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





                     THE CHANGING ROLE OF THE FDIC

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

                                HEARING

                               before the

                SUBCOMMITTEE ON TARP, FINANCIAL SERVICES
              AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 22, 2011

                               __________

                           Serial No. 112-68

                               __________

Printed for the use of the Committee on Oversight and Government Reform










         Available via the World Wide Web: http://www.fdsys.gov
                      http://www.house.gov/reform

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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

  Subcommittee on TARP, Financial Services and Bailouts of Public and 
                            Private Programs

              PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire,      MIKE QUIGLEY, Illinois, Ranking 
    Vice Chairman                        Minority Member
ANN MARIE BUERKLE, New York          CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan               PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania         JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois                  JACKIE SPEIER, California
TREY GOWDY, South Carolina           JIM COOPER, Tennessee
DENNIS A. ROSS, Florida














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 22, 2011....................................     1
Statement of:
    Bair, Sheila, chairman, Federal Deposit Insurance Corporation     6
Letters, statements, etc., submitted for the record by:
    Bair, Sheila, chairman, Federal Deposit Insurance 
      Corporation, prepared statement of.........................     9
    McHenry, Hon. Patrick T., a Representative in Congress from 
      the State of North Carolina, prepared statement of.........     4

 
                     THE CHANGING ROLE OF THE FDIC

                              ----------                              


                        WEDNESDAY, JUNE 22, 2011

                  House of Representatives,
      Subcommittee on TARP, Financial Services and 
           Bailouts of Public and Private Programs,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:34 p.m. in 
room 2157, Rayburn House Office Building, Hon. Patrick T. 
McHenry (chairman of the subcommittee) presiding.
    Present: Representatives McHenry, Meehan, Gowdy, Ross, and 
Quigley.
    Staff present: Will L. Boyington and Kate Dunbar, staff 
assistants; Katelyn E. Christ, research analyst; Pete Haller, 
senior counsel; Ryan M. Hambleton, professional staff member; 
Rebecca Watkins, press secretary; Kevin Corbin, minority staff 
assistant; and Justin Kim and Davida Walsh, minority counsels.
    Mr. McHenry. The subcommittee will come to order.
    Today's hearing on the TARP, Financial Services and 
Bailouts of Public and Private Programs Subcommittee is 
entitled, ``The Changing Role of the FDIC.''
    We have before us today the 19th chairman of the Federal 
Deposit Insurance Corporation, Sheila Bair, who has served 
honorably during some of our Nation's toughest times. Chairman 
Bair, we realize this is your last hearing before Congress and 
you have had quite a career in your service to our Government 
and to our people, and I want to thank you for that. It has 
been through some of the most challenging times in our Nation's 
history.
    You have also served on Capitol Hill and we appreciate your 
service there. We forgive you for serving on the Senate side, 
but certainly understanding Capitol Hill as you do, we thank 
you for your time.
    It has been the tradition of this subcommittee to read the 
Oversight and Government Reform Committee's Mission Statement.
    The Oversight Committee's Mission Statement begins, we 
exist to secure two fundamental principles. First, Americans 
have a right to know that the money Washington takes from them 
is well spent. Second, Americans deserve an efficient, 
effective government that works for them. Our duty on the 
Oversight and Government Reform Committee is to protect these 
rights. Our solemn responsibility is to hold government 
accountable to taxpayers because taxpayers have a right to know 
what they get from their government. We will work tirelessly in 
partnership with citizen watchdogs to deliver the facts to the 
American people and to bring genuine reform to the Federal 
bureaucracy.
    This is the mission of the Oversight and Government Reform 
Committee.
    I now recognize myself for 5 minutes for an opening 
statement.
    As I said, we are pleased to welcome the chairman of the 
FDIC, Sheila Bair, for her last testimony before the U.S. House 
of Representatives. We certainly appreciate your role and your 
hard work. We wish you well in your future endeavors.
    Today's discussion allows Members to better understand the 
role of the FDIC during the financial crisis, the new 
regulatory authorities issued by Dodd-Frank and the health of 
FDIC-insured banks.
    Since 2007, the FDIC has been called upon to resolve 370 
failed banks and thrifts. These efforts have cost the FDIC an 
estimated $83 billion and depleted the balance of the Deposit 
Insurance Fund pushing it into the red ink to the tune of $1 
billion. Chairman Bair has taken steps to replenish the fund 
and I think the American people should know that this does not 
cost the taxpayers a dime and, in fact, this is self-funded by 
the banking industry.
    Due to the FDIC's role as a safety and soundness regulator 
for most of the world's largest financial institutions, the 
Dodd-Frank Act positions the Corporation as a key player in 
preventing a future financial crisis. Dodd-Frank requires or 
authorizes the FDIC to implement 44 new regulations and grants 
the regulator various enforcement authorities, many that stem 
directly from Dodd-Frank's hope to end Too Big to Fail.
    Among these regulations are risk retention rules that will 
dramatically impact the secondary mortgage market and other 
areas of securitization as well as increase capital standards 
set out under Dodd-Frank and being negotiated under Basel III.
    Although these measures had some bipartisan support in 
theory, concerns have been raised during implementation. New 
risk retention rules could reduce the amount of lending to an 
already crippled housing market, while extreme capital 
standards may jeopardize the global competitiveness of U.S. 
financial institutions.
    Just yesterday, Acting Comptroller of the Currency, John 
Walsh, stated that additional capital requirements for large 
firms should be ``modest,'' noting that ``capital levels are 
now extraordinarily high by historical standards.'' He 
specifically cautioned that ``higher capital fosters a safer 
banking system, but if carried too far, the economy suffers 
when banking activity is not sufficient to support the desired 
levels of real economic activity.'' I think we all share those 
concerns and finding that balance, as part of today's hearing 
is to understand your thought process on that.
    Each member of this subcommittee hears from constituents 
and businesses that are struggling to access capital. Thus, 
before instituting a regulation, it is imperative that 
regulators consider the flexibility that our small and 
community banks need to serve our communities. I look forward 
to Chairman Bair's explanation as to how the FDIC and other 
regulators will work to avoid one size fits all regulations 
that would deteriorate job growth and our economy.
    Additionally, while some insist that the FDIC's new 
regulatory authority under Dodd-Frank will put an end to the 
bailout culture and Too Big to Fail, it appears the opposite is 
true. The Special Inspector General for the troubled Asset 
Relief Program has reported to Congress that even after Dodd-
Frank, ``the largest institutions continue to enjoy access to 
cheaper credit based upon the existence of the implicit 
government guarantee against failure.''
    Ironically, Dodd-Frank has actually made big banks even 
bigger. Five of the largest financial institutions in this 
country are 20 percent larger than they were before the crisis.
    This is not directed at the FDIC, but rather, many of these 
things are design failures in the legislation we passed and I 
will have some questions about that and how you see that 
implementation, and perhaps some legislative relief on some 
things you don't think are quite appropriate going forward.
    Even Secretary Geithner noted the possibility of future 
bailouts, when months ago he stated that the Federal Government 
might have to do ``exceptional things again.'' I know you have 
been questioned about that before, but the moral hazard of such 
explicit and implicit guarantees cannot be overstated.
    These concerns, along with others that Chairman Bair and I 
have spoken about, are of critical importance to the economic 
future and well being of the United States and its citizens. 
Getting that balance right is a struggle. In terms of capital 
requirements, we would like to hear your thoughts on that.
    [The prepared statement of Hon. Patrick T. McHenry 
follows:]





    Mr. McHenry. With that, I recognize the ranking member, Mr. 
Quigley of Illinois, for 5 minutes.
    Mr. Quigley. Thank you, Mr. Chairman. Thank you for holding 
this committee meeting.
    Chairman Bair, thank you for attending and for your years 
of service.
    Obviously, the FDIC played a central role in navigating the 
2008 financial crisis, specifically overseeing two of the 
largest bank failures in U.S. history, Washington Mutual and 
IndyMac Bank. In addition, in the aftermath of the crisis, 
Chairman Bair has actively engaged in implementing the 
necessary reforms to prevent another financial crisis.
    As the chairman's tenure comes to a close, I believe her 
insight and perspective will be invaluable to the 
subcommittee's oversight of the events that comprised the 
financial crisis as well as the implementation of Dodd-Frank 
and other reforms aimed at bringing greater transparency and 
stability to our financial markets.
    While there were multiple causes of the financial crisis, 
it is widely acknowledged that regulatory failure through gaps 
in oversight, insufficient tools and weakening of bank 
regulations was a significant factor. Therefore, Dodd-Frank 
addresses these failures by creating the Financial Stability 
Oversight Council to ensure coordination among multiple banking 
regulators.
    It also extends the FDIC's resolution authority for failing 
depository institutions to large non-bank financial firms and 
requires strong capital standards for the largest financial 
institutions. These and other provisions have significantly 
altered the authority and responsibility of the Federal banking 
regulators including the FDIC.
    I was heartened by the chairman's past statements that 
through the orderly liquidation authority and capital 
requirement provisions, the regulators have the tools to end 
Too Big to Fail. Still, I am concerned by the fact that in 
2009, Bank of America, Chase, Citi Group and Wells Fargo 
controlled 56 percent of domestic banking assets up from 35 
percent in 2000, while the top 10 U.S. banks controlled 75 
percent of domestic deposits, up from 54 percent. I hope 
today's hearing will provide an update on the implementation of 
these Too Big to Fail provisions.
    There are also a number of FDIC-related provisions under 
Dodd-Frank that are critical not only to ensuring financial 
stability, but also to leveling the playing field between the 
largest financial institutions which have only expanded since 
the crisis, and the community banks and credit unions.
    These provisions relate to capital standards, as well as 
the manner in which the FDIC is assessed and I look forward to 
hearing from Chairman Bair regarding the status and 
implementation of these reforms.
    Last, Chairman Bair has been praised as guiding the FDIC to 
``greater prominence through her fierce advocacy, not just for 
community banks, but also for consumers.'' In this regard, I 
commend you for your tireless efforts to hold accountable our 
Nation's mortgage-servicing industry. This is an industry that 
continues to engage in alleged systemic abuses and misconduct 
against homeowners across the country.
    In your own words, ``the mortgage-servicing and 
documentation problems are yet another example of the 
implications of lax underwriting standards and misaligned 
incentives in the mortgage process.'' Despite numerous 
investigations and regulatory actions taken by Federal and 
State regulators and law enforcement officials against the 
mortgage servicers, more allegations of misconduct have 
surfaced.
    Therefore, I look forward to hearing from the chairman 
regarding further steps that can be taken by both regulators 
and policymakers to hold the servicers accountable and protect 
our constituents and communities from wrongful foreclosures.
    Again, I thank you. I thank the chairman for appearing 
before us today and your service to our country.
    Thank you.
    Mr. McHenry. I thank the ranking member.
    With that, Chairman Bair, it is the tradition of the 
Oversight and Government Reform Committee and policy of the 
committee that all witnesses be sworn. So if you please rise 
and raise your right hand.
    [Witness sworn.]
    Mr. McHenry. Let the record reflect that the witness 
answered in the affirmative.
    Again, thank you, Chairman Bair. You have served under 
Republican and Democratic Presidents, you have had a 
distinguished career in government service and we wish you the 
best going forward.
    With that, we recognize you for 5 minutes for an opening 
statement. You know the drill with the lights and we look 
forward to hearing your testimony.

 STATEMENT OF SHEILA BAIR, CHAIRMAN, FEDERAL DEPOSIT INSURANCE 
                          CORPORATION

    Ms. Bair. Thank you very much, Chairman McHenry, Ranking 
Member Quigley and members of the subcommittee. Thank you for 
the opportunity to testify today on the Changing Role of the 
FDIC.
    My testimony today is focused on two very important lessons 
learned from the crisis. First, in order to restore discipline 
in the marketplace, large, complex banks and other financial 
companies must, without exception, be allowed to fail if they 
become non-viable.
    The problem of financial companies that are perceived by 
the market as too big to fail unfortunately has been about for 
decades, but the bailouts of several badly managed, 
systemically important financial institutions during the crisis 
removed all doubt about their implicit government backing.
    These bailouts were made necessary by the absence of FDIC 
style resolution powers for non-bank financial institutions as 
well as for bank holding companies and their non-bank 
affiliates. The massive disruptions caused by the Lehman 
failure made clear that the bankruptcy process was ill suited 
to the orderly resolution of large financial entities. Forcing 
bank holding companies into a bankruptcy process was not a risk 
the government was willing to take.
    The bailouts have consequences. They undermine market 
discipline. They inhibit restructuring of troubled financial 
companies and the recognition of losses. They keep substandard 
management in place and preserve a suboptimal allocation of 
economic resources.
    In contrast, smaller banks are fully exposed to the 
discipline of the marketplace. Some 370 FDIC-insured 
institutions have failed since I became FDIC chairman. This is 
how capitalism is supposed to work. Failed companies give way 
to successful companies and the remaining assets and 
liabilities are restructured and returned to the private 
sector.
    Bailouts are inherently unfair. They violate the 
fundamental principles of limited government on which our free 
enterprise system is founded. That is why the FDIC was so 
determined to press for a more robust and effective SIFI 
resolution framework as a centerpiece of the financial reform 
legislation.
    We were early advocates for a SIFI receivership authority 
that operates like the one we have applied thousands of times 
to insured banks in the past. We pushed for liquidation plans 
by the SIFIs that would prove they could be broken apart and 
sold in an orderly manner and for greater oversight and higher 
capital in relation to the risk these companies pose to 
financial stability.
    While all of these proposals were ultimately enacted in 
Dodd-Frank, there does remain skepticism as to whether the 
SIFIs can actually be made resolvable in a crisis. For the very 
largest institutions, it will be difficult, but we have many 
important tools which if used correctly can end Too Big to 
Fail.
    Under Dodd-Frank, we will have more information about these 
institutions on an ongoing basis, stronger prudential 
requirements, living wills prepared in advance, as well as the 
authority to require, if necessary, organizational changes that 
rationalize business lines and legal entities to assure that 
they can be broken up and sold back to the private sector in an 
orderly way.
    I hope this is an area where the industry will work 
collaboratively with the government. The expectation of 
bailouts creates funding advantages for weak, large banks, 
creating competitive disadvantages not only for smaller 
institutions, but also for the better managed larger 
institutions. Most importantly, the reputation of the entire 
industry is damaged when poorly managed institutions are bailed 
out by taxpayers and escape responsibility for their own 
actions. Because of the bailouts, popular resentment and 
cynicism toward the banking sector remains very high.
    The second lesson of the crisis involves the dangers of 
excessive debt and leverage. The single most important element 
of a strong and stable banking system is its capital base. 
Capital is what allows and institution to absorb losses while 
maintaining the confidence of its counter parties and its 
capacity to lend.
    After the last banking crisis in the early 1990's, Congress 
passed a number of important banking reforms that included 
stronger capital requirements. The capital requirements were 
watered down over the years through rules that permitted use of 
capital with debt-like qualities that encouraged banks to move 
assets off the balance sheet and that set regulatory capital 
thresholds based on internal risk models.
    The result was an increase in financial system leverage, 
particularly at bank holding companies and on-bank financial 
companies that weakened the ability of the industry to absorb 
losses during the crisis and that has led to a dramatic de-
leveraging of banking assets in its wake.
    The problems of excess leverage extend far beyond banking. 
Our tax system rewards the use of debt financing over equity 
for businesses and households alike, making them more 
vulnerable to financial distress. Governments too have relied 
on debt to postpone the cost of paying for services that the 
constituencies are reluctant to do without.
    As the crisis has shown, over reliance on leverage is a 
short term strategy with a big down side over the longer term. 
That is why the FDIC has been so committed to following through 
on the capital reforms that are taking place through the Basal 
III International Capital Accord. That is also why we have been 
such strong supporters of other measures to enhance capital 
including the Collins Amendment to Dodd-Frank, the elimination 
of trust preferred securities and the SIFI capital surcharge.
    Since 1933, public confidence and financial stability have 
been the core missions of the FDIC. We understand the economic 
cost of financial crises. One of the most important lessons I 
have drawn from my experience has been the need for regulators 
to have the political courage to stand firm against weak 
practices and excessive risk taking in the good times.
    My main regret is that we did not have better information 
and better resolution tools in place at the height of the 
crisis to prevent the bailouts of a number of our Nation's 
largest financial companies. Yes, the bailouts were necessary 
under the limitations we faced, but they have slowed the 
recovery, they have undermined support for government in all 
forms, tainted the reputation of well run banks and tilted the 
competitive balance toward weak, mega banks.
    Our support for a more robust SIFI resolution regime and 
stronger capital standards in the wake of the crisis speaks to 
our determination that this experience never be repeated.
    Thank you and I would be happy to take your questions.
    [The prepared statement of Ms. Bair follows:]



    Mr. McHenry. Thank you for your testimony.
    I now recognize myself for 5 minutes.
    As I said in my opening statement, the Acting Comptroller 
of the Currency, John Walsh, stated in an interview the other 
day that additional capital requirements for large firms should 
be ``modest,'' noting that capital levels are now 
extraordinarily high by historical standards and higher capital 
fosters a safer banking system, but if carried too far, the 
economy suffers when banking activity is not sufficient to 
support desired levels of economic activity.''
    Chairman Bair, we noted that you and the Acting Comptroller 
of the Currency have had disagreements on capital levels. Is 
there a capital level requirement that is too high?
    Ms. Bair. I think there certainly could be, but I don't 
think the numbers we are talking about really come anywhere 
close to that. We are working through the Basal Committee 
process. I think it is very important to have international 
agreement on the appropriate standards and the Basal Committee 
has done a lot of analytical work on this, looking at the cost 
of the crisis, the amount of losses on financial institution 
balance sheets and how much additional capital would have been 
needed to absorb those losses to avoid this massive de-
leveraging that we experienced.
    It has also tried to weigh those costs against incremental 
increases in lending from higher capital standards. So I think 
the numbers have very much tried to strike the right balance.
    The 7 percent Basal III standard, which I don't think 
Acting Comptroller Walsh has a disagreement with, has been 
agreed to but as part of that agreement, there was broad based 
consensus on the Basal Committee, including with Mr. Walsh, 
that we would be looking at higher loss absorption capacity for 
the very largest institutions. That is the process now.
    I have been on record as thinking at 300 basis points, a 10 
percent standard would be about right. That is actually 
moderate when you look at most of the studies that have been 
independently done by academics or the government. These 
studies generally support much high capital levels based on the 
type of analytics I described.
    The Wall Street Journal, in a recent editorial endorsing 
much higher capital standards, actually threw out 15 percent. I 
thought it was interesting. The benchmark they were using was 
what the market demands of a smaller finance company which 
clearly has no government support whatsoever and the market 
demands a 15 percent capital requirement. I think the 10 
percent actually is moderate by all analytics we have looked 
at.
    I would also add though that this is going to go out for 
comment. Whatever the number the Basal Committee agrees to will 
go out for comment. It will explain the analytics behind the 
number and people will have a chance to provide public comment.
    Mr. McHenry. How are your metrics different from the OCC's?
    Ms. Bair. I don't know. Apparently OCC has done some 
independent analysis. I just haven't seen it and would welcome 
looking at it. I think perhaps he is looking at historical 
number but historically I think there is probably a prudent 
case that this financial system has not had sufficient capital 
which is why we continue to have these cycles, a very severe 
one recently.
    Also, if you are looking at risk weighted assets, 
unfortunately, there is a lot of subjectivity in capital levels 
based on how a bank is risk weighting its assets. I don't know 
what the analytical underpinning is for his views. I would be 
happy to take a look at them but I haven't seen them.
    Mr. McHenry. I am not asking about the health of European 
banks, but in terms of international competitiveness, isn't it 
important that we are harmonized globally with these capital 
requirement levels so we are not disadvantaged?
    Ms. Bair. I think it is important we have international 
agreement. I think strong capital is a competitive strength and 
I think European banks are having some trouble now because the 
way they risk weight their assets does not have the confidence 
of the market. I think also the problems they are having with 
Greece and other distressed countries with their sovereign debt 
and the inability to restructure that is related to the high 
levels of leverage in their banking system and the inability of 
some of their banks to withstand the writedowns on that debt if 
there was a debt restructuring.
    I worry about capital levels in Europe and I worry about 
the impact that could have coming back to the United States. I 
think international agreement is important to get those capital 
levels up in Europe.
    Mr. McHenry. Finally, in terms of the Dodd-Frank law as it 
is proposed by Congress, are there items that we should address 
as you are walking out the door, items we should address to 
fix, to correct, to improve, to change Dodd-Frank? It is 
intended to be an open ended question.
    Ms. Bair. It is not a perfect law. Certainly there were 
things that we would like to have seen differently and we can 
share those views with you. I think it is a law we can work 
with. I think on the Title II authority, we feel we do have the 
tools that we need. I do believe that net-net, it is a good 
law. We are better having it, than not having it, at least the 
parts of it where the FDIC has a mandate that we can work with, 
the authorities given to us.
    Mr. McHenry. You didn't take the bait?
    Ms. Bair. I didn't take the bait. Sorry.
    Mr. McHenry. Perhaps in another month, we can have a 
conversation and you can tell me your thoughts.
    With that, I recognize the ranking member, Mr. Quigley.
    Mr. Quigley. Thank you.
    Coming from Illinois, small banks, community banks, you 
touched a little bit on competitive disadvantages. What else 
can we do?
    Ms. Bair. I think the good news is that the banking sector 
is healing and it is really all about the economy and getting 
the economy on a stronger footing so borrowers will want to 
start borrowing more money again. Even smaller banks, we are 
seeing many instances where they are raising capital. A lot of 
them that had been on our rejected failure list are actually 
coming off because they have raised capital. I think there are 
some positive improvements in the community banking sector.
    It has been tough for them, but if you look at the number 
of community banks that got in trouble as a percentage of 
assets as well as numbers, it is much, much smaller than the 
kind of distress we saw with the large institutions. Most of 
them actually managed through this very well. They managed 
their commercial real estate concentrations pretty well and in 
our supervisory process, we are trying to take lessons learned 
from the success with community banks and fine tuning our own 
supervisory process.
    I do think regulatory burden is an issue. Chairman McHenry 
mentioned this as well. I have endorsed some type of two tier 
regulatory approach. I do think that regulatory requirements 
that may be driven by problems we have seen with larger banks, 
if you apply them across the board to small banks even if they 
have not much to do with the business model of small banks, can 
make it very expensive for small banks. They don't have the 
huge compliance departments that large banks have. I think a 
two tiered regulatory approach is important.
    I think simplification of consumer rules and consumer 
disclosures would help consumers. It would also help community 
banks. A lot of community banks have gotten out of consumer 
lending just because the rules are so complex and complicated. 
They don't have the compliance capability to deal with it.
    Mr. Quigley. That is a specific point we hear quite a bit 
about the regulatory process. The terms they are using--harsh 
regulatory examinations, depressing impacts these practices 
have on their ability to lend and support the fragile economic 
recovery--some very specific stuff. The senior regulators in 
D.C. keep saying they are properly instructing their field 
examiners but bankers are saying the field examiners are not 
following the rules.
    We hear there are inconsistencies in their decisions. The 
people higher up are saying their plans are not being 
implemented locally. The examiners are telling the bankers 
their decisions are being changed above but then there is a 
time lag in how these decisions get back to the banks which 
creates inconsistencies and a real problem moving forward.
    Ms. Bair. I do hear this a lot. I can tell you the measures 
we have taken. I am kind of beside myself to try to figure out 
what else to do. We have told our examiners directly that loans 
shouldn't be criticized because collateral has fallen. If you 
have a credit worthy borrower that can make the loan, if the 
collateral has gone down, it is still a good loan.
    We have not required new appraisals unless more credit is 
being extended. Then obviously you do want to get an appraisal. 
I have said this specifically, we have said it in writing. We 
have disseminated this information to banks so they know what 
the rules are. If they feel examiners are doing it 
inconsistently, they can tell that to the examiner.
    We have told our examiners they need to be independent of 
the banks. They have a job independent of the bank, but they do 
need to listen to bank management and hear their side of it and 
discuss directly with them their concerns.
    We have done all this and set up special hotline numbers 
for bankers who feel the policies are not being applied. We 
have an ombudsman program that will keep it confidential if 
they don't want their names used. We have frankly worked hard 
on this. We are not perfect. We have a lot of examiners and 
more banks than anybody, so perhaps the challenge of getting 
all this communication out to examiners is more pronounced 
because of the sheer numbers.
    On the other hand, when we have received complaints and 
have drilled down into it, sometimes examiners are being blamed 
for bringing the bad news. Bank management is not always 
realistic about the extent of their troubles. Sometimes I find 
the complaints are not actually coming from the community banks 
but from borrowers who were not able to get a loan. Especially 
in the construction industry, there are a lot of folks who are 
not creditworthy anymore.
    We do try to drill down and get to the truth of the matter 
and we have found instances where mistakes were made and we try 
to correct that. In some other cases, it may just be a bad 
situation, examiners being blamed when they really have 
followed the appropriate policies.
    Mr. Quigley. Mr. Chairman, rather than go into a whole new 
area, I will yield.
    Mr. McHenry. I thank the ranking member.
    At this point, I will recognize Mr. Gowdy of South Carolina 
for 5 minutes.
    Mr. Gowdy. Thank you, Mr. Chairman.
    Thank you for your service to our country.
    I will yield the remainder of my time to Chairman McHenry.
    Mr. McHenry. I thank the gentleman. That is quite kind and 
gracious.
    You mentioned the ombudsman program you have, the hotline. 
I will be very honest with you. We were going to have a second 
panel and we reached out to different associations here in 
town, invited bankers and no one wanted to appear on a second 
panel.
    Ms. Bair. How should I take that?
    Mr. McHenry. That is really the question and it is not 
personal, first of all, but it is either that the complaints, 
they don't want to air publicly. Why is that? Are they so 
fearful of their regulator or are they fearful of what the 
public thinks of them complaining or is it one of those things, 
they will grumble but really don't want to get into the 
specifics? It may just be Washington politics. Who knows? I 
thought that was a little odd.
    Wrestling with that concept, because I am concerned about 
regulatory overreach as we have discussed privately, but there 
is a balance. We look at our banks in our community, and Mr. 
Quigley mentioned this as well, we don't know the health of 
their balance sheet, we don't know if they have overexposure in 
raw land, for instance, so they are telling their customers it 
is the regulator that won't let me do it, when in reality it is 
an imbalance in their balance sheet or they have a capital 
problem, a challenge.
    Do you have any comments about that?
    Ms. Bair. I do. I have been dealing with this a lot. We 
want a high quality, second to none examination process. Our 
examiners feel that way, our leadership feels that way, so it 
is important for that process to be one where there is an issue 
that procedure has not been followed appropriately, those can 
be brought to our attention in a way that we encourage, don't 
penalize, so we can look into it.
    It has frustrated me because I get a lot of generalized 
complaints but when I say tell me what it is so I can fix it, 
let us look into it and I will fix it if it is there, and I 
don't get any specifics, so I don't know if maybe people just 
want to grumble and it may be a little bit of both. All I can 
say is that it is my policy, it will be Vice Chairman 
Gruenberg's policy, it is the policy of our leadership in our 
Risk Management Division to encourage, accommodate and look 
into every single complaint and not the other way around.
    That doesn't mean we will always agree. We do look into 
them and we find the examiner was doing things appropriately 
and there have been instances where we found something else and 
we have taken appropriate action, but I don't know what else I 
can do. If people don't want to come forward, there is not much 
I can help with.
    Mr. McHenry. Thank you for commenting on that because it is 
one of those things that we all deal with. We want to fix 
problems where we can fix them.
    Ms. Bair. Right.
    Mr. McHenry. There is another question that kind of goes 
hand in hand with this. You saw the news last week or the week 
before with Jamie Dimon's question of Chairman Bernanke, sort 
of the cumulative effect of these regulations and the impact 
they will have on the cost and availability of credit.
    Has there been a holistic review by the regulators or at 
the FSAC level about the cost of these regulations because 
certainly we agree, and I think it is economic fact that they 
do have an impact--additional capital does cost, but there is a 
tipping point for safety and soundness by which you have to be 
there and over the long term, it could be a net positive. Can 
you comment on that?
    Ms. Bair. I don't think there has been at the FSAC level. I 
think certainly with regard to capital, there has been a lot of 
cost benefit analysis and also for the rules that we do. Our IG 
just looked at this at the request of Congress, I believe, and 
we follow all the requirements of cost benefit analysis. We 
have a lot of economists, we encourage that type of economic 
analysis of our rules.
    We have also started looking into community bank impact and 
actually for any rule or guidance we put out, we have a 
separate line that says what the community bank impact will be. 
Yes, on an individual agency basis, I think it is occurring. It 
might be very worthwhile for the FSAC on an interagency basis 
to look at this.
    I do think there are interrelationships especially with 
what we are doing with the derivatives new rules and some of 
the restrictions on proprietary trading, what kind of impact 
that will be and how they interrelate to capital I think would 
be a helpful interagency analysis. Just in terms of raising 
capital, I am actually very confident that there has been very 
good analysis and the numbers we are talking about now are more 
than justified.
    Mr. McHenry. Thank you.
    With that, I recognize Mr. Meehan of Pennsylvania for 5 
minutes.
    Mr. Meehan. Thank you, Mr. Chairman.
    Thank you, Chairman Bair, for your service to our country 
during what was certainly a very challenging time for our 
Nation. I am sure you are looking for an opportunity to enjoy 
the life thereafter, but again, thank you for your service.
    There are so many aspects of the impact of what we have 
tried to do in response to the many problems that occurred, but 
I see it through the eyes of many of the people in my district 
who are facing issues locally. I was intrigued by your comment 
that many of the smaller banks are the ones that are competing 
now at a disadvantage because of the rules that have been 
focused on the large banks.
    I hear a lot in my community, particularly in the housing 
sector--homebuilders, realtors, bankers--and there seems to be 
a game in which they are all sort of pointing to the other one 
and saying, they are the ones responsible for not allowing us 
to get going. Everything that I have studied certainly 
indicates that a robust housing market is a key to getting out 
of an economic slump.
    Obviously with such an amount of under water mortgages, we 
are not going to see robust, but I also see small community 
bankers with responsible institutions who have weathered this 
area very well and builders with very good reputations who have 
proven their capacity to analyze the market. Right now, some 
are actually saying this is a great time to take risks, if you 
understand your market.
    Yet, what I am understanding from talking and meeting with 
my homebuilders is that many of them are concerned about hard 
caps for construction lending, development lending. What I 
really need to understand is whether or not this 100 percent 
hard cap is really that? Is it advisory or are we creating the 
kind of hardline standard that locks in the inability for local 
bankers and local builders to do what they have been doing for 
generations, which is to make sound judgments about each other?
    Ms. Bair. I think construction development lending is very 
high risk lending and if you look at the figures we have had 
for the smaller institutions, they have been almost heavily 
driven by losses in construction development lending and high 
concentrations of those. Yes, it is a benchmark, it is not a 
cap, but the general rule is 100 percent, they shouldn't go 
over 100 percent of capital and if they do go over 100 percent 
of capital, you need to have special risk management processes 
in place and board level involvement in managing those risks.
    There is a lot of scrutiny in C&D lending; it is not a hard 
cap, but I would say there is a lot of scrutiny of it and well 
justified given the number of banks we have seen that have 
failed because of heavy concentrations in that area. Again, it 
depends on the local market. Obviously in some areas they are 
heavily over billed already, so probably the last thing you 
need to do is start a new housing tract. That is based on local 
conditions. Our examiner are asked to look at the local 
conditions.
    Mr. Meehan. They are taking into factor not only local 
conditions, but the history of both the builder and the 
institution. Obviously, they don't analyze the builder, but the 
builder is living through the analysis by the bankers. I am 
hoping that is an issue that can continue to be analyzed on the 
local level and that the regulators will take into 
consideration that impact.
    The other issue, which we are getting a lot from the 
realtors, and I know you have made comments on the QRM and some 
of them have included even you are not quite sure, if I am 
correct, if we ought not let incentives deal with it rather 
than this hard and fast rule. Can you give me your instincts on 
that, where we should be going with it?
    Ms. Bair. I guess I am a market oriented person, so if we 
can let economic incentives drive lending standards instead of 
regulators micromanaging it and saying this is what your 
lending standards should be, yes, I prefer that approach. I 
think it is very difficult. I think the distributing process 
got completely out of control--it was a huge driver of the 
crisis. It needs to be reformed.
    My sense is that meaningful risk retention, skin and the 
game, will be the best way that we can discipline underwriting 
standards going forward. I would like to bring the 
securitization market back, I think it is a healthy part. I 
would like to have banks have diversification in their funding 
of their lending activity, but it needs to be brought back in 
the right way.
    Already we are getting into debates. I think the staff put 
together what they felt objectively based on a lot of 
analytical work or the ``gold standard,'' which was the 
directive of the legislation. The QRM was mean to be an 
exception, not a rule. Now we have into arguments about are we 
setting the standards too high, is this going to disadvantage 
people.
    Yes, my preference would be that everybody has to keep some 
skin in the game, to discipline it that way as opposed to 
regulators trying to micromanage what those lending standards 
should be. I think I can say that freely because I won't be 
part of the decisionmaking, as you know. That would be my 
preference.
    That, plus I also agree, I think Chairman McHenry spoke of 
this, we need loan level disclosure in these securitizations. 
Investors buying these mortgage-backed securities need to see 
the loans inside the securitizations before they make an 
investment decision. That would also be a very good check on 
underwriting standards.
    Mr. Meehan. Your perspective is very important to us as we 
look at these policies. Thank you again for your service.
    Mr. Chairman, I yield back.
    Mr. McHenry. I thank you, Mr. Meehan.
    We have votes on the floor now and I just have two or three 
more questions to ask and we will be able to adjourn.
    Yesterday I read about a meeting you had yesterday, somehow 
a meeting of all the bank minds.
    Ms. Bair. Sort of an advisory committee.
    Mr. McHenry. Yet discussions about orderly liquidation was 
a significant order of the day. I read there was no agreement 
really on the proper way to approach this. Was there consensus? 
Can you comment on that?
    Ms. Bair. I don't think we were looking at consensus. It 
was the first meeting of an Advisory Committee on Systemic 
Resolutions. We have a lot of senior prominent people involved, 
representing a lot of different segments of the industry as 
well academia. I think they challenged us, raised good 
questions and I think it helped clarify our thinking. That, 
frankly, is what we wanted to get out of it. We did not want 
someone to come in and nod their heads at us.
    I thought it was very valuable. I think the message I took 
away was it is going to tough, but it is doable. There is no on 
and off switch on this. I can't just turn off Too Big to Fail 
and say it is gone now after being around for decades. It is 
going to take a lot of hard work on our part, on the banks 
part, on the Federal Reserve Board's part.
    We do have the tools now to tackle it in a meaningful way. 
At least one rating agency has signaled a possible downgrade of 
some of these large institutions, removing the bump up they 
have gotten in the past from implied government support. I view 
that as a positive sign. I think we do have the tools to end it 
and over time, will end it.
    Mr. McHenry. In terms of the orderly liquidation authority, 
some have knocked it saying it basically prioritizes systemic 
risk over property rights. How do you reconcile that?
    Ms. Bair. I don't understand that.
    Mr. McHenry. Is that unfounded?
    Ms. Bair. I think it is. Our priority of claims is pretty 
much what you have in bankruptcy. The thing that we can do that 
you can't do in bankruptcy is we can preplan, we can be in 
these institutions with the Fed on an ongoing basis, collecting 
information. We can preplan with their living will. We can work 
with international regulators in advance of failure to navigate 
whatever their requirements might be for facilitating an 
international resolution and we have done that with smaller 
banks a lot already.
    Bankruptcy courts really can't do that. The other thing 
they can't do is they can't provide temporary liquidity support 
which I think is where was some of the ``bailout'' criticism 
comes from, but with the financial institution, if you need to 
preserve the franchise value, you do need to provide some 
ongoing liquidity support just to keep the place operational as 
it is broken up and sold off.
    Those are the things that are different, what we can do 
better in bankruptcy and we can require continued performance 
in derivatives which was a huge problem during Lehman and one I 
hope Congress will look at in the bankruptcy process as well.
    In terms of how creditors are treated, it is very, very 
similar to bankruptcy. Actually, I think creditors will come 
out better in our process because we do have the ability to 
maintain the franchise, it just doesn't fall apart when the 
filing occurs, as you saw with the Lehman process. I think in 
that sense it will help creditors but the claims priority is 
the same.
    In implementing OLA, we have tried to follow the bankruptcy 
code as much as possible, as we do with bank receiverships.
    Mr. McHenry. Your view is it is going to be a rules-based 
unwind?
    Ms. Bair. It will be rules-based, it will be transparent. 
There will be lots of reports to Congress and it will be faster 
too, and less laden with attorneys' fees and other types of 
administrative expenses.
    Mr. McHenry. But not situationally? It is going to be a 
rules-based unwind that will be public?
    Ms. Bair. Yes.
    Mr. McHenry. You will set the standard?
    Ms. Bair. Yes, and it will be competitive too, as we do 
with banks now. There is an advanced marketing process, we try 
to get in as many bidders as possible. That is one of the key 
parts of the living will process, to make sure that the 
business lines are a line with legal entity so they can be 
broken up into marketable segments and sold in a very prompt 
manner.
    Our process is to get back into the private sector as 
quickly as possible. We don't like setting up bridges and 
running them indefinitely. Having that preplanning is 
important. Some may need to do some organizational changes to 
simplify their legal entities with their business line so they 
can be broken up and sold off if they get into trouble. That is 
good from a risk management perspective as well.
    Mr. McHenry. Will you speak to my small business owners, 
because they are talking to their banker and they have had a 
relationship, they may have good cash-flow, they may be 
profitable and the banker is saying, the regulator won't let us 
lend. Having met with you, and we had this meeting 6 months 
ago, I said, respond to this. Talk to the small business person 
who is trying to keep things going and their banker is telling 
them it is the regulator, the regulator is saying each bank is 
different. Who is speaking the truth here?
    Ms. Bair. We have really strongly encouraged banks to make 
prudent small business loans. We want them to make small 
business loans--especially the small banks have a big presence 
in this area. We want them to make those loans.
    I think sometimes the regulators are blamed and maybe the 
bank is just feeling the small business may be a little too 
risky but maybe it is easier for the customer relationship to 
say the regulator is making them do it as opposed to saying 
they don't think it is a good credit risk. We have set up a 
hotline for small businesses who feel they have been unfairly 
denied credit. They can call us, we will look into it if it is 
our bank. We will refer it to another regulator if it is not 
our bank.
    That has been helpful. It has been educational for us to 
see the kinds of complaints that are coming in. I think it has 
been helpful to the small businesses as well to understand what 
our rules say and do not say and what our examination processes 
allow banks to do and perhaps discourage them to do.
    I think part of the problem here is that the economy is 
uncertain. It is making small business borrowers cautious, it 
is making banks cautious. Getting the economy on a sounder 
footing, I cannot overestimate that is really what is going to 
cure this. We can keep pushing banks and I think interim 
government programs to provide support for small business 
lending are good but at the end of the day, it has to be get 
the economy going again in a more robust way.
    Mr. McHenry. What I am hearing from you today is you have 
some concern about the transparency of derivative transactions 
and the approach there?
    Ms. Bair. I think transparency for derivatives is extremely 
important. I would certainly put that at the top of my list of 
things. I think a lot of the abuses that occurred in the CDS 
market would not have occurred if regulators and certainly the 
market in general had a better picture of who was taking what 
position, what size of exposure and what price. I think that is 
very important.
    Derivatives are going to take a while. That market 
developed for a long time without any kind of regulatory 
overlay. As I have said before, I think doing that in some 
graduated way probably makes sense.
    Also, in terms of the problems during the crisis, I think 
derivatives all gets bunched together. It was really the credit 
default swap market that was the big driver in the crisis, so 
perhaps paying particular attention to that segment would be a 
good thing.
    Mr. McHenry. The second thing you mentioned is the cost 
benefit analysis and the cost of the totality of these 
financial regulations and rulemaking coming out of Dodd-Frank? 
That FSAC could move forward on it.
    Ms. Bair. Yes, I think looking at the interrelationships of 
the rules and their cumulative impact, I think that is good. We 
each have individually been looking at this, but I think that 
would be a good structure project for the FSOC. I think that 
makes a lot of sense.
    Mr. McHenry. Thank you. Thank you for your testimony.
    Because we have votes on the House floor, the Members have 
departed and I took the liberty to ask a few questions before I 
depart, but thank you for your service to the American people. 
You have chaired the FDIC at what would seem like a pretty 
reasonable time when you took your first term. We know you were 
very active in the financial crisis in trying to make sure 
cooler heads prevailed and to really preserve the insurance 
fund you are in charge of. We really appreciate that.
    I don't think we will fully understand the impact you had 
or the role you played for many years, unless you are writing a 
book and we may know sooner.
    Ms. Bair. Very good. I hope I hold up. Thank you, Mr. 
Chairman. I am sorry we didn't have more of a chance to work 
together. I have enjoyed this opportunity and wish you all the 
best as well.
    Mr. McHenry. Thank you. Thank you for your service.
    Before this meeting is adjourned, Members will have 7 
legislative days to submit questions for the record.
    With that, the hearing is now adjourned.
    [Whereupon, at 2:24 p.m., the subcommittee was adjourned.]

                                 
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