[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                       FDIC OVERSIGHT: EXAMINING
                       AND EVALUATING THE ROLE OF
                        THE REGULATOR DURING THE
                       FINANCIAL CRISIS AND TODAY

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 26, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-34



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 26, 2011.................................................     1
Appendix:
    May 26, 2011.................................................    45

                               WITNESSES
                         Thursday, May 26, 2011

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation (FDIC).............................................     6

                                APPENDIX

Prepared statements:
    Bair, Hon. Sheila C..........................................    46

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Written responses to questions submitted to Hon. Sheila C. 
      Bair.......................................................   107
Westmoreland, Hon. Lynn:
    Written statement of Jeff Betsill............................   111
    Written statement of Richard R. Harp.........................   114
    Written statement of Tom Reese...............................   116


                       FDIC OVERSIGHT: EXAMINING
                       AND EVALUATING THE ROLE OF
                        THE REGULATOR DURING THE
                       FINANCIAL CRISIS AND TODAY

                              ----------                              


                         Thursday, May 26, 2011

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:38 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Renacci, Royce, 
Manzullo, McHenry, Westmoreland, Luetkemeyer, Huizenga, Duffy, 
Canseco, Grimm, Fincher; Maloney, Baca, Scott, Velazquez, and 
Carney.
    Chairwoman Capito. First of all, I want to apologize for 
the delay. We are having a little organizational issue here.
    So this hearing will come to order. And I would like to 
thank the members of the subcommittee and our witness, the 
chairman of the FDIC, for coming today.
    It sounds like we are going to have our first series of 
votes around noon or 12:30, so we will hopefully have this 
concluded by then, because we are going to be in a lengthy 
series of votes. That is the plan for this hearing.
    Today we are joined, as we know, by FDIC Chairman Sheila 
Bair, who will be leaving her position in July of this year.
    First of all, I would like to thank the chairman for her 
dedicated service. I think one thing you could say is that it 
hasn't been a dull 5 years for you. You have had a lot of 
activity. And I thank you for your service to our country.
    It is my hope that this will provide a forum for our 
members to gain a better understanding of the role of the FDIC 
in the financial crisis, the Corporation's new role in the 
regulatory regime presented by the Dodd-Frank Act, and the 
current state of FDIC-insured banks in general.
    The recent passage of Dodd-Frank further enhances the role 
of the FDIC in our Nation's regulatory structure, as they will 
be charged with unwinding failed large financial institutions 
as provided in the Orderly Liquidation Authority, or OLA.
    I am interested to hear from Chairman Bair about the FDIC's 
ability to balance these new powers with the traditional role 
of a prudential regulator.
    Insuring deposits is the FDIC's duty with which most people 
are familiar. An unfortunate effect of the financial crisis has 
been an increase in bank failures across the country. The rate 
of bank failures has increased dramatically over the last 2 
years, with 140 failing in 2009, and 157 in 2010.
    These failures have significantly depleted the Deposit 
Insurance Fund, known as the DIF, and the FDIC has been forced 
to utilize emergency assessments on banks to replenish the 
fund, as well as requiring banks to pre-pay premiums for the 
years 2010 through 2012.
    Despite these efforts, the Deposit Insurance Fund still has 
significant challenges. I look forward to hearing from Chairman 
Bair on this and the status of the Deposit Insurance Fund.
    Although I fully understand the need to replenish the Fund, 
I am concerned about the future needs for pre-payments of 
premiums. This could have an unintended consequence, I believe, 
of reducing the amount of funds available for lending.
    The one common thing I hear from the community banks across 
my district is that they feel hamstrung by the regulators in 
their ability to lend. So we need to find a balance here to 
ensure we have a safe and sound Deposit Fund, while not 
encumbering lending by our institutions.
    Regulatory burden is not limited to the assessments placed 
on banks. I am very interested to learn what measures Federal 
financial regulators are taking to ensure new regulations are 
not duplicative with other agencies or existing regulations.
    We need to ensure that new regulations provide enough 
flexibility for small institutions to meet the needs of their 
customers and not be encumbered by a one-size-fits-all 
regulation geared to the largest institutions in our Nation. A 
diverse financial institution is good for all market 
participants.
    I am very interested to hear from Chairman Bair how she 
envisions the FDIC working with the newly created Consumer 
Financial Protection Bureau on enforcement of consumer 
protection regulation.
    Finally, I would like to touch on the Orderly Liquidation 
Authority that was granted to the FDIC by the Dodd-Frank Act. I 
know that Chairman Bair sincerely believes that these new 
powers effectively end too-big-to-fail. And I sincerely hope 
that she is correct.
    I still have reservations about this resolution authority 
and would prefer to see a different form--and we have talked 
about this several times--of resolution where there is 
absolutely no taxpayer exposure.
    Let us work together to ensure that the message is clear to 
market participants: There will be no more government bailouts.
    I would now, if she is ready, like to introduce the ranking 
minority member, the gentlelady from New York, Mrs. Maloney, 
for the purpose of making an opening statement.
    Mrs. Maloney. I just want to join you, Madam Chairwoman, in 
welcoming our distinguished and outstanding Chairman Bair. I 
know that this is her last appearance before our committee.
    And I wanted to express my deep appreciation for your 
service, especially during the most recent financial crisis and 
your attention to communities, to details, to Members of 
Congress. I truly believe you have done an incredibly 
outstanding job.
    Thank you.
    The FDIC was forced to take significant measures during the 
crisis, and continues to act in the wake of the crisis to 
ensure the health of our banking system.
    Your involvement and leadership was critical during this 
difficult time. We can now say that we are recovering from a 
crisis, not a depression. And I think you played a meaningful 
and significant role in our being able to say that.
    This hearing is very timely because it is happening during 
your last few weeks in your tenure at the FDIC, but also 
because it is happening during a period of recovery, when we 
have the benefit of hindsight.
    During this most recent crisis, we saw 8.5 million jobs 
lost and over $15 trillion in household wealth lost in America. 
And although we are trending up in terms of job creation, it is 
slower than any of us would like.
    This crisis highlighted how important it is to have a sound 
financial system in terms of the functioning of our overall 
economy. We know of the fear that can set in on Main Street 
when institutions on Wall Street are challenged and in some 
cases failing.
    And we know that overleveraged, overcapitalized financial 
institutions contribute to the problem. Structured finance 
products that were unregulated, opaque, and highly risky ran 
rampant. And you, the regulators, did not have the tools you 
needed to rein them in.
    Congress changed that with the enactment of Dodd-Frank last 
year. The law now gives the regulators the authority to wind 
down failing institutions and more power to regulate the 
institutions.
    And we made significant changes that directly affect FDIC-
insured institutions. For example, we made the $250,000 deposit 
insurance limit permanent to increase public confidence in 
their financial institutions. And you played a meaningful role 
in helping to make that happen.
    We changed the formula for deposit insurance assessment, so 
larger institutions that are engaged in riskier activities will 
pay more than smaller institutions that pose less of a 
potential threat to the FDIC.
    And we increased the minimum level required in the DIF to 
provide a better cushion in troubled economic times so that 
smaller banks are protected from having to foot the bill if 
there is a need to raise additional funds.
    All of the actions we took in Dodd-Frank were meant to both 
help prevent another economic crisis and to help soften the 
blow when unanticipated things happen.
    So I am looking forward to hearing from Chairman Bair, 
because I know there are a number of new requirements on 
regulators, how you believe the system has fared since the 
crisis, what you see as challenges going forward, and to hear 
any words of wisdom you have for us before you leave your 
position.
    I just want to underscore again how much I appreciate your 
service. I am looking forward to the next chapter. I know you 
will continue to make meaningful contributions to our great 
country.
    Thank you for your leadership and your service.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Royce for a minute-and-a-half 
for the purpose of an opening statement.
    Mr. Royce. Thank you, Madam Chairwoman.
    And, Chairman Bair, I would just like to welcome you. Thank 
you for your years of service. I have enjoyed our 
conversations. As you know, I am still concerned that Dodd-
Frank hasn't ended too-big-to-fail, but has left us with a 
number of massive institutions with a much lower cost of 
capital, that are going to continue to expand at the expense of 
their competitors because their borrowing costs are lower.
    There is a 78-basis-point advantage, I think, according to 
the studies that you have done.
    And, at the end of the day, it is a system that enables the 
use of government funds in resolving an institution, and relies 
on the prudence of regulators during a crisis to avoid 
overpayment to creditors and counterparties.
    I think that the very fact that you have that lower cost of 
capital just shows that it is human nature--that the way we set 
this up; there is the presumption. We have created additional 
moral hazard in the equation.
    So while I hope that this committee works to eliminate the 
Orderly Liquidation Authority in a move to a more objective 
enhanced bankruptcy, I believe we can take steps in the near 
term, in the meantime, to tighten up the resolution authority 
and minimize some of the unintended, and frankly probably some 
of the intended, consequences of this legislation.
    I appreciate your efforts in this regard and certainly your 
thoughts today, especially on this particular theme.
    Thank you very much.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Luetkemeyer for a minute-and-
a-half for the purpose of an opening statement.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Years ago in another life, when I was a bank examiner, our 
mission was to work in cooperation with institutions to ensure 
that they understood the regulations to which they are 
subjected. There now seems to be a shift in the attitude of the 
regulators. Instead of a partnership, I hear time and time 
again that relationships between financial institutions and the 
regulators are more like a game of ``gotcha.''
    Like many of my colleagues, I have heard stories of 
overzealous examiners who practice little or no regulatory 
forbearance. One bank in my district has been profitable and 
sound for many years but was put on the problem list at a 
recent examination.
    And it was noted to me that the examiner had been scolded 
the previous day for having not done a good enough job in 
predicting another bank that he had recently been in be put on 
the list. That bank, by the way, since then has had no problems 
since it was put on the problem list, similar to what it was 
prior to that.
    The bottom line is we need regulators to do their job. We 
need the FDIC and other agencies to promote sound financial 
practices and ensure consumer protections. No more, no less.
    What we do not need are overzealous examiners who have no 
regard for any sort of forbearance or upper management to stick 
its head in the sand and refuse to recognize what is going on 
in the field or in our economy.
    I urge the FDIC to take a look at your practices, 
communicate with your examiners, and work with institutions so 
that together we can work to get our economy moving again.
    I look forward to the discussion. I yield back.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize the gentleman from Texas, Mr. 
Canseco, for 1 minute, for the purpose of an opening statement.
    Mr. Canseco. Thank you, Madam Chairwoman, for holding this 
hearing on the oversight of a very important Federal agency.
    My hope is that today's hearing addresses a simple yet very 
important question: Did the Dodd-Frank Act institutionalize 
too-big-to-fail or did it really level the playing field and 
disallow further taxpayer bailout, as some politicians and 
regulators have argued?
    I am concerned that recent developments, including market 
data showing borrowing costs are currently much lower at big 
banks than small ones, and the continuing questions surrounding 
the FDIC's new authority lead us to believe that too-big-to-
fail is still very much alive, and the taxpayers could yet 
again be asked to pick up the bailout tab in the future.
    I look forward to hearing from Chairman Bair today on this 
important and ongoing issue.
    Thank you.
    Chairwoman Capito. Thank you.
    I would like to recognize our newest member of the 
subcommittee, and welcome him to the subcommittee, Mr. Fincher 
from Tennessee, for 1 minute for the purpose of an opening 
statement.
    Mr. Fincher. Thank you, Madam Chairwoman.
    And thank you, Chairman Bair, for coming today and taking 
time for us.
    It is a privilege to be here this morning to discuss the 
issues and concerns regarding the FDIC and its role during the 
financial crisis of 2008.
    As the newest member of the Financial Services Committee, I 
am pleased to have the opportunity to deal with, hopefully, 
what are going to be things that are going to fix the problems 
in the future.
    I was not in Congress in 2008 when the financial crisis 
roared across the communities of our district. However, as a 
small business owner, I felt its effects firsthand as the 
bottom dropped out of our economy.
    One major principle that I did take away from those 
terrible days was that access to credit is vital in helping our 
small businesses function. Until our financial institutions, in 
my opinion, are allowed to responsibly do their jobs again and 
loan money to qualified borrowers, we are not going to see 
businesses creating new jobs.
    But too many times, Washington is not the answer. It is the 
problem. We need to make sure that we do what is right.
    Again, thank you for your service. And I look forward to 
hearing what you have to say today.
    I yield back.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Westmoreland, from Georgia, 
for 2 minutes for the purpose of an opening statement.
    Mr. Westmoreland. Thank you, Chairwoman Capito, for calling 
this hearing. I think this is a very important hearing.
    I would like to throw out some numbers for Chairman Bair: 
63, that is the number of banks that have failed in Georgia 
since 2008; 12, that is the number of bank failures in Georgia 
in just 2011; and 10, that is the number of banks headquartered 
in my district that have failed since 2008, including on this 
past Friday.
    This number is much larger if you factor the banks that 
have failed that only have branches in the district.
    Chairman Bair, these numbers are unacceptable. Therefore, 
today I will be introducing a bill directing the FDIC Inspector 
General to study FDIC's loss share agreements, banks failing 
due to paper losses, the lack of an ability to modify or work 
out an application of the FDIC policies by examiners in the 
field.
    This study is not only vital for surviving banks. It is so 
the FDIC and this committee can learn from the problems that 
have faced Georgia over the last 3 years.
    It is my hope that the FDIC and my colleagues will support 
this bill so we can have an honest assessment of the FDIC's 
handling of this bank crisis. Georgia is in a vicious cycle 
right now, going the wrong way. Failures begot more write downs 
and more failures.
    I have borrowed a lot of money from banks in my business 
career, and I know there will be more failures in Georgia this 
year.
    But I am here to say that when a Georgia bank fails, my 
office will be here asking why, searching for answers, and 
holding the appropriate regulators accountable.
    And with that, Madam Chairwoman, I yield back.
    Chairwoman Capito. Thank you.
    That concludes our opening statements.
    I would like to now introduce Ms. Sheila Bair, Chairman of 
the Federal Deposit Insurance Corporation, for the purpose of 
making an opening statement.
    And, again, thank you for coming today.

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
              DEPOSIT INSURANCE CORPORATION (FDIC)

    Ms. Bair. Chairman Capito, Ranking Member Maloney, and 
members of the subcommittee, thank you for the opportunity to 
testify today on the state of the banking industry and the 
Federal Deposit Insurance Corporation and on future challenges 
to our economic and financial stability.
    Much has been written and said about the events associated 
with the recent financial crisis and the factors that led up to 
it. My written testimony summarizes four factors that I 
consider the most important: excessive reliance on debt 
financing; misaligned incentives in finance; regulatory 
arbitrage; and an inadequate resolutions framework that allows 
some financial companies to become too-big-to-fail.
    The FDIC was created in 1933 in response to the most 
serious financial crisis in American history to that time. Our 
mission then, as now, is to promote financial stability and 
public confidence in banking through bank supervision, deposit 
insurance, and the orderly resolution of failed banking 
institutions.
    Working with our regulatory counterparts, the FDIC has 
played an instrumental role in addressing the recent crisis. 
Our actions have helped restore financial stability and pave 
the way for economic recovery. My written testimony includes a 
comprehensive account of those actions.
    I am proud of all that the FDIC has accomplished during the 
past 5 years. My greatest satisfaction lies in the knowledge 
that through 368 failures, including the largest failures in 
FDIC history, we kept pace with the depositors we were 
established to protect.
    We have maintained the FDIC's 78-year record of no losses 
to any insured depositor. And we did it without borrowing a 
penny from taxpayers.
    But we still have important work to do. Our first task must 
be to follow through on the Dodd-Frank Act reforms that will 
end too-big-to-fail. At the height of the crisis, we lacked the 
necessary tools to resolve large, complex financial companies 
in an orderly manner and were forced to authorize government 
bailouts that further insulated these companies from the market 
discipline that applies to smaller banks and practically every 
other private company.
    Too-big-to-fail really represents state capitalism. Unless 
reversed, the result is likely to be more concentration and 
complexity in the financial system, more risk-taking at the 
expense of the public, and in due time, another financial 
crisis.
    The Dodd-Frank Act provides the tools to restore market 
discipline and put an end to the cycle of government bailouts 
under too-big-to-fail. These tools will be effective and the 
large systemically important institutions, or SIFIs, will be 
resolvable in the next crisis only if regulators show the 
courage today to fully exercise their authorities under the 
law.
    The success of this new resolution framework critically 
depends on the ability to collect information about potential 
SIFIs to determine whether they are, in fact, resolvable under 
bankruptcy. It will also require the willingness of the FDIC 
and the Federal Reserve Board to actively use their authority 
to require structural changes at SIFIs that better align 
business lines, legal entities, and funding well before a 
crisis occurs.
    Unless organizations are rationalized and simplified in 
advance, there is a real danger that their complexity could 
make a SIFI resolution far more costly and more difficult than 
it needs to be.
    These authorities are being shaped now in the interagency 
rulemaking process. If properly implemented, they can make our 
financial system more stable by restoring market discipline to 
systemically important institutions.
    But if we fail to follow through on these measures now, 
when market conditions are relatively calm, we will have no 
hope of preventing bailouts in the next crisis.
    My testimony describes the role played by excessive 
leverage among both banks and non-bank financial companies in 
bringing the crisis about. Strong capital standards are of 
fundamental importance in maintaining a safe and sound banking 
system that supports economic growth.
    Supervisory processes will always lag innovation and risk-
taking to some extent. And restrictions on activities can be 
difficult to define and enforce. Hard and fast objective 
capital standards, on the other hand, are easier for 
supervisors to enforce and provide an additional cushion to 
absorb losses when mistakes are inevitably made.
    Skeptics argue that requiring banks to hold more capital 
will raise the cost of credit and impair economic performance. 
But the experience of the crisis shows that the social costs of 
debt financing are extremely high in such a downturn, and that 
the lack of an adequate capital cushion makes lending highly 
procyclical.
    While there will always be business cycles, the massive 
deleveraging which occurred during the financial crisis led to 
the most severe downturn since the Great Depression.
    Loans and leases held by FDIC-insured institutions alone 
have declined by nearly $750 billion from peak levels, while 
unused loan commitments have declined by $2.5 trillion. 
Trillions more in capital flows were lost with the collapse of 
the securitization market and other shadow providers of credit.
    I would also like to highlight the urgent need for Congress 
and the Administration to address the rapid growth in U.S. 
Government debt, which has doubled in just the past 7 years. 
Financial stability critically depends on public investor 
confidence, which can never be taken for granted.
    There is no greater threat to our future economic security 
and financial stability than an inability to control the size 
of U.S. Government debt.
    But as strongly as I feel about this issue, I feel just as 
strongly that a technical default on U.S. Government 
obligations would prove to be calamitous.
    Any signal that policymakers might fail to make good on 
these obligations risks permanently destroying the inviolable 
trust that investors have placed in our Nation for more than 2 
centuries.
    I urge Congress to reaffirm this trust by committing to a 
responsible increase in the debt ceiling.
    As I conclude, I would like to share with you one of the 
central lessons I have drawn from my experience as FDIC 
chairman. It is that the most important attribute of effective 
regulation is the courage to stand firm against weak practices 
and excessive risk-taking in the good times.
    It is during a period of prosperity that the seeds of 
crisis are sown. It is then that overwhelming pressure is 
placed on regulators to relax capital standards, to permit 
riskier loan products, and to allow higher concentrations of 
risk both on and off balance sheets.
    The history of the crisis shows many examples when 
regulators acted too late or with too little conviction, when 
they failed to use authorities they already had or failed to 
ask for the authorities they needed to fulfill their mission. 
As the crisis developed, many in the regulatory community were 
too slow to acknowledge the danger and remained behind the 
curve in addressing it.
    The fact is that regulators are never going to be popular 
or glamorous, whether they act in a timely manner to forestall 
a crisis or fail to act and allow it to take place. The best 
they can hope to achieve is the knowledge that they exercised 
the statutory authority entrusted to them in good faith and to 
its fullest effect in the interests of financial stability and 
the broader economy.
    Thank you very much. I would be happy to answer your 
questions now.
    [The prepared statement of Chairman Bair can be found on 
page 46 of the appendix.]
    Chairwoman Capito. Thank you, Chairman Bair.
    We will now begin the questioning portion of the hearing. 
And I will begin my 5 minutes of questioning.
    We have had ongoing discussions with you and your staff 
concerning the relationship of the FDIC and the CFPB for 
consumer protection. It is my understanding that the FDIC just 
recently announced a new consumer division within the 
Corporation.
    I am interested in how that is going to work in relation to 
CFPB. If the CFPB comes down with regulations understanding 
that smaller institutions are exempted out in theory, do you 
envision a consumer protection within the FDIC that then takes 
the regulations that come from the CFPB and modifies them for 
the other institutions?
    There has to be some coordination here. Are we creating a 
two-tiered system here?
    Ms. Bair. Under the statute, for institutions with assets 
less than $10 billion, the supervision and enforcement remains 
with the primary banking regulators.
    Chairwoman Capito. Right.
    Ms. Bair. And we have most of the smaller banks. So the 
lion's share of our institutions stay with us in terms of 
examination and enforcement of rules.
    We have never had the authority to write consumer rules. 
That authority has been with the Federal Reserve. And now most 
of that is being transferred to the CFPB. So this coordination 
issue for us is not new. We have never had the ability to write 
the rules. The Fed has written the rules.
    We have coordinated with them. We provide input to them and 
comment, and obviously, examine and enforce the rules that they 
promulgate.
    The CFPB Director, when that person is installed, will be 
on the FDIC board. And I think that will help assure 
coordination, appropriately so.
    I am hoping that this will help also increase the 
understanding of the CFBP's Director about broader banking 
regulatory issues on the safety and soundness side, some of the 
concerns of the FDIC, and our perspective on the various issues 
that we have to deal with on a day-to-day basis.
    In terms of creating the new division, I do want to 
emphasize that we did not create new examination staff. 
Actually, the examination staff reporting structures in the 
regions stay the same.
    This is an organizational change. There were a very few 
additional administrative staff to support the organizational 
separation of consumer and depositor protection from risk 
management. It was really more to make sure that the FDIC had 
an appropriate policy focus on consumer protection.
    And I would say the focus is for more effective consumer 
regulation.
    I am sensitive to the concerns of community banks that have 
been expressed, that perhaps sometimes under consumer 
compliance, as well as risk management, there has been more of 
a focus than there should be on the kind of ``gotcha'' 
violations that other members expressed concern about, such as 
reporting violations or what have you.
    We have tried to refocus the examination force on those 
areas where there is actually consumer harm. And I think that 
has been a good outcome of this new policy-level focus of the 
FDIC on consumers.
    This will be a way for us to have a better focus on 
consumer protection, making consumer protection supervision 
more effective as applied to banks, and enabling better 
coordination with the new consumer agency, which, again, I 
think will have somewhat of an advantage because the Director 
of the CFPB eventually will be on our board.
    Chairwoman Capito. Okay. I want to go to another question 
quickly. But it sounds like the structure that is being enacted 
while these institutions under $10 billion are exempted--it 
sounds as though they really aren't going to be exempted, which 
is their fear, because--or not their fear, their fear of the 
unknown more than anything else--because it will be coordinated 
through your institution.
    Ms. Bair. That is right. The exemption is just with regard 
to examination and enforcement. It is not really an exemption. 
It preserves what we have always done. The primary banking 
regulator will be the entity that examines and enforces for 
compliance with consumer rules.
    The consumer agency now has rule-writing for all 
institutions. So whatever rules they write, those will apply to 
all institutions.
    Chairwoman Capito. Right.
    Ms. Bair. They can, on their own, exempt small banks. I 
have spoken in favor of a two-tiered regulatory structure. I 
think in certain areas it is appropriate. We will have an 
ability to engage and have input with the new consumer agency 
because eventually that person will be on our board as well.
    Chairwoman Capito. Okay. Over the last several years, there 
has been increasing consolidation of the banking industry.
    Ms. Bair. Right.
    Chairwoman Capito. Some of the opening statements talked 
about the advantages that the larger institutions have. The 
smaller banks, the smaller institutions and community banks are 
concerned about being able to staff the regulatory issues, the 
legal issues that they now see in front of them because of 
Dodd-Frank.
    How do you see this playing out, the consolidation? Is this 
a concern for you? And I think it is a concern for, really, 
Main Street America.
    Ms. Bair. Right, right. It is a concern. We have a 
Community Banking Advisory Committee. And we have talked with 
them a lot about this.
    I think on the process side, the Dodd-Frank Act did have 
some important reforms for community banks. Certainly, raising 
the deposit insurance limit to $250,000 had been long advocated 
by community banks and will help them address funding 
disparities by having a higher deposit insurance limit.
    Also, the change in our assessment base is going to 
probably save them about $4 billion in assessments over a 
period of time in assessment fees. So there were some process 
improvements in the Dodd-Frank Act that will benefit community 
banks..
    However, there are some concerns with the Durbin amendment. 
And I commend you on your leadership on that issue.
    We are trying very hard to make sure that the law is 
implemented as Congress intended, which was to insulate 
community banks from the lion's share of the reforms that 
really were targeted at larger institutions. And we will 
continue that focus.
    We are obviously very concerned about the differentials in 
funding costs as well. That existed pre-crisis. It has existed 
for far too long.
    The rules need implementation. We will talk more about that 
later. Title II can help get these funding costs up for large 
banks, as will higher capital requirements.
    Chairwoman Capito. Thank you.
    Mrs. Maloney?
    Mrs. Maloney. Thank you.
    Thank you, Madam Chairwoman, for holding this hearing and 
giving us this opportunity to be with Sheila Bair one last 
time.
    I would like to ask you to respond to what critics have 
claimed, that the new Orderly Liquidation Authority promotes 
bailouts because it allows the FDIC to pay creditors 100 cents 
on the dollar.
    Ms. Bair. Right.
    Mrs. Maloney. And isn't it true that this is erroneous in 
light of the fact that the law requires the FDIC to ensure that 
creditors bear losses?
    Ms. Bair. That is right.
    Mrs. Maloney. And secondly, the FDIC's authority to pay 
creditors more than they would have received in a liquidation 
bankruptcy is very limited and is subject to the requirement 
that creditors bear losses.
    So your comments, please, Madam Chairman.
    Ms. Bair. Thank you.
    I think it is important and we clearly have a job ahead of 
us in terms of educating folks about our process and assuring 
them that it is every bit as harsh as bankruptcy. It is 
basically the same creditor priority that you see in 
bankruptcy.
    The statute limits our ability very narrowly to 
differentiate among creditors in a way that is consistent with 
our traditional receivership powers.
    And basically, that is two situations. First, to continue 
with essential operations--things like paying the IT folks to 
keep IT services going; paying your security people; and paying 
the employees. That is also recognized in bankruptcy.
    The second situation relates to maximizing value, and is 
simply a mathematical determination. We see this in bank 
resolutions. Frequently when we bid out a bank, the potential 
acquirers will pay us a premium to cover all insured and 
uninsured deposits, because it impairs franchise value to 
impose losses on their larger uninsured depositors.
    So it actually maximizes our recoveries to cover the 
uninsured deposits and sell all the deposits to the acquirer, 
as opposed to imposing a loss on those uninsured depositors, 
because we are making more money with the premium that the 
acquirer pays.
    That is an example where you would maximize value by 
differentiating. And again, that is pretty much a mathematical 
formula. To emphasize it more, we have said in an interim final 
rulemaking that we don't think there would ever be any 
situation where a longer-term creditor--that is one longer than 
a year--would either maximize value or be necessary for 
essential operations.
    And for unsecured creditors with shorter terms, they are 
probably going to take losses as well. But again, they would 
have to meet these narrow tests.
    We have tried very hard to assure people that the losses 
imposed on creditors will be every bit as harsh as it is in 
bankruptcy. The 97 cents on the dollar issue, I think that 
comes from an analysis that our staff did on the Lehman 
bankruptcy and how it might have been resolved under Title II.
    So the 97 cents was simply a reflection of what we think 
the recoveries would be for the senior debt holders based on 
the capital cushions and subordinated debt cushions that 
existed in Lehman at the time of its failure, and our 
prediction of what the losses would have been on their bad 
assets.
    The recovery in Lehman, as it would be with any other Title 
II resolution, will be driven by the extent of losses and the 
amount of equity and subordinated debt under their senior debt 
holders.
    But I would say, as a matter of market discipline, if 
senior debt holders want to protect themselves, they should 
look at the equity capitalization levels and the sub-debt below 
them.
    Mrs. Maloney. To put it in a framework that is helpful to 
us, could you explain the extent to which having the Orderly 
Liquidation Authority during the financial crisis could have 
prevented bailouts and mitigated systemic effects?
    Ms. Bair. It would have. We have the ability, if you have 
time, and there was a lot of time with Lehman. There were 
months of alarm signals before the institution finally failed.
    Firstly, under the Dodd-Frank Act, all systemic entities, 
including all bank holding companies above $50 billion, are 
required to have resolution plans on file with us. So we we 
will have a blueprint on resolvability well before any time 
that they would get into trouble.
    The bankruptcy trustee and others who have analyzed the 
Lehman bankruptcy have all spoken to the need for advanced 
planning to resolve these larger complex financial 
institutions. So there would have been a game plan in place.
    We would have been in the institution months in advance. We 
anticipate having an ongoing presence in these large SIFIs, 
just as we do with larger bank holding companies now.
    I think just the fact that there was a resolution process 
that would have imposed losses on shareholders and creditors, 
would have replaced the board, and would have replaced 
management, that, in and of itself, would have been a strong 
incentive for the leadership of Lehman to right their own ship 
and go out and sell themselves at a reasonable price, which 
they were unwilling to do.
    We see this all the time with banks. Banks know that if 
they fail and they go into our process, their shareholders are 
wiped out; their unsecured creditors are wiped out; their 
boards are gone; and their executives lose their jobs.
    It is a powerful incentive to take care of yourself. About 
25 percent of banks that are on our projected failure list end 
up not failing because they go out and they recapitalize. They 
are very motivated. And I think that would be an important 
factor that we didn't have during the crisis.
    It also, frankly, provides us a defense against blackmail, 
right? During the crisis, a lot of institutions were coming in 
and saying, ``You know, if we go down, you are going to have 
all these problems.'' And there was no orderly process to put 
them into.
    Now, we have a process. Even if it is an emergency 
situation, we can put them into a bridge and provide temporary 
liquidity support, but their shareholders and unsecured 
creditors are all exposed to loss and their boards are gone. 
And actually under the Dodd-Frank Act, there is a claw-back of 
up to 2 years of compensation for management if you have a 
failed entity.
    Chairwoman Capito. The gentlewoman's time has expired. 
Sorry.
    Ms. Bair. There are just a lot of tools that we would have 
in the future that we didn't have going into the crisis.
    Chairwoman Capito. The gentleman from Ohio, Mr. Renacci?
    Mr. Renacci. Thank you, Madam Chairwoman.
    And thank you, Chairman Bair, for being here.
    I want to focus today on the composition of your board of 
directors, and under Dodd-Frank the new composition, which 
includes the Director of the CFPB being one of the members on 
your board.
    Coming from the private sector and the business sector and 
sitting on many boards, I was always concerned. And I think the 
setup of all boards, there was always concern about apparent, 
perceived, direct, indirect conflict of interest.
    Knowing that you are going to have to work on a regular 
basis with one of the individuals who would be the Director of 
the CFPB, I am a little concerned that there is a conflict of 
interest, especially when it comes to your seat on the FSOC, 
basically.
    Because as we know right now, FSOC can review, stay, and 
block a CFPB rule, but it takes two-thirds to do that.
    Ms. Bair. Right.
    Mr. Renacci. I know my colleague, Mr. Duffy, introduced 
some legislation last week or the week before to try and talk a 
little bit about this.
    But when you have to work with somebody on your board on a 
regular basis, and then you go over to FSOC and you have a 
vote, and it takes today 7 out of 10 to block a rule by the 
Director who sits on your board--
    Ms. Bair. Right.
    Mr. Renacci. --and that person also has a vote out of the 
10, and you would have a vote out of the 10, you start to limit 
down the ability to really have oversight by using the 
Financial Stability Oversight Council.
    Ms. Bair. Right.
    Mr. Renacci. So my concern is, when you have that kind of 
conflict of interest, is it good policy? Is it good procedure? 
I have actually drafted a bill that I am going to introduce 
next week which would simply replace the Director of the CFPB 
with the Chairman of the Fed.
    And the reason I am doing that is because I believe we need 
to focus on safety and soundness, and get any perceived 
conflict of interest out of the way.
    Ms. Bair. Right.
    Mr. Renacci. I just want to hear your thoughts on that 
potential conflict of interest.
    Ms. Bair. I think it is a good question. I think a lot of 
people had suggestions during the consideration of Dodd-Frank 
about who should replace the OTS on the FDIC's Board, and the 
Fed was one option. I was supportive of that. I said I would 
like some reciprocity. I think that would be helpful.
    The advantage and the argument for putting the consumer 
bureau head on the FDIC Board is that perhaps it might help 
sensitize that person to some of the safety and soundness 
issues that are associated with deposit insurance and the 
intersection with consumer protections.
    Frankly, there is a close connection. They are really two 
sides of the same coin. To the extent people were worried about 
the consumer bureau head not being aware of the larger context 
of bank regulation, it might help educate that person to have 
them on the FDIC Board. That is the argument for it.
    Again, we wouldn't mind some reciprocity. If you go to a 
commission structure for the CFPB, that might be a nice thing 
to have as well.
    But, we are fine with it. Again, earlier iterations did 
have the Fed on the Board. We were fine with that, too. We 
would have liked some reciprocity if that was the structure.
    But in terms of the conflict, I would also point out, 
though, that FSOC actually has the ability to intercede with 
pretty much all the regulators, if they think one of the 
regulators is doing something that could create systemic risk 
or is not appropriately addressing systemic risk.
    So arguably, there could be a conflict for the OCC for 
instance, as well. If the OCC wasn't doing as good a job as 
they should in regulating large banks, and the FSOC was going 
to intervene in that, I guess you could make the same argument 
there.
    So these are difficult questions. And I think we can 
certainly live with what is in the law right now.
    Mr. Renacci. It is interesting, as you mentioned, you would 
bring on that Director so they can be briefing on the safety 
and soundness aspect.
    Ms. Bair. Right.
    Mr. Renacci. And I read the CFPB's mission statement 
yesterday, and out of the 764 words, there is no talk about 
safety or soundness in their mission, which is--
    Ms. Bair. A safe and sound bank--a bank that doesn't fail--
is the best bank for customers. As good a job as we do with 
protecting depositors, it is always better to avoid a failure.
    Similarly, consumer abuses eventually, as we saw with the 
mortgages, can have profound safety and soundness 
ramifications, too. So there really needs to be a lot of cross-
communication and collaboration on this. I couldn't agree more.
    Mr. Renacci. Thank you.
    In regard to the Orderly Liquidation Authority, there have 
been a number of examples. And I have Continental Illinois 
Bank, $400 billion in assets, 57 offices in 14 States. It took 
7 years to resolve at a cost of $1 billion to the fund.
    The Bank of Clark County, Washington, $440 million in 
assets, 50 bank employees, a 3-day weekend to resolve.
    Citigroup, $1.9 trillion in assets, the time, the energy, 
the staff that you needed--and I know I am running out of time, 
but maybe I can catch you on the second round.
    I would like to find out how you believe that the manpower, 
time, and strain on the fund will take to wind down simple 
institutions, and how you will be able to be able to exercise 
authority over much larger institutions.
    So I will yield back.
    Chairwoman Capito. We will give you lots of time to think 
about that.
    Mr. Baca, from California, for 5 minutes.
    Mr. Baca. Thank you, Ms. Blair, for being here.
    I understand that the FDIC has issued an internal financial 
final report and proposed rule to implement an Orderly 
Liquidation Authority.
    Could you briefly discuss these rules, particularly to the 
extent to which they would align an orderly liquidization 
process without a bankruptcy or a failed bank resolution, and 
ensure that creditors bear losses and the institution itself 
does not survive?
    Ms. Bair. The statute is very clear: It bans bailouts. And 
the claims priority that we follow is pretty much the same 
claims priority that is followed in bankruptcy.
    To the extent the government would need to provide 
liquidity support to keep the institution operational as it is 
broken up and sold off, those are administrative expenses that 
are paid off the top back to the government before any other 
expenses are paid.
    So it really is a process that is every bit as harsh as 
bankruptcy. It resembles bankruptcy in the claims priority. And 
I think we need to reassure folks on that.
    The purpose of this was to end too-big-to-fail, not to 
reinforce it. We have engaged with the rating agencies on this. 
Some have decided to continue or have sought comment on whether 
they should continue to have a bump up for large institutions.
    And we say to them: read the statute. The statute prohibits 
bailouts. They actually think the Congress is going to do it. 
They just can't imagine that the Congress, even if the 
regulators can't, that the Congress would not step in.
    So I know you don't want to do that. I know you don't want 
to face the Secretary of the Treasury and the Chairman of the 
Federal Reserve coming up and asking for $700 billion to do a 
lot of things that none of us like to do.
    The tools are there to require credible resolution plans. 
The tools are there to require structural changes as well as 
downsizing if they cannot come up with a plan that shows that 
they can be resolved in an orderly way.
    Mr. Baca. But do you think they will downsize?
    Ms. Bair. I think some of them may need to. I think some of 
them are already.
    Mr. Baca. And who will enforce that?
    Ms. Bair. It is jointly with the Fed and the FDIC. And the 
FSOC as a group can also, with a supermajority vote, require a 
divestiture if that is necessary.
    Mr. Baca. It seems that many people overlook or 
underestimate the importance of the rapid resolution or living 
will requirement, which the Feds and the FDIC jointly are in 
process of implementing.
    Could you please discuss the importance of a living will, 
both as an ongoing regulatory tool that will help ensure 
appropriate risk management and that mitigate against failure 
of large complex financial institutions as a planning took that 
will make disorderly resolutions less likely and hopefully a 
rare event at large and financial failures.
    Ms. Bair. It is a statutory requirement jointly of the Fed 
and the FDIC. It requires that the institutions have plans in 
place that can show the orderly resolution through a bankruptcy 
process. It is a very high standard.
    For several institutions, this is going to require some 
structural changes. I think they have thousands of legal 
entities that have been accumulated over the years, through 
acquisition activity or what have you, that they just never 
bothered to rationalize.
    And so getting their business operations aligned with their 
legal structure--so that if they start to fail, there is a 
strategy to be able to break them up and market them in 
marketable-size pieces--is going to be a key part of this.
    I think for those with international operations, there may 
be some level of subsidiarization that is required. That is 
that they need to separate themselves as a separate legal 
entity in certain foreign jurisdictions, perhaps where they 
have significant business activities.
    There are several banks, though, in particular Santander 
and HSBC, that already operate with a subsidiarization model, 
and they do so quite profitably.
    So it may not be required for all of them, but I think it 
is the kind of thing that we need to look at and may be 
required for some if they can't otherwise show that they could 
be resolved on an orderly way even in an international context.
    Mr. Baca. Thank you. I yield back the balance of my time.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer for 5 minutes for questions.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Chairman Bair, recently the FDIC completed a pilot program 
on small dollar loans and had a couple of different programs, 
one for under $1,000, and another one for under $2,500. Can you 
just recap some of your findings on that?
    Ms. Bair. Our small dollar loan pilot program?
    Mr. Luetkemeyer. Yes, on your pilot program.
    Ms. Bair. We were very pleased. It was very successful. The 
delinquency rates were a little bit higher than they are for 
other forms of lending. But the default rates and losses were 
very much in line.
    The banks that participated in the pilot were very pleased 
and gave us the information, which we have, in turn, made more 
broadly available to banks in general.
    There is a particular need for small dollar credit right 
now. The options for a lot of consumers are not good. They can 
be very high cost.
    Having proven models to provide reasonably priced small 
dollar lending was important to us. We were very pleased, as 
well as the banks, with their success.
    Mr. Luetkemeyer. Okay. What interest rate did you see on 
the small dollar loans actually worked?
    Ms. Bair. What industry?
    Mr. Luetkemeyer. Yes, what interest rate?
    Ms. Bair. These were consumer loans. Oh, interest rate. I 
am sorry.
    Mr. Luetkemeyer. Interest rate, yes. What interest rate 
did--
    Ms. Bair. They were all below 36 percent, which is pretty 
high. We have guidance out that says that we will actually give 
CRA credit for those who can offer this--
    Mr. Luetkemeyer. Did they think they could make any money 
at that?
    Ms. Bair. Sorry?
    Mr. Luetkemeyer. Did they think that they could make any 
money at that?
    Ms. Bair. They did make money. Most of them were 
significantly lower than 36 percent, usually around 18, 16, 12 
percent. And they did make money, because they all--
    Mr. Luetkemeyer. My information says that after 2 years, 
the FDIC, according to your report, found that the interest 
rate cap was not profitable for the participating bank.
    Ms. Bair. Was not what? I am sorry.
    Mr. Luetkemeyer. I said that after 2 years, the FDIC 
program--my information says that after 2 years, your pilot 
program showed that the interest rate cap was not profitable 
for participating banks.
    Ms. Bair. There was no interest rate cap. There is guidance 
that says for the pilot, we wanted them to stay below 36 
percent. But that is a voluntary program.
    And, I am sorry, Congressman. If we could take a look at 
the document you are looking at, because those were profitable. 
And they were significantly below 36 percent.
    Mr. Luetkemeyer. Okay. We will work out the differences on 
that later. Thank you.
    Ms. Bair. Sure.
    Mr. Luetkemeyer. With regards to the insurance fund, how 
solid are we right now?
    Ms. Bair. We are still in negative territory, but we should 
be in positive territory by June 30th, by the end of the second 
quarter.
    The fund at the end of the first quarter was a negative $1 
billion. That is up from a trough of negative $20.9 billion in 
2009.
    So it is improving. That represents our equity position, 
not our cash position. Our cash position is a positive $45 
billion.
    But the fund's equity position should be in positive 
territory by the end of the second quarter.
    Mr. Luetkemeyer. Do you anticipate any future assessments--
    Ms. Bair. No.
    Mr. Luetkemeyer. --to make up the difference in that--
    Ms. Bair. No. No. As a matter of fact, we had a scheduled 3 
basis point increase that we did not impose because the 
industry is recovering and our projected losses are going down.
    Mr. Luetkemeyer. Okay. With regards to interchange fees, 
the other day we had Chairman Bernanke in front of us and asked 
him a question, whenever your regulators go in and you take a 
look at a bank, and they have to chalk off 13 percent of their 
income, are you going to forget about that lost income? Or are 
you going to require them to make that up somewhere?
    And he really had no answer to that.
    Ms. Bair. Yes.
    Mr. Luetkemeyer. He said, well, it is up to the bank to 
decide how they want to do that, but we certainly want to see 
them to continue to be capitalized.
    Yes, that is true. But his regulation is going to have--
when he comes up with his interchange fee regulation, it is 
going to have a dramatic impact on the bottom line for a lot of 
the institutions.
    Ms. Bair. Right.
    Mr. Luetkemeyer. What are your thoughts on that?
    Ms. Bair. We are concerned about it. In fairness to the 
Fed, they are implementing a provision that was in the Dodd-
Frank Act.
    Mr. Luetkemeyer. Right.
    Ms. Bair. --and doing it as they see is consistent with the 
statute.
    We are very concerned about it, especially for the 
community bank impact. The statute specifically says, community 
banks under $10 billion in assets are supposed to not be 
subject to this cap.
    As a practical matter, can you really protect them, 
particularly if network providers are not required to take the 
higher fees they could continue to charge.
    Mr. Luetkemeyer. Right.
    Ms. Bair. We also think the 12 cents is too low. We filed a 
comment letter which I am happy to share with you. We think 
they should take anti-fraud measures into account. And that can 
be a significant expense.
    We also think they should do more to take in the 
incremental costs of small banks that provide for debit card 
usage. I think the cost structure they considered was mainly 
for the large institutions. Obviously, their incremental costs 
are less than the smaller banks.
    I don't know how they are going to come out with it. I 
think Congress may or may not still take some more time with 
this. If they don't, I am hoping that if this goes final, that 
12 cent-limit is raised, and that they can find a legal 
justification for requiring that networks accept two-tier 
pricing to protect the smaller banks.
    Mr. Luetkemeyer. Thank you. And just a comment: I 
appreciate your comment on the capital requirements.
    Ms. Bair. Right.
    Mr. Luetkemeyer. I think that is important, even during 
good times, to retain adequate level of capital--
    Ms. Bair. That is right.
    Mr. Luetkemeyer. My dad told me that a long time ago. He 
lived through the Depression. And he lived to be able to 
explain why it was a good thing and show here with this last 
crisis why it actually worked.
    Thank you very much for your comment.
    Chairwoman Capito. Thank you.
    Mr. Scott, from Georgia?
    Mr. Scott. Thank you very much.
    Chairman Bair, I just want to first of all start off by 
thanking you for the excellent service you have done as the 
Chairman of the FDIC, and especially for responding to me. Each 
time I call your office, you get right on the phone and talk 
with me and help us to handle things.
    As you know, my State of Georgia has had just a plethora of 
very serious problems. Unfortunately, we have led the Nation in 
bank closures.
    But I want to ask you this first question: A number of 
banks, community banks especially, in my State of Georgia, are 
under regulatory orders from the FDIC. And I understand these 
orders are driven primarily by the performance of their loan 
portfolios and capital levels.
    These regulatory orders often require a bank to reduce 
their concentration in real estate loans to some artificial 
level. And that is forcing them to not renew even performing 
loans for some borrowers. That seems to hurt everyone, 
especially in States like Georgia that are so centered on real 
estate.
    The borrower has to find a new bank, which we know is 
difficult in these economic times, while the bank loses a 
performing loan.
    Surely there is a better way to enforce FDIC rules and 
regulations so that they don't hurt the very consumers that 
they are designed to protect and the banks that they are 
designed to oversee.
    What might you say would be a better way?
    Ms. Bair. Congressman, thank you for asking that question, 
because I think our policies are not consistent with what you 
are being told.
    And, again, I will say this to all members here: If there 
are specific examples where you feel that our policies are not 
being applied by our examiners, I personally want to know about 
it.
    I do stay engaged with the examiners. I do conference 
calls. I visit the regions. I cannot tell you how focused I 
personally have been on this.
    And the rule is quite simply this: if the loan is 
performing, if you have a creditworthy borrower with cash flow 
to keep making payments on that loan, it doesn't matter what 
the collateral is. If the loan is a good loan, it doesn't need 
to be written down, no additional reserves, nothing, it is a 
fine loan.
    If you are just refinancing the unpaid principal, and you 
have a creditworthy borrower who can continue to make payments, 
you don't have to write down that loan, even if the collateral 
has declined in value.
    If you are extending new credit, new money, yes, the bank 
needs to go make an appraisal of the collateral, because you 
are expending new money. That is just a basic tenet of banking.
    But regarding existing loans or refinancing of existing 
loans, if the borrower is creditworthy and can make the 
payments, you do not have to do an appraisal and you do not 
have to do a write-down.
    That is the rule. I went through this again yesterday as 
part of my hearing prep because I hear this a lot. And it is 
very frustrating to me.
    And, again, if you have specific examples, I do want to 
know about it.
    Mr. Scott. Okay, let me just ask you specifically then, 
what should my banks in Georgia do? You are saying that is not 
the way it should be. They are saying it is the way it is. So 
what should they do?
    Ms. Bair. They could call me directly. Or, we have an 
Ombudsman that is set up as a confidential process. So, they 
can do it on a confidential basis.
    Also, they can call Sandra Thompson, the head of our 
Division of Risk Management.
    Mr. Scott. Who was that again, please?
    Ms. Bair. Her name is Sandra Thompson. She is the head of 
our Division of Risk Management.
    There are any number of avenues to bring this to our 
attention. We do want to know about it.
    I have found a couple of cases where policies were 
misapplied, and we corrected it very quickly.
    I will tell you, though, other times when we drilled down, 
what we found was that the borrower really did have some 
problems. There may be a different perception about what a 
creditworthy borrower is, and sometimes that can be a judgment 
call.
    We individually review every single allegation. I promise 
you that.
    Mr. Scott. Right. Thank you very much.
    Just last week, two more banks failed in my home State of 
Georgia: First Choice Community Bank; and Park Avenue Bank. And 
this brings the number of banks that have closed this year to 
10, which is by far the most of any other State.
    And unfortunately this is not unusual news, as banks in 
Georgia continue to struggle.
    Can you tell me what, in your opinion, makes small banks 
especially vulnerable to closure?
    Ms. Bair. Early on, we had a lot of failures of banks that 
had grown too fast. They had taken deposits and grown their 
balance sheets very quickly, had not adhered to good 
underwriting, and had clearly made a lot of out-of-area 
lending, which is something that generally is not good, unless 
you very carefully manage that exposure.
    Later, as we progressed into economically troubled times, 
more problems arose from weaknesses in risk management. But, 
they were succumbing to economic conditions as well.
    If the losses are mounting and the capital is insufficient 
to curb those losses and if they can't raise additional 
capital, there is not a lot we can do about it. Under the 
statute, we have a prompt corrective action process that we 
follow. It is fairly rigid about when the banks--
    Mr. Scott. Very quickly, are there any specific things you 
could say right now that the FDIC can do to assist them?
    Ms. Bair. I think we do try to work with them. I know we 
have a different role than they do. But it is not a 
confrontational role, and we don't want that.
    We tell our examiners they need to understand what is going 
on in the bank. They need to talk to management. They need to 
listen to management.
    They must exercise their own independent judgment about the 
health and safety of that bank. But that should be informed by 
robust conversations with the bank management and the board. 
And we do that.
    Certainly, anything that we can do with an appropriate 
balance to help them recapitalize is in our interest. We don't 
want these banks to fail. It costs us money every time it 
happens.
    But, nonetheless, if they can't raise their capital and the 
losses are mounting, if you delay the closing of the bank for a 
long time, the losses will go even higher. That was the lesson 
learned during the S&L crisis, and which is why we have prompt 
corrective action now, and why we follow it.
    Mr. Scott. Thank you, Chairman Bair.
    And thank you, Madam Chairwoman, for your generosity of 
time.
    Chairwoman Capito. Thank you.
    Mr. Westmoreland, from Georgia, 5 minutes.
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    Ms. Bair, in a meeting I had 2 weeks ago with your staff, 
they informed me that it is unlikely that the FDIC will wind 
down the use of loss share agreements in Georgia.
    Setting aside my strenuous objection to this, I have 
serious concerns about the loss-share agreements that will 
begin to mature in 2 years. As the stop-date of a loss-share 
agreement approaches, I have serious concerns that the banks 
with these agreements will begin to rapidly sell off assets to 
take advantage of the agreement.
    This could lead to yet another downturn in real estate and 
make it harder for people to obtain loans.
    What is the FDIC's plan for these maturities of loss-share 
agreements?
    Ms. Bair. I am not sure where you got this 2-year figure. 
In practice, the terms of the loss-share agreements generally 
coincide with the tenure of the loans.
    But there is no cut-off point in 2 years where there is no 
longer any loss-share and it is going to get dumped on the 
market. That is not how it works.
    Actually, we think that the loss-share prevented a lot of 
property going onto the market, because it facilitated our 
ability to sell the whole bank, with the deposits and the 
assets, to another insured depository institution. If we had 
not provided loss-share, the bank probably wouldn't have taken 
the assets.
    We would have had to sell it on the open market at an 
extreme liquidation discount, or held it ourselves and managed 
it, which is inefficient and costly and difficult.
    So actually, I think the loss-share has helped keep a lot 
of assets in the hands of other, better-capitalized, stronger 
depository institutions. It has kept the property off the 
market. Also, I want to emphasize that we have very stringent 
rules in loss-share agreements about loss mitigation.
    If a loan restructuring will have greater value than a 
foreclosure, we want the loan restructured. We have very 
specific rules about that. And we audit that. If they don't do 
that, they can lose their loss-share payment.
    Mr. Westmoreland. You all might want to send some folks out 
with your regulators who actually go out and do the work in the 
field, and see where the disconnect is. There is certainly--
    Ms. Bair. I would. I do hear this. And again, if you have 
some specific examples, we would love to hear them--
    Mr. Westmoreland. The problem with giving examples is these 
banks are afraid to death of retaliation.
    Ms. Bair. Yes.
    Mr. Westmoreland. And so we would be glad to give you 
examples, but trying to get some of these guys to come 
forward--I have been trying to do it for a long time now, and 
they are--I am being serious. They are desperately afraid of 
retaliation.
    And if you all think loss-share agreements are helping--
    Ms. Bair. Right.
    Mr. Westmoreland. --then that could be the problem, because 
they are not.
    But let me ask before--and I don't want to cut you off, but 
I do want to ask you one other question.
    Despite the occasional lip service that some of these 
regulators give for talking about they want these community 
banks to continue to be able to provide service to small 
business and local customers, the examiners continue to second-
guess bank management policies and downgrade loans based not on 
the current status of the loan. In other words, some of these 
loans are performing loans.
    But based on a scenario where there is no economic 
recovery, and virtually every examination ends with significant 
downgrades not supported by professional outside loan review or 
by independent accountants, if the FDIC is serious about 
allowing banks to serve their customers, why are the banks 
being second-guessed on even the best-documented loans?
    And I don't understand how a bank can get all ``A's'' on a 
report card, and 6 months later get all ``F's'' and do 
everything but call the board members crooks.
    Ms. Bair. Again, it is hard to respond without knowing what 
the facts would be in the individual case. I would say that if 
the loan is performing, if the borrower has success, and the 
loan continues to perform, it is a good loan, even if the 
collateral has gone down in value. Even if it needs to be 
refinanced, it is a good loan.
    Again, if you have examples, I do want to know about them. 
I will personally assure the banker that there will not be any 
retribution by bringing this to our attention.
    So I really don't know what else I can say. I think 
examiners do need to exercise independence of judgment. They 
need to listen to bank management, and understand their 
reasoning. But bank managers are not always right. There have 
been some big mistakes.
    I think we are, hopefully, for the most part, through this. 
But early in this crisis, we did have a lot of very dramatic 
downgrades from banks that had very good supervisory ratings to 
ones that went to troubled status. And for that reason, we are 
putting more of an emphasis on what we call ``forward-looking 
CAMELS'' and asking banks to stress their portfolios and stress 
conditions.
    But that is just from a risk-management perspective. That 
doesn't mean if the economy tanks unexpectedly that they have 
to start holding more capital now. No, we just want them to be 
prepared and think through all the scenarios.
    Mr. Westmoreland. And listen, I appreciate those comments. 
But I really hope that some of your senior management, or 
whatever, can go into some of these banks. And as my colleague 
from Georgia mentioned, we have a tremendous amount of them 
that are either under consent orders, cease-and-desist, on the 
problem bank list, that is still to come.
    And this is sucking wealth out of these communities.
    And the loss-share agreement and the immediate write-down 
is doing a reverse situation on our local economies. It is 
killing us. We need some help.
    Thank you, Madam Chairwoman, for your generosity.
    Ms. Bair. If I could just indulge the Chair, I am actually 
going to be in Atlanta soon. I will go you one further. I am 
happy to go to your district and meet with a group of bankers 
personally if that would be helpful to you.
    Mr. Westmoreland. I may take you up on that.
    Chairwoman Capito. Mr. Carney, from Delaware, for 5 
minutes.
    Mr. Carney. Thank you, Madam Chairwoman.
    And thank you for being here today, Chairman Bair.
    I would just like to add my voice to those who have 
expressed concern about banks being told that they had to do 
away with performing loans and creditworthy borrowers not 
getting access to that. So I would like to take you up on your 
offer to entertain those kinds of referrals and that 
discussion.
    I have heard it a number of times from the borrowers and 
from the banks themselves.
    I would just like to touch on and follow up on a couple of 
questions. And the first one is you addressed the issue of 
bailouts of banks and what the tools are that you have today 
that you didn't have under Dodd-Frank.
    And the question really is, are you better positioned 
today? Are the regulators better positioned today to prevent 
government bailouts of those troubled financial institutions 
then they were before?
    And you did it a minute ago, but if you could just 
highlight some of those things, how the incentives have 
changed, how your tools have been strengthened, and so on.
    Ms. Bair. Yes, they have. We now have the authority to 
resolve the entire financial institution, whereas before, our 
receivership authority only went to the insured bank. And so 
now, at least for large bank holding companies, there is a 
whole list of authorities to put them into receivership, into 
our process, if that would avoid systemic consequences.
    And as I said before, the process is very rigorous, every 
bit as harsh as bankruptcy. Any temporary liquidity support 
that might be provided is paid off the top. There is no 
guarantee of liabilities. All unsecured creditors are exposed 
to loss.
    On the remote chance that there could be some remaining 
loss for the government--that has to be assessed against the 
industry. There is no way that taxpayers would pay--there are 
bells and whistles on this thing, and belts and suspenders. We 
pushed for that.
    We actually wanted a pre-funded reserve. We wanted an 
assessment to actually provide a pool of liquidity in advance, 
so we wouldn't even have to borrow from the U.S. Treasury for 
even that temporary liquidity support. We didn't get that.
    But nonetheless, even if there is temporary borrowing that 
is necessary, that gets paid off the top. In the unlikely event 
there would be losses after being paid off the top, that would 
be assessed against the industry.
    Mr. Carney. You mentioned some things that management--some 
incentives management has to resolve it themselves.
    Ms. Bair. Yes, the boards are gone. The executive 
management is gone.
    Mr. Carney. These are really strong, you know--
    Ms. Bair. It is quite harsh. Yes it is. And, there is the 
2-year claw-back--a potential for a 2-year claw-back of 
compensation, too, for senior executives. So, yes. Which is 
why, again, I think a lot of the benefit is prophylactic as 
well. Managers, knowing what this process is now, don't have 
the option of going to a bailout. The fact that this process is 
there and will be the scenario if they fail is going to give 
them a strong incentive to go out, raise capital, and sell 
themselves if necessary.
    Mr. Carney. The second question is really to follow up on 
my friend, Mr. Renacci's, question about the conflict between 
the CFPB, potentially, and the safety and soundness regulators. 
What is your view on that? And as it relates as well to the 
governing bodies that you discussed with my colleague from the 
other side?
    Ms. Bair. Right. I think there is a close intersection. And 
it will require a lot of collaboration with the new consumer 
head. There is a statutory requirement that the consumer agency 
consult with the bank regulators in writing rules.
    Again, I think the fact that the consumer head would be on 
our board will help further that sensitivity and knowledge and 
awareness of the intersection of safety and soundness with 
consumer protection.
    So I think it can work. Again, it is all about--
    Mr. Carney. Do you have some reservations? You seem to 
express some.
    Ms. Bair. Not really, no. Early on when the Congress was 
considering this, we were sympathetic to a board approach. We 
have a board. I like boards. Even though it is more difficult 
for me, I am not a dictator. I have to go get my five votes.
    The chairman of a committee has to do that. But I think it 
is a good process. Either way, though--you have the OCC with a 
single head--so you have both models in the financial 
regulatory sphere.
    So, no, I wouldn't say I have reservations. I think there 
are arguments pro and con for either approach. But the statute 
provides an approach that we support and one we think we can 
work with.
    Mr. Carney. So the kinds of things that the CFPB might be 
doing around consumer protections, do you see a big conflict 
with safety and soundness issues?
    Ms. Bair. No. There actually can be some safety and 
soundness advantages, particularly with regard to the ability 
of the consumer bureau to now examine and enforce consumer 
protection rules for non-banks. One of the things that put 
pressure and led to a lot of bad lending by insured banks was 
competitive pressure from the non-bank sector.
    You had a lot of non-bank mortgage originators who really 
had no regulation whatsoever. They were selling these loans to 
the securitization trusts. They weren't retaining any of the 
risks of these loans which was really driving down lending 
standards.
    Having a more robust enforcement mechanism for the non-
banks I think will actually help level the competitive playing 
field and make sure we don't have competitive pressure on banks 
to lower their standards.
    Mr. Carney. Thank you. I see my time has expired. Thank you 
for your service. I appreciate it.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Canseco, from Texas, for 5 
minutes for questioning.
    Mr. Canseco. Thank you, Madam Chairwoman.
    Good morning, Madam Chairman.
    Lehman Brothers, the FDIC's report on the possible orderly 
liquidation; the FDIC said that had the resolution authority 
granted to them under Dodd-Frank been in place in September of 
2008, the estimated losses to Lehman's creditors would have 
only been 3 cents on every dollar.
    However, officials at the Federal Reserve, including 
Chairman Bernanke, have stated that one of the primary reasons 
that the Fed did not step in to save Lehman was because the 
estimated losses were so large and Lehman did not have 
sufficient collateral to post to the Fed.
    Chairman Bernanke stated in his testimony to the Financial 
Crisis Inquiry Commission, ``There was not nearly enough 
collateral to provide enough liquidity to meet the run on 
Lehman. The company would fail anyway. And the Federal Reserve 
would be left holding the very illiquid collateral, a very 
large amount of it.''
    So my question to you is, the FDIC seems to think that 
there was significant value in Lehman while the Federal Reserve 
thought that the risk was too large to lend to it.
    How could the FDIC and the Federal Reserve come to such 
different conclusions?
    Ms. Bair. I think a couple of things. First of all, the 97 
cents on the dollar as the senior debt holder, that assumes 
that the sub-debt and equity is wiped out. So it is not all 
Lehman creditors. As you do with bankruptcy, you work your way 
up the capital stack with equity at the bottom, and sub-debt 
later.
    Because of the significant equity and sub-debt cushions, we 
think that the senior bond holders would have taken very small 
haircuts. That is based on very aggressive assumptions about 
what the loss rates would have been on their bad assets.
    I think there is a difference between what collateral was 
available to the Fed to lend, as well as the Fed's legal 
constraints against lending into a failing institution. That 
really drove Chairman Bernanke's comments.
    But the value of available unencumbered assets shouldn't be 
confused with the broader franchise value of the institution 
and the ability of significant sub-debt and equity to absorb 
losses, which the Fed could not rely on because there was no 
resolution process, which we have now.
    Mr. Canseco. Was this difference of conclusions between the 
two agencies discussed when the Federal Reserve and the FDIC 
issued the proposed rule for living wills?
    Ms. Bair. Congressman, I don't think there really is a 
difference. I think Chairman Bernanke was talking about the 
availability of quality collateral--they have very high 
standards for collateral when they lend. And they actually lent 
well over $100 billion into the broker-dealer.
    Because of the bankruptcy process, the derivative 
counterparties had the ability to pull all their collateral 
out--the Fed lent a lot already for liquidity needs and it was 
still a very disruptive process.
    I don't think we are inconsistent in what we are saying. 
But we certainly, to your question about living wills, have 
closely collaborated on the living will rule. It is a joint 
proposal.
    Mr. Canseco. Going back to the Lehman bankruptcy, the FDIC 
called its past experience with orderly wind downs of financial 
institutions ``instructive.'' The paper argues that the FDIC is 
readily equipped to handle the authority given it under Dodd-
Frank because from 1995 through 2007, the agency was 
responsible for the orderly wind-down of 56 financial 
institutions.
    But a closer examination begs questions as to just how 
ready the FDIC is to handle its new responsibilities. According 
to data from the FDIC's Web site, the total asset of those 56 
financial institutions wound down from 1995 to 2007 was about 
$12.23 billion, or an average of $218 million per bank. Most of 
the banks were much smaller than that.
    So Lehman Brothers had $639 billion in assets when it 
failed. This was the largest bankruptcy in American history. 
And Lehman's assets were 50 times greater than all the combined 
assets of the banks the FDIC shut down over a 12-year period.
    What makes the FDIC think it has the resources available to 
wind down such a large institution?
    Ms. Bair. More recent history may better attest to our 
capabilities. We have moved about $650 billion in failed bank 
assets over the past 2\1/2\ years, since the beginning of 2008. 
WaMu, obviously, was over $300 billion and was resolved over a 
weekend in a process that would have been very similar to the 
process we would have used for Lehman.
    We insure these banks. We understand them. And, 
Congressman, I get this question sometimes--people try to paint 
us as understanding only little banks. But, we insure these big 
banks. We, regrettably, participated in some of the bailouts of 
these very large banks. Nobody questioned our expertise or 
authority to do that.
    So, I think we are quite prepared. I will match the 
expertise of my staff on capital markets, on derivatives, on 
complex financial structures against anybody at the Fed or the 
OCC or the Treasury. We have very smart people who do this for 
a living.
    We really are the only agency in the world that has the 
long experience in resolving large and small financial 
institutions.
    And others look to us. We are doing training in Europe and 
China. Others look to us for expertise as they are setting up 
their own resolution regimes.
    Mr. Canseco. I notice that my time is up. But I sure hope 
that the FDIC has changed its own personnel and operating 
structure for the benefit of our financial system.
    Ms. Bair. Congressman, I am very sensitive to this. We are 
designed to expand and contract very quickly. We also have 
reservoirs of contractor help, because our work is cyclical. 
And we are used to it.
    We are not perfect. This is a challenge for us. But, I 
think certainly compared to the expertise shown in the 
bankruptcy process--you saw what happened with Lehman--this is 
a good approach. And I want to prove to you that it can work.
    Mr. Canseco. Thank you.
    Chairwoman Capito. The gentlewoman from New York, Ms. 
Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Madam Chairwoman.
    Thank you, Honorable Sheila Bair.
    Last Congress, this committee held a hearing to examine 
community bankers' concern that regulators were being overly 
restrictive. How has the FDIC addressed these concerns to work 
with banks that want to increase small business lending?
    And I am concerned, as the ranking member of the House 
Small Business Committee, we held a joint hearing with this 
committee to address the lack of access to affordable capital 
for small businesses. So I would like for you to comment on 
this.
    Ms. Bair. I think this has been a major impediment in the 
broader economic recovery. And, certainly, given your expertise 
with the small business sector, you know that much better than 
I do.
    I think there are a variety of reasons. Risk aversion, 
perhaps, is part of it. But I think borrower demand is part of 
it, as well. Borrower demand is driven by a couple of different 
factors. One is, I think, uncertainty about how robust the 
economic recovery is. If they borrow money and commit capital 
to expand, or if we are in another downturn a year from now, I 
think this is the problem that is dampening borrower demand.
    I also think because so much small business lending is 
collateralized by real estate, and real estate values have 
dropped so substantially, they don't have the collateral 
anymore to borrow against as they did pre-crisis.
    We encourage lending. We focus on it. I was very 
disappointed when small business loan balances were down in the 
first quarter and even though C&I lending was up, small 
business lending was down. Commercial and industrial lending, 
the broader category, was up.
    We are trying to strike a very strong balance. We want our 
banks to lend. We especially want them to lend to small 
businesses. But, I think they obviously need to find 
creditworthy borrowers to do that, and a lot of the 
creditworthy borrowers are still standing on the sidelines.
    Ms. Velazquez. Okay.
    The FDIC recently implemented the Dodd-Frank mandate to 
expand the deposit insurance assessment fee, which will result 
in community banks paying 30 percent less in premiums while 
large banks pay more. What effect on small business lending 
will the new assessment systems will have?
    Ms. Bair. I think if you are doing this for small banks, 
this is small business. I think it will help them. It will ease 
their assessment burden in a way that is quite consistent with 
our loss exposure based on the funding structures that larger 
institutions employ.
    So I think it will certainly help them. To the extent the 
small banks do about 40 percent of the small business lending 
done by insured depository institutions, it should free up 
resources to help them in that regard.
    Ms. Velazquez. Under the proposed rules for qualified 
residential mortgages, home buyers will have to put down 20 
percent of the purchase price. As a Member who represents New 
York, we are very much concerned about this because it will 
have a significant potential impact in high-cost areas like New 
York City.
    Should QRM requirements be based on local market conditions 
instead of an across-the-board increase?
    Ms. Bair. No. The QRMs are meant to be an exception to the 
general rule that if you are issuing a securitization, you need 
to retain 5 percent of the risk.
    And I think that 5 percent risk retention is important. The 
fact that securitizers did not have skin in the game with these 
loans, by and large, or meaningful skin in the game, led to a 
lot of the lax underwriting and abuses that we saw in the 
mortgage market.
    So the 5 percent risk retention, in my view, should be the 
rule. The QRM is the exception. As such, it is meant to be a 
narrow niche part of the market, not what the more broadly 
available standards will be.
    If you retain 5 percent of the risk or if you retain all of 
it with a portfolio loan, you have broad flexibility to 
underwrite the loan within prudential standards. So it only 
applies to what I think is going to be a small slice of the 
market.
    Ms. Velazquez. Have you looked at any other alternatives to 
a 20 percent downpayment that could reduce the number of 
defaults in the future?
    Ms. Bair. The staff of all the agencies looked at this very 
carefully. Loan to value ratios are a significant driver of 
whether a loan defaults and what the losses are when the loan 
does default. And so no, we are out for comment on exactly that 
question, among others. And I anticipate this is a huge issue. 
We will get a lot of comments on it.
    But, the analytical work that the staff did indicates that 
a 20 percent downpayment is a really strong indicator of credit 
quality.
    Ms. Velazquez. But you understand my point that it is not 
fair--
    Ms. Bair. I do understand your point.
    Ms. Velazquez. --for places like Massachusetts--
    Ms. Bair. I think for low- and moderate-income families, 
this is a huge issue. And I think, what is a meaningful 
downpayment for a lower-income person can be very different 
from what a meaningful downpayment is for those with other 
means.
    The question is, how do we meet those needs?
    And I think, again, my view is that with the 5 percent risk 
retention, you will have a robust market that will have prudent 
but more flexible underwriting standards to meet that swath. 
And, of course, we have the continuation of FHA programs.
    Ms. Velazquez. Thank you.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Royce, from California, for 5 
minutes for questioning.
    Mr. Royce. Thank you, Madam Chairwoman.
    Chairman Bair, let me first say that I think a lot of my 
colleagues here have been pretty impressed over time with the 
straightforward way that you respond to questions. It is not 
always the rule around here.
    Second, let me just say that I have laid out for you the 
arguments that I think are made by the studies that there is 
this 88 basis point advantage, this presumption that is out 
there--
    Ms. Bair. There is.
    Mr. Royce. --in terms of the systemically significant 
firms.
    And I think that the studies of the FDIC show the same 
relative--
    Ms. Bair. They do, absolutely.
    Mr. Royce. --magnitude.
    So to go back to the markup or the conference committee, I 
put forward several amendments to try to overcome this 
tendency. One in particular required the FDIC to estimate at 
the outset of the resolution process what creditors would have 
received in bankruptcy and limit payment to bankruptcy less a 
haircut of 20 percent, which would act as sort of an insurance 
mechanism against future write-downs.
    If following the resolution process under that scheme there 
were additional funds, then the FDIC would have the authority 
to pay back all or part of that 20 percent premium. But I 
thought that might solve out in the market this presumption.
    Let me go through the two arguments I made during the 
conference committee. We didn't carry this argument, but I 
think it still holds true.
    First, there is this strong presumption that the regulators 
are going to err on the side of bailouts, especially for the 
most interconnected and largest firms that will likely get 
preferential treatment through the resolution process.
    With this understanding, creditors--and we are talking 
especially here about short-term creditors. Those creditors, by 
the way, are going to be considered essential under the FDIC's 
proposed rule, right?
    So they are going to know that lending to these large 
complex financial firms, subject to the resolution authority, 
is basically risk-free or it is very close to that, because if 
these firms fail, creditors are going to be made immediately 
whole or very close to whole.
    And as a result, these firms are going to be able to borrow 
more cheaply. They are going to grow even larger. They are 
going to become more significant, systemically significant. And 
that is going to compound the too-big-to-fail problem.
    Now, there is a second problem also that arises. And that, 
to go back to it again, is the claw-back provision. Once that 
money is out the door to creditors, it is going to be very 
difficult to recover. And I think that is, again, why you see 
this basis point difference, bankruptcy over here for these 
firms versus resolution authority for the large one.
    It is not hard to foresee a situation where a recently 
bailed-out creditor strongly argues that handing over these 
sums may jeopardize their unstable firm. And this is an 
argument that regulators, having just bailed out these same 
creditors in the name of preserving financial stability, may 
find very difficult to resist.
    Additionally, there is no guarantee that a given creditor 
will be able to pay back the difference between the advances 
and what they would have received in bankruptcy under the 
Bankruptcy Code and under this mandate.
    So, I am just going to go to the Dallas Fed President, 
Richard Fisher, who recently said this about these arguments 
that I have made in the past: ``A credible big bank resolution 
process that imposes creditor losses will be difficult to 
enforce, especially when regulators are explicitly directed to 
mitigate disruptions to the financial system, as they are in 
the reform bill.''
    So I understand that you believe regulators need broad 
authority to handle a crisis, but I think that the unintended 
consequences here have to be considered. And if we were to look 
to tightening the language while working with the resolution 
authority mechanism, are there steps we can take to minimize 
the potential for abuse down the road? And the argument, the 
amendment I made earlier, does that hold water with you? Is 
there a way to get at that?
    Ms. Bair. So, a couple of things.
    We are all for tightening as much as we can. We do not want 
bailouts. We want market discipline back.
    As deposit insurer, there is obviously moral hazard 
associated with providing deposit insurance for these entities 
that have insured banks. So we need market discipline to 
complement the regulatory process as a weapon against excessive 
risk-taking.
    So whatever we can do to tamp this down, believe me, we 
will work with you.
    We are trying to do a lot of this through regulation. We 
put a rule out that basically said that if you hold debt with a 
term over a year, forget it, there will never be any 
differentiation. Please do not interpret that to mean that if 
you hold debt with a term less than a year, you are going to 
get it, because you are not. Short-term creditors are very much 
subject to loss absorption.
    I think one of the advantages of the government being able 
to provide liquidity is, for instance, if you had unsecured 
commercial paper, you could haircut that. Even though you would 
lose the funding, you replace it with government funding, and 
those creditors absorb the losses.
    The presumption for the short-term creditors should be that 
they are taking losses, too. Again, the only time I can see 
that wouldn't happen is if the acquirer wanted to maintain 
those customer relations.
    And you might then find that, for instance, with a 
derivatives book. If they want to buy the failed institution's 
derivatives book, maybe we don't need to impose losses--even if 
there are some counterparties that are unsecured or 
undercollateralized. We find that now with uninsured deposits.
    But that is going to be a mathematical determination. 
Whatever is going to maximize recoveries, that is what we will 
do.
    So I do think we want it narrow. The statute does have some 
significant limitations. We are trying to tighten those even 
more with regulation. I am happy to look at language and talk 
with you about this further.
    Believe me, there is no entity more so than the FDIC that 
wants to end too-big-to-fail.
    Mr. Royce. Thank you, Chairman Bair.
    Chairwoman Capito. Thank you.
    Mr. Royce. Thank you, Madam Chairwoman.
    Chairwoman Capito. Mr. McHenry, from North Carolina, for 5 
minutes.
    Mr. McHenry. I thank the Chair.
    And, Chairman Bair, thank you so much for being here. I 
echo Mr. Royce's comments. I appreciate your forthrightness. I 
know you have testified many times during your government 
service. And we thank you for your service.
    I wanted to ask you, based on something you had in your 
written statement, the Dodd-Frank Act, you said, ``if properly 
implemented, will not only reduce the likelihood of future 
crises, but will provide effective tools to address large 
company failures when they do occur without resorting to 
taxpayer-supported bailouts or damaging the financial system.''
    I think we would like to believe that we won't have future 
taxpayer bailouts. Many of us have concerns that, as 
constructed, it still leaves that door open. And I think that 
is Mr. Royce's point.
    But we look at the breakneck pace of rulemaking, and you 
see regulators in many respects overwhelmed with the volume and 
the pace.
    Ms. Bair. Right.
    Mr. McHenry. Do you have concerns about the pace and the 
quality of the rulemaking?
    Ms. Bair. I think from the FDIC's perspective, we are 
comfortable with it. We did not have the huge number of 
rulemakings that the SEC and the CFTC did. So I think we feel 
like we are proceeding at a reasonable pace. And for anything 
major, we are giving 60-day comment periods.
    And so I think, at least from the FDIC's perspective, we 
are comfortable with implementation so far.
    I do understand, especially in the derivatives area, some 
of the market regulation issues. There is a lot being done 
there at once. Frankly, there were a lot of problems, 
especially with the derivatives oversight.
    So I think the rulemaking needs to continue. Whether 
perhaps some sequencing could be done, that might have some 
merit. But, on the other hand, it is important to continue to 
proceed. And I do think the market needs to understand that at 
some point these rules will be in place.
    And I think, frankly, they need that to adapt as well. 
Markets can be very resilient. Once they know what the rules 
are, our financial sector is pretty good at complying with them 
and figuring out how to do it.
    But, some sequencing might well have some merit.
    Mr. McHenry. What about harmonization?
    Ms. Bair. I think we are doing a pretty good job there, 
even on the international front. I know you hear different 
things from some. The FSOC is still getting its sea legs, but I 
think it is forcing all of us to get together and talk 
regularly and have our staffs talk regularly.
    And so I think there has been a good deal of harmonization, 
including on the international front. I think we have made a 
lot of progress in harmonizing international capital standards. 
In addition to resolution authority, I can't overemphasize the 
need for strong capital buffers.
    So I think there has been some good work on harmonization, 
and we should continue to focus on that. But I know there is 
concern about treatment of commercial end users in the 
derivatives rules. And we are talking with each other about 
that.
    I do think, though, it may be that at some times you want 
some differentiation among end users. For instance, you are 
probably going to want more risk aversion with an insured bank 
than you are with an entity that is completely outside the 
safety net.
    So there may be some reasons for differentiation. But I 
think we are working hard at harmonization.
    Mr. McHenry. You mentioned two things that are of interest, 
this international harmonization--
    Ms. Bair. Right.
    Mr. McHenry. --Basel III, ensuring sort of an international 
level playing field.
    Ms. Bair. Right.
    Mr. McHenry. You also mentioned capital standards. I hear a 
lot from my community banks about their concern about--
    Ms. Bair. Right.
    Mr. McHenry. --raising capital standards. And I understand 
there is a balance here. We want to make sure that we have 
safety and soundness. But we also want to ensure lending and 
economic recovery.
    Are you wrestling with that? Do you believe that is--
    Ms. Bair. I--
    Mr. McHenry. Do you weigh that when you are going through 
this process?
    Ms. Bair. You do need to weigh it. But I think the primary 
focus has been with large institutions' capital requirement--
getting that sector to deleverage.
    And I think, back to the earlier point Congressman Royce 
was making about funding differentials, if you have higher 
capital standards, since capital is more expensive than debt, 
that will not only provide a better buffer for loss absorption, 
but it will help differentiate funding costs, or reduce the 
differentiation in funding costs.
    So I think the capital discussions have been targeted 
primarily at the larger institutions. There have been a few 
issues with smaller institutions' holding companies, regarding 
the quality of capital.
    A lot of the holding companies--not the banks; it is not 
allowed for banks--use something called trust preferred 
securities that ended up to not have loss-absorbing capacity in 
the crisis. And I know there have been some concerns there. 
That is really the only capital issue relating to small 
institutions.
    Mr. McHenry. My time is short, but I want to ask you about 
the QRM. I think that private mortgage insurance should be a 
part of this to ensure a lower downpayment and an insured 
product that should be a part of the QRM. Can you comment on 
that?
    Ms. Bair. Again, that is out for comment. My only caution 
on that--I started worrying when the government was relying on 
credit rating agencies, for instance.
    And so then we say, we will have better standards, review 
standards, if there is a private sector mortgage insurer. We 
need to know, who are the mortgage insurers? How well are they 
regulated? How good are their resources if we get into a down 
cycle?
    I think those are the things really to think about. And 
mortgage insurance can be a good product, but do we want demand 
for it driven by markets or driven by regulations, giving them 
an extra penny, frankly, for having a lower downpayment.
    I know you care about the markets the way I do. I think 
that may be the trade-off that we should think hard about.
    Mr. McHenry. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Duffy for 5 minutes.
    Mr. Duffy. Thank you, Madam Chairwoman.
    Good morning, Chairman Bair.
    Was it you who said that you thought that consumer 
protection and safety and soundness were two issues on the same 
side of the coin?
    Ms. Bair. Right. Yes, it was me.
    Mr. Duffy. Why is that?
    Ms. Bair. I think because consumer abuses generally will 
end up costing banks money. Mortgages are the prime example for 
any financial institution, not just banks. Mortgages are a 
prime example.
    Banks and other entities were making loans that the 
consumers couldn't afford--and more of it was done outside of 
the banks. Eventually, the loans defaulted and a lot of losses 
occurred. So it didn't help the consumer. It didn't help the 
financial institution either.
    Mr. Duffy. And so when we see these two going together, and 
we want to make sure our consumers are protected and treated 
fairly, and they are engaging in transactions that are 
transparent. And we also want banks to be profitable, and make 
sure that they are not going under.
    Do you have a concern when we separate consumer protection 
from safety and soundness? I think it was Mr. Renacci who 
commented that in the mission statement of the CFPB, there is 
no reference to safety and soundness.
    Ms. Bair. Right.
    Mr. Duffy. Does that give you some pause or some concern? 
Or are you okay with the oversight that comes from FSOC? It has 
been a political issue.
    Ms. Bair. Right.
    Mr. Duffy. And I don't mean--I don't want to--
    Ms. Bair. No, I know. Yes, we support the consumer agency. 
There were different iterations of its structure early on in 
the process, but we support the final outcome.
    We think it is a positive thing, actually, that the 
consumer bureau will be on our board, because that will provide 
additional interaction to make sure that safety and soundness 
and consumer protection are considered together.
    That will work both ways, too, I think.
    Mr. Duffy. But it is not on the CFPB.
    Ms. Bair. I am sorry?
    Mr. Duffy. The CFPB doesn't have that consideration for 
safety and soundness--
    Ms. Bair. Right. We are all for reciprocity.
    But, given that, we are fine with how the Dodd-Frank Act 
came out. And I do think it is important to understand, for the 
rule-writing piece of this, that has always been separate from 
the examination and enforcement process.
    Mr. Duffy. But if you look at the--I know you have talked 
about reciprocity. And you really don't have reciprocity, but 
for your FSOC, right, to review the rules that are coming from 
the CFPB.
    Ms. Bair. Right.
    Mr. Duffy. And one of my concerns is that the standard is 
so high. You need 7 out of 10 votes--
    Ms. Bair. Right.
    Mr. Duffy. --to overturn a rule from the CFPB. And the 
Director is one of the voting members. So it is really seven 
out of nine.
    Ms. Bair. Right.
    Mr. Duffy. It is incredibly high. And the risk there, it 
has to be systemic risk. We are talking about playing Russian 
roulette with our economy.
    Ms. Bair. Right.
    Mr. Duffy. I introduced a bill that would reduce the 
requirement to just a simple majority, and take the director 
off, a 5-4 majority of some pretty significant folks who sit on 
FSOC.
    Ms. Bair. Right.
    Mr. Duffy. And we talked about reducing the standard that 
if the rule was inconsistent with the safe and sound operation 
of United States financial institutions, it could be 
overturned.
    Do you think that is reasonable that we have a little 
different standard in how we can coordinate consumer protection 
with safety and soundness?
    Ms. Bair. There are a lot of things about the Dodd-Frank 
Act that all of us would have written differently. At the end 
of the day, it was a compromise product.
    But we can support the final product. I think it can work.
    Mr. Duffy. But can we improve upon it?
    Ms. Bair. Sorry?
    Mr. Duffy. Can we improve upon it?
    Ms. Bair. I fear you are going to draw me into a situation 
where--
    Mr. Duffy. I will be gentle with you.
    Quickly, I am from a more rural district, with all 
community banks and credit unions. We don't have big Wall 
Street banks in my district.
    And I hear this nonstop from my local bankers. They are 
talking about how they are crushed by so many rules and so many 
regulations, and the impact that it has on them, as they say, 
``Listen, we don't have the ability to diversify this cost over 
a large base. And you make me hire a lawyer or a compliance 
officer--''
    Ms. Bair. Yes.
    Mr. Duffy. --``and our costs go up. It makes it more 
difficult for us to compete with bigger banks.'' Or sometimes 
they will go on, ``We can't even stay in the market anymore.'' 
And that is the lifeblood of our economy.
    Ms. Bair. Right.
    Mr. Duffy. And this is nonstop coming from them. I don't 
know if you are hearing the same thing or trying to figure out 
how can we still be safe--
    Ms. Bair. Right.
    Mr. Duffy. --but still have rules that allow our local 
bankers, who didn't have anything to do with the financial 
crisis, to do business.
    Ms. Bair. I think they have a point. I think every time you 
have a new rule or a new compliance requirement for safety and 
soundness or a consumer requirement, the incremental costs of 
doing that are going to be significantly higher than they are 
for a large institution.
    We can and should do a better job of taking that into 
account.
    I have said this, and I will say it again; all the problems 
we have had with servicing, and we have had a lot of them, but 
as near as we can tell, these are problems of scale that affect 
the very large servicers. So, we should have two tiers of 
regulation.
    If there are going to be a lot of new rules for servicing, 
we don't see a basis for layering all of that on the smaller 
banks as well. From a diversification standpoint, smaller banks 
have really been relegated to specialty commercial real estate 
lenders.
    We would love to see them diversify their balance sheets, 
start doing more mortgages again or car loans or whatever.
    But the regulatory barriers to getting back into those 
lines of business may be an impediment.
    And servicing is one example. I would love to see community 
banks start making more mortgages again. I think they do a 
better job with the customer.
    So I am very sensitive to this. And I think we should look 
at more structured, two-tiered regulation, because the issues 
are completely different
    Mr. Duffy. So that is something you are looking at?
    Ms. Bair. Absolutely. And we have an advisory committee on 
community banking. They have given us a number of good ideas 
for making regulations more effective and streamlined when it 
comes to smaller banks.
    When we do a FIL, we already, at the very top, say whether 
this even applies to community banks or not. I require the 
staff to do an analysis of community bank impact and why we 
need this to apply to community banks.
    We are looking at more automation, too, in the forms banks 
have to fill out, putting those all on a system we have called 
FDICconnect. So instead of doing a new form every year, they 
can go in and update the old one.
    So we are trying on a number of fronts to deal with this.
    Mr. Duffy. And I appreciate that, because, again, we hear 
that from the community banks and the credit unions.
    Ms. Bair. Yes.
    Mr. Duffy. To get them to agree on some issues, it is 
pretty impressive. That interchange are two things that they 
will talk about. And I appreciate you looking at that. Thank 
you.
    And I yield back.
    Chairwoman Capito. Thank you.
    The Chairman has consented to go to a second round of 
questioning, if that is--you were consented upon.
    And we are still going to be called for votes here in the 
next probably 15 to 20 minutes.
    So I will go ahead and start the second round, and I 
appreciate you spending the time with us.
    We had a recent hearing and we also had a discussion in the 
markup for the bill for the CFPB on the differences or the 
interchangeability or not of safety and soundness and 
profitability for banks.
    One witness said that safety and soundness is used as a 
code word by the institutions as profitability. And so by 
trying to reshape or reform maybe in the CFPB or something and 
using safety and soundness, we were being accused of protecting 
the profits of an institution.
    And while a safe and sound bank may realize a profit, and I 
think that is a good thing, a profitable bank is not 
necessarily safe or sound.
    Could you comment on this assertion in the 
interchangeability of that and how you see those two different 
phrases differently?
    Ms. Bair. I do think they are--and I have said this 
throughout my career--two sides of the same coin. I think if a 
product does not serve consumers or your customers long-term 
benefit, this is going to be a product that eventually loses 
money for you and could result in significant litigation 
exposure as well.
    We certainly saw that with all the lax funding on 
mortgages. We are seeing a lot of additional litigation on 
overdraft protection. So I think having some sensitivity of 
good business practices for the consumer side is important. 
Products that don't serve consumer needs are eventually going 
to lose money.
    They will probably default, or the customers will start 
abusing them, or they could result in litigation exposure.
    On the other hand, since these are insured banks, you need 
to have a full analysis of changes, whether it is safety and 
soundness or consumer protection, of how that is going to 
impact the financial health of the institution, I would say, 
not the profitability.
    And so I think both factors need to be weighed. But again, 
I think with the consumer bureau needing to consult with the 
bank regulators and also serving on our board, I think there 
are ways now built into Dodd-Frank to facilitate that kind of 
communication and consideration of those factors.
    Chairwoman Capito. So, safe and sound consumer products 
will in the long run, in your opinion, and I agree with this, 
bring about a profitability for the institution?
    Ms. Bair. Sustainable profitability.
    Chairwoman Capito. Yes. And I think that while there is a 
distinction between safety and soundness and profitability, I 
think that, as you said, the unsafe product or the non-well 
research product or the one that takes it too far is eventually 
going to be a nonprofitable instrument for the institution.
    My final question, we have talked a little bit about a 
commission--and I don't want to draw you into a big political 
argument on that. But in looking at your own commission or 
corporation, you serve as the chair. The vice chair--you have a 
vice chair. You have an OCC, who is acting. We have no 
appointment there.
    Ms. Bair. Right.
    Chairwoman Capito. We have the OCS, which is going to be 
grandfathered out, or however, in July, no longer exist on July 
21st.
    We have the CPFB chair, but we don't have one. And I think 
I wouldn't be stretching the imagination to say it is going to 
have to be--it can't be a Senate-confirmed--it would be highly 
unlikely that it would be Senate-confirmed because of the 
timing.
    And then we have your independent director who has also is 
on an expired term.
    This really concerns me. We are losing your expertise and 
longevity and history. And I know you are not really going far, 
but in all fairness to you and to the Corporation, this needs 
to live on.
    Ms. Bair. Right.
    Chairwoman Capito. What are we going to do about it? I 
guess for me, it is a political statement. I say to the 
President, get these appointments out. Get them Senate-
confirmed. Let us have some stability here. Or we are going to 
end up in--not a la la land kind of situation, but an ever-
changing transitional situation where it causes me concern.
    Do you have concerns about that?
    Ms. Bair. I have profound concerns. I am frustrated that 
there is not greater urgency and prioritization of this issue 
on the part of the Administration, as well as on the part of 
the Senate.
    And I am very worried about my agency. We could go down to 
three or two board members after I leave.
    There are some nominations in process. But the names are 
not up yet. There are still some vacancies where, as far as I 
know, no candidates have been vetted.
    And so thank you for flagging that, because I think that 
this is very urgent, when the financial system is healing, but 
it is not out of the woods yet. There are a lot of unknown 
factors out there. We need strong people in these jobs. And 
there are still reforms to be implemented in a commonsense, 
effective way.
    And you are right, having a two-member or three-member 
board making these kinds of decisions is not a good thing.
    Chairwoman Capito. Mrs. Maloney?
    Mrs. Maloney. Thank you.
    And I thank you for raising your concern on having a 
Director of the CFPB in place on July 21st. This is a grave 
concern to me also.
    The difficulty is that 44 Senators have signed a letter 
saying that they will not confirm anyone unless bills that they 
want, that passed out of this committee, and other policy 
positions that they want such as moving the funding of the CFPB 
to the political appropriations process, which if we look at 
what happened to the SEC and the CFTC, they were basically cut, 
making it more difficult for them to do their job.
    So in other words, politicizing the funding of it. They 
said that they would not confirm anyone. I believe this is a 
tremendous abuse of the confirmation process, basically holding 
the entire Congress hostage, that you have to write legislation 
like we want.
    In this case, not what I am saying, but roughly five or six 
major editorial boards from the United States have said in 
their editorials, and good government groups and others have 
said, to remove it from politics or the Democratic and 
Republican perspective, that these bills would gut, dismantle, 
disrupt, and destroy the CFPB, the Consumer Financial 
Protection Agency.
    So this is a huge problem. They basically have given the 
President no choice but to make an interim appointment because 
they are saying they will have to gut the entire agency and 
make it basically a non-performing, toothless situation.
    So I believe the CFPB has a role to play in protecting 
consumers. Too often, consumers' concerns were a second 
thought, a third thought, or not thought about at all. And we 
maybe would have been able to prevent the subprime crisis. I 
can't imagine any consumer agency approving products that the 
degree of probability that they would end up on the street or 
hurting the family and the overall finances of our country were 
greater than the mortgage working them.
    The joke in New York during this time was if you can't 
afford your rent, go out and buy a house. It was so easy to get 
a mortgage, a faulty mortgage, that became clogged in the 
system and helped bring down the financial crisis that we had.
    So we have a disagreement, a basic choice. It is a basic 
disagreement between the Republican Party and the Democratic 
Party. The Democratic Party supports the CFPB. The Republican 
Party has come forward with a series of bills that would 
dismantle, destroy, and gut the CFPB.
    And you have Republican Senators saying, ``We will not 
confirm anyone unless you do exactly what we want,'' using it, 
taking hostage the entire legislative process to get what they 
want.
    They have forced the President, really with no other 
choice, since he supports the CFPB. And I would say the 
overwhelming majority of the American people do. The American 
people would like someone looking at their loans, at their 
credit cards, at their student loans, and making sure that they 
are fair; not giving anyone an advantage, but making sure that 
there is a fair playing field that consumers can understand 
what the terms are; that they are in plain print out there for 
everyone to understand.
    So we have a basic disagreement between the Republican and 
Democratic Parties.
    But I do want to address my questions to our distinguished 
guest today in the area in which she has played such a 
fundamental role. I would like to go back to the too-big-to-
fail, which is a huge issue. And I understand it is the next 
focus of the hearings we will be having on this committee.
    Some have argued repeatedly that the financial reform law, 
particularly the Orderly Liquidation Authority, perpetuates, 
rather than eliminates, too-big-to-fail. So I would like to ask 
you, what is your assessment of the allegation that the 
Authority perpetuates too-big-to-fail?
    Ms. Bair. I do not believe it in any way perpetuates too-
big-to-fail. Too-big-to-fail was with us pre-crisis. It was 
reinforced by the bailouts. And we need to end too-big-to-fail 
now.
    And the Dodd-Frank Act gives us the tools to end it. It 
quite specifically bans the bailouts in language that we 
supported and wanted in.
    So I think it is there. The tools are there. The clear 
legislative intent is there. And I think, as I indicated in my 
testimony, implemented effectively, it will end too-big-to-
fail.
    Mrs. Maloney. My final question, and my time is running 
out, is which parts of the financial reform law do you think 
are the most critical to ending too-big-to-fail?
    Ms. Bair. I think Title I and Title II, which gives us the 
Orderly Liquidation Authority powers for systemic non-banks. We 
already have it for banks. Title I is important, which requires 
the Fed to impose higher prudential standards and particular 
capital requirements on larger entities, as well as requires, 
jointly with the FDIC, living wills or resolution plans where 
they must demonstrate that they are resolvable.
    Mrs. Maloney. I thank you for your testimony today. I thank 
you for your distinguished service to our country.
    And I thank you for your really nonpartisan response to 
questions and policies. I think you have done a magnificent job 
for our country.
    Thank you.
    Chairwoman Capito. Thank you.
    Mr. Renacci, from Ohio?
    Mr. Renacci. Thank you, Madam Chairwoman, again.
    And Chairman Bair, I do want to thank you again for being 
here, and your testimony, and your service to our country also.
    The one question I asked before, several people have 
already asked you, and I heard your answer. So I am going to 
move to another topic. And it regards the Orderly Liquidation 
Authority. I know several times in your testimony today, you 
have talked about how you believe--or at least the impression I 
got was that you believe the FDIC's authority over liquidation 
is better than bankruptcy.
    Ms. Bair. Yes.
    Mr. Renacci. There are a number of--
    Ms. Bair. --for financial institutions.
    Mr. Renacci. --for financial institutions.
    There are a number of people in the bankruptcy community 
who believe that if the bankruptcy laws were changed, that 
bankruptcy would be better.
    Ms. Bair. Right.
    Mr. Renacci. And I know a lot of it deals with derivatives 
and making sure there is some timing on derivatives.
    Can you give me some ideas or thoughts where you might 
believe that bankruptcy would be better? Because one of the 
issues of bankruptcies, of course, is that we are looking out 
for the creditors as we wind things down. So I would like to 
hear your thoughts on some things that could be changed in the 
Bankruptcy Code that would actually make bankruptcy better.
    Ms. Bair. I think you are right. How derivatives are 
treated is really very important. First of all, we would love 
to work with this committee and the Judiciary Committee on 
this. We deal a lot with bankruptcy courts because banks that 
we resolve are frequently part of holding company structures 
that go into bankruptcy. So we are quite familiar with some of 
the strengths and weaknesses of the process.
    I think how bankruptcy treats derivatives is a big problem. 
And having the ability to require counterparties to continue to 
perform on their derivatives contracts is important. Now they 
have the ability to terminate their contract and claim their 
collateral, which can be quite disruptive and was a major 
factor in the disruptions that surfaced with Lehman.
    So we would love to work with the Congress to make 
bankruptcy work better. For most of these financials 
companies--for instance CIT, we were opposed to any kind of 
bailout assistance for CIT. We didn't think they were systemic. 
They weren't. They went into a bankruptcy process.
    It was just fine. It was financial. They relied on a lot of 
short-term funding through commercial paper, but they were the 
size where their bankruptcy was not systemic. And bankruptcy 
worked just fine. And I think there are ways to make bankruptcy 
work even better.
    For the larger entities, though, I think there will be a 
couple of things that we can do that bankruptcy courts will 
never be able to do. First, we will be able to have a 
continuing on-site presence with these entities. We will be 
able to plan.
    We will have ongoing access to information about their 
counterparty exposures and the concentration of their overseas 
operations. The bankruptcy court is just never going to be able 
to do that.
    Similarly, we will be able to pre-plan and work with the 
international regulatory community, as an institution becomes 
more troubled, to find and identify any potential obstacles to 
resolving our domestic entity if they have foreign operations.
    We do that now. We resolved banks with international 
operations.
    We had a West Coast bank that owned branches through a 
subsidiary in China and Hong Kong. Several months in advance, 
we contacted the regulatory authorities there. We identified 
what we needed to do to make sure there was a smooth sale in 
our receivership process.
    And we did. We were able to keep the branches and 
subsidiary in Asia open. We got the regulatory approvals for 
the new buyer to take the failed bank.
    So it is hard to see how the bankruptcy court could ever 
engage in that kind of bilateral international coordination in 
the event of a failure, or be involved in pre-planning.
    Finally, we can provide immediate liquidity support, which 
can be very important to maintaining franchise value. They have 
debtor-in-possession financing mechanisms in bankruptcy, but 
generally those cannot be done immediately the way liquidity 
support can be provided by the FDIC.
    Mr. Renacci. Thank you.
    I yield back.
    Chairwoman Capito. I am going to take the liberty and ask a 
question before I go to Mr. Carney, real quick, to piggyback on 
his question.
    When you say you can provide immediate liquidity support, 
is that through the ability to go to the Treasury?
    Ms. Bair. That is. Under the bill, yes. For banks, we have 
the Deposit Insurance Fund that we use. But yes, for non-banks, 
it would be through the credit with Treasury. Yes.
    Chairwoman Capito. And I think that is where the rub is, 
really, in terms of the perception. Because if you--
    Ms. Bair. I think that is right.
    Chairwoman Capito. --if you can go to the Treasury, you are 
going to the taxpayer.
    Ms. Bair. Right.
    Chairwoman Capito. And can you help with that distinction?
    Ms. Bair. Again, we wanted a pre-funded reserve, and that 
passed the House, but didn't pass the Senate. But I do think it 
is very important to emphasize that any funds that are provided 
through that Treasury line are paid back and have priority over 
everything else. As assets are sold, they are paid off the top.
    I can't believe there would ever be any losses on that 
because you are not guaranteeing any liabilities for the non-
bank institutions. So whatever assets are sold, those 
recoveries go to Treasury first.
    And if in the unlikely event there would be losses, there 
would be an assessment on the industry, just the way we assess 
now for deposit insurance.
    So I really think there are a lot of safeguards against 
taxpayers ever taking exposure on this. And I would say in 
turn, the fact that the industry would have to pay for any 
losses if that would occur, in and of itself will create 
industry pressure against any creditor differentiation, because 
they will know that if the receiver--we would never do this 
anyway--but if the receiver started trying to show favoritism, 
those losses would be assessed against the industry. And there 
will be a lot of industry pressure not to do that.
    Chairwoman Capito. Mr. Carney, from Delaware.
    Mr. Carney. Thank you, Madam Chairwoman. I am happy to 
yield any time you might need.
    Chairman Bair, thank you again. I have been really enjoying 
the hearing this morning. And I want to reiterate the comments 
that my colleagues have made on both sides of the aisle about 
your candor and straightforward answers. We don't always get 
that.
    And I think it has a positive effect on the Members and the 
questions they ask, by the way, as well.
    You said a minute ago that you thought the financial system 
was healing, but not out of the woods yet. Could you expand a 
little bit on that?
    Ms. Bair. Yes. I think they are still working some troubles 
out.
    Loan volume is down. And, again, I think there may too much 
risk aversion with some banks, but I think there is also a lack 
of borrower demand. And banks need to make loans to make money.
    That is what they are supposed to be doing with their 
funds, and that is what they need to do to make money.
    I think, longer term, as I have said in testimony and as I 
said in an op-ed last November, I think we are worried about 
the fiscal situation. We are in a very low-interest-rate 
environment and have been for some period of time.
    That means there are more low-interest assets on banks' 
balance sheets. And even though the maturities have been 
shortening, obviously banks are heavily exposed to interest-
rate volatility because, particularly, their liabilities are 
shorter than their assets.
    So I think anything that would undermine confidence in the 
fiscal strength of the United States Government could have an 
adverse, potentially volatile impact on interest rates.
    And so we are very much worried about that and hope very 
much that these discussions can produce a long-term deficit 
reduction plan.
    Also, as I mentioned in my testimony, we are not out of the 
woods with the housing market yet, either.
    Mr. Carney. Yes, that was my next, kind of, line of 
questioning. You said that we need to get mortgages--mortgage 
lending going on. What are the barriers there?
    I hear, as I said a minute ago, from my bankers and from 
borrowers that the regulators are tightening down, not allowing 
them to make those loans.
    Ms. Bair. Actually, I think I would put more of a priority 
on business lending and small business lending. I think 
certainly mortgages and housing is an important part of our 
economy, but I think we need to accept, going forward, it will 
be a smaller part of our economy--
    Mr. Carney. Right.
    Ms. Bair. --and probably needs to be. It got bloated and 
overheated. But I do think ultimately, there needs to be a GSE 
exit strategy. We know that model didn't work. And I think--
    Mr. Carney. Do you have a view on what model might work?
    Ms. Bair. I think what we have said is that it is really 
outside my portfolio to--
    Mr. Carney. That is okay. There are just a few of us here 
now.
    Ms. Bair. I will say this. I think it could go one way or 
the other. Regarding this hybrid model where you had a private 
for-profit shareholder-return-driven entity with an implied 
government backstop--providing this government support was 
absolutely the wrong model. What you got was the privatization 
of gains and the socialization of losses.
    So going forward, I would say if you are going to continue 
to have government support, make it explicit; charge for it up 
front, the way we do at the FDIC. Make sure it is actuarially 
sound, in terms of what is being charged for the credit 
support. And make that explicit.
    These implicit backstops--
    Mr. Carney. Explicit and narrower?
    Ms. Bair. Explicit the way the FDIC charges insurance 
premiums for deposit insurance. If you are going to be 
guaranteeing mortgages, have the government determine the 
amount and charge a guarantee fee that accurately reflects 
risk. Yes. Or get out, one way or the other.
    Mr. Carney. And so, what about--there was some back-and-
forth about lending standards.
    Ms. Bair. Right.
    Mr. Carney. What is your view of that? Twenty percent is a 
huge--
    Ms. Bair. Again, Congressman--
    Mr. Carney. I don't see how that works.
    Ms. Bair. That is supposed to be the exception, not the 
rule.
    There are mortgages out there with 20 percent downpayments, 
but that is meant to be a niche exception to the general rule 
that if you are going to securitize mortgages, you need to 
retain 5 percent of the risk.
    So the QRM standard is a way to get around the 5 percent 
risk retention. If you retain 5 percent risk, you have a lot of 
flexibility on the underwriting side.
    Mr. Carney. Okay.
    What sounds reasonable to you, in terms of the downpayment 
or--
    Ms. Bair. I think it is a combination of factors. Clearly, 
with a borrower with a strong credit history, with a low debt-
to-income, there may be other flexibilities that you can 
provide. And we provide that with banks now, with portfolio 
lending.
    I think you need to have some downpayment. I don't want 
to--
    Mr. Carney. Let me squeeze one more question in. I only 
have a short amount of time.
    Ms. Bair. Sure.
    Mr. Carney. It is about credit agencies. You mentioned 
credit agencies. Do you have a view of what we should be doing 
there?
    Ms. Bair. I think that one thing we are doing is getting 
rid of all references to credit rating agency ratings in our 
regulation. That is required by the Dodd-Frank Act. Pre-Dodd-
Frank, we had already started telling banks that they needed to 
do their own independent analysis of the creditworthiness of 
the securities they invest in. They can't rely just on the 
ratings.
    We used to use ratings for our deposit insurance 
assessments. We have gotten rid of that. So I think that has 
been in process for some time.
    If you are not using credit ratings, what are you going to 
replace them with?
    And so, that is really the hard question. And I don't think 
we have figured that out yet.
    Mr. Carney. Thanks very much.
    Ms. Bair. Sure.
    Chairwoman Capito. Thank you. This concludes our hearing. 
The Chair notes that some members may have additional questions 
for this witness which they may wish to submit in writing. 
Without objection, the hearing record will remain open for 30 
days for members to submit written questions to this witness 
and to place her responses in the record.
    Again, thank you so much--
    Ms. Bair. Thank you.
    Chairwoman Capito. --for, I think, a very productive 
hearing today. Good luck to you. And we appreciate, again, your 
great service to our country.
    This hearing is adjourned.
    [Whereupon, at 11:41 a.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 26, 2011


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