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





                      FINANCIAL REGULATORY REFORM:
                       THE INTERNATIONAL CONTEXT

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 16, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-39









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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










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 16, 2011................................................     1
Appendix:
    June 16, 2011................................................    57

                               WITNESSES
                        Thursday, June 16, 2011

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................    15
Brainard, Hon. Lael, Under Secretary for International Affairs, 
  U.S. Department of the Treasury................................    11
Gensler, Hon. Gary, Chairman, The Commodity Futures Trading 
  Commission (CFTC)..............................................    19
O'Connor, Stephen, Managing Director, Morgan Stanley, and 
  Chairman, International Swaps and Derivatives Association, on 
  behalf of the International Swaps and Derivatives Association 
  (ISDA).........................................................    36
Ryan, T. Timothy, Jr., President & CEO of the Securities Industry 
  and Financial Markets Association (SIFMA)......................    38
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange 
  Commission.....................................................    17
Scott, Hal S., Nomura Professor and Director of the Program on 
  International Financial Systems, Harvard Law School............    39
Silvers, Damon A., Policy Director & Special Counsel, American 
  Federation of Labor and Congress of Industrial Organizations 
  (AFL-CIO)......................................................    42
Tarullo, Hon. Daniel K., Governor, Board of Governors of the 
  Federal Reserve System.........................................    13
Walsh, Hon. John, Acting Comptroller of the Currency, Office of 
  the Comptroller of the Currency................................    21
Zubrow, Barry, Executive Vice President and Chief Risk Officer, 
  JPMorgan Chase & Co............................................    41

                                APPENDIX

Prepared statements:
    Fincher, Hon. Stephen........................................    58
    Bair, Hon. Sheila C..........................................    59
    Brainard, Hon. Lael..........................................    90
    Gensler, Hon. Gary...........................................    96
    O'Connor, Stephen............................................   110
    Ryan, T. Timothy, Jr.........................................   121
    Schapiro, Hon. Mary..........................................   146
    Scott, Hal S.................................................   156
    Silvers, Damon A.............................................   183
    Tarullo, Hon. Daniel K.......................................   191
    Walsh, John..................................................   203
    Zubrow, Barry L..............................................   222

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Written statement of The Clearing House Association..........   239
Biggert, Hon. Judy:
    Written statement of the Institute of International Bankers..   274
Fincher, Hon. Stephen:
    Written responses to questions submitted to Hon. Gary Gensler   286
Stivers, Hon. Steve:
    Written responses to questions submitted to Hon. Sheila Bair.   287
    Written responses to questions submitted to Hon. Lael 
      Brainard...................................................   292
    Written responses to questions submitted to Hon. Gary Gensler   294
    Written responses to questions submitted to Hon. Mary 
      Schapiro...................................................   295
    Written responses to questions submitted to Hon. Daniel K. 
      Tarullo....................................................   298
    Written responses to questions submitted to Hon. John Walsh..   301

 
                      FINANCIAL REGULATORY REFORM:
                       THE INTERNATIONAL CONTEXT

                              ----------                              


                        Thursday, June 16, 2011

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Manzullo, Biggert, Capito, Garrett, Neugebauer, McHenry, 
Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, 
Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, 
Grimm, Canseco, Fincher; Frank, Waters, Maloney, Watt, Sherman, 
Capuano, Hinojosa, Lynch, Miller of North Carolina, Scott, 
Green, Cleaver, Ellison, Perlmutter, Carson, and Carney.
    Chairman Bachus. The hearing will come to order.
    Without objection, all members' written statements will be 
made a part of the record. The Chair will recognize himself for 
an opening statement.
    When President Obama signed the Dodd-Frank Act into law 
last summer, he set in motion the most ambitious changes in 
financial institution regulation since the Great Depression.
    While American regulators and financial institutions sort 
through its 2,300 pages to find out what the new legislation 
means for them and to race to meet its deadlines, the 
international implications of the law have garnered relatively 
little attention.
    Receiving even less attention has been the work of the 
Basel Committee on Banking Supervision. Last November, the G-20 
formally adopted its recommendations for Basel III, a new 
global framework for determining the minimum amount of capital 
that banks must hold to cushion against losses or insolvency. 
These complex matters are too significant to ignore.
    During today's hearing we will examine the implementation 
of these new bank regulations and the implications for the 
competitiveness of our financial markets. We need to know, if 
we lead, will others follow? Does it matter?
    It has been said that if banks impose cost and risk on a 
country's economy, the country is better off with rules that 
limit the risk and cost, even if others are not doing the same.
    That might be true, if the only risk and cost to a country 
were the risk and cost of bank failure. But there are other 
threats and dangers. If we overregulate and ignore the plans of 
the rest of the world, then I fear we will push capital, 
industry, and jobs out of the country.
    At a time when each new release of government data seems to 
underscore the sensitivity of our economic recovery, it is fair 
to ask Treasury and other agencies represented on our first 
panel whether they have carefully considered the cumulative 
effect that the tsunami of regulatory mandates unleashed by 
Dodd-Frank is having on the real economy.
    We will be discussing four critical issues during this 
hearing and raising important questions I hope our panelists 
will address.
    First, capital and liquidity. Will the Basel III rules make 
the financial sector more stable? And if so, at what cost? Is a 
banking system awash in capital worth the potential trade-off 
of slower economic growth, less innovation, and diminished 
credit availability?
    Second, regulation of SIFIs. Is Governor Tarullo's proposal 
to impose additional capital requirements on the SIFIs that 
reflect the amount of harm a SIFI failure will inflict on the 
rest of the financial system the right approach, or will it 
just make U.S. significantly important financial institutions 
less efficient and less competitive without making the system 
safer?
    As we dial up the capital and liquidity constraints on the 
regulated financial sector, do we run the risk that more 
activity will migrate to the shadow banking system and the 
jurisdictions offering a lighter regulatory structure?
    Third, derivatives regulation. Should we expect that 
participants in derivatives markets will shift their business 
to non-U.S. firms, if other countries refuse to follow our lead 
on margin and capital requirements? How should we expect U.S. 
firms to compete if they face higher costs than their foreign 
competitors?
    And fourth, regulation of proprietary trading. Not even 
Paul Volcker claims that proprietary trading caused the 
financial crisis in 2008, but the Dodd-Frank Act Volcker Rule 
prohibits banks and non-bank financial companies from engaging 
in trades for their own gain.
    Now that the rest of the world has rejected the call to 
impose similar proprietary trading bans on their institutions, 
what effect will unilateral U.S. application of the Volcker 
Rule have on the liquidity and vibrancy of our capital markets?
    These are important questions, and I am pleased we have two 
distinguished panels of witnesses with us today to answer them. 
I look forward to the discussion, and I will now recognize the 
ranking member.
    Mr. Frank. Mr. Chairman, before I start, how much time on 
each side?
    Chairman Bachus. We have 12 minutes on each side.
    Mr. Frank. Then I will yield myself 5 minutes.
    Chairman Bachus. Okay.
    Mr. Frank. I was looking at the testimony of Mr. Zubrow, 
which we will hear later, and I was pleased to see him say in 
his first page, ``Certainly, the financial crisis exposed 
serious flaws in the U.S. regulatory system, particularly the 
dangers of unchecked leverage and regulatory arbitrage. Most of 
the reforms imposed in the wake of the recent financial crisis 
by market participants, accounting authorities, supervisors, 
regulators and the Congress will improve the soundness of our 
system while allowing U.S. firms to remain competitive.''
    I appreciate that, because that is the framework in which 
we operate.
    Now, within that framework there are several things we want 
to do: first, to make sure that capital is adequate; and 
second, not to put American institutions at a competitive 
disadvantage. But there are a couple of points I want to make 
about this first.
    And I say to my friends in the financial industry, you do 
understand that we have to separate, to the extent that we can, 
two important desires that you have. One is not to be regulated 
in a way that puts you at a disadvantage vis-a-vis your foreign 
competitors, and two is the desire not to be regulated.
    Now, I understand that. That doesn't make you bad people. 
Everybody would rather do what he or she wants and not be told 
what to do by others. And we won't always be able to make that 
clear.
    But I do have to say, we have had a history--and that is 
why I was pleased that Mr. Zubrow mentioned; this is Mr. 
Zubrow, who is the chief risk officer of JPMorgan Chase--``the 
dangers,'' he said, ``we learned of unchecked leverage and 
regulatory arbitrage.''
    Regulatory arbitrage is one of the factors we have to deal 
with, but what we have in part is a problem in which the desire 
of American institutions not to be regulated and the desire of 
European institutions not to be regulated can reinforce each 
other, and it is important for us to single those out.
    There is a second point I want to make to my friends in the 
financial community, and I think another important distinction 
we have to keep in mind that I must say, to be honest, they 
don't always--and I can understand that--they are the means to 
a sound financial system. They are not the end. Their 
profitability in and of itself is not important to anyone other 
than themselves.
    That doesn't make it unimportant. They have that right. But 
their role in the financial system is to be the intermediary. 
Their role in the financial system is to help us gather enough 
capital in the system from a variety of sources and make it 
available to people who will do things productively.
    The fact that a particular financial institution may or may 
not be making a good profit is really not a matter for public 
policy.
    That does not mean, as some have suggested, that we should 
set out consciously to try and reduce the role of the financial 
sector in the economy, although there was a very interesting 
paper by Adair Turner from the Financial Services Authority 
raising some of these questions.
    It does say to me that if, as a consequence of regulation 
that we think preserves the safety and soundness of the system, 
the simple fact of a reduction in profitability from some very 
profitable institutions with some very well-paid executives is 
not a problem.
    It is a problem if that reaches the point where it 
interferes with our ability to have capital formation. And I 
want to look at that.
    Now, we also have the question of what comes first, the 
chicken or the egg? And that is a particular problem here. 
There is a danger that various financial institutions in each 
country will lobby to the point where there is an overall 
reduction.
    I am told by some of our regulators that when they talk to 
their European counterparts in particular, they are told that 
the counterparts hear the same things that they hear: ``If you 
don't stop, we are moving elsewhere.''
    I do know, for example, in the area of compensation, there 
is a strong argument from Europe, and I heard it myself from 
Michel Barnier, the markets commissioner of the European Union, 
that the extremely lax rules in America on compensation for 
chief executives puts Europeans at a disadvantage, that in fact 
Europe has much tougher rules on compensation.
    That doesn't drive me to do anything differently, but I do 
have to note that.
    I understand people talk about the level playing field and 
we are told that we won't have a level playing field here if we 
are too tough. I have noted something extraordinary about the 
level playing field, which would defy logic.
    That is, in all the years I have heard people complain 
about the unlevel playing field, I have never heard of an 
instance in which anybody was at the top of the unlevel playing 
field. It is a constantly declining playing field. Maybe I get 
a Nobel prize for that, like a constantly declining--I yield 
myself another minute.
    We have a constantly declining playing field in which 
everybody is at the bottom and no one has ever been at the top. 
And I worry that we get into that same situation in which all 
the financial institutions in the world will be able to prove 
to their regulators that they are at a disadvantage vis-a-vis 
every other financial institution in the world, and the result 
will be a net lowering.
    There were some reasonable points to be made. I do not 
think, for example, that margin requirements on sovereign 
entities are a good idea. I could be persuaded otherwise. My 
New York colleagues have pointed out a very particular case 
where there might be some disadvantage.
    I do believe, and I will be interested if the regulators 
have any different view, that the law as adopted gives them the 
flexibility to take that into account. I do not think that the 
CFTC would be mandated to do things that would put people at a 
disadvantage, if that can be clearly established for no other 
purpose.
    But the general framework is, yes, as Mr. Zubrow said, we 
had a problem of unchecked leverage. We had a problem of there 
not being enough rules. We got into a terrible financial crisis 
because we hadn't done appropriate regulation.
    And as we do the regulation, it is important to keep in 
mind two things, that the role of the financial institution is 
not to make money for themselves, but to be the intermediary 
between the various sources of capital and people who will put 
it to good use, and the need not to allow a competition to be 
used simply to denigrate regulation in general, but rather to 
try to get cooperation so that we get a good regulatory scheme 
that puts no one of our people at an international competitive 
disadvantage.
    Chairman Bachus. Thank you.
    Mr. Royce for 1 minute?
    Mr. Royce. Given where the financial crisis originated, Mr. 
Chairman, it is unfortunate how far off the radar this reform 
effort has gone. Let us not forget this all started when 
Congress decided to embark on a course of social justice to get 
everyone who wanted one into a home regardless of whether or 
not they could afford it. Then came the crisis, followed by 
Dodd-Frank.
    Let us be clear: An avalanche of regulation doesn't mean 
better regulation. The new regulations were simply piled on top 
of the old ones. Will it make our financial system any safer? 
Unlikely.
    Rather than giving markets more stability, this new law 
fundamentally weakened the global financial system by 
encouraging capital flight out of the most stable and liquid 
markets in the world.
    Buried in the pile of new regulations coming down the pike 
may be a few good ideas, such as higher capital standards. 
Unfortunately, this effort is getting trumped by 2,300 pages of 
government attempting to micromanage virtually every player 
throughout our financial system.
    As The Wall Street Journal noted today, the most 
competitive banking system is one with high capital 
requirements and few rules on the extension of credit, whether 
to a consumer or a corporate derivatives customer.
    It is up to us to correct the mistakes and ensure the end 
result is a financial system built on higher capital, built on 
market discipline and commonsense regulation.
    I yield back, Mr. Chairman.
    Chairman Bachus. Thank you.
    Ms. Waters for 2 minutes?
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to thank our witnesses for coming today, 
particularly Chairman Bair, whose 5-year tenure at the FDIC 
will come to an end on July 8th.
    Chairman Bair, I imagine this may be your last time 
testifying before this committee, so I would like to thank you 
for your service during this unprecedented, turbulent time for 
our Nation's financial system.
    It has been almost a year since Democrats in Congress 
passed the most sweeping reform of our financial market since 
the Great Depression. Because of that reform, our regulators 
now have the tools to closely monitor systemically significant 
institutions, unwind failing firms in an orderly fashion, 
regulate the shadow banking industry, and bring transparency to 
the derivatives market.
    Of course, the statutory authority we provided will only be 
as effective as the rules adopted to implement that authority, 
and the ability to prevent another crisis will only be realized 
if regulators are willing to test-drive the enforcement and 
resolution powers we granted.
    Our hearing today is about implementation of Dodd-Frank, as 
well as Basel III. And I am very interested to hear from our 
regulators about how they are cooperating with their 
international partners. I am also interested to hear from the 
industry witnesses on the second panel, who are concerned about 
their competitive position relative to their international 
counterparts.
    But I think it is extremely important to caution against 
engaging in a global race to the bottom when it comes to 
financial regulation. If we water down financial reform in 
order to entice firms to locate in the United States, we may 
find the only thing we have accomplished is ensuring that the 
next bailout recipient is headquartered in the United States.
    As I have said consistently, strong, transparent, and 
fairly regulated markets are our best way to increase 
certainty, prevent another crisis, and create jobs.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Bachus. Thank you.
    Mr. Hensarling for 1 minute?
    Mr. Hensarling. Thank you, Mr. Chairman.
    This week is the 1-year anniversary of the Administration's 
summer of recovery. We now have one in seven Americans on food 
stamps. New business starts are at a 17-year low.
    It now takes 10 months, according to the Bureau of Labor 
Statistics, to find a job. This is the longest period in 
recorded history. And we now have 28 months where unemployment 
has been north of 8 percent, the longest period of sustained 
high unemployment since the Great Depression.
    We now have on top of this, Dodd-Frank signed into law--
which is fraught with intended and unintended consequences--
that I believe has impeded and will harm job creation in 
America.
    Dodd-Frank was not passed in the E.U. It was not passed by 
the G-20, and our regulators must proceed with great care. We 
do not know what the total impact is. We cannot afford greater 
job loss.
    I yield back.
    Chairman Bachus. Thank you.
    Mrs. Maloney for 2 minutes?
    Mrs. Maloney. Thank you, Mr. Chairman, for calling this 
hearing.
    I welcome all of the witnesses today and thank you for your 
service.
    And I join my colleagues in thanking Sheila Bair for her 
extraordinary leadership during one of the most difficult times 
in our history.
    You did an incredible, outstanding job. Thank you. And I am 
interested in seeing what your next goal will be, and I am sure 
you will continue to have an outstanding career in service to 
our country.
    I join the chairman and the ranking member in expressing my 
concern for any competitive disadvantage for American 
institutions in the world economy.
    I am particularly concerned about a requirement in the 
Dodd-Frank Wall Street Reform Act, which responded to the worst 
financial crisis in our country's history since the Great 
Depression and certainly moved forward with an improved 
regulatory infrastructure in the financial services sector.
    It was very clear that our infrastructure had not kept pace 
with the development of financial products and services, and it 
was a long-needed reform.
    But I am concerned about one of the features in it that 
would impose heightened capital requirements on the most 
complex U.S. banking entities and unbanked financial 
institutions. And I wonder if this SIFI surcharge adopted under 
Basel III satisfies that requirement, or is this an additional 
burden that would be on our financial institutions? And what 
would that impact be?
    Also, with the implementation of Basel III and Dodd-Frank, 
how the implementation schedules are different, how you are 
coordinating that, how you are working with our European 
counterparties and other counterparties across the world to 
make sure that we are moving in the same direction and, 
hopefully, enacting similar regulations.
    I had raised these concerns with Federal Reserve Chairman 
Ben Bernanke during his annual testimony before our committee. 
And he had indicated that he thought that we could be at a 
competitive disadvantage.
    I look forward to hearing what your comments are on the 
capital requirements specifically for entities and complex U.S. 
entities and nonbanks.
    Chairman Bachus. Thank you, Mrs. Maloney.
    Mrs. Maloney. Thank you.
    Chairman Bachus. Mrs. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman.
    One of the most important dynamics of implementing 
regulatory reform is to keep our U.S. financial industry 
competitive. Without a strong financial sector that can issue 
loans and supply capital to help businesses grow and create 
jobs, our economy will continue to falter. More jobs will be 
lost.
    If we unnecessarily constrain American financial 
institutions through unlevel standards to those of their 
international competitors, businesses will migrate to the 
international competitors. And if we restrict our financial 
institutions from providing innovative and competitive products 
to consumers, consumers will look elsewhere.
    It is counterproductive if the most stringent regulation of 
our U.S. financial institutions drives businesses overseas and 
shifts risky behavior to unregulated sectors of the economy. We 
must find the right balance. U.S. jobs and our economy depend 
on it.
    And I would like just for a moment to also talk about 
Sheila Bair. I think you have done a wonderful, wonderful job 
in your role during this financial crisis, and I know that 
whatever you do next is going to be very important, and I know 
that will also help all of us in this country. We thank you so 
much for all that you have done.
    Thank you.
    Chairman Bachus. Mr. Scott for 2 minutes?
    Mr. David Scott. Thank you, Mr. Chairman.
    Welcome, panel.
    And I would like to also convey my deep appreciation to Ms. 
Bair for her excellent work.
    I want to talk about the international aspects of this, but 
there is no more important deal for us to in our financial 
system to take care of a pressing issue at home.
    And so I want to start off by putting on the table--
hopefully, your comments will reflect--I am certainly going to 
ask a question--on our failure of our financial system right 
here at home to deal with this extraordinary problem of home 
foreclosure and the downward turn of home values. I think our 
standing in the world is going to go down with our failure to 
address this.
    We have a problem with our loan servicers and our banking 
establishment. They are good people, but we have to figure out 
a way to get them, our financial system, to be more responsive 
to the issue of home foreclosures. It is the core that will 
drag our economy down and we are not responding. So I hope that 
as we move on in some of our comments, we can get that.
    But I also want to mention that the Dodd-Frank measure in 
terms of international aspects, the measure included 
requirements for increased transparency of derivatives by 
mandating that they be traded on transparent exchanges and by 
pursuing legal recourse against banks that violate this 
condition.
    And although the provisions of the Dodd-Frank Act are a 
needed reform to the derivatives market, parts of the financial 
industry have expressed concern regarding the application of 
these regulations in foreign countries, particularly their 
effect on competitiveness.
    The rules would require international branches of U.S. 
banks to collect margins from financial end-users for uncleared 
swaps, thus potentially jeopardizing their ability to compete 
with foreign entities.
    And in addition, it is unlikely that foreign jurisdictions 
will adopt similar laws as that within the Dodd-Frank law, 
since the issue was not addressed as part of the G-20 accords.
    So I would like for us to, as we move forward in the 
question-and-answer period, both address that and certainly 
reflect here what is happening at home with foreclosures, and 
particularly, as I am putting together a major event in 
Atlanta, Georgia, this weekend, to address that.
    So your comments will be very much appreciated on those two 
issues--derivatives and home foreclosures.
    Thank you very much, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mrs. Capito for 1 minute?
    Mrs. Capito. Thank you, Mr. Chairman.
    I think there are many lessons that we learned from the 
recent financial crisis, but few are more clear than that we 
are in a global financial system that is more interconnected 
than ever before.
    On the one hand, we see technological and communication 
advances that allow companies from around the world to 
interact. But on the other hand, we have seen in the last few 
financial crises, problems in one part of the globe can flow 
throughout the entire financial system.
    Whether we supported Dodd-Frank or not, it set a new 
regulatory benchmark across the entire financial services 
industry. The regulators before this committee today are going 
to bear a considerable burden on writing hundreds of rules and 
regulations.
    I would encourage you all to move forward with caution, and 
to work with your counterparts from around the globe to ensure 
that America remains a financial leader.
    We have the opportunity today to bring an important 
discussion in front of the committee about the cumulative 
effects of Dodd-Frank on financial institutions. I think 
failing to examine the aggregate cost of compliance with Dodd-
Frank could lead to job losses and, in the worst case, a 
downgrade of the United States as a financial center.
    I look forward to hearing from our witnesses today, and I 
thank the chairman for holding this hearing.
    Thank you all.
    Chairman Bachus. Thank you.
    Mr. Garrett for 1 minute?
    Mr. Garrett. Thank you, Mr. Chairman.
    So as far as international coordination of financial reform 
is concerned, I guess we are a long way from the solidarity 
that we had back in 2009, back in Pittsburgh, with the G-20 to 
where we are today.
    I guess that is because there are some substantial 
differences beginning to emerge between Dodd-Frank financial 
reform and what we are seeing in the rest of the world.
    Back then, it was more like, ``Well, you lead here in the 
U.S., and we will follow,'' for the rest of the world. Now, it 
is, ``You lead here in the U.S., and we will sort of pick and 
choose as to what we are going to follow with.''
    That is because: Dodd-Frank has the Volcker Rule, and they 
don't; Dodd-Frank requires multi-dealer exchange trading of 
swaps, and they don't; Dodd-Frank wants pension funds to tie up 
more retirement money as collateral for trades, and they don't. 
Those are just a few examples.
    So because of that, this country now risks capital and jobs 
fleeing this country, going overseas, and impairing our economy 
and our competitiveness.
    The overreaching policies that were codified in Dodd-Frank 
have basically incentivized other countries to do what we would 
think they would do--increase their taxable revenues through 
basically strategic regulatory arbitrage.
    And so, the cumulative impact of all these new regulations 
may be hard to measure, but that is precisely what the FSOC 
must undertake to do. What is the total cost of all this 
additional regulation in the form of jobs and economic growth? 
Which of these regulations actually address real problems and 
which ones simply add cost?
    This type of economic and cost-benefit analysis must be 
done now. Why? Because the stakes are just too high to do it 
otherwise and get it wrong.
    With that, I yield back.
    Chairman Bachus. Thank you.
    Mr. Neugebauer?
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I am putting a chart up, and I apologize; it is a small 
chart. But basically, these are the 50 top financial firms by 
country by market cap. And over on the far right-hand side in 
2003, the United States had 51 percent of the total 
capitalization.
    You move into 2006, it dropped to 35 percent of total 
market capitalization. And then U.S. companies in 2010 moved to 
24 percent of market capital, with China going from 1 percent 
in 2003 to 22 percent in 2010. You also see a little bit of a 
shrinking in the E.U. and the U.K.
    And so when we talk about how important market 
harmonization is, and regulatory harmonization, it is extremely 
important that we accomplish that goal, because already we are 
seeing a migration of capital to these other countries.
    And for those of you who maybe don't understand jobs 
creation, capital is a primary driving force for that, and that 
is the reason, if we are trying to create jobs, we need to make 
sure that capital is in the United States of America.
    What I am extremely concerned about--and I appreciate the 
chairman holding this hearing today--is that if we do not make 
sure we get this right, we will see further deterioration of 
capital formation in the United States of America. And that is 
going to mean more unemployment and less jobs for American 
families.
    With that, Mr. Chairman, I yield back my time.
    Chairman Bachus. Mr. McHenry for 30 seconds?
    Mr. McHenry. Thank you, Mr. Chairman.
    I am deeply concerned that the cumulative effect of all 
these regulations will be a vacuum, and that will be the huge 
sucking sound of capital out of our market into other markets 
across the globe. And this is at a very time when we have 
companies that are starved for capital in order to create jobs.
    This week, the head of Japan's second-largest bank 
predicted that our stringent regulations on Western banks will 
help double their lending. This is a great example of the loss 
of competitiveness, and I hope that the regulators will 
understand this, that our folks are starved for capital, and we 
need to get more capital on the street so we can actually 
create jobs.
    I look forward to this hearing from the panel.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Manzullo?
    Mr. Manzullo. I thank the chairman for calling the--
    Chairman Bachus. Oh, 30 seconds, Mr. Manzullo.
    Mr. Manzullo. It is ironic that you talk about the 
international context when still I have companies back home, 
factories with orders, business people who are unable to get 
their lines of credit renewed because of capricious and 
arbitrary actions on the part of the examiners.
    This has to stop.
    For years, I have been complaining that these people, who 
are in the process of trying to create jobs, who are solvent, 
who have never had a problem, are suddenly having their loans 
classified and have complained bitterly to the OCC, the FDIC, 
and the Fed.
    It always falls upon deaf ears: ``We will check into it. We 
will talk to our examiners.'' But there has been no change in 
policy.
    There had better be a change in policy on the U.S. side 
before we worry about the international side.
    Chairman Bachus. Mr. Grimm?
    Mr. Grimm. Thank you, Chairman Bachus, for holding this 
hearing.
    And thank you to our witnesses.
    I think most of it has been said, so I will be very, very 
brief. Obviously, we are concerned that the implementation of 
Dodd-Frank is going to hurt the U.S. market competitiveness. 
But I think we need to emphasize, it is U.S. competitiveness as 
a whole, these markets that provide capitalization for the 
businesses to grow and to entrepreneurs.
    Everywhere you go, you hear about job creation. We are not 
going to be able to do that if we are at a competitive 
disadvantage that moves industry, capital and jobs overseas.
    So I am very interested in hearing the panel today and how 
the implementation process will go with respect to our 
competitiveness throughout the world.
    Thank you. I yield back.
    Chairman Bachus. Thank you.
    Our last statement will be 30 seconds from Mr. Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman.
    And to our witnesses today, I appreciate this. This is 
potentially just a fascinating discussion.
    On occasion, we will visit the comments of regulatory 
arbitrage. I am trying to get my head around how much of that 
is folklore, it actually exists, how much of that is actually 
rule-for-rule where you have variations, perception of 
stability of the rulewriting. But also, there is that other 
fundamental out there, actual enforcement.
    We may have equal rules, but this particular government, 
this particular sovereign entity, has a bad habit of never 
really looking at that capital reserve. And that actually 
either puts us at quite a disadvantage or actually creates a 
greater instability, and that is a concern.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    And at this time, I would like to welcome our esteemed 
panelists. Several of the members have acknowledged the 
challenges you face, and we commend you for your hard work and 
industry.
    Our first witness, from my, I guess, left to right, is the 
Honorable Lael Brainard, Under Secretary of the Treasury for 
International Affairs. Our second witness is the Honorable 
Daniel Tarullo, Governor, Board of Governors of the Federal 
Reserve System.
    Our third witness is the Honorable Sheila Bair, Chairman of 
the Federal Deposit Insurance Corporation. And you will be 
leaving, so we wish you well in your new endeavor.
    Our fourth witness is the Honorable Mary Schapiro, Chairman 
of the Securities and Exchange Commission. Our fifth witness is 
the Honorable Gary Gensler, Chairman of the Commodities Futures 
Trading Commission.
    And our last witness is Mr. John Walsh, the Acting 
Comptroller of the Currency.
    We welcome our panelists.
    And we will start with Under Secretary Brainard.

 STATEMENT OF THE HONORABLE LAEL BRAINARD, UNDER SECRETARY FOR 
     INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY

    Ms. Brainard. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee. I appreciate the 
opportunity.
    There are some who would argue that the United States is 
moving too fast on financial reform, that we should slow it 
down, and wait to see what other countries implement.
    I don't agree. By moving first and leading from a position 
of strength, we are elevating the world's standards to ours. 
For financial markets that are more globally integrated than 
ever, we need financial reforms that are more globally 
convergent than ever.
    While we don't need to synchronize across all issues, there 
are a few key reforms that must be global in scope if they are 
to succeed.
    The risk of regulatory arbitrage carries real impacts. It 
means a race to the bottom for standards and protections. It 
means the potential loss of jobs in the American financial 
sector if firms move overseas.
    And it may increase the possibility of future financial 
instability, if riskier activities migrate to areas with less 
transparency, looser regulation, and laxer supervision.
    Acting in concert is the best way to address the potential 
for regulatory arbitrage and the concerns of American firms 
about competing fairly. The sooner we level the playing field, 
the better.
    Let me just briefly touch on the four priority areas that 
are most relevant.
    The first priority is to strengthen capital liquidity and 
leverage. These standards can make the difference between the 
success or failure of firms and the jobs and livelihoods they 
are lending support, confidence or contagion in the markets, 
and the protection of taxpayer dollars.
    The new capital framework known as Basel III will help 
ensure that banks hold significantly more capital, that the 
capital will be able to absorb losses of a magnitude associated 
with the crisis without relying on taxpayers, and that the 
definition of ``capital'' will be uniform across borders.
    But full international convergence will be achieved only if 
supervisors in all major financial jurisdictions ensure that 
banks across the world measure risk-weighted assets similarly. 
That is why the United States has called on the Basel Committee 
to pursue greater visibility across borders and to supervise 
their scrutiny of how banks measure risk-weighted assets. And 
we are pleased that is now on the committee's agenda.
    In addition, Basel III includes a simple check, called a 
mandatory leverage ratio, to protect against the possibility of 
weak international implementation.
    A second vital issue is reducing the systemic risk from 
large interconnected financial firms, so-called SIFIs or global 
SIFIs. Prior to the crisis, many of these firms held too little 
capital, putting the global financial system at risk and 
necessitating significant government intervention.
    To make sure that does not happen again, Dodd-Frank 
requires that the Fed subject our largest firms to heightened 
prudential standards. And G-20 leaders adopted a parallel 
commitment to develop additional capital requirements for these 
firms across borders.
    In those negotiations, the United States has been very 
clear about our priorities. First, additional capital must 
consist of high quality and loss-absorbing common equity. 
Second, the surcharge must be well calibrated to balance the 
imperatives of financial sector stability and of macroeconomic 
stability. And, third, it must apply to a wide range of the 
large interconnected banks across the globe and be mandatory 
and comparable across jurisdictions to promote a level playing 
field.
    The third area is resolution. Dodd-Frank established a 
special robust resolution regime that provides Federal 
authorities with strong authority to resolve the largest 
institutions.
    But the best national regime in the world is not going to 
be adequate if other countries do not adopt robust resolution 
toolkits and complementary authorities. The United States is 
working actively in the FSB to implement an international 
framework.
    The U.K. and Germany have already passed resolution 
legislation, and we will continue working to encourage other 
financial jurisdictions to do the same.
    And finally, international convergence is critical across 
derivatives markets. In the run-up to the crisis, few 
understood the magnitude of aggregate derivatives exposures in 
the system, because derivatives such as credit default swaps 
were traded over the counter on a bilateral basis and without 
transparency.
    As we learned from the crisis, we must require greater 
transparency, move trading onto exchanges or platforms, and 
require them to be centrally cleared. But, of course, if we do 
not have alignment across borders in these rules, firms will 
move activities to jurisdictions with lower standards, which 
will increase risk to the system. For this reason, G-20 leaders 
set forward principles that are in full alignment with Dodd-
Frank.
    Both the United States and the European Commission are 
developing margin requirements for OTC derivatives that are not 
central cleared. We think it is important for those 
requirements to be developed internationally, and our 
regulators have agreed to work with international regulators to 
do so.
    If we don't have a consistent margin standard for uncleared 
trades, we run the risk that activities will migrate to 
jurisdictions that do not provide incentives for central 
clearing.
    In sum, we are making great strides to ensure that the 
financial system is stronger so that future generations can 
avoid a financial crisis of the type that we have just 
witnessed. And we appreciate the leadership of this committee 
on these key challenges.
    [The prepared statement of Under Secretary Brainard can be 
found on page 90 of the appendix.]
    Chairman Bachus. Thank you.
    Governor Tarullo?

 STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you, Mr. Chairman, and members of the 
committee.
    I want to try to make four points in 5 minutes. First, it 
is important to remember why we have strengthened minimum 
capital standards and introduced liquidity standards, both the 
three banking agencies in front of you and regulators around 
the world.
    The financial crisis revealed that the amount of capital 
held by many banking institutions under prevailing capital 
requirements proved quite inadequate in both quantity and 
quality.
    Firms with substantial reliance on wholesale funding 
markets found that those sources of funding dried up quickly, 
at times almost overnight, as market concerns rose.
    Back in 2008, the prospect of the failure of the most 
systemically important institutions raised in turn the prospect 
of a collapse of the financial system, to which none of these 
large complex financial institutions would have been immune.
    And that, of course, is what led to TARP. I think it is 
fair to say, as we sit here today, that no one wants another 
TARP--not those who reluctantly supported it 2\1/2\ years ago, 
and certainly not those of you who opposed it.
    If we are to avoid another Hobson's choice between a TARP-
like mechanism on the one hand or a collapse of the financial 
system on the other, we have to ensure that financial firms 
have adequate loss absorption capacity and can sustain stresses 
in funding markets.
    Second point: In a global financial market, serious 
problems in any major financial center can spread, sometimes 
very quickly. That is why it is important to negotiate good 
capital and liquidity requirements for all internationally 
active banks. That is what Basel III was about.
    And that is why it is important to ensure that the most 
systemically significant institutions around the world have an 
additional capital buffer in light of the impact that their 
failure would have on the financial system.
    Third point: There are a number of additional areas where 
there is need for more international cooperation. Several of 
you have mentioned derivatives, and I wholeheartedly agree.
    Fourth point--and this is the one where I want to spend 
most of my time--the financial stability benefits of Basel III 
and other international reforms will be realized only if they 
are implemented rigorously and consistently across 
jurisdictions.
    And here I want to distinguish between implementation in 
the sense of incorporating the agreements into domestic 
legislation and regulation on the one hand, and on the other 
hand ensuring that those standards are in practice observed by 
firms in all the Basel Committee countries.
    The first step--getting the agreement into laws and 
regulations--is obviously necessary, but it is not sufficient. 
Yet, historically, that is about all that the Basel Committee 
implementation efforts have been able to achieve.
    As effective, external monitoring of international capital 
and now liquidity agreements becomes harder, it is all the more 
important to take the second step.
    For example, there has been considerable external analysis 
in recent months of the apparent divergence in risk-weighting 
of traded assets across institutions and countries. A number of 
reports issued by financial analysts both in the United States 
and in Europe suggested that, generally speaking, it appears as 
though risk-weighted assets and similar portfolios are more 
risk-weighted here than in at least some European countries.
    These analyses raise significant questions, but their 
authors don't have access to the models and processes of the 
financial institutions in question, so they cannot provide 
definitive answers to those questions.
    That is where an effective international monitoring 
mechanism comes in.
    We have raised this issue in the Basel Committee. I raised 
it just last week at the Financial Stability Board steering 
committee meeting. And as we move to the implementation phase 
of Basel III, we will be putting forth detailed proposals for 
how international agreements can be effectively monitored at 
the firm level.
    I have provided some ideas along these lines in my 
testimony this morning and would be happy to discuss them 
further with you.
    The key point, though, is that much more needs to be done 
for at least three reasons: first, as I said earlier, to ensure 
that the financial stability benefits of the agreements are 
realized; second, to avoid a situation in which firms from some 
countries, including the United States, are competitively 
disadvantaged; and third, because the effectiveness of these 
rather complex standards will benefit from the very concrete 
sharing of perspective and problem solving among supervisors 
from all the Basel Committee countries that will be entailed 
when such a monitoring mechanism is in place.
    Thank you very much for your attention, and I am, of 
course, pleased to answer questions.
    [The prepared statement of Governor Tarullo can be found on 
page 191 of the appendix.]
    Chairman Bachus. Thank you.
    Chairman Bair?

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

    Ms. Bair. Thank you. Good morning, Chairman Bachus and 
Ranking Member Frank.
    I am pleased to testify about how current regulatory 
initiatives will affect the economic health and international 
competitiveness of the United States.
    This morning, I want to focus in particular on the 
importance of strengthening capital regulation.
    A strong and stable financial system is a precondition for 
a vibrant and competitive U.S. economy. Unfortunately, in the 
years leading up to the crisis, some large financial 
institutions strayed from their core mission of providing 
credit intermediation to support the real economy.
    Instead, they exploited regulatory gaps and weaknesses to 
reap huge fees through complex securitization structures and 
esoteric derivative instruments that did little to support real 
economic growth and productivity.
    Fueled by the market perception of too-big-to-fail, many 
were able to access low-cost debt financing which they funneled 
into high risk lending and investment strategies, misallocating 
economic resources into unstable financial activities instead 
of more productive uses such as manufacturing, energy, 
technology, and infrastructure.
    The full costs of the financial crisis are not yet known. 
We know that we have lost almost 9 million payroll jobs in 25 
months, homeowners have suffered a one-third decline in house 
prices since 2006, and over 9 million foreclosures have started 
over the past 4 years.
    Lending by insured banks alone contracted by $750 billion 
since the start of the crisis, and loan commitments have 
declined by $2.7 trillion. Trillions more in credit 
availability have been lost with the collapse of the so-called 
``shadow banking sector.''
    A healthy and competitive U.S. economy requires a financial 
system that is stable and supports the credit needs of the real 
economy. This is not the system we had prior to the crisis.
    As we debate the needed improvements, there is much 
discussion, as there should be, of how financial reforms will 
impact the overall competitiveness of the U.S. economy.
    U.S. economic competitiveness is a broad concept, of which 
financial industry competitiveness is only one part. The short-
term profitability of financial institutions should not be 
confused with our international competitiveness.
    Many of the regulatory gaps and lapses which occurred pre-
crisis were rationalized as the way to strengthen our 
international competitive position. What we discovered was that 
sacrificing safety and soundness in the name of global 
competition made both the financial institutions themselves and 
the broader economy worse off.
    A prime example is capital regulation during the pre-crisis 
years, which in retrospect gave undue weight to the desire of 
financial institutions to boost the return on equity with 
leverage. Capital requirements were repeatedly and materially 
weakened in the pre-crisis years. As a direct result, the 
leverage of large financial institutions steadily increased to 
the point where capital was inadequate entering the crisis.
    Insufficient capital skews incentives. Shareholders and 
management reap the upside when times are good and bets are 
paying off, but the costs of the subsequent unraveling are 
borne by the broader economy. We are still paying the price as 
a country for accommodating the pre-crisis appetite for 
leverage of some of our largest institutions.
    With Basel III and an important provision of the Dodd-Frank 
Act known as the Collins Amendment, we have an historic 
opportunity to strengthen the capital of our banking system. 
The Basel III agreement strengthens capital in a variety of 
ways and is a marked improvement over the current regulation.
    The numerical Basel III ratios are probably on the low end 
of what is needed for banks to weather a severe crisis. This is 
especially true for the largest banks. We saw in 2008 the 
substantial external costs associated with the failure of large 
interconnected financial institutions. I strongly support the 
need for additional common equity buffers for such 
institutions.
    It seems self-evident that capital requirements for the 
largest financial institutions should be higher, not lower, 
than the general standard that applies to smaller banks. Yet, 
prior to the crisis a number of large European banks were 
allowed to implement the so-called Advanced Approaches under 
Basel II, which allowed them to significantly increase their 
leverage by using their internal models to set capital 
requirements.
    Large U.S.-insured banks and their holding companies were 
also on a course to take on additional leverage by using their 
risk models to drive risk-based capital requirements.
    On Tuesday of this week, we corrected the situation. The 
FDIC board approved a final rule, joint with the OCC and the 
Federal Reserve, to implement Section 171 of the Dodd-Frank 
Act. This provision of the Act, the Collins Amendment, says 
simply that the capital requirements of our largest banks 
cannot be less than the capital requirements community banks 
face for the same exposures. Thus, models under Basel II can be 
used to increase, but not reduce, capital requirements.
    Unfortunately, large banks in Europe and elsewhere are 
still allowed to effect their own capital requirements. This 
concerns me greatly, for all the reasons that Governor Tarullo 
has also indicated, and I look forward to discussing that more 
with the committee.
    I think we need, as we strengthen capital standards here, 
to make sure that Europe follows suit, and I will be glad to 
work with this committee for as long as I can, which is not 
much longer, and I hope my fellow colleagues will continue this 
course to maintain very strong capital standards in the United 
States.
    Thank you.
    [The prepared statement of Chairman Bair can be found on 
page 59 of the appendix.]
    Chairman Bachus. Chairman Schapiro?

  STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Ms. Schapiro. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee. I appreciate the 
opportunity to testify today on behalf of the Securities and 
Exchange Commission regarding the international implications of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act.
    The Act establishes a host of new reforms that will have 
implications for U.S. companies that compete internationally. 
My written testimony discusses a number of these reforms, as 
well as the SEC's efforts to coordinate with foreign regulators 
and to limit regulatory arbitrage.
    I would like to focus in particular on the over-the-counter 
derivatives marketplace. Today, the OTC derivatives marketplace 
has a global notional value of just over $600 trillion. Yet, 
OTC derivatives were largely excluded from the financial 
regulatory framework by the Commodity Futures Modernization Act 
of 2000.
    Title VII of the Dodd-Frank Act would bring this market 
under the regulatory umbrella requiring that the SEC and CFTC 
write rules relating to, among other priorities, mandatory 
clearing, the operation of execution facilities and data 
repositories, capital and margin requirements, business conduct 
standards for dealers, and greater transparency of transaction 
information.
    These rules are designed to greatly improve transparency, 
facilitate centralized clearing, enhance regulatory oversight, 
and reduce counterparty risk. By promoting transparency, 
efficiency, and stability, this framework should foster a more 
nimble and competitive market.
    Because this marketplace already exists as a functioning 
global market with limited regulation, international 
coordination is critical as we seek to limit opportunities for 
regulatory arbitrage, eliminate competitive disadvantages, and 
address duplicative and conflicting regulations.
    Domestically, the SEC is working closely with the CFTC, the 
Federal Reserve Board, and other Federal prudential regulators 
to coordinate implementation of Title VII, while recognizing 
relevant differences in products, entities, and markets.
    Working closely domestically also bolsters our efforts 
internationally. The Act specifically requires the SEC, the 
CFTC, and the prudential regulators to consult and coordinate 
with foreign regulatory authorities on the establishment of 
consistent international standards, and we are working closely 
with international regulators in this regard.
    While the United States is the leader in this area, a 
significant international consensus exists around core 
components of OTC derivatives reform. While progress is being 
made internationally, other nations do lag behind U.S. efforts.
    To address differences in scope and timing, the SEC has 
been extremely active in bilateral and multilateral discussions 
with regulators abroad. We have been engaged with international 
market regulators both bilaterally and through participation in 
and leadership of various international task forces and working 
groups to discuss the full range of issues surrounding the 
regulation of OTC derivatives.
    Rather than addressing the international implications of 
Title VII of Dodd-Frank piecemeal, we are considering 
addressing the relevant international issues holistically in a 
single proposal. This approach should generate thoughtful and 
constructive comments for us to consider in the application of 
Title VII to cross-border transactions.
    In addition, after proposing all of the key rules under 
Title VII, we intend to consider seeking public comment on a 
detailed implementation plan that will permit a rollout of the 
new security-based swap requirements in an efficient manner 
while minimizing unnecessary disruption and cost to the market.
    I also would note that last Friday, the SEC announced that 
it would be taking a series of actions in the coming weeks to 
clarify the requirements that will apply to security-based swap 
transactions as of July 16th, the effective date of Title VII, 
and provide appropriate temporary relief.
    And yesterday, in the first such action, the SEC provided 
guidance making clear that many of Title VII's requirements 
applicable to security-based swaps will not go into effect on 
July 16th and granted temporary relief from compliance with 
many of the new requirements that would otherwise apply.
    We took this action to avoid market disruption as we work 
expeditiously to finish rule writing and adopt our rules.
    While derivatives are a key focus of the international 
efforts of the SEC, other policy areas also demand our 
attention. For example, accounting and financial reporting 
standards are essential to efficient allocation of capital by 
investors everywhere in the world.
    The SEC is continuing its work on the important issue of 
whether to incorporate international accounting standards into 
the U.S. financial reporting regime. Our primary consideration 
in these activities is the best interests of U.S. investors.
    In conclusion, the SEC continues to work closely with 
regulators in the United States and abroad and members of the 
financial community and investing public to conduct rulemakings 
with international implications in a manner that supports the 
interests of U.S. markets, investors, and firms.
    Thank you for the opportunity to share my thoughts with 
you. And of course, I am happy to respond to questions.
    [The prepared statement of Chairman Schapiro can be found 
on page 146 of the appendix.]
    Chairman Bachus. Thank you.
    Chairman Gensler?

 STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, COMMODITY 
               FUTURES TRADING COMMISSION (CFTC)

    Mr. Gensler. Good morning, Chairman Bachus, Ranking Member 
Frank, and members of the committee. I thank you for inviting 
me to today's hearing on the international context of financial 
regulatory reform.
    I thank Ms. Bair, because this might be the last of five or 
six times we have testified together, and I wish you the best 
in everything you do.
    It has now been more than 2 years since the financial 
crisis, when both the financial system and, I would say, the 
financial regulatory system failed America. So many people 
throughout the world who never had any connection to 
derivatives or exotic financial contracts had their lives hurt 
by the risks taken by financial actors.
    All over the world, we still have high unemployment, homes 
that are worth less than their mortgages, and pension funds 
that have not regained the value they had before the crisis. 
And we still have very real uncertainties in our economy.
    And though the crisis had many causes, and I would agree 
with many of the members' statements on that, it is clear that 
the swaps market did play a central role in the crisis. They 
added leverage to the financial system where more risk could be 
backed with less capital.
    They contributed, particularly through credit default 
swaps, to an asset bubble in the housing market, and I believe 
also accelerated the financial crisis as we got nearer to it. 
They contributed to a system where large financial institutions 
were not only thought to be too-big-to-fail, but we had a new 
phrase called ``too-interconnected-to-fail.''
    The swaps, which do help manage and lower risk for many end 
users, actually concentrated and heightened risk in the economy 
by concentrating it amongst these large financially important 
firms.
    And as capital and risk knows no geographical boundaries, 
we really need to have international oversight that ensures 
that these markets, these swaps and derivatives markets, 
function with integrity, transparency, openness, and 
competition.
    Transparency, openness, and competition have been found 
since the great reforms of the 1930s to benefit the securities 
markets and the futures markets and to benefit the economy and 
job growth and creation.
    To address the real weaknesses in the swap markets, the 
President and the G-20 leaders in Pittsburgh in 2009 laid out a 
framework for regulation of the swaps market. The United States 
and Japan both have passed reform through legislatures and are 
working on implementation. The European Council and the 
European Parliament currently are considering their swaps 
proposal, and Asian nations, as well as Canada, are working on 
their reforms.
    As we work to implement Dodd-Frank, we are actively 
coordinating with international regulators to promote robust 
and consistent standards, and the Commission participates in 
numerous international work groups.
    But we are also sharing our work product. At the CFTC, we 
actually started last July and August sharing our memos and 
term sheets and draft work products with international 
regulators both in Europe and in Asia. We have found this to be 
a great benefit, because we get comments even before we put 
some of the proposals out, and then, consistent with the 
Administrative Procedures Act, as we put proposals out, we have 
gotten more comments.
    Specifically, we are coordinating with regard to the scope 
of the derivatives regulation--central clearing, capital, 
margin, which has been raised by many members here, data 
reporting, business conduct standards, and the transparency 
initiatives, including trading on electronic trading platforms.
    Furthermore, a very important feature of the Act was a 
section called 722(d). I have learned so much now. But it 
states specifically that the Act relating to swaps shall not 
apply to activities outside the United States, unless those 
activities have a direct and significant connection with the 
activities of the commerce here.
    We are developing a plan for the application, as I said, 
722(d), and expect to receive public input on that plan. And we 
are working closely with the SEC on the similar work that they 
are going to be doing there.
    Before I close, I will address the issue related to what 
occurs on July 16th. The Commission, 2 days ago, had a public 
meeting on this matter. First, a substantial portion of Title 
VII actually only becomes effective once we finalize rules. So, 
a majority of Title VII is not effective on July 16th.
    But for the provisions that are not dependent on a final 
rule--they are sort of self-executing--we proposed exemptive 
relief until December 31st of this year. This will provide 
relief from most of title VII. We look forward to hearing 
public comment on it. To the extent that we need to tailor 
additional relief towards the end of the year, we would look 
for additional relief at that time as we move forward.
    Effective reform requires comprehensive international 
response, and yes, consistency, but I thank you and I look 
forward to your questions.
    [The prepared statement of Chairman Gensler can be found on 
page 96 of the appendix.]
    Chairman Bachus. Thank you.
    Comptroller Walsh?

 STATEMENT OF THE HONORABLE JOHN WALSH, ACTING COMPTROLLER OF 
    THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Walsh. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee. I appreciate this 
opportunity to discuss the work that the OCC and the other 
banking agencies have under way to revise bank capital and 
liquidity requirements, consistent with the Dodd-Frank Act and 
Basel III.
    This is a complex undertaking, and we believe it is 
important to determine not only how individual requirements of 
Basel and Dodd-Frank will impact U.S. firms and their 
international competitiveness, but the cumulative impact of the 
provisions as well.
    The invitation letter raised the issue of an international 
race to the bottom, but I don't think this is a serious concern 
when regulatory requirements are becoming more stringent around 
the world. The concern, instead, is that standards are being 
raised both significantly and comprehensively, and so much so 
that we could unnecessarily restrict financial intermediation 
and economic performance.
    At the same time, it is certainly true that if the same 
high standards are not adopted by all countries and enforced 
with the same vigor, U.S. institutions could be left at a 
competitive disadvantage. Our challenge, then, is to address 
the problems that led to the financial crisis without 
undermining the ability of banking institutions to support a 
strong national economy or placing U.S. institutions at an 
unfair competitive disadvantage internationally.
    Both the Dodd-Frank Act and Basel III aim to promote a more 
resilient banking sector by imposing stronger capital and 
liquidity standards. They raise the amount of regulatory 
capital and, just as important, the quality of that capital is 
improved significantly by placing much greater reliance on 
common equity and raising capital charges on risky asset 
classes.
    Banks will also be required to hold substantially more 
liquidity in the form of short-term, low-risk assets, and to 
increase their reliance on more stable long-term debt and core 
deposits.
    The Basel III standards were designed around the crisis 
experience of the largest internationally active U.S. banks. So 
while the OCC has also supported a capital surcharge of common 
equity for a small number of the very largest banks, that add-
on should be modest, given where capital requirements have 
already moved.
    This is not to argue that surcharges should not be higher 
in countries where large institutions represent a greater risk 
to the national economy, particularly where the assets of the 
largest banks exceed national GDP, like Switzerland or the U.K. 
The United States, on the other hand, has imposed statutory 
caps on the size of our largest firms, and even the largest 
firms are only a fraction of GDP.
    While 27 countries reached general agreement on the 
policies and standards outlined in Basel III, the details of 
its implementation will likely vary from country to country. 
U.S. implementation is likely to be more complex and impose 
additional constraints than in other countries, owing to its 
interaction with Dodd-Frank.
    For example, the Collins Amendment set the floor on capital 
based upon current Basel I standards, a dual capital 
calculation that non-U.S. banks will not face. And with the 
simpler Basel I framework still used to determine capital, 
large U.S. banks will have far less incentive to rigorously 
pursue the complex and costly task of implementing the Basel II 
framework.
    The Dodd-Frank Act's prohibition against the use of credit 
ratings also will impede our efforts to achieve international 
consistency in the implementation of Basel III since Basel III, 
the Basel II framework upon which it is built, and Basel I for 
that matter make use of internal ratings in several areas, 
including securitizations, assessment of counterparty credit 
risk, and trading book positions.
    Given capital already raised by large banks, a return to 
profitability and the extended phase-in period for the higher 
capital standards of Basel III, U.S. banks should be able to 
transition to the 7 percent standard without causing undue 
stress on the economic recovery.
    However, I am concerned with how much further we can turn 
up the dial without negative effects on lending capacity. A 
very real risk is that lending will fall, will become more 
expensive, and will again move from the regulated banking 
sector into the less regulated shadow banking sector. 
Certainly, a lesson of the financial crisis is that risk can 
migrate to and accumulate in the unregulated shadow sector with 
undesirable consequences.
    The fact that so many Dodd-Frank and Basel III reforms are 
occurring at once, with combined effects we cannot measure, is 
cause for caution. Before contemplating substantial further 
increases to capital and finalizing liquidity requirements, we 
need to take account of all the reforms being introduced, to 
increase the ability of the financial system to absorb losses, 
and to reduce the probability and potential impact of the 
failure of large institutions.
    The goal of all these changes is to improve the system's 
resilience, but taken too far, we may limit the availability of 
credit that is needed to support economic growth.
    Thank you, and I welcome your questions.
    [The prepared statement of Acting Comptroller Walsh can be 
found on page 203 of the appendix.]
    Chairman Bachus. Thank you.
    I think we all agree that banks should be sufficiently 
capitalized, particularly all the banks, but our global SIFIs, 
because we want to avoid bailouts. We want to avoid taxpayer 
funding and the shock that it does to the economy. And I think 
the same is true about overleveraging and borrowing overnight, 
which some of our investment banks were doing.
    Having said that, I think Comptroller Walsh has an 
important point. As we raise capital, and I know, Governor 
Tarullo, you actually had talked about 700 basis points on some 
of our SIFIs, how does that affect our lending? And do you 
think that will have any negative effect on our economy?
    Mr. Tarullo. Mr. Chairman, let me say a couple of things 
here.
    First, it is important to understand that the rationale for 
a surcharge on systemically important institutions--
    Chairman Bachus. Yes, that is what we are talking about, 
the surcharge.
    Mr. Tarullo. Right. It complements the rationale for Basel 
III, which is essentially a micro-prudential or firm-by-firm 
analysis. So for the Basel III capital standards, we will look 
at each firm and, basically on the basis of its balance sheet 
and its balance sheet alone, say what is the riskiness of the 
various assets on your balance sheet and relevant off-balance 
sheet assets.
    It doesn't take into account the correlation of risk among 
firms that hold similar assets. In a financial crisis, what 
happens, of course, is that those assets, particularly traded 
assets, are the ones that come under the most stress, the ones 
for which the market is most imploding. And that is why these 
systemic effects that we saw in 2008 are of such concern to us.
    So the motivation for the surcharge is one that takes into 
account the size, interconnectedness, and associated systemic 
consequences of the failure of such an institution. That is the 
first point.
    Second point: There has been a fair amount of attention to 
the numbers I cited in that speech I gave about a week-and-a-
half ago. What I said in that speech is that when analysts here 
and abroad have applied some analyses or some modes of analysis 
as to how much the surcharge should be in order to try to 
contain that systemic risk, there is a range that everybody 
comes up with, within which you have to make a certain set of 
assumptions.
    And that range, which I indicated was some variant on a 
certain number of percentage points as high as maybe 7 
percentage points above Basil III, is just what different 
studies have produced. That is not to say that this is the 
amount that gets eventually adopted.
    There are reasons to calibrate any such range. You have to 
choose a number somewhere, and that is what is going on right 
now in the international process, and domestically it is what 
will go on when the Federal Reserve does its rulemaking on the 
enhanced prudential standards.
    So I absolutely agree, Mr. Chairman, that you have to take 
into account the cost for the firms and the benefits to the 
firms, and we have done a cost analysis. We have used the 
analytic tools we have available to us. But what is important 
is not to lose sight of the cost of not acting here.
    Chairman Bachus. I understand. Yes, and I understand there 
is a cost to not acting, but if you--for instance, Comptroller 
Walsh is concerned, as I am, and I know that Chairman Bair 
takes a different approach, but under Basel III, I think it is 
called the advanced approach to risk management, other 
countries will be using this approach to sort of refine their 
approach, and the Collins amendment takes that off the table 
for us.
    I would ask Under Secretary Brainard, are you concerned 
about that? Are you concerned about that, Governor Tarullo?
    Mr. Tarullo. Sir, as you probably know, my concerns about 
the implementation of Basel II pre-dated my arrival at the 
Federal Reserve. That related to a lot of the academic work I 
was doing before I came to the Fed.
    And yes, I am concerned. I am particularly concerned about 
the way it has been implemented. One would think that if you 
put a procyclical capital regime into place in the middle of 
the biggest recession since the 1930s, that capital 
requirements ought to go up. But they didn't, and that is why I 
think it is important to make the kind of proposals on 
compliance that I made in my testimony.
    Chairman Bachus. Under Secretary?
    Ms. Brainard. I think it is very important as we are 
looking at this SIFI surcharge. Because these institutions are 
competing internationally, it is absolutely critical that 
whatever is agreed is comparable across countries and mandatory 
in every jurisdiction.
    And that is why we have put such an emphasis on having 
common equity, which is, of course, the strongest, most loss-
absorbing kind of capital. We would like to see an 
international agreement that has common equity and where it 
gives very little discretion to supervisors.
    The other thing that I think is important just on the issue 
that you raise, risk-rated assets and how they are assessed, I 
think our institutions are concerned and we share those 
concerns. And that is why, as I said earlier, and as Governor 
Tarullo said, we are trying to put in place monitoring 
mechanisms for the first time so that we will be able to have 
some visibility into how supervisors are actually assessing 
risk weights.
    The simple leverage ratio that was agreed to in Basel III 
will be helpful. It doesn't go as far as the Collins amendment, 
but it is another way of trying to create a floor.
    Chairman Bachus. Thank you. And I think we are all 
concerned about rules that are on the books that aren't 
enforced by some of these other countries.
    Ms. Bair. Mr. Chairman, if I could just add, I think I want 
to reiterate what Governor Tarullo indicated, that these 
Advanced Approaches have not worked. They allowed European 
banks implementing them to significantly reduce their capital 
levels. They were overleveraged going into this crisis.
    And then, as the recession hit, when you expect the capital 
levels to go up because the probability of default on loans is 
going up in a recession, capital kept going down.
    Capital is still going down. There is a recent Barclay's 
report which we are happy to share with you. Investors have no 
confidence in the Advanced Approaches. It is a very large 
issue, but all the effort in the Basel Committee is to try to 
put more objective constraints on the ability of these 
individual banks to essentially set their own capital 
standards.
    The United States is very strongly pushing that. I think 
that is the direction to go.
    I must say, in terms of easing regulatory burden on large 
institutions, given the tremendous flaws in the Advanced 
Approaches, it is very expensive to implement. I would just get 
rid of it. It is harmful, and it is not helpful. And I think we 
can improve the current Basel I standard. But if we are going 
to try to decrease compliance costs, I think one way to do that 
would be to just get rid of the Advanced Approaches altogether.
    Chairman Bachus. Thank you.
    Mr. Frank?
    Mr. Frank. I want to begin by joining my colleague, Ms. 
Waters, in saying good-bye to Sheila Bair. I will say that my 
working relationship with Chairman Bair has been an 
extraordinarily beneficial one for me, and I just wanted to 
make a prediction now to Chairman Bair that she will be missed, 
even by people who don't know that now. But I think that her 
tenure will stand out as an extraordinary example of the right 
kind of public service.
    I am not sure I will be able to get back. I would like to 
give credit where it is due. Mr. Zubrow, from JPMorgan Chase, I 
just want to read a little bit from what he says, because we 
tend in hearings, obviously, to focus on differences. But we 
ought to understand the commonality that we come from.
    On page 3, he has a quick--recent initiatives designed to 
reduce risk taken by U.S. financial firms. And it is Federal 
Reserve supervision, off-balance sheet activity being reduced, 
margins reporting and supervision of derivatives, centrally 
clearing derivatives, risk retention, prohibition on 
proprietary trading.
    Here is what he says, ``As a result of these post-financial 
crisis changes, Lehman Brothers would have been subject to the 
same Federal Reserve capital and prudential supervision as 
JPMorgan Chase, including extremely high capital charges for 
collateralized debt obligations and other exotic securities.
    ``AIG would have been required to register as a major swap 
participant, report on its positions and subject itself to 
Federal supervision.
    ``Countrywide and Washington Mutual would have been subject 
to the same mortgage underwriting standards as national banks 
and would have been either significantly limited in making 
subprime loans or required to retain the risk of these 
mortgages.
    ``And the FSOC and the Office of Financial Research would 
have been gathering data. These are important changes.''
    I appreciate this acknowledgement. Those are all things 
that are in this bill and, as he notes, would have 
substantially lessened the likelihood of those institutions 
that were major failures and, as he notes, apply all of the 
restrictions in the banking system to the unregulated. This is 
where the shadow bank system came in.
    He also then, on page 5, talks about what we did in terms 
of resolution of large institutions, which I continue to 
believe should be called dissolution. That is a euphemism too 
far.
    And what he says in summary of the listing of these is, 
``The United States is ahead of the rest of the world. The 
FDIC's new authorities are already in place. Most countries 
have no plans for orderly resolution. Some have prospectively 
acknowledged that their banks should be bailed out at taxpayer 
expense, should a crisis occur.
    ``The U.S. is doing the hard work to make orderly 
resolution of large financial institutions a viable option. And 
JPMorgan Chase and other banks are devoting extraordinary 
resources to this unheralded project.''
    It is very clear from the context that this is not a case 
where he is complaining that America is different from the rest 
of the world. It is a case where he is boasting that together 
with the financial institutions, with Congress and the 
regulatory agencies, we are ahead of the rest of the world.
    And on page 6, he has a heading, ``Further Insulation for 
Taxpayers.'' And Mr. Zubrow says, ``Aside from decreasing the 
risk of trouble at large financial institutions, Dodd-Frank 
also reduces the risk that a large institution's failure would 
impose costs on taxpayers.''
    So, Mr. Zubrow, I thank you for that. And we have some 
differences, but I think we ought to be clear where they are.
    Mr. Tarullo, one point, because it goes on too-big-to-fail. 
On the imposition of a capital charge, I noticed that one of 
the contributory factors you said could be considered would be 
an increase in the capital charge to offset the perceived 
advantage of being too-big-to-fail.
    I differ with that, because I do not think we ought to be 
reinforcing it. Rather than charge people for what I believe is 
an increasingly inaccurate perception--even Moody's, my own 
view is on the rating agencies, when Moody's finally gets it, 
it has to be pretty clear-cut--what we have now, I think, is an 
increasing recognition that is not the case. And I think that 
is one area where, and I understand that we don't want to 
charge banks excessively.
    I would hope you would reconsider that. It does not seem to 
me--and rather than charge the bank for inaccurate perception, 
let us all make sure that we dissolve the inaccurate 
perception. And I would hope that would drop out.
    Finally, to Mr. Gensler, there have been concerns about 
margin requirements on sovereign wealth funds. Margin 
requirements, my New York colleagues have noted, when the non-
U.S. subsidiary of a U.S. bank is dealing with a non-U.S. 
entity, that there could be a margin requirement.
    My own view is that is a very legitimate area of 
competitive advantage. Do you, under the statute, have the 
authority to take that into account? And can you and your 
fellow Commissioners adjust with regard to margins so that in 
those very particular cases where there would be an 
international setting, a competitive disadvantage, make it go 
away?
    Mr. Gensler. We are working along with the prudential 
regulators, because they actually have authority under Dodd-
Frank to set the margins for the banks. We just have the non-
banks. But we are, along with the SEC, initiating dialogues 
with international colleagues to try to get--
    Mr. Frank. But do you have the existing statutory authority 
collectively to adjust, if it looks like there might be a 
problem?
    Mr. Gensler. I think that we have the existing authority. 
It has to be based upon rational reasons, along with how the 
Administrative Procedure Act has us do it. Yes.
    Mr. Frank. I understand. I am assuming rationality, but you 
do have sufficient statutory authority to deal with those 
specific situations that we are talking about?
    Mr. Gensler. Along with other regulators who actually have 
the auuthority, because we are not--
    Mr. Frank. I appreciate that. Let me then ask you--may I 
have just 30 seconds--do the other regulators who would have 
that authority concur that in those very specific situations 
where we were talking about a competitive disadvantage, the 
authority would be there to take that into account?
    Mr. Tarullo?
    Mr. Tarullo. Generally, I think that is true.
    Mr. Frank. Ms. Bair?
    Ms. Bair. Yes, we have the authority.
    Mr. Frank. Thank you.
    Thank you, Mr. Chairman.
    Oh, I am sorry. Mr. Walsh?
    Mr. Walsh. Yes.
    And you agree also?
    Okay. Waving doesn't quite make it into the record.
    Mr. Walsh. I didn't know you wanted to hear, but, yes, 
absolutely.
    Mr. Frank. That I wanted to hear. I don't always want to 
hear, but that I wanted to hear.
    Chairman Bachus. Thank you.
    Was JPMorgan Chase's testimony inside a Valentine card?
    Mr. Frank. Yes, but there was no box of candy with it, so I 
didn't have to report it to the Ethics Committee.
    Chairman Bachus. Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    Certainly, there is wide agreement that capital and 
liquidity standards were most inadequate going into the 
financial panic of 2008, and clearly there is a convergence of 
opinion they must be raised.
    But I think the question, particularly in this hearing, 
that has to be addressed, is what is the cumulative impact of 
raising those capital standards under Basel III? What will be 
the impact of the extra capital standards to be assessed 
against the SIFI institutions just imposed in the 2,000-plus 
pages of Dodd-Frank?
    I am uncertain that we know the answer to that question. I 
have heard many testify that we must have stability in our 
capital markets. I agree that stability is a good thing. But we 
have had stability in our employment markets for almost 2\1/2\ 
years. Unemployment has stabilized at roughly 9 percent. So 
stability as a macroeconomic virtue may be somewhat overrated.
    And, clearly, I think we have to look at the balance, 
again, of what ultimately will be the impact of this extra 
stability on our job creation.
    Secretary Brainard, you confused me with one part of your 
testimony, and perhaps I am going to give you an opportunity to 
explain it.
    What I thought I heard you say is that it was critical that 
the United States essentially be the first mover in regulatory 
reform. But at the same time, I believe I heard you and almost 
every other panelist talk about their fears of essentially a 
race to the bottom in what we know as regulatory arbitrage.
    So I am having a little trouble understanding why it is 
mission-critical to move first and why we should not move 
concurrently. I cannot reconcile the two. Did I misunderstand 
part of your testimony?
    Ms. Brainard. Let me just address both points that you 
raised.
    First on all, on the capital standards, there was a great 
deal of consideration in the development of the Basel III 
capital standards to the macroeconomic impacts of those capital 
standards.
    Our regulators did a lot of impacts here on the United 
States, and it was also done internationally. There was a broad 
agreement--I have seen the analysis--that the transition 
timelines, which are quite generous in the Basel III framework, 
give our institutions plenty of time to earn their way to 
meeting those capital standards without having any adverse 
impact.
    And so, I don't think we are actually choosing between 
stability and growth. In fact, I think the real point here is 
that we will have much healthier growth if, in fact, we put in 
place a safe and sound financial system.
    With regard to the advantages--
    Mr. Hensarling. Let me interrupt here, if I could. Chairman 
Bernanke, I guess about 10 days ago, spoke before the 
International Monetary Policy Conference in Atlanta. When asked 
about the cumulative impact of Basel III, Dodd-Frank, SIFI 
charges, he said, ``Has anybody done a comprehensive analysis 
of the impact on credit? I can't pretend that anybody really 
has. It is just too complicated.''
    So I think what I am hearing from you, Secretary, is that 
you may know something that the Chairman doesn't.
    Ms. Brainard. With regard to the capital standards in 
particular, within Basel III--
    Mr. Hensarling. So you are looking solely to the capital 
standards?
    Ms. Brainard. Yes, there has been quite a bit of analysis 
of that. Secondly, with regard to moving first, really, I 
think, we have a choice, and we have chosen as a nation to put 
in place very strong standards and then to work internationally 
to get other countries to agree on those standards.
    Mr. Hensarling. But what assurance for convergence--
    Ms. Brainard. But in terms of implementation, we actually 
agree--
    Mr. Hensarling. If I could, Madam Secretary, what assures 
the convergence of these standards? Many of you have come 
before this committee to say that Basel II had disparate 
interpretations, disparity of compliance. And that was with 
Basel II. What assurance is there that there is going to be 
this uniformity of compliance and timing? What is the 
mechanism?
    Ms. Brainard. What we have done is, first of all, we have 
gotten agreement in the G-20 and the FSB and the Basel 
Committee around the same standards, the same set of reforms, 
the same principles in all of the three areas that were under 
discussion today.
    Second, there are implementation deadlines for most of 
those areas. And third, there are processes put in place that 
permit supervisors to have peer review and to hold other 
jurisdictions to account for those implementation deadlines.
    Mr. Hensarling. I just would say, in the remaining time I 
do not have, that Michael Barnier has said, ``Europe is not 
going to be under American supervision.'' And they seem to be 
on a different timeline.
    I am out of time. I will--
    Chairman Bachus. Thank you.
    Ms. Waters?
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to engage the Honorable Sheila Bair.
    Chairman Bair, as you know, so many bad practices and a 
considerable amount of fraud has proliferated throughout the 
mortgage servicing industry in the years following the 
financial crisis. And to be honest, I think the response of 
regulators could have been much quicker and stronger.
    For example, I was dissatisfied with the Federal 
interagency foreclosure review released by regulators in April. 
And since you have been leading the charge for sustainable loan 
modifications, I think the FDIC was likewise disappointed.
    Let me read from the FDIC's press release: ``The 
interagency review was limited to the management of foreclosure 
practices and procedures and was not by its nature a full-scope 
review of the loan modification or other loss mitigation 
efforts of these servicers. A thorough regulatory review of 
loss mitigation efforts is needed to ensure processes are 
sufficiently robust to prevent wrongful foreclosure actions and 
to ensure servicers have identified the extent to which 
individual homeowners have been harmed.''
    So, first, it seems you believe that another regulatory 
review is needed. Is that what we need to deal with this, 
Chairman Bair?
    Ms. Bair. I just wanted to make sure it was clear what the 
scope of the review was. I don't think there was disagreement 
among any of the regulators in describing the scope.
    Right now, pursuant to the consent orders that are being 
discussed, there needs to be a look-back. These major servicers 
need to do a thorough review of servicing errors retroactively, 
and identify harmed borrowers and provide appropriate redress 
for that, as well as some type of complaint process.
    We are in discussions with our fellow regulators on that 
right now. I would defer to Mr. Walsh, who is the lead 
regulator for most of the servicers and has been playing a key 
role in this.
    But I do think it is important for the public to explain 
what was and was not covered. This is also being coordinated 
with the Justice Department and the State AGs on the law 
enforcement end. There is some hope that this can all be 
packaged together so that there is one set of standards for 
both the prospective reforms, to make sure we don't have these 
errors going forward, as well as the look-back to make sure 
that borrowers who were harmed receive appropriate redress.
    Ms. Waters. So this recommendation about letting the 
servicers hire outside consultants to investigate them is of 
concern to, I suppose, many of us. Do you believe that outside 
consultants can do the job that is needed to be done, instead 
of a regulatory review?
    Ms. Bair. There needs to be a robust validation process. 
So, yes, we would like to see an interagency examination team 
reviewing sizable samples of the reviews that the independent 
consultants are doing to validate the work.
    I think everybody is operating in good faith here, but an 
extra set of eyes, given the importance of this project, would 
be helpful.
    Ms. Waters. Mr. Walsh, you testified to the Senate Banking 
Committee in March that only a small number of wrongful 
foreclosures took place. Do you still think that? And if the 
Federal interagency review was limited, how would we know that?
    Mr. Walsh. I think the key there will be the look-back that 
Chairman Bair was referring to. The sampling that was done in 
those exams was to establish whether there were sufficient 
grounds to determine that the servicers had failed in 
significant ways and that remedial actions, cease-and-desist 
orders, remediation plans, were needed.
    And the result of that sampling was to determine that was 
indeed the case. Now, having done that, we have enforcement 
orders in place that will require significant follow-up, both 
implementation plans and also, again, this look-back process 
that Chairman Bair referred to and that we are working on, on 
an interagency basis.
    And that will establish the wider scope of problems, if 
there are more substantial problems. The reference was only 
made to the sample.
    Ms. Waters. In that review, how could it be determined if a 
foreclosure was improper, if the review didn't look at how 
servicer software applied to borrower payments or to look to 
see if the fees servicers charged borrowers were proper or 
otherwise verify that servicer records were in fact correct?
    None of that was looked at in the review. Is that right?
    Mr. Walsh. Certain of those elements were looked at. Fees 
and other things were checked, but the task will now be to look 
at those things in the context of this look-back review, where 
you will drill down deeper.
    Ms. Waters. Thank you, Mr. Chairman, and I yield back.
    Chairman Bachus. Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman.
    I wanted to ask Chairman Bair and Mr. Tarullo on a point 
here, and it goes to Tom Hoenig, the president of the Kansas 
City Fed's, commentary on this very thing you are struggling 
with, and that is, as he says, ``The funding advantages the 
too-big-to-fail organizations have over others amounted to $250 
billion for the 28 largest banks in 2009.''
    ``At the Federal Reserve Bank of Kansas City,'' he says, 
``we estimate the ratings and funding advantage for the five 
largest U.S. banking organizations during the crisis, and in 
2009, these organizations had senior long-term bank debt that 
was rated four notches higher on average than it would have 
been based on just the actual condition of the banks, with one 
bank given an eight-notch upgrade for being too-big-to-fail. 
Looking at the yield curve, this four-notch advantage 
translates into 160 basis point savings for debt, with 2 years 
to maturity and over 360 basis points for 7 years to 
maturity.''
    This is huge. And it has a highly distorting influence on 
the market.
    I also notice, Mr. Tarullo, you argue, ``An ancillary 
rationale is that additional capital requirements could help 
offset any funding advantage derived from the perceived status 
of such institutions as too-big-to-fail.''
    We had a hearing yesterday regarding too-big-to-fail. And I 
think some very well-meaning people believe that the problem is 
solved by this new Orderly Liquidation Authority.
    And, of course, according to their logic, because of the 
new authority, the institutions will not be perceived as being 
bailed out, and the rating agencies will downgrade those 
institutions, which is going to lead to higher borrowing costs, 
thus eliminating that status.
    But I don't believe many of the Fed Governors believe this, 
and I don't believe many in the market believe it.
    I will start with you, Chairman Bair, and ask you for your 
perception on this, and how do you believe the Orderly 
Liquidation Authority impacts the size and scope of this global 
surcharge in the future and this global systemically important 
financial institution surcharge?
    Ms. Bair. I would say too-big-to-fail was a problem pre-
crisis. There were bump-ups there. The problem is that the 
bailouts reinforce the perception, and so we have seen widening 
disparities in funding costs between small and large 
institutions.
    We are making progress already. Moody's has announced that 
for a number of banks on negative watch for downgrade, they are 
actively considering removing the bump-up.
    Mr. Royce. You said they may--
    Ms. Bair. They may; that is right. As we have described 
before, the FDIC and the Fed, through implementation of the 
living will requirement, and thus through our liquidation 
authority, has a case to make and will make that. Yes, this can 
work, it will work, and bailouts will be a thing of the past.
    Too-big-to-fail was well-ingrained into market thinking 
pre-crisis. It has been with us for too long. It is going to 
take some time to get rid of it. But I do think Title II and 
Title I give us the authorities to take the steps to get rid of 
it over time. It is going to take some time, but I do believe 
that.
    Also, I don't see any alternative.
    Mr. Royce. But let me then go to Mr. Tarullo for his 
thoughts.
    Mr. Tarullo. Mr. Royce, as Sheila--I will say Chairman Bair 
for the next 22 days, every time I address her--I think 
Chairman Bair has already made the point that it is not an off/
on switch. That is, we have the orderly resolution authority in 
place now, which the FDIC is implementing.
    As I have suggested, the capital standards are a complement 
to the orderly resolution authority. And in order to get to 
market discipline, I think, actually, both of these things are 
going to change.
    If you think about it, if you end up in a situation in 
which counterparties truly believe that there is not going to 
be a bailout forthcoming, those who advance credit to very 
large organizations are going to demand higher levels of 
capital than existed in the past.
    So I have regarded the resolution authority and the SIFI 
capital surcharge as complementary, self-reinforcing mechanisms 
which can move us along the road to what I think everybody on 
the committee and everybody on this panel agrees should be the 
end, which is eliminating any too-big-to-fail reality or 
perception.
    Mr. Royce. I agree that should be our end goal. And the one 
concern I have is the way in which the legislation was written. 
I am afraid, in some ways, we may have reinforced it.
    And I say that because counterparties--you can see it right 
now in the market. Clearly, at the moment, things have not 
changed, in terms of the way too-big-to-fail is being 
perceived, and you see it by the basis point spread in the 
market.
    But my time has expired, and thank you.
    Chairman Bachus. We will take one more on each side, and 
then, when we come back, we will start with the other members 
who haven't--
    Mr. Frank. Right. Yes, Mr. Chairman, I think we both agreed 
on that. For our members, when we return, it may be a different 
panel, but we will start the questioning with the--those of us 
who have already asked will not go again. We will start with 
those who haven't asked.
    Chairman Bachus. And after one witness on each side here, 
we will discharge this panel, so you can look forward to lunch 
off the Hill.
    Mrs. Maloney?
    Mrs. Maloney. Thank you.
    I would like to ask all the panelists about the capital 
requirements and whether or not they will have a disadvantage 
on American firms.
    Specifically, I would like to start with Chairwoman Bair. 
Section 165 of the Wall Street Reform Act requires the Fed to 
impose heightened capital requirements on the most complex U.S. 
banking entities. In your opinion, should any SIFI charge 
adopted under Basel III satisfy that requirement? Or should 
American banks be subject to a surcharge in addition to what is 
required under Basel III?
    Ms. Bair. I would defer to Governor Tarullo because the Fed 
does have the authority, but I believe he has said that the Fed 
is going to be taking this up with Basel III. At least for 
capital, we have all made a very, very conscientious effort to 
make sure that the standards are harmonized internationally.
    Mrs. Maloney. And, Governor?
    Ms. Bair. I am sorry--the SIFI surcharge would be on top of 
Basel III. Yes. I thought your question was whether the Fed 
would have something in addition to Basel III.
    Mrs. Maloney. No, the SIFI charge.
    Ms. Bair. Whatever the SIFI charge is that the Basel 
Committee and the Group of Governors and Heads of Supervision 
agrees to will be what the Fed implements here. Is that 
correct? Yes.
    Mrs. Maloney. So in other words--maybe the Fed should 
answer.
    Ms. Bair. Yes, the Fed.
    Mrs. Maloney. The Fed should answer. In other words, are 
you going to put an additional charge? Wouldn't that be a 
disadvantage for our banks?
    Mr. Tarullo. It would, Mrs. Maloney, it would be an 
additional charge on top of the Basel III standards. But as 
Chairman Bair just noted, it is one that we are working on in 
the Basel Committee to get agreement on internationally so that 
comparable institutions in all the major financial markets 
would have a comparable surcharge.
    Mrs. Maloney. That is definitely a good goal. Otherwise, I 
feel that we would be disadvantaged.
    May I ask you and the other panelists whether you believe 
that there is a risk of regulatory arbitrage with the 
requirements that we have in our country? And whether there is 
any risk that U.S. markets and our financial institutions could 
be placed at a competitive disadvantage?
    Mr. Tarullo. Shall I start?
    Mrs. Maloney. Yes.
    Mr. Tarullo. Yes, there is always a risk of that. And I 
think you have heard from several of us and a number of your 
colleagues on both sides of the aisle that in the derivatives 
and margin areas in particular, I think a number of us are 
concerned about that, which is why there is a need to 
accelerate work to get basic convergence on that proposition.
    Mrs. Maloney. Would anyone else like to comment? Mr. 
Gensler, since derivatives is your area, could you comment on 
competitiveness, whether or not we will be at a disadvantage--
    Mr. Gensler. It is a concern shared with every regulator 
and even Treasury here, but I think that there is always that 
challenge. It was one of the reasons why I think this nation 
didn't regulate this market. It was one of the five or six key 
assumptions before the crisis, well, the markets will just go 
overseas.
    I do think there is international coordination on and good 
consensus on central clearing, on capital, because that is part 
of Basel III. I think we are going to work together on the 
margining approach. I think there is good consensus on risk 
mitigation techniques. There is, frankly, a greater challenge 
on some of the transparency initiatives.
    We have swap execution facilities. Europe is looking at 
something called OTFs, but those OTFs might be a little 
different than what we are doing here on swap execution 
facilities.
    Mrs. Maloney. And Chairman Schapiro?
    Ms. Schapiro. Thank you. I would just add, I agree there 
is, of course, always a risk of regulatory arbitrage, but there 
are also very significant incentives among the G-20, among the 
Financial Stability Board members who have put forward the 
recommendations to implement the G-20 commitments, about what 
needs to be done in the OTC derivatives space.
    And while we have a lot of consensus around a lot of 
issues, there are a few, as Chairman Gensler notes--trading 
platforms and transparency regimes I would speak to in 
particular--where we are not exactly in the same place. That is 
why it is so important for us to continue to push, to lead task 
forces and working groups of international regulators, and to 
persuade others to come to very consistent requirements along 
with the United States.
    Mrs. Maloney. And Mr. Walsh?
    Mr. Walsh. I guess I would just add to what the others have 
said, that commitments have been made to achieve consistency. 
And if we succeed in achieving consistency in the derivatives 
area and the capital area, and, as Governor Tarullo pointed 
out, if people actually deliver on those commitments in 
comparable ways, then there should not be an arbitrage or a 
race-to-the-bottom problem. But of course, it is challenging to 
do that in an international context and we will have to work at 
that.
    We also have to be careful here at home that as we 
integrate some of the Dodd-Frank requirements specific to us 
and the international commitments, that it works well also.
    Mrs. Maloney. My time has expired. Thank you very much.
    Chairman Bachus. Thank you.
    Mrs. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman.
    I would note that there is not a representative of the 
insurance industry on this panel. So I will ask Ms. Brainard, 
do you know when the President plans to finally nominate an 
independent insurance expert who will have a vote on FSOC?
    Ms. Brainard. In fact, we have our new Director of the 
Federal Insurance Office, Michael McRaith, in place; I think it 
has been 3 days.
    Mrs. Biggert. You have him, but you don't have the 
insurance expert who has the vote on FSOC, as you all do.
    Ms. Brainard. I don't have the answer for you on the timing 
on that, but I will get that for you.
    Mrs. Biggert. All right. Then, critical to the U.S. 
competitiveness is the FIO person, and I am glad, and he also--
I happen to be from Illinois, so I am very happy that he is 
there--but so he will proceed right away--3 days he has been 
there now?
    Ms. Brainard. That is right, and I can get you the 
information on the expert as well.
    Mrs. Biggert. Okay. Because certainly with what is 
happening in USTR on the trade agreements, it is important that 
he be there.
    And then to all of you, since all of you represent Federal 
agencies that are a part of FSOC, can someone explain their 
understanding of how FSOC's proposed rules could impact 
insurance businesses, which are regulated by the States? We 
have no insurance person to really let us know.
    Ms. Brainard?
    Ms. Brainard. I think, first of all, the insurance 
commissioners from the States will be represented on FSOC, and 
as they go through the designations process, will be part of 
that process.
    The other thing that we are working hard on just because 
this hearing is very focused on achieving international 
consistency, is that we already have a representative, the 
NAIC, on the international body, the IAIS. And we are looking 
forward to having FIO represented there as well.
    Mrs. Biggert. Okay. So your resources and staffs are 
devoted to ensuring that the FSOC rules when they are 
finalized, that taking into consideration the uniqueness of the 
insurance and--
    Ms. Brainard. Absolutely. I think given the importance of 
the State insurance commissioners, that FSOC will proceed in a 
way that takes into account the unique nature of this market 
and the way that it is regulated in the United States.
    Mrs. Biggert. So looking at the Volcker Rule, which several 
of you have addressed here, would insurance businesses be 
allowed to continue to invest in private equity?
    Ms. Brainard. I cannot speak to how the Volcker Rule will 
be applied. As you know, that process is yet to come, and in 
particular how it will applied, but that is something that is 
still under consideration.
    Mrs. Biggert. Mr. Tarullo?
    Mr. Tarullo. The key issue, though, with the Volcker Rule 
is whether or not the depository institution is engaged in the 
activity and then whether any insured institution that is 
affiliated with that entity engaged in the activity. If an 
insurance company is itself not the owner of a depository 
institution, then it is not going to be covered.
    Mrs. Biggert. Okay.
    Chairman Schapiro, would you agree with that?
    Ms. Schapiro. Yes, I would. The Volcker Rule applies to 
banking entities, and so it would depend upon the structure of 
a particular insurance company.
    Mrs. Biggert. Okay. And I would note that before the August 
recess, the Subcommittee on Insurance, Housing and Community 
Opportunity will hold an insurance oversight hearing to further 
examine these related insurance issues. And I hope that by then 
we have a representative on FSOC, which would be helpful.
    With that, I yield back.
    Chairman Bachus. Thank you.
    And Under Secretary Brainard, that is something I think 
many of our members are concerned about, that that position is 
filled. And I know that the Administration has put some ethical 
considerations out, but one of them was that they had not been 
involved in insurance operations, which sort of rules out a lot 
of people with experience.
    At this time, the first panel is discharged. We appreciate 
your testimony. And the fact that the hearing was not a long 
hearing doesn't mean that--we have your testimony, which will 
be of great value to us. And we look forward to working with 
you in the coming months as we try to implement Dodd-Frank.
    Thank you.
    The committee stands in recess until votes are over.
    [recess]
    Chairman Bachus. I want to welcome our panelists. The 
hearing will come to order.
    Our second panel is made up of: Mr. Stephen O'Connor, 
managing director of Morgan Stanley, and chairman of the 
International Swaps and Derivatives Association, testifying on 
behalf of the International Swaps and Derivatives Association; 
Mr. Tim Ryan, president and CEO of the Securities Industry and 
Financial Markets Association, SIFMA, and we welcome you, Mr. 
Ryan; Professor Hal Scott, Nomura professor and director of the 
Program on International Financial Systems at Harvard Law 
School; Mr. Barry Zubrow, executive vice president and chief 
risk officer of JPMorgan Chase; and Mr. Damon Silvers, 
associate general counsel of the AFL-CIO.
    So, Mr. O'Connor, we will start with you.

   STATEMENT OF STEPHEN O'CONNOR, MANAGING DIRECTOR, MORGAN 
  STANLEY, AND CHAIRMAN, INTERNATIONAL SWAPS AND DERIVATIVES 
     ASSOCIATION, ON BEHALF OF THE INTERNATIONAL SWAPS AND 
                 DERIVATIVES ASSOCIATION (ISDA)

    Mr. O'Connor. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee, for the opportunity to 
testify today.
    I would like to begin by making five key points.
    First, ISDA represents more than 800 members from 56 
countries. Our broad membership includes corporations, asset 
managers, governments, supranational entities, exchanges, and 
clearinghouses, as well as global and regional banks.
    ISDA and our members squarely support the goals of Dodd-
Frank and global financial regulatory reform. We have worked 
proactively with policymakers in the United States and around 
the world to this goal.
    Second, we have made and continue to make substantial 
progress in implementing the most important aspects of reform, 
those relating to systemic risk mitigation, such as central 
clearing and trade repositories.
    Third, further improvements can and will be made. And I 
would like to note here that there is a high degree of 
consistency between U.S. regulators and regulators in other 
major jurisdictions on the systemic risk rules relating to 
clearing and regulatory reporting. This is very helpful for 
market participants.
    On the other hand, there is far less consensus between the 
United States and overseas jurisdictions regarding matters 
outside the systemic risk area. These issues relate primarily 
to OTC derivatives market structure, and they are critical to 
the viability of U.S. markets.
    Finally, in addition to the potentially substantive policy 
differences between the United States and other regulatory 
regimes, there are equally significant timing differences 
between jurisdictions, differences that will go a long way in 
determining the competitiveness of our country's markets.
    Turning to some of the key policy differences, we believe 
that the application and effect of U.S. law and regulation 
should be as evenhanded as possible with respect to both U.S. 
and non-U.S. institutions. And, regrettably, at this point, it 
seems that there will not be equal treatment of U.S. and 
foreign firms at the institutional level.
    In addition, our members are concerned about the 
potentially divergent approaches at the jurisdictional level. 
It appears that other regulatory jurisdictions are likely to 
adopt regimes that differ from our own in meaningful and 
material ways.
    As I have mentioned, these policy differences are not 
generally in the area of systemic risk mitigation, the primary 
driver of regulatory reform. Instead, they are in the area of 
market structure.
    Here are some examples of the differences.
    Banks operating in the United States will be forced to 
comply with Section 716 of the Dodd-Frank Act, the so-called 
``push-out'' provision, which has no counterpart in proposed 
European or Asian regulations.
    ISDA supports the removal of Section 716 to resolve the 
inefficiencies, competitive challenges, and increased systemic 
risk that will surely result from such a requirement.
    Another area of difference is with regard to electronic 
trading venues or SEFs. At this point, critical components of 
the CFTC rules for SEFs have no regulatory parallel in Europe 
or other major jurisdictions.
    As I have noted in great detail in my written testimony. 
these rules could adversely impact U.S. competitiveness and the 
depth and liquidity of U.S. markets. And ironically, they will 
likely harm the intended beneficiaries of the new rule, the 
commercial end-users of derivatives.
    Another important point of divergence relates to the 
proposed business conduct rule. The CFTC's proposal seems to 
ignore the institutional nature of the OTC derivative market. 
Moreover, the standards far exceed the protections required by 
the statute and go well beyond the regulatory framework 
contemplated in other jurisdictions. These rules will further 
impair the viability of U.S. markets.
    Another key issue is the issue of extraterritorial 
jurisdiction. Today, there are serious concerns about the reach 
of the Dodd-Frank Act outside of the United States and into 
activities undertaken overseas. Extraterritorial reach 
exacerbates the problems created by asymmetric rules. 
Furthermore, it is inconsistent with congressional intent in 
limiting the territorial scope of the new regulatory framework 
for derivatives.
    As I mentioned, there are also meaningful differences in 
timing between the various jurisdictions. It appears that the 
U.S. financial markets will be subjected to a new regulatory 
framework well before other jurisdictions. This will create an 
uneven playing field and could cause capital to leave our 
shore, and will be harmful to U.S. markets.
    To summarize, there are large and growing differences in 
regulatory reform efforts in the United States and abroad. 
These differences have less to do with systemic issues--risk 
issues--and more to do with the structure of markets.
    Policy differences that impose significant costs but offer 
few, if any, offsetting benefits, may lead to decreased 
liquidity, a reduction in growth of capital, and the erosion of 
U.S. competitiveness. These losses will be measured in jobs and 
tax revenues.
    The best way to avoid the issues that I have discussed and 
to protect the competitiveness of U.S. markets is to work with 
Europeans and other overseas policymakers to ensure strong, yet 
harmonized, rules that are implemented along the same timeline. 
This will reduce the impact of any temporary or permanent 
regulatory differences between markets and mitigate the damages 
these differences will cause to the United States.
    Thank you, and I would be happy to answer your questions.
    [The prepared statement of Mr. O'Connor can be found on 
page 110 of the appendix.]
    Chairman Bachus. Thank you.
    Mr. Ryan?

   STATEMENT OF T. TIMOTHY RYAN, JR., PRESIDENT & CEO OF THE 
 SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Ryan. Thank you, Mr. Chairman, and members of the 
committee.
    In my written statement, I have responded to the questions 
you asked in your invitation. So in my oral statement, I want 
to focus on three major issues that significantly warrant 
special attention.
    It is our hope that Congress will agree with me and press 
for answers to questions I will raise through a combination of 
further hearings by this committee and additional study by 
policymakers here and globally.
    First, who are the global systemically important financial 
institutions, the so-called G-SIFIs? This is a very difficult 
question which frames subsequent debate, including the capital 
surcharge debate you had this morning, and impacts what actions 
should be taken with respect to such firms.
    Most of us think we know the firms pre-ordained to make the 
list, but at this moment, no such public list exists. We do 
know there is a long list of firms who do not want to be in the 
G-SIFI club.
    There are related questions that need to be asked on this 
topic. One, who decides whether a firm should be on the list? 
Two, is this a domestic decision or a global decision?
    Three, should countries without a G-SIFI have a say in the 
process? Four, what will be the criterion factors used to make 
these determinations? Five, will this process be transparent, 
fair, and subject to review and appeal?
    None of these questions have been publicly answered.
    A second major question we would like to pose, and you 
talked about this all morning, regulators have spent a lot of 
time focused on the need and size of a special additional 
capital surcharge on G-SIFIs to mitigate systemic risk.
    Like the first question, this one has several related 
questions associated with it, such as how large should the 
surcharge be? What types of capital should qualify to meet the 
surcharge? And will there be any mitigating factors or actions 
which might lessen the need for a surcharge?
    Since the financial crisis occurred, policymakers, 
regulators, the financial services industry and consumers have 
all changed their behavior. We have been very busy making the 
systems changes. But the industry and government have failed, 
really, to understand or assess the total aggregate impact of 
all of these actions.
    It is important for you to understand the enormous amount 
of change taking place in our financial markets today. Other 
witnesses will provide you with definitive figures, but it is 
really important to note that in the United States, we have 
raised more than $300 billion of common equity, while repaying 
TARP with a $12 billion profit. The largest banks have 
significantly reduced their average leverage. And loan reserves 
have increased by over 200 percent.
    Now, I can go through a long list, but you all know the 
list of Dodd-Frank actions which we are now trying to 
implement. SIFMA alone has filed over 100 comments during this 
regulatory process.
    While we are working through the Dodd-Frank changes, which 
significantly modify the banking activities in the United 
States, we are also faced with comparable changes in Basel 
which we are trying to work through.
    One point I would like to make that is important, I want to 
echo a comment made yesterday by the General Counsel of the 
FDIC, Mr. Krimminger, which was also discussed this morning, 
about the question of resolution of large systemically 
important institutions, certainly in the United States.
    We worked very hard with this committee to make sure that 
legislation was done in an appropriate fashion, and we are 
hopeful that both in the United States and outside the United 
States, that resolution scheme is recognized as something that 
is viable.
    So as to question two, we would like Congress and the 
regulators to postpone any decision on G-SIFI capital surcharge 
until the industry has had time to implement all of the 
regulatory changes making their way through the system and the 
affected parties, which includes the private sector and 
government, conduct a study to see what impacts this surcharge 
has actually on the financial institutions and on the economy.
    Now, Mr. Chairman, one last comment. In your letter, you 
asked us to specifically comment on accounting convergence. I 
can say that, from a SIFMA standpoint, we are supportive of the 
convergence of US GAAP and international accounting standards.
    We are concerned with the application of IEFC standards on 
offsetting, and we welcome the recent pronouncements by the 
U.S. standards setter, the FASB, supporting the US GAAP 
standard that allows netting.
    Again, thank you for holding this hearing and asking me to 
testify.
    [The prepared statement of Mr. Ryan can be found on page 
121 of the appendix.]
    Chairman Bachus. Thank you.
    Professor Scott?

STATEMENT OF HAL S. SCOTT, NOMURA PROFESSOR AND DIRECTOR OF THE 
 PROGRAM ON INTERNATIONAL FINANCIAL SYSTEMS, HARVARD LAW SCHOOL

    Mr. Hal Scott. Thank you, Chairman Bachus, and members of 
the committee.
    I am testifying in my own capacity and do not purport to 
represent the views of any organizations with which I am 
affiliated, although much of my testimony is based on work of 
the Committee on Capital Markets Regulation. Indeed, for the 
last 6 years, the committee has been tracking and making 
recommendations to strengthen the competitiveness of our 
capital markets.
    Let me address the issues you called on us to comment on.
    Let me begin with the Volcker Rule. The Volcker Rule was 
passed with the hope of Chairman Volcker that other nations 
would follow us. None have.
    This rule was ill-advised from the start, because 
proprietary trading was not responsible for the financial 
crisis. Indeed, it was a source of profitability.
    Now, it could have the effect of making U.S. firms less 
competitive internationally. There is still time to dampen its 
potential effect, however, because defining the precise 
boundaries of the prohibition falls to regulators. They can, 
and should, take a narrow approach in defining proprietary 
trading to preserve our competitiveness.
    For the derivatives rules, there are major areas in which 
the U.S. proposals diverge from the proposals of the E.U., our 
major competitor in this area. The differences include 
standards for membership in and ownership and control of 
clearinghouses, the scope of the end-user exemption, and 
possibly accounting standards.
    We should put aside for now the initiatives we are taking 
that are in conflict with the E.U. These areas can be defined 
in concert with the E.U. and should be the subject of efforts 
to harmonize our approaches.
    In the meantime, we can implement the non-conflicting 
initiatives on an appropriate timetable. And, as you know, the 
CFTC has called for comments on proper sequencing. We may have 
to make some compromises, as will the E.U. But it is not 
credible for us to say, ``our way or the highway.''
    For capital requirements, we are now in the third version 
of the capital accord, the Basel Capital Accord. Although it is 
very difficult to precisely quantify the economic impact of 
Basel III, we know it will affect GDP in only one direction--
down, perhaps up to $951 billion in the U.S. alone, between 
2011 and 2015, according to one estimate.
    Although Basel III is an international initiative, it has 
differential impact in different countries. Testimony earlier 
today by Acting Comptroller of the Currency Walsh and of 
Governor Tarullo frankly acknowledges this problem. But beyond 
the uniformity problem, we should have learned a big lesson 
from our experiences with Basel I and Basel II.
    The ability of Basel to determine the right amount of 
capital for a given risk is highly questionable. Basel III is 
not a silver bullet. Far from it. In my view, we should use the 
long full phase-in in time provided by the Basel III rules to 
re-examine how these rules can be more effective and 
implemented in a fashion to minimize differential impact.
    Next, I want to discuss designating SIFIs, or systemically 
important financial institutions. Dodd-Frank requires FSOC to 
designate non-bank firms as systemically important and thus 
subject to Fed supervision, along with the $50 billion-plus 
banking organizations which are already subject to Fed 
supervision under Dodd-Frank.
    Other countries are going through a similar designation 
process. Different approaches to designation and different SIFI 
surcharges could have a major competitive impact. Thus, we 
should have a global approach here. Our national process should 
be tightly coordinated with the work of the Financial Stability 
Board, the operational arm of G-20.
    Finally, resolution of failed financial firms remains an 
important and difficult issue with competitive implications. 
Chief among these is that divergent positions on bailouts will 
alter the cost of capital. Countries more willing to bail out 
banks will lower their cost of capital.
    We learned this from our competition with Japan before its 
lost decade. Furthermore, many large banks have significant 
cross-border operations, and their failures can affect all the 
countries in which they operate. Some countries ring-fence the 
assets of their local banks to protect local creditors. Those 
banks could get a competitive edge as well.
    We should continue to work with the FSB to achieve as 
internationally coordinated approach to these resolution issues 
as possible.
    Thank you, and I look forward to your questions.
    [The prepared statement of Professor Scott can be found on 
page 156 of the appendix.]
    Chairman Bachus. Thank you.
    Mr. Zubrow?

 STATEMENT OF BARRY ZUBROW, EXECUTIVE VICE PRESIDENT AND CHIEF 
               RISK OFFICER, JPMORGAN CHASE & CO.

    Mr. Zubrow. Thank you, Mr. Chairman, and members of the 
committee. My name is Barry Zubrow, and I am the chief risk 
officer of JPMorgan Chase.
    In the wake of the financial crisis, numerous steps have 
been taken to reduce system risk in U.S. banking. Since some of 
my testimony was quoted so extensively earlier today, I won't 
repeat those portions now. However, the important lesson to 
draw from all the actions taken in the last few years is that 
capital is one tool, but certainly not the only tool, nor is it 
a cure-all for ensuring that there is not a recurrence of a 
financial crisis.
    JPMorgan Chase is not trying to avoid regulation, but we do 
have serious concerns that the regulatory pendulum has swung to 
a point that risks hobbling the competitiveness of our 
financial system and of our economy.
    Basel III is a dramatic increase in capital standards, 
focused exclusively on the largest banks. It focuses 
particularly on trading and other assets likely to produce 
systemic risk.
    At this point, the best course for the system is not adding 
a surcharge on top of the Basel III standards, but rather 
ensuring that liquidity, derivatives, and other rules are 
written right and applied globally.
    One year after Dodd-Frank, other countries are still 
debating whether to follow suit. And there are indications they 
will not, in many areas. Lack of international coordination on 
derivatives and the potential for extraterritorial application 
of the U.S. rules could prevent U.S. firms from serving our 
clients overseas.
    There is already evidence that Basel III will not be 
enforced as stringently abroad as it is here. Nowhere has 
change been more profound than in the area of capital, where 
U.S. banks face a dramatic increase under Basel III.
    And I should emphasize that these increases effectively 
apply only to the largest banks. To illustrate, JPMorgan Chase 
entered the financial crisis with capital sufficient not only 
to weather the crisis but also to make acquisitions and to 
continue our lending activities.
    The new Basel III rules would require us to hold as much 45 
percent more capital than we did during the crisis.
    Let me be clear. JPMorgan Chase supports Basel III capital 
standards. However, we believe that a G-SIFI surcharge on the 
largest U.S. banks would be excessive and could impede economic 
growth.
    Draconian capital requirements come at a cost for U.S. 
competitiveness and economic growth. Requiring capital at a 
level above Basel III will force large banks to either reduce 
their balance sheets, increase prices or abandon more capital-
intensive activities.
    For example, we estimate a hospital requesting a standby 
letter of credit could see its costs go up by as much as 30 
percent. Or a small mid-market client could see increases of as 
much as 20 percent on a revolving line of credit.
    In conclusion, our holistic approach to risk management was 
one of the key reasons JPMorgan weathered the financial crisis 
as well as we did.
    My responsibility as chief risk officer is to look at all 
of the bank's activities across all markets. We believe the 
FSOC was intended to serve in effect as the chief risk officer 
for the financial system, analyzing and coordinating the impact 
of regulation on safety and soundness, but also on economic 
growth and competitiveness.
    We believe that before any capital surcharge is imposed, 
the FSOC should review and report on the global regulatory 
reforms that have already been enacted and their impact on 
competitiveness, whether existing capital standards are being 
evenly applied, and the cumulative impact of existing 
regulations on safety and soundness as well as economic growth.
    We would expect that such an analysis would demonstrate 
that a G-SIFI surcharge is unwarranted.
    Thank you very much, and I look forward to answering your 
questions.
    [The prepared statement of Mr. Zubrow can be found on page 
222 of the appendix.]
    Chairman Bachus. Thank you, Mr. Zubrow.
    Let me say that Ranking Member Frank acknowledged that he 
only read small inserts which were most favorable to him. And 
we pointed out some of the things that were not so in line.
    Mr. Zubrow. We appreciate that. And I am sure that he and 
others on the committee will take my testimony in its entirety.
    Chairman Bachus. And, actually, since he likes your 
testimony so much, I don't think we will have any problem 
getting him to go along with some of these suggestions.
    Mr. Zubrow. We certainly hope that he will be as 
enthusiastic about the conclusions as about the premise.
    Chairman Bachus. Thank you.
    Mr. Silvers?

   STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR & SPECIAL 
     COUNSEL, AMERICAN FEDERATION OF LABOR AND CONGRESS OF 
               INDUSTRIAL ORGANIZATIONS (AFL-CIO)

    Mr. Silvers. Yes, thank you, Mr. Chairman. Good afternoon. 
I appreciate, on behalf of the AFL-CIO and Americans for 
Financial Reform, the opportunity to testify. The Americans for 
Financial Reform is a coalition of over 250 organizations which 
represent well over 50 million Americans.
    In an age of global markets, any serious effort to ensure 
that we do not repeat the experience of 2008 must include the 
establishment of an international regulatory floor. Otherwise, 
every country's financial institutions are vulnerable to 
contagion from radically unregulated markets, as Iceland, 
Ireland, the United Kingdom, and the United States proved in 
2008.
    However, minimum standards are inevitably weaker than more 
effective national efforts. That is why they are called minimum 
standards.
    The United States, for example, has moved more rapidly on 
derivatives regulation than Europe has, but has been less 
aggressive with private pools of capital like hedge funds and 
private equity. And we have been faulted by European regulators 
for the weakness of our approach to regulating executive pay in 
financial firms.
    And so while we hear this afternoon about the possibility 
that business would leave the United States because of the 
strength of our regulatory effort, over in Europe, parallel 
threats are being made about financial activity moving to the 
United States as a result of the strength of European 
regulatory efforts.
    Nonetheless, today the big banks have come seeking help 
from Congress yet again. They say that Dodd-Frank is too tough 
compared to foreign regulation.
    It seems odd that a group of firms that the American public 
so recently rescued from imminent bankruptcy now, amid 9 
percent unemployment and after 7 million foreclosures, after 
record bonuses and amid rising CEO pay, think that they are the 
people whom Congress needs most to help right now. Nonetheless, 
here we are, and so I will now address the banks' specific 
arguments.
    On derivatives, we have heard that by requiring that 
capital be posted and that there be disclosure on pricing, we 
will drive derivatives trading away from U.S. institutions.
    This type of argument has been used to oppose virtually 
every effort to regulate finance for at least the last century 
and perhaps longer. It sounds plausible, but it is historically 
wrong.
    As a general matter, capital markets activity flows through 
well-regulated markets, where market participants have 
confidence in their counterparties and can benefit from 
transparent pricing. Radically deregulated markets attract 
brief bubbles before their inevitable comeuppance.
    In addition, there are some kinds of derivatives businesses 
that we do not want. We do not want the next AIG, the next 
seller of bond insurance without any capital to back it to be a 
U.S.-based firm. We should not want the United States to retain 
a dominant position in derivatives by guaranteeing that 
derivatives dealers' monopolistic profits at the expense of our 
real economy.
    We have heard today that the Volcker Rule in Section 716 of 
Dodd-Frank will impair the competitiveness of U.S. financial 
institutions, apparently by lowering their rates of return.
    This argument ignores the basic principle of investing that 
seeking higher returns exposes a firm to greater risk. Moving 
up the risk-return curve is not a good idea for a too-big-to-
fail institution, though it is in the interest of the 
executives of those firms with stock-based compensation who 
benefit from the heads-I-win, tails-you-lose nature of allowing 
systemically significant FDIC-insured firms to place bets in 
the securities markets.
    On capital requirements, the Basel III process envisions 
basically a one-size-fits-all risk-based capital requirement 
system backstopped by an absolute leverage limit of 33:1, an 
extraordinary high level.
    Here, Congress should ask, do we want the United States to 
have a robust, size-based system of capital requirements for 
our banks, or do we want to be no better than the global 
minimum standard that does not impose higher capital 
requirements on larger institutions, thereby not addressing the 
problem of too-big-to-fail?
    Finally, we hear that we cannot implement the resolution 
authority process envisioned in Dodd-Frank until we have a 
comprehensive international resolution authority.
    This argument is a red herring and will be used in the 
future to promote new bailouts. It is a red herring, because 
the resolution process in Dodd-Frank is fundamentally focused 
on the parent company, not its foreign subsidiaries. The 
breakup and wind-down of the failed U.S. parent occurs entirely 
within U.S. law.
    Now, real progress has been made toward a global financial 
regulatory floor. Great credit goes to the witnesses in the 
first panel, particularly to Governor Tarullo and his 
colleagues at the Fed for their work on Basel III.
    But a minimum standard is just that, a minimum.
    The measure of U.S. financial regulatory policy should not 
be whether we manage to meet the global minimum. The measure 
should be whether we have ensured that the financial system is 
a contributor to sustained, balanced growth in our real 
economy.
    International deregulatory whipsawing and infinite delay of 
the kind recommended today by my fellow witnesses may 
temporarily increase some bank profits, but the price will be 
another cycle of economic crisis and job loss.
    Thank you.
    [The prepared statement of Mr. Silvers can be found on page 
183 of the appendix.]
    Mrs. Biggert. [presiding]. Thank you.
    And thank you all for being so patient as we left this 
morning to go vote and finally came back. The chairman and the 
ranking member had agreed that we would not start at the top 
again, but would go to those who are here who did not have the 
opportunity to ask a question this morning.
    So we will go to Mr. Luetkemeyer from Missouri, who is 
recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Mr. Ryan, with regard to the Foreign Account Tax Compliance 
Act, FATCA, I was going to talk to Ms. Brainard about it, but 
since it is affecting you and your industry, I would like to 
pose a question to you with regards to under FACTA, the firms 
will be required to report to the IRS on U.S. clients or face a 
heavy withholding tax on U.S. assets and treasury bonds.
    As a response, many have indicated that they will either 
sell all of their assets, form subsidiaries that will not touch 
U.S. assets, or stop buying U.S. bonds. This will undoubtedly 
hurt companies not only in my State but across the Nation. And 
we are curious as to what steps that you see that the Treasury 
Department needs to do to prevent FATCA from having a negative 
impact on U.S. capital markets.
    Mr. Ryan. And I will be able to move quickly on this issue, 
because we have multiple committees working on this issue, and 
we have not come to a conclusion. So what I would like to be 
able to do is to submit our views for the record after the 
hearing.
    Mr. Luetkemeyer. Okay.
    It could have a major impact on the ability of investments 
being made by foreign entities and Americans who are purchasing 
through their foreign entities into this country. And that can 
have a dramatic impact on the amount of capital that is 
available in the marketplace if suddenly the foreign entities 
stop purchasing. So I think it is a pretty pertinent question 
to the title of the hearing today, and I appreciate that.
    With regard to the fiduciary rule that is coming out of 
DOL, of all places, with regards to the ability of some 
securities folks to be able to sell different types of 
securities, what do you think we need to do with that one?
    Mr. Ryan. You probably look at my resume, because I have 
repotted myself many times in my--during the Reagan 
Administration, I was solicitor of labor so I have had a lot of 
experience with ERISA and a lot of experience with the DOL.
    We have spent quite a bit of time with the Department of 
Labor and other bureaus of the government, basically, trying to 
get the Department of Labor to withdraw their proposal and re-
propose. We would like to see it better coordinated with other 
similar work that is taking place now with the Securities and 
Exchange Commission as a result of Dodd-Frank.
    And we are especially concerned about their effort to, for 
the first time ever, regulate at the Department of Labor IRAs.
    Mr. Luetkemeyer. Okay, Professor Scott, you deal a lot 
with--you are director of the program on international 
financial systems at Harvard. I am just kind of curious, what 
is your thought process on the--with Dodd-Frank, it seems as 
though we have a lot more connectivity between all the 
different larger institutions. They have gotten bigger, and by 
putting other weaker institutions that absorb--to me, they have 
gotten bigger and weaker.
    In discussing this with a number of panels over the last 
several months, we have seen the connectivity between our banks 
here and those countries over in Europe, especially some that 
are in trouble.
    And this morning we saw that Greece--the headlines in the 
paper, anyway, with Greece indicates--one article had a 50/50 
chance that they would default. I think Moody's made the 
comment this morning that there was a 50/50 chance they would 
default.
    What do you see as the impact of that? I know we are 
talking about regulations here going in that direction, but the 
impact of them coming this direction, our ability with this 
Dodd-Frank bill, which has caused the connectivity of all these 
banks to be even greater and now connected over there, how is 
that going to impact everything? Can you kind of shed some 
light on it?
    Mr. Hal Scott. You are focused on the issues going on in 
Europe and what their impacts are here.
    Mr. Luetkemeyer. Right. We also have some regulatory issues 
here that have, I think, impacted that by tying everybody 
together even to a greater extent.
    Mr.  Hal Scott. I think American banks hold a lot of 
sovereign debt of the countries that we are talking about, 
directly or indirectly, or have derivatives of such debt. While 
I have not studied this in depth, I believe that there would 
be--if we were talking about any kind of restructuring or 
default of that debt, which, of course, is in the midst of 
argument at the moment--that we could expect that it would have 
some impact on our banking system.
    That being said, it would have a lot more impact on 
European banks in terms of their holding of this debt. So, 
overall, whether it would rise to the level of real concern, I 
don't know, because I haven't looked at the statistics enough. 
But I would think we would have some concern with the impact on 
our banking system. Whether it is severe or not, I don't know.
    Mr. Luetkemeyer. I see my time is over.
    But I would think it would have a pretty significant impact 
when you have--I think the latest figure I saw was $1.3 
trillion worth of investments from our banks in those 
countries' bonds. That is pretty significant. And if the domino 
effect keeps going, we are going to be at the end of this line 
of dominoes.
    So thank you, Madam Chairwoman.
    Mrs. Biggert. Thank you.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you.
    Mrs. Biggert. Five minutes.
    Mr. Miller of North Carolina. Thank you.
    I joined this committee in 2003, and I remember that by the 
end of 2006, certainly early 2007, it was very apparent that 
there was an enormous problem in subprime mortgages, that there 
would be an enormous number of defaults, an enormous number of 
foreclosures, that because house prices had stopped 
appreciating, it would not be possible for homeowners to sell 
their homes or refinance their homes.
    And we were assured by the financial industry throughout 
2007, really through September of 2008, that there was nothing 
to worry about, everything was under control.
    Because of that experience, I have not always known who to 
believe since then. And I may very well have disbelieved some 
things that people told me that were true as a result of that 
experience. But it is very hard to tell what the liability of 
some of the banks really is for what is going on in mortgage 
securitization.
    Mr. Silvers, if you may change hats for a second, the 
Congressional Oversight Panel said in November of last year 
that the potential liability for the chain of title issues for 
mortgages that ended up in securitized pools was sufficiently 
serious and uncertain that it could threaten solvency of the 
banks. Sheila Bair said roughly the same thing just a month 
ago.
    And within the last few days, it appears that the New York 
attorney general is investigating Bank of America, at least, 
for those very violations or potential violations.
    Mr. Silvers, what is your current estimation of the 
potential liability of the securitizers, which were the biggest 
banks, for chain of title issues?
    Mr. Silvers. As you said, the Congressional Oversight 
Panel's report on this matter, the panel which I was the vice 
chair of, found that there were certain key issues that we 
could not answer, partly because we did not have the 
investigative authority and partly--somewhat complex legal 
issues.
    However, the statements that you were quoting, which I 
believe is still the case, is that if it turned out to be true 
that systemically title was not properly conveyed to the liens 
on the properties that had been securitized, and that if it was 
also true as a matter of law that the lien did not follow in 
some equitable fashion the note, then that would implicate a 
series of very significant issues associated with the REMIC 
doctrine in our tax code. And it would also implicate some 
questions in New York trust law.
    If all those things went wrong--meaning wrong from the 
perspective of causing liability--and it turned out that 
effectively the properties in the securitization trust did not 
have--that the trust did not have liens--
    Mr. Miller of North Carolina. Instead, they were mortgage-
backed securities. They were unsecured debts.
    Mr. Silvers. Right. They were mortgage-backed. If it turns 
out that the mortgage-backed securities were not mortgage-
backed and it turned out that could not be cured as a result 
without incurring vast tax liabilities for breaching the REMIC 
structure, then potentially between the tax liabilities 
involved and the possibility that the holders of the mortgage-
backed securities would be able to call upon their right to 
repurchase the loans at face value, that you would be talking 
about liabilities back to the securitizers, the institutions 
that put those trusts together in the multiple hundreds of 
billions of dollars, well in excess of the numbers that were 
cited by my fellow panelists in terms of new capital raised by 
the banks.
    Mr. Miller of North Carolina. Mr. Zubrow, how has JPMorgan 
Chase reserved for that potential liability?
    Mr. Zubrow. I think, as Mr. Silvers responded to your 
question, there is a long chain of different things that might 
have to have happened in order for that liability to actually 
have come about. And so, we certainly do not think that whole 
long series of events actually did occur. And I would say if--
    Mr. Miller of North Carolina. So you see it as a long shot, 
and you have reserved it. If at all, it is a long shot.
    Mr. Zubrow. That would be correct.
    Mr. Miller of North Carolina. Okay.
    Let me ask you about other pending litigation. There are a 
couple of insurers of the bond, AMBAC, another that has sued 
JPMorgan Chase really for conduct of Bear Stearns, that Bear 
Stearns sold mortgage-backed securities, but then pursued 
claims against the originators of the mortgages to buy the 
mortgages back, and instead of making them buy it back, took 
monetary damages.
    Even though they no longer had equitable--excuse me--
beneficial ownership of the mortgages, they kept that money and 
said not a word to the investors. That lawsuit appears to be 
pending. It is perhaps moving to trial this fall.
    How has JPMorgan Chase reserved for that litigation?
    Mr. Zubrow. I am generally familiar with some of the 
litigation in that area. I don't know off the top of my head 
the exact way that we have assessed the potential or possible 
liability under that case, which as you noted, originated 
originally with activities that Bear Stearns pursued. But we 
would certainly be happy to get back to you and give you a 
specific answer.
    Mr. Miller of North Carolina. Okay.
    Mrs. Biggert. The gentleman's time has expired.
    The gentleman from Arizona, Mr. Schweikert, is recognized 
for 5 minutes.
    Mr. Schweikert. Thank you, Madam Chairwoman.
    I don't know if any of you were able to hear some of the 
testimony this morning, but one of our current pop culture 
phrases is ``regulatory arbitrage.'' And I was going to 
actually start with Mr. Scott, since I thought we will go from 
the academic.
    Will you give me, first, some international, but also even 
some domestic examples?
    Mr. Hal Scott. Yes, examples of regulatory arbitrage. We 
have had many in our history. When the United States imposed 
very tough requirements on banks in this country in the 1970s, 
we spurred the creation of London as an international banking 
center.
    When the United States, in my view, overregulated its 
equity capital markets, and our committee has documented this 
extensively, a lot of the business in those capital markets, in 
the equity capital markets moved abroad, and particularly to 
London again.
    And the severity of this is once you get whole businesses 
moving someplace, even if we readjust our policies or London 
gets more aggressive on theirs, people don't come back. They 
kind of stay where they are. So I think we have had a number of 
very important examples of regulatory arbitrage in the history 
of our financial system.
    Mr. Schweikert. Okay.
    Madam Chairwoman, to the panel, and actually it was 
Congressman--is it Miller?--who was just speaking, who actually 
just kicked off one of my heads. And I can actually sort of 
think of something domestically, and tell me if this is 
actually true. And this might be appropriate for my friend from 
Chase.
    If I am in a State that has a 91-day deed of trust default, 
compared to a State that may use a mortgage document that has a 
6-month right of redemption, should there not be a difference 
in the pricing of those loans, a 30-year home loan between 
those two jurisdictions? If both of those actually have a 
regulatory arbitrage, just in the--might threaten my cost of a 
foreclosure and my liability.
    Mr. Zubrow. I think that you are certainly correct that, 
given the application of individual State laws, and in some 
instances individual county laws, to the home financing 
marketplace can have an impact upon how we assess risk and 
ultimately would expect that risk to be reflected in the 
marketplace.
    I think in addition it is worth noting that, going back to 
your question about historical examples of regulatory 
arbitrage, there certainly was a significant amount of 
regulatory arbitrage in the United States through the 
disproportionate oversight of different financial institutions.
    And certainly one of the things that we now have is the 
fact that the Federal Reserve Board has overall responsibility 
for oversight and supervision of the large financial 
institutions in order to avoid that sort of arbitrage.
    I would cite on the international side that one of the 
things that we are very concerned about is a form of regulatory 
arbitrage between different countries, where different 
supervisors and regulators will apply different standards for 
measuring risk-weighted assets under the Basel III accord such 
that the application of models and analysis of risk-weighted 
assets may result in a lower rating or lower ranking of risk in 
some jurisdictions than what we would anticipate will be 
applied here in the United States.
    Mr. Schweikert. Okay. If I have that different risk 
ranking, how much of that is also in the quality of, we will 
call it enforcement? If I have, whether it be a derivative 
trade or a home mortgage, if I have a different enforcement of 
the rules in Greece or someplace in Europe compared to if I do 
in Iowa, how much will you look into, when you are doing risk 
analysis, not only saying, ``Okay, we lined up on Basel III 
rulemaking, but we believe there is a failure of enforcement?''
    Mr. Zubrow. I think that is a very good question, 
Congressman. And certainly that does need to be a factor in our 
analysis of how we assess risks that we take in different 
jurisdictions and certainly, in the potential for 
enforceability of contracts around the world.
    Mr. Schweikert. Okay, if anyone else has something to 
educate us in our--
    Mr. Ryan. I don't want to take anybody's time, but could I 
make one comment, Madam Chairwoman?
    Mrs. Biggert. Mr. Ryan, yes.
    Mr. Ryan. Thank you.
    For us, I think this is not specifically regulatory 
arbitrage, but we are in the middle now of trying to implement 
Dodd-Frank, which is a massive assignment for the government 
and for the industry. And disparate application of Dodd-Frank 
by various U.S. agencies is a real issue.
    We have recently sent a letter to Secretary Geithner 
outlining over 20 absolute dead-bang conflicts in regulation 
that are now being offered by various U.S. agencies.
    And to Mr. Zubrow's comment about FSOC, we actually thought 
that. That is why FSOC was created within Dodd-Frank, to 
resolve those types of issues. So you don't have to go beyond 
the borders of the United States to find conflicting 
application of the same law.
    Mr. Schweikert. Okay. Thank you, Madam Chairwoman. Thank 
you for letting me--
    Mrs. Biggert. The gentleman's time has expired.
    Mr. Carney from Delaware is recognized for 5 minutes.
    Mr. Carney. Thank you very much, Madam Chairwoman. I just 
joined the hearing. I just walked in, so I missed all the lead-
up to this.
    But I was present here this morning when we had the panel 
of regulators and the discussion. Most of the discussion this 
morning was on the cumulative effect of Dodd-Frank regulations 
and so on, capital and liquidity requirements.
    And Sheila Bair in particular said that she thought that 
the capital requirements were on the low end, and the Governor 
from the Fed, Mr. Tarullo, I spoke with afterwards, and he 
suggested that he agreed. We had some back-and-forth on that.
    And I would like to know--this question may not be germane 
to the discussion that preceded my arriving, but we have some 
expertise at this panel and I would like your view on that 
question, if I could.
    Please?
    Mr. Silvers. The answer to this question is not simple, in 
part because of the exchange that just occurred. If your 
capital requirement--if you are looking at risk-weighted 
capital requirements and you get into the interstices of that 
and it turns out that risk-weighting is being used essentially 
to pretend that you don't have risks that you do have, as we 
saw under Basel II around mortgage-backed securities, for 
example, then you may look like you have really strong capital 
requirements, but you don't. Okay?
    With Dodd-Frank, some of this is still being put in place. 
There are some very important principles in Dodd-Frank that are 
very good. One of them, for example, is at least Dodd-Frank 
embodies the principle of size-based capital requirements, that 
we have just learned that we tend to like to bail out large 
institutions, so we charge them a higher capital rate.
    That counterbalances for the fact that their cost of 
capital is subsidized by the market perception that they are 
going to get bailed out. So it is a good thing.
    Mr. Carney. If I could stop you there, one of the questions 
that I had of Governor Tarullo was just that--those SIFIs that 
are on the borderline, and whether or not they would be subject 
to the same capital requirements of the big, big SIFIs, if you 
will.
    And the answer was no, that there was a gradation there, 
and it seems to me that you are addressing that.
    Mr. Silvers. I think sliding-scale capital requirements are 
a really, really good idea. I think that a cliff structure or a 
binary structure, you get into this argument of, ``I am on the 
line.''
    Mr. Carney. Right.
    Mr. Silvers. And the sad thing about people who are on the 
line is is that when they are setting the rules, they are 
likely to be exempted. And then when the crisis comes, they are 
likely to be bailed out.
    If you have more of a continuous approach--the kind 
Governor Tarullo, I think, spoke to you about--then you are 
more likely to have a consistent approach.
    Mr. Carney. Others? Please?
    Mr. Zubrow. So I think that the--
    Mr. Carney. By the way, your name and your paper was quoted 
profusely by the ranking member, I might say. And somebody 
asked whether it came on Valentine's Day with a box of 
chocolates. And he said, ``No, the candy didn't come with it.'' 
I say that in a complimentary way, if I might.
    Mr. Zubrow. We did have some comment about that with 
Chairman Bachus earlier when the panel started. And I think 
that it was acknowledged that the ranking member selectively 
quoted from the paper, and we hope that he will also endorse 
the conclusions of the testimony, as well as the premise of it.
    I do think that the question of capital is a very important 
one. And as we tried to say in the written testimony, and as I 
said here earlier this afternoon, capital is one tool in the 
overall framework of how large, systemically important 
institutions have to be regulated and managed.
    But it is not the only tool. And the Basel III capital 
levels that are being enacted at a 7 percent level of tier one 
common equity are much larger than what any of the financial 
institutions operated under, going into the financial crisis.
    For JPMorgan Chase, that would be an increase of roughly 65 
percent to meet the Basel III standards above what the prior 
minimum standards were. And, in fact, we think that the Basel 
Committee and the implementation of Basel III has done an 
enormous amount to both increase the amount of capital in 
financial institutions, but also the quality of that capital, 
which is equally important.
    And, our view is at this point in time to add an additional 
SIFI surtax on top of that is both unnecessary, but also has 
the opportunity to threaten growth in the economy, which we 
think would be very dangerous to the financial system.
    Mrs. Biggert. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Manzullo, is recognized 
for 5 minutes.
    Mr. Manzullo. Thank you, Madam Chairwoman.
    By a showing of hands, could you tell me how many of you 
here agree with this statement? Proprietary trading and private 
equity and hedge fund investing were not responsible for the 
financial crisis, and, indeed, were the source of profitability 
to banks during the crisis. The losses to banks resulted from 
bad housing loans and investments in pools of those loans, 
traditional banking activity.
    How many would agree with that statement?
    Mister--
    Mr. Hal Scott. I am glad they are endorsing my position.
    Mr. Manzullo. You got it.
    Mr. Zubrow. I was going to say--
    Mr. Manzullo. Those are your words on page 4.
    Mr. Zubrow. It sounded familiar from prior testimony.
    Mr. Manzullo. And did you notice how deliberatively he 
raised his hand?
    Mr. Ryan. It is really a payoff. We all hoped we could get 
a degree from Harvard--
    Mr. Manzullo. Is that what it is?
    But, Professor Scott, that is a very simple answer to a 
very complex issue, and I agree with that 100 percent.
    If the Fed had exercised appropriately its jurisdiction 
over instruments and underwriting standards and not waited 
until October 1st of 2009 to set forth the rule that requires 
written proof of a person's earning, would we be in this mess 
now?
    Mr. Hal Scott. I am not really prepared to answer that 
specific question, but I think the thrust of it is that the 
standards for making loans were low. People got caught up in 
the bubble.
    This has happened over and over in the history of banking. 
People get enthusiastic, they lower the standards, they think 
things are going to keep going on as they are, and, boom, there 
is a burst, people are caught short--and almost always in 
lending, which is the core function of banks.
    So the point I was making is this is still anther crisis 
about lending, really, not a crisis about private equity, hedge 
funds or proprietary trading.
    Mr. Manzullo. And you state that so correctly. I am sorry, 
you are in a--no, go ahead.
    We had before this committee and before the House in 2000 a 
GSE reform bill, and it didn't go anywhere. In 2005, we had a 
GSE reform bill with the Royce amendment that really would have 
tightened things up with regard to lending. That didn't go 
anywhere. It passed the House, but didn't go into the Senate.
    We had numerous hearings here with the president of Fannie 
Mae showing how they cooked the books in order to make 
themselves eligible for the pensions down to two or three mils 
to come within that particular window.
    It just appears to me that the evidence was out there. Both 
Presidents Bush and Clinton encouraged the GSEs to buy up 
subprime and Alt-A loans into these packages.
    And the reason I quoted your statement--and I am glad you 
recognized that you are indeed the author of that sentence on 
page 4--is the fact that that really is the core reason for why 
we are in this financial crisis today.
    Dodd-Frank addresses a lot of issues, and that is fine and 
they are interesting. But do you believe that the power existed 
within the Federal agencies that they could have stopped these 
bad loans from taking place in the first place, without any 
further legislation?
    Mr. Hal Scott. I definitely think they had the power to 
maybe not stop them, but certainly raise the standard for 
making loans. That is the essence of bank supervision.
    So if a bank supervisor feels that the bank is taking too 
much risk, is not controlling its risk, his job is to go to 
that bank and say so. And the bank works with the regulator to 
try to address it. They didn't do that.
    On the other hand, Congressman, we were all in a housing 
price euphoria. So, looking back it is obvious, okay, but at 
the time, if you really believed housing prices were going to 
keep going up, which almost everybody did, the pressure to 
raise those standards was not very high, and there would be 
political push-back, in any event, if you tried to lower the 
standards in a way that deprived certain people from getting 
loans.
    So I think that was the reality of it.
    Mr. Manzullo. I appreciate that.
    Wasn't that a great answer?
    Mrs. Biggert. The gentleman's time has expired.
    The gentleman from Texas, Mr. Canseco, is recognized for 5 
minutes.
    Mr. Canseco. Thank you very much, Madam Chairwoman.
    Mr. O'Connor, you mention in your testimony the divergence 
in rules between the European Union and the United States in 
regards to inter-affiliate derivatives transactions.
    If I understand it correctly, as it currently stands in the 
United States, a financial institution helping one of its 
affiliates hedge their risk through derivatives would 
essentially have to post margin to itself. Is that correct?
    Mr. O'Connor. That is currently the case with the proposed 
rule set. In the E.U., currently the commission is considering 
exemptions for certain types of inter-affiliate transactions. 
So, these are effectively two subsidiaries of the same parent 
company.
    In the United States, such an exemption has not yet been 
given, which could result in two parts of the same firm having 
to clear trades between them or post margins between 
themselves, yes.
    Mr. Canseco. So what we could end up with is that 
derivatives trades, instead of being conducted between a 
company and its affiliate, they are conducted between non-
related companies if the case is where an affiliate has to post 
a margin with its parent company, thus increasing systemic risk 
and flying in the face of what Dodd-Frank was intended to do. 
Is that correct?
    Mr. O'Connor. It certainly would increase costs and not 
directly affect systemic risk. But if such a margin had to be 
segregated, for instance, then that would be taking money off 
the institution's balance sheet that could ordinarily be put to 
other uses, such as lending or other things that would have a 
beneficial effect on the economy.
    Mr. Canseco. In your opinion, is this worthwhile?
    Mr. O'Connor. No.
    Mr. Canseco. Okay. And does this rule make sense?
    Mr. O'Connor. This rule needs--no, this rule does not make 
sense to me.
    Mr. Canseco. Thank you.
    Mr. Ryan, do you feel the same way, or do you have another 
opinion?
    Mr. Ryan. No, I agree totally with Mr. O'Connor.
    Mr. Canseco. Okay.
    Mr. Zubrow, is that your answer also?
    Mr. Zubrow. Congressman, that is correct. I think that rule 
does not make sense.
    I would also point out that I think your example of how it 
could lead to an increase in systemic risk was really 
predicated on the assumption that instead of having a firm 
engage with transactions with affiliates, that instead a firm 
might have to in effect do a three-legged transaction where it 
goes outside of its affiliates in order to lay off certain 
risks as a way of transferring risks amongst its different 
entities, which would obviously increase the overall exposure 
to risk and credit risk across the system.
    In addition, I think, as you are aware, there are also 
proposals that are competing between what the United States has 
proposed and what it appears Europe is likely to propose as to 
the types of collateral and margin that could be posted for 
different transactions, and the U.S. proposals limit the amount 
of margin that could be posted to instruments that are 
basically denominated in U.S. dollars.
    And so therefore, if there is extraterritorial application 
of the U.S. rules to foreign entities, be they affiliates or 
end customers, we would be asking European clients to be 
posting U.S. dollar securities as opposed to European bond 
collateral or government collateral or currency, which would 
obviously be the natural currency in which they would have 
their assets.
    Mr. Canseco. Let me just clarify what you just said. So 
even if these rules were harmonized across borders, is the 
restriction and cost increase on affiliate trades worthwhile, 
in your opinion?
    Mr. Zubrow. If they are harmonized in a way that requires 
posting of margin in between affiliates, then we would not 
think that that was worthwhile.
    Mr. Canseco. Thank you very much.
    And I yield back my last 9 seconds.
    Mrs. Biggert. Thank you.
    I will recognize myself for 5 minutes.
    This question is for Mr. O'Connor, and I think Mr. Ryan has 
had some part of this in his statement.
    Does the swap push-out provision decrease market liquidity? 
And does it impair safety and soundness, increase systemic 
risk, and make it harder for the large banks to evolve?
    And are you aware of any country besides the United States 
with a sophisticated derivative market that is planning to 
adopt such a push-out requirement?
    Mr. O'Connor. Thank you for the question, Congresswoman 
Biggert.
    Answering the second question first, no, I am not aware of 
any jurisdiction that is adopting a rule that would be similar 
to the push-out rule.
    And, yes, I agree with those points that you make, namely, 
that requiring banks to move parts of their businesses outside 
of the bank into differently regulated entities adds to 
systemic risk in the sense that these two entities now need to 
be managed by the bank from a liquidity and a capital point of 
view, and also customers of the bank who typically would engage 
in derivative transactions under one agreement, the netted 
credit exposure, would now have to trade across two master 
agreements, and therefore they are paying an increase in 
counterparty credit risk within the market, which adds to 
systemic risk.
    Mrs. Biggert. But wouldn't this put us then at a real 
disadvantage in the global economy?
    Mr. O'Connor. In my testimony, I included that as one of 
the examples, that it puts the United States at a competitive 
disadvantage against, yes.
    Mrs. Biggert. Thank you.
    Mr. Ryan, would you like to comment on that?
    Mr. Ryan. I concur totally with Mr. O'Connor. It is 
interesting that the end result here--not only Dodd-Frank, but 
some of the things that are going on in Basel--that in effect 
we are pushing risk out of the highly regulated, highly 
capitalized environment and into shadows, and it is predictable 
that in the future, that will be an issue.
    So to answer your question, could it or will it increase 
systemic risk, it is entirely possible.
    Mrs. Biggert. So should it be repealed?
    Mr. Ryan. We are not pushing for any repeal of Dodd-Frank 
right now. The industry is really concentrated--
    Mrs. Biggert. I mean this section, not--
    Mr. Ryan. Section 716?
    Mrs. Biggert. Yes.
    Mr. Ryan. We were against it totally during the enactment 
of the statute. So if it disappeared, we would probably be very 
happy.
    Mrs. Biggert. All right.
    Then, Mr. Zubrow, your testimony was made a lot of this 
morning. I would just--on page 2 of your testimony, you talk 
about how the regulatory pendulum has swung to a point that the 
risks are hobbling our financial system and our economic 
growth.
    And you say that U.S. policymakers should focus on how much 
the regulations they propose collectively reduce risk taken by 
financial firms and how this collective impact is likely to 
result or reduce the economy and job growth and how many of 
these regulations are being rejected or deferred by other 
countries.
    What is putting U.S. firms at a competitive disadvantage? 
Does FSOC have anything to do with this? Is the fact that the 
FSOC members are not coordinating or thinking in the context of 
the global marketplace causing problems?
    Mr. Zubrow. Madam Chairwoman, I think that you are exactly 
correct, that the FSOC has a very important role to play here. 
And it is really within their purview to be able to analyze and 
assess what is the cumulative impact of all the regulations 
that are being proposed under both Dodd-Frank, but also the 
additional regulatory activities that the different supervisory 
agencies as well as the Basel Committee are imposing upon the 
financial system.
    And so, I think that it is very important that the FSOC do 
a study in order to really be able to assess what that 
cumulative impact is and have we accomplished enough already in 
order to feel comfortable that we have a much safer and sounder 
banking system?
    Obviously, it is all going to be in how the rules are 
ultimately promulgated and implemented, but so it is very 
important that we constantly step back and look at what that 
cumulative impact and how it is impacting the economy.
    Mrs. Biggert. Thank you.
    And with that, I would ask unanimous consent to enter into 
the record a statement for the record by the Institute of 
International Bankers.
    Without objection, it is so ordered.
    And I think that we will give you a rest here. I think that 
you have been here for a very long time. Unfortunately, we 
haven't had probably as much time as we would have liked. I 
think we will remember that maybe sometimes having such an 
important hearing not in what we call getaway day is not the 
best idea. But we are thankful that you stayed and gave such 
great testimony. We really appreciate all that you had to say.
    So I would note that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. And without objection, the hearing record will remain 
open for 30 days for members to submit written questions to 
these witnesses and to place their responses in the record.
    And with that, this hearing is adjourned.
    [Whereupon, at 3.18 p.m., the hearing was adjourned.]




                            A P P E N D I X



                             June 16, 2011





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