authority
provisions of the Dodd-Frank Act. The second roundtable addressed the
FDIC's current Deposit Insurance Fund (DIF) management and risk-based
assessment system and changes made by the Dodd-Frank Act. Information
on our roundtables is posted on our public Web site.
The FDIC is also disclosing on our Web site the names and
affiliations of private sector individuals who meet with senior FDIC
officials to discuss how the FDIC should interpret or implement
provisions of the Dodd-Frank Act that are subject to independent or
joint rulemaking. Moreover, in addition to the longstanding practice of
publishing public comments on our Web site that are received through
our rulemaking process, we are encouraging general input from the
public on how the FDIC should implement the new law. The comments
already received have been published on our Web site and we will
continue this practice in advance of formal rulemaking.
Implementation of Dodd-Frank
The recent financial crisis exposed the short-comings of the
current regulatory regime for addressing large, nonbank financial
companies that posed systemic risk. Specifically, the Government was
forced to either prop up a failing institution with expensive bailouts
or allow a disorderly liquidation through the normal bankruptcy
process. The bankruptcy of Lehman Brothers triggered a liquidity crisis
that led to the bailout of AIG and massive public assistance to most
major U.S. banking organizations. An orderly closure and liquidation is
essential if we are to prevent such crises from occurring in the
future. Many provisions of the Dodd-Frank Act are designed to reduce
risk to the financial system and economy by enhancing the supervision
of large nonfinancial companies or by facilitating their orderly
closing and liquidation in the event of failure. The Dodd-Frank Act
provides a new comprehensive regulatory regime that, coupled with
higher capital standards, is designed to reduce risk in both individual
firms and the wider financial system. Further, in order to reduce risk
in the system to reasonable levels, it must be made clear to these
companies that their financial folly could result in losses to
shareholders and bondholders and in the dismissal of their senior
managers.
My testimony reviews the top priorities of the FDIC in implementing
the Dodd-Frank Act, which include: resolution plan requirements and
orderly liquidation authority, systemic risk oversight, capital and
liquidity requirements, and consumer protection. In addition, I will
discuss other important implementation issues with respect to reliance
on credit rating agencies, back-up examination and enforcement
authorities, supervision of State chartered thrifts and changes to the
deposit insurance system that should smooth the effect of economic
cycles on IDIs by maintaining steady assessment rates and allowing the
FDIC to maintain a positive fund balance during a financial crisis.
Orderly Liquidation Authority and Resolution Plans
The new resolution plan requirements and orderly liquidation
authority are fundamental tools necessary to close large, systemically
important financial companies and end ``Too Big to Fail.'' The new
requirements will ensure that the largest nonbank financial companies
can be wound down in an orderly fashion without costing taxpayers
billions of dollars in the form of bailouts. From the FDIC's more than
75 years of bank resolution experience, we have found that clear legal
authority and transparent rules on creditor priority--coupled with
adequate information and cooperation--are critical tools for the
effective advance planning of a large, orderly liquidation.
Legal Authorities for Orderly Liquidation
The Dodd-Frank Act provides for orderly liquidation of covered
``financial companies''--that is, those financial companies (including
bank holding companies) for which a systemic risk determination has
been made that failure and resolution under otherwise applicable law
would have ``serious adverse effects on financial stability in the
United States.'' Title II of the Act vests the FDIC with legal
resolution authorities similar to those for insured depository
institutions (IDIs). Once the FDIC is appointed as receiver, it is
required to carry out an orderly liquidation of the financial company.
In order to implement this authority, the FDIC must determine: how a
company will be closed; how assets of the receivership will be sold;
how claims will be determined and paid; and what policies and
safeguards must exist to ensure that the taxpayers do not bear losses.
We are currently establishing processes needed to make these
determinations.
In August, the FDIC Board of Directors approved the creation of an
Office of Complex Financial Institutions (OCFI), that will, among other
things, carry out the FDIC's new authority to implement orderly
liquidations of systemically important bank holding companies and
nonbank financial companies that fail. I will discuss the new OCFI in
more detail later.
Information Necessary for Liquidation
Without access to information, the FDIC's legal authority for
liquidation under the Dodd-Frank Act would be insufficient for
implementing an effective and orderly liquidation process. For example,
the court-appointed trustee overseeing the liquidation of Lehman
Brothers found that Lehman Brothers' lack of a disaster plan
``contributed to the chaos'' of its bankruptcy and the liquidation of
its brokerage. \1\ This is fully consistent with the FDIC's experience.
Without advance planning, the FDIC could not have effectively resolved
the many insured banks that have failed. Recognizing this, the Dodd-
Frank Act created supervisory and regulatory powers designed to give
the FDIC information and cooperation from the largest financial
companies and other regulators, and the authority to conduct extensive
advance planning.
---------------------------------------------------------------------------
\1\ See, James W. Giddens, Trustee for the SIPA Liquidation of
Lehman Brothers Inc., Trustee's Preliminary Investigation Report and
Recommendations, United States Bankruptcy Court Southern District of
New York, Case No. 08-01420 (JMP) SIPA, p. 8 ff.
---------------------------------------------------------------------------
The new legislation requires the FDIC and the Board of Governors of
the Federal Reserve System (FRB) to jointly issue regulations within 18
months of enactment of the Dodd-Frank Act to implement new resolution
planning and reporting requirements that apply to bank holding
companies with total assets of $50 billion or more and nonbank
financial companies supervised by the FRB. Importantly, the statute
requires both periodic reporting of detailed information by the largest
financial companies and the development and submission of a plan ``for
rapid and orderly resolution in the event of material financial
distress or failure.'' The resolution plan requirement in the Dodd-
Frank Act appropriately places the burden on financial companies to
develop their own plans in consultation with the FDIC and the FRB.
We are in the beginning phase of implementation and are closely
coordinating the development of the resolution plan regulatory
requirements with the FRB. This new resolution plan regulation will
require financial companies to look critically at the often highly
complex and interconnected corporate structures that have emerged
within the financial sector. For a resolution plan to be viewed as
credible and facilitating orderly resolution under the Bankruptcy Code
as required by the Act, it must provide a clear discussion with regard
to corporate structure and key business operations. The plan should
describe which assets and liabilities belong to which legal entities,
identify functions or services provided by third parties and who within
the financial firm has the relevant information about these functions.
These large complex firms are continuously growing and changing,
which yields complex and opaque legal and operating structures. Over
time, these can present obstacles not only to regulators, but also to
the firm's management. Resolution plans can clarify a financial firm's
risks and lines of authority and control, which can ultimately benefit
the firm.
The existence of a resolution plan will generate financial
benefits, as inefficiencies associated with resolving a company without
sufficient background information will be alleviated, financial system
resiliency will be improved, and systemic risk will be reduced. Taken
together, the new resolution powers, the enhanced regulatory and
supervisory cooperation mandated in the law, and the resolution
planning authority provide an infrastructure to end ``Too Big to
Fail.''
In fact, we view resolution planning as such a critical matter that
we already have used the FDIC's preexisting authority to propose a
requirement for resolution planning for certain large IDIs. In May of
this year the FDIC issued a notice of proposed rulemaking which would
set forth information-reporting requirements intended to provide the
FDIC with key information regarding operations, management, financial
aspects and affiliate relationships. Further, the proposed rulemaking
would require a contingent resolution plan to be submitted to the FDIC
that describes how the IDI could be effectively separated from the rest
of the organization. The Dodd-Frank Act goes one step further by
mandating an orderly resolution plan for the entire organization.
The Dodd-Frank Act lays out steps that must be taken with regard to
the resolution plans. First, the FRB and the FDIC must review the
company's plan to determine credibility and utility in facilitating an
orderly resolution under the Bankruptcy Code. Making these
determinations will necessarily involve the agencies having access to
the company and relevant information. If a plan is found to be
deficient, the company will be asked to submit a revised plan to
correct any identified deficiencies within a time period determined by
the agencies. The revisions must demonstrate that the plan is credible
and would result in an orderly resolution under the Bankruptcy Code.
The revised plan could include changes in business operations and
corporate structure to facilitate implementation of the plan. If the
company fails to resubmit a plan that corrects the identified
deficiencies, the Dodd-Frank Act authorizes the FRB and the FDIC to
jointly impose more stringent capital, leverage or liquidity
requirements. In addition, our agencies may impose restrictions on
growth, activities or operations of the company or any subsidiary,
until such time as an acceptable plan has been submitted. In certain
cases we may force divestiture of portions of the nonbank financial
firm.
Systemic Risk
The Dodd-Frank Act addresses systemic risk in several ways. As
discussed above, each systemically important financial company must
submit a periodic orderly resolution plan that is reviewed by the FDIC
and the FRB and assessed for its credibility and ability to facilitate
an orderly resolution under the Bankruptcy Code. In addition, the FDIC
will have the authority to liquidate such entities in the event of
failure. The Act also addresses the macro-oversight of the financial
industry by establishing the Financial Stability Oversight Council
(Council), strengthening liquidity and capital requirements, and
prohibiting the use of credit ratings for regulatory purposes.
Financial Stability Oversight Council
The Dodd-Frank Act established the Council and vested it with the
responsibility for identifying financial companies and practices that
could create systemic risk in the future and taking actions to mitigate
identified risks. The Council's success will be determined by the
willingness of its members to work together closely and expeditiously
to implement the Council's duties and to do so in a way that is not
just a ``paper exercise.'' One of the highest priorities for the
Council is to establish the criteria for identifying systemically
important financial companies to be subject to enhanced prudential
supervision by the FRB. The Dodd-Frank Act specifies a number of
factors that can be considered when designating a nonbank financial
company for enhanced supervision, including: leverage; off-balance-
sheet exposures; and the nature, scope, size, scale, concentration,
interconnectedness and mix of activities.
This process of identifying the nonbank financial companies that
should be subject to FRB oversight is likely to be involved and take
considerable time. It may be prudent to begin the process by qualifying
a small group of companies that are clearly subject to this provision
of the Act while the Council members work through the details necessary
to identify the more nuanced cases. Once a nonbank financial company is
identified and subject to FRB supervision, the company must file an
orderly resolution plan with the FRB and the FDIC, as discussed
earlier.
Another key priority for the Council is to identify potentially
systemic activities and practices. The Council needs to have a forward-
looking focus to identify emerging risks and recommend that the primary
regulators take quick action to mitigate those risks. At the same time,
the Council members must work together to develop the most effective
recommendations for enhanced prudential standards for the range of
potentially systemic financial companies and activities. It is
important to remember that the Council was formed to take a long-term,
macro viewpoint. It was not meant to interfere with or complicate the
ability of the independent agencies to fulfill their statutory mandates
and move ahead with clearly needed reforms. We look forward to
collaborating with our colleagues to assure continued progress in
strengthening the stability of our financial system and utilizing our
respective authorities and individual areas of specialized expertise to
close regulatory gaps which contributed so greatly to the financial
crisis.
In order to accomplish its challenging tasks, I believe that the
Council should begin with experienced and capable staff from each of
the member agencies to work as a team in implementing the Council's
responsibilities. Interagency working groups should be established to
take full advantage of the knowledge and unique perspective of each
member agency.
To meet these implementation objectives, as I previously mentioned,
the FDIC has recently reorganized and established the OCFI to help
carry out its responsibilities under the Act. To support the priority
of systemic risk oversight, the OCFI will perform continuous review and
oversight of bank holding companies with more than $100 billion in
assets as well as nonbank financial companies designated as
systemically important by the Council. It will also be responsible for
carrying out the FDIC's new orderly liquidation authority over those
systemic companies that fail. Further, the OCFI will monitor risks
among the largest and most complex financial institutions and develop
plans for the contingency that one or more of these companies might
fail. The OCFI will work closely with our counterparts at the U.S.
Department of the Treasury (the Treasury Department), the FRB, and the
other banking agencies to ensure that the Dodd-Frank Act is implemented
in a way that makes prudential supervision and orderly liquidation of
designated nonbank financial companies as effective as possible.
Bank Capital and Liquidity Requirements
One of the fundamental lessons of the financial crisis was the
disastrous economic consequences of insufficient capital in the global
banking system. Over time, the regulations that were in place allowed
the financial system to become excessively leveraged and insufficiently
liquid. Excessive leverage fueled a credit bubble and decreased the
ability of financial institutions to absorb losses.
Through the auspices of the Basel Committee on Banking Supervision
(Basel Committee), the Federal Reserve Board, the FDIC and our fellow
U.S. banking regulators have been working with other supervisors and
central bank governors throughout the world to increase both the level
and loss-absorption capacity of capital. While important work remains
to be done, as I will describe later in this testimony, the agreements
reached in July and September by the Basel Committee and it's oversight
body--the Group of Central Bank Governors and Heads of Supervision
(GHOS)--will do much to improve both the quantity and quality of
capital and discourage excessive leverage and excessive risk-taking by
large international banking organizations.
The agreement sets out new explicit numerical minimum requirements
for common equity, calculated for regulatory purposes in a way that is
intended to ensure that such equity is fully available to absorb
losses. It also includes capital buffers designed to encourage banks to
hold capital well above regulatory minimums so they can absorb losses
and keep lending during a crisis; increases in capital requirements for
the counterparty credit risk arising from derivatives exposures;
explicit regulatory liquidity ratios; and of critical importance, an
internationally agreed leverage ratio. All of these elements are
subject to an extraordinarily long phase-in period.
A great deal of attention has been directed to the potential impact
of these requirements. While the agreement does represent a significant
strengthening of requirements, we believe achieving the new capital
levels will be easily manageable with the extremely long transition
period. First, none of these enhancements will take effect until
January 1, 2013, over 2 years from now. At that time, a 3.5 percent
minimum ratio of tier 1 common equity to risk-weighted assets is
introduced--but without, at that time, a requirement for any of the new
regulatory deductions. For U.S. banks, a 3.5 percent common equity
requirement is clearly a nonevent.
During the 5 years following January 1, 2013, new regulatory
deductions from capital would be phased-in incrementally. In the U.S.,
the most important of these deductions would come from the phase-out of
Bank Holding Companies' tier 1 capital recognition of trust preferred
securities. This phase-out is part of both Basel III and the Dodd-Frank
Act, and appropriately so since these instruments did not prove to be
loss-absorbing in the crisis and their prevalence greatly weakened the
capital strength of the U.S. banking industry and increased the FDIC's
insurance losses.
There is also a more-stringent cap on the recognition of deferred
tax assets in tier 1 common equity. When the value of these assets
depends on future income, they are not really available to absorb loss
in a severe scenario. It is likely, however, that banks would avoid
much of this deduction simply by realizing the value of these deferred
tax assets over time through earnings.
Another important deduction includes a tighter cap on the capital
recognition of mortgage servicing rights and the deduction of all other
intangible assets (goodwill, by far the largest category of intangible
assets, has long been deducted from regulatory capital). While the
value of mortgage servicing rights can be volatile, they clearly have
value and the U.S. delegation argued successfully that the full
deduction of this asset proposed by the Basel Committee in December was
unwarranted. Finally, deductions of certain large financial equity
investments and cross-holdings are designed to reduce the double-
counting of capital in the financial system. We anticipate banks will
avoid many of these types of deductions simply by selling or
restructuring their holdings.
Just as these deductions would be phased in gradually, the higher
numerical requirements would also be phased-in, even more gradually.
This would include a capital buffer over and above the minimum common
equity ratio. The minimum plus buffer for tier 1 common as a percentage
of risk-weighted assets would increase from the 3.5 percent on January
1, 2013, to 7 percent on January 1, 2019. Corresponding figures
(minimum plus buffer) by 2019 for tier 1 and total capital would be 8.5
percent and 10.5 percent respectively. The leverage requirement that
tier 1 capital be at least 3 percent of the sum of balance-sheet assets
and selected off-balance-sheet assets would not take effect until
January 1, 2018.
The agreement also includes important new requirements for
liquidity. A new Liquidity Coverage Ratio requires banks to hold
sufficient high quality liquid assets to meet cash needs during a 30-
day stress scenario. While simple in concept, implementing this ratio
requires many key assumptions and definitions. The agreement includes
an observation period to allow for potential adjustments if needed.
Another proposed liquidity ratio, the Net Stable Funding Ratio, in
essence attempts to ensure that illiquid assets are not funded with
volatile liabilities. This ratio is still under development.
Determining the amount of new capital that banks would ultimately
need to retain through earnings or raise externally during the next 8
years under these requirements is extremely difficult. Some of the
specific required deductions may be avoidable as noted above.
Deductions or extremely high capital charges affecting certain
speculative grade or unrated securitizations may be largely avoidable
as well, as banks sell, restructure or allow these exposures to pay
down over time.
Our own analysis, that assumes no mitigating actions by the banks
and that the full increase in risk-weighted assets estimated by the
Quantitative Impact Study (QIS) is realized, suggests that
overwhelmingly, U.S. banks can meet the new requirements through
retained earnings over time, with no need to tap external equity
markets.
Our view is that while the evidence supported the case for still
higher requirements, the agreement is a major strengthening of current
rules and an acceptable compromise given the multiple perspectives
represented in the negotiations.
Thus, the requirements agreed by the GHOS would go a long way to
strengthen the U.S. banking system, but there is more to be done.
First, the GHOS and the U.S. banking agencies have affirmed that
further steps will be taken to augment the loss absorbing capacity of
systemically important banks. The FDIC places a high priority on these
efforts, and believes that they are needed to help avoid a recurrence
of the events of the Fall of 2008.
The Dodd-Frank Act establishes a mandate for the largest and most
systemically important banks to have capital requirements that are
higher than those applying to community banks, for systemically
important nonbank financial companies to be subject to strong and
appropriate capital regulation, and for depository institution holding
companies to serve as a source of financial strength to banks. The
Dodd-Frank Act requirement that is most critical to ensuring that all
this happens is Section 171.
Section 171 states that the generally applicable capital
requirements shall serve as a floor for any capital requirement the
agencies may require. Without this provision, the Nation's largest
insured banks and bank holding companies could avoid being held to
higher capital standards, simply by using their own internal risk
metrics under the agencies' rules implementing Basel II's ``advanced
approaches'' to compute the risk-weighted assets against which they
hold capital. Section 171 also provides that the generally applicable
insured bank capital requirements will serve as a floor for the capital
requirements of depository institution holding companies, and of
nonbank financial companies supervised by the FRB pursuant to the Dodd-
Frank Act. These important requirements will help ensure that holding
companies do serve as a source of strength for their banks rather than
as a vehicle for increasing leverage, and will address gaps and
inconsistencies in regulatory capital between banking organizations and
systemically important nonbank financial companies.
The FDIC attaches enormous importance to working with our fellow
regulators to promptly implement these important requirements of
Section 171.
Limitation on Reliance on Credit Rating Agencies
Another lesson of the financial crisis is the importance of
performing independent due diligence on the underwriting standards and
credit risks posed by credit exposures contained within structured
products such as mortgage-backed securities and credit derivative
products. To this end, the Dodd-Frank Act requires the regulatory
agencies to remove all references to, or reliance on, credit ratings
and substitute credit-worthiness standards developed by the agencies.
On August 25, 2010, the banking agencies published a joint Advance
Notice of Proposed Rulemaking seeking comment on a number of
alternatives to the use of credit ratings within the various U.S. bank
regulations and capital standards that reference such ratings. While we
are interested in seeing industry comments on the alternatives, we also
recognize the significant challenges involved with developing credit
worthiness standards for the broad range of exposures and complex
securities structures that exist within today's financial system.
Consumer Protection
I have long argued for increased consumer protections and fully
supported the creation of the CFPB. Put bluntly, consumer protections
need to be beefed up especially for nonbank providers of financial
services. There is ample evidence that consumers did not understand the
consequences of the subprime and nontraditional mortgages that were
sold to them during the buildup of the housing bubble. That is why
basic consumer protections are a fundamental piece of our regulatory
infrastructure, and the new CFPB has much work to do to bolster these
protections.
As you know, under the Dodd-Frank Act, the FDIC maintains
compliance, examination and enforcement responsibility for over 4,700
insured institutions with $10 billion or less in assets. The CFPB
assumes responsibility to examine, and enforce for compliance with
Federal consumer financial law, the 46 institutions we now supervise
that have more than $10 billion in assets or that are affiliates of
institutions with over $10 billion in assets. Even for these large
organizations the FDIC will have back-up authority to enforce Federal
consumer laws and address violations.
The Committee has asked about the transfer of employees to the new
CFPB. We recognize the tremendous importance of working closely with
our colleagues at the Treasury Department and the other banking
agencies to ensure a smooth transition and the need for ongoing agency
coordination once the transition is complete. Above all, we are fully
committed to a fair transition and the equitable treatment of
employees. With these goals in mind, we have taken a number of
preliminary steps to begin the transfer process.
Initially, two senior employees are being detailed to the Treasury
Department to work on a wide range of examination and legal issues that
will confront the CFPB at its inception. We are also actively engaged
with the Treasury Department in helping to determine staffing levels
and identify skill sets needed for the CFPB. Recognizing that FDIC
employees have developed expertise, skills, and experience in a number
of areas to benefit the CFPB, we fully expect some employees will
actively seek an opportunity to assist the CFPB in its earliest stages,
or on a more permanent basis.
Related to the creation of the CFPB, the Dodd-Frank Act changes the
composition of the FDIC Board of Directors by replacing the position
held by the Director of the Office of Thrift Supervision (OTS) with the
Director of the CFPB. Given the importance of consumer protections as
part of financial reform, it is appropriate that the Director of the
CFPB is a member of our Board.
In addition to this change to the Board's governance structure, the
FDIC has taken steps to raise the stature and attention of consumer
protections by creating a new division within FDIC with consumer
protection as its focus. The new Division of Depositor and Consumer
Protection will be created through the transition of staff from our
existing Division of Supervision and Consumer Protection. We also will
transfer employees from our existing research staff to the new Division
to perform consumer research and Home Mortgage Disclosure Act (HMDA)/
fair lending analysis. We also are in the process of strengthening our
legal workforce dedicated to supporting depositor and consumer
protection functions. Finally, to maintain synergies between safety and
soundness and consumer protection, FDIC risk management staff will
continue to work closely with the FDIC's depositor and consumer
protection staff.
Additional FDIC-Related Dodd-Frank Act Provisions
The Dodd-Frank Act provides the FDIC with new and enhanced
authorities related to examinations and supervision of nonbank
financial companies supervised by the FRB, IDIs, and their holding
companies. Among other things, the Act provides the FDIC with back-up
examination authority for systemically important nonbank financial
companies, and bank holding companies. The Act also transfers
regulatory authority over State chartered thrifts from the OTS to the
FDIC. In addition, the Act mandates changes to the DIF that will allow
the FDIC to more effectively manage the Fund.
Back-up Examination and Enforcement Authority
The Dodd-Frank Act grants the FDIC new authorities to examine
systemically important nonbank financial companies and bank holding
companies with at least $50 billion in assets for the purposes of
implementing the FDIC's orderly liquidation authority. These back-up
examinations may only be conducted in certain circumstances and only if
the FDIC Board decides they are necessary to determine the condition of
the company and other conditions are met.
Before conducting a back-up examination, the FDIC will review
available resolution plans submitted by the company, as well as
available ``reports of examination.'' We will coordinate with the FRB
to the maximum extent practicable to minimize duplicative or
conflicting examinations. However, consistent with FDIC's methods for
resolving IDIs, back-up examination authority likely would play a key
role in the planning for any potential orderly liquidation of a
systemically important financial company under Title II of the Dodd-
Frank Act. The information obtained from examinations (along with the
information obtained through the resolution plan review process) is
crucial for planning an effective liquidation.
Similarly, the Dodd-Frank Act gives the FDIC back-up enforcement
authority over a depository institution holding company if the conduct
or threatened conduct of the holding company poses a risk to the DIF.
This new authority recognizes that the activities and practices of the
holding company may affect the safety and soundness of the IDI.
With respect to our existing back-up examination authority for IDIs
prior to passage of the Dodd-Frank Act, the FDIC Board voted on July 12
to revise its Memorandum of Understanding (MOU) with the other primary
Federal banking regulators to enhance the FDIC's existing back-up
authorities over IDIs that the FDIC does not directly supervise. The
revised agreement will improve the FDIC's ability to access information
necessary to understand, evaluate, and mitigate its exposure as deposit
insurer, especially to the largest and most complex firms.
The complexity and opaqueness of large, complex depository
institutions requires the FDIC to have a more active on-site presence
and greater direct access to information and bank personnel in order to
fully evaluate the risks to the DIF. The need to revise the existing
MOU was previously identified in a report by the Offices of Inspector
General of the FDIC and the Treasury Department. \2\ They criticized
the then-existing MOU because it limited the FDIC's ability to make its
own independent assessment of risk to the DIF and required the FDIC to
place unreasonable reliance on the work of the primary Federal
regulator.
---------------------------------------------------------------------------
\2\ Offices of Inspector General of the FDIC and The Treasury,
Evaluation of the Federal Oversight of Washington Mutual Bank, Report
No. EVAL-10-002, April 2010. http://www.fdicoig.gov/reports10/
10002EV.pdf.
---------------------------------------------------------------------------
Our new back-up supervision MOU meets the recommendations of the
Inspectors' General report and the commitment for action that I made
personally in response to the recommendations. Further, I believe that
the new agreement strikes a reasonable balance between preserving the
role of the primary Federal regulator and providing the FDIC with the
information that is critical to meet our statutory responsibilities.
While much work lies ahead in implementing the terms of the new MOU,
the FDIC will benefit from the stronger and more robust agreement.
However, we also recognize that our ultimate success will depend
heavily upon our ability to work together collectively as regulators
and to respect the roles and responsibilities that we have each been
given to protect the financial system.
FDIC's Authority Over State Chartered Thrifts
We have initiated discussions with the OTS, the Office of the
Comptroller of the Currency (OCC), and the FRB to ensure a smooth
transition of OTS personnel and the approximately 60 State-chartered
OTS institutions that will become FDIC-supervised pursuant to the
regulatory realignment in the Dodd-Frank Act. An implementation plan
for the transfer of OTS powers and personnel will be developed in
coordination with the other Federal banking agencies. As you know, the
Act sets the transfer date for OTS functions at 1 year after enactment,
with a possibility for a 6-month extension. Prior to the implementation
date, the FDIC, in consultation with the OCC, will identify and publish
a list of OTS orders and regulations that the FDIC will enforce. We
plan to use the systems currently in place to communicate with the
management of these institutions during the transition phase. We are
confident that the FDIC will have the resources needed to effectively
supervise these institutions.
Changes to the DIF Under the Dodd-Frank Act
The FDIC has experienced two banking crises in the years following
the Great Depression. In both of these crises, the balance of the
insurance fund became negative, hitting a low of negative $20.9 billion
in December 2009, despite high assessment rates and despite other
extraordinary measures in the most recent crisis, including a special
assessment of $5.5 billion. However, prepaid assessments of
approximately $46 billion maintained the fund's liquidity.
The FDIC has long advocated that the deposit insurance assessment
system should smooth the effect of economic cycles on IDIs, not
exacerbate them. In practice, however, the opposite has tended to
occur--rates have been low during prosperous times and high during
crises. At the very least, assessment rates should not increase during
a crisis.
In the Dodd-Frank Act, Congress granted the FDIC increased
flexibility to manage the DIF to achieve goals for deposit insurance
fund management that the FDIC has sought for decades but has lacked the
tools to achieve. The provisions of the Act, used to their fullest
extent, should allow the FDIC to maintain a positive fund balance even
during a banking crisis and maintain steady assessment rates throughout
economic and credit cycles.
Specifically, the Dodd-Frank Act raised the minimum level for the
Designated Reserve Ratio (DRR) from 1.15 percent to 1.35 percent and
removed the requirement that the FDIC pay dividends of one-half of any
amount in the DIF above a reserve ratio of 1.35 percent. The new
legislation also allows the FDIC Board, in its sole discretion, to
suspend or limit dividends when the reserve ratio reaches 1.50 percent.
Going forward, the dividend policy set by the Board (combined with
assessment rates) will directly determine the size of the DIF.
The FDIC has analyzed various trade-offs among assessment rates,
dividend policies and reserve ratio targets. The analysis shows that
the dividend rule and the reserve ratio target are among the most
important factors in maximizing the probability that the DIF will
remain positive during a crisis, when losses are high, and in
preventing sharp swings in assessment rates, particularly during a
crisis. This analysis also shows that the DIF minimum reserve ratio
(DIF balance/estimated insured deposits) should be about 2 percent in
advance of a banking crisis in order to avoid high deposit insurance
assessment rates when IDIs are strained by a crisis and least able to
pay.
The FDIC Board will soon be considering a long-term strategy for
DIF management, including assessment rates, a target reserve ratio, and
a dividend policy, consistent with long-term FDIC goals and achieving
the statutorily required 1.35 percent DIF reserve ratio by September
30, 2020. It is important to take advantage of this new fund management
authority while the need for a sufficiently large fund and stable
premiums are apparent to most. Memories of the last two crises will
eventually fade and the need for a strong fund will become less
apparent. Action taken now by the FDIC's present Board, taking
advantage of the tools granted by the Dodd-Frank Act, will make it
easier for future Boards to resist inevitable calls to reduce
assessment rates or pay larger dividends at the expense of prudent fund
management.
In addition, among the various rulemakings that will be required to
implement the DIF-related provisions in the Dodd-Frank Act, the FDIC
Board will issue notice-and-comment rulemaking later this fall to
implement the requirement that we change the assessment base from
domestic deposits to average assets less average tangible equity.
This change, in general, will result in shifting more of the
overall assessment burden toward the largest institutions, which rely
less on domestic deposits for their funding than do smaller
institutions.
Conclusion
In creating the Dodd-Frank Act, Congress enacted an historic
package of financial reforms that will shape the financial industry for
decades to come. Not only are these reforms needed to address the
problems and abuses that led to the crisis, but they also offer the
opportunity to create a financial system that will once again support
the American economy, and not the other way around. A stable,
profitable and internationally competitive U.S. financial services
industry is in everyone's interest.
This financial reform is about better aligning incentives--
internalizing the costs of leverage and risk taking--so that financial
institutions can safely and efficiently channel capital to its highest
and best use in our economy. If our economy is to prosper and if our
Nation is to meet the economic challenges looming ahead, our financial
sector simply must do its job better.
As we meet today, much remains to be done. The FDIC has begun its
rulemaking tasks and is committed to a quick, transparent process to
allow the financial industry to readily adapt to the new environment.
We have reorganized ourselves internally to produce the focus and
accountability needed to ensure the orderly liquidation of nonbank
financial entities, the control of systemic risk, and the enhancement
of consumer protections. We are working with our regulatory
counterparts to quickly and carefully issue regulations to implement
the Dodd-Frank Act. We are approaching these complex tasks with both a
sense of urgency and a view toward their long-run efficacy.
The stakes are high. If we fail to create effective frameworks now
for exercising our authorities under Dodd-Frank, we will have forfeited
this historic chance to put our financial system on a sounder and safer
path in the future. We must not let this tremendous opportunity go to
waste. Thank you for today's hearing. I look forward to answering any
questions.
______
PREPARED STATEMENT OF MARY L. SCHAPIRO
Chairman, Securities and Exchange Commission
September 30, 2010
Chairman Dodd, Ranking Member Shelby, and Members of the Committee:
Thank you for inviting me to testify today on behalf of the Securities
and Exchange Commission regarding our implementation of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'' or
``Act''). As you know, the Dodd-Frank Act fills a number of significant
regulatory gaps, brings greater public transparency and market
accountability to the financial system, and gives the SEC important
tools to better protect investors.
The Act includes over 100 rulemaking provisions applicable to the
SEC, many of which require action within 1 year. It also requires the
SEC to conduct more than twenty studies and create five new offices.
While this is a very significant task, we are fully committed to
fulfilling our mandates under the Act, as well as our preexisting
responsibilities.
My testimony today will describe our progress and plans for
implementing the Dodd-Frank Act, particularly with respect to those
issues that you specifically inquired about: derivatives regulation,
clearance and settlement activities, registration of private fund
advisers, credit rating agency regulation, corporate governance and
executive compensation regulation, reforms to the asset-backed
securitization process, the standard of care applicable to financial
intermediaries, and other improvements to investor protection.
Process and Priorities
Let me begin by discussing our overall approach to implementing the
new rules, studies, reports, offices and other actions mandated or
contemplated by the Dodd-Frank Act.
Internal Processes
To hit the ground running, we established new internal processes
and formed cross-disciplinary working groups for each of the major
rulemaking initiatives and studies, and designated team leaders for
each effort. Our rule-writing divisions and offices are meeting weekly
to review the status of rulemakings and studies and to plan for the
upcoming weeks. My office and the Office of the General Counsel oversee
and coordinate much of this planning effort, and all Commissioners are
provided with both written weekly updates and monthly oral briefings on
status.
Public Consultation
We also have enhanced our public consultative process by expanding
the opportunity for public comment beyond what is required by law. To
maximize the opportunity for public comment and to provide greater
transparency, less than a week after the President signed the Act, we
made available to the public a series of e-mail boxes to which
interested parties can send preliminary comments before the various
rules are proposed and the official comment periods begin. \1\ These e-
mail boxes are on the SEC Web site, organized by topic. Since July
27th, the public has been providing preliminary comments on 31 topics,
including over-the-counter (OTC) derivatives, private funds, corporate
disclosure, fiduciary duty, credit rating agencies, and other areas in
which the SEC will be conducting rulemaking and studies over the next
12 to 18 months. We also specifically solicited comment on the
definitions contained in Title VII of the Act, \2\ on the interim final
rule on temporary municipal advisor registration and on the study we
have undertaken regarding the effectiveness of the existing legal and
regulatory standards of care for broker-dealers and investment advisers
when providing personalized investment advice about securities to
retail investors. \3\
---------------------------------------------------------------------------
\1\ SEC Chairman Schapiro Announces Open Process for Regulatory
Reform Rulemaking, Press Release 2010-135 (July 27, 2010), http://
www.sec.gov/news/press/2010/2010-135.htm.
\2\ Advance Joint Notice of Proposed Rulemaking--Definitions
Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer
Protection Act, Rel. No. 34-62717 (Aug. 13, 2010), http://www.sec.gov/
rules/concept/2010/34-62717.pdf.
\3\ Study Regarding Obligations of Brokers, Dealers, and
Investment Advisers, Rel. No. 34-62577 (July 27, 2010), http://
www.sec.gov/rules/other/2010/34-62577.pdf.
---------------------------------------------------------------------------
Through this process, we are receiving a wide variety of views.
Indeed, our request for comment on the investment adviser/broker-dealer
study alone has generated over 3,000 individualized comments.
Transparency
We recognize that the process of establishing regulations works
best when all stakeholders are engaged and contribute their combined
talents and experience, and our staff and Commissioners are trying,
within reasonable time constraints, to meet with anyone who seeks to
meet with us on these issues. We have increased transparency for
meetings with interested members of the public. \4\ We are asking those
who request meetings to provide an agenda, and we are posting on our
Web site the agendas and names of individuals participating in these
meetings, along with copies of any written materials that are
distributed at those meetings. In addition, staff will reach out as
necessary to solicit views from affected stakeholders who do not appear
to be fully represented by the developing public record on a particular
issue. Thus far, our approach has resulted in meetings with a broad
cross-section of interested parties. To further this public outreach
effort, the Commission is holding public roundtables and hearings on
selected topics. For example, to further inform our OTC derivatives
rulemaking efforts under Title VII of the Act, our staff has held three
joint roundtables with the CFTC staff regarding key swap and security-
based swap matters. \5\
---------------------------------------------------------------------------
\4\ See, SEC Press Release 2010-135 (July 27, 2010), http://
www.sec.gov/news/press/2010/2010-135.htm.
\5\ Joint Public Roundtable on Swap Execution Facilities and
Security-Based Swap Execution Facilities, Rel. No. 34-62864 (Sept. 8,
2010), http://www.sec.gov/rules/other/2010/34-62864.pdf; Joint Public
Roundtable to Discuss Data for Swaps and Security-Based Swaps, Swap
Data Repositories, Security-Based Swap Data Repositories, and Real-Time
Public Reporting, Rel. No. 34-62863 (Sept. 8, 2010), http://
www.sec.gov/rules/other/2010/34-62863.pdf; and Joint Public Roundtable
on Governance and Conflicts of Interest in the Clearing and Listing of
Swaps and Security-Based Swaps, Rel. No. 34-62725 (Aug. 16, 2010)
http://www.sec.gov/rules/other/2010/34-62725.pdf.
---------------------------------------------------------------------------
Coordination With Other Regulators
We are meeting regularly, both formally and informally, with other
financial regulators. Staff working groups consult and coordinate with
the staffs of the CFTC, Federal Reserve Board and other prudential
financial regulators, as well as the Department of the Treasury, the
Department of State, the Commerce Department, and the Comptroller
General. Because the world today really is a global marketplace and
what we do to implement many provisions of the Act will affect foreign
entities that do business within our shores, our Office of
International Affairs is consulting bilaterally and through
multilateral organizations with counterparts abroad, and is meeting
biweekly with our rule-writing staff to ensure appropriate coordination
with our foreign counterparts. In short, we remain committed to working
closely, cooperatively and regularly with our fellow regulators to
strengthen our regulatory structure.
Priorities
To help us timely complete all rulemakings, as well as studies,
reports, and other actions, required under the Act, we have prioritized
our activity into four principal categories.
The first category includes all matters that require very rapid
action. A number of provisions of the Dodd-Frank Act became effective
immediately upon, or shortly after, the Act's date of enactment, and
required prompt interpretive guidance, changes to administrative
practice, or removal of inconsistent regulations, including:
Adopting an interim final rule that establishes a procedure
for municipal advisors to satisfy temporarily the requirement
that they register with the Commission by October 1, 2010, as
required by Section 975 of the Act; \6\
---------------------------------------------------------------------------
\6\ Temporary Registration of Municipal Advisors, Rel. No. 34-
62824 (Sept. 1, 2010), http://www.sec.gov/rules/interim/2010/34-
62824.pdf.
Amending our rules that were in conflict with Dodd-Frank's
provision that the auditor attestation requirement of Section
404(b) of the Sarbanes-Oxley Act does not apply with respect to
nonaccelerated filers; \7\
---------------------------------------------------------------------------
\7\ Internal Control Over Financial Reporting in Exchange Act
Periodic Reports of Non-Accelerated Filers, Rel. No. 33-9142 (Sept. 15,
2010), http://www.sec.gov/rules/final/2010/33-9142.pdf.
Issuing an interpretation clarifying the requirement for
audits of broker-dealers pending implementation of the
authority over such audits granted to the Public Company
Accounting Oversight Board by the Dodd-Frank Act; \8\ and
---------------------------------------------------------------------------
\8\ Commission Guidance Regarding Auditing, Attestation, and
Related Professional Practice Standards Related to Brokers and Dealers,
Rel. No. 34-62991 (Sept. 24, 2010), http://www.sec.gov/rules/interp/
2010/34-62991.pdf.
Providing interim guidance on calculating the net worth
standard for an accredited investor, to reflect the elimination
of a person's principal residence in the calculation, as
required by Section 413 of the Act; \9\
---------------------------------------------------------------------------
\9\ Interpretation of Section 413(a): Corporation Finance
Compliance & Disclosure Interpretation Section 179.01 (July 23, 2010);
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-
interps.htm.
The second category of priorities includes matters that require
action within 1 year from the date of enactment of the Act. This
category includes the bulk of the rulemakings, reports, and studies
about which the Committee inquired. As discussed in more detail below,
we have made significant progress on many of the action items in this
category. We have performed analyses, reviewed preliminary comments
received in response to our public solicitation for comment, and are
making substantial progress in preparing draft rule proposals for
public comment.
The third category of priorities includes items that require action
more than 1 year from the date of enactment, and the fourth category
includes items for which there is no prescribed statutory deadline.
To help the public track our progress as we take actions to
implement the Act, we have created a new section on our Web site that
provides greater detail about our schedule for implementation, along
with links to completed actions. \10\ We think this will provide a
useful reference tool to both the investing public and the financial
industry as we proceed with implementation.
---------------------------------------------------------------------------
\10\ See, http://www.sec.gov/spotlight/dodd-frank.shtml.
---------------------------------------------------------------------------
I will now turn to the specific items raised by the Committee.
Reform Initiatives
OTC Derivatives
Title VII of the Dodd-Frank Act provides a comprehensive framework
for the regulation of the OTC derivatives market. Working with other
regulators, and the CFTC in particular, we are writing rules that
address, among other issues, capital and margin requirements; mandatory
clearing; the operation of execution facilities and data repositories;
business conduct standards for swap dealers; and public transparency
for transactional information. Under the Act, primary jurisdiction over
swaps is divided between the SEC and the CFTC. The SEC has primary
jurisdiction over security-based swaps, and the CFTC has primary
jurisdiction over other swaps, such as energy and agricultural swaps.
To prevent gaps, regulatory arbitrage and confusion, the SEC and CFTC
will engage in joint rulemaking regarding issues including the
definition of terms like ``swap,'' ``security-based swap'' and
``security-based swap agreement.''
We have done much already in preparation for making rule proposals
in this area. Jointly with the CFTC, we have held three staff
roundtables on the topics of conflicts of interest, data repositories,
reporting and dissemination, and execution facilities. We also
solicited comment in our Advance Joint Notice of Proposed Rulemaking
regarding key definitional terms. Based on input from these roundtables
and the comment letters on key definitions, as well as other comment
letters received, we anticipate soliciting public comment on a number
of proposed rulemakings in this area in the coming months.
As part of our collaborative outreach, our rulemaking teams are
working closely with the corresponding teams at the CFTC to coordinate
our efforts. While the Act requires the SEC and CFTC to adopt joint
rules further defining key definitional terms relating to jurisdiction
and certain categories of market participants, we believe that
collaboration with the CFTC, the Federal Reserve Board and other
prudential regulators also is essential for the rulemakings where joint
action is not required by the Act. Our overarching goal is to build on
the foundation established by Congress in Title VII of the Act to
create a robust and workable framework for regulating the derivatives
market.
We expect to propose and adopt Title VII rules in a series of
actions, beginning in October and proceeding over the next few months.
We fully expect to meet the deadlines described in the Act.
Clearance and Settlement
Our staff also is working closely with the Federal Reserve Board
and the CFTC to develop, as required by Title VIII of the Act, a new
framework to supervise systemically important financial market
utilities, including clearing agencies registered with the Commission.
For example, Commission staff has been actively coordinating with the
other agencies to develop rules regarding submission of notices by
systemically important financial market utilities with respect to
rules, procedures, or operations that may materially affect the risks
presented.
Commission staff also has discussed with the other agencies the new
authority granted to SEC and CFTC to develop standards for these
financial market utilities. Moreover, the SEC and CFTC staffs have
begun working with staff from the Federal Reserve Board to develop a
framework for consulting and working together on exams of systemically
important financial market utilities consistent with Title VIII. This
added layer of protection, or ``second set of eyes,'' called for by the
Act provides assurance that the U.S. financial system receives well
coordinated oversight from all relevant supervisory authorities.
We expect to propose our first set of Title VIII rules in December.
Private Fund Adviser Registration and Reporting
By July 2011, all large hedge fund advisers and private equity fund
advisers will be required to register with the Commission. \11\ Under
the Act, venture capital advisers and private fund advisers with less
than $150 million in assets under management in the United States will
be exempt from the new registration requirements, although the Act does
provide for record keeping and reporting by these advisers. \12\ In
addition, family offices will not be subject to registration. \13\ In
order to implement the exemptions, the Commission must propose and
adopt rules. The staff is planning to propose rules on all of these
matters between October and December of this year.
---------------------------------------------------------------------------
\11\ See, Title IV of the Dodd-Frank Act.
\12\ See, Section 408 of the Dodd-Frank Act.
\13\ See, Section 409 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Our staff also has begun work regarding the collection of systemic
risk information from private fund advisers as required by Title IV of
the Act. In this regard, our staff has had informal discussions with
staffs from the CFTC and other regulators regarding what categories of
potentially reportable information would be consistent with the Act. In
addition, we are working with the International Organization of
Securities Commissions and various foreign regulators, most
particularly the United Kingdom Financial Services Authority, regarding
hedge fund systemic risk reporting. The goal of these consultations is
to gain a better understanding about what categories of data would be
useful and necessary for assessing the potential systemic risks posed
by hedge funds, and how comparable this data would be with data from
other countries.
Credit Rating Agency Initiatives
The Dodd-Frank Act requires the SEC to establish a new Office of
Credit Ratings, conduct annual exams of each nationally recognized
statistical rating organization (NRSRO), report on the collective
results of those exams, and conduct studies relating to credit rating
agencies regarding, among other things, NRSRO independence, \14\
conflicts of interest \15\ and standardizing ratings terminology. \16\
We are in the process of establishing this office, and are actively
recruiting for its new director. We also are identifying the staff from
existing divisions who should be transferred to this new office, and
have posted 25 new credit rating agency examination positions.
---------------------------------------------------------------------------
\14\ See, Section 939C of the Dodd-Frank Act.
\15\ See, Section 939F of the Dodd-Frank Act.
\16\ See, Section 939 of the Dodd-Frank Act.
---------------------------------------------------------------------------
The Commission is required to undertake approximately a dozen
NRSRO-related rulemakings. The Act requires the SEC to address internal
controls and procedures, conflicts of interest, credit rating
methodologies, rating methodology transparency and performance, analyst
training, credit rating symbology, and disclosures accompanying asset-
backed securities ratings. \17\ To meet the July 2011 deadline for
these rules, the staff plans to recommend rule proposals to the
Commission by early next year. In addition, the SEC, and all other
Federal agencies, must review and report to Congress on existing
references to credit ratings in their rules and undertake rulemaking to
eliminate these references. \18\ SEC staff has begun this review in
preparation for drafting the report and proposed rulemaking.
---------------------------------------------------------------------------
\17\ See, Subtitle C, Title IX of the Dodd-Frank Act.
\18\ See, Section 939A of the Dodd-Frank Act.
---------------------------------------------------------------------------
In addition, this week the Commission issued an amendment to
Regulation FD that implements Section 939B of the Act, which requires
that the SEC amend Regulation FD to remove the specific exemption from
the rule for disclosures made to NRSROs and credit rating agencies for
the purpose of determining or monitoring credit ratings. The amendment
will be effective upon publication in the Federal Register.
Many of the credit rating agency provisions of the Act became
effective immediately upon enactment. Therefore, shortly after the Act
was signed by the President, we sent letters to each NRSRO asking how
it planned to comply with these new requirements. In addition, SEC
staff asked each NRSRO to describe the impact of the repeal of the
expert liability exemption formerly available to NRSROs for ratings
used as part of a securities registration statement. We are evaluating
the responses to these requests, will conduct appropriate follow-up,
and will examine these issues as part of our annual examinations of the
NRSROs.
Corporate Governance and Executive Compensation Reforms
Section 951 of the Act requires a shareholder advisory ``say-on-
pay'' vote on executive compensation at least once every 3 years and a
separate advisory vote at least once every 6 years on whether the say-
on-pay resolution will be presented for shareholder approval every 1,
2, or 3 years. In addition, in any proxy statement asking shareholders
to approve a merger or similar transaction, the Act requires disclosure
about, and a shareholder advisory vote to approve, compensation related
to the transaction, unless the arrangements were already subject to the
periodic say-on-pay vote. The Act also requires every institutional
investment manager subject to Exchange Act Section 13(f) to report at
least annually how it voted on any of the required votes. The staff is
preparing rule proposals to address each of these new requirements. The
Commission's goal is to adopt final rules in time to inform the 2011
proxy season. We anticipate that the Commission will propose rules
designed to implement these provisions in the next few weeks.
The Act also requires the rules of each national securities
exchange to be amended to prohibit brokers from voting uninstructed
shares on the election of directors (other than uncontested elections
of directors of registered investment companies), executive
compensation, or any other significant matter, as determined by the
Commission by rule. \19\ The Commission previously approved changes to
New York Stock Exchange (NYSE) Rule 452 to prohibit broker voting of
uninstructed shares in director elections, as well as similar changes
for several other national securities exchanges. \20\ On September 9,
2010 the Commission approved further changes to the NYSE rules to
prohibit broker voting on all executive compensation matters. \21\ On
September 24, 2010, the Commission approved corresponding changes to
the Nasdaq rules, \22\ and we anticipate that corresponding changes to
the rules of other national securities exchanges will be considered by
the Commission in the near future.
---------------------------------------------------------------------------
\19\ See, Section 957 of the Dodd-Frank Act.
\20\ See, New York Stock Exchange Rule 452.11(19) and Listed
Company Manual Section 402.08(B)(19); Securities Exchange Act Release
No. 34-60215 (July 1, 2009), http://www.sec.gov/rules/sro/nyse/2009/34-
60215.pdf; Securities Exchange Act Release No. 34-61732 (March 18,
2010), http://www.sec.gov/rules/sro/cboe/2010/34-61732.pdf; Securities
Exchange Act Release No. 34-61733 (March 18, 2010), http://www.sec.gov/
rules/sro/chx/2010/34-61733.pdf; Securities Exchange Act Release No.
34-61292 (January 5, 2010), http://www.sec.gov/rules/sro/nyseamex/2010/
34-61292.pdf; and Securities Exchange Act Release No. 34-62775 (August
26, 2010), http://www.sec.gov/rules/sro/phlx/2010/34-62775.pdf.
\21\ See, Securities Exchange Act Release No. 34-62874 (September
9, 2010), http://www.sec.gov/rules/sro/nyse/2010/34-62874.pdf.
\22\ See, Securities Exchange Act Release No. 34-62992 (September
24, 2010), http://www.sec.gov/rules/sro/nasdaq/2010/34-62992.pdf.
---------------------------------------------------------------------------
By April 2011, the Commission is required to adopt--jointly with
other financial regulators--incentive-based compensation regulations or
guidelines that apply to covered financial institutions, including
broker-dealers and investment advisers, with assets of $1 billion or
more. \23\ The regulations or guidelines will prohibit incentive-based
compensation practices that encourage firms to take inappropriate risks
and will require firms to disclose to their respective appropriate
financial regulator their incentive-based compensation structures. The
Commission staff has met with other regulators in preparation for
drafting either proposed regulations or guidelines. To meet the April
2011 adoption deadline, we anticipate that the staff will submit
proposed rules to the Commission for consideration as soon as December.
---------------------------------------------------------------------------
\23\ Section 956 requires the SEC to adopt these regulations or
guidelines jointly with the Federal Reserve, Office of the Comptroller
of the Currency, the FDIC, the Office of Thrift Supervision, the
National Credit Union Administration Board, and the Federal Housing
Financing Agency.
---------------------------------------------------------------------------
The Dodd-Frank Act also requires the Commission to write rules
mandating new listing standards relating to the independence of
compensation committees and establishing new disclosure requirements
and conflict of interest standards that boards must observe when
retaining compensation consultants. \24\ Under the Act, these rules
must be adopted by the Commission within 360 days from the date of
enactment of the Act, and we anticipate that the staff will submit
proposed rules for the Commission's consideration by year end.
---------------------------------------------------------------------------
\24\ See, Section 952 of the Dodd-Frank Act.
---------------------------------------------------------------------------
In addition, the Act requires the Commission to amend our executive
compensation disclosure rules to require public companies to disclose
information showing the relationship between executive compensation
actually paid and the financial performance of the company, \25\ as
well as information about the total annual compensation of the chief
executive officer, the median annual total compensation of all other
employees, and the ratio of these two amounts. \26\ Rule amendments
also are mandated that will require public companies to disclose in
their annual meeting proxy materials whether any employee or director
is permitted to purchase financial instruments designed to hedge any
decrease in market value of equity securities granted as part of their
compensation. \27\ Finally, the Act requires the Commission to adopt
rules mandating changes to listing standards requiring companies to
implement and disclose ``clawback'' policies for recovering from
current and former executive officers incentive-based compensation paid
during any 3-year period preceding a material accounting restatement.
\28\ We currently anticipate that the staff will submit proposed rules
for the Commission's consideration by the middle of next year.
---------------------------------------------------------------------------
\25\ See, Section 953(a) of the Dodd-Frank Act.
\26\ See, Section 953(b) of the Dodd-Frank Act.
\27\ See, Section 955 of the Dodd-Frank Act.
\28\ See, Section 954 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Also related to corporate governance, the Act confirmed the
Commission's authority to adopt rules that facilitate shareholders'
ability to nominate director candidates. \29\ The Commission had
proposed such rules in May 2009, before the Act's enactment, and we
approved final rules on August 25, 2010. \30\ Further, Section 972 of
the Act requires the Commission to adopt rules requiring an issuer to
disclose in its annual proxy statement the reasons why it has chosen
the same or different people to serve as chairman of the board and
chief executive officer. The Commission adopted Item 407(h) of
Regulation S-K in December 2009, which requires this information to be
disclosed.
---------------------------------------------------------------------------
\29\ See, Section 971 of the Dodd-Frank Act.
\30\ See, Release No. 33-9136, Facilitating Shareholder Director
Nominations (Aug. 25, 2010), http://www.sec.gov/rules/final/2010/33-
9136.pdf.
---------------------------------------------------------------------------
Asset-Backed Securities
Section 943 of the Dodd-Frank Act requires the Commission to adopt
rules on the use of representations and warranties in the market for
asset-backed securities (ABS). Also, Section 945 of the Act requires
the Commission to issue rules requiring an asset-backed issuer in a
Securities Act registered transaction to perform a review of the assets
underlying the ABS, and disclose the nature of such review. Under the
Act, both sets of rules must be adopted by the Commission by January
14, 2011, and we expect to propose rules in these areas within the next
few weeks. We also are working on rules prohibiting material conflicts
of interest in certain securitizations \31\ and rules requiring the
disclosure of information regarding the assets backing each tranche or
class of security. \32\ We expect that these rules also will be
proposed by the end of the calendar year, and considered for adoption
in early 2011.
---------------------------------------------------------------------------
\31\ See, Section 27B of the Securities Act, as added by Section
621 of the Dodd-Frank Act.
\32\ See, Section 942(b) of the Dodd-Frank Act.
---------------------------------------------------------------------------
Our efforts to advance the securitization reform envisioned by the
Act are not limited to writing new rules. The Act also addresses risk
retention (i.e., the requirement that a securitizer retain an economic
interest in a material portion of the credit risk for any asset that it
transfers, sells, or conveys to a third party) in connection with
securitization. The Act mandates two studies on risk retention: one to
be conducted by the Federal Reserve Board in coordination and
consultation with the Commission, among other agencies, which is due
October 19, 2010. The other study is to be conducted by the Chairman of
the Financial Stability Oversight Council, and it is due January 14,
2011. \33\ Accordingly, we are providing advice and assistance to the
Federal Reserve Board in connection with the first study. We are
working with other regulators to jointly create the risk retention
rules, including the appropriate amount, form and duration of required
risk retention, and the definition of qualified residential mortgages.
For example, to encourage discussion of these issues, the staff in the
Division of Corporation Finance communicated with Treasury and other
regulators shortly after the Act's enactment, raised relevant questions
and provided preliminary staff thoughts on the risk retention
provision. In light of the Act's April 15, 2011, deadline for
prescribing rules in this area, we currently are planning for
Commission consideration of proposed risk retention rules by year end.
---------------------------------------------------------------------------
\33\ As a member of the Financial Stability Oversight Council, the
Chairman of the SEC is actively participating in this study.
---------------------------------------------------------------------------
Municipal Securities
Section 979 of the Dodd-Frank Act requires the SEC to establish an
Office of Municipal Securities to administer the rules pertaining to
broker-dealers, advisors, investors, and issuers of municipal
securities. The new office will coordinate with the Municipal
Securities Rulemaking Board on rulemaking and enforcement actions. We
expect to create the new office by the end of October, transfer
existing staff performing these duties to that office, and begin
recruiting for the new director, who will report directly to the
Chairman.
Section 975 of the Act also requires the registration of municipal
advisors with the Commission. This new registration requirement becomes
effective on October 1, 2010. On that date, it becomes unlawful for any
municipal advisor to provide advice to a municipality unless registered
with the Commission. As noted above, on September 1, the Commission
adopted an interim final rule establishing a temporary means for
municipal advisors to satisfy the registration requirement. The SEC
staff is working on proposed final registration rules for the
Commission's consideration.
Studies and Reports
The Dodd-Frank Act requires the Commission to conduct a significant
number of studies and issue numerous reports, some on a periodic basis.
As with our rulemaking efforts, we have prioritized these studies and
reports and assigned teams to address each of them. While I have
already referenced some of the studies we are conducting in conjunction
with rule writing, I want to share with you our progress on three
studies that relate to topics about which the Committee specifically
requested information.
Investment Adviser-Broker Dealer Standard of Care Study
Section 913 of the Dodd-Frank Act mandates that we study the
effectiveness of existing legal or regulatory standards of care for
broker-dealers and investment advisers for providing personalized
investment advice and recommendations about securities to retail
customers. Under Section 913, we must produce a report on the study to
the Senate Committee on Banking, Housing, and Urban Affairs, and the
House of Representatives' Committee on Financial Services. The report
regarding the study is due to the Committees in January 2011.
We are moving rapidly to meet the report's January deadline. Six
days after the date of enactment of the Dodd-Frank Act, we published a
request for public input, comments, and data on issues related to the
effectiveness of existing standards of care for brokers-dealers and
investment advisers, and whether there are gaps, shortcomings, or
overlaps in the current legal or regulatory standards. In response, we
received more than 3,000 individualized letters, including letters from
investors, financial professionals, industry groups, academia, and
other regulators. Staff is reviewing the comments, and the views of
these commenters will be reflected in the report on our study.
We established a cross-divisional working group to implement the
study. To help further inform our study and consistent with our public
outreach on these issues, from August to October, the working group is
meeting with as many interested parties representing a variety of
perspectives as possible. We also requested assistance from State
regulators and FINRA with the aspects of the study involving their
efforts, such as examinations and enforcement.
At the completion of the study, the Act gives the SEC the authority
to write rules, including rules that could create a uniform standard of
conduct for professionals who provide personalized investment advice to
retail customers. Under the Act, any new standard can be ``no less
stringent'' than the standard applicable to investment advisers under
sections 206(1) and (2) of the Investment Advisers Act of 1940. The
Commission's ultimate rulemaking in this area will, of course, be
informed by what we learn from our study and from the comments we
receive.
Internal Operations
A top challenge is continuing to strengthen the SEC's organization
itself--its structure, daily operations, personnel, technological
infrastructure, and resources--to meet its statutory responsibilities
and adapt to the ever changing realities of our dynamic markets. To
assist the SEC in assessing its operational efficiency, Section 967 of
the Dodd-Frank Act directs the agency to engage the services of an
independent consultant to study a number of specific areas of SEC
internal operations and the SEC's relationship with self-regulatory
organizations (SROs).
To quickly implement this provision, we sought and received formal
reprogramming approval from our House and Senate Appropriations
Subcommittees to fund the study. On August 3, 2010, the SEC's Office of
Acquisitions issued a formal solicitation (a Request for Quotation, or
RFQ) describing the work to be performed and asking contractors to
submit bids that describe their qualifications and discuss their plans
to carry out the work. Bids were required to be submitted by August 27.
Once a contract is awarded, the contractor will be given 150 days to
conduct its study, and to prepare recommendations to the SEC and to
Congress. We have already formed the working team of staff that will be
made available to assist the consultant as requested.
Financial Literacy
Section 917 requires the Commission to conduct a broad study
regarding the financial literacy of investors. The study will focus on,
among other things, the current level of financial literacy of
individual investors and how to increase the transparency of expenses
and conflicts of interest in investment products such as mutual funds.
Additionally, we will be studying the most effective private and public
efforts to educate investors. I have asked the Commission's Office of
Investor Education and Advocacy (OIEA), which is focused in this area,
to take the lead on the study. The staff is currently working on a
project plan, including developing an organizational framework, an
analysis of required resources, and a calendar of expected completion
dates of various project milestones. I expect OIEA will complete the
study within the next 18 months, and we will be prepared to submit the
required report to Congress within the two-year period reflected in the
statute.
Agency Growth and Infrastructure
New Offices
The Act requires the SEC to establish five new offices, four of
which will report directly to the Chairman. We are consulting with our
appropriations committees regarding the reprogramming of funds needed
to establish these new offices. I have previously mentioned the new
Office of Credit Ratings and Office of Municipal Securities in
connection with rulemaking in these areas. The other three offices are:
Whistleblower Office. Section 924 requires us to establish a new
Whistleblower Office. We already have posted a job announcement for the
head of the new office, and we expect the office to include a senior
special counsel and at least four additional employees. The office will
be located within the Division of Enforcement and will work closely
with that division's Office of Market Intelligence, which is dedicated
to the handling of tips, complaints, and referrals. The primary
functions of the new office will include: (1) performing intake,
tracking, and record keeping of whistleblower tips; (2) overseeing the
review process for eligible whistleblower claims and presenting
recommendations concerning whistleblower awards; and (3) communicating
with the general public, the Commission, and reporting to Congress on
the whistleblower program. The first report to Congress on the
whistleblower program will be provided on October 30, 2010.
Staff in the Division of Enforcement, with assistance from other
divisions and offices, is actively working to draft implementing
regulations for the whistleblower program. Pending the issuance of
these regulations (due no later than 270 days after the date of
enactment of the Act), the staff has been and will continue to be able
to receive whistleblower complaints. Also, information for potential
whistleblowers has been posted on our Web site. \34\ Already, since the
passage of the Act, we have seen a slight uptick in the number of tips
and complaints received, and, more importantly, an uptick in the
quality of complaints.
---------------------------------------------------------------------------
\34\ See, http://www.sec.gov/complaint.shtml.
---------------------------------------------------------------------------
Office of the Investor Advocate. Section 915 requires the SEC to
establish an Office of the Investor Advocate, headed by an Investor
Advocate who reports directly to the Chairman. The office will assist
retail investors in resolving significant problems they may have with
the Commission or with SROs. The Investor Advocate also will identify
areas in which investors would benefit from changes in Commission
regulations or SRO rules; identify problems that investors have with
financial service providers and investment products; and analyze the
potential impact on investors of proposed Commission regulations and
SRO rules. The Investor Advocate must report to Congress annually on
its activities, including information on the steps the Investor
Advocate has taken to improve investor services and responsiveness of
the Commission and SROs to investor concerns; a summary of the most
serious problems encountered by investors; and recommendations for
administrative and legislative actions to resolve problems encountered
by investors. The Investor Advocate also must hire an Ombudsman, whose
activities will be included in the Advocate's reports to Congress. The
Commission must adopt regulations establishing procedures for
responding to all recommendations submitted to the Commission by the
Investor Advocate. We have developed a position description, and are
actively recruiting.
Office of Minority and Women Inclusion. Section 342 requires
specified financial agencies, including the SEC, to establish an Office
of Minority and Women Inclusion that is responsible for all matters of
the agency relating to diversity in management, employment, and
business activities, other than enforcement of civil rights laws. The
director of this Office will report to the Chairman. The director will
develop and implement standards for: equal employment opportunity and
the racial, ethnic, and gender diversity of the workforce and senior
management of the SEC; increased participation of minority-owned and
women-owned businesses in the programs and contracts of the agency,
including standards for coordinating technical assistance to such
businesses; and assessing the diversity policies and practices of
entities regulated by the SEC.
Additionally, the director will advise the Chairman on the impact
of the policies and regulations of the SEC on minority-owned and women-
owned businesses. We have solicited comments from our internal
Diversity Council on the structure of this new office, as well as
several external groups. This is an area in which our request for
suggestions from the public has been helpful. We are drafting the
director position description, and plan to begin recruiting for this
position very soon.
Hiring
As noted earlier, the Dodd-Frank Act not only requires the
Commission to complete a significant number of rulemakings, studies,
and reports, it also expands the role of the SEC in the regulation of
OTC derivatives, private fund advisers, credit rating agencies, and
other areas of the financial industry. To enable us to carry out these
new responsibilities, we will need additional resources, and in
particular, additional staff.
We have been working to develop estimates of the resources that
will be needed to achieve the full implementation of Congress'
regulatory reform mandate. While the dollar cost of full implementation
will depend greatly on the effective date of new rules, the timing of
hiring, and other factors, we currently estimate that the SEC will need
to add approximately 800 new positions over time in order to carry out
the new or expanded responsibilities given to the agency by the
legislation.
If Congress were to appropriate the funds to support this increase
in the agency's workforce, then the SEC would need to be ready to act
swiftly to recruit and hire hundreds of additional personnel. To
accomplish this, the SEC is enhancing our human resources staff and
streamlining our hiring process. Improvements include simplifying the
application process and maintaining a searchable database of
applicants, so that it is possible to interview for a vacancy as soon
as it appears rather than having to go through the lengthy posting
process each time. Being able to better tailor, target and speed
recruiting will enhance the quality of the applicant pool and help the
agency more efficiently acquire the necessary talent to perform
effectively in an increasingly complex financial environment. The
expanded streamlined hiring authority included in the Dodd-Frank Act
will help these efforts.
Technology
The SEC's Office of Information Technology is currently
collaborating with the principal rule-writing divisions and offices to
gather and develop the technology requirements that will be necessary
to implement the legislation and the associated rulemaking. We
currently anticipate technology investment will be required to
implement a variety of changes to our responsibilities included in the
Dodd-Frank Act, such as those relating to SRO rulemaking, regulation of
security-based swap intermediaries, disclosure filing requirements,
regulation of security-based swap execution facilities and data
repositories, advisor registration, equipment to enable improved audits
of market participants, end user equipment for additional staff
expected to be hired, and changes to our filing and registration
management and reporting systems.
Our ``EDGAR'' team, which operates our disclosure system for public
company filings, will assist in the deployment of changes to the asset-
backed securities disclosure system in December 2010, and changes to
existing forms, items, and exhibits to improve disclosure. While many
of the technology requirements remain under development at this stage,
the Office of Information Technology, under the leadership of our new
Chief Operating Officer, will remain closely engaged with our operating
divisions and offices and work to provide responsive solutions to
enable implementation of the legislation.
Conclusion
The Dodd-Frank Act provides the SEC with important tools to better
meet the challenges of today's financial marketplace. While
implementation of the Act clearly will require a major effort, this
effort is already well underway at the SEC. While we undoubtedly will
encounter some bumps along the way, we are on track to meet the goals,
mandates and deadlines specified in the Act and to do so in a
transparent and inclusive manner. As we proceed with implementation, we
look forward to continuing to work closely with Congress, our fellow
regulators and members of the financial and investing public. Thank you
for inviting me here today to share with you our progress on and plans
for implementation. I look forward to answering your questions.
______
PREPARED STATEMENT OF GARY GENSLER
Chairman, Commodity Futures Trading Commission
September 30, 2010
Good morning Chairman Dodd, Ranking Member Shelby, and Members of
the Committee. I thank you for inviting me to today's hearing on
implementing the Dodd-Frank Wall Street Reform and Consumer Protection
Act. I am honored to appear at today's hearing alongside fellow
regulators with whom we are working so closely to implement the Dodd-
Frank Act. I also look forward to joining my fellow panelists as
members of the new Financial Stability Oversight Council (FSOC). I am
pleased to testify on behalf of the Commodity Futures Trading
Commission (CFTC). I also thank my fellow Commissioners for their hard
work and commitment on implementing the legislation.
Before I move into the testimony, I want to thank Chairman Dodd for
his leadership on the Banking Committee and in the Senate. On a
personal note, I would like to thank Chairman Dodd for his support over
the last 13 years. I first worked with Chairman Dodd in the late 1990s
during my time in the Treasury Department. I again worked closely with
Chairman Dodd on the Sarbanes-Oxley Act. He actually introduced the
first bill in committee on that issue before Chairman Sarbanes did so.
I am honored and pleased to have had this most recent chance to once
again work with Chairman Dodd on what became the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
Implementing the Dodd-Frank Act
The Dodd-Frank Act brings three critical reforms to the previously
unregulated swaps marketplace. These reforms lower interconnectedness
and risk in the financial system while promoting transparency. First,
the Act requires swap dealers to come under comprehensive regulation.
Second, the Act moves the bulk of the swaps marketplace onto
transparent trading facilities--either exchanges or swap execution
facilities (SEFs). Third, the Act requires clearing of standardized
swaps by regulated clearinghouses to lower risk in the marketplace.
The Dodd-Frank Act is very detailed, addressing all of the key
policy issues regarding regulation of the swaps marketplace. To
implement these regulations, the Act requires the CFTC and Securities
and Exchange Commission (SEC), working with our fellow regulators, to
write rules generally within 360 days. That means that we have 289 days
left. At the CFTC, we have organized our effort around 30 teams who
have been actively at work. We had our first meeting with the 30 team
leads the day before the President signed the law.
Two principles are guiding us throughout the rule-writing process.
First is the statute itself. We intend to comply fully with the
statute's provisions and Congressional intent to lower risk and bring
transparency to these markets.
Second, we are consulting heavily with both other regulators and
the broader public. We are working very closely with the SEC, the
Federal Reserve, the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency and other prudential regulators.
Within 24 hours of the President signing the Dodd-Frank Act, more than
20 of our rule-writing team leads were meeting at the SEC with their
counterparts. Our staff was having similar meetings the following week
with staff from the Federal Reserve.
Specifically, our rule-writing teams are working with the Federal
Reserve in several critical areas: swap dealer regulation,
clearinghouse regulation and swap data repositories, though we are
consulting with them on a number of other areas as well. With the SEC,
we are working on the entire range of rule writing, including those
previously mentioned as well as trading requirements, real time
reporting and key definitions. To the best of our ability, we will be
aligning our public meeting schedule with the SEC. Tomorrow, the CFTC
will hold a public meeting to consider rules relating to (1) an interim
final rule relating to the time frame for reporting preenactment
unexpired swaps to a swap data repository or to the Commission, (2)
proposed rules regarding financial resources of clearing organizations
and (3) proposed rules regarding governance of clearinghouses,
designated contract markets (DCMs) and SEFs.
Coordination with the SEC, the Federal Reserve and other regulators
has been strong both at the staff level and at the Chairman's level. I
have personally met with leaders at each of my fellow regulators
testifying here this morning, starting the week the President signed
the bill. In each circumstance, we have continued the active dialogue,
including both exchanging written materials as well as having
additional meetings.
In addition to working with our American counterparts, we have
reached out to and are actively consulting with international
regulators to harmonize our approach to swaps oversight. I returned
yesterday from Brussels where I met with senior European regulators. In
particular, our early discussions have focused on clearing
requirements, clearinghouses more generally and data repositories. Two
weeks ago, the European Commission released their detailed proposal to
bring regulation to the swaps marketplace. Based upon their release and
the Dodd-Frank Act, I am confident that we will bring strong and
consistent regulation to the American and European swaps markets. Each
of our rule-writing teams will be referring to these new proposals in
Europe as we seek consistency in our regulatory approaches.
We also are soliciting broad public input into the rules. This
began the day the President signed the Dodd-Frank Act when we listed
the 30 rule-writing teams and set up mailboxes for the public to
comment directly. We want to engage the public as broadly as possible
even before publishing proposed rules.
In some circumstances, we are organizing roundtables with the SEC
to hear specifically on particular subjects. We have had three days of
meetings to date, which have been very beneficial. So far we have heard
from investors, market participants, end-users, academics, exchanges
and clearinghouses on key topics including governance and conflicts of
interest, real time reporting, swap data record keeping, and SEFs.
Based on how helpful these have been, we intend to have additional
roundtables in the next month or two.
Additionally, many individuals have asked for meetings with either
our staff or Commissioners to discuss swaps regulation. In the first
seven weeks after the bill was signed, we had more than 141 such
meetings. We are now posting on our Web site a list of all of the
meetings CFTC staff or I have with outside organizations, as well as
the participants, issues discussed and all materials given to us.
We plan to actively publish proposed rules in the fall, using
weekly public Commission meetings for this purpose. Our first such
meeting will be tomorrow at 9:30 am. Public meetings will allow us to
propose rules in the open. With each proposed rulemaking, we will
solicit public comments for a period not less than 30 days. Since a
number of the rules we are publishing have Paperwork Reduction Act
requirements and thus must stay open for public comment for at least 60
days, we have to publish our proposed rulemakings quickly. This is as
it generally takes us four to 6 months to review all of the public
comments on proposed rules and finalize those rules. Though as with any
such plan, some things may be delayed, our current goal is to publish
the vast majority of our proposed rules by the end of December.
We already have published one final rulemaking regarding retail
foreign exchange transactions. Further, with the SEC, we have published
an advanced notice of proposed rulemaking seeking comments on the
definitions of key terms in the Dodd-Frank Act.
Regulating the Dealers
Now I will address just a few of the key areas where we will write
rules regulating the swaps marketplace. The first is regulating the
dealers. Six of our rule teams are focused specifically on this area.
One team is working jointly with the SEC on defining key terms, such as
``swap dealer'' and ``major swap participant.'' Another team is working
on registration requirements for dealers. We also have teams working on
business conduct standards, capital and margin requirements and rules
for segregating customer funds.
It is estimated that as many as 200 entities may register with the
CFTC as swap dealers. This includes:
Approximately 80 global and regional banks currently known
to offer swaps in the U.S. Of the International Swaps and
Derivatives Association's (ISDA) 830 members, 209 are ``Primary
Members.'' Under ISDA's bylaws, a firm is only eligible for
primary member status if it deals in derivatives for purposes
other than ``risk hedging or asset or liability management.''
Though many of the dealers in emerging markets may not seek to
register in the U.S., it is likely that most, if not all, of
ISDA's global and international members would;
Approximately 60 affiliates of existing swap dealers, based
upon the Dodd-Frank Act's Section 716 requirement that banks
push out their swaps desks to affiliates;
Approximately 40 nonbank swap dealers currently offering
commodity and other swaps; and
Approximately 20 potential new market makers that wish to
become swap dealers.
I would emphasize, however, that at this point these numbers are
only preliminary estimates. The final numbers will, of course, depend
upon the decisions of market participants as well as the outcome of the
rulemaking process.
In addition to regulating dealers, we also are tasked with
regulating major swap participants. The major swap participant category
is comprised of entities that are not swap dealers but whose
participation in the swaps market is substantial enough to
significantly affect or present systemic risks to the economy or the
financial system as a whole.
Transparent Trading Requirement
In addition to regulating swap dealers, the Dodd-Frank Act brings
transparency to the swaps marketplace by requiring standardized swaps
to trade on exchanges or SEFs. A SEF is ``a trading system or platform
in which multiple participants have the ability to execute or trade
swaps by accepting bids and offers made by multiple participants.'' We
have five teams focused on writing rules related to trading. It is
anticipated that as many as 30 new entities will register as SEFs or
DCMs. That is in addition to the 16 futures exchanges that we already
regulate.
Congress also mandated that if a swap both is clearable and it is
``made available for trading'' on a SEF or an exchange, then there is a
mandate that it be traded on such a facility. Congress also has been
very specific that market participants and end-users will benefit from
real time reporting and that such posttrade transparency must be
achieved ``as soon as technologically practicable'' after a swap is
executed. Further, the statute says that one of the goals of SEFs is
``to promote pretrade transparency in the swaps market,'' though it
appropriately authorizes the CFTC to write rules to facilitate block
trades.
Centralized Clearing
The Dodd-Frank Act requires that standardized derivatives be
cleared through central clearinghouses. At the CFTC, we have six teams
focused on rules related to clearing, including determining which
contracts will be subject to the mandatory clearing requirement. Though
we do not yet know the total number of contracts that will be submitted
for clearing, and the Commission may be able to group many by class,
the largest swaps clearinghouse currently clears nearly one million
unique contracts. It is anticipated that the number of registered
derivatives clearing organizations will increase from 14 to around 20
as a result of the Dodd-Frank Act.
Furthermore, for the first time, some derivatives clearinghouses
may be designated systemically important by the FSOC. For those
clearinghouses, there will be enhanced rules for financial resources,
risk management and other prudential standards. In this regard, we are
consulting very closely with the Federal Reserve and international
regulators. We recognize the need for very robust risk management
standards, particularly as more swaps are moved into central
clearinghouses.
Data
Moreover, the Dodd-Frank Act for the first time sets up a new
registration category called swap data repositories (SDRs). The bill
requires registrants--including swap dealers, major swap participants,
SEFs and DCMs--to have robust record keeping and reporting, including
an audit trail, for swaps, and to report each swap to an SDR or to the
regulators.
We anticipate rules in this area to require SDRs to perform their
core function of collecting and maintaining swaps data and making it
directly and electronically available to regulators. We also anticipate
rules governing how data must be maintained by registrants and sent to
the data repositories.
Position Limits
In January, the CFTC proposed rules to restore position limits in
the four major energy futures contracts. Position limits have long been
relied upon in futures market regulation to address the effects of
excessive speculation and position concentration. Fixed limits that had
been in effect for energy contracts were removed in 2001. Under the
Dodd-Frank Act, the CFTC now is required to publish rules setting
aggregate position limits on exempt and agricultural commodities across
markets, including futures, swaps that perform significant price
discovery functions and linked contracts on foreign boards of trade
that operate in the U.S. As a result, the CFTC has withdrawn its
January proposed rule and will build off that proposal and comments
that were received as we write a new rule that satisfies the Dodd-Frank
Act's mandate.
The Commission currently administers position limits on nine
exchange-listed agricultural futures contracts. Under the Dodd-Frank
Act, the CFTC is required to set position limits on more than 30
commodities. In general, the Act requires that rules establishing
position limits be completed within 180 days from the date of enactment
for energy and metals and within 270 days for agricultural contracts.
Foreign Boards of Trade
The Dodd-Frank Act empowers the CFTC to require that a foreign
board of trade (FBOT) offering direct access to U.S. persons register
with the Commission. This requirement replaces the agency's no-action
regime, under which FBOTs were permitted to offer access to U.S.
investors upon meeting certain conditions.
Conclusion
The next year of rule writing will test the very talented staff of
the CFTC. Our staff has significant expertise regulating the on-
exchange derivatives markets that will translate well into regulating
the over-the-counter swaps markets. Still, we need significant new
resources.
The President's budget called for $261 million for the CFTC for
fiscal year 2011, which is a substantial boost in funding. The House
Appropriations Subcommittee with jurisdiction over the CFTC matched the
President's request. The Senate Appropriations Subcommittee with
jurisdiction over the CFTC boosted that amount to $286 million. Though
we have the resources to write the rules required by Dodd-Frank, we
will need more staff to implement and enforce them in the years to
come.
The CFTC faces challenges in the months ahead, but we are prepared
and geared up to meet those challenges. We look forward to continuing
our excellent collaboration with other regulators to implement the
Dodd-Frank Act. Thank you, and I would be happy to take questions.
______
PREPARED STATEMENT OF JOHN WALSH
Acting Comptroller of the Currency, Office of the Comptroller of the
Currency
September 30, 2010
Statement Required by 12 U.S.C. 250: The views expressed herein are
those of the Office of the Comptroller of the Currency and do not
necessarily represent the views of the President.
Chairman Dodd, Senator Shelby, and Members of the Committee, I
appreciate the opportunity to describe the initiatives the Office of
the Comptroller of the Currency (OCC) has undertaken to implement the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). The Committee's letter of invitation asked the OCC to address
several key topics: (1) the OCC's priorities in implementing the Dodd-
Frank Act and the progress we have made; (2) the OCC's plans for
integrating the staff and functions of the Office of Thrift Supervision
(OTS) into the OCC; (3) the OCC's plans for identifying employees for
transfer to the Bureau of Consumer Financial Protection (CFPB); and (4)
our views about how Basel III will further the objectives of the Dodd-
Frank Act. My testimony addresses each of these areas in turn. We also
offer some additional thoughts for the Committee's consideration on a
few aspects of the legislation that present particular implementation
challenges.
Rulemaking and Policy Initiatives
The Dodd-Frank Act directs the OCC to draft rules, some jointly
with other agencies and others on a coordinated basis, on a broad range
of topics, including: regulatory capital; permissible proprietary
trading, hedge fund, and private equity fund investments (the so-called
``Volcker rule''); derivatives margin requirements; executive
compensation; and real estate appraisals, among others. The OCC will
need to revise some regulations to address statutory changes. Moreover,
our new role as primary supervisor for Federal savings associations
will require us to review and republish rules issued by the OTS. For
each of these rulemaking obligations, we have established an
interdisciplinary team of agency experts dedicated to lead the OCC's
efforts and to work with interagency teams, where appropriate, to
develop the new rules.
The legislation also requires other financial regulatory agencies
to consult with primary supervisors as those other agencies draft
studies or develop regulations or standards, since there may be
implications for the safety and soundness of depository institutions.
Accordingly, we have designated OCC experts to advise the other
financial regulatory agencies about the potential impact on the
institutions we supervise and their customers.
Taken together, these responsibilities constitute an implementation
challenge of unprecedented scale. A large number of staff professionals
will be assigned to work on the financial regulatory reform provisions
of the Dodd-Frank Act, and we have established a senior management
oversight group within the OCC to direct and coordinate our effort.
Among our efforts, the OCC is supporting the organization of the
Financial Stability Oversight Council (FSOC), which is chaired by the
Secretary of the Treasury and includes as members, among others, the
heads of the Federal banking agencies, including the Comptroller of the
Currency; the Director of the CFPB; the Chairs of the Securities and
Exchange Commission (SEC) and Commodities Future Trading Commission
(CFTC); and the Director of the Federal Housing Finance Agency (FHFA).
The FSOC's mission is to identify risks to financial stability that
could arise from the activities, material financial distress, or
failure of large, interconnected financial companies; to recommend
standards for implementation by the agencies in specified areas; to
promote market discipline; and to respond to emerging threats to the
stability of the U.S. financial system.
In addition, a number of implementation projects are already
underway. In August, we sought comment through an Advance Notice of
Proposed Rulemaking (ANPR) on the implementation of section 939A of the
Dodd-Frank Act. This section directs the Federal agencies to review
regulations that require an assessment of the creditworthiness of a
security or money market instrument, and remove any references or
requirements involving credit ratings and substitute an alternative
standard of creditworthiness. Apart from capital rules, the OCC's
regulations use credit ratings in several different ways, most
significantly in setting the criteria for determining which
``investment securities'' national banks may acquire as permissible
investments. Through the ANPR, the OCC sought comment on the
implementation of section 939A with respect to these regulations and
others governing securities offerings and international activities
where credit ratings are referenced. The ANPR also set forth
considerations underlying the reliance on credit ratings and requested
comments on potential alternatives to the use of credit ratings.
Separately, we also joined in an interagency ANPR to assess the
impact of section 939A on the banking agencies' regulatory capital
rules, which currently reference credit ratings in four general areas:
(1) the assignment of risk weights to securitization exposures; (2) the
assignment of risk weights to claims on, or guaranteed by, qualifying
securities firms; (3) the assignment of certain regulatory capital add-
ons for trading assets held by banks with large trading portfolios; and
(4) the determination of the eligibility of certain guarantors and
collateral for purposes of the credit risk mitigation framework under
the advanced approaches rules.
One active interagency project involves standards for uncleared
swaps. Sections 731 and 764 of the Dodd-Frank Act require the banking
agencies, the Farm Credit Administration, and the FHFA to promulgate
margin requirements for uncleared swap transactions by swap dealers and
major swap participants subject to the agencies' jurisdiction. The
agencies are engaged in discussions to establish the design of the
margin requirements and margin levels, in light of the risk standards
for such rules established by the Dodd-Frank Act.
On another front, an interagency group consisting of the Federal
banking agencies, the SEC, Housing and Urban Development (HUD), and the
FHFA, has begun to discuss the design of several rulemakings mandated
by section 941 risk-retention requirements. Section 941 generally
mandates that the agencies publish rules requiring securitizers (and in
some cases, originators of securitized assets) to retain at least 5
percent of the credit risk of the loans they package and sell through
securitizations. Lower risk retention levels may be allowed for
specific loans, particularly mortgages, if they are underwritten
according to prudential standards to be set by the agencies through the
rulemaking process.
The OCC has also begun work on the provisions in section 956 which
require the Federal agencies jointly to prescribe regulations or
guidelines requiring the disclosure of certain incentive-based
compensation arrangements and prohibiting compensation arrangements
that encourage inappropriate risk-taking by financial institutions.
In addition, an interagency working group consisting of the FSOC's
member agencies has begun providing input to the FSOC as it initiates
its study of proprietary trading and hedge fund and private equity fund
investments with a view to making recommendations to the banking
agencies and the SEC when they promulgate regulations for the
implementation of section 619.
As we begin to implement the Dodd-Frank Act, we also have
identified some notable implementation challenges that may be of
interest to the Committee. These include the practical effects of
prohibiting the use of credit ratings in regulations under section
939A. Ambiguities in section 171, relating to baselines for existing
and future leverage and risk-based capital requirements, also raise a
number of issues that pose implementation challenges and, as in the
case of section 939A, could pose significant burdens on smaller banking
institutions. There also appears to be an inconsistency in the duties
assigned to the banking agencies and the CFPB with regard to fair
lending that creates confusion in responsibilities. These issues are
more fully discussed in Attachment A to this testimony.
Transfers of Agency Functions
The Dodd-Frank Act transfers from OTS to the OCC supervisory
responsibilities for Federal savings associations, as well as
rulemaking authority relating to all savings associations. Under the
statute, all OTS employees will be transferred to either the OCC or the
Federal Deposit Insurance Corporation (FDIC) no later than 90 days
after the ``transfer date,'' which is 1 year after enactment unless
extended for an additional 6 months by the Secretary of the Treasury.
The allocation is to be based generally on the proportion of Federal
versus State savings associations regulated by the OTS.
The Dodd-Frank Act also establishes the CFPB as an independent
bureau in the Federal Reserve System. Certain existing authorities of
the banking agencies, HUD, and the FTC for consumer protection
regulations are to be transferred to the CFPB, along with
responsibility for overseeing compliance with a number of listed
consumer protection standards applicable to depository institutions
with assets of more than $10 billion. Employees from the banking
agencies, HUD, and the FTC will be transferred to the CFPB as part of
this process.
Thus, the OCC is uniquely challenged with respect to transfers of
functions under the Dodd-Frank Act because we are both absorbing
significant new functions and a significant number of new staff as a
result of the integration of the OTS into the OCC, while at the same
time transferring functions and some associated personnel in connection
with the organization of the CFPB.
Integration of Specified OTS Functions Into the OCC
Although the legislation preserves the thrift charter and the Home
Owners' Loan Act, the OTS is abolished 90 days after the transfer date.
The OCC recognizes its important responsibilities under the Dodd-Frank
Act to ensure the orderly and effective transfer of functions and
personnel from the OTS to the OCC and to assure efficient and effective
supervision and regulation of Federal thrifts, and we have already
taken a number of steps to begin this process. To centralize efforts in
this area, the OCC established a transition team and appointed a senior
agency official to coordinate and supervise the implementation of all
issues involving the integration of OTS functions and responsibilities.
Transition team members have begun working with their counterparts at
other agencies to identify and address mutual concerns and issues for
resolution. While it is early in that process, and many details are yet
to be determined, I can provide some details regarding our planning for
the transfer of personnel and supervisory functions, as well as the
transfer of funds, property, and systems.
Transfer of Personnel and Supervisory Functions. The Dodd-Frank Act
provides that the OCC will become the appropriate Federal banking
agency for Federal savings associations, and the FDIC will assume that
role for State savings associations. All OTS employees are to be
transferred to the OCC or FDIC no later than 90 days after the transfer
date. The Director of the OTS, the Comptroller of the Currency, and the
Chairperson of the FDIC will jointly determine the number of OTS
employees needed to perform the functions transferred and identify
employees for transfer to the OCC or FDIC. While the final number of
OTS employees who will transfer to the OCC has not yet been determined,
the preponderance of OTS-supervised institutions are Federal savings
associations that will be supervised by the OCC and, thus, under the
personnel transfer provisions in the Dodd-Frank Act, a correspondingly
large portion of OTS employees would be transferred to the OCC. We
believe that the orderly transfer of these individuals from the OTS to
the OCC is essential to the success of integrating the supervision of
federally chartered savings associations into the OCC. We also
recognize that these staff members have critical knowledge and insight
into the unique mission and resulting supervisory challenges associated
with the thrift industry. The OCC is working with the OTS to plan and
ensure an orderly transfer of authority and responsibilities to ensure
the effective supervision of both national banks and Federal thrifts.
To ensure the success of this transition, we are guided by a basic
principle that informs the legislation, that there will be no gaps in
supervision as we expand our supervisory framework to include Federal
thrifts. Our goal is a rigorous, consistent, and balanced supervisory
approach for all of the institutions that we will supervise.
The 1,300 nationally chartered community banks that we currently
supervise use a variety of business models, including a significant
number of institutions that look very similar to thrifts with a
preponderance of long-term assets. We also supervise other types of
specialized institutions, including credit card banks and trust banks.
Because of this diversity of experience, our examiners understand the
importance of evaluating the condition and future prospects of each
institution based on its unique characteristics and performance, as
well as its local market conditions.
We also recognize the importance of communicating regularly with
the industry throughout this process. Among other things, the OCC is
developing an outreach program for thrift executives to provide
information and perspective on the OCC's approach to supervision and
regulation. This one-day program will be held at various locations
throughout the country and will be cohosted by an OCC District Deputy
Comptroller and an OTS Regional Director. During these sessions, our
senior examiners will explain how we examine banks, including the
development of individually tailored supervisory strategies based on
the unique risks facing each institution. The program also will
describe the functions of our district counsel and district licensing
activities. We expect these events to take place in the first and
second quarters of 2011.
In addition to the thrift-focused programs, OCC bank supervision
managers have begun participating in industry events that provide
interaction with thrift executives in group settings as well as
individual conversations to expand the industry's awareness of the OCC,
its policies, procedures, and supervision philosophy. I also sent a
personal letter to the chief executive officers of all Federal savings
associations to begin the process of communication that will be so
important to the transition.
As part of our transition effort, our human resources specialists
are also working closely with their OTS counterparts to review employee
positions, duties, and responsibilities to ensure proper alignment of
transferring OTS staff in the combined organization. Consistent with
the legislation, this process will ensure that OTS employees are
treated equitably with regard to status and tenure, and that pay and
other benefits will be protected.
We are undertaking a business line approach in these early stages.
Each of our business units is coordinating with its counterparts at the
OTS to review positions, responsibilities, and business processes to
determine the best means of integrating staff and their functions into
the OCC. We have found this interaction at a business line level
promising in establishing relationships and identifying issues of
mutual concern. To the extent practicable, transferred employees will
be placed in OCC positions with functions and duties similar to those
they had prior to their transfer. In some instances, we already have
jointly identified opportunities to detail OTS staff to assist with our
current responsibilities.
Our general intent is to integrate transferred employees into the
OCC's organizational structure and pay plan as soon as possible and to
maintain existing OCC human resources policies. At the same time, we
will work closely with our OTS counterparts to review and analyze
personnel policies and practices and to identify and resolve any
significant differences.
The transition team also is reviewing and comparing employee
benefits and any related contracts, including those under the Financial
Institutions Retirement Fund (FIRF), which covers some OTS employees,
and other supplemental retirement benefits. The OCC is reviewing the
FIRF plan to determine what actions need to be taken to ensure that it
is in a position to meet obligations to employees and retirees under
that program. As reported in the OTS Annual Report for fiscal year
2009, the estimated OTS FIRF pension shortfall as of July 1, 2009, was
$80.7 million.
One area that we have identified as critical to the combined
success of the OCC and the OTS is the role of training, even at this
early stage in the integration process. As a result, we have begun to
review each agency's training and certification programs to ensure that
existing and transferred employees have the training and skills
necessary to supervise both national banks and Federal savings
associations. This review will identify areas where OCC and OTS
training programs overlap, as well as gaps that need to be addressed.
While the legislation does not require additional certification for
transferred OTS employees to continue supervising the types of
institutions that they supervised prior to the transfer, additional
training may be required before transferred employees can supervise
national banks. As a first step in integrating our examination
workforce, we are developing plans to enroll recent OTS hires in OCC
national bank examiner training courses.
Effective communication is key to managing organizational change as
large as this and, as we work through these details over the next 10
months, I recognize the importance of keeping employees fully informed.
Our communications staff and bank supervision leadership team are
working closely with OTS managers to keep employees informed throughout
this transition, to demonstrate that the OCC recognizes the importance
and value of OTS employee experience, to communicate expectations
clearly, and to ensure that OTS employees are aware of the value
provided by the OCC's professional work environment and comprehensive
benefits and compensation package. While we are still working on
answers to many employee questions, establishing regular communication
helps to ensure that employees remain focused on their mission while
having access to information they need to make informed decisions about
their careers.
As OTS employees look toward this transition, I am confident they
will find the OCC a supportive and rewarding place to continue their
careers. We are proud that responses from our own employees documented
by the Office of Personnel Management's Employee Viewpoint Survey
placed the OCC in the top five places to work among more than 220
Federal agency subcomponents. As our staff expands to include former
OTS employees, we will continue our commitment to providing a
competitive, comprehensive package of compensation and benefits that
meets our employees' needs and allows us to retain and attract the
talent and experience necessary to perform our important and expanded
mission.
Transfer of Funds, Property, and Systems. The OCC's Chief Financial
Officer is working closely with his counterparts to review the
financial position, statements, and existing obligations of the OTS to
ensure that the OCC will have the financial resources necessary to
support the supervision of the Federal savings associations and meet
the obligations the OCC must assume in the transfer, particularly
relating to the unfunded OTS liabilities of the FIRF noted previously.
This review includes determining any changes that may be needed to the
assessment structure to provide for combined supervision in the future.
As this review progresses, the OCC is committed to working closely with
the OTS and the FDIC to keep supervised financial institutions fully
informed.
Also, as we review the financial considerations associated with
integrating the OTS into the OCC, we are working closely with the OTS
to review the status of leased office space supporting the mission of
thrift supervision, including the leasing decisions required over the
next 2 years. This review includes an assessment of space needs to
support thrift supervision staff throughout the country, as well as the
continuing space requirements for more than 3,000 current OCC
employees.
Another important issue relating to the transfer of OTS functions
to the OCC involves the transfer and integration of information
technology systems and assets. The OCC's Chief Information Officer is
working closely with his OTS counterpart to develop a comprehensive
inventory of assets and systems, to compare OCC and OTS systems, and to
determine the most effective method of integrating these assets and
systems. In developing this transition plan, the OCC is sensitive to
the impact that systems change can have on the employees, as well as
the industry, and will take care to minimize any potential disruption.
While today's testimony provides a high-level view of the processes
the OCC has begun to ensure the effective transfer of staff and
functions from the OTS to the OCC, the OCC also is working with the
OTS, FDIC, and Federal Reserve Board to develop the report to Congress
that is due in January 2011. This report will provide additional
details of the initiatives taken to implement the Dodd-Frank Act.
Transfers of Specified Functions to the CFPB
The Dodd-Frank Act transfers to the CFPB authorities of specified
agencies to issue rules, orders, and guidelines under certain Federal
consumer financial laws, plus the authority of the Federal banking
agencies to supervise and examine insured depository institutions of
over $10 billion in asset size for compliance with enumerated Federal
consumer financial laws.
In addition, the legislation provides for the transfer of personnel
to the CFPB for two purposes. First, each transferor agency, including
the OCC, must jointly determine with the CFPB the number of employees
necessary to support the rulemaking and supervision examination
functions transferred to the CFPB. Second, the CFPB and each of the
agencies must jointly determine the number of employees necessary to
perform certain additional functions that are authorized to the CFPB,
but that also continue to be performed by the agencies. These functions
include, for example, research, financial literacy, and responses to
consumer complaints.
We are working with the Treasury staff that are organizing the CFPB
until a Director is appointed to set up a process to identify personnel
that could be transferred. This involves identifying those OCC
employees who have both the skills needed by the CFPB and are
interested in transferring to the CFPB. To facilitate this, we have
solicited expressions of interest from employees who may be interested
in moving to the CFPB.
To further the understanding of our current operations, we also
have provided extensive materials to Treasury staff, including
organizational charts describing our consumer protection functions,
details about the national banks with more than $10 billion in assets
that the CFPB will assume responsibility to examine, position
descriptions, and FTE requirements for supervision. In addition, we
have provided extensive information about the complaint processing
function performed by the OCC's Customer Assistance Group, including
key operating statistics. As the CFPB's organizational activities
accelerate, we are prepared to work with appropriate Treasury staff
that is working on the CFPB start-up to follow-through on all these
areas.
Relationship Between the Dodd-Frank Act and Basel III
The recent initiatives of the Basel Committee on Banking
Supervision (Basel Committee), including establishing additional
prudential standards for large, internationally active banks and
setting contingent capital requirements, are focused on many of the
same issues and concerns that the Dodd-Frank Act sought to address.
In response to the financial crisis, the Basel Committee initiated
a comprehensive reform package designed to strengthen global capital
and liquidity requirements and promote a more resilient banking sector.
These reforms, often referred to as ``Basel III,'' seek to improve the
ability of banks to absorb the shocks of economic stress, thereby
strengthening the financial system and reducing risks to the real
economy. As described in more detail below, the OCC believes that
implementation of the Basel III rules by the Federal banking agencies
will serve to advance the objectives of the Dodd-Frank Act, and certain
other Basel-initiated measures may also satisfy particular requirements
of Dodd-Frank.
Current Basel III Proposal
The Basel Committee published two consultative papers in December
2009, seeking comment on a series of substantive changes to the
standards governing internationally active banks. These changes
involved the tightening of the definition of what counts as regulatory
capital by placing greater reliance on higher quality capital
instruments, expanding the types of risk captured within the capital
framework, establishing more conservative minimum capital ratio and
buffer requirements, providing a more balanced consideration of
macroprudential and systemic risks in bank supervision practices and
capital rules, and establishing for the first time an international
leverage ratio requirement and global minimum liquidity standards. As a
complement to the consultation process, the Basel Committee also
initiated a quantitative impact study to better assess the impact of
these proposals on individual banks.
On July 26, 2010, the Group of Governors and Heads of Supervision
(GHOS), the oversight body of the Basel Committee, reached broad
agreement on the overall design of the capital and liquidity reform
package. On September 12, 2010, the GHOS and the Basel Committee
announced an agreement on the remaining major elements of the Basel III
revisions--the calibration of the new, higher capital ratios that banks
will be expected to maintain and phase-in arrangements of the revised
framework. A more detailed description of the enhancements introduced
by the Basel III rules is provided in Attachment B to this document.
The establishment of higher minimum ratios significantly
strengthens existing capital requirements by requiring more capital per
dollar of measured exposure. This change alone will materially enhance
the resiliency of the banking sector and broader financial system to
economic shocks. The September GHOS agreement also sets forth
harmonized implementation and transition arrangements for national
authorities, with implementation of the new requirements beginning
January 1, 2013, with all aspects of the revisions fully phased-in by
2019. This transition period is intended to give institutions the
opportunity to implement the new prudential standards over time, and
thus alleviate the potential for associated short-term pressures on the
cost and availability of credit to households and businesses.
The Dodd-Frank Act and Basel III
The provisions of the Dodd-Frank Act relating to capital and
liquidity share the broad objectives and address many of the same
issues as the Basel III enhancements noted above. Since the Basel III
enhancements can take effect in the U.S. only through formal rulemaking
by the banking agencies, the steps the OCC and other agencies are
taking to implement Dodd-Frank may present an opportunity to integrate
the Basel III agreement with the heightened standards required by Dodd-
Frank in various areas.
Enhancing the Level, Quality, and Stringency of Capital
Requirements. Basel III and the Dodd-Frank Act both seek to establish
conservative, stringent capital standards, especially for large
financial institutions. In addition, Basel III and the Dodd-Frank Act
enhance the quality and consistency of regulatory capital, limiting the
ability of trust-preferred securities and other similar instruments to
qualify as Tier 1 capital. More generally, Basel III raises the level,
quality, consistency, and transparency of capital instruments.
Significantly, the Basel Committee has focused considerable attention
on common equity, which is superior to other capital instruments in its
ability to absorb losses, and articulated a more conservative basis for
what qualifies as regulatory capital. Basel III also revises regulatory
requirements to ensure that all material risks confronting financial
companies--especially the risks held in trading portfolios and the
risks posed by complex structured finance transactions, including
certain securitization positions--are appropriately reflected in
regulatory capital requirements. Finally, Basel III establishes
materially higher minimum ratio requirements for internationally active
banks.
Macroprudential and Systemic Risk Considerations. Both Basel III
and the Dodd-Frank Act focus increased attention on macroprudential and
systemic risk considerations in bank supervision practices and capital
rules, including efforts to address excessive interconnectedness of
financial sector exposures and the establishment of improved incentives
for the use of central clearing houses for OTC derivatives. The Dodd-
Frank Act also establishes more formal mechanisms and requirements to
identify risks to the financial stability of the U.S. through the
establishment of the FSOC and compels action to prevent or mitigate
such risks, especially as they relate to large, interconnected
financial institutions.
Mitigating Procyclicality of Regulatory Requirements. Both Basel
III and the Dodd-Frank Act focus on cyclicality concerns and the
potential benefits of contingent capital instruments. Basel III seeks
to mitigate procyclicality in the regulatory capital regime through the
development of countercyclical buffers and the study of the potential
uses and design of contingent capital instruments. Similarly, the Dodd-
Frank Act requires the Federal banking agencies to make capital
standards countercyclical and provides the agencies discretion to
require large interconnected financial institutions to maintain a
minimum amount of contingent capital that is convertible to equity in
times of financial stress.
Leverage Ratio Requirements. Basel III and the Dodd-Frank Act
advance similar objectives in seeking to limit excessive leverage in
the banking system. Basel III establishes for the first time an
international leverage ratio requirement that seeks to discourage
excessive leverage in the banking system. The U.S. currently limits
leverage based only on a bank's on-balance sheet assets. However, the
Basel III leverage ratio also accounts for certain off-balance sheet
exposures that could contribute to the build-up of leverage. Along the
same lines, the Dodd-Frank Act mandates that large, interconnected
financial institutions be subject to more stringent prudential
standards and requirements, including standards relating to leverage
limits.
Liquidity Requirements. Both the Dodd-Frank Act and Basel III call
for the establishment of minimum liquidity standards to promote bank
resilience to stressed funding conditions, such as those experienced
during the recent financial crisis. In this regard, Basel III addresses
both short-term resilience and long-term structural liquidity
mismatches. Basel standards are consistent with the Dodd-Frank Act,
which mandates that large, interconnected financial institutions be
subject to more stringent prudential standards and requirements
relating to liquidity.
Next Steps
While the key elements of the Basel III framework have been set
forth, much work will be needed to implement those enhancements plus
the related elements of the Dodd-Frank Act. For example, over the
remaining months of 2010, the international agreements need to be more
fully articulated as a concrete set of standards. This will be followed
in the U.S. by a formal rulemaking process that will take into account,
through public notice and comment, the views of all interested parties.
In addition, there are also many details in terms of the interaction
between the Dodd-Frank Act and Basel III provisions that need to be
sorted out.
The OCC fully supports the Basel III reforms to capital and
liquidity standards. The agreements represent a significant step
forward in reducing the likelihood and severity of financial crises,
and lay the foundation for a more stable banking system that is both
less prone to excessive risk-taking and better able to absorb losses.
We think the framework strikes an appropriate balance between
introducing more stringent requirements for banks, while allowing the
banking system to continue to perform its essential function of
providing credit to creditworthy households and businesses.
Furthermore, the extended transition period minimizes any short-term
disruptions in financial services during a period of fragile economic
conditions.
Conclusion
The OCC appreciates the opportunity to testify on the initiatives
we have taken to date to implement the provisions of the Dodd-Frank
Act. We also would be pleased to provide additional information as the
Committee continues to review Dodd-Frank Act implementation.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM NEAL S. WOLIN
Q.1. Secretary Wolin, does the Obama administration believe
that ``too-big-to-fail'' is dead?
A.1. Through the creation of an orderly liquidation authority,
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(DFA) ends ``too-big-to-fail.'' Under the DFA, the Federal
Deposit Insurance Corporation has the authority to wind down
any firm whose failure would pose substantial risks to our
financial system. Under this liquidation authority, failing
firms will be placed into a Government-run receivership,
holders of common stock and other providers of regulatory
capital to the firm will be forced to absorb any losses, and
culpable management of the firm will be terminated.
Q.2. Section 155 of Dodd-Frank requires that during the 2-year
period following enactment the Federal Reserve Board provide to
the Office of Financial Research ``an amount sufficient to
cover the expenses of the Office.''
Secretary Wolin, what has Treasury determined to be the
amount necessary to cover expenses of the Office of Financial
Research for the remainder of the year?
A.2. The Office of Financial Research (OFR) submitted an
initial funding request of $2.1 million to the Federal Reserve
Board. These funds are being used for planning and initial
implementation of Congressional mandates for the OFR. Estimated
expenses for all of FY2011 and FY2012 will be reflected in the
President's Budget for FY2012. We will provide details
regarding those estimates once the Budget is published.
Q.3. Chairman Bernanke and Secretary Wolin, the Fed and
Treasury provided extraordinary Government support when it
bailed out AIG during the recent crisis. The spirit of part of
Title II of Dodd-Frank is to promote transparency of Fed
emergency actions. In that same spirit, I wonder if you can
provide some information about taxpayer investments in AIG.
First, how much taxpayer-funded assistance did the
Government provide to AIG? Second, to date, and given current
market prices of AIG financial instruments--not projections of
future values--how much have U.S. taxpayers lost because of
that bailout?
A.3. Aggregate peak Federal Reserve Bank of New York and
Treasury commitments to AIG totaled $180 billion. The aggregate
amount of outstanding Government support to AIG is
approximately $93 billion. When that support is valued using
current market prices, the taxpayer has not incurred a loss.
Instead, the current market value of the $93 billion of
taxpayer investment (in the form of loans to and investments in
AIG and its related entities)--based on AIG's closing stock
price on January 26--is approximately $120 billion. This
represents approximately $27 billion of profit to the taxpayer.
Q.4. Secretary Wolin, the new ``Assistant to the President and
Special Advisor to the Secretary of the Treasury on the
Consumer Financial Protection Bureau,'' Elizabeth Warren,
writes the following in Chapter 6 of her populist 2003 book
titled The Two Income Trap: ``The only way to stop predatory
lending once and for all is to go directly to the heart of the
loan--the interest rate. Limiting the amount of interest that
creditors can charge avoids the hide-and-seek game over what is
and what is not `predatory,' offering instead a simple,
effective means of regulation.''
Secretary Wolin, given Ms. Warren's calls for usury
ceilings on allowable interest rates and other forms of price
controls in credit markets, and given her Special Advisor
status, does Treasury plan to have the CFPB set allowable
prices for credit and nationwide ceilings on interest rates?
A.4. The Treasury does not plan to have the Bureau of Consumer
Financial Protection (``Consumer Financial Protection Bureau''
or ``CFPB'') set allowable prices for credit and nationwide
ceilings on interest rates.
Q.5. Secretary Wolin, you testified that Treasury and those in
charge of ``standing up'' the CFPB will ``soon'' have a
transparency policy available. When do you expect to have a
transparency policy available?
When will Treasury make available, publicly and to this
Committee, the names, affiliations and agendas of individuals
who meet with Treasury officials, including Assistant to the
President and Special Advisor to the Secretary of the Treasury
on the Consumer Financial Protection Bureau Ms. Elizabeth
Warren?
A.5. The Department of the Treasury strongly supports increased
transparency in Government, and the Secretary has committed to
implementing the DFA in an open and transparent manner. On
November 1, 2010, Treasury implemented a transparency policy
that applies to in-person meetings in which Treasury employees
who are Deputy Assistant Secretaries or Treasury officials of
equal or higher rank participate. Meetings involving Special
Advisor to the Secretary Elizabeth Warren are subject to the
transparency requirements promulgated under this policy.
Treasury's transparency policy requires meetings between
these Treasury officials and private sector individuals or
entities and nongovernmental organizations that are set up to
discuss policy implementation of the Dodd-Frank Act be posted
to the Treasury Department's Web site. Disclosure consists of:
(1) the date of the meeting; (2) the names and titles of all
covered Treasury participants; (3) the names and affiliations
of all non-Treasury participants, and; (4) a list of the
primary topics of conversation related to Dodd-Frank
implementation.
Meeting disclosures will be posted to the Treasury Web site
by the last day of each month, covering meetings that took
place during the previous month. For example, the first posting
occurred on December 30, 2010, and covered meetings that took
place in November 2010.
In addition, on a monthly basis, Professor Warren posts her
full calendar--with minimal redactions--on the Treasury Web
site.
Q.6. Mr. Wolin, while the Dodd-Frank Act prohibits Treasury
from creating any new programs under the Troubled Asset Relief
Program (TARP), it does not affect the TARP's October 3, 2010,
expiration as defined in the Emergency Economic Stabilization
Act (EESA). While some say that Dodd-Frank ends TARP, it is
important to remain clear that TARP bailout money will continue
to flow even with provisions of the Dodd-Frank Act.
According to the Congressional Oversight Panel's September
16, 2010, report titled September Oversight Report: Assessing
the TARP on the Eve of Its Expiration, with respect to the
Treasury Secretary's authority under TARP:
EESA, which was signed into law on October 3, 2008, is
clear that the Secretary cannot extend his authority
under the TARP beyond October 3, 2010. Section 120(b)
of EESA reads: `The Secretary, upon certification to
Congress, may extend the authority under this Act to
expire not later than 2 years from the date of
enactment of this Act.' The phrase `the authority under
this Act' would seem to capture all authority provided
under EESA; however, the statute allows for one
exception. Section 106(e) of EESA stipulates: `The
authority of the Secretary to hold any troubled assets
purchased under this Act before the termination date in
Section 120, or to purchase or fund the purchase of a
troubled asset under a commitment entered into before
the termination in Section 120, is not subject to the
provisions of Section 120.'
Section 106(e) provides Treasury with two specific
authorities. First, it allows Treasury to hold its
investments made through the TARP after October 3,
2010. Second, it allows Treasury to continue to use the
TARP to fund TARP commitments, provided Treasury had
made those commitments prior to October 3. Treasury has
committed TARP funding to a variety of programs that it
has not yet fully funded to their allocated amounts.
Many of these programs will continue to receive TARP
funding well beyond October 3, 2010. HAMP represents
the largest commitment of TARP dollars yet to be
expended. Treasury considers its HAMP contracts to be
`financial instruments' or `commitments to purchase
troubled assets' and, therefore, captured under Section
106(e). According to Treasury, the modification
payments `made to servicers are the purchase prices for
the financial instruments' or troubled assets. As a
result, Treasury plans to continue to fund HAMP and
make modification payments to mortgage servicers in the
years ahead.
Treasury has noted to the Panel that it will lose some
of its flexibility to alter operational aspects of HAMP
after October 3. First, it will not be able to enlist
new servicers to HAMP. Treasury has explained to the
Panel that in its view the authority under Section
106(e) `to purchase or fund the purchase of a troubled
asset under a commitment entered into before the
termination' of TARP requires Treasury to have entered
into a HAMP contract with a mortgage servicer on or
prior to October 3, 2010. Treasury has also explained
to the Panel that it will lose its ability to use
committed dollars under HAMP if a servicer were to drop
from the program after TARP's expiration. To provide it
with more flexibility and maximize HAMP committed
dollars, Treasury has informed the Panel that it is
exploring changes to the way in which purchase prices
are calculated for HAMP contracts. Currently, the
purchase price in a HAMP contract is a set dollar
amount under Treasury's proposed plan, purchase prices
will instead be based on a formula. This change will
enable Treasury to preserve RAMP funding after TARP's
expiration date. According to Treasury, under the new
arrangement, if a servicer were to discontinue
participation in HAMP, the funds that had been
committed to that servicer would not lapse, or become
unavailable for further use, but instead would be
spread among the remaining servicers. The change would
be made by issuance of a supplemental directive.
(Footnotes in original text omitted.)
Mr. Wolin, would you elaborate on any changes in Treasury's
TARP programs designed to maintain TARP money availability for
future uses, to ensure that money will be available so that
programs can continue to receive TARP funding ``well beyond
October. 3, 2010,'' or so that Treasury can preserve TARP
funding after TARP's expiration date?
A.6. Treasury has implemented its TARP programs-including the
housing programs described above-pursuant to its statutory
authority under the Emergency Economic Stabilization Act
(EESA). As you note, EESA requires that purchases or
commitments to purchase troubled assets be entered into by
October 3, 2010.
In regard to the Home Affordable Modification Program
(RAMP), Treasury entered into contracts with various mortgage
servicers prior to October 3, 2010. Each contract originally
specified a maximum purchase price by Treasury--a fixed dollar
amount that represented the maximum amount of TARP funding
available to each servicer under the program. Treasury
periodically adjusted the maximum purchase prices based on its
analysis of the respective servicers' volume of eligible loans
and their performance under the program.
On October 1, 2010, Treasury issued revised guidance
regarding each servicer's maximum purchase price. According to
the guidance, each servicer's maximum purchase price will be
adjusted in the future--beginning on January 1, 2011, and
updated at the beginning of each calendar quarter, or at other
intervals chosen by Treasury--pursuant to a preestablished, set
formula. It is important to note that the revised guidance did
not change the total funding that already had been committed
under RAMP, or the participants in the program. Instead, it
merely provided a mechanism to shift resources among servicers
based on their capacity and implementation of the program. In
other words, it ensured that taxpayer resources are being
allocated in an effective and efficient manner.
Q.7. The Financial Stability Oversight Council is an important
feature of Dodd-Frank. During the conference, my amendment was
adopted to clarify the role of the Council and the Federal
Reserve. My amendment gave the Council responsibility for
financial stability regulation. Up to that point, the
legislation had colocated this responsibility at the Fed and
the Council. The Congressional intent is clear that you, as
members of the Council, are responsible for all policy matters
related to financial stability. After the Council acts,
implementation of your policy determinations will fall to the
individual Federal financial regulators, including, of course,
the Fed.
With this in mind, I would like each of you to comment on
your preparations to serve on the Council: Have you directed
your staff to examine and study all of the issues that will
come before you? Are you prepared to participate on the
Council, not as a rubber stamp for the Chairman of the Council,
but as a fully informed individual participant?
A.7. As Chair of the Financial Stability Oversight Council
(FSOC), Treasury is fully prepared to participate, together
with the other members of the Council, in all aspects of the
FSOC's work and is committed to ensuring that the FSOC
accomplishes its objectives.
The duties of the FSOC commenced upon enactment and the
work of implementation started immediately. Member agencies
have been full participants in the FSOC's work addressing
matters related to financial stability.
The FSOC has already taken important steps to fulfill its
duties in a rigorous, transparent manner. At its first three
meetings, the FSOC released requests for public comment
regarding the criteria for designations of nonbank financial
firms and financial market utilities for supervision by the
Federal Reserve. In addition, the FSOC released an integrated
implementation roadmap reflecting the priorities and statutory
requirements of the FSOC and its member agencies over the first
18 months of implementation of the Dodd-Frank Act.
In its most recent meeting, the FSOC released a study on
effective implementation of the Volcker rule (Section 619 of
the DFA) and the concentration limit on growth by acquisition
(Section 622 of the DFA). The FSOC also released a notice of
proposed rulemaking on the process and criteria to designate
nonbank financial firms for consolidated supervision. We intend
to build upon this collaborative approach for all matters that
come before the FSOC.
Q.8. Secretary Geithner has argued that there is a strong case
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published
a paper that proposes Government guarantees of a wide range of
asset backed securities, including those backed by mortgages,
credit cards, autos, student loans, commercial real estate, and
covered bonds. While some may believe that the Government will
charge fair prices for Government guarantees, the history of
Government run insurance programs suggests that things will not
go well.
Does anyone on the panel support extending or increasing
Government insurance against losses on asset backed securities
which, it seems to me, socializes risk, puts taxpayers on the
hook for losses, and protects Wall Street against losses?
A.8. The Administration is committed to carefully considering a
wide range of reform alternatives. Treasury is performing
thorough analysis of these alternatives and consulting with a
wide array of stakeholders in order to determine the potential
consequences of various reform proposals.
It is important to emphasize that the current level of
Government involvement in the market is neither sustainable nor
desirable. In formulating its plan for reform, the
Administration is committed to crowding in private capital as
soon as is practicable and places a high priority on ensuring
significant private sector involvement in the future structure
of mortgage finance. Should any form of Government guarantee
survive the rigorous review of alternatives by Congress, it
would have to be accurately priced to reflect the risk.
Q.9. Please provide the Committee with an implementation
schedule that includes:
(a) a list of the rules and studies that your agency is
responsible for promulgating or conducting under Dodd-Frank and
the date by which you intend to complete each rule or study;
and
(b) a list of the reorganizational tasks your agency will
undertake to fulfill the mandates of Dodd-Frank and the date by
which you intend to complete each task.
A.9. Please see attached timelines.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM NEAL S. WOLIN
Q.1. Over the last 15 years, the 6 biggest banks grew from
having assets equal to 17 percent of GDP to 63 percent of GDP.
The four largest banks control about 48 percent of the total
assets in the Nation's banking system. And the 5 largest dealer
banks control 80 percent of the derivatives market and account
for 96 percent of the exposure to credit derivatives.
Part of the Volcker Rule, section 622 of the Dodd-Frank
Act, requires the Financial Stability Oversight Council (FSOC),
to study and make recommendations concerning the effects of
financial sector concentration on financial stability, moral
hazard, efficiency, and competitiveness in the financial
system. Subject to these recommendations, no company will be
permitted to hold more than 10 percent of the liabilities held
by all financial companies, with some significant exceptions.
What are effects does concentration in the financial
industry have on financial stability, moral hazard, efficiency,
and competitiveness?
A.1. The FSOC believes that the concentration limit that is
contained in Section 622 of the DFA will have a positive impact
on U.S. financial stability. Specifically, the FSOC believes
that the concentration limit will reduce the risks to U.S.
financial stability created by increased concentration arising
from mergers, consolidations or acquisitions involving the
largest U.S. financial companies. Restrictions on future growth
by acquisition of the largest financial companies ultimately
will prevent acquisitions that could make these firms harder
for their officers and directors to manage, for the financial
markets to understand and discipline, and for regulators to
supervise. The concentration limit, as structured, could also
have the beneficial effect of causing the largest financial
companies to either shed risk or raise capital to reduce their
liabilities so as to permit additional acquisitions under the
concentration limit. Such actions, other things equal, would
tend to reduce the chance that the firm would fail.
Although the FSOC expects the impact of the concentration
limit on moral hazard, competition, and the availability of
credit in the U.S. financial system to be generally neutral
over the short- to medium-term, over the long run the FSOC
expects the concentration limit to enhance the competitiveness
of U.S. financial markets by preventing the increased dominance
of those markets by a very small number of firms.
Q.2. Given that the six biggest banks alone have about $7.4
trillion in liabilities, almost 53 percent of GDP, do you think
this provision will meaningfully restrict the size of financial
institutions?
A.2. The concentration limit is one of several regulatory
tools, including the tougher prudential standards for the
largest, most interconnected financial institutions and the new
orderly liquidation authority, designed to work in a
complementary fashion to restrain the risks posed to financial
stability by the largest, most interconnected firms.
Q.3. The Basel Committee on Banking Supervision set the so-
called ``Basel III'' minimum capital requirements for banks at
8 percent, with an additional 2.5 percent buffer. But a recent
study by the Bank for International Settlements (BIS) suggests
that the optimal capital ratio would actually be about 13
percent. The Financial Stability Oversight Council (FSOC), of
which your organizations are a member, will recommend capital
requirements for systemically important financial companies.
Do you favor increasing capital for systemically important
financial companies above the 10.5 percent Basel ITI ratio, and
closer to the 13 percent number?
A.3. A subsequent amendment to Basel II by the Basel Committee
(effective at the beginning of 2012) will increase capital
requirements on risky securitizations and bank trading book
activities that affect the largest banks, thereby reducing the
perverse incentives for these banks to engage in such
activities. The Basel Committee estimates these changes will
increase the capital requirements for these activities by a
factor of three to four times.
Basel III substantially increases the quantity of common
equity required to absorb losses, while also increasing the
deductions from the amount of common equity for risky
activities. These changes will increase the common equity
requirement by more than three times, before even considering
more stringent capital deductions that will mostly affect the
largest banks. Capital requirements for counterparty credit
risk, which particularly affects the largest banks, are also
being increased. Moreover, Basel III introduces, for the first
time, a global leverage ratio standard and a global liquidity
ratio standard. The Basel III requirements are rigorous and are
designed to ensure that major banks hold enough capital to
withstand losses as large as what we saw in the depths of this
recession and still have the ability to operate without turning
to the taxpayer for extraordinary help. We are confident this
agreement will make our financial system more stable and more
resilient.
The Basel Committee has stated that it is ``conducting
further work on systemic banks and contingent capital in close
coordination with the FSB.'' As our supervisors and regulators
work to meet the requirements of the Dodd-Frank Act, it is
important to align international financial rules so as to
ensure level playing field.
Q.4. Would you be comfortable establishing progressive capital
requirements that increase as institutions grow larger?
A.4. We fully endorse the Dodd-Frank Act which requires that
the largest firms face higher prudential standards, including
higher capital requirements. These firms should be forced to
internalize the cost of the risks they impose on the financial
system, and to strengthen their ability to withstand shocks and
downturns.
Basel III effectively will increase capital requirements
for the largest banks by increasing the quantity and quality of
capital that banks must hold, as well as the capital
requirements for securitization, trading book activities, and
counterparty credit risk. These new standards will better align
regulatory capital requirements with the risks to which banks
are exposed.
The Basel Committee has stated that it is ``conducting
further work on systemic banks and contingent capital in close
coordination with the FSB.'' As our supervisors and regulators
work to meet the requirements of the Dodd-Frank Act, it is
important to align international financial rules so as to
ensure a level playing field.
Q.5. Wall Street often argues that higher capital means higher
costs for borrowers, and DIS has estimated that for each 1
percent of increased capital, banks will have to raise rates by
15 basis points (0.15 percent). Do you believe that banks could
adapt to new capital requirements in ways that do not pass
costs on to customers and borrowers, for example, by cutting
outsized salaries and bonuses?
A.5. We are confident that the increased capital standards will
make the system safer and provide an economic benefit in the
long run. Basel III gives banks a meaningful transition period
to meet the new standards. The new capital standards will not
become effective until the beginning of 2013, and banks will
not have to meet the full minimum common equity capital
requirement until the beginning of 2015. The definition of
capital will become progressively more stringent between 2013
and 2018. U.S. banks moved quickly to raise capital after the
2009 stress tests, and as a result, U.S. financial institutions
should be in a very strong position to adopt the new global
standards. Banks should be able to meet these new requirements
through future earnings or equity issuance.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM NEAL S. WOLIN
Q.1. Section 1022(b) of the Dodd-Frank bill requires that in
rulemaking, the Consumer Financial Protection Bureau shall
consider ``the impact of proposed rules on covered persons, as
described in section 1026, and the impact on consumers in rural
areas.''
What specific processes and infrastructure will the Bureau
develop to ensure that it has adequate understanding of the
impact of proposed rules on community banks and credit unions
with assets of less than $10 billion?
How will Treasury work with the FDIC, the Federal Reserve
and NCUA to ensure that Bureau has the institutional knowledge
to understand the impact of proposed consumer protection
regulations on community banks and credit unions?
What infrastructure will you develop to ensure the
coordination and sharing of information between the Bureau and
the FDIC and the Federal Reserve in cases in which the rule
writing and examination and enforcement authority is split
among agencies?
A.1. The Bureau of Consumer Financial Protection (Consumer
Financial Protection Bureau or CFPB) implementation team is
building infrastructure and processes to enable CFPB to acquire
the knowledge it needs to understand and fully consider the
impact of any future proposed rules on rural consumers and on
banks and credit unions With assets of less than $10 billion.
The implementation team plans to work with Federal
supervisors of these institutions to develop processes for
consultation. The implementation team is also working with
other Federal supervisors on written agreements for exchanging
supervisory information about institutions SQ that CFPB can
maintain an ongoing understanding of their business models and
conditions.
The implementation team is also making preparations to
comply with obligations under the Regulatory Flexibility Act to
consider the impact of proposed regulations on the smallest
banks and credit unions and, in certain cases, to establish
panels to seek direct input from such institutions before
proposing a regulation.
The CFPB implementation team is analyzing what other
processes and infrastructure will be useful in this effort.
Elizabeth Warren, Special Advisor to Secretary Geithner, is
meeting regularly with community bankers across the country to
get their perspectives on the impact of consumer protection
regulations on community banks and credit unions.
Q.2. Mr. Wolin, during your testimony you referenced efforts
that Treasury is undertaking to develop a simpler mortgage
disclosure form to provide better choices for consumers. Over
the past several years, Congress has enacted a number of
mortgage disclosure provisions which in some cases have led to
more paperwork without necessarily better informing consumers.
As it relates to mortgage disclosure, will the Bureau be
conducting an analysis of all existing disclosure requirements
to simplify requirements or will these efforts be layered on
top of existing requirements? Will the Bureau evaluate the
effectiveness of existing efforts and eliminate requirements
that are ineffective?
A.2. The CFPB is currently reviewing mortgage disclosure
requirements as a whole and working to ensure that they promote
informed consumers and competitive markets and do not impose
unnecessary requirements on banks. The CFPB will not simply
layer new requirements upon requirements that are outdated or
ineffective. As part of this process, the CFPB will consolidate
Federal mortgage disclosures as required by the DFA. This
consolidation will improve disclosure for consumers and reduce
unwarranted burdens for banks.
Q.3. Will the Treasury Department designate a senior staff
member who is participating in the transition efforts of the
Consumer Financial Protection Bureau to serve as a liaison to
community banks and credit unions, specifically those with
assets of less than $10 billion?
A.3. The CFPB implementation team is setting up a robust
outreach function for the CFPB, including creating an office
devoted to small business and community banks. Staff is already
working with small banks and credit unions, expanding the
outreach efforts of Elizabeth Warren and making certain that
the perspectives of small banks and credit unions are well-
represented: within the consumer agency.
Q.4. Can you provide me an update on your agencies progress in
implementing the property appraisal requirements of Title XIV
of Dodd-Frank? What process will you use to develop and
implement these requirements?
A.4. Section 1472 of Title XIV adds a new section to the Truth
in Lending Act. This provision vests the initial responsibility
to implement appraisal independence requirements with the
Federal Reserve Board (Board). As the statute requires, the
Board released an interim final rule on October 18, 2010.
With the exception of the Board's interim final rule,
Section 1472 provides joint rule-writing authority for
appraisal independence to the Board, the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, the
National Credit Union Administration Board, the Federal Housing
Finance Agency, and the Consumer Financial Protection Bureau.
Similarly, Sections 1471 and 1473 amend the Truth in Lending
Act and provide joint rulemaking authority to those same
agencies with respect to requirements for in-person appraisals
and appraisal management companies. As with other rules that
are required to be implemented on an interagency basis, we
expect the agencies to work cooperatively to adopt all the
rules relating to appraisals under Title XIV by the statutory
deadline of January 21, 2013.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
FROM NEAL S. WOLIN
Q.1. Title XII of Dodd Frank ``encourage[s] initiatives for
financial products and services that are appropriate and
accessible for millions of Americans who are not fully
incorporated into the financial mainstream.'' I helped author
Section 1206 of the Act which enables the Community Development
Financial Institutions Fund to establish a grant program within
to encourage affordable small dollar lending through loan-loss
reserve funds and provision of technical assistance. Can you
please describe the Department's implementation plan for these
new programs?
A.1. The Treasury Department's Community Development Financial
Institutions and Office of Financial Education and Financial
Access are working together to ensure the agency is ready to
implement Title XII once appropriations are secured. In the
near future, the Treasury Department will publish in the
Federal Register one or more ``Request for Comments''
documents, so that it can better gauge from the public the key
issues to consider when standing up these new initiatives,
should appropriations be made available.
Although we have begun these initial steps, appropriated
resources will be needed to implement the Small Dollar Loan
Program and other proposed programs, such as Bank On USA, which
are envisioned under Title XII. Funding for Title XII
initiatives is necessary to capitalize on the important
economic empowerment opportunities provided by Dodd-Frank.
In the mean time, we will continue to work with community
based organizations, financial institutions, financial
education providers, and local officials to ensure that we will
be able to quickly implement Title XII programs once funding
becomes available.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM NEAL S. WOLIN
Q.1. We need to fix our Nation's broken housing finance system
and reduce the Government's involvement in the housing market
from current levels where the GSEs and FHA are guaranteeing
about 95 percent of all new mortgages. According to the August
FHFA report, Fannie Mae and Freddie Mac have burnt through $226
billion in capital since the middle of the 2007. Some
alternatives being discussed range from a completely privatized
housing finance system to a system in which the Government
takes the first-loss position in the entire conforming mortgage
market.
Please describe the options and rationale in each category
the Administration is considering for its comprehensive reform
proposal for the GSEs?
A.1. The Administration is considering a wide range of reform
proposals in conjunction with its commitment to present a
proposed reform white paper, as mandated by the DFA. The
Administration is committed to meeting with and collecting
input from a wide range of stakeholders to ensure that options
and rationale for each type of reform is carefully considered.
We look forward to working with Congress to deliver a reformed
housing finance system as soon as practical.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM BEN S. BERNENKE
Q.1. Section 1022(b) of the Dodd-Frank bill requires that in
rulemaking, the Consumer Financial Protection Bureau shall
consider ``the impact of proposed rules on covered persons, as
described in section 1026, and the impact on consumers in rural
areas.''
What specific guidance and resources will the FDIC and the
Federal Reserve provide to the Bureau to ensure that it can
adequately understand the impact of proposed rules on community
banks with assets of less than $10 billion?
A.1. Where our experience as the supervisor of community banks
suggests that a proposed rule could create compliance
difficulties for these banks or affect credit availability, the
Federal Reserve would use the public comment process to offer
its analyses on the impact of the proposed rule. In addition, I
would expect our analyses to suggest possible alternatives that
would also be effective in protecting consumers.
Q.2. What infrastructure will the Fed and FDIC develop to
ensure the coordination and sharing of information with the
Bureau in cases in which the rule writing and examination and
enforcement authority is split among agencies?
A.2. With the implementation of the Dodd-Frank Act, the
Director of the Consumer Financial Protection Bureau will join
the Federal Reserve and the other depository institution
supervisory agencies as a member of the Federal Financial
Institutions Examination Council (FFIEC). The Consumer
Compliance Task Force of the FFIEC promotes policy
coordination, a common supervisory approach, and uniform
enforcement with respect to consumer protection laws and
regulations. The member agencies of the FFIEC have processes in
place to share appropriate supervisory information among the
agencies, as needed. The Bureau's participation in the FREC
should ensure that it is in the same position as the other
agencies with regard to information sharing.
Q.3. Can you provide me an update on your agencies progress in
implementing the property appraisal requirements of Title XIV
of the Dodd-Frank Act? What process will you use to develop and
implement these requirements?
A.3. Sections 1471 and 1472 of the Dodd-Frank Act amend the
Truth in Lending Act (TILA). Section 1471 establishes certain
property appraisal requirements for a category of loans
designated ``higher-risk mortgages,'' including a physical
property inspection of the interior of the mortgage property in
connection with a higher risk mortgage and a second appraisal
of such properties under certain circumstances. Rulemaking
authority under Section 1471 is delegated to the Federal
Reserve Board (Board), FDIC, OCC, NCUA, FHFA, and Bureau.
However, those rules must be based on final rules to be issued
under Section 1411, which establishes minimum lending standards
for residential mortgage loans. The rules under Section 1471,
like all other rules required under Title IV where no specific
deadline is provided, must be issued within 18 months after
July 21, 2011.
Section 1472 of the Dodd-Frank Act amends TILA to establish
requirements for appraisal independence in connection with
home-secured loans. Section 1472 mandates that the Board issue
interim final rules within 90 days after enactment. On October
18, 2010, the Board issued an interim final rule implementing
the appraisal independence, mandatory reporting, and customary
and reasonable fee requirements of section 1472. Section 1472
also authorizes the Board, FDIC, OCC, NCUA, FHFA, and Bureau to
jointly issue regulations to address appraisal report
portability.
Section 1473 of the Dodd-Frank Act directs the Board, FDIC,
OCC, NCUA, FHFA, and the Bureau to jointly develop rules for
appraisal management companies and automated valuation models.
These mandates have been identified in the Board's Dodd-Frank
related project work and will require the formation of an
interagency working group to draft proposed regulations for
comment and, after consideration of these comments to issue
final regulations. This section also directs the Board, FDIC,
OCC, and NCUA, in consultation with the Bureau, to assess the
agencies' appraisal regulatory threshold for 1-to-4 single
family residences for reasonable protection of consumers. All
rules required under section 1473 must be issued within 18
months after July 21, 2011.
Section 1473 also directs the agencies to address the
requirements for appraisal reviews in their appraisal
regulations. It should be noted that the agencies already
address appraisal review practices in the Interagency Appraisal
and Evaluation Guidelines and, more recently, the agencies
issued proposed revisions to these guidelines. Appraisal review
practices are addressed in the proposed revisions to these
guidelines. The section also prohibits in conjunction with the
purchase of a consumer's principal dwelling the use of broker
price opinions as the primary basis to determine the value of a
piece of property for the purpose of a loan origination of a
residential mortgage loan secured by such piece of property.
While the Act does not direct the agencies to issue regulations
to implement this requirement, the Board will consider this
mandate in safety and soundness regulations and guidance on
collateral valuation practices.
Other provisions of section 1473 of the Dodd-Frank Act
direct the FFIEC Appraisal Subcommittee to take certain
actions, including its operations, the oversight of State
appraisal regulatory authorities, and appraisal management
companies. The Board has a representative on the Appraisal
Subcommittee. Similar to the Dodd-Frank Act project planning
that is occurring at the Board, the Appraisal Subcommittee is
developing its own plan and time table for implementing the
Dodd-Frank mandates. This month, as mandated by the Dodd-Frank
Act, the Appraisal Subcommittee adopted an increase in the
National Appraiser Registry fee from $25 to $40. To provide the
State appraiser regulatory agencies with sufficient time to
implement this change, the new fee becomes effective on January
1, 2012.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM SHEILA C. BAIR
Q.1. Chairman Bair, Section 331 of Dodd-Frank requires that the
FDIC change its assessment base for computing insurance
premiums.
When will the FDIC change its insurance premium assessment
base, and will the change be effective on a specific future
date that the FDIC chooses or will it be retroactive?
A.1. As a result of the Dodd-Frank Act, an insured depository
institution's (IDI's) assessment base will be calculated using
average consolidated total assets less average tangible equity
(with the possible exception of banker's banks and custodial
banks, which the Dodd-Frank Act allows the FDIC to treat
differently). This change constitutes a substantial revision to
the deposit assessment system, which, by statute, can only be
made after notice and opportunity for comment. On November 9,
2010, the FDIC Board of Directors adopted a notice of proposed
rulemaking with request for comment on the changes to the
assessment base mandated by Section 331 of the Dodd-Frank Act
and their anticipated effect. The proposal has a 45-day comment
period. The FDIC also proposes to make the changes effective
April 1, 2011, and looks forward to the comments on all aspects
of the proposed rulemaking.
The FDIC is committed to implementing the Dodd-Frank Act in
the most expeditious manner possible and considered the
possibility of making the application of the new assessment
base retroactive to passage of the Dodd-Frank Act. However, to
determine assessments using the new assessment base requires
that a number of changes be made to the Consolidated Reports of
Condition (Call Report) and Thrift Financial Report (TFR) that
render retroactive application of the new assessment base
operationally infeasible, both for insured depository
institutions and the FDIC. Additionally, retroactively applying
such changes could introduce significant legal complexity and
introduce unacceptable levels of litigation risk. For these
reasons, the FDIC did not propose applying the new assessment
base retroactively.
Q.2. Chairman Bair, your testimony identifies that Dodd-Frank
address macro-oversight of the financial industry in part by
prohibiting the use of credit ratings for regulatory purposes.
Given that interpretation of the law, what is the FDIC
going to eliminate credit ratings from regulations and when
will the process be completed?
A.2. On August 10, 2010, the FDIC and the other Federal banking
agencies issued an advanced notice of proposed rulemaking
(ANPR) seeking comment on alternatives to the use of credit
ratings. The ANPR listed a number of principles that the
agencies believe any alternative standard of creditworthiness
must meet, described the use of credit ratings in the agencies'
capital rules, and discussed possible approaches to alternative
standards of creditworthiness. The comment period closed on
October 25, 2010. To date the FDIC has received 23 comments,
which we are reviewing. The FDIC and the other banking agencies
also held a roundtable discussion on this issue with industry
and other participants in early November. A summary of the
items discussed and other materials from the participants will
be posted on the FDIC and Federal Reserve Websites. In
addition, the FDIC Board, on November 9, 2010, approved the
issuance of a notice of proposed rulemaking to update the
FDIC's risk-based assessment system for large banks. This rule
proposes eliminating any reliance on long-term debt issuer
ratings in determining risk-based assessments for large banks.
We anticipate timely completion of all the necessary
rulemaking to implement Section 939A of the Dodd-Frank Act.
Q.3. Chairman Bair, under Dodd-Frank, certain firms in distress
may be resolved under an alternative process to bankruptcy
which would be managed by the FDIC, if regulators so desire.
The idea seems to be to provide the firm, or some or all of its
counterparties, with funds, or ``additional payments,'' that
would not be available in a bankruptcy. There are then
mechanisms available for the Government to try to recover funds
over time from the firm's assets, creditors, or industry.
Recently, you stated that ``The authority to differentiate
among creditors will be used rarely and only where such
additional payments are `essential to the implementation of the
receivership or any bridge financial company.' ''
Chairman Bair, what criteria would or could the FDIC use to
determine whether payments are ``essential'' to implementation
of a receivership or bridge company, and what protections exist
to ensure that the criteria do not include political
considerations?
A.3. On October 4, 2010, the FDIC issued a notice of proposed
rulemaking addressing certain orderly liquidation authority
provisions of the Dodd-Frank Act. Of particular significance,
the proposed rule would clarify that the authority to make
additional payments to certain creditors will never be used to
provide additional payments, beyond those appropriate under the
statutorily defined priority of payments, to shareholders,
subordinated debt holders and bondholders. The FDIC, in this
proposed rule, is proposing that these three types of creditors
of the covered financial company could never, as a legal
matter, meet the statutory criteria for receiving such
additional payments.
To emphasize that all unsecured creditors should expect to
absorb losses along with other creditors, the proposed rule
clarifies the narrow circumstances and procedures under which
other creditors, including short-term debt holders, could
receive any additional payments or credit amounts under
Sections 210(b)(4), (d)(4), or (h)(5)(E). Under the proposed
rule, such payments or credit amounts could be provided to a
creditor only if the FDIC Board of Directors, by a recorded
vote, determines that the payments or credits are necessary (i)
to maximize the value of the assets of the covered financial
company; (ii) to initiate and continue operations essential to
implementation of the receivership or any bridge financial
company; (iii) to maximize the present value return from the
sale or other disposition of the assets of the covered
financial company; or (iv) to minimize the amount of any loss
realized upon the sale or other disposition of the assets of
the covered financial company. The proposed rule further
provides that the authority of the Board to make this decision
cannot be delegated to management or staff of the FDIC. By
requiring a vote by the Board, the proposed rule would require
a decision on the record and ensure that the governing body of
the FDIC has made a specific determination that such payments
are necessary to the essential operations of the receivership
or bridge financial company, to maximize the value of the
assets or returns from sale, or to minimize losses.
Fundamental to an orderly liquidation of a covered
financial company is the ability to continue key operations,
services, and transactions that will maximize the value of the
firm's assets and avoid a disorderly collapse in the
marketplace. The FDIC has long had authority under the Federal
Deposit Insurance Act to continue operations after the closing
of a failed insured bank, if necessary, to maximize the value
of the assets in order to achieve the ``least costly''
resolution or to prevent ``serious adverse effects on economic
conditions or financial stability'' (12 U.S.C. 1821(d) and
1823(c)). Under the Dodd-Frank Act, the corresponding ability
to continue key operations, services, and transactions is
accomplished, in part, through authority for the FDIC to
charter a bridge financial company. The bridge financial
company is a completely new entity that will be freed from the
shareholders, debt, senior executives, or bad assets and
operations that contributed to the failure of the covered
financial company or that would impede an orderly liquidation.
Shareholders, debt holders, and creditors will receive
``haircuts'' based on a clear priority of payment set out in
section 210(b). As in prior bridge banks used in the resolution
of large insured depository institutions, however, the bridge
financial company authority will allow the FDIC to stabilize
the key operations of the covered financial company by
continuing valuable, systemically important operations in order
to maximize value.
Q.4. Recent news reports have detailed disturbing information
about servicers' foreclosure processes. Allegations have ranged
from forged documents to the signing of eviction notices
without review.
What evidence have your agencies found in regards to these
charges?
What actions have been undertaken by your agencies both to
address this situation and to prevent future abuses?
What policies and procedures have your agencies put in
place to ensure compliance with State laws, and when were they
implemented?
A.4. The FDIC is very concerned about the devastating impact
foreclosures are having on homeowners, the American economy and
the banking industry. As the primary Federal supervisor for
nearly 5,000 State-chartered insured institutions, we
vigilantly monitor compliance with consumer protection
requirements and aggressively pursue enforcement actions to
address any violations of law. Upon initial review, it appears
that FDIC-supervised nonmember State banks have not engaged in,
and have limited exposure to, loans with affidavits signed by
``robo-signers.'' However, the FDIC is closely monitoring the
situation and will continue to work closely with State
officials to ensure compliance with applicable Federal and
State banking laws and regulations.
We have contacted the FDIC's loss-share and LLC partners
and are receiving certifications that all past and future
foreclosure claims filed under the loss-share agreement are
compliant with the law. We will deny loss-share payments for
any foreclosures that are found not to be compliant with State
laws or not fully remediated. We are independently verifying
full compliance, with a priority on owner-occupied properties.
Through our backup examination authority, our examiners
also are working with other regulators on site at the major
mortgage servicers. Our activities include direct verification
of the loan file documentation handled by the ``robo-signers''
and review of the servicer's loan modification practices and
their record keeping for ownership of the underlying loans. The
agencies also are working together to evaluate the role played
by the Mortgage Electronic Registry Service or ``MERS.''
Once we have complete and thorough information regarding
the extent of the foreclosure documentation problems on an
individual and systemwide basis, we will be in a better
position to determine what actions should be taken to prevent a
recurrence of this situation.
Q.5. Chairman Bernanke and Chairman Bair, have your agencies
developed prototypes or templates for what information will be
contained in living wills and for how frequently updates of
living wills might be required of certain financial
institutions?
Do you intend to develop living wills in concert with the
international regulatory community and, if so, have you made
any progress yet?
A.5. The FDIC and the Federal Reserve Board are in the initial
stages of exploring the joint rulemaking on Resolution Plans
(or ``living wills'') required by Section 165(d) of the Dodd-
Frank Act. We will work with the Federal Reserve Board to
produce a consensus template on information to be contained in
the living wills and the required updating frequency within the
18 month timeframe required by the Act. In addition to the
Dodd-Frank Act requirements, the FDIC already has been working
extensively with domestic and international supervisors,
especially over the past 2 years, to establish requirements for
living wills with respect to certain large and complex,
internationally active financial firms.
In May 2010, the FDIC issued a notice of proposed
rulemaking entitled ``Special Reporting, Analysis and
Contingent Resolution Plans at Certain Large Insured Depository
Institutions'' (75 FR 27464 (May 17, 2010)). This proposed rule
would require specific reporting and resolution planning by
insured depository institutions with greater than $10 billion
in total assets that are owned or controlled by a parent with
total assets of more than $100 billion. This proposed rule
articulated minimum requirements for a resolution plan,
including information on organizational structure; business
activities, relationships and counterparty exposures; capital
structure; intragroup funding, transactions, accounts,
exposures and concentrations; cross-border elements and any
other material factors. The proposed rule would require annual
updates with the additional proviso that ``material information
elements should be updated more frequently as reasonable and
necessary, given the risk profile and structure of the
institution relative to its affiliates and to demonstrate the
capacity to provide specific information when needed (e.g.,
deposit flows, intragroup funding flows, short-term funding,
derivatives transactions, or material changes to capital
structure or sources).''
Additionally, at the 2009 Pittsburgh G20 Summit, in
response to the recent financial crisis, the G20 Leaders called
on the Financial Stability Board (FSB) to propose possible
measures to address the ``too-big-to-fail'' and moral hazard
concerns associated with systemically important financial
institutions. Specifically, the G20 Leaders called for the
development of ``internationally consistent firm-specific
contingency and resolution plans.'' The FSB considered the
issue and presented its Principles for Cross-border Cooperation
on Crisis Management in April 2009 at the London G20 Summit.
The FSB principles were based on the ongoing work of the Basel
Committee on Banking Supervision's Cross-border Bank Resolution
Group (CBRG) (cochaired by the FDIC since 2007). The CBRG's
detailed final Report and Recommendations were issued on March
18, 2010, emphasizing the importance of preplanning and the
development of practical and credible plans to promote
resiliency in periods of severe financial distress and to
facilitate a rapid resolution should that be necessary.
The FSB's Principles for Cross-Border Cooperation on Crisis
Management commit national authorities to ensure that firms
develop adequate contingency plans and highlight that
information needs are paramount, including information
regarding group structure and legal, financial and operational
intragroup dependencies; the interlinkages between the firm and
financial system (e.g., in markets and infrastructures) in each
jurisdiction in which it operates; and potential impediments to
a coordinated solution stemming from the legal frameworks and
bank resolution procedures of the countries in which the firm
operates. The FSB Cross-border Crisis Management Working Group
has recommended that supervisors ensure that firms are capable
of supplying in a timely fashion the information that may be
required by the authorities in managing a financial crisis. The
FSB recommendations strongly encourage firms to maintain
contingency plans and procedures for use in a wind-down
situation (e.g., fact sheets that could easily be used by
insolvency practitioners) and to regularly review these plans
to ensure that they remain accurate and adequate.
U.S. and international supervisors, along with the firms,
have been active and responsive to the FSB's requirements.
Development of resolution plans is progressing well in most
jurisdictions, with individual countries being at various
stages of development. Crisis management group sessions have
been conducted and the FDIC and its sister agencies are
committed and engaged in the iterative process of establishing
viable crisis management plans.
Q.6. The Financial Stabilty Oversight Council is an important
feature of Dodd-Frank. During the conference, my amendment was
adopted to clarify the role of the Council and the Federal
Reserve. My amendment gave the Council responsibility for
financial stability regulation. Up to that point, the
legislation had colocated this responsibility at the Fed and
the Council. The Congressional intent is clear that you, as
members of the Council, are responsible for all policy matters
related to financial stability. After the Council acts,
implementation of your policy determinations will fall to the
individual Federal financial regulators, including, of course,
the Fed.
With this in mind, I would like each of you to comment on
your preparations to serve on the Council: Have you directed
your staff to examine and study all of the issues that will
come before you? Are you prepared to participate on the
Council, not as a rubber stamp for the Chairman of the Council,
but as a fully informed individual participant?
A.6. As you point out, when the Dodd-Frank Act established the
Council, it vested the Council with the responsibility for
identifying financial companies and practices that could create
systemic risk and taking action to mitigate those identified
risks. In order to accomplish these challenging tasks, the
Council needs experienced and capable staff from each of the
member agencies to work as a team in implementing the Council's
responsibilities. The FDIC is an active participant on a number
of staff-level interagency working groups analyzing and
providing input on the development of study reports and
rulemakings. These working groups develop proposals with
appropriate direction and review from senior agency management,
including the FDIC Chairman. For example, prior to the first
meeting of the Council on October 1, 2010, an interagency
working group developed and vetted the Advance Notice of
Proposed Rulemaking aimed at collecting information on the
types of things the Council should consider when deciding
whether a nonbank financial company should be subject to
heightened prudential supervision by the Federal Reserve and
subject to the resolution plan requirement in section 165(d) of
the Act.
With this in mind, we have a significant number of staff
throughout the FDIC in various disciplines that are diligently
and carefully analyzing and developing positions on Council-
related issues. In addition, the FDIC recently established the
Office of Complex Financial Institutions, which, in part, was
created to support the priority of systemic risk oversight.
The FDIC is committed to participating on the Council as a
fully informed and engaged participant. In many ways, the
Council's success will be determined by the willingness of its
members to work together closely to implement the Council's
duties. And, while the FDIC looks forward to collaborating with
our colleagues to assure continued progress in strengthening
the stability of our financial system, I also value the diverse
views and opinions that each agency's unique perspective and
expertise will bring to the table. By utilizing each agency's
respective authorities and individual areas of specialized
expertise to close regulatory gaps, the Council will be able to
successfully carry out its objectives and prevent financial
crises in the future.
Q.7. Secretary Geithner has argued that there is a strong case
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published
a paper that proposes Government guarantees of a wide range of
asset backed securities, including those backed by mortgages,
credit cards, autos, student loans, commercial real estate, and
covered bonds. While some may believe that the Government will
charge fair prices for Government guarantees, the history of
Government run insurance programs suggests that things will not
go well.
Does anyone on the panel support extending or increasing
Government insurance against losses on asset backed securities
which, it seems to me, socializes risk, puts taxpayers on the
hook for losses, and protects Wall Street against losses?
A.7. Asset-backed securitization has grown in recent decades
into an important means of channeling global savings into
credit products for U.S. businesses and households outside of
the traditional banking system. However, misaligned incentives
and risky practices in this ``shadow banking system'' directly
contributed to the housing bubble and the financial crisis.
While the Dodd-Frank Act contains a number of measures to
reform private securitization and the institutions that engage
in this process, future legislation will be needed to reform
the Government-sponsored mortgage enterprises (GSEs), whose
implicit Federal backing also contributed to excessive growth
and risk taking by these companies.
The financial reforms of the 1930s were designed to provide
greater stability in our economy and to ensure that credit
remains available to U.S. businesses and households in good
times and bad. Following the recent financial crisis, more
research should be done on the nature of the market failures
that can arise in securitized asset markets and the extent to
which Government backing is needed to address those market
failures.
Any proposal for either a continuation of Federal backing
for mortgage instruments or an expanded Federal role in backing
other types of assets must meet three basic tests. First, it
must respond to a clearly defined market failure that can be
addressed by Government involvement. Second, any Government
backstop must be explicit in nature, clearly delineated in
advance and accounted for in a transparent fashion on the
Government balance sheet. Third, any type of explicit
Government backstop must be actuarially priced so that its
direct beneficiaries--the lenders and borrowers in these
markets--end up footing the bill instead of taxpayers.
These are the basic rules that govern the FDIC's program of
Federal deposit insurance. The confidence of the American
public in the FDIC guarantee was one of the stabilizing forces
in this crisis that helped to prevent an outcome that could
have been far worse. As financial markets continue to evolve in
the future, there will always be an essential role for the
Federal Government in preserving financial stability. But it is
incumbent on us, as stewards of that Government involvement, to
write and enforce a clear set of rules that protect taxpayers
and prevent bailouts that undermine both fairness and financial
stability.
Q.8. Please provide the Committee with an implementation
schedule that includes a list of the rules and studies that
your agency is responsible for promulgating or conducting under
Dodd-Frank and the date by which you intend to complete each
rule or study.
A.8. The FDIC has committed to implement the reforms required
by the Dodd-Frank Act as quickly and transparently as possible,
and within the statutory deadlines, where applicable. As part
of the FDIC's efforts to improve transparency, the agency posts
its planned and completed initiatives to the publicly available
FDIC Initiatives Web site. The site, available at http://
www.tdic.gov/regulations/reform/initiativcs.html and presented
at the end of this response, includes the FDIC's financial
reform initiatives completed to date and projected through the
end of the first quarter of 2011. This site is updated weekly
to reflect progress made. We hope this site will be a useful
tool for finding up-to-date information on the FDIC's financial
reform efforts. By the end of this quarter, the projections
will be extended to the second quarter of 2011 and will
continue to be updated quarterly. An additional resource for
financial reform implementation information is the U.S.
Department of the Treasury's Integrated Implementation Roadmap,
available at http://www.treasury.gov/FSOC/docs/
FSOC%20Integrated%20Roadmap%20-%20October%201.pdf. This
document includes implementation information for many of the
interagency rules, with timelines extending through the end of
2011.
The following table includes the rules the FDIC is
responsible for promulgating, as well as the applicable
statutory deadlines, if any. Items currently included on the
FDIC Initiatives Web site with a projected completion date are
marked with an asterisk. In some instances, the Dodd-Frank Act
provides for agency discretion in rulemaking. Where the FDIC
has exercised its discretion not to promulgate a rule at this
time, it has not been listed below.
Q.9. Please provide the Committee with an implementation
schedule that includes a list of the reorganizational tasks
your agency will undertake to fulfill the mandates of Dodd-
Frank and the date by which you intend to complete each task.
A.9. 1. In August, the FDIC Board of Directors approved the
creation of an Office of Complex Financial Institutions (OCFI)
that will:
perform continuous review and oversight of banks
and bank holding companies with more than $100 billion
in assets, as well as nonbank financial companies
designated as systemically important by the FSOC to be
supervised by the FRB;
monitor risks among the largest and most complex
financial institutions and develop plans for the
contingency that one or more of these companies might
fail; and
carry out the FDIC's new authority to implement
orderly liquidations of systemically important bank
holding companies and nonbank financial companies that
fail.
2. We are establishing a new division within FDIC with
consumer protection as its focus. The new Division of Depositor
and Consumer Protection will be created through the transition
of staff from our existing Division of Supervision and Consumer
Protection. We also will transfer employees from our existing
research staff to the new division to perform consumer research
and Home Mortgage Disclosure Act (HMDA)/fair lending analysis.
On October 12, the FDIC announced the appointment of Mark
Pearce as director of the new division. He will assist in the
orderly set-up of the division by January 2011. We also are in
the process of strengthening our legal workforce dedicated to
supporting depositor and consumer protection functions.
3. In addition, the FDIC--jointly with the Board of
Governors, the OCC, and the OTS--is developing an
implementation plan for the transfer of OTS powers and
personnel. Upon completion of the implementation plan, it will
be forwarded to the Committee on Banking, Housing, and Urban
Affairs, among others, for review. Any additional
organizational changes required will be outlined in that
document.
4. Section 342 of the Dodd-Frank Act requires the FDIC and
other specified agencies to establish an Office of Minority and
Women Inclusion (OMWI) within 6 months of enactment of the new
law, which is January 21, 2010. We are currently considering
how many additional staff will be needed, how best to integrate
the work of the OMWI with our operating divisions, and whether
to advertise the position of Office Director for applicants
outside the FDIC. While our Board of Directors has not yet made
any final decisions on how the Office will be organized and led
or how many staff will be authorized, the FDIC is having robust
discussions among senior management on how to best transition
our existing functions to the OMWI and expand the functions to
include the important new responsibilities under Section 342 of
the Dodd-Frank Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM SHEILA C. BAIR
Q.1. Over the last 15 years, the 6 biggest banks grew from
having assets equal to 17 percent of GDP to 63 percent of GDP.
The four largest banks control about 48 percent of the total
assets in the Nation's banking system. And the 5 largest dealer
banks control 80 percent of the derivatives market and account
for 96 percent of the exposure to credit derivatives.
Part of the Volcker Rule, section 622 of the Dodd-Frank
Act, requires the Financial Stabilty Oversight Council (FSOC),
of which your organizations are a member, to study and make
recommendations concerning the effects of financial sector
concentration on financial stability, moral hazard, efficiency,
and competitiveness in the financial system. Subject to these
recommendations, no company will be permitted to hold more than
10 percent of the liabilities held by all financial companies,
with some significant exceptions.
What effect does concentration in the financial industry
have on financial stability, moral hazard, efficiency, and
competitiveness?
A.1. Financial firms can reduce risk by diversifying across
product lines and by serving wider geographic areas. The risk
reducing benefit is realized as a financial firm grows in size
and is able to offer more products and operate in wider
markets. However, once a firm operates across almost all
available business lines on a nationwide basis, it has
exhausted any benefit from diversification. At this point, the
firm has a risk profile that mirrors the overall risk of the
market and general economic conditions. Risk is further
concentrated when these financial firms become important
counterparties and service providers to many transactions that
facilitate financial intermediation in the economy. These
issues became apparent during the financial crisis when large,
complex financial organizations--because they are so
interconnected--contributed to instability of the financial
system.
Q.2. Given that the six biggest banks alone have about $7.4
trillion in liabilities, almost 53 percent of GDP, do you think
this provision will meaningfully restrict the size of financial
institutions?
A.2. Section 622 will restrict growth through merger that would
put the combined firm above the 10 percent limit as implemented
by regulation. However, as this question and the preamble
suggest, this still represents significant concentration of
industry assets and liabilities in a handful of companies.
As we have discussed in prior testimony, the notion of
``Too-Big-to-Fail'' (TBTF) led to a system of ``privatized
profits and socialized risks.'' This was exacerbated by other
misaligned incentives throughout the financial system that led
to a substantial buildup of risks in the system and the
resulting crisis. The key to addressing the concentration and
moral hazard issue is not only setting size and market share
limits, but more importantly, addressing market perceptions
that certain institutions are TBTF. If TBTF can be effectively
eliminated, it will realign systemically important
institutions' risk and reward framework and instill market
discipline on investors and counterparties.
Q.3. How should this rule be implemented to address financial
stability, moral hazard, efficiency, and competitiveness?
A.3. We are in agreement that limiting a single institution's
size is prudent and helps reduce concentration risk to not only
the deposit insurance fund but to the broader financial system.
The FDIC and other members of the FSOC are participating in the
study and recommendations required by Section 622 of the Dodd-
Frank Act. The study should address many of your concerns about
concentration in the financial industry including how
concentration affects financial stability, moral hazard, and
the efficiency and competitiveness of U.S. financial firms. The
results of the study are due in January.
Q.4. Can you identify any potential loopholes in the existing
provision?
A.4. Section 622 gives the FSOC wide latitude to make
recommendations to the Board of Governors to issue regulations
under the section, including definition of terms, as necessary.
This allows the FSOC and the Board to close loopholes that may
appear.
Q.5. As I've made clear before, I think the largest financial
firms in this country are just too large, and that their
massive size threatens our economic security and puts us at
risk in future crises.
I think the rise of proprietary trading was one of the key
drivers behind the massive growth in our largest financial
institutions. Firms were taking on ever increasing prop trading
positions, often with highly unstable short term financing, and
when things froze up, the house of cards collapsed. The Volcker
Rule looks to stop this risk.
I know that my colleagues, Senator Merkley and Senator
Levin, drafted section 619 of the Dodd-Frank Act to ensure
broad coverage of the prohibition on proprietary trading by
banks, and meaningful restrictions on the largest nonbank
financial firms. Nevertheless, one of the concerns I have is
that firms may try to evade the restrictions. Particularly, I'm
concerned that if the regulators set a definition of ``trading
account'' that is too narrow, it might not capture all of the
risks of proprietary trading. These evasions could only happen
if the regulators ignore the clear direction of the law to stop
proprietary trading.
Are you prepared to take a broad view on the definition of
``trading account'' and examine and prevent proprietary
trading, wherever it occurs?
A.5. Historically, regulatory capital requirements for trading
positions have been lower than requirements for banking
positions, providing firms with an incentive to take a broad
view of the trading account. However, we understand that the
advent of the Volcker Rule could realign these incentives such
that firms may be motivated to move some proprietary trading
positions outside the trading account. As a result, we agree
that the definition of ``trading account'' should be viewed
broadly.
We believe the exemptions to the prohibition on proprietary
trading--particularly the exemptions related to customer
accommodation, hedging, and market-making and underwriting--
present a more significant threat to the adoption of a
meaningful ban on proprietary trading. We will work with the
other regulators to define these exemptions as narrowly as
possible.
Q.6. In short, are you prepared to use the full power of the
Merkley-Levin provisions to cut the size and riskiness of our
banks so they get back to the business of lending to families
and businesses?
A.6. The provisions that strictly limit investments in hedge
funds and private equity firms are important checks on the
ability of banking organizations to increase both their size
and risk profile through opaque structures.
The Basel Committee on Banking Supervision set the so-
called ``Basel II'' minimum capital requirements for banks at 8
percent, with an additional 2.5 percent buffer. But a recent
study by the Bank for International Settements (BIS) suggests
that the optimal capital ratio would actually be about 13
percent. Going forward, the FSOC will recommend capital
requirements for systemically important nonbank financial
companies.
Q.7. Do you favor increasing capital for systemically important
financial companies above the 10.5 percent Basel III ratio, and
closer to the 13 percent number?
A.7. The regulatory capital requirements for banks should
reflect the risk of the bank itself and the risk the bank poses
to the broader financial system. For large systemically
important banks, we have been working with the Basel Committee
on Banking Supervision and the Financial Stability Board, as
well as the other banking regulators, to develop systemic
capital surcharges for systemically important banks. The total
risk-based capital requirement as proposed by the Basel
Committee is 10.5 percent. Any systemic surcharge would be
added on top of that 10.5 percent minimum requirement.
Q.8. Would you be comfortable establishing progressive capital
requirements that increase as institutions grow larger?
A.8. The regulators are discussing how we might apply a
graduated surcharge for systemically important banks. It is
certainly a credible option.
Q.9. Wall Street often argues that higher capital means higher
costs for borrowers, and BIS has estimated that for each 1
percent of increased capital, banks will have to raise rates by
15 basis points (0.15 percent). Do you believe that banks could
adapt to new capital requirements in ways that do not pass
costs on to customers and borrowers, for example, by cutting
outsized salaries and bonuses?
A.9. One of the very clear lessons of the recent financial
crisis is that banks did not have enough capital or enough high
quality capital. Increasing the amount and quality of capital
does have a cost and the BIS estimate does provide a reasonable
benchmark. Although the cost of capital is an element of
pricing of credit, pricing also should reflect risk inherent in
credit exposures. The financial crisis revealed that banks
offered credit products at artificially low prices. As these
prices are adjusted to more appropriately reflect risk, the
cost of some credit products will increase and others may
decrease.
Although there is not a direct correlation between
compensation and cost of credit, the compensation issues are
being addressed as mandated by section 956 of the Dodd-Frank
Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM SHEILA C. BAIR
Q.1. Section 1022(b) of the Dodd-Frank bill requires that in
rulemaking, the Consumer Financial Protection Bureau shall
consider ``the impact of proposed rules on covered persons, as
described in section 1026, and the impact on consumers in rural
areas.''
What specific guidance and resources will the FDIC and the
Federal Reserve provide to the Bureau to ensure that it can
adequately understand the impact of proposed rules on community
banks with assets of less than $10 billion?
A.1. As the primary supervisor of community banks and their
Federal deposit insurer, the FDIC is particularly sensitive to
the regulatory environment in which community banks operate.
With regard to the many consumer financial protection laws for
which the FDIC has examination and enforcement authority, but
not rule-writing authority, the FDIC has long made it a
practice to convey detailed information or concerns to the
agencies with rulemaking authority. The examples include, but
are not limited to, the Truth in Lending Act, the Electronic
Fund Transfer Act, the Real Estate Settlement Procedures Act,
and Section 5 of the Federal Trade Commission Act relating to
Unfair and Deceptive Acts or Practices.
Under the Dodd-Frank Act, the FDIC will not have primary
rulemaking authority for consumer financial protection laws;
however, the FDIC will retain consumer protection examination
and enforcement authority for institutions with assets of $10
billion or less. The Dodd-Frank Act will likely strengthen the
consultative process in consumer financial protection
rulemaking since the Act mandates prior consultation by the
Bureau with the FDIC in many provisions (such as sections
1022(b), 1031(e), and 1015, as well as in various specific
sections of consumer laws). It will be critically important for
the FDIC to communicate to the Bureau regarding how proposed
rules could impact the FDIC's supervisory program and the
affected FDIC supervised institutions. The information will be
based on a variety of sources, including extensive research,
supervisory experience, and outreach efforts. As a result, it
will be a priority for the FDIC to provide input on proposed
rules to the Consumer Financial Protection Bureau so that the
Bureau has the benefit of the FDIC's long experience in
supervising community banks.
Q.2. What infrastructure will the Fed and FDIC develop to
ensure the coordination and sharing of information with the
Bureau in cases in which the rule writing and examination and
enforcement authority is split among agencies?
A.2. Under the Dodd-Frank Act, an infrastructure will be in
place to ensure coordination and information sharing at the
agency principal and staff levels, as well as through the
interagency process.
First, the Director of the Consumer Financial Protection
Bureau will be a member of the FDIC's Board. In this role,
there will be opportunities to communicate on rule writing,
examinations, and enforcement authority at the highest levels
between the two agencies.
Second, following enactment of the Dodd-Frank Act, the FDIC
approved the establishment of a new division--the Division of
Depositor and Consumer Protection. One of the key reasons for
creating this division was to ensure that the FDIC has a strong
infrastructure in place to conduct ongoing dialogue with the
new Consumer Financial Protection Bureau at the staff level in
order to provide the FDIC's perspective as the supervisor of
community banks.
Finally, the Consumer Compliance Task Force of the Federal
Financial Institutions Examination Council (FFIEC) has long
coordinated the development of examination procedures, and rule
writing when appropriate, among the Federal banking regulators.
As a result, the Federal banking agencies already have standard
operating procedures in place for when we need to jointly
develop examination procedures or regulations. In the future,
the Director of the Bureau will also be a member of the FFIEC.
We expect that although the Bureau will have sole rulemaking
authority for many consumer protection regulations, all of the
agencies that examine for and enforce these laws will continue
to jointly develop examination procedures through our existing
collaborative process, which will include the Bureau.
Q.3. The Dodd-Frank bill included provisions requiring the FDIC
to change its insurance assessment based from domestic deposits
to total assets less tangible equity. What is the FDIC's
timeframe for implementing this change, including the
publishing of the proposed rule, comment period and
implementation date of the new assessment base for financial
institutions?
A.3. As a result of the Dodd-Frank Act, an insured depository
institution's (IDI's) assessment base will be calculated using
average consolidated total assets less average tangible equity
(with the possible exception of banker's banks and custodial
banks, which the Dodd-Frank Act allows the FDIC to treat
differently). This change constitutes a substantial revision to
the deposit assessment system, which, by statute, can only be
made after notice and opportunity for comment. Accordingly, on
November 9, 2010, the FDIC's Board of Directors adopted a
notice for proposed rulemaking with request for comment on
changes to the assessment base and their anticipated effect.
The proposed rulemaking has a 45 day comment period and
proposes to make the changes effective April 1, 2011.
Q.4. Can you provide me an update on your agencies progress in
implementing the property appraisal requirements of Title XIV
of Dodd-Frank? What process will you use to develop and
implement these requirements?
A.4. Title XIV contains several provisions pertaining to
appraisals for transactions secured by a consumer's principal
dwelling. Several provisions require joint rules to be
promulgated, which includes drafting the joint proposed rules,
soliciting public comments, and finalizing those rules.
Therefore, the FDIC is working closely with the Federal Reserve
Board, the Office of the Comptroller of the Currency, the
National Credit Union Administration, the U.S. Department of
Housing and Urban Development, and the Federal Housing Finance
Agency to address these provisions and rulemakings, as
appropriate. In addition, once the Consumer Financial
Protection Bureau becomes operational, this agency also will
participate in interagency efforts relating to the
implementation of many of these provisions.
In September 2010, the FDIC, along with the other agencies,
established interagency working groups which are meeting to
study and discuss key implementation issues. These groups now
are identifying specific appraisal-related issues relative to
transactions secured by a consumer's principal dwelling that
will need to be addressed by proposed rules or interpretive
guidance.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
FROM SHEILA C. BAIR
Q.1. In February 2008, the FDIC began a two-year pilot project
to review affordable and responsible small-dollar loan programs
in financial institutions. Title XII of the Dodd Frank Act
calls for the establishment of a small dollar loan program
within the Department of Treasury's Community Development
Financial Institutions Fund. What has the FDIC learned from its
pilot program that would be helpful for Treasury to consider as
it implements its own small dollar loan program?
A.1. The FDIC's Small-Dollar Loan pilot was a two-year case
study designed to illustrate the feasibility of banks offering
small-dollar loans as an alternative to high-cost credit
products, like payday loans or fee-based overdraft programs.
The pilot ran from February 2008 to February 2010, and
concluded with 28 participating banks ranging in asset size
from $28 million to $10 billion. Cumulatively, during the
pilot, banks made more than 34,400 loans with a principal
balance of about $40.2 million. While delinquencies for loans
made under the pilot were much higher than for personal
unsecured loans in general, the loans had similar default rates
to the general population. This fact--that loans made under the
pilot are no more likely to default than other similar loans--
is an important takeaway from the pilot that might be helpful
to the Treasury as it implements its program.
Regarding other important lessons learned, a key point was
that, as an overall program, most of the bankers did not view
the small-dollar loans as a stand-alone profit generator.
Rather, they indicated that long-term relationship building was
the primary goal for their small dollar loan program. The
bankers are seeking to generate long-term profits by using the
small dollar product to build or retain multiproduct
relationships.
In terms of actual product elements, bankers indicated that
loan terms longer than just a few pay periods were critical for
loan performance in that they gave consumers more time to
recover from financial emergencies. While some banks
experimented with shorter loan terms, in all but one rather
specialized case, 90 days emerged as the bare minimum with
averages hovering much longer, at 9 months or more.
Streamlined, but solid underwriting, also was considered
important for mitigating defaults.
The pilot also found that in general, small-dollar loan
programs that emphasized savings linked to credit and delivery
of financial education tended to have lower default rates than
those that did not. Given the limited sample size and
differences in program features, it is difficult to determine
whether and the extent to which linked savings or formal
financial education directly affected performance, however,
there were some indications that these could be factors.
Another interesting finding in this area was the difference of
opinion among pilot bankers about mandating linked savings and
financial education. Some bankers believed that these items had
to be hardwired into the small-dollar lending process to break
the cycle of high-cost lending. Others believed that adding
features for a loan complicates the small-dollar loan product
and drives stressed consumers into the ease of the payday
process.
The best practices and lessons learned from the pilot
resulted in the following model template of product design and
delivery elements for small-dollar loans that might be of use
to the Treasury. The template is simple and it is replicable in
that it requires no particular technology or infrastructure
investment. It also could help banks adhere to existing
regulatory guidance that requires banks to monitor excessive
overdraft use and offer available alternatives to qualified
consumers.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM SHEILA C. BAIR
Q.1. Regulatory Structure for Volcker Rule. As you know, the
objectives of the Merkley-Levin Volcker Rule are two-fold: (1)
to address the specific risks to our financial stability caused
by proprietary trades gone bad, and (2) to take on the
conflicts of interests in proprietary trading.
Ensuring effective oversight will be challenging, because
the issues are complicated. As you could see from the exchange
at the hearing between Senator Reed and Chairman Bernanke, with
interjections by Chairman Shapiro and Mr. Walsh, I and others
are beginning to come of the view that there will have to be
oversight at two levels. First, there will need to be real-time
(or as close as practicable) monitoring and enforcement at the
individual trade-by-trade level, which looks to whether any
given transaction is proprietary trading. This will be
necessary to ensure that the permitted activities are not
abused. Second, there will need to be macro-level reviews of
policies and procedures, and overall portfolio holdings. This
will be necessary to ensure that proprietary positions and
conflicts of interest are not cropping up despite the
restrictions. In addition to monitoring and enforcing the
proprietary trading and conflicts of interest restrictions,
regulators are also tasked with setting appropriate capital
charges, both for permitted activities, and, in the instances
of nonbank financial companies supervised by the Board, capital
charges for all covered activities.
Your agencies appear to have somewhat different strengths
in these areas, with perhaps the SEC and CFTC having greater
experience policing the securities and derivatives markets for
trading violations, and the banking regulators having greater
experience evaluating the safety and soundness of firms and
setting appropriate capital charges and levels.
Share with me your view about the strengths you believe
your agency brings to the oversight and enforcement of the
Merkley-Levin Volcker Rule? Are you committed to working with
your fellow regulators to best use your agency's strengths in
the effort to keep our financial system safe?
A.1. As you indicated, the FDIC has significant experience in
evaluating the safety and soundness of financial firms and
specific investments, as well as setting appropriate regulatory
capital requirements. We are prepared to work closely with our
fellow regulators and use the skills and abilities of the FDIC
to keep the financial system safe. We view the implementation
of a strong Volcker Rule as a vital tool in this effort.
Q.2. Data Collection. The Dodd-Frank Act requires a significant
amount of new data collection and storage, particularly in the
derivatives arena. The SEC and CFTC have made a priority of new
data collection in a number of areas. Collection and the
ability to automate reviews of the data will be critical to
enforcing a wide range of mandates under Dodd-Frank, including
derivatives position limits, the Volcker Rule provisions, and
other parts of the bill. At a minimum, your staffs will need to
know who's making trades, the prices, how long firms hold onto
their positions, and whether and how their positions are
hedged.
Where is your agency in terms of thinking through the
relevant data you will need to collect?
A.2. Although the CFTC and SEC are responsible for establishing
data collection requirements, the FDIC staff has developed a
list of the relevant data fields and is in the process of
communicating these data needs directly to these agencies. As
you indicate in your question, these revolve around the volume
of positions and the purpose of the trade (hedge, speculate,
make a market). As deposit insurer, the FDIC needs to be able
to identify potential risks that are building within the
financial system as a result of derivatives concentrations.
Moreover, the FDIC has a specific mission regarding the
disposition of over-the-counter (OTC) derivatives in the event
of the failure of an insured depository or systemically
significant market participant. In an earlier rulemaking, the
FDIC developed data maintenance and reporting standards for the
OTC derivatives in troubled banks; we refer to this as the
``QFC Rule.'' Because the FDIC must make a decision on the
disposition of the qualifying financial contracts (QFCs) one
day after the appointment of the FDIC as receiver of the failed
bank, an orderly resolution demands that a full understanding
of the positions and the purpose of the trades be known in
advance.
Q.3. Are there any major challenges you see in being able to
collect and analyze that data in real-time, so as to ensure
compliance with these various restrictions?
A.3. It is not clear that all of the analysis would need to be
done in real time. Certainly, real time analysis would be
needed to assure markets are functioning in an orderly manner
and that violation of SEC or CFTC rules are not occurring. In
general, the positions that banking organizations put on their
books are not reversed during the course of one day. Moreover,
data integrity is very important; therefore, using data that
have been confirmed by both parties, or so-called ``paired
trades,'' should be the cornerstone of data accuracy for data
being housed in the data repositories. For accuracy and as it
pertains to the ultimate use, position reporting may not need
to be in real time.
In terms of challenges, the greatest challenge likely may
be obtaining accurate prices of positions in the repositories.
Unlike the exchange-traded markets, where prices are generally
set through a transparent market, the OTC contract values are
usually marked-to-model rather than marked-to-market.
Particularly for the FDIC's receivership responsibilities,
knowledge of the market value of the contracts aggregated by
exposure to a given counterparty (and the family of affiliates)
and the value of collateral (and the jurisdiction in which it
is being held) is critical.
Q.4. How do you see the newly created Office of Financial
Research playing into this process?
A.4. The Office of Financial Research (OFR) will be very
important for the analysis of the data and fostering data
reporting infrastructure standardization. The OFR may be able
to provide assistance to regulators by developing data
standards. Recent public discussions by senior Treasury
officials have emphasized the need to create standardized
identifiers for counterparties, trade types, etc., to be able
to analyze meaningfully the volume of information that will be
housed in multiple repositories. For example, the trade
repositories likely will be based on asset classes, such as
interest rates, foreign exchange, equities, etc. Without
standardized identifiers, the ability to aggregate positions
across trade repositories for a given banking organization will
be limited.
Q.5. Cross-border Resolution. I know FDIC and to some extent
others have been working very diligently to implement the new
resolution authority for our Nation's large complex financial
institutions--which owes so much to my colleagues on this
Committee from Virginia and Tennessee.
But one of the areas I want to keep an eye on--and on which
I offered an amendment during financial reform to provide
additional oversight of--is how to make that resolution work
for large firms operating across multiple national borders.
Where are we in terms of making the Dodd-Frank resolution
authority work for large, systemically significant financial
firms operating across borders? How cooperative have our
international partners been in this effort?
A.5. We have received good cooperation from international
supervisors regarding the development of resolution plans for
cross-border firms. In January and in July of this year,
multiple day meetings were held with international supervisors
related to crisis management planning, specifically including
resolution challenges facing the FDIC. Staff-level meetings
have been ongoing with the United Kingdom, in furtherance of
and pursuant to a Memorandum of Understanding (MOU) with the
Bank of England specifically related to resolutions and crisis
management. The FDIC continues work with other international
regulators as well to develop resolution and crisis management
MOUs.
Various challenges to cross-border implementation of
resolutions have been identified and continue to exist. These
relate to different insolvency regimes in national
jurisdictions, which cause legal impediments to effectuating a
cross-border resolution (e.g., differences in creditor rights,
contractual termination rights, impediments to transferring
assets and liabilities, data protection and disclosure rules),
as well as operational challenges (e.g., continued access to
payment and settlement systems, functioning of operations cross
time zones around the world). These concerns are being
discussed bilaterally, as well as at the multilateral level,
with organizations such as the FSB, the International Monetary
Fund and the Basel Committee.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM SHEILA C. BAIR
Q.1. Chairman Bair, I cannot tell you how many times I have
heard community banks complain about how their regulators will
not allow them to make good, solid, small-business loans.
Congress responded to the lending crisis by creating another
TARP-like structure for small business lending, which I believe
was a terrible idea. To what extent is the FDIC guilty of
smothering even solid loans, and is the Fed or other regulators
to blame?
A.1. The FDIC is profoundly concerned about the availability of
small business credit. Clearly, the recession and real estate
crisis have caused banks to curtail loan originations as they
seek to preserve capital and workout an increasing level of
nonperforming assets. In addition, rapid collateral value
depreciation is influencing banks' small business lending and
loan restructuring decisions as loan-to-value ratios, in
certain instances, have deteriorated beyond lenders' internal
underwriting standards. We have attempted to address these
issues and have taken actions internally to ensure our
supervisory practices encourage, rather than hinder, the
availability of small business credit. As you know, small
businesses are a key driver of growth in our economy and likely
will be the first enterprises to create jobs and spur an
expansion.
In response to the great public concern over small business
credit availability, the regulators issued the Interagency
Statement on Meeting the Credit Needs of Creditworthy Small
Business Borrowers on February 5, 2010, to encourage prudent
small business lending and emphasize that examiners will apply
a balanced approach in evaluating loans. The guidance states
that examiners will not discourage prudent small business
lending or criticize loans solely due to a decline in
collateral value. This guidance was issued subsequent to the
October 30, 2009, Policy Statement on Prudent Commercial Real
Estate Workouts that encourages banks to restructure loans for
commercial real estate mortgage customers experiencing
difficulties making payments. This Statement applies
appropriate and long-standing supervisory principles in a
manner that recognizes pragmatic actions by lenders and
borrowers are necessary to weather this difficult economic
period. The FDIC believes these Statements have helped banks
become more comfortable extending and restructuring soundly
underwritten small business loans.
The FDIC has not changed its expectations for prudent small
business lending. We provide banks with considerable
flexibility in dealing with customer relationships and managing
loan portfolios, and will continue to advocate for an expansion
of prudent small business lending at the institutions we
supervise.
Q.2. What is the total number of bank failures over the past 3
years, and have the failures of smaller institutions
contributed to the growing trend of financial concentration in
large banks?
A.2. Since the beginning of 2008 there have been 311 insured
depository institution failures (as of November 15, 2010).
There were 25 in 2008, 140 in 2009 and 146 as of November 15.
The failure of small insured depository institutions has
not contributed to significant financial concentrations among
large banks. Of the 311 failures over the past 3 years, 302
have been small institutions, defined as those with total
assets of less than $10 billion. These smaller institutions
amount to only 3.9 percent of the more than 7,800 insured
depository institutions in existence today. The top 50 insured
depository institutions hold 72 percent of total banking
assets. But the top 50 institutions accounted for the
acquisition of only 29 of the small failed institutions since
2008, or less than 10 percent of the total number. The trend
toward increased financial concentration over the past several
years has been driven mainly by the acquisition by the largest
financial companies of other large companies, in many cases
involving the acquisition of a troubled financial company
without FDIC assistance.
Q.3. Is there anything in the Dodd-Frank law that will prevent
the concentration of big banks, or will the fact that ``too-
big-to-fail'' institutions will get both special Fed regulation
and access to a new FDIC resolution process (with unlimited
ability to get loans from the Treasury) actually encourage
investors to leave smaller institutions and flock to the ones
that are too big to fail?
A.3. Section 622 of the Dodd-Frank Act specifically restricts
mergers of large financial firms that would result in their
total liabilities exceeding 10 percent of the industry's total
liabilities. The Council is required to complete a study on the
concentration limit by late January 2011. There is currently in
place a similar restriction on bank mergers based on domestic
deposit concentrations.
The Dodd-Frank Title II orderly liquidation authority
allowing the FDIC to resolve large nonbank financial firms is
specifically designed to impose losses on the stockholders and
bond holders of Systemically Important Nonbank Financial
Companies or Bank Holding Companies with no cost to the
American taxpayer. These new authorities will level the playing
field by putting large financial firm investors at risk.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM SHEILA C. BAIR
Q.1. Dodd-Frank requires that risk retention be jointly
considered by the regulators for each different type of asset
and includes a specific statutory mandate related to any
potential reforms of the commercial mortgage-backed securities
market to limit disruption. In light of the FDIC's unilateral
decision to add an across the board risk retention requirement
in the safe harbor rule, which the OCC opposed, how do you plan
to coordinate and reconcile disagreements in the joint
rulemaking?
A.1. The FDIC undertook to revise its original safe harbor rule
(initially adopted in 2000) in light of accounting changes that
came into effect for reporting periods after November 15, 2009.
Nothing in this revised safe harbor rule (the Rule) is
inconsistent with the Dodd-Frank Act. The provisions of the
Dodd-Frank Act substantively address only the risk retention
requirements and, pending further regulatory action, require 5
percent risk retention. This 5 percent level matches the level
in the Rule (unless certain underwriting standards are met).
Nonetheless, in order to assure consistency between the Rule as
issued and any future interagency regulations that may be
inconsistent, the Rule provides that automatically, upon the
effective date of final regulations required by Section 941(b)
of the Dodd-Frank Act, such final regulations shall exclusively
govern the risk retention requirement under the Rule. Thus,
there will not be disagreement to coordinate and reconcile
because of this safe harbor rule.
Q.2. Market participants highlight uncertainty related to
changing regulations, new accounting standards, and other
mandates as an obstacle to a resurgence of these markets. What
steps are your agencies currently taking to minimize these
complications? What should be done collectively by regulators
to limit this uncertainty as you look toward the joint
rulemaking?
A.2. We believe that this safe harbor rule strikes a fair
balance between protecting the FDIC's Deposit Insurance Fund
and allowing participants to adjust to a safer, more
transparent securitization market.
The FDIC advocates a reestablishment of the securitization
market, but in a way that is characterized by strong disclosure
requirements for investors, good loan quality, accurate
documentation, better oversight of servicers, and incentives to
assure that assets are managed in a way that maximizes value
for investors as a whole. The FDIC has taken and is in the
process of taking other steps to minimize market uncertainty.
In response to industry concerns, the FDIC did not delay,
but took a measured evaluation of its original safe harbor
rule. This evaluation has been in process for nearly a year,
and we believe that the industry should have no problem
adjusting. Even though the final regulations were adopted on
September 30, 2010, application of the rule will not be
effective until 2011, with the prior safe harbor rule extended
through the end of the calendar year. All securitizations
originated prior to January 1, 2011, will be grand fathered
under the previous safe harbor rule.
While it is axiomatic that different regulatory agencies
have different regulatory jurisdiction, and in exercising their
different responsibilities, the agencies may have to adopt
rules addressing the same issues within their regulatory
mandate, the FDIC has made a conscious effort to harmonize its
rules with other agencies, except where differences are
appropriate to accomplish different regulatory missions. As
noted in the response to the previous question, the FDIC,
balancing requests from the industry for expedited revisions to
the safe harbor rule with the pending financial reform
legislation, issued its rule with a risk retention level that
will automatically apply the risk retention levels established
by the interagency regulations.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HUTCHISON FROM SHEILA
C. BAIR
Q.1. Since the passage of the Dodd-Frank Act, I have heard from
a number of my small banks that are tremendously concerned
about the onslaught of new regulations on the horizon,
particularly because they are already drowning in a sea of
regulatory burden. In fact, over the past few months, the vast
majority of community banks in Texas State that they are much
more concerned with future compliance exams than they are about
safety and soundness exams. The reason for their concern lies
simply in ``missing something;'' that is, not properly adhering
to any of the new and unfamiliar regulations.
In addition to the amount of compliance that community
banks will soon face, I am also hearing concern about the sheer
cost, particularly for the smallest community banks with $250
million in assets or less. These banks will increasingly have
more and more difficulty absorbing the additional costs to
comply with the ever-expanding Government intervention into
their business. These community banks will be forced to attract
and pay for necessary staff, consultants, and lawyers as the
regulations and new requirements keep piling on, something one
of my bankers in Texas has described as ``death by a thousand
cuts.'' Many of these small community banks have indicated that
they are simply waiting for the value of their banks to rise as
the economy improves, so that they can sell their banks in the
near future. In my assessment, this will leave a number of
small communities without their local community bank, the
primary driver of their local economy.
While it has been acknowledged over and over again
throughout the debate on financial regulatory reform that
community banks neither contributed to nor profited from the
excesses that led to the financial crisis, community bankers in
Texas, and across our country, feel that they're paying a very
dear price.
What observations do you have? Is there a regulatory model
that might allow these local institutions to operate in an
environment where they can take deposits in from their
communities, then lend out to local families and small
businesses to foster economic growth and job creation in their
respective communities, and do so without the economic and
mental anguish of immense regulation that will only continue to
increase as a result of the Dodd-Frank Act?
A.1. Congress has mandated a number of financial regulations to
protect consumers and the FDIC recognizes that banks expend
significant resources to comply with these laws. The FDIC is a
strong advocate for consumer protection and we take our
responsibility for ensuring compliance very seriously.
We agree with your constituents that this is an extremely
challenging time for banks, and we applaud their efforts to
maintain strong compliance programs while remediating credit
quality and earnings issues associated with the economic
downturn. Compliance with consumer protection laws requires
considerable time and resources on the part of financial
institutions, particularly during a period of stressed business
conditions. Recent legislation should help level the playing
field with nonbanks as they now will be required to meet the
same standards as banking institutions, especially in the
mortgage finance arena. However, it is clear that consumers
have come to expect, and depend greatly on, insured depository
institutions to design and offer fair and equitable financial
services products. We believe the public's significant trust in
banks has been fostered by banking institutions' diligence in
maintaining effective consumer protection programs.
We understand your constituents' concerns and hope banks
can continue to meet the public's expectations for delivering
responsible consumer financial products. At the same time, the
FDIC will strive to maintain a streamlined examination process
to help ensure bankers can focus on their core banking business
and serve consumers on Main Street.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM MARY L. SCHAPIRO
Q.1. Chairman Schapiro, a number of recent SEC initiatives have
been approved by a split Commission.
Given the importance of implementing the Dodd-Frank
legislation in a balanced manner, what steps are you taking to
propose and adopt rules that have the support of all five
Commissioners?
A.1. Since I have become Chairman, over 91 percent of the
Commission's rulemaking actions have been approved by a
unanimous vote. The Commission works hard to reach consensus on
every matter, and I have rescheduled matters when additional
time and further discussion may help us arrive at a decision
that can be supported by all.
This is not to say, however, that unanimity is the only
acceptable outcome. Sometimes, reasonable people--acting based
on their own informed judgment--must ultimately agree to
disagree. As our experience indicates, this happens relatively
infrequently at the Commission. When it does occur, the matters
are typically among the most controversial also from a public
perspective. This is to be expected, as our Commission
structure and public comment process is designed so that
strongly held differences of opinion by external constituents
are important factors that are considered by all Commissioners.
Q.2. Chairman Schapiro, the Dodd-Frank Act requires the SEC to
adopt countless rules, establish new offices, and conduct a
number of studies. A 10-page implementation schedule recently
posted on the SEC's Web site gives an idea of what an
undertaking this will be. These Dodd-Frank responsibilities
must be balanced with the SEC's routine enforcement and
oversight responsibilities. Needless to say, some more
discretionary rulemaking by the SEC will have to be moved to
the back burner in order to comply with the aggressive Dodd-
Frank implementation schedule and address the serious problems
with enforcement and compliance brought to light by the Madoff
and Stanford cases.
How do you reconcile your decision to move forward with
proxy access, a completely discretionary grant of authority in
the Dodd-Frank legislation, with the need to move forward with
the legislation's many other time-sensitive mandates?
What additional discretionary items do you intend to take
up in the next year?
A.2. The Commission most recently proposed its ``proxy access''
rules on June 10, 2009, over a full year before the enactment
of the Dodd-Frank Act. The comment period on these proposals
was extended once, and ultimately closed in mid-January, 2010.
Between that date and mid-July, 2010, the staff analyzed
comments; developed a term sheet for adoption; considered
Commission responses to that term sheet; and drafted an
adopting release and regulatory text. Consistent with our
internal processes, a fully developed adoption package was
provided to Commissioners well before the Dodd-Frank Act was
passed by Congress and signed into law by the President on July
21, 2010. Between that date and the Commission's adoption on
August 25, 2010, the remaining staff work involved responding
to Commissioners' questions, redrafting to address
Commissioners' concerns, and revising the draft release to
account for the statutory language on the topic included in the
Dodd-Frank Act. Finalizing this regulatory action did not
divert any resources that are or were necessary for
implementing Dodd-Frank. The timing was driven by a hope that
new rules could be in place for most, if not all, of the 2011
proxy season.
As you note, Commission and staff resources are focused on
meeting the obligations that Congress has created for us
through Dodd-Frank as well as previous legislative actions. We
believe, however, that certain ``discretionary'' rulemakings
must continue to go forward--despite strained resources--to
fulfill our overarching mandate of protecting investors,
maintaining fair and orderly markets, and facilitating capital
formation. At this time, while it is difficult to predict
precisely which rulemaking efforts will go forward, non-Dodd-
Frank issues I expect to bring before the Commission for
consideration during the next year include: a variety of market
structure rulemakings, consolidated audit trail, large trader
reporting, broker-dealer financial responsibility, short-term
borrowing disclosure, Regulation M, point of sale disclosure,
proxy solicitation enhancements, target date funds, and 12b-1
fees. In addition, following review of the comments on our
recent concept release on proxy ``plumbing'' issues, I expect
to bring some related proposals before the Commission during
the next year.
Q.3. Chairman Schapiro, Section 939G of the Dodd-Frank Act,
which eliminated the expert liability exemption for credit
rating agencies, shut down the already weakened securitization
markets for a brief period upon enactment. A temporary fix by
the SEC averted the problem, but a long-term solution still is
needed. More generally, other regulatory changes in the
securitization space could have unintended consequences,
particularly if differences among asset classes are not taken
into account.
What is the SEC doing to develop and implement a permanent
solution to the credit rating agency issue?
What is the SEC doing to ensure that the securitization
rules it adopts avoid creating further unintended consequences
in any affected asset class?
A.3. With respect to the first question, Commission staff
currently is discussing this issue with market participants and
the credit rating agencies. In light of the significant
revisions to the regulatory landscape currently being
implemented for asset-backed securities and rating agencies,
the staff is working on a solution that takes account of the
new regulatory regime.
With respect to the second question, on April 7, 2010, the
Commission published for public comment proposals to amend
Regulation AB to enhance the disclosure investors receive when
they purchase asset-backed securities. In addition, last month
we issued two further proposals concerning asset-backed
securities to implement Sections 932, 943, and 945 of the Dodd-
Frank Act. Each of these proposals is subject to public
comment, a critical step in the Commission's rulemaking
process. We currently are working with our fellow regulators to
propose risk retention requirements for asset-backed securities
as required by Dodd-Frank, which also will be subject to notice
and comment. As always, we will carefully consider all input we
receive, including unintended consequences, as we formulate
final rules. In addition, while we will make every effort to
foresee and address unintended consequences in adopting final
rules, whether in implementing Dodd-Frank or otherwise, the
Commission and its staff stand ready to act quickly to address
any unintended consequences that may arise.
Q.4. Chairman Schapiro, last year you announced the creation of
a new Division of Risk, Strategy, and Financial Innovation,
which combined the Office of Economic Analysis and the Office
of Risk Assessment, and you said ``By combining economic,
financial, and legal analysis in a single group, this new unit
will foster a fresh approach to exchanging ideas and upgrading
agency expertise.''
This summer, both the Chief Economist and Deputy Chief
Economist, along with some other economists, left the
Commission. The former Chief Economist was quoted in a recent
news article as saying that one of the reasons he left the SEC
was because he felt the chief economist's role was diminished
in importance under your chairmanship. In fact, prior to your
chairmanship, the Chief Economist had reported directly to the
Chairman. But, you insisted that the Chief Economist now report
to the head of the Division of Risk, Strategy and Financial
Innovation.
Why have you diminished the role of economic analysis at
the Commission?
A.4. The importance of economic analysis to the SEC and its
work is undiminished. Neither the creation of the new Division
of Risk, Strategy, and Financial Innovation (RiskFin), nor our
current need for a new Chief Economist should be viewed as
reflecting any diminishment of the role of economic analysis at
the SEC. On the contrary, as is clear in the portion of my
statement quoted above, it was--and remains--my intention to
strengthen the already significant role of economic analysis at
the Commission by integrating it with other analytic
disciplines and techniques into a single organization serving
the entire Commission. In light of the SEC's broad
responsibilities, I continue to believe that such a
comprehensive, synergistic analytic capability makes far better
sense than permitting economic analysis to remain isolated from
other, complementary analytic disciplines that are useful in
understanding emerging market conditions, trading practices,
and their implications. Even so, the full benefits of combining
these formerly separate or novel analytic functions cannot be
realized overnight.
Vigorous and expert economic analysis under strong
leadership is essential to support the Commission's work. As
noted above, RiskFin was designed to combine and build upon our
existing analytic capabilities. Nevertheless, as part of our
ongoing search for the Chief Economist, I have made it explicit
that, ``the Chief Economist will report directly to me and, on
economic matters, play the lead role in representing the
Division of Risk, Strategy, and Financial Innovation before the
Commission.'' I have made the Chief Economist's primary role
equally clear: ``I will look to the Chief Economist to assist
me, my fellow Commissioners, and senior Commission staff in
identifying and evaluating the economic implications of
potential policy options.''
Q.5. Chairman Schapiro, four SEC rulemakings in the past 5
years have been successfully challenged in court because of the
Commission's failure to provide a sound economic justification
for some of its arguments.
In light of these defeats, why do you insist on favoring
unmeasurable, behavioral concepts like ``investor confidence''
as justifications for rulemakings over rigorous economic
analysis based on sound theoretical arguments and solid
empirical evidence?
A.5. Economic analysis is a critical component of the
Commission's rulemaking process. It provides the Commission
with a valuable framework to assist in the development of
policies that best serve investors and the broader capital
markets. For example, the Commission relies on principles of
economic reasoning to understand and assess the likely
responses of market participants to various regulatory
alternatives. Similarly, the Commission relies on available
empirical data and economic analysis to understand a potential
rule's economic costs and benefits, as well as its likely
effect on competition, efficiency, and capital formation.
Recognizing the importance of robust economic analysis in
the rulemaking process, I established the Division of Risk,
Strategy, and Financial Innovation in September 2009. A
principal purpose of this new division is to elevate the role
of economic analysis in the Commission's policymaking process
and to strengthen the quality of the economic analysis
underlying new Commission rules. As the Commission undertakes
rulemaking in response to the Dodd-Frank Act and in other
areas, this new division will continue to provide the
Commission with sound economic analysis to inform our policy
choices. The end result, I believe, will be Commission rules
that rest on solid economic analyses that further our statutory
mission.
Q.6. Chairman Schapiro and Chairman Gensler, the Dodd-Frank Act
placed great emphasis on moving over-the-counter derivatives
into clearinghouses for the purpose of reducing risk in the
financial system. While this is a laudable goal, if not
properly constructed, clearinghouses could be the too-big-to-
fail entities at the center of the next crisis. The last thing
the American people want to do is pay for another bailout.
What is each of you doing to ensure that the rules take
seriously the potentially disastrous consequences of a misstep
in the operation or oversight of clearinghouses?
A.6. The Commission has extensive experience with centralized
clearance and settlement systems for securities. Since the 1975
amendments to the Exchange Act, the Commission has had direct
regulatory authority over the clearinghouses and securities
depository that serve as the infrastructure of the U.S.
securities markets. To date, the Commission's authority over
clearance and settlement in the security-based swap market has
been much more limited. As a result of the Dodd-Frank Act, the
Commission now has substantially greater authority to regulate
this area.
In the coming months, I anticipate the Commission will use
this new authority to consider rules designed to strengthen the
risk management and governance practices of clearing agencies.
The Commission staff also will continue its efforts to
coordinate supervisory and oversight responsibilities in this
area with the staff from the CFTC and the Federal Reserve,
including under the payment, clearing, and settlement
provisions of Title VIII of the Dodd-Frank Act. Both the
Commission's rulemaking and its ongoing oversight of clearing
agencies will continue to focus on the critical role that
clearing agencies play in our financial system and the
regulatory principles for those agencies set forth in the
Exchange Act.
Q.7. Chairman Schapiro and Chairman Gensler, at a time when our
economy is in terrible shape, we need to be particularly
attentive to the unintended consequences of regulatory actions.
Main Street businesses, large and small, have told us how
imposing clearing and margin requirements on them will affect
their ability to expand and hire. An effective, broad end user
exemption is essential and completely consistent with the goals
of transparency and mitigation of risk to the financial system.
Are you committed to crafting a broad end user exemption
that allows our job creators to avoid costly clearing, margin,
exchange trading, and other obligations under the Act?
A.7. As you note, with respect to clearing, an effective end-
user exception is consistent with the policy goals of the Dodd-
Frank Act. An end-user clearing exception that is appropriately
implemented can facilitate the activities of end users. In the
coming months, the Commission plans to propose rules relating
to the end-user clearing exception, and will consider seriously
the comments of all interested parties in order to help ensure
appropriate implementation. With respect to margin, the
Commission has not yet proposed rules under the Dodd-Frank Act
provisions relating to margin requirements for noncleared
security-based swaps transacted by security-based swap dealers
and major security-based swap participants for which there is
not a prudential regulator. I am sensitive to the concerns that
have been expressed about the potential impact of these
requirements--and other provisions of the Dodd-Frank Act--on
end users. Accordingly, I expect that the Commission will
carefully consider both the scope of its authority in this area
and the potential effects of margin requirements on the markets
and market participants, including the nature and extent to
which such requirements could impact the business of end users.
Public feedback through the notice and comment process--
including input from end users--also will fully inform any
final rule that the Commission may adopt.
Q.8. Chairman Schapiro and Chairman Gensler, Dodd-Frank
mandates that both of your agencies adopt an unprecedented
number of rules in a very short period of time. And, as you
know, each of your agencies has a ``statutory obligation to do
what it can to apprise itself--and hence the public and the
Congress--of the economic consequences of a proposed regulation
before it decides whether to adopt the measure.''
However, a recent news article pointed out that both the
SEC and the CFTC have been without Chief Economists for months.
Chairman Schapiro and Chairman Gensler, why have your Chief
Economist positions gone unfilled for so long?
How can you expect to adequately consider the economic
consequences of all of your proposed rules with unfilled Chief
Economist positions?
A.8. The SEC's need for sound economic analysis ranges across
all three of its rule-writing divisions and includes the
considerable litigation support our economists provide to the
Division of Enforcement. Finding the strongest possible Chief
Economist for the SEC is therefore a matter of considerable
importance not only to me but to the SEC as a whole. We are
conducting a broad search for the SEC's next Chief Economist
and I actively have participated in that effort. I believe the
additional effort we have taken to identify a range of strong
candidates to meet our requirements is well worth the time
inevitably entailed.
While we hope to recruit a Chief Economist soon, our
economist staff in Risk Fin continues to analyze the economic
implications of each proposed rule. The Chief Economist will
provide strong and experienced leadership to this team of 25
PhD financial economists who routinely analyze the potential
economic consequences of proposed regulatory actions and
provide analytic support for SEC enforcement actions. They are
also engaged in the more prospective and creative process of
helping to identify the most appropriate regulatory approaches
for new or evolving markets and products. Those activities
continue unabated as we conduct a vigorous search for the SEC's
next Chief Economist. We continue to hire experts in financial
engineering and other analytic disciplines that complement our
economists' analytic efforts. We are now in the midst of our
annual effort to recruit new staff economists to the SEC.
Attrition and replacement hiring within our staff of PhD-level
financial economists is normal and can even assist in ensuring
that our economist staff retains its familiarity with the
latest analytic techniques and leading currents of thought in
their fields.
Leading our team of professional financial economists,
particularly during the present, exceptionally active period of
rule writing, will require exceptional leadership and practical
skills. In seeking candidates to serve as the SEC's next Chief
Economist, I have, therefore, stressed that, ``The Chief
Economist will . . . play a special leadership role in guiding
our staff economists and ensuring a uniformly high standard of
analysis.'' I personally have sought the assistance of a wide
variety of leaders outside the SEC, including each of the SEC's
former Chief Economists, as we build the strongest possible
list of candidates to fill this position.
Q.9. Chairman Schapiro and Chairman Gensler, the derivatives
title of the Dodd-Frank Act establishes new entities called
``swap execution facilities'' and ``security-based swap
execution facilities,'' commonly referred to as ``SEFs,'' as
alternatives to exchanges. Ideally, multiple SEFs will compete
to give market participants several different choices for
trading particular types of swaps.
Given the SEC's experience in overseeing securities markets
in which participants have the choice of several different
trading venues, what is each of you doing to ensure that the
CFTC has the benefit of the SEC's expertise in this area?
A.9. Members of SEC and CFTC staff have collaborated
extensively and regularly exchanged information while working
to create a framework for the regulation of the swap and
security-based swap markets under the Dodd-Frank Act. In
particular, the two teams working on SEFs have sought to make
sure that each agency has the benefit of the other's expertise
in regulating the financial markets.
Based on joint meetings with market participants and a
joint roundtable on SEFs held by SEC and CFTC staff, I believe
it is possible that multiple SEFs will trade the same swaps or
security-based swaps. Trading on multiple markets is a hallmark
of our equity and options markets, and competition among those
markets helps investors and market professionals obtain the
best price. We have shared with CFTC staff our experience in
regulating multiple trading venues under the authority of the
Exchange Act and the national market system.
Q.10. Chairman Schapiro and Chairman Gensler, Title VIII
authorizes your agency to prescribe regulations for financial
institutions engaged in designated activities for which each is
the Supervisory Agency or the appropriate financial regulator
governing the conduct of the designated activities.
What plans do you have for exercising this authority?
A.10. Commission staff has been working closely with the staffs
from the Federal Reserve and the CFTC to develop a coordinated
strategy for rulemaking and supervisory activities under Title
VIII of the Dodd-Frank Act for financial market utilities
designated as systemically important. In the coming months, I
anticipate that the Commission will propose rules relating to
standards for clearing agencies within its jurisdiction,
including rules to implement the new ``notice of material
change'' provisions applicable to designated financial market
utilities under Title VIII.
Q.11. The Financial Stability Oversight Council is an important
feature of Dodd-Frank. During the conference, my amendment was
adopted to clarify the role of the Council and the Federal
Reserve. My amendment gave the Council responsibility for
financial stability regulation. Up to that point, the
legislation had colocated this responsibility at the Fed and
the Council. The Congressional intent is clear that you, as
members of the Council, are responsible for all policy matters
related to financial stability. After the Council acts,
implementation of your policy determinations will fall to the
individual Federal financial regulators, including, of course,
the Fed.
With this in mind, I would like each of you to comment on
your preparations to serve on the Council:
Have you directed your staff to examine and study all of
the issues that will come before you?
Are you prepared to participate on the Council, not as a
rubber stamp for the Chairman of the Council, but as a fully
informed individual participant?
A.11. Yes. The Council and the staff of each agency (including
the SEC) have formed a number of interagency working teams to
establish the structure of the Council itself and address its
substantive responsibilities. This includes teams establishing
a process for designating systemically important nonbank
financial companies and financial market utilities for
heightened supervision and identifying potential risks and gaps
in oversight and regulation.
The Council already has sought public comment regarding the
Volcker Rule study (http://www.treas.gov/FSOC/docs/2010-
25320_PI.pdf) and the proposed rulemaking for designating
nonbank financial companies as systemically important (http://
www.treas.gov/FSOC/docs/2010-25321_PI.pdf).
I appreciate that the Council was designed to bring
together multiple independent perspectives to these and other
issues that involve potential risks to the stability of our
financial system. Indeed, I believe that this model is one of
the Council's core strengths.
Q.12. Secretary Geithner has argued that there is a strong case
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published
a paper that proposes Government guarantees of a wide range of
asset backed securities, including those backed by mortgages,
credit cards, autos, student loans, commercial real estate, and
covered bonds. While some may believe that the Government will
charge fair prices for Government guarantees, the history of
Government run insurance programs suggests that things will not
go well.
Does anyone on the panel support extending or increasing
Government insurance against losses on asset backed securities
which, it seems to me, socializes risk, puts taxpayers on the
hook for losses, and protects Wall Street against losses?
A.12. The mission of the SEC is to protect investors, maintain
fair, orderly, and efficient markets, and facilitate capital
formation. In fulfilling this mission, the SEC's role
traditionally has been to regulate the disclosure that public
companies provide to their investors and to enforce the Federal
securities laws, except where another role is specifically
mandated or authorized by Congress,. Accordingly, I do not
believe that this is a topic on which it would be appropriate
for me to take a position.
Q.13. Please provide the Committee with an implementation
schedule that includes:
(a) a list of the rules and studies that your agency is
responsible for promulgating or conducting under Dodd-Frank and
the date by which you intend to complete each rule or study;
and
(b) a list of the reorganizational tasks your agency will
undertake to fulfill the mandates of Dodd-Frank and the date by
which you intend to complete each task.
A.13. Attached is a list containing the approximate dates of
the rulemakings, studies and other actions the Commission will
be undertaking pursuant to the Dodd-Frank Act in the 1 year
period following its becoming law. The information contained in
the list also can be found on our Web site at http://
www.sec.gov/spotlight/dodd-frank/dfactivity-upcoming.shtml#11-
10. This Web page is updated regularly. Currently, we have not
yet set target dates beyond the 1-year time frame for other
rulemaking actions and studies, but will make that information
available on our Web site when those time frames have been
developed. The Commission is on schedule to complete all of the
required rulemakings, studies and other actions by the dates
set forth in Dodd-Frank.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM MARY L. SCHAPIRO
Q.1. As I've made clear before, I think the largest financial
firms in this country are just too large, and that their
massive size threatens our economic security and puts us at
risk in future crises.
I think the rise of proprietary trading was one of the key
drivers behind the massive growth in our largest financial
institutions. Firms were taking on ever increasing prop trading
positions, often with highly unstable short term financing, and
when things froze up, the house of cards collapsed. The Volcker
Rule looks to stop this risk.
I know that my colleagues, Senator Merkley and Senator
Levin, drafted section 619 of the Dodd-Frank Act to ensure
broad coverage of the prohibition on proprietary trading by
banks, and meaningful restrictions on the largest nonbank
financial firms. Nevertheless, one of the concerns I have is
that firms may try to evade the restrictions. Particularly, I'm
concerned that if the regulators set a definition of ``trading
account'' that is too narrow, it might not capture all of the
risks of proprietary trading. These evasions could only happen
if the regulators ignore the clear direction of the law to stop
proprietary trading.
Are you prepared to take a broad view on the definition of
``trading account'' and examine and prevent proprietary
trading, wherever it occurs?
In short, are you prepared to use the full power of the
Merkley-Levin provisions to cut the size and riskiness of our
banks so they get back to the business of lending to families
and businesses?
A.1. With respect to the first question, Commission staff is
working closely with the staff of the bank regulators to study
the definition of a ``trading account'' under Section 620 of
the Dodd-Frank Act. \1\ Commission staff is considering how the
definition should be applied in the broker-dealer context to
best meet the goals established by Section 619 of the Dodd-
Frank Act. I am mindful--as is the Commission staff--that the
results of the study currently being conducted by the Financial
Stability Oversight Council (FSOC) under Section 619 also will
help inform our approach to this important issue.
---------------------------------------------------------------------------
\1\ While Section 619 establishes a broad definition of ``trading
account,'' the term historically has been used principally in a banking
context because banks generally maintain separate investment accounts
and trading books (as opposed to broker-dealers, who have no such
separation).
---------------------------------------------------------------------------
With respect to the second question, I must defer to our
colleagues at the banking regulators, who are better-placed to
address the size and riskiness of banks serving the vital
function of lending to families and businesses. More broadly,
however, there are parts of the Merkley-Levin provisions where
our expertise can help further the goals of those provisions.
For example, with respect to ``proprietary trading'' and
``market making,'' Commission staff currently is sharing its
expertise to inform the FSOC study, and I anticipate that this
expertise will help reduce the risk that either activity is
employed by firms to undercut the goals of Section 619 of the
Dodd-Frank Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM MARY L. SCHAPIRO
Q.1. Regulatory Structure for Volcker Rule. As you know, the
objectives of the Merkley-Levin Volcker Rule are two-fold: (1)
to address the specific risks to our financial stability caused
by proprietary trades gone bad, and (2) to take on the
conflicts of interests in proprietary trading.
Ensuring effective oversight will be challenging, because
the issues are complicated. As you could see from the exchange
at the hearing between Senator Reed and Chairman Bernanke, with
interjections by Chairman Shapiro and Mr. Walsh, I and others
are beginning to come of the view that there will have to be
oversight at two levels. First, there will need to be real-time
(or as close as practicable) monitoring and enforcement at the
individual trade-by-trade level, which looks to whether any
given transaction is proprietary trading. This will be
necessary to ensure that the permitted activities are not
abused. Second, there will need to be macro-level reviews of
policies and procedures, and overall portfolio holdings. This
will be necessary to ensure that proprietary positions and
conflicts of interest are not cropping up despite the
restrictions. In addition to monitoring and enforcing the
proprietary trading and conflicts of interest restrictions,
regulators are also tasked with setting appropriate capital
charges, both for permitted activities, and, in the instances
of nonbank financial companies supervised by the Board, capital
charges for all covered activities.
Your agencies appear to have somewhat different strengths
in these areas, with perhaps the SEC and CFTC having greater
experience policing the securities and derivatives markets for
trading violations, and the banking regulators having greater
experience evaluating the safety and soundness of firms and
setting appropriate capital charges and levels.
Share with me your view about the strengths you believe
your agency brings to the oversight and enforcement of the
Merkley-Levin Volcker Rule? Are you committed to working with
your fellow regulators to best use your agency's strengths in
the effort to keep our financial system safe?
A.1. We are committed to working with our fellow regulators to
develop a coordinated implementation of the Merkley-Levin
Volcker Rule (Volcker Rule) that builds on each agency's
relative strengths in regulating financial firms.
Among the strengths the Commission brings to the
implementation of the Volcker Rule is our regulatory experience
with securities trading activities, as well as with the
concepts of ``proprietary trading,'' ``market making,'' and
``hedging.'' For instance, the Commission staff has experience
with activity that we consider to be bona fide market making in
the equities markets. I look forward to the Commission and its
staff using this experience as we consider--together with our
fellow regulators--how ``market making'' should be viewed for
purposes of the Volcker Rule. Another example is the
Commission's experience in examining and sanctioning firms with
respect to conflicts of interests--experience that will help
inform our understanding and ability to address some of the
misconduct the Volcker Rule seeks to prevent.
With respect to real-time collection of trade-by-trade
data, given that a key goal of the Volcker Rule is addressing a
firm's risk exposure, it may be necessary to focus on the
nature and scope of a firm's principal trading and positions in
the context of the type of market activity in which it is
engaged. Collecting and analyzing trade-by-trade data on a
real-time basis would require substantial new resources given
both the volume of data that would need to be monitored and the
current lack of regulatory infrastructure for collecting and
surveilling such data on a real-time basis across all relevant
asset classes and firms.
Q.2. Data Collection. The Dodd-Frank Act requires a significant
amount of new data collection and storage, particularly in the
derivatives arena. The SEC and CFTC have made a priority of new
data collection in a number of areas. Collection and the
ability to automate reviews of the data will be critical to
enforcing a wide range of mandates under Dodd-Frank, including
derivatives position limits, the Volcker Rule provisions, and
other parts of the bill. At a minimum, your staffs will need to
know who's making trades, the prices, how long firms hold onto
their positions, and whether and how their positions are
hedged.
Where is your agency in terms of thinking through the
relevant data you will need to collect?
Are there any major challenges you see in being able to
collect and analyze that data in real-time, so as to ensure
compliance with these various restrictions?
How do you see the newly created Office of Financial
Research playing into this process?
A.2. The Dodd-Frank Act not only creates new requirements for
data collection and analysis of security-based swaps by the
SEC, but also underscores similar needs for markets we have
long regulated. Today, the SEC collects data after the fact
through a series of manual requests that can take days or even
weeks to fulfill. This is not acceptable. I therefore have
sought to have the Commission take a holistic approach--
addressing issues with our current data requirements while at
the same time designing programs for our new requirements that
take into consideration what we have learned from past efforts.
These requirements start with data collection and
reporting. For the equities markets, challenges around data
collection have led the Commission to propose new rules for
large trader reporting and a consolidated audit trail. Both of
these initiatives seek to address shortcomings in the agency's
ability to collect and monitor data in an efficient and
scalable manner. For derivatives, the Commission staff is in
the midst of developing new rules and reporting requirements
that are designed to facilitate data collection. The staff is
considering a range of options and issues in the derivatives
space, including the utility of standardized formats and data
elements and the need for robust and automated Commission
access to the data. In addition, the Commission staff is
considering standardized counterparty names so that derivative
ownership can be tracked.
A framework in which data is regularly collected on a daily
basis and available to the SEC and other regulators would
provide the Commission an opportunity for the timely analysis
of specific issues as well as a framework for continuous, long-
term study of the markets. In order to ensure any type of
general or specific analysis accurately reflects the order and
sequence of trading events, new systems we procure should be
capable of receiving time stamps, and the Commission has
proposed requiring data to be tagged with time stamps.
Implementation of such initiatives would be a tremendous step
forward.
Ensuring standardization of reporting is necessary, but not
sufficient, to ensure a robust data analysis program. The
Commission also needs to create an infrastructure for the
scalable collection and timely analysis of such data. Again, we
have started with existing requirements for the equities
markets and are currently engaged in a Request for Information
process with vendors who have proven track records in providing
the types of specialized databases and analytical solutions
required by the Commission. To help support and staff these
initiatives with appropriate levels of expertise, the Division
of Trading and Markets and the Division of Risk, Strategy, and
Financial Innovation have been working, within the limitations
of current budget constraints, to identify industry experts
with the abilities, knowledge, and desire to help the
Commission meet the new requirements under the Dodd-Frank Act.
In addition to internal programs, the Commission staff has
been working with the CFTC staff whenever data standards are to
be shared across similar products regulated by both agencies.
The Commission staff also has been working with the newly
created Office of Financial Research on their preliminary
initiatives. In particular, OFR can be an excellent conduit for
disseminating common data standards that can be used across all
regulators and market participants. In this fashion, data can
be sourced in a more efficient manner that benefits not only
regulators of specific firms and markets, but also the OFR
itself as it seeks to aggregate summary information from across
the marketplace. I believe OFR will provide an excellent
complement to the type of work underway at the Commission today
and look forward to continuing our active participation as they
expand their efforts.
With respect to ``real-time'' data collection and analysis,
the collection of information on a regular, intraday basis
would pose significant technical hurdles in markets where data
is not generated in real-time. In addition, even if real-time
collection of data may be feasible, it will require substantial
new resources to achieve real-time analysis of the entire
volume of the data that the Commission will seek to collect.
Moreover, because much of the analysis likely to be performed
will require careful reconstruction of events that also
requires time, such analysis may best be accomplished in the
context of end-of-day, or even longer, processing.
Q.3. Cross-border Resolution. I know FDIC and to some extent
others have been working very diligently to implement the new
resolution authority for our Nation's large complex financial
institutions--which owes so much to my colleagues on this
Committee from Virginia and Tennessee.
But one of the areas I want to keep an eye on--and on which
I offered an amendment during financial reform to provide
additional oversight of--is how to make that resolution work
for large firms operating across multiple national borders.
Where are we in terms of making the Dodd-Frank resolution
authority work for large, systemically significant financial
firms operating across borders? How cooperative have our
international partners been in this effort?
A.3. The challenge of resolving a large complex financial
institution is compounded by different regulatory regimes that
may apply to the same entity, or to affiliated entities, that
operate across borders. The Commission and its staff
participates in productive multilateral discussions among
regulators in order to better understand the business practices
and organizational aspects of global financial firms and how
those practices and organizations can make resolution of
international entities more challenging. The Commission plans
to continue to work closely with the FDIC and other regulators
to identify and address issues of mutual concern that arise in
the context of the resolution of the Nation's large complex
financial institutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM MARY L. SCHAPIRO
Q.1. Chairman Schapiro, this summer the New York Times reported
on yet another AIG outrage. As part of the deal the New York
Fed put together that paid off AIG's counterparties at par, AIG
also waived its right to sue Goldman Sachs and other
counterparties, even for fraud. It is interesting that you sued
Goldman Sachs for fraud, but the New York Fed's deal did not
allow AIG to sue Goldman Sachs or anyone else for fraud. If AIG
had been able to sue, that could have helped recover
shareholder value and made the massive bailout smaller. In your
opinion, was it a mistake to force AIG to give up its right to
sue, and do you plan to investigate this?
A.1. I understand your question to involve the actions of the
Federal Reserve Bank of New York in November 2008 to
restructure certain AIG credit-default swap contracts. I am not
familiar with the considerations that factored into the
decision-making process. As a result, I am not able to offer an
opinion on particular components of the final agreements.
You also asked whether the Commission intends to
investigate any issues related to these events. Although I am
unable to comment on the existence or nonexistence of specific
law-enforcement investigations, I can assure you that the
Commission's Enforcement Division continues to examine the
events surrounding the financial crisis and, where violations
of the securities laws are uncovered, the Commission will
vigorously pursue culpable entities and individuals.
Q.2. As you know, this Committee held an oversight hearing last
week on the SEC's mishandling of the Stanford Ponzi scheme,
which defrauded investors out of $5 billion. I asked the SEC
Inspector General and witnesses from the SEC whether anyone had
been fired over the Enforcement Division's disturbing actions,
or more accurately, deliberate inaction in spite of examiners
begging them over several years to do something. None of the
witnesses were aware of any firing. And worse, after the
hearing I was informed by the Stanford Victims Coalition that
exactly the wrong people were rewarded and punished. I was told
that many of the very people in the Enforcement Division who
were guilty of malfeasance were actually promoted. And further,
the one person from the Examinations Division who identified
the problem and doggedly tried to get employees of the
Enforcement Division to do their job has actually been demoted,
possibly out of retaliation for blowing the whistle. Is this
true, and if so, why does the SEC reward employees who are
guilty of malfeasance and punish employees who do the right
thing?
A.2. With respect to discipline of staff who worked on the
Stanford matter, we have carefully reviewed the Inspector
General's report and are in the final stages of determining
what, if any, personnel actions are appropriate. Although the
Inspector General's report generally is critical of the
performance of Enforcement staff, it does not recommend
discipline for any particular employee. The Inspector General's
report also did not find that the failure to investigate
Stanford more aggressively was related to any improper
professional, social, or financial relationship on the part of
any current or former Commission employee. Moreover, the
conduct that the Inspector General investigated occurred over 5
years ago, some of it extending back well over a decade. Many
of the Enforcement employees identified in the report no longer
work at the Commission, including the most senior people who
had final decision-making authority, such as the former
District Administrator and two former Associate District
Directors for Enforcement in the Fort Worth Office.
The Commission has not promoted or demoted any member of
its Enforcement or Examination staff as a result of work
performed on the Stanford matter during the time period
reviewed by the Inspector General. Employees with varying
degrees of involvement in the Stanford matter have been
promoted in both programs, however, based on their
contributions to the Commission's overall efforts.
You also inquire about a Fort Worth office employee who was
allegedly demoted in retaliation for whistleblowing. The
employee at issue currently is assigned to a position chairing
our Southwest Regional Oil and Gas Task Force, which includes
State and Federal regulators. The employee was not demoted and
did not receive a decrease in pay or grade. The employee
received a letter of reprimand based on conduct unrelated to
Stanford that occurred prior to public criticism of the agency
for its handling of the Stanford matter.
Q.3. Chairman Schapiro, I also learned at the Stanford Ponzi
scheme hearing that the SEC Inspector General, who is supposed
to be an independent watchdog, is not so independent after all.
Apparently, the SEC can take as much time as it wants reviewing
an IG report before it becomes public, redact whatever it wants
from the report and call it ``proprietary,'' and control the
release date of the report. The SEC's release of the Inspector
General's Stanford report looked suspicious because it was done
on a day with other distracting SEC news. It is stunning that
the SEC has so much control over the Inspector General. By
contrast, I am told that the Treasury Department has only seven
days to review reports of the Treasury Inspector General for
Tax Administration (TIGTA). Treasury can recommend redactions
for taxpayer confidentiality or other narrow reasons, but TIGTA
makes the call about whether the information will be redacted
and when the report is released. Why does the SEC not allow its
Inspector General to be truly independent, and how many IG
reports is the SEC currently sitting on?
A.3. The Commission's Inspector General has full independence
in determining what matters to investigate, in conducting those
investigations, in drawing its conclusions and in preparing its
reports. The process described below does not impact that
independence in any way.
As you may be aware, under the Inspector General Act, an
Inspector General's reports are provided to the Commission. The
Commission determines what redactions are needed prior to the
dissemination of those reports. The Commission strives to make
only limited redactions to the reports and seeks to perform its
review function as expeditiously as is practicable. Examples of
the types of information typically redacted from recent reports
include:
information the disclosure of which may harm
ongoing law enforcement investigations or proceedings;
and
names and personal identifying information
(generally of persons not employed by the Commission
who played peripheral roles in the events under
investigation and of lower-level Commission employees)
to protect personal privacy (in instances where names
are redacted, we overlay replacement text which
generally describes the job/role of that individual so
that the substance of the report is unaltered).
In certain instances, the Commission may disclose
information even though it falls into a category listed above
due to the public's interest in the information at issue. Prior
to the Commission's approval of the release of a report,
Commission staff solicits the input and feedback of the
Inspector General's Office on the proposed redactions.
With regard to the timing of the Commission's release of
the Inspector General's report in the Stanford investigation,
the Inspector General found in a separate report that the act
of redacting portions of the Stanford report ``appeared to
proceed independently of the timing of the SEC's . . . action''
against Goldman Sachs & Co. and that it ``did not find any
concrete and tangible evidence'' that the filing of the
Commission's action against Goldman Sachs was ``delayed to
coincide with the issuance of the OIG Stanford Report.''
There are two Inspector General reports that the Commission
or its staff currently is reviewing. We will be making those
available as soon as possible.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM MARY L. SCHAPIRO
Q.1. Congress clearly intended, as Chairman Dodd and Chairman
Lincoln set forth in a letter that: ``The legislation does not
authorize the regulators to impose margin on end-users, those
exempt entities that use swaps to hedge or mitigate commercial
risk . . . Again Congress clearly stated in this bill that the
margin and capital requirements are not to be imposed on end-
users.''
Do you agree with the Congressional intent of the Dodd-
Lincoln letter?
In setting capital requirements under Title VII, do you
agree that increases in capital requirements will be linked to
the risk associated with the swap, and not as a punitive
mechanism to drive volume to central clearinghouses or
exchanges?
Please describe any and all cost-benefit analysis,
particularly with regard to end-users, that you will undertake
prior to issuing rules.
A.1. The Commission has not yet proposed rules under the Dodd-
Frank Act provisions relating to margin requirements for
noncleared security-based swaps transacted by security-based
swap dealers and major security-based swap participants for
which there is not a prudential regulator. I am sensitive to
the concerns that have been expressed about the potential
impact of these requirements--and other provisions of the Dodd-
Frank Act--on end users. Accordingly, I expect that the
Commission will carefully consider both the scope of its
authority in this area and the potential effects of margin
requirements on the markets and market participants, including
the nature and extent to which such requirements could impact
the business of end users. Public feedback through the notice
and comment process--including input from end users--will also
fully inform any final rule that the Commission may adopt.
The Commission also has not yet proposed rules establishing
capital requirements for security-based swap dealers and major
security-based swap participants. In establishing such capital
requirements, the Dodd-Frank Act directs the Commission to
consider whether they will help ensure the safety and soundness
of the entity and whether the standards are appropriate for the
risks associated with uncleared security-based swaps. These
principles established by the statute--as well as input through
the notice and comment process--will guide our consideration of
capital requirements in this area.
The Commission conducts a cost-benefit analysis of proposed
rules pursuant to specific statutory requirements, including
those set forth in the Paperwork Reduction Act and the Small
Business Regulatory Enforcement Fairness Act of 1996.
Accordingly, any proposed rulemaking impacting end users and
other market participants will include an analysis of any costs
and benefits that may accrue to such end users and will be
subject to public comment prior to any final action that may be
taken.
Q.2. Dodd-Frank requires that risk retention be jointly
considered by the regulators for each different type of asset
and includes a specific statutory mandate related to any
potential reforms of the commercial mortgage-backed securities
market to limit disruption. In light of the FDIC's unilateral
decision to add an across the board risk retention requirement
in the safe harbor rule, which the OCC opposed, how do you plan
to coordinate and reconcile disagreements in the joint
rulemaking?
A.2. Under Section 941 of the Dodd-Frank Act, the Commission
and the banking and other agencies will jointly write rules
regarding risk retention, with the Department of Treasury--the
Chairperson of the Financial Stability Oversight Council--
coordinating all joint rulemaking required under the section.
Staff from a number of Divisions and offices of the Commission
have been meeting regularly and frequently with the staff from
the other agencies and Treasury. Thus, we are working
diligently with Treasury and the other agencies to jointly
consider how best to prescribe risk retention rules for the
various asset classes of asset-backed securities.
I also would note that the FDIC rule you referenced (12
C.F.R. 360.6) provides that upon the effective date of final
regulations required by Section 941(b) of the Dodd-Frank Act,
such final regulations shall exclusively govern the requirement
to retain an economic interest in a portion of the credit risk
of the financial assets under the FDIC rule.
Q.3. Market participants highlight uncertainty related to
changing regulations, new accounting standards, and other
mandates as an obstacle to a resurgence of these markets. What
steps are your agencies currently taking to minimize these
complications? What should be done collectively by regulators
to limit this uncertainty as you look toward the joint
rulemaking?
A.3. Given the breadth of the Dodd-Frank Act's implementation
requirements, including many necessitating joint rulemakings,
the SEC has significantly expanded its public outreach and is
committed to an open and transparent notice and comment
rulemaking process.
Specifically, we have enhanced our public consultative
process by expanding the opportunity for public comment beyond
what is required by law. To maximize the opportunity for public
comment and to provide greater transparency, less than a week
after Dodd-Frank became law, we made available to the public a
series of e-mail boxes to which interested parties can send
preliminary comments before the various rules are proposed and
the official comment periods begin. We also are trying, given
time constraints, to meet with anyone who seeks to meet with us
on the various issues raised. In addition, staff is seeking to
reach out as necessary to solicit views from affected
stakeholders who do not appear to be fully represented by the
developing public record on a particular issue. To further our
public outreach effort, the Commission also is holding public
roundtables and hearings on selected topics.
Commission staff also is meeting regularly on both a formal
and informal basis with other financial regulators, and staff
working groups frequently consult and coordinate with the
staffs of the CFTC, Federal Reserve Board and other prudential
financial regulators, as well as the Department of the
Treasury, the Department of State, the Commerce Department, and
the Comptroller General.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM GARY GENSLER
Q.1. Chairman Gensler, you have been very active in the CFTC's
implementation of the derivatives title of the Dodd-Frank Act.
Recognizing that you are only one of five Commissioners at
the CFTC, what steps are you taking to adopt balanced rules
that can garner the support of all five Commissioners?
A.1. Throughout the rulemaking development process, Commission
staff strives to ensure that each Commissioner is apprised of
issues involved. Staff teams consult with all Commissioners and
the comments and suggestions of each are often incorporated in
staff recommendations.
Q.2. Chairman Gensler, the Dodd-Frank Act gives the CFTC new
registrants such as major swap participants and swap dealers.
Does the CFTC intend to rely on a self regulatory
organization to oversee these new entities, as it does for
futures commission merchants?
A.2. Some tasks assigned to the Commission may be delegated in
turn to Self Regulatory Organizations (SROs) where permitted,
appropriate and where the SROs are ready to assume the new
tasks.
Q.3. How will the CFTC coordinate its oversight of these
entities with other regulators?
A.3. Coordination with the Securities and Exchange Commission
and the banking regulators will be required to implement the
Dodd-Frank Act in an efficient manner and to avoid unnecessary
duplication on registrants. The Commission is striving to
coordinate its rulemaking activities with its fellow regulators
through staff to staff contacts, and it is contemplated that
these coordination efforts will continue as the agencies move
past the rule-writing process to administering the Dodd-Frank
Act.
Q.4. Chairman Gensler, as one law firm's commentary noted,
``major provisions of the Derivatives Legislation are either
largely indeterminate or too broadly drafted to be implemented
literally.''
Chairman Gensler, how do you reconcile this assessment with
your conclusion that the ``Dodd-Frank Act is very detailed,
addressing all of the key policy issues regarding regulation of
the swaps marketplace''?
A.4. While the Dodd-Frank Act is detailed and comprehensive, it
directs the financial regulatory agencies to write regulations
to implement the policies Congress enacted. The rule-writing
process will involve careful consideration of the insights of
industry and other members of the public through meetings and
written comments that may spotlight refinements that should be
made before regulations are finalized.
Q.5. Should we be concerned that you are not paying sufficient
attention to the potential unintended consequences of the
legislation?
A.5. We are actively seeking participation in the rule-writing
process from industry and other members of the public. As the
rule-writing process goes forward, I am confident that concerns
of industry and other members of the public about the
consequences of rules, unintended or otherwise, will be brought
to the attention of my fellow commissioners and myself.
Q.6. Chairman Gensler, you have set up 30 rulemaking teams for
the Dodd-Frank Act. Some of those teams are headed by
enforcement attorneys.
Please identify which teams are headed by enforcement
attorneys and why enforcement attorneys are best suited to
write the rules in the area assigned to each of those teams.
A.6. Four of the 30 rulemaking teams assigned to draft the
rules required by the Dodd-Frank Act are led by Division of
Enforcement Staff. Staff from the Division of Enforcement are
leading groups drafting rules on manipulation, disruptive
trading practices, whistleblowers, and business conduct with
counter parties. The Division has 35 years experience
investigating and litigating cases of manipulation, attempted
manipulation, and false price reporting. Each of these areas is
closely related to the mission of the Division. It should be
noted that these teams are not limited to Division of
Enforcement staff, but rather are composed of staff from
several offices. Ultimately, the teams' recommendations must be
approved by the Commissioners as proposals, exposed to comments
from the public, and adopted by the Commissioners as final
rules before they go into effect.
Q.7. Chairman Schapiro and Chairman Gensler, the Dodd-Frank Act
placed great emphasis on moving over-the-counter derivatives
into clearinghouses for the purpose of reducing risk in the
financial system. While this is a laudable goal, if not
properly constructed, clearinghouses could be the too-big-to-
fail entities at the center of the next crisis. The last thing
the American people want to do is pay for another bailout.
What is each of you doing to ensure that the rules take
seriously the potentially disastrous consequences of a misstep
in the operation or oversight of clearinghouses?
A.7. The Commission is in the process of proposing detailed
rules for derivatives clearing organizations (DCOs). These
proposals contain standards concerning financial resources,
margin, and risk management with which DCOs will be required to
comply. The Commission also conducts daily risk surveillance of
DCOs, clearing members, and large traders and periodic reviews
of DCO compliance with the Commodity Exchange Act and
Commission regulations.
Q.8. Chairman Schapiro and Chairman Gensler, at a time when our
economy is in terrible shape, we need to be particularly
attentive to the unintended consequences of regulatory actions.
Main Street businesses, large and small, have told us how
imposing clearing and margin requirements on them will affect
their ability to expand and hire. An effective, broad end user
exemption is essential and completely consistent with the goals
of transparency and mitigation of risk to the financial system.
Are you committed to crafting a broad end user exemption
that allows our job creators to avoid costly clearing, margin,
exchange trading, and other obligations under the Act?
A.8. The concerns of end users are being given a great deal of
attention by the Commissioners and the staff. Their concerns
will continue to be of great importance throughout the
rulemaking process. The Dodd-Frank Act was enacted to reduce
risk, increase transparency, and promote market integrity
within the financial system. The rulemakings are intended to
implement those goals, all of which will benefit customers,
particularly end users, using the market. There is no intention
to unnecessarily increase burdens on end users seeking to
reduce their commercial risks.
Q.9. Chairman Schapiro and Chairman Gensler, Dodd-Frank
mandates that both of your agencies adopt an unprecedented
number of rules in a very short period of time. And, as you
know, each of your agencies has a ``statutory obligation to do
what it can to apprise itself--and hence the public and the
Congress--of the economic consequences of a proposed regulation
before it decides whether to adopt the measure.''
However, a recent news article pointed out that both the
SEC and the CFTC have been without Chief Economists for months.
Chairman Schapiro and Chairman Gensler, why have your Chief
Economist positions gone unfilled for so long?
How can you expect to adequately consider the economic
consequences of all of your proposed rules with unfilled Chief
Economist positions?
A.9. The CFTC recently announced the appointment of Dr. Andrei
Kirilenko as Chief Economist. Dr. Kirilenko, who received his
Ph.D. in Economics from the University of Pennsylvania, has
been with the CFTC since 2008. Prior to joining the agency, he
worked for 12 years at the IMF working on global capital
markets issues. During the process of selecting a Chief
Economist, the Commission's Acting Chief Economist, the other
economists in the Office of the Chief Economist, and other
economists on the Commission's staff took an active role in the
Dodd-Frank rule-writing process.
Q.10 Chairman Schapiro and Chairman Gensler, the derivatives
title of the Dodd-Frank Act establishes new entities called
``swap execution facilities'' and ``security-based swap
execution facilities,'' commonly referred to as ``SEFs,'' as
alternatives to exchanges. Ideally, multiple SEFs will compete
to give market participants several different choices for
trading particular types of swaps.
Given the SEC's experience in overseeing securities markets
in which participants have the choice of several different
trading venues, what is each of you doing to ensure that the
CFTC has the benefit of the SEC's expertise in this area?
A.10. I have encouraged the CFTC staff to consult with and
coordinate their rule-writing efforts with the SEC staff
whenever appropriate in the implementation of the Dodd-Frank
Act including the drafting of rules to govern SEFs. As part of
ongoing communications, contacts between the two staffs have
included more than 100 meetings.
Q.11. Chairman Schapiro and Chairman Gensler, Title VIII
authorizes your agency to prescribe regulations for financial
institutions engaged in designated activities for which each is
the Supervisory Agency or the appropriate financial regulator
governing the conduct of the designated activities.
What plans do you have for exercising this authority?
A.11. The Commission issued a proposed rule that was published
in the Federal Register of October 14, 2010, addressing the
financial resources of derivatives clearing organizations
(DCOs) that might be designated as systemically important under
Title VIII.
Q.12. The Financial Stability Oversight Council is an important
feature of Dodd-Frank. During the conference, my amendment was
adopted to clarify the role of the Council and the Federal
Reserve. My amendment gave the Council responsibility for
financial stability regulation. Up to that point, the
legislation had colocated this responsibility at the Fed and
the Council. The Congressional intent is clear that you, as
members of the Council, are responsible for all policy matters
related to financial stability. After the Council acts,
implementation of your policy determinations will fall to the
individual Federal financial regulators, including, of course,
the Fed.
With this in mind, I would like each of you to comment on
your preparations to serve on the Council:
Have you directed your staff to examine and study all of
the issues that will come before you?
A.12. Yes.
Q.13.Are you prepared to participate on the Council, not as a
rubber stamp for the Chairman of the Council, but as a fully
informed individual participant?
A.13. Yes.
Q.14. Secretary Geithner has argued that there is a strong case
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published
a paper that proposes Government guarantees of a wide range of
asset backed securities, including those backed by mortgages,
credit cards, autos, student loans, commercial real estate, and
covered bonds. While some may believe that the Government will
charge fair prices for Government guarantees, the history of
Government run insurance programs suggests that things will not
go well.
Does anyone on the panel support extending or increasing
Government insurance against losses on asset backed securities
which, it seems to me, socializes risk, puts taxpayers on the
hook for losses, and protects Wall Street against losses?
A.14. The Commission does not have a position on this issue.
Q.15. Please provide the Committee with an implementation
schedule that includes:
A list of the rules and studies that your agency is
responsible for promulgating or conducting under Dodd-Frank and
the date by which you intend to complete each rule or study;
and . . .
A.15. We identified 30 areas where rules will be necessary and
assigned teams of staff to work on rulemakings for each of
these areas.
Following each team on the list are found the date of the
Commission meeting to consider the Advanced Notice of Proposed
Rulemaking (ANPR) or Notice of Proposed Rulemaking (NPR), the
Final Rule (FR) or the anticipated date of those meetings that
have been scheduled.
I. Registration (NPR 11/10/10)
II. Definitions, such as Swap Dealer, Major Swap
Participant, Security-Based Swap Dealer, and Major
Security-Based Swap Participant, to be Written Jointly
with SEC (NPR 12/1/10)
III. Business Conduct Standards with Counterparties
(NPR 12/9/10)
IV. Internal Business Conduct Standards (NPR 11/10/10),
(NPR 12/16/10), (NPR 1/13/11)
V. Capital & Margin for Nonbanks (NPR 1/20/11)
VI. Segregation & Bankruptcy for both Cleared and
Uncleared Swaps (uncleared, NPR 11/19/10; cleared, ANPR
11/19/10) (NPR wk of 2/21/11)
Clearing:
VII. DCO Core Principle Rulemaking, Interpretation &
Guidance (NPR 9/30/10), (NPR 12/1/10), (NPR 12/16/10)
VIII. Process for Review of Swaps for Mandatory
Clearing (NPR 10/26/30)
IX. Governance & Possible Limits on Ownership & Control
(NPR 9/30/10), (NPR 12/9/10)
X. Systemically Important DCO Rules Authorized Under
Title VIII (NPR 16/10), (FR 1/19/11)
XI. End-user Exception (NPR 12/9/10)
Trading:
XII. DCM Core Principle Rulemaking, Interpretation &
Guidance (NPR 12/1/10)
XIII. SEF Registration Requirements and Core Principle
Rulemaking, Interpretation & Guidance (12/16/10)
XIV. New Registration Requirements for Foreign Boards
of Trade (NPR 11/10/10)
XV. Rule Certification & Approval Procedures
(applicable to DCMs, DCOs, SEFs) (NPR 10/26/10)
Data:
XVI. Swap Data Repositories Registration Standards and
Core Principle Rulemaking, Interpretation & Guidance
(Int. FR 9/30/10), (NPR 11/19/10)
XVII. Data Record Keeping & Reporting Requirements (NPR
11/19/10), XVIII. Real Time Reporting (NPR 11/19/10)
Particular Products:
XIX. Agricultural Swaps (ANPR 9/20/10), definitions
(NPR 10/19/10), (FR 1/20/11)
XX. Foreign Currency (Retail Off Exchange) (FR 9/3/10)
XXI. Joint Rules with SEC, such as ``Swap'' and
``Security-Based Swap'' (NPR week of 2/7/11)
XXII. Portfolio Margining Procedures (combined with VI
above and other rules)
Enforcement:
XXIII. Antimanipulation (NPR 10/26/10)
XXIV. Disruptive Trading Practices (ANPR 10/26/10),
(NPR wk of 2/21/11)
XXV. Whistleblowers (NPR 11/10/10)
Position Limits:
XXVI. Position Limits, including Large Trader
Reporting, Bona Fide Hedging Definition & Aggregate
Limits (large trader reporting NPR 10/19/10), (NPR 12/
16/10), (NPR 1/13/11)
Other Titles:
XXVII. Investment Adviser Reporting (NPR 1/20/11)
XXVIII. Volcker Rule (not scheduled)
XXIX. Reliance on Credit Ratings (NPR 10/26/10)
XXX. Fair Credit Reporting Act and Disclosure of
Nonpublic Personal Information (NPR 10/19/10)
Recently an additional team was created and assigned the
task of writing conforming rules.
A comprehensive schedule for the rulemaking process was set
out with dates for technical conferences on many of the rules,
dates to circulate drafts of rule proposals to Commissioners,
dates for meetings to consider Advanced Notices of Proposed
Rules and Notices of Proposed Rules and comment periods. The
public, including the regulated industry, other businesses that
may be affected, interest groups, and others, have been
encouraged to participate in the process through filing writing
comments. Schedules for the adoption of final rules have not
been set because in large part the staff recommendations to the
Commission and the views of the Commissioners themselves are
expected to be significantly affected by the public comments.
Q.16. A list of the reorganizational tasks your agency will
undertake to fulfill the mandates of Dodd-Frank and the date by
which you intend to complete each task.
A.16. The Commission has discussed potential reorganizations;
however, given uncertainties of funding, staffing, and other
issues no final reorganization plans have been adopted.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM GARY GENSLER
Q.1. Over the last 15 years, the 6 biggest banks grew from
having assets equal to 17 percent of GDP to 63 percent of GDP.
The four largest banks control about 48 percent of the total
assets in the Nation's banking system. And the 5 largest dealer
banks control 80 percent of the derivatives market and account
for 96 percent of the exposure to credit derivatives.
Part of the Volcker Rule, section 622 of the Dodd-Frank
Act, requires the Financial Stability Oversight Council (FSOC),
of which your organizations are a member, to study and make
recommendations concerning the effects of financial sector
concentration on financial stability, moral hazard, efficiency,
and competitiveness in the financial system. Subject to these
recommendations, no company will be permitted to hold more than
10 percent of the liabilities held by all financial companies,
with some significant exceptions.
What are effects does concentration in the financial
industry have on financial stability, moral hazard, efficiency,
and competitiveness?
Given that the six biggest banks alone have about $7.4
trillion in liabilities, almost 53 percent of GDP, do you think
this provision will meaningfully restrict the size of financial
institutions?
How should this rule be implemented to address financial
stability, moral hazard, efficiency, and competitiveness?
Can you identify any potential loopholes in the existing
provision?
As I've made clear before, I think the largest financial
firms in this country are just too large, and that their
massive size threatens our economic security and puts us at
risk in future crises.
I think the rise of proprietary trading was one of the key
drivers behind the massive growth in our largest financial
institutions. Firms were taking on ever increasing prop trading
positions, often with highly unstable short term financing, and
when things froze up, the house of cards collapsed. The Volcker
Rule looks to stop this risk.
I know that my colleagues, Senator Merkley and Senator
Levin, drafted section 619 of the Dodd-Frank Act to ensure
broad coverage of the prohibition on proprietary trading by
banks, and meaningful restrictions on the largest nonbank
financial firms. Nevertheless, one of the concerns I have is
that firms may try to evade the restrictions. Particularly, I'm
concerned that if the regulators set a definition of ``trading
account'' that is too narrow, it might not capture all of the
risks of proprietary trading. These evasions could only happen
if the regulators ignore the clear direction of the law to stop
proprietary trading.
Are you prepared to take a broad view on the definition of
``trading account'' and examine and prevent proprietary
trading, wherever it occurs?
A.1. Section 619 of the Dodd-Frank Act defines ``trading
account'' to mean any account used for acquiring or taking
positions in the securities and instruments described in
paragraph (4) principally for the purpose of selling in the
near term (or otherwise with the intent to resell in order to
profit from short-term price movements), and any such other
accounts as the appropriate Federal banking agencies, the
Securities and Exchange Commission, and the Commodity Futures
Trading Commission may, by rule, determine. The FSOC is
currently conducting its study that will provide
recommendations on the Volcker Rule, and whether the definition
in this section is adequate to enforce the Volcker Rule;
however, at this time because this study is still underway, I
believe that it is too early to opine on the definition of
``trading account.''
Q.2. In short, are you prepared to use the full power of the
Merkley-Levin provisions to cut the size and riskiness of our
banks so they get back to the business of lending to families
and businesses?
A.2. The CFTC is committed to using its resources to ensure
that applicable CFTC regulated entities will be monitored to
seek to ensure compliance of the CFTC promulgated rules
relating to the Volcker Rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM GARY GENSLER
Q.1. Regulatory Structure for Volcker Rule. As you know, the
objectives of the Merkley-Levin Volcker Rule are two-fold: (1)
to address the specific risks to our financial stability caused
by proprietary trades gone bad, and (2) to take on the
conflicts of interests in proprietary trading.
Ensuring effective oversight will be challenging, because
the issues are complicated. As you could see from the exchange
at the hearing between Senator Reed and Chairman Bernanke, with
interjections by Chairman Shapiro and Mr. Walsh, I and others
are beginning to come of the view that there will have to be
oversight at two levels. First, there will need to be real-time
(or as close as practicable) monitoring and enforcement at the
individual trade-by-trade level, which looks to whether any
given transaction is proprietary trading. This will be
necessary to ensure that the permitted activities are not
abused. Second, there will need to be macro-level reviews of
policies and procedures, and overall portfolio holdings. This
will be necessary to ensure that proprietary positions and
conflicts of interest are not cropping up despite the
restrictions. In addition to monitoring and enforcing the
proprietary trading and conflicts of interest restrictions,
regulators are also tasked with setting appropriate capital
charges, both for permitted activities, and, in the instances
of nonbank financial companies supervised by the Board, capital
charges for all covered activities.
Your agencies appear to have somewhat different strengths
in these areas, with perhaps the SEC and CFTC having greater
experience policing the securities and derivatives markets for
trading violations, and the banking regulators having greater
experience evaluating the safety and soundness of firms and
setting appropriate capital charges and levels.
Share with me your view about the strengths you believe
your agency brings to the oversight and enforcement of the
Merkley-Levin Volcker Rule? Are you committed to working with
your fellow regulators to best use your agency's strengths in
the effort to keep our financial system safe?
A.1. The CFTC has the ability to collect and analyze trade data
in regulating and supervising the futures markets. The agency
also has capabilities for auditing and reviewing
intermediaries. These tools would be available to the CFTC to
help enforce all aspects of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. The CFTC is committed to keeping
our financial system safe and to working with all other fellow
financial regulatory agencies toward that objective.
Q.2. Data Collection. The Dodd-Frank Act requires a significant
amount of new data collection and storage, particularly in the
derivatives arena. The SEC and CFTC have made a priority of new
data collection in a number of areas. Collection and the
ability to automate reviews of the data will be critical to
enforcing a wide range of mandates under Dodd-Frank, including
derivatives position limits, the Volcker Rule provisions, and
other parts of the bill. At a minimum, your staffs will need to
know who's making trades, the prices, how long firms hold onto
their positions, and whether and how their positions are
hedged.
Where is your agency in terms of thinking through the
relevant data you will need to collect?
Are there any major challenges you see in being able to
collect and analyze that data in real-time, so as to ensure
compliance with these various restrictions?
How do you see the newly created Office of Financial
Research playing into this process?
A.2. On November 19th the Commission held an open meeting to
consider, among other things, requirements and duties of swap
data repositories; real time public reporting requirements of
swap transactions; and record keeping and reporting
requirements for swaps entities. These proposed rules were
published in the Federal Register in December 2010.
The proposed rules specify minimum data fields and/or
categories that must be reported to the public and to swap data
repositories. The data reported to swap data repositories will
allow the staff to identify parties involved in a trade, the
prices, how long counterparties hold onto their position, among
other things. The staff identified major categories of relevant
data that needs to be collected based on the instrument type
and asset-class underlying.
The proposal requires real time reporting for swap
transaction and pricing data to occur as soon as
technologically practicable for trades other than trades of
large notional size or block trades.
The proposal implements the Dodd-Frank Act direction that
regulators have direct access to information maintained by swap
data repositories. We are currently in the public comment
period and will be considering those comments before the
Commission adopts and final rules in these areas.
Agency staffs are meeting to coordinate data collection and
analysis and to efficiently identify market interconnectedness.
To achieve that, the Commission staff is involved in numerous
consultations with various Federal Government agencies
including the Office of Financial Research.
Q.3. Cross-border Resolution. I know FDIC and to some extent
others have been working very diligently to implement the new
resolution authority for our Nation's large complex financial
institutions--which owes so much to my colleagues on this
Committee from Virginia and Tennessee.
But one of the areas I want to keep an eye on--and on which
I offered an amendment during financial reform to provide
additional oversight of--is how to make that resolution work
for large firms operating across multiple national borders.
Where are we in terms of making the Dodd-Frank resolution
authority work for large, systemically significant financial
firms operating across borders? How cooperative have our
international partners been in this effort?
A.3. Our role in responding to the insolvency of firms such as
holding companies with a Futures Commission Merchant (FCM)
subsidiary is somewhat limited, such as assisting in the
transfer of customer funds and positions, advising the
bankruptcy court with respect to the FCM, and exchanging
information with foreign regulators concerning our respective
regulated entities. We do not undertake the operational role
envisioned under the Dodd-Frank Act for the FDIC.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM GARY GENSLER
Q.1. Mr. Gensler, I support the concept of regulating
derivatives because they helped cause the problem. But I do
understand that some businesses use derivatives to manage
legitimate business risk. How will dealers be encouraged to not
pass on additional capital and regulatory costs to businesses
that are end users, and how will the regulators know whether a
derivative is being used to manage commercial risk?
A.1. On December 9, 2010, the Commission issued proposed rules
to implement the end user exception to mandatory clearing that
was contained in Section 2(h)(7) of the Dodd-Frank Act, which
were published in the Federal Register of December 23, 2010.
This provision of the Dodd-Frank Act generally provides that a
swap otherwise subject to mandatory clearing is subject to an
elective exception from clearing if one party to the swap is
not a financial entity, and is using swaps to hedge or mitigate
commercial risk. A number of commercial end-users were
concerned that mandatory clearing would require them to deposit
cash in margin accounts. The Commission rule proposal also
addresses the need to verify that swaps exempt from clearing
and margining were entered into to mitigate commercial risk.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM GARY GENSLER
Q.1. Congress clearly intended, as Chairman Dodd and Chairwoman
Lincoln set forth in a letter that: ``The legislation does not
authorize the regulators to impose margin on end-users, those
exempt entities that use swaps to hedge or mitigate commercial
risk . . . Again Congress clearly stated in this bill that the
margin and capital requirements are not to be imposed on end-
users.''
Do you agree with the Congressional intent of the Dodd-
Lincoln letter?
In setting capital requirements under Title VII, do you
agree that increases in capital requirements will be linked to
the risk associated with the swap, and not as a punitive
mechanism to drive volume to central clearinghouses or
exchanges?
Please describe any and all cost-benefit analysis,
particularly with regard to end-users, that you will undertake
prior to issuing rules.
A.1. The Dodd-Frank Act was enacted to reduce risk, increase
transparency, and promote market integrity within the financial
system. At the Commission's open meeting on December 1, I
stated that ``my view is that uncleared swaps entered into
between financial entities pose more risk to the financial
system than those where one of the parties is a nonfinancial
entity.''
I further stated that ``Interconnectedness among financial
entities allows one entity's failure to cause uncertainty and
possible runs on the funding of other financial entities, which
can spread risk and economic harm throughout the economy. We
know from the AIG debacle that the interconnectedness of
financial entities through their swap books raises the risks of
bailouts. Transactions involving nonfinancial entities,
however, do not present the same risk to the financial system
as those solely between financial entities. The risk of a
crisis spreading throughout the financial system is greater the
more interconnected financial companies are to each other. I
think that Congress also recognized the different levels of
risk posed by transactions between financial entities and those
that involve nonfinancial entities, as reflected in the
nonfinancial end-user exception to clearing. Consistent with
this, I believe that proposed rules on margin requirements
should focus only on transactions between financial entities
rather than those transactions that involve nonfinancial end-
users. I would be interested to hear views from the public on
this issue.''
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM JOHN WALSH
Q.1. Recent news reports have detailed disturbing information
about servicers' foreclosure processes. Allegations have ranged
from forged documents to the signing of eviction notices
without review.
What evidence have your agencies found in regards to these
charges? What actions have been undertaken by your agencies
both to address this situation and to prevent future abuses?
A.1. To date, six large national bank servicers have publicly
acknowledged procedural deficiencies in their foreclosure
processes. The lapses that have been reported represent a
serious operational breakdown in foreclosure governance and
controls that national banks should maintain. These lapses are
unacceptable, and we are taking aggressive actions to hold
national banks accountable, and to get these problems fixed.
As soon as the problems at Ally Bank--which is not
supervised by the OCC--came to light, the OCC directed the
largest national bank mortgage servicers under our supervision
to review their operations, to take corrective action to remedy
identified problems, and to strengthen their foreclosure
governance to prevent recurrences. At the same time, we
initiated plans for intensive, on-site examinations of the
eight largest national bank mortgage servicers. The Federal
Reserve Board and the Federal Deposit Insurance Corporation
(FDIC), are participating in these examinations.
Our examination objectives are to independently test and
verify the adequacy and integrity of bank self-assessments and
corrective actions; the adequacy and effectiveness of
governance over servicer foreclosure processes to ensure
foreclosures are completed in accordance with applicable legal
requirements and that affidavits and claims are accurate; and
to determine whether troubled borrowers were considered for
loss mitigation alternatives such as loan modifications prior
to foreclosure. The scope of work to assess governance is
extensive and includes an assessment of each servicer's
foreclosure policies and procedures, organizational structure
and staffing, vendor management, quality control and audit,
loan documentation including custodial document management, and
foreclosure work flow processes. We also will test and validate
the effectiveness of foreclosure governance and adequacy of the
bank's self-assessment including corrective actions taken and/
or planned.
Examiners will also be reviewing samples of individual
borrower foreclosure files from judicial and nonjudicial States
that include both in-process and completed foreclosures. In
reviewing these files, examiners will determine whether
foreclosed borrowers were appropriately considered for
alternative loss mitigation actions such as a loan
modification. Examiners will also check for the following:
A documented audit trail that demonstrates that
data and information (e.g., amount of indebtedness and
fees) in foreclosure affidavits and claims are accurate
and comply with State laws;
Possession and control over the underlying,
critical loan documents such as original note,
mortgage, and deed of trust to support legal
foreclosure proceedings; and
Evidence that the affidavit and documents were
appropriately reviewed, and that proper signatures were
obtained.
In addition to these loan file reviews, examiners will
review the nature, volume, and resolution of foreclosure-
related complaints. These will include complaints received by
the OCC's Customer Assistance Group as well as complaints
received by the banks.
Finally, examiners will assess the adequacy of each bank's
analysis and financial reporting for the potential adverse
impact on the bank's balance sheet and capital that may arise
from the increased time and costs needed to correct any
procedural errors; losses (if any) resulting from inability to
access collateral; and expected litigation costs. We are
directing banks to maintain adequate reserves for potential
losses and other contingencies and to make appropriate
disclosures, consistent with applicable Securities and Exchange
Commission disclosure rules.
As our examination work proceeds, where we find errors or
deficiencies, we are directing banks to take immediate
corrective action. We are also responding to the concerns that
have been raised about the so-called ``dual track'' foreclosure
process when a borrower is in a trial loan modification. We
recognize that the so-called ``dual track'' process is
confusing for many consumers and risks consumers receiving
mixed or contradictory information. As a result, we have
directed the large national bank servicers, when they have the
legal ability to do so, to suspend foreclosure proceedings for
borrowers who are in a trial modification and are performing
according to the terms of the modification agreement. This
directive is modeled on provisions that the Treasury Department
has adopted for trial modifications made under the HAMP
program. It is important to note, however, that the terms and
conditions for non-HAMP modifications, and the ability of
servicers to suspend foreclosure processes, may be
significantly affected--and limited--by requirements imposed by
the GSEs and agreements with private investors.
Using our authority under the Bank Service Company Act, we
also are conducting interagency examinations of two major
nonbank mortgage service providers. In coordination with the
Federal Reserve Board, FDIC and the Federal Housing Finance
Administration, the OCC is leading an on-site examination of
the Morlgage Electronic Registration System (MERS), which
operates a system that electronically registers and tracks
mortgage ownership interests and servicing rights and may serve
as the mortgagee of record as a nominee/agent of the owner of a
loan (the lender or subsequent investor). A key objective of
the MERS examination is to assess MERS corporate governance,
control systems, and accuracy and timeliness of information
maintained in the MERS system.
We also are participating in an examination being led by
the Federal Reserve Board of Lender Processing Services Inc.
(LPS) which provides third party foreclosure services to banks.
The OCC is focused on identifying and rectifying problems
so that the basic function and integrity of the foreclosure
process is restored; the rights of all homeowners subject to
the foreclosure process are protected; and the basic
functioning of the U.S. mortgage market is stabilized. As we
move forward we will continue to cooperate with the many
inquiries and investigations that are taking place.
Q.2. What policies and procedures have your agencies put in
place to ensure compliance with State laws, and when were they
implemented?
A.2. The OCC's Mortgage Banking Handbook, which provides
guidance to the industry and examiners on risks associated with
mortgage banking activities, states that ``a bank that
originates and/or services mortgages is responsible for
complying with applicable Fderal and State laws.'' As a general
matter, we expect national banks to know what laws apply to
their business activities, whether Federal or State, to have
policies and procedures for complying with those laws, and to
have ongoing quality controls and audits that test compliance
with these procedures.
Q.3. Mr. Walsh, your testimony states that there appears to be
an inconsistency in the duties assigned to the banking agencies
and the CFPB with respect to fair lending, and that this
creates confusion in responsibilities. Could you elaborate?
A.3. Fair lending compliance and reporting requirements are
contained in provisions of the Fair Housing Act, Equal Credit
Opportunity Act and the Home Mortgage Disclosure Act. The Dodd-
Frank Act provides the Consumer Financial Protection Bureau
(CFPB) with exclusive examination and enforcement authority
over national banks (and other insured depository institutions)
with assets greater than $10 billion with respect to the Equal
Credit Opportunity Act and the Home Mortgage Disclosure Act
(Secs. 1025, 1002(12)(D), 1002(12)(K)). However, the law does
not transfer to the CFPB the authority to examine insured
depository institutions with assets over $10 billion for
compliance with the Fair Housing Act. See, Sec. 1002 (defining
``enumerated consumer laws''); see, also Sec. 1027(s)
(preserving current authorities under the Fair Housing Act).
Continuing the banking agencies' supervision of Fair
Housing Act compliance for institutions over $10 billion in
asset size will potentially result in duplication of, or
overlap with, the CFPB's supervision and in inconsistencies in
supervisory approach between the banking agencies and the CFPB.
If Congress did not intend this jurisdictional split,
amendments to Title X of the Dodd-Frank Act would be needed.
Q.4. Mr. Walsh, your testimony identifies that Dodd-Frank
requires Federal banking agencies to make capital standards
countercyclical. How will that be accomplished?
A.4. As you know, the OCC, along with the other U.S. banking
agencies, are participating in the international efforts to
revise and improve regulatory capital standards as part of the
Basel III reform process. Throughout the development of these
new standards, we have made a concerted effort to reduce the
cyclicality of capital requirements. The countercyclical
elements of Basel III operate both at the bankwide level,
through the introduction of capital buffers and a new
international leverage ratio, and at the exposure level,
through the assignment of higher capital requirements to
certain types of transactions and risks that proved most
problematic during the crisis.
Basel III will create countercyclical bank-level capital
requirements through the introduction of capital conservation
buffers. These capital conservation buffers essentially raise
the capital ratios at which banks will operate. If a bank dips
into the capital conservation buffer range, it faces
constraints on its capital distributions including constraints
on dividends and discretionary bonuses. The capital buffers
will reduce the cyclicality of capital requirements by creating
incentives for banks to hold high levels of capital during good
times that can then be drawn down during periods of economic
stress. This additional capital cushion will also make it
easier for banks to lend during a downturn without fear of
broaching minimum capital requirements, which will help to
reduce the likelihood of a credit crunch.
Basel III will also introduce an international leverage
ratio that is intended to limit the build-up of excessive
leverage and serve as a backstop to the risk-based capital
requirements. While the United States already employs a
leverage ratio, the international leverage ratio will also
incorporate certain off-balance sheet elements, which will
strengthen the ability of the leverage ratio to serve as a
governor on excessive leverage.
At the individual exposure level, Basel III will reduce the
cyclicality of capital requirements for trading book exposures
by requiring banks to explicitly incorporate stress periods
when assigning capital to these positions. In contrast, the
existing capital requirements only require banks to make use of
recent experience, which during benign periods led to capital
requirements that proved to be too low. Similarly, Basel III
reforms will also require banks to consider stress periods when
assessing capital for counterparty credit risk. By using
periods of stress to assign capital requirements for trading
book positions and counterparty exposures, the amount of
capital required will be less variable over the business cycle,
and more capital will be required before a downturn instead of
once the downturn occurs.
Basel III will also require more capital for bank exposures
to certain other financial institutions, particularly large
banks and highly leveraged firms such as hedge funds. By
requiring more capital for exposures to other financial
institutions, each bank under Basel III will be better able to
withstand a negative shock to another financial institution,
thereby reducing the likelihood of contagion that was clearly
evident during the crisis.
Basel III will also significantly increase capital
requirements under the Standardized Approach for certain bank
exposures to asset-backed commercial paper (ABCP) programs.
During the crisis, some banking organizations decided to
support their ABCP programs and similar structures such as
structured investment vehicles. This support required
additional capital at the most inopportune time. By raising
capital requirements for these programs, capital will be
required to be held up front, resulting in a smoothing of
capital requirements over the cycle.
The enhancements under Basel III described above represent
significant progress in limiting the cyclicality of capital
requirements; however, it is worth noting that there are limits
with respect to the extent to which capital requirements can be
made less cyclical. Capital requirements are meant to be
reflective of risk, and if risk increases for a bank during a
downturn, one would expect capital requirements to also rise
during a downturn. Despite this limitation, we believe the
Basel III changes noted above will reduce the cyclicality of
regulatory capital standards, and we will continue to work to
make capital requirements less cyclical and will consider
cyclicality in every capital rulemaking we undertake, as
required under Dodd-Frank.
Lastly, it is also important to note that the Basel
Committee and the banking agencies are actively engaged in
efforts to reduce procyclicality through changes in areas other
than the capital rules, Specifically, the Committee and the
agencies are advocating changes in domestic and international
accounting standards that would promote stronger and less
procyclical provisioning practices, Both the Financial
Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB) have proposed changes to the
current ``incurred loss model'' of provisioning that would move
the standards towards an expected loss (EL) approach. The OCC,
along with the other agencies are providing input to both the
FASB and IASB in their efforts to finalize an EL approach to
provisioning to permit earlier-in-the-cycle provisioning that
captures credit losses more transparently and results in a less
procyclical regime than the current ``incurred loss'' approach.
Q.5. The Financial Stability Oversight Council is an important
feature of Dodd-Frank. During the conference, my amendment was
adopted to clarify the role of the Council and the Federal
Reserve. My amendment gave the Council responsibility for
financial stability regulation. Up to that point, the
legislation had colocated this responsibility at the Fed and
the Council. The Congressional intent is clear that you, as
members of the Council, are responsible for all policy matters
related to financial stability. After the Council acts,
implementation of your policy determinations will fall to the
individual Federal financial regulators, including, of course,
the Fed.
With this in mind, I would like each of you to comment on
your preparations to serve on the Council:
Have you directed your staff to examine and study all of
the issues that will come before you? Are you to prepared to
participate on the Council, not as a rubber stamp for the
Chairman of the Council, but as a fully informed individual
participant?
A.5. Yes, The OCC is fully committed to the independent
exercise of its authority and judgment in tile Council's
deliberations and actions, and there are statutory provisions
that broadly protect the OCC's independence. These statutory
independence provisions would cover matters that arise in
connection with the OCC's membership on the Council.
Moreover, the OCC has put staffing arrangements in place to
ensure that the OCC's participation on the Council is informed
by careful staff review and analysis of the matters the Council
considers. We have committed staff resources to the support of
its Council responsibilities that are commensurate with scope
and importance of the Council's work. For example, the OCC's
Senior Deputy Comptroller/Chief National Bank Examiner serves
on the Council's deputies' committee. He is supported by staff
at the deputy comptroller level, specialists in various areas
of supervisory policy, and, in the Law Department, by lawyers
expressly assigned to support Council-related work.
Q.6. Secretary Geithner has argued that there is a strong case
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published
a paper that proposes Government guarantees of a wide range of
asset-backed securities, including those backed by mortgages,
credit cards, autos, student loans, commercial real estate, and
covered bonds. While some may believe that the Government will
charge fair prices for Government guarantees, the history of
Government run insurance programs suggests that things will not
go well.
Does anyone on the panel support extending or increasing
Government insurance against losses on asset-backed securities
which, it seems to me, socializes risk, puts taxpayers on the
hook for losses, and protects Wall Street against losses?
A.6. We believe that this is a public policy issue that is for
Congress to decide. Should the Congress determine that such
guarantees are in the public interest, we would incorporate
this into our supervision of the assets.
Q.7. Please provide the Committee with an implementation
schedule that includes: A list of the rules and studies that
your agency is responsible for promulgating or conducting under
Dodd-Frank and the date by which you intend to complete each
rule or study.
A.7. Please see the chart attached as Appendix A [Ed.: See Page
196], which details the rules and studies the OCC is
responsible for under Dodd-Frank (either as primary drafter or
in a consultative capacity) and the target dates for completion
of each rule or study.
Q.8. Please provide the Committee with an implementation
schedule that includes: A list of the reorganizational tasks
your agency will undertake to fulfill the mandates of Dodd-
Frank and the date by which you intend to complete each task.
A.8. The OCC is engaged in a number of tasks to plan for and
accomplish the integration of the OTS's personnel and its
supervision of Federal savings associations into the OCC; the
establishment of our Office of Minority and Women Inclusion;
and the transfer of certain OCC functions and personnel to the
CFPB.
In addition to the list of items below, section 327(a) of
the Dodd-Frank Act requires the OCC, the FDIC, the OTS, and the
Board of Governors of the Federal Reserve System (FRB) to
submit an Implementation Plan to the Committee on Banking,
Housing, and Urban Affairs of the Senate, the Committee on
Financial Services of the House of Representatives, and the
Inspectors General of the Department of the Treasury, the FDIC,
and the FRB. The Plan, which must be submitted by January 17,
2011, will provide additional details with respect to the
integration of the OTS into the OCC.
OTS/OCC Integration
The OCC has established a transition team, headed
by the Senior Deputy Comptroller/Chief Financial
Officer, to coordinate and supervise the implementation
of all issues involving the integration of OTS
functions and personnel.
Pursuant to section 314 of the Dodd-Frank Act, we
have designated a Deputy Comptroller for Thrift
Supervision, who will lead the agency's planning
process for integration of OTS examination and
supervision functions and staff into the OCC. He will
report to the Senior Deputy Comptroller for Midsize/
Community Bank Supervision.
Pursuant to the Dodd-Frank Act, the Director of the
OTS, the Comptroller of the Currency, and the
Chairperson of the FDIC must jointly determine the
number of OTS employees needed to perform the functions
transferred and identify employees for transfer to the
OCC or FDIC. While the final number of OTS employees
who will transfer to the OCC has not yet been
determined, senior managers from the OCC, OTS, and FDIC
are meeting regularly to discuss the process and to
identify and address mutual concerns and issues for
resolution.
We also have begun the process of integrating our
examination workforce by developing plans to enroll
recent OTS hires in OCC national bank examiner training
courses. Pursuant to the statute, OTS personnel coming
to the OCC will be transferred not later than 90 days
after the transfer date.
The OCC intends to integrate transferred employees
into the agency's organizational structure and pay plan
as soon as possible and to maintain existing OCC human
resources policies.
The transition team also is reviewing and comparing
employee benefits and any related contracts, including
those under the OTS's Financial Institutions Retirement
Fund (FIRF), which covers some OTS employees, and other
supplemental retirement benefits.
OCC staff is now participating in OTS supervisory
review committee presentations for problem banks, and
sharing information on other institutions and
supervisory strategies. The development of examination
plans and supervisory strategies for national banks and
Federal thrifts for fiscal year 2012 will be conducted
jointly and is scheduled to begin in January 2011.
The OCC is working closely with the OTS to review
the status of leased office space supporting thrift
supervision, including the leasing decisions required
over the next 2 years. This review includes an
assessment of space needs to support thrift supervision
staff throughout the country, as well as the continuing
space requirements for more than 3,000 current OCC
employees.
We have posted on our internal Web site a number of
frequently asked questions and answers regarding the
OTS/OCC integration.
Establishment of the OCC's Office of Minority and Women Inclusion
The OCC has moved promptly to fulfill the
requirements of Section 342 of the Dodd-Frank Act.
Shortly after passage of the Act, the agency's Human
Resources office, in consultation with senior OCC
leadership, developed a job description for the
position of Director and advertised the position within
the OCC in accordance with our policies and principles
for merit promotion and internal placement. The process
for evaluating eligible candidates is complete and a
selection will be announced shortly.
Once a selection is made, the Director will play an
integral role in determining the orgranizational
structure and the number of staff needed to
successfully carry out his or her responsibilities. We
expect to have the office organized and functioning on
or before mid-January, 2011.
Transfer of OCC Functions and Personnel to the CFPB
The OCC is coordinating with the Department of
Treasury to identify personnel that could be
transferred to the CFPB. This involves identifying
those OCC employees who have both the skills needed by
the CFPB and are interested in transferring to the
CFPB.
We also have solicited expressions of interest from
employees who may be interested in moving to the CFPB.
To help keep OCC employees informed, the OCC has posted
on our internal Web site a number of frequently asked
questions and answers regarding the CFPB. In addition,
on November 10, the OCC held an agencywide
teleconference to inform OCC employees about
developments regarding the CFPB.
Acting Comptroller Walsh and other senior managers
at the OCC recently met with Treasury officials and
Professor Warren to discuss issues related to the
transfer of OCC personnel. To further the understanding
of our current operations, we also have provided
extensive materials to Treasury staff, including
organizational charts describing our consumer
protection functions, details about the national banks
with more than $10 billion in assets that the CFPB will
assume responsibility to examine, position
descriptions, and FTE requirements for supervision.
In addition to assist with the organization of the
CFPB, we have detailed employees to the CFPB and
provided technical assistance to CFPB organizers
relating to bank supervision, consumer compliance and
consumer complaint functions, and internal systems and
issues such as payroll, procurement, and benefits.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JOHN WALSH
Q.1. As I've made clear before, I think the largest financial
firms in this country are just too large, and that their
massive size threatens our economic security and puts us at
risk in future crises.
I think the rise of proprietary trading was one of the key
drivers behind the massive growth in our largest financial
institutions. Firms were taking on ever increasing prop trading
positions, often with highly unstable short term financing, and
when things froze up, the house of cards collapsed. The Volcker
Rule looks to stop this risk.
I know that my colleagues, Senator Merkley and Senator
Levin, drafted section 619 of the Dodd-Frank Act to ensure
broad coverage of the prohibition on proprietary trading by
banks, and meaningful restrictions on the largest nonbank
financial firms. Nevertheless, one of the concerns I have is
that firms may try to evade the restrictions. Particularly, I'm
concerned that if the regulators set a definition of ``trading
account'' that is too narrow, it might not capture all of the
risks of proprietary trading. These evasions could only happen
if the regulators ignore the clear direction of the law to stop
proprietary trading.
Are you prepared to take a broad view on the definition of
``trading account'' and examine and prevent proprietary
trading, wherever it occurs? In short, are you prepared to use
the full power of the Merkley-Levin provisions to cut the size
and riskiness of our banks so they get back to the business of
lending to families and businesses?
A.1. The OCC is fully committed to ensuring that national banks
comply with the requirements of section 619, including the
statute's restrictions on proprietary trading. The statute
requires, as a first step, that the Financial Stability
Oversight Council conduct a study and make recommendations
about implementation of the provision. The statute prescribes
certain implementation objectives, including protecting banks'
safety and soundness, protecting taxpayers and consumers,
enhancing financial stability, limiting the inappropriate
transfer of Federal subsidies to unregulated entities, reducing
conflicts of interest between banks and their customers,
limiting activities that have caused or might reasonably be
expected to create undue risk or loss at banks, appropriately
accommodating the business of insurance, and appropriately
timing the divestiture of illiquid assets that will be affected
by the restrictions of section 619(a). It further provides that
the study must be completed not later than 6 months after the
enactment of the Dodd-Frank Act, that is, in January 2011.
The Council sought public input for the required study by
publishing a notice in the Federal Register on October 6, 2010.
The public comment period closed on November 5, 2010; the
Council received more than 8,000 comments in total,
approximately 1,450 of which were unique (that is,
individualized, rather than form, letters). \1\ An interagency
staff group currently is developing a draft study for
consideration and final action by the Council at its next
meeting, in January 2011. As a member of the Council, the
Acting Comptroller has been fully engaged in these
implementation efforts, and OCC are actively participating in
the interagency group that is conducting the staff work.
---------------------------------------------------------------------------
\1\ For the Council's Federal Register notice, see, 75 Fed. Reg.
61758 (Oct. 6, 2010). Comments received may be viewed on
Regulations.gov at http://www.regulations.gov/search/Regs/
home.html#docketDetail?R=FSOC-2010-0002.
---------------------------------------------------------------------------
Section 619 directs the OCC, the Federal Reserve Board, and
the Federal Deposit Insurance Corporation to issue joint
regulations implementing section 619 for banks after carefully
considering the findings of the Council's study, and after
consultation and coordination with the Securities Exchange
Commission and the Commodity Futures Trading Commission. These
regulations are due 9 months after the study is completed, that
is, in October 2011. We will proceed as directed by the
statute, and will consider the findings in the Council's study
and the views of the other regulatory agencies in defining
statutory terms and implementing the important proscriptions in
the statute on proprietary trading.
With particular respect to the size of financial firms,
section 622 of the Dodd-Frank Act imposes a concentration limit
that prevents a financial company from acquiring, merging or
consolidating with another company if the resulting company's
total consolidated liabilities would exceed 10 percent of the
aggregate consolidated liabilities of all financial companies.
Congress directed the Council to study the effects of imposing
this concentration limit, specifically the extent to which the
concentration limit would affect financial stability, moral
hazard in the financial system, the efficiency and
competitiveness of the U.S. financial firms and financial
markets, and the cost and availability of credit and financial
services to U.S. households and businesses. In January, 2011,
the Council must issue recommendations regarding modifications
to the concentration limit that the Council determines would
more effectively implement section 622. Following the Council's
study and recommendations, the Federal Reserve Board will issue
implementing regulations. The OCC is actively participating in
the interagency staff group that is drafting the study, which
we expect the Council also will consider and act on at its
January, 2011, meeting.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM JOHN WALSH
Q.1. Can you provide me an update on your agencies progress in
implementing the property appraisal requirements of Title XIV
of Dodd-Frank? What process will you use to develop and
implement these requirements?
A.1. Title XIV provides that the appraisal rules are to be
developed jointly by a group of agencies that includes the OCC,
the FDIC, the Federal Reserve Board, the National Credit Union
Administration (NCUA) the Federal Housing Finance
Administration (FHFA), and the CFPB. Title XIV provides, in
general, that the regulations it requires must be prescribed in
final form before the end of the 18-month period beginning on
the designated CFPB transfer date which will be in July, 2011,
and take effect 12 months following issuance of the final
regulations. Since the CFPB does not yet have a director or
permanent staff, the rulemakings in which it is required to
participate have not yet commenced. Pending initiation of the
rulemakings, OCC staff have primarily focused on evaluating the
changes required by the legislation.
In addition, the OCC, together with the Federal Reserve
Board, the FDIC, the OTS, and the NCUA recently issued
revisions to their joint ``Interagency Appraisal and Evaluation
Guidelines.'' The revised Guidelines update the agencies'
supervisory guidance and clarify their expectations for
institutions' appraisal and evaluation programs to conduct real
estate lending safety and soundly. The revised Guidelines were
published in the Federal Register on December 10, 2010.
Finally, Title XIV required that within 90 days of the
enactment of the Dodd-Frank Act, the Federal Reserve Board
issue an interim final rule specifiying acts or practices that
violate appraisal independence requirements. Pursuant to this
provision, the Board issued its interim final rule for comment
on October 18, 2010, with a mandatory compliance date of April
1, 2011.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM JOHN WALSH
Q.1. Regulatory Structure for Volcker Rule. As you know, the
objectives of the Merkley-Levin Volcker Rule are two-fold: (1)
to address the specific risks to our financial stability caused
by proprietary trades gone bad, and (2) to take on the
conflicts of interests in proprietary trading.
Ensuring effective oversight will be challenging, because
the issues are complicated. As you could see from the exchange
at the hearing between Senator Reed and Chairman Bernanke, with
interjections by Chairman Shapiro and Mr. Walsh, I and others
are beginning to come of the view that there will have to be
oversight at two levels. First, there will need to be real-time
(or as close as practicable) monitoring and enforcement at the
individual trade-by-trade level, which looks to whether any
given transaction is proprietary trading. This will be
necessary to ensure that the permitted activities are not
abused. Second, there will need to be macrolevel reviews of
policies and procedures, and overall portfolio holdings. This
will be necessary to ensure that proprietary positions and
conflicts of interest are not cropping up despite the
restrictions. In addition to monitoring and enforcing the
proprietary trading and conflicts of interest restrictions,
regulators are also tasked with setting appropriate capital
charges, both for permitted activities, and, in the instances
of nonbank financial companies supervised by the Board, capital
charges for all covered activities.
Your agencies appear to have somewhat different strengths
in these areas, with perhaps the SEC and CFTC having greater
experience policing the securities and derivatives markets for
trading violations, and the banking regulators having greater
experience evaluating the safety and soundness of firms and
setting appropriate capital charges and levels.
Share with me your view about the strengths you believe
your agency brings to the oversight and enforcement of the
Merkley-Levin Volcker Rule? Are you committed to working with
your fellow regulators to best use your agency's strengths in
the effort to keep our financial system safe?
A.1. The OCC is unequivocally committed to working with our
fellow regulators to promote the safety of our financial
system. The strengths we bring to this challenge include,
first, a comprehensive and detailed knowledge about the
securities and derivatives activities of the national banks we
supervise and the risks presented by those activities. The
OCC's knowledge derives from our examination activity, which is
conducted through the continuous presence of examiners on-site
at the largest institutions. (Smaller institutions are examined
on-site on a 12-18 month schedule, consistent with requirements
for the frequency of bank examinations established by statute).
The on-site examination process is complemented by extensive
off-site monitoring and analyses done not only by examiners but
also by experienced supervisory staff and economists. Finally,
the OCC has an extensive array of supervisory tools that it can
use to remedy problems or weaknesses that we identify. These
tools include broad administrative enforcement authority to
impose cease-and-desist remedies and assess civil money
penalties. But, unlike some other regulators, the OCC is not
solely reliant on formal administrative or judicial
proceedings, where remedies may be applied only after lengthy
proceedings are concluded. The OCC also can use its supervisory
process to direct bank management to correct deficiencies
identified in an examination report as ``matters requiring
attention'' or MRAs--an approach that is especially effective
because it requires a bank to fix a problem right away.
Q.2. Data Collection. The Dodd-Frank Act requires a significant
amount of new data collection and storage, particularly in the
derivatives arena. The SEC and CFTC have made a priority of new
data collection in a number of areas. Collection and the
ability to automate reviews of the data will be critical to
enforcing a wide range of mandates under Dodd-Frank, including
derivatives position limits, the Volcker Rule provisions, and
other parts of the bill. At a minimum, your staffs will need to
know who's making trades, the prices, how long firms hold onto
their positions, and whether and how their positions are
hedged.
Where is your agency in terms of thinking through the
relevant data you will need to collect?
Are there any major challenges you see in being able to
collect and analyze that data in real-time, so as to ensure
compliance with these various restrictions?
How do you see the newly created Office of Financial
Research playing into this process?
A.2. As directed by Congress, the Financial Stability Oversight
Council is currently conducting a study on how to implement the
Volcker Rule. As a member agency of the Council, the OCC is
working closely with the Department of the Treasury and other
member agencies on the study, and will carefully consider the
study's findings and recommendations in the Volcker Rule's
implementing regulations. We will be better positioned to
ascertain what data might be required once the study and
implementing regulations are finalized.
We do not foresee major challenges in acquiring this data.
The OCC's supervisory authorities, as well as the Dodd-Frank
Act and other banking statutes, provide tools adequate to
collect any data needed to monitor compliance with the
proprietary trading restrictions.
The Office of Financial Research is still in formation, so
it is too soon to determine how it will fulfill its duties
under the Dodd-Frank Act. We expect the Office will support the
Council and its constituent agencies in carrying out their
respective responsibilities under the Volcker Rule, including,
as appropriate, through data collection and related services.
Q.3. Cross-border Resolution. I know FDIC and to some extent
others have been working very diligently to implement the new
resolution authority for our Nation's large complex financial
institutions--which owes so much to my colleagues on this
Committee from Virginia and Tennessee.
But one of the areas I want to keep an eye on--and on which
I offered an amendment during financial reform to provide
additional oversight of--is how to make that resolution work
for large firms operating across multiple national borders.
Where are we in terms of making the Dodd-Frank resolution
authority work for large, systemically significant financial
firms operating across borders? How cooperative have our
international partners been in this effort?
A.3. On an interagency basis with the FRB and FDIC, the OCC has
been working as a home regulator on recovery and resolution
planning for large, U.S.-owned, cross-border firms. Significant
international partners (i.e., host supervisors) have been
cooperative in seeking answers to difficult resolution issues
for both U.S. and foreign owned cross-border firms. The U.S.
agencies have conducted vertical (i.e., firm specific plans)
and horizontal (i.e., issues across firms) reviews of recovery
plans prepared by the U.S. firms. The FRB and OCC are preparing
feedback to the firms on their detailed recovery plans. This is
an iterative process which will require further work by the
firms.
As home supervisors, the OCC, FRB, and FDIC have hosted
crisis management group (CMG) meetings with significant host
supervisors of the large, U.S.-owned, cross-border firms. The
SEC was also invited to participate in these meetings. The CMG
meetings served to identify resolution issues which are being
researched by both home and host supervisors (e.g., recognition
of U.S. bridge bank, licensing processes, etc.). Follow up
meetings are being planned for early 2011. CMG meetings are in
addition to the supervisory colleges held for these firms.
As the host supervisor of foreign-owned U.S. banks/
branches, the OCC has participated in supervisory colleges and
CMG meetings of foreign firms with significant global
operations. As with the meetings for the U.S. firms, there are
many resolution issues that require further research.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM JOHN WALSH
Q.1. Dodd-Frank requires that risk retention be jointly
considered by the regulators for each different type of asset
and includes a specific statutory mandate related to any
potential reforms of the commercial mortgage-backed securities
market to limit disruption. In light of the FDIC's unilateral
decision to add an across the board risk retention requirement
in the safe harbor rule, which the OCC opposed, how do you plan
to coordinate and reconcile disagreements in the joint
rulemaking?
A.1. The OCC believes that it is essential to set policy for
U.S. securitization markets on a comprehensive, interagency
basis as mandated by the Dodd-Frank Act. Dodd-Frank assigns
several different aspects of the credit risk retention rule
writing that it requires to several different combinations of
agencies and assigns a coordination role to the Secretary of
the Treasury as Chairman of the Financial Stability Oversight
Council. Through an interagency group coordinated by the
Treasury Department, the respective staffs of the OCC, the
FDIC, the Federal Reserve Board, the SEC, the FHFA, and HUD are
currently working cooperatively to draft the various sets of
risk retention rules mandated under the Dodd-Frank Act.
Differences among the agencies are negotiated the staff level
with guidance from agency principals. If necessary, agency
principals will hold direct discussions to reach closure on any
unresolved issues.
This interagency process is unaffected by the OCC's views
on the proposed or final FDIC safe harbor rule. At both stages
of the rulemaking process, the OCC took the position that FDIC
action was premature in light of legislation--the provisions
ultimately enacted in section 941 of Dodd-Frank--that addressed
securitizations and risk retention on a comprehensive basis.
The FDIC final rule acknowledges that the joint agency rules
promulgated pursuant to Dodd-Frank will ``exclusively govern''
the requirement to obtain an economic interest in a portion of
the credit risk of the financial assets that are subject to its
rule.
Q.2. Market participants highlight uncertainty related to
changing regulations, new accounting standards, and other
mandates as an obstacle to a resurgence of these markets. What
steps are your agencies currently taking to minimize these
complications? What should be done collectively by regulators
to limit this uncertainty as you look toward the joint
rulemaking?
A.2. We recognize that the uncertainty that has been created by
the scope and magnitude of regulatory and accounting changes
facing the financial industry can, by itself, create obstacles
for bankers, their accountants, auditors, and other market
participants as they try to make strategic business decisions.
The OCC's Senior Deputy Comptroller and Chief National Bank
Examiner, Tim Long, highlighted these issues in his recent
speech before the AICPA National Conference on Banks and
Savings Institutions. \1\ As Mr. Long noted in his speech, we
believe it is important that regulators and accounting
standard-setters move as quickly as possible to give the
industry the clarity it needs to move ahead, at a time when a
strong and competitive financial sector is more important than
ever to our economy. At the same time, however, we must ensure
that our decisions are governed by a process that is
deliberate, transparent, and inclusive. To that end, we believe
it will be important to provide the industry and other
interested parties sufficient time to review and comment on
proposed rules and standards and, to the extent practical,
allow appropriate transition periods and mechanisms to assess
the impact of rule changes before they take full effect. The
phased-in approach for strengthening capital and liquidity
standards that the Basel Committee has recently announced is
one example of such an approach.
---------------------------------------------------------------------------
\1\ A copy of Mr. Long's speech is available at: http://
www.occ.gov/news-issuances/speeches/2010/pub-speech-2010-108.pdf.
---------------------------------------------------------------------------
The myriad of rules required under the Dodd-Frank Act will
also place a premium on interagency coordination and
communication. As I noted in my written testimony, the Dodd-
Frank Act wisely requires other financial regulatory agencies
to consult with primary supervisors as those agencies draft
studies or develop regulations or standards, since there may be
implications for the safety and soundness of depository
institutions. To help facilitate this collaboration, we have
designated OCC experts to advise the other financial regulatory
agencies about the potential impact on the institutions we
supervise and their customers.