[Senate Hearing 112-241]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-241

 
 ENHANCED OVERSIGHT AFTER THE FINANCIAL CRISIS: THE WALL STREET REFORM 
                            ACT AT ONE YEAR

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING THE IMPACT OF THE FINANCIAL CRISIS ON AMERICAN CONSUMERS, 
   INVESTORS AND THE OVERALL ECONOMY, HOW THE DODD-FRANK WALL STREET 
     REFORM AND CONSUMER PROTECTION ACT HAS IMPROVED THE FINANCIAL 
  REGULATORY FRAMEWORK, AND HOW THE WALL STREET REFORM ACT WILL HELP 
                         PREVENT ANOTHER CRISIS

                               __________

                             JULY 21, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

                     Laura Swanson, Policy Director

                  Drew Colbert, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel

                Mike Piwowar, Republican Chief Economist

          Emily Pereira, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Brett Hewitt, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 21, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                               WITNESSES

Barney Frank, a Representative in Congress from the State of 
  Massachusetts..................................................     5
Neal S. Wolin, Deputy Secretary, Department of the Treasury......    11
    Prepared statement...........................................    36
    Response to written questions of:
        Senator Shelby...........................................   137
        Senator Crapo............................................   141
        Senator Toomey...........................................   142
Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................    12
    Prepared statement...........................................    45
    Response to written questions of:
        Senator Shelby...........................................   144
        Senator Crapo............................................   149
        Senator Toomey...........................................   150
Mary L. Schapiro, Chairman, Securities and Exchange Commission...    14
    Prepared statement...........................................    59
    Response to written questions of:
        Senator Shelby...........................................   153
        Senator Crapo............................................   157
        Senator Toomey...........................................   159
Gary Gensler, Chairman, Commodity Futures Trading Commission.....    16
    Prepared statement...........................................    83
    Response to written questions of:
        Senator Shelby...........................................   161
        Senator Crapo............................................   163
        Senator Toomey...........................................   166
Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance 
  Corporation....................................................    17
    Prepared statement...........................................    94
John Walsh, Acting Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    19
    Prepared statement...........................................   113
    Response to written questions of:
        Senator Shelby...........................................   168
        Senator Crapo............................................   171
        Senator Toomey...........................................   172

              Additional Material Supplied for the Record

Draft of Republican Committee Members' Regulatory Reform 
  Principles submitted by Senator Shelby.........................   177
Written statement of Hal S. Scott, Director of the Committee on 
  Capital Markets Regulation, Nomura Professor and Director of 
  the Program on International Financial Systems at Harvard Law 
  School.........................................................   180
Letter from the Council of Institutional Investors...............   203


 ENHANCED OVERSIGHT AFTER THE FINANCIAL CRISIS: THE WALL STREET REFORM 
                            ACT AT ONE YEAR

                              ----------                              


                        THURSDAY, JULY 21, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:06 a.m. in room SD-538 Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I would like to call this 
hearing to order. Today marks the first anniversary of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    The Wall Street Reform Act was a direct response to the 
worst financial crisis since the Great Depression. It created a 
sound regulatory foundation to protect consumers and investors 
and to help prevent or mitigate future crises. I am pleased to 
have one of the architects of this historic legislation, 
Representative Barney Frank, here with us today.
    I also welcome our panel of distinguished regulators to 
discuss the steps they have taken to implement the provisions 
of this important law to enhance their agencies' oversight of 
the financial services industry.
    But Congress must also do its part. As Chairman of this 
Committee, I am committed to holding rigorous oversight of the 
implementation process and restoring Americans' trust in a 
credible financial system.
    While it appears that many on Wall Street, and even some 
here in Washington, have already forgotten the real costs of 
inadequate financial regulations, I have not. And neither have 
the millions of Americans who lost their jobs, their homes, 
their savings, and who are still waiting for the recovery.
    Unfortunately, these reforms have been under constant 
attack since this bill was signed into law. Opponents of Wall 
Street reform continually repeat misleading claims that the new 
law was hastily conceived, will be overly burdensome, and will 
harm our economy.
    But the American public disagrees. In fact, a poll released 
this week by Lake Research Partners found that Americans 
broadly and strongly support Wall Street reform. They support 
the legislation's goals of holding Wall Street accountable, 
making the financial system more transparent, and enhancing 
oversight of Wall Street firms that have shown they could put 
the entire economy at risk. Even after hearing arguments 
supporting and opposing this legislation, Democrats, 
Republicans, and Independents support the Wall Street reform 
law.
    But we cannot take that support for granted. Since the 
bill's passage, this Committee has taken its oversight 
responsibilities seriously, ensuring that the regulators are on 
the right track to implement the law's provisions. Passing the 
Wall Street Reform Act was a monumental achievement, and while 
the regulators have completed many rulemakings, there is much 
work left to be done. This will take time, but we owe it to the 
American people to get it right.
    I thank our witnesses again for being here today, and I 
look forward to the testimony.
    Ranking Member Shelby, your opening statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Yesterday, in a Wall Street Journal op-ed piece by 
Secretary Geithner, he claimed that financial reform was 
``designed to lay a stronger foundation for innovation, 
economic growth, and job creation.'' However, for millions of 
Americans, the 1-year anniversary of Dodd-Frank provides little 
comfort as they continue to deal with the harsh economic 
reality marked by little to no innovation, anemic, economic 
growth, and virtually no job creation.
    The unemployment rate remains stubbornly above 9 percent, 
with more than 14 million Americans still out of work. 
Secretary Geithner also wrote that the Obama administration 
``expected backing from both sides of the aisle'' when the 
debate over the financial reform began, implying that there was 
not any. The truth is that there was as great deal of agreement 
on a number of issues until the White House decided that the 
only issue that mattered was the creation of a massive new 
consumer bureaucracy. In fact, Chairman Dodd and I had agreed 
to create early on a consolidated banking regulator where the 
authorities of the Federal Reserve, OCC, OTS, and FDIC would be 
joined in a single entity. It even had a name: the Financial 
Institutions Regulatory Authority.
    There was strong agreement at that time that the current 
regulators had failed and radical reform was needed. Also 
agreed was to elevate consumer protection to equal status with 
prudential regulation. I proposed at that time giving the 
Consumer Protection Division equal access to Congress and to 
provide it with dedicated funding. We even agreed to permit 
nonbanks to be supervised and subject to enforcement.
    By any measure, the Republicans were willing to meet our 
Democratic colleagues and the Administration more than halfway 
on a number of issues, including consumer protection. Any hope 
for a bipartisan agreement evaporated when the word came down 
from the Administration that it was going to be their way or 
the highway.
    A similar dynamic was at work in the Agriculture Committee 
where Senators Chambliss and Lincoln had agreed on a bipartisan 
derivatives title until the former Senator from Arkansas was 
told that there was not going to be any compromise.
    Secretary Geithner also wrote, and I will quote:

        Senior Republican negotiators on the Senate Banking Committee 
        were unable or unwilling to define a core set of reforms they 
        could support.

    Mr. Chairman, the first thing the Republican Members of 
this Committee did was to draft a set of core principles to 
guide our consideration of regulatory reform. I have a copy of 
that in my hand. I would like for it to be made part of the 
record here.
    These principles that I reference would address all of the 
major issues, including systemic risk regulation, prudential 
regulation, consumer protection, and derivatives regulation.
    Also, Republicans filed hundreds of amendments based on 
this core set of reform principles, and prior to the bill's 
markup, we were informed, however, that not a single amendment 
would receive any Democratic support. Once again, it was their 
way or the highway.
    Secretary Geithner also wrote in his op-ed piece, and I 
will quote: ``We have already turned a profit on the TARP 
investments made in banks.'' However, as I have said in the 
past, claims of TARP's profitability are premature at best. 
Many financial institutions have yet to fully repay their TARP 
funds, and the taxpayer will still likely take losses on TARP's 
housing and auto bailout programs. Moreover, TARP used taxpayer 
dollars for very risky investments.
    A proper evaluation of the returns on any investment must 
appropriately adjust for risk. I believe such an evaluation 
would show that taxpayers were not adequately compensated for 
the large risk the Administration took with their money. In 
addition, what matters most is TARP's negative long-term impact 
on the overall economy, which will dwarf any so-called profit. 
On that basis, TARP's record has not been good for American 
families.
    Since TARP was enacted, the unemployment rate has reached 
and stayed at record levels. Lending remains stagnant and 
millions of Americans continue to face foreclosure. Secretary 
Geithner took credit for the banking regulators having forced 
the largest financial institutions to increase their capital 
basis ``as the most important step toward diminishing the risk 
of future crises.''
    For years, I have been arguing--and other Republicans here 
have, too--that capital standards have been inadequate. While 
some bank regulators, such as former FDIC Chairman Sheila Bair, 
actively sought to increase bank capital standards, others 
remained on the sideline right here.
    One of the regulators who did nothing to improve bank 
capital standards before the last crisis was the President of 
the Federal Bank of New York. The New York Fed's supervisory 
responsibilities include the largest financial institutions 
that received the largest TARP bailouts during the crisis. Who 
was the New York Fed President who failed to oversee our 
largest banks and then presided over the TARP bailouts? None 
other than our current Treasury Secretary.
    Secretary Geithner further wrote that the regulators have 
outlined major elements of reforms to bring oversight, 
transparency, and greater stability to the $600 trillion 
derivatives market.
    Republicans offered a derivatives substitute amendment that 
accomplished all of these goals while preserving Main Street's 
ability to hedge their business risk. Main Street businesses 
had nothing to do with the financial crisis. Nevertheless, 
Dodd-Frank will impose huge costs on them at a time when they 
can least afford it. The Secretary failed to mention that fact.
    Secretary Geithner also said that the Obama administration 
has started the process of ``winding down Fannie Mae and 
Freddie Mac.'' Can you believe it? However, Fannie and 
Freddie's market share is actually increasing. They now account 
for 75 percent of all mortgage-backed securities that were 
issued. In fact, with other Government programs included, the 
Federal Government now controls 97 percent of the market. 
Meanwhile, housing finance reform has not even begun in the 
Congress.
    Secretary Geithner claims that success will ``depend on 
making sure that we can write sensible rules that promote the 
health of the broader economy instead of the interests of 
individual firms. However, politically connected unions and 
other special interest groups were among the bigger winners 
under Dodd-Frank. The Act contains an assortment of new 
corporate governance and executive compensation requirements 
that harm shareholders by empowering special interests in the 
board room and encouraging short-term thinking by managers.
    Fifty years ago, President Dwight D. Eisenhower famously 
admonished us all ``to guard against the acquisition of 
unwarranted influence by the defense industry and the 
Pentagon.'' I am afraid, however, Mr. Chairman, that his words 
have gone unheeded in this context in that the only thing Dodd-
Frank has truly accomplished is the creation of a financial 
regulatory analog to the military-industrial complex.
    Dodd-Frank has created a cottage industry for Wall Street 
lawyers and special interest lobbyists. It has turned the 
financial regulatory landscape into a nightmare.
    Secretary Geithner also claims that Republicans are 
blocking nominations ``so that they can ultimately kill 
reform.'' However, Senate Republicans have been clear that the 
structure of the Bureau of Consumer Financial Protection needs 
to be properly reformed before we consider any nominee to lead 
it.
    We have urged President Obama to adopt three specific 
reforms:
    First, establish a board of directors to oversee the 
Bureau. Diversifying the leadership of this untested and very 
powerful fledgling bureaucracy would ensure the consideration 
of multiple viewpoints in the Bureau's decisionmaking process.
    Second, subject the Bureau to the appropriations process to 
ensure that the Bureau has an effective oversight and does not 
engage in wasteful or inappropriate spending.
    Third, establish a safety and soundness check for the 
prudential regulators. After all, one of the best consumer 
protections is a safe and a sound bank.
    Finally, I believe that the most disturbing claim made by 
the Secretary is that Republicans formed ``the forces of 
opposition to reform.'' This statement reflects the unfortunate 
view that anyone who does not support their idea of reform must 
be against any reform. That is nonsense.
    As I have explained and reiterated many times, there were 
numerous areas where Republicans and Democrats could have 
easily reached an agreement. Unfortunately, the Administration 
decided early on that there would be no compromise. The result 
was the bill that this hearing purports to celebrate.
    I do not believe, Mr. Chairman, that the American people 
are in the mood to celebrate yet.
    Thank you.
    Chairman Johnson. Representative Frank, I welcome you to 
the Senate Banking Committee today. As one of the architects of 
the Wall Street reform bill, I want to thank you again for all 
your hard work in ushering this legislation through Congress. I 
know that you have to get back to manage a bill on the House 
floor, so please begin.

 STATEMENT OF BARNEY FRANK, A REPRESENTATIVE IN CONGRESS FROM 
                   THE STATE OF MASSACHUSETTS

    Mr. Frank. Thank you, Mr. Chairman, and I am glad to be 
here in this spirit of bipartisanship, and I say that because I 
was struck by the very bipartisan tone of the Ranking Member's 
statement. For example, he was extremely critical of the Bush 
administration. I might not have anticipated that. But I say 
that because, as Members will remember, it was in the fall of 
2008 that we were summoned by Secretary Paulson and then-
Chairman Bernanke, two Bush appointees, and asked to do the 
TARP. And, in fact, it was a bipartisan response to that.
    The gentleman from Alabama was very critical of the TARP. I 
think he is unfair to the Bush administration in that regard, 
but I do appreciate the bipartisan nature of his criticism.
    I would note he said Secretary Geithner said they made a 
profit on the loan to the banks, and he rebutted that with 
reference to the automobiles and the foreclosures. Well, that 
does not rebut the statement. He very carefully said it was 
from the banks. It is true we have not yet recovered the money 
from the automobiles. What we have instead is a thriving 
American automobile industry, GM and Chrysler, which I think 
would not have happened if we had not intervened. And I would 
note that Ford, which was not seeking any of the funds, 
actively supported that for fear that if both General Motors 
and Chrysler had gone bankrupt and were not assisted, the 
supply chain would have disappeared.
    So at a time when we all talk about enhancing manufacturing 
in America, that was, I think, the single biggest thing that we 
did.
    Second, I would have to say, though, that the gentleman 
from Alabama's description of the legislative process does not 
cover what went on in the House. As for the Senate, I know 
there was some discussion between him and the Senator from 
Tennessee, and I was not privy to them. But it certainly was 
not a case where the Administration told us to go forward.
    On the Consumer Bureau, I was one of the ones who said no. 
The solution that he talked about--namely, elevating the status 
bureaucratically of a consumer protection function within an 
entity that is primarily a bank regulator--would not work. 
There is a qualitative difference between having an independent 
consumer regulatory and having it as one of the things bank 
regulators do, because the history was clear that bank 
regulators did not do it.
    In fact, interestingly, the largest single chunk of 
authority to protect consumers that existed before this law was 
passed was at the Federal Reserve, and when we questioned the 
Federal Reserve, they had had very little to do with things.
    I would note again, by the way--I was struck when the 
Senator from Alabama talked about it--that he appeared to think 
that Mr. Geithner was more important in the Bush administration 
than any of the Presidential appointees. Yes, he was President 
of the Federal Reserve. He served under Ben Bernanke, who was 
the appointee of President Bush to be Chairman of the Council 
of Economic Advisers and then of the Federal Reserve, and he 
worked with Secretary Paulson. So once again, I think if there 
is criticism, it goes to all of them.
    But to return to the Consumer Bureau, I do think it is 
important that it be independent, that it not be a second 
thought from the bank regulators, whether it was just one bank 
regulator or individual bank regulators. And I believe that 
makes a great deal of sense to give the consumer--the gentleman 
says let us give them equal status. The only way you do that is 
to make them an equal entity, not subject to others.
    As to the bill itself, it had a common theme. One of the 
criticisms we heard was that the bill was too big. Well, I am 
sorry that we apparently exceeded the attention span of some 
Members of Congress, but I guess they could wait for the movie. 
Maybe it will be coming forward. But the fact is that we are 
dealing with an interconnected system, and to have dealt 
piecemeal with an interconnected system would not have been a 
good idea. And there was a central theme there. The theme was 
this: that by sources of liquidity outside the banking system 
and by increased information technology, people in the 
financial industry had figured out a way to engage in lending 
while appearing to escape the burden of risk; and they appeared 
to be able to avoid risk themselves.
    Of course, this did not go away. It accumulated elsewhere 
in the system, and it exploded on all of us. So what we have 
done is to basically make people be responsible for their risk. 
And I would say here one very important issue that has come 
up--and I differ with some of my friends on the liberal side 
here--is the question of risk retention. I would urge people to 
look at Michael Lewis' book ``The Big Short.'' When people make 
loans and have no responsibility for whether or not they are 
repaid, they will not be as prudent. And that is a market 
incentive. The alternative that I have been told--and this is 
ironic--by some of my friends in the banking industry is, oh, 
no, the regulators will be able to tell you what is a good loan 
and what is not. No, we are on the market side here. I do not 
want to depend on the regulators to be able to look at all 
these loans. Yes, we have banned the worst kind of loans, but 
there are still going to be loans that could be made, properly 
or not. And the choice is: Do you rely solely on the discretion 
of the regulators to supervise all those loans? Or do you build 
a market incentive in with risk retention? And I am told, well, 
then, we will not have the loans made.
    Well, if that is the case, I have a question, because 
securitization--I went back. There was testimony by Lew Ranieri 
before this very Committee in which he talked about 
securitization taking off. That was in 1986. So I do have this 
question: If securitization without risk retention--which is 
not going to rival taxation without representation as a slogan 
for the ages. But securitization without risk retention, if 
that is necessary for there to be a housing market, what were 
people living in before 1986? Were there no loans made before 
1986?
    This notion that people have got to be able to avoid risk 
is a great mistake, and I am for an exception for those loans 
that are very solid. But I think the notion that risk retention 
is somehow an impediment is a great mistake.
    The insurance industry, of course--and that is where we 
borrowed the concept--follows it. You cannot get reinsurance 
without some risk retention. And I think that some of my 
friends are falling into that trap once again.
    As to derivatives, the law does not mandate any requirement 
that affects people who are the users of the commodity in 
question. It gives full discretion to the regulators to make 
differences and to, in fact, focus on the kind of transactions 
that AIG engaged in with other financial institutions, not with 
end users.
    And I would add to this--and there may be a debate on this. 
One of these things I want to address here--and then if you 
want me to answer questions, I can do that. But one of the 
things we have done is to empower the CFTC--and if it gets the 
funding, then it would be able to do this--to deal with 
speculation. Now, there is a legitimate economic argument about 
whether or not speculation does, in fact, affect prices, and I 
think it is probably the case that 30 years ago it may not have 
done so so much. What has happened, however, in the interim is 
there is a greatly increased amount of liquidity and very great 
sophistication in information technology. As somebody pointed 
out, if you look at the charts, individual commodities used to 
move in different directions. It tends to be more of a 
uniform--they used to move in the same direction. Now it is 
more individualized.
    There is a consensus now from Goldman Sachs, from Wilbur 
Ross, an investor, from people in the home heating oil 
business, from gasoline distributors, and from the facts that 
speculation does add something to the price of oil. One of the 
big issues here is this: Will the Commodity Futures Trading 
Commission be allowed to exercise the powers we have given it 
to put limits on people who are not end users so that we are 
not trying to--what we are saying, if you are somebody who 
never goes near a barrel of oil, in fact, you are probably 
somebody who does not go near oil at all because you have got 
somebody else to pump your gas for you, your chauffeur, maybe. 
If you are in that category, we want to limit the amount you 
can buy because we see that--we are told billions of dollars 
will be lost if they cannot trade in the financial area. Well, 
where do those billions of dollars come from? They did not come 
from the sky. They get added to the price.
    So those are two areas, whether or not we can deal with 
speculation and what we do about risk retention, where I intend 
to keep pressing.
    The further point I would make is this, and it has to do 
with the funding. I have talked to some business people, one of 
the leading business people of Boston in my office just last 
week. I understand people who think we have too much 
regulation, but I think the analog here is to the 
pharmaceutical industry where the major pharmaceutical 
companies might not like some of what the FDA has, but they 
have worked to provide the FDA with enough money to carry it 
out. You might think that less regulation would be better, but 
clearly the worst of all worlds is to have regulations on the 
books and have regulatory authorities that are not able to deal 
with them appropriately. They cannot hire the right people and 
have the right information technology.
    So this nickel-and-diming the SEC and the CFTC I think does 
grave harm, and it is, of course, a Catch-22 to complain that 
they are not moving appropriately with the rules but then deny 
them the funding to do it. And I have to say this: For people 
who are prepared to have America stay in Iraq for a couple more 
years--and I was encouraged when my colleague from Alabama 
talked about the military-industrial complex. Let us work on 
cutting them down, too, to help. But when people tell me they 
want to stay in Iraq over the Bush administration decision to 
get out, and, of course, the billions and billions, but we 
cannot find $150 million for the CFTC, I am not impressed. And 
let us be clear with the SEC that that is an area where there 
is no taxpayer money.
    Finally, I do want to talk about Fannie Mae and Freddie 
Mac. I have to say here--let me be a little partisan. I am 
impressed with the on-again, off-again nature of this with my 
colleagues in the House. I do not here address the Senate. My 
Republican colleagues in the House talk very tough about Fannie 
Mae and Freddie Mac when they are in the minority. But when 
they are in the majority, something happens. They are affected 
by a strange kind of paralysis that comes with responsibility. 
I say that because last year, when we dealt with this bill in 
conference, the Republicans in the House offered the Hensarling 
bill, a total abolition of Fannie Mae and Freddie Mac, with no 
particular attention to its succession, as an amendment. We 
said no, we said it was not germane.
    We are now almost 7 months into this session with the 
Republicans in the majority. Mr. Hensarling is a member of the 
majority. He is a subcommittee chairman. They have not offered 
it. In fact, we had a discussion about some smaller bills to 
deal with this, which the Wall Street Journal said was a poor 
way to do it, and here is what Mr. Bachus said: ``I speak for 
all members of all the subcommittee chairs. We would like a 
comprehensive bill.'' This is on Fannie Mae and Freddie Mac. 
``Now, can we get a comprehensive bill? I do not know. I do not 
think so.''
    So the Republicans in power in the House are much less 
certain. The gentleman from Alabama said where are we. Well, I 
do not know. Ask your colleague from Alabama on the next plane 
ride home.
    And I will say this. Somewhat embarrassed by this failure 
of memory once he became the majority. The gentleman from 
Alabama blamed the Obama administration, and this is really 
extraordinary, and I will close with this. Of all the issues in 
all the world--I feel like Humphrey Bogart in ``Casablanca.'' 
Of all the issues in all the world, when it comes to Fannie Mae 
and Freddie Mac, the Republicans in the House cannot proceed 
without Obama. Why haven't we seen one? Because Obama will not 
let them do it. I suppose a more recent entertainment analogy 
is, for those who remember, Flip Wilson, which the Republicans 
in the House are Geraldine, and Obama is the devil who will not 
let them do it.
    The Chairman said, inaccurately--I am sure he 
misunderstood--that he was asked by the Obama administration to 
wait. I have checked with the Secretary of the Treasury. I have 
checked with HUD. I have checked with the Administration. He 
misunderstood them. No one in the Obama administration has 
asked him to wait, and the notion that they cannot proceed on 
Fannie and Freddie, that they have said ``May I?'' to the Obama 
administration and they have not gotten permission--I have a 
rule that I try to follow myself. I would advise this to my 
Republican colleagues here. No matter how tight the corner you 
are in because of problems, try to avoid saying something that 
no one will believe. It is not going to help you. The notion 
that they are not acting on Fannie and Freddie--oh, the 
gentleman from New Jersey, Mr. Garrett, said that it is not a 
simple problem, that is why they cannot act.
    So here is the deal. The Republicans in the House, here is 
why we are not acting on Fannie and Freddie. They have the 
Hensarling bill, which is opposed by everybody who deals with 
the housing market, who want to get the private market back 
in--the realtors, the mortgage bankers, the Financial Services 
Roundtable, the American Bankers Association, the home 
builders. That collection of radicals all disagree with the 
Hensarling plan, all think you will have to have a more 
comprehensive approach for what happens afterwards. But the 
Republicans have this problem in the House. Their ideology and 
reality are having a heck of a fight, and it is a draw right 
now. Ideologically, they are committed to the Hensarling bill, 
but everybody who cares about housing says, ``Do not do that.''
    So Mr. Bachus then says, ``OK, I cannot do anything until 
the Obama administration lets me.'' That is not plausible, and 
I agree with the gentleman--I would say this, by the way. The 
only time since 1992 that the Congress has acted on Fannie Mae 
and Freddie Mac was in 2007 and 2008 when I was the Chairman 
and Mr. Dodd was the Chairman, and we got together a bill at 
the request of Secretary Paulson, which President Bush signed, 
which gave Secretary Paulson the authority to put Fannie and 
Freddie into conservatorship, which he did. And while there 
were serious problems before and we have to deal with this, in 
the current situation I agree with Mr. Shelby. They have too 
much of the market. But at least it is not the kind of cost on 
us that it was before. Fannie and Freddie today are behaving in 
a much more responsible fashion because we gave them the power 
to do that, and I think that was bipartisan at the time in 
2008, and Secretary Paulson acted on it.
    Mr. Chairman, I appreciate this opportunity.
    Chairman Johnson. Thank you again, Representative Frank, 
for coming over here today. I know you need to get back to the 
House. Senator Shelby has a couple----
    Mr. Frank. I do feel at home here. I counted nine of my 
former colleagues up here, so I did not feel entirely isolated. 
Oh, 10.
    Chairman Johnson. Senator Shelby has a couple very quick--
--
    Senator Shelby. A few observations. I know Congressman 
Frank and I have sparred over the years on different issues, 
agreed on some. Some. I do agree with Congressman Frank that 
there is a heck of a lot of difference between managing risk 
and speculation. And I think we all agree on that. That 
speculation will cause people to get in trouble. Managing risk 
will help people, and we have got to recognize the difference.
    Mr. Frank. Agreed.
    Senator Shelby. As far as Fannie Mae and Freddie Mac, the 
Congressman knows when we were in control here--I was the 
Chairman of this Committee--we pushed hard--hard--for a reform 
of Fannie and Freddie. We got it out of the Committee. We 
pushed it hard. We will continue to do that. I do not know what 
is going on in the House. As he knows, it has been 25 years 
since I was there. But I can tell you, we hope, working with 
Chairman Johnson, that sooner or later--the sooner the better--
that we can do something comprehensive, something substantive 
dealing with Fannie and Freddie because they continue to 
hemorrhage.
    Mr. Frank. I welcome that.
    Senator Shelby. Yet we all recognize they are the only game 
in town right now as far as----
    Mr. Frank. Could I say, Senator? I agree with--first of 
all, two things. As you remember--and I remember that in 2005 
and 2006 doing a bill. But as I remember, your major opponent 
at that point was my Republican Chairman, Mr. Oxley. He had a 
very different bill, and there was a dispute. Mr. Oxley----
    Senator Shelby. I think he had a weaker bill.
    Mr. Frank. Right. In fact, Mr. Oxley----
    Senator Shelby. You must have helped him with it.
    Mr. Frank. No, I----
    [Laughter.]
    Mr. Frank. The notion that--actually, Mr. DeLay was calling 
the shots then. You know, I wanted to deal with this. People 
have said, well, I was blocking it. I was in the minority. Tom 
DeLay was a major factor in the House, and if Tom DeLay was 
really susceptible to my suggestions, we would not have gone to 
war in Iraq, and he would not have gone on the dance show.
    [Laughter.]
    Mr. Frank. I have to say that he was not someone who 
listened to me. But I hope we can move ahead on Fannie Mae and 
Freddie Mac, but I will say that was when the Republicans were 
in power and there was an intercameral dispute. But we did work 
together in 2008. We had cooperation. And the only thing I 
would say to amend your statement is I think we stopped the 
hemorrhaging. There is still a problem. It is still too much of 
the market. But if you look at the people that President Bush 
put in power and since, they will tell you that the problem 
that we are facing is losses incurred before it went into 
conservatorship. Since then, it has been running in a much more 
conservative and responsible fashion, but we still need to fix 
it.
    Chairman Johnson. I will now call up our second panel of 
witnesses today.
    [Laughter.]
    Mr. Frank. Thank you.
    Chairman Johnson. I want to welcome our witnesses back to 
the Banking Committee and I will keep the introductions brief. 
Second panel, please come forward.
    [Pause.]
    Chairman Johnson. I will keep the introductions brief.
    The Honorable Neal S. Wolin is Deputy Secretary of the U.S. 
Department of the Treasury.
    The Honorable Ben S. Bernanke is currently serving his 
second term as Chairman of the Board of Governors of the 
Federal Reserve System.
    The Honorable Mary Schapiro is Chairman of the U.S. 
Securities and Exchange Commission.
    The Honorable Gary Gensler is the Chairman of the 
Commodities Futures Trading Commission.
    The Honorable Marty Gruenberg is the new Acting Chair of 
the Federal Deposit Insurance Corporation. As a former Senate 
Banking Committee server, I also welcome you back to a very 
familiar Senate committee room.
    Mr. John Walsh is Acting Comptroller of the Currency of the 
Office of the Comptroller of the Currency.
    I thank all of you again for being here today. I would like 
to ask the witnesses to please keep your remarks to 5 minutes. 
Your full written statements will be included in the hearing 
record.
    Secretary Wolin, you may begin your testimony.

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Mr. Wolin. Chairman Johnson, Ranking Member Shelby, Members 
of the Committee, I appreciate the opportunity to appear before 
the Committee. One year ago today, the President signed into 
law a comprehensive set of reforms to the financial system, 
reforms which are essential to making our economy stronger and 
more resilient.
    Those reforms were enacted in the wake of the most 
devastating financial crisis since the Great Depression.
    In the depths of the crisis, the economy lost an average of 
800,000 jobs per month. American families saw $5 trillion of 
household wealth erased in the last 3 months of 2008. Credit 
was frozen. Financial markets were barely functioning.
    The Administration and its predecessors put in place a 
comprehensive strategy to repair the financial system. As a 
result of that strategy, the U.S. financial system today is 
stronger, more stable, and better able to fuel growth and 
create jobs.
    But in order to protect our economy and create the 
conditions for long-term prosperity, we needed to put in place 
comprehensive reform of the financial system.
    That is why we proposed, Congress passed, and the President 
signed into law a sweeping set of reforms.
    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act made important and fundamental changes to the structure of 
the U.S. financial system to strengthen safeguards for 
consumers and investors and to provide better tools for 
limiting risk in the major financial institutions and the 
financial markets. The core elements of the law were designed 
to build a stronger, more resilient financial system, less 
vulnerable to crisis, more efficient in allocating financial 
resources, and less susceptible to fraud and abuse.
    These reforms were responsive to the many weaknesses that 
together nearly brought our financial system to collapse. They 
include: tougher constraints on excessive risk taking and 
leverage across the financial system, stronger consumer 
protection, comprehensive oversight of derivatives, and a new 
orderly liquidation authority to wind down a failing financial 
firm in a manner that protects taxpayers and the broader 
economy.
    The statute created three new institutions that fall within 
Treasury's implementation responsibility: The Financial 
Stability Oversight Council, to identify, monitor, and respond 
to threats across the financial system; the Office of Financial 
Research, to enhance the quality and analysis of financial data 
available to policymakers and the public; and the Consumer 
Financial Protection Bureau, to help consumers make informed 
financial decisions and to protect them from abuses in the 
marketplace.
    We are far along in standing up these institutions and they 
have each begun to play their critical roles.
    As we move forward, we must continue to move quickly but 
carefully, taking the time we need to get things right. We must 
make sure our efforts are coordinated. We must make sure to 
take care to regulate firms in a manner appropriate to the risk 
they pose to the financial system. We must be sure to work to 
improve the efficiency and effectiveness of financial 
regulation as we write a new set of rules. We must work with 
our international partners to create a level playing field with 
a set of high global standards. And we must make sure 
regulators have the funding they need to do their jobs.
    A year ago, in the wake of a catastrophic financial crisis, 
Dodd-Frank was enacted to reform our financial system. These 
reforms were an obligation, not a choice. Without them, we 
could not build the financial system we need, a financial 
system with the stability and the resilience necessary to 
support our economy and to protect it in times of stress.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Secretary Wolin.
    Chairman Bernanke.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Mr. Chairman, Ranking Member, for 
this opportunity to testify on the first anniversary of the 
Dodd-Frank Act.
    On this anniversary, it is worth reminding ourselves of why 
Congress passed the sweeping financial reforms a year ago. The 
financial crisis of 2008-2009 was unprecedented in its scope 
and severity. Some of the world's largest financial firms 
collapsed or nearly did so, sending shock waves through the 
highly interconnected global financial system. Critical 
financial markets came under enormous stress. Asset prices fell 
sharply and flows of credit to American families and businesses 
were disrupted. The crisis, in turn, wreaked havoc on the U.S. 
and global economies, causing sharp declines in production and 
trade and putting millions out of work.
    Extraordinary actions by authorities around the world 
helped stabilize the situation, but nearly 3 years later, the 
recovery from the crisis in the United States and in many other 
countries remains far from complete.
    In response to the crisis, we have seen a comprehensive 
rethinking and reform of financial regulation, both in the U.S. 
and around the world. Among the core objectives of both the 
Dodd-Frank Act and the global regulatory reform effort are, 
first, enhancing regulators' ability to monitor and address 
threats to financial stability. Second, strengthening both the 
prudential oversight and resolvability of Systemically 
Important Financial Institutions, known as SIFIs. And third, 
improving the capacity of financial markets and infrastructures 
to absorb shocks.
    First, to help regulators better anticipate and prepare for 
threats to financial stability, legislatures in both the United 
States and other developed economies have instructed central 
banks and regulatory agencies to adopt what has been called a 
macroprudential approach to supervision and regulation. That is 
an approach that supplements traditional supervision and 
regulation of individual firms or markets with explicit 
consideration of threats to the stability of the financial 
system as a whole.
    As you know, the Dodd-Frank Act created a council of 
regulators, the so-called FSOC, to coordinate efforts to 
identify and mitigate threats to U.S. financial stability 
across a range of institutions and markets. The Council's 
monitoring efforts are well underway, and this new organization 
has contributed to what has been a very positive atmosphere of 
consultation and coordination among its member agencies.
    The Council is also moving forward with its rulemaking 
responsibilities, including rules under which it will be able 
to designate systemically important nonbank financial 
institutions and financial market utilities for additional 
supervisory oversight, including by the Federal Reserve.
    For its part, the Fed has also made organizational changes 
to promote a macroprudential approach to regulation. Among 
these changes is the establishment of high-level multi-
disciplinary working groups to oversee the supervision of large 
complex banking firms and financial market utilities, with a 
strong focus on the development side of implication for 
financial stability. We have also created an Office of 
Financial Stability Policy and Research to help coordinate our 
efforts to identify and analyze potential risk to the broader 
financial system and to serve as liaison with the Council.
    The second major objective of financial reform is to 
mitigate the threats to financial stability posed by the too-
big-to-fail problem. Here, the Dodd-Frank Act takes a two-
pronged approach. The first prong empowers the Fed to reduce 
the SIFIs' probability of failure through tougher prudential 
regulations and supervision, including enhanced risk-based 
capital and leverage requirements, liquidity requirements, 
single counterparty credit limits, stress testing, an early 
remediation regime, and activities restrictions. The Federal 
Reserve and other agencies face the ongoing challenge of 
aligning domestic regulations with international agreements, 
including the Basel III requirements for globally active banks. 
These efforts are going well. In particular, the Federal 
Reserve expects to issue proposed rules on the oversight of 
SIFIs later this summer, and working with other banking 
agencies, we are on schedule to implement Basel III.
    Ending too-big-to-fail also requires allowing a SIFI to 
fail if it cannot meet its obligations and to do so without 
inflicting serious damage on the broader financial system. 
Thus, the second prong of the Dodd-Frank Act's effort to end 
too-big-to-fail empowers the Fed and the FDIC to reduce the 
effect on the system in the events of a SIFI's failure through 
tools such as the new orderly liquidation authority and 
improved resolution planning by firms and supervisors. In 
particular, the Federal Reserve is working with the FDIC to 
require SIFIs to better prepare for their own resolution by 
adopting so-called living wills. A joint final rule on living 
wills is expected later this summer.
    Reducing the likelihood of a severe financial crisis also 
requires strengthening the resilience of our financial markets 
and infrastructure, a third major objective of the Dodd-Frank 
Act. Toward that end, provisions of the Act improve the 
transparency and stability of the over-the-counter derivatives 
markets and strengthen the oversight of financial market 
utilities and other critical parts of our financial 
infrastructure. We and our colleagues at the SEC, the CFTC, and 
other agencies are moving this work forward in consultation 
with appropriate foreign regulators and international bodies. 
The U.S. agencies are also working together to address 
structural weaknesses in areas not specifically addressed by 
the Dodd-Frank Act, such as the tri-party repo market and the 
money market mutual fund industry.
    To be sure, any sweeping reform comes with costs and 
uncertainties. In implementing the statute, the Federal Reserve 
is committed to the promulgation of rules that are economically 
sensible, appropriately weigh costs and benefits, protect 
smaller community institutions, and most important, promote the 
sound extension of credit in the service of economic growth and 
development.
    A full transition to the new system will require much more 
work by both the public and private sectors, and no doubt, we 
will learn lessons along the way. However, as we work together 
to implement financial reform, we must not lose sight of the 
reason that we began this process, which is ensuring that 
events like those of 2008 and 2009 are not repeated. Our long-
term economic health requires that we do everything possible to 
achieve that goal. Thank you.
    Chairman Johnson. Thank you, Chairman Bernanke.
    Chairman Schapiro.

    STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES AND 
                      EXCHANGE COMMISSION

    Ms. Schapiro. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, thank you for inviting me to testify 
on the occasion of the 1-year anniversary of the Dodd-Frank 
Act. Following the biggest financial crisis since the Great 
Depression, Congress passed legislation that is already 
reshaping the U.S. regulatory landscape, reducing systemic 
risk, and helping to restore confidence in the financial 
system.
    At the SEC, we were given broad new investor protection and 
market integrity responsibilities, and in the past year, we 
have made significant progress in our efforts to meet them. 
Already, we have proposed or adopted rules for about three-
fourths, or about 70, of the mandatory rulemaking provisions we 
were assigned. In addition, we have finalized 10 studies and 
reports that the Act required us to complete.
    In my prior testimony before this Committee, I outlined our 
efforts to establish a process to help us not only get the 
rules done, but get them done right. Among our efforts, we 
created internal cross-disciplinary working groups to 
coordinate the rulemaking process and facilitate our action. We 
increased transparency and aggressively sought input from the 
public. We forged and strengthened collaborative relationships 
with other Federal and State regulators and our international 
counterparts. We engaged in a substantial outreach effort, 
participated in scores of interagency and working group 
meetings, conducted public roundtables, met with hundreds of 
interested groups and individuals, including investors, 
academics, and industry participants, and received, reviewed, 
and considered thousands of public comments.
    All of these efforts, in addition to Congressional input 
and robust Commission debate, are helping us write rules that 
effectively protect investors and the financial system without 
imposing undue burdens on market participants. While some feel 
we are moving too quickly and others feel we are not moving 
rapidly enough, I believe we are proceeding at a pace that 
ensures that we will get the rules right.
    My written statement illustrates the breadth and complexity 
of the rulemaking activities that have engaged the SEC for the 
past year--activities that range from hedge fund registration 
to the obligations of investment advisors and broker-dealers, 
to implementation of the new whistleblower program. Other 
priorities include completing the specialized disclosure rules 
called for in the Act, continuing to establish a new oversight 
regime for the over-the-counter derivatives market, 
strengthening oversight of credit rating agencies, increasing 
oversight of systemically important financial market utilities, 
putting in place new oversight for municipal advisors, 
implementing the Act's corporate governance and executive 
compensation requirements, engaging our foreign counterparts in 
detailed discussions aimed at limiting the potential for 
regulatory arbitrage, and making effective use of the Act's 
enhanced enforcement powers to address wrongdoing.
    While the SEC has made tremendous progress over the past 
year, the provisions of the Dodd-Frank Act vastly expand the 
SEC's responsibilities and will require significant additional 
resources to fully implement the law. To date, the SEC has 
proceeded with the first stages of implementation without 
additional funding, taking staff from other responsibilities 
and working without sufficient investments in areas such as 
information technology. While it is, of course, incumbent upon 
us to use our existing resources efficiently, the new 
responsibilities assigned to us are so significant that they 
cannot be achieved solely by wringing efficiencies out of the 
existing budget. Attempting to do so will hamper our ability to 
meet both new and existing responsibilities.
    If the SEC does not receive additional resources, 
circumstances that contributed to the financial crisis will not 
be adequately addressed as the SEC will not be able to build 
out the technology and hire the expertise needed to oversee and 
police these new areas of responsibility.
    I would note that the Dodd-Frank Act requires the SEC to 
collect transaction fees to offset the annual appropriation of 
the agency. So regardless of the amount appropriated to the 
SEC, because it will be fully offset by fees that we collect, 
it will have no impact on the nation's budget deficit.
    Though the SEC's efforts to implement the Dodd-Frank Act 
have been extensive, we know our work continues. Thank you for 
inviting me to share with you our progress to date and our 
plans going forward. I look forward to answering your 
questions.
    Chairman Johnson. Thank you, Chairman Schapiro.
    Chairman Gensler.

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 
                           COMMISSION

    Mr. Gensler. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of this Committee. I thank you for inviting 
me here to testify today and I am pleased to testify on behalf 
of the Commodities Futures Trading Commission.
    On this anniversary, it is important to remember why the 
law's derivatives reforms were so necessary. When AIG and 
Lehman Brothers failed, we all paid the price. All of your 
constituents paid the price. And what is more, the effects of 
the crisis continue to be very real, with significant 
uncertainty in the economy and millions of Americans still out 
of work.
    And though the crisis had many causes, it is clear that the 
derivatives or swaps marketplace played a central role. Swaps 
added leverage to the financial system, with more risk being 
backed by less capital. They contributed, particularly through 
the product called credit default swaps, to a bubble in the 
housing market and I believe helped accelerate problems as we 
went into that crisis.
    And they also contributed to a system where large financial 
institutions, once just thought too-big-to-fail, were all of 
the sudden--this new phrase--too interconnected to be allowed 
to fail. So swaps, which are still to this day so important in 
helping manage and lower risk for thousands of end users in 
this economy, also in that moment of crisis concentrated and 
heightened risk in the financial system and thus to the public.
    So what did Dodd-Frank do to address this? First, the Dodd-
Frank Act broadened the scope of the oversights of the CFTC and 
SEC for the first time to cover swaps and securities-based 
swaps.
    Second, the Act promotes market transparency, something 
that has worked in the securities and futures markets since the 
1930s, and that is through real-time reporting of transactions 
and bringing those transactions that can to a centralized place 
called swap execution facilities. Economists for decades have 
found that transparency reduces cost to users of the markets.
    Third, the Act lowered risk to the public and the overall 
economy by directly regulating the dealers and moving that 
which we can to central clearing.
    Fourth, the Act provides important new enforcement 
authorities and reporting requirements so that regulators 
themselves, the CFTC and SEC, can better police the markets for 
fraud, manipulation, and other abuses. In fact, this month, the 
Commission finalized a rule on anti-manipulation which is very 
similar to what the SEC has had for decades, and we think it 
will help.
    And fifth, I note that the Ranking Member Shelby and 
Ranking Member Frank had a discussion about speculation. 
Congress actually mandated that the CFTC set aggregate position 
limits for physical commodities, expanding the scope to certain 
swaps and linked contracts.
    So the CFTC is working along with other regulators, 
particularly the SEC, deliberately, efficiently, and 
transparently to write rules to implement these and other 
provisions of the Act. This spring, we substantially completed 
the proposal phase of rulemaking, and then we provided the 
public an extra 30 days to look at the whole mosaic at once. 
And now the staff and Commissioners have turned toward final 
rules, approving eight so far. We anticipate taking up in 
August rules with regard to swap data repositories, in 
September, clearing, position limits, and others, October, and 
we will be moving forward continuing to finalize rules.
    But as we finalize rules, we are reaching out broadly to 
market participants, with over 21,000 comments to date, 
including roundtables and public comment periods to consider 
how best to implement this, talking to international 
regulators. And we are also looking very closely at phased 
implementation, which helps lower costs and risk.
    Before I close, I would like to just make note that the 
CFTC is taking on a significant expanded scope and mission, a 
market that is seven times the size of what we currently 
oversee. The Commission must be adequately resourced to 
effectively police this market and protect the public. Without 
sufficient funds, there will be fewer cops on the beat, but 
also, we will not really even have enough staff to answer the 
basic questions for market participants and the public on the 
new rules.
    In conclusion, we are working thoughtfully at the 
Commission to get these rules right based on significant public 
input, but it is more important to get it right than work 
against the clock and that is not what we are doing. We are 
going to get this right and move forward. But until the CFTC 
completes its rule-writing process and implements and enforces 
the new rules, the public remains unprotected.
    I thank you. I look forward to your questions.
    Chairman Johnson. Thank you, Chairman Gensler.
    Acting Chairman Gruenberg.

  STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Mr. Chairman. Chairman Johnson, 
Ranking Member Shelby, and Members of the Committee, thank you 
for the opportunity to testify today on the 1-year anniversary 
of the passage of the Dodd-Frank Act.
    Chairman Johnson, if I may, thank you for your kind words 
at the outset. It does occur to me that it used to be more 
comfortable for me to sit behind you all on the dais than where 
I am right now, but I am privileged to have the opportunity.
    The Dodd-Frank Act provided the FDIC with important new 
authorities in the areas of deposit insurance and systemic 
resolution that we believe will significantly enhance financial 
stability and on which we have made significant progress toward 
implementation.
    First, the Act grants the FDIC new authorities to manage 
the Deposit Insurance Fund in a way that will make it more 
resilient in a future crisis. The FDIC has already implemented 
provisions in the Act that make permanent the increase in the 
deposit insurance coverage limit to $250,000 and provide 
insurance on the entire balance of non-interest-bearing 
transaction accounts through the end of 2012.
    We have also implemented the changes in the assessment base 
mandated by the Act, which generally shifts the overall 
assessment burden from community banks to the largest 
institutions, which rely less on domestic deposits for funding. 
The change in the assessment base from deposits to assets will 
result in an aggregate decrease of 30 percent in deposit 
insurance assessments for insured institutions with assets 
under $10 billion.
    In addition, the Act provided the FDIC with new flexibility 
in setting the target size of the Deposit Insurance Fund. We 
have used the new authority to adopt a long-term fund 
management plan that should maintain a positive insurance fund 
balance even during a banking crisis while preserving steady 
and predictable assessment rates through economic and credit 
cycles. This will enable us to avoid imposing procyclical 
deposit insurance assessments on financial institutions during 
an economic downturn.
    The Dodd-Frank Act also provides for a new systemic 
resolution framework to be used in those rare instances when we 
must act to mitigate the systemic risk posed by the resolution 
of a financial company in bankruptcy. The framework includes an 
orderly liquidation authority and a requirement for resolution 
plans that will give regulators much better tools with which to 
manage the failure of large complex financial institutions.
    If the FDIC is appointed as receiver for a covered 
financial company under the orderly liquidation authority, we 
are required to carry out an orderly liquidation in a manner 
that ensures that creditors and shareholders appropriately bear 
losses while maximizing the value of the company's assets, 
minimizing losses, mitigating risk, and minimizing moral 
hazard.
    Critical to the exercise of this authority is a clear and 
transparent process. The FDIC Board approved a final rule 
implementing the orderly liquidation authority on July 6. This 
final rule provides a framework to resolve systemically 
significant financial institutions using many of the same 
powers we have long used to manage failed bank receiverships.
    The FDIC and the Federal Reserve Board, as Chairman 
Bernanke mentioned, are also working jointly to issue 
regulations implementing new resolution plan requirements. The 
comment period on the Notice of Proposed Rulemaking ended on 
June 10 and we hope to issue a final rule in the near future.
    In order to carry out these responsibilities for the 
resolution of Systemically Important Financial Institutions, 
the FDIC has established a new Office of Complex Financial 
Institutions which will have three key functions: To monitor 
the condition of systemically important financial companies 
from the standpoint of resolvability; to oversee jointly with 
the Federal Reserve the development of resolution plans by 
these companies; and to engage with the supervisors of the 
foreign operations of these companies in regard to resolution 
planning.
    Finally, the Dodd-Frank Act contains provisions that will 
complement the ongoing Basel III reforms that will make capital 
requirements more uniformly strong across the banking system. 
Section 171 of the Dodd-Frank Act states that capital 
requirements for the largest banks and bank holding companies 
must not be less than the capital requirements that are 
generally applicable to insured institutions. The FDIC, the 
Federal Reserve, and the Comptroller of the Currency recently 
finalized a rule implementing this provision.
    We have made significant progress in the past year but 
still have considerable work ahead of us. Throughout this 
process, we have sought input from the industry and the public 
and we continue to report back to Congress on our progress. We 
have sought to make the process as transparent as possible. We 
believe that successful implementation of these provisions will 
lead to a financial system that is more stable and less 
susceptible to crises and better prepared to withstand crises 
if and when they develop.
    Thank you, and I look forward to answering your questions.
    Chairman Johnson. Thank you, Acting Chairman Gruenberg.
    Acting Comptroller Walsh.

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

    Mr. Walsh. Thank you, Chairman Johnson, Ranking Member 
Shelby, Members of the Committee. I appreciate the opportunity 
to be here today to discuss the progress that the OCC and other 
regulatory agencies have made in implementing the Dodd-Frank 
Act in the year since the law was passed.
    Although we have weathered the worst financial crisis since 
the Great Depression, it will be years before we put all of its 
effects behind us. Dodd-Frank took important steps to 
strengthen the financial system and guard against future 
crises, and I think all of us are determined to implement those 
safeguards as quickly and effectively as possible.
    As I have said in previous testimony, the OCC is involved 
in 85 individual projects stemming from Dodd-Frank, including a 
number of interagency rulemakings that will have a very 
significant impact on the financial system. Our biggest single 
task has been to integrate the staff and functions of the 
Office of Thrift Supervision into the OCC, but we have also 
devoted considerable effort to the transfer of supervisory 
responsibilities to the new Consumer Financial Protection 
Bureau, and we have participated in the early work of the 
Financial Stability Oversight Council, which has the potential 
to serve as an important defense against market disruption.
    Regarding OTS integration, I am pleased to report that on 
Monday 674 employees of the Office of Thrift Supervision 
reported for duty at the OCC in offices around the country. We 
have worked very hard over the past year to ensure a smooth 
transition, and we have now succeeded in moving to a single 
regulator for national banks and Federal thrifts. We will need 
every bit of the talent and experience of former OTS staff to 
help fulfill our combined supervisory mission, and the men and 
women joining us from OTS have been fully integrated into 
policy and field units where their talents can best be 
utilized.
    We also recognize the importance of communication to the 
industry so that thrift executives know what to expect from the 
combined agency, and among our efforts we held 17 outreach 
meetings around the country and had more than 1,000 thrift 
executives join us for those meetings.
    As part of the transition, we have engaged in several 
rulemakings affecting the thrift industry. Today we posted an 
interim final rule that republishes as OCC rules those OTS 
regulations that the OCC has authority to administer and 
enforce going forward. We are continuing to review 
regulations--those as well as our own--to see where 
improvements may be in order.
    We also published a final rule today that addresses a 
number of areas important for continuity of supervision after 
July 21st, including assessments of Federal savings 
associations. That rulemaking, published in today's Federal 
Register, also addressed the areas where Dodd-Frank made 
changes in the standard upon which the OCC's rules on 
preemption and visitorial powers were based.
    The rulemaking scales back our current rules in a number of 
areas. The amendments eliminate the obstruct, impair, or 
condition preemption standard from our regulations. They 
eliminate preemption for operating subsidiaries of both 
national banks and federally chartered thrifts, limit Federal 
savings associations to the same standard of conflict 
preemption that applies to national banks, and expressly 
recognize the enhanced visitorial authorities of State 
Attorneys General that are provided under Dodd-Frank. We also 
implement new procedures for future preemption decisions, 
including consultation with the CFPB.
    Over the past year, we have provided considerable support 
for the stand-up of the CFPB and worked to ensure cooperation 
between the OCC and the new Consumer Bureau in our 
complementary supervisory roles. In addition to participating 
in numerous informational briefings with CFPB staff, we have 
assisted in developing the agency's procurement and personnel 
management processes. To ensure the agency has the information 
it needs about the banks it will be supervising, we executed a 
memorandum of understanding that allowed us to share reports of 
examination, supervisory letters, information on enforcement 
matters, and other important confidential information.
    We have also agreed to provide transitional support for 
other CFPB functions, including consumer complaints. The OCC 
will continue to operate our Customer Assistance Group to 
handle consumer complaints about the large banks now under CFPB 
supervision while the Bureau builds its own capacity in this 
area.
    As we discussed in our last appearance before the 
Committee, we have participated in the interagency effort to 
create an effective Financial Stability Oversight Council as a 
forum for participants to share views, perspectives and 
expertise in a confidential setting on emerging risks across 
the system. The Council will be an important venue for averting 
and addressing future market disruptions.
    And, finally, Dodd-Frank also calls for a number of 
rulemakings, and we have proposed interagency rules to address 
credit risk retention, incentive compensation, and margin and 
capital requirements for covered swap entities, among others.
    Clearly, we have a great deal of work ahead in implementing 
the many important provisions of Dodd-Frank, but I am confident 
that we will get it done in a way that strengthens the 
financial system and protects it against the kinds of risks 
that led to the last crisis.
    Thank you, and I am happy to answer your questions.
    Chairman Johnson. Thank you for your testimony.
    We will now begin the questioning of our witnesses. Will 
the clerk please put 5 minutes on the clock for each Member for 
their questions?
    Secretary Wolin, I think it is important to keep in mind 
the damage inflicted by the crisis and what the Wall Street 
Reform Act will do to prevent or mitigate another crisis. Could 
you highlight in your opinion the greatest costs of the crisis 
and the most important benefits of the new regulatory 
framework?
    Mr. Wolin. Thank you, Mr. Chairman, for that question. The 
costs which I tried to enumerate in my testimony were really 
extraordinary. The financial system came to the brink of utter 
failure--credit markets froze up. In the end our economy was 
enormously affected in a way that hurt all Americans with 
respect to the availability of credit, with respect to the 
destruction of an enormous amount of wealth, lost jobs, lost 
homes, and so forth. And a key reason for all of that, of 
course, is that the framework we had for our financial system 
was manifestly inadequate. It had gaps and weaknesses that 
needed to be addressed. We had no alternative really but to do 
that, and the Dodd-Frank statute does exactly that. It makes 
sure that our financial system rests on a more stable, more 
resilient foundation, requiring firms, especially those that 
are more risky and present more risk to the system, to hold 
bigger capital, to have greater liquidity standards and 
leverage constraints. It brought the derivatives markets and 
the swap markets out of the darkness. That was clearly an 
important factor that created or led to the crisis. And it 
strengthens enormously consumer protection because we know that 
consumers did not have information and were not put in a 
position to make fundamental choices about the kinds of credit 
they undertook, and that led, of course, to enormous amounts of 
credit being extended in ways that neither they nor the overall 
system could bear.
    In all of these ways, and many others, I think, the Dodd-
Frank Act makes important strikes to put ourselves on a 
foundation that allows our financial system to contribute what 
it can to the economy and its growth, which is, after all the 
critical need we have as a country.
    Chairman Johnson. I have a question directed at Chairman 
Bernanke, Acting Chairman Gruenberg, and Acting Comptroller 
Walsh. We are all concerned about the unnecessary regulatory 
burden for financial institutions that did not cause the 
crisis. Can each of you describe what your agencies are doing 
to ensure that we have an appropriate set of rules that work, 
but also that are not duplicative, contradictory, and overly 
burdensome to small businesses and small financial 
institutions? Chairman Bernanke?
    Mr. Bernanke. Yes, thank you. We agree that small banks are 
critical to our financial system. They have the ability to make 
loans in a local community that large banks often do not have, 
including loans to small businesses. And so it is very 
important to minimize the burden on those banks.
    First of all, the law itself, is very focused on the 
largest firms and on the most complex activities, so the direct 
implications of the law for smaller banks is less.
    That being said, it is important for us as regulators to 
make clear to smaller banks that they are exempt and to make 
sure that they are effectively exempt. We are trying in our 
rules to provide more guidance to small banks about what 
applies to them and what does not apply to them. I think small 
banks will benefit to some extent from the fact that tougher 
rules on the biggest banks and on nonbank institutions will 
create a more level playing field. It will be of assistance to 
them.
    Finally, I would mention that the Fed has made a very 
strong effort to reach out to smaller institutions. For 
example, our Supervision Committee has a subcommittee which is 
focused on making sure that the rules that we pass do not have 
excessive burden on small banks, and we have created a 
Community Bank Council that meets three times a year with the 
Federal Reserve Board to give us maximum feedback.
    So we are taking a lot of steps to try to achieve that 
objective. I agree with you it is a very important one.
    Chairman Johnson. Acting Chairman Gruenberg?
    Mr. Gruenberg. Thank you, Chairman Johnson. This is a 
matter of significant priority for the FDIC because we are the 
leading Federal supervisor of the majority of community banks 
in the United States, so it is a matter we take very seriously.
    One of the challenges that the community banks have told us 
about is with the number of regulations required by the Dodd-
Frank Act. There is an issue for them simply sorting through 
which ones actually have relevance and applicability to them.
    To try to respond to that, on every financial institution 
letter--and we issue a letter for each regulation--we provide a 
box on the front that specifically summarizes the applicability 
of that regulation to institutions with assets under $1 
billion. So they have a quick shorthand place to go to identify 
the relevance of the regulation to them.
    In addition, we have an ongoing statement of policy at the 
FDIC on the development and review of FDIC regulations and a 
policy which requires regular periodic reviews by us of our 
regulations and their impact, and that is something we are 
undertaking specifically in regard to the implementation of the 
Dodd-Frank Act.
    And, finally, I would mention we also have a Community Bank 
Advisory Committee that has been extremely helpful to us, and 
one of the recommendations they made was to conduct a review of 
the questionnaires and surveys that we require our regulated 
institutions to fill out. In response to that review, we have 
created a new place on the FDIC Web site consolidating all of 
those questionnaires and surveys, so it is in a single place 
institutions can go to, and they will now be able to fill out 
those questionnaires and surveys online, which they were not 
able to do before. So this is a matter of ongoing attention for 
us.
    Chairman Johnson. Acting Comptroller Walsh, could you 
elaborate a bit?
    Mr. Walsh. Well, I would certainly join my colleagues in 
expressing the same concerns, and, in fact, the approach that 
we are taking, about 2,000 of our 2,100 institutions are 
community banks. We have substantial outreach to them. We have 
an Internet-based BankNet system that enables them to come and 
look at updates on regulation and to remain apprised of things 
that are happening.
    Certainly, they share the concern that there are a lot of 
rules, and they are not quite sure what affects them and what 
does not. And it is true that most of those rules are aimed at 
larger institutions and more complex activities. But we 
continue to work with them to understand those things that will 
affect them and the many that will not.
    Chairman Johnson. Thank you.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Bernanke, it seems to me that after most crises, 
we are told that if regulator only had more resources, they 
could have prevented whatever crisis it was. As a result, the 
standard response by Congress is to grow the bureaucracies. 
Dodd-Frank fits this pattern, it seems to me. Because of Dodd-
Frank, regulators have seen their powers grow over the American 
economy and their budgets also grow. Dodd-Frank also will add 
over 4,000 new Government jobs, many of them very well paying 
jobs. Employees, for example, at the SEC and other agencies can 
earn up to $230,000 a year. Meanwhile, as we all know, private 
sector job growth has been flat.
    Mr. Chairman, do we now have enough Government bureaucrats 
to protect the financial system?
    Mr. Bernanke. Senator, let me go back to the premise of 
your question.
    Senator Shelby. OK.
    Mr. Bernanke. Which is I really do think that--and I 
believe there is widespread agreement--the regulatory structure 
before the crisis was inadequate. There were obviously large 
gaps in our coverage. There was nobody responsible for looking 
at the system as a whole. There were significant weaknesses in 
the structure of our financial system, including the shadow 
banking system and so on.
    I congratulate you on some of your attention early on to 
Fannie and Freddie, to capital standards, and so on. These were 
things that were inadequate.
    This is not just a pointless response. There are clearly a 
lot of things that need fixing and that we can improve, and I 
believe that, broadly speaking, the Dodd-Frank Act covers the 
main bases, with the main exception of housing finance, which 
was discussed earlier.
    You need more people to carry out more regulations, write 
more regulations, and to do just in general a better job of 
overseeing private sector activity.
    That being said, what we want is quality more than 
quantity. We want it done well. We want to make sure that there 
is clarity in terms of the rules, that financial institutions 
understand what the rules of the game are, and so that we 
achieve these results at the least cost to the financial 
system.
    Let me just say that the Fed does do regular cost/benefit 
analyses of all our rules, and it is always our intention to 
try to meet the goals of the statute in the least cost way that 
we can.
    Senator Shelby. Didn't the Inspector General of the Fed 
recently call that into question, the cost/benefit methodology 
that the Fed was using that they claim was antiquated?
    Mr. Bernanke. I do not believe that is correct.
    Senator Shelby. OK.
    Mr. Bernanke. There have been several studies, one by a 
group of the IGs, I believe, and another by the GAO which is 
more related to some of the programs we did during the crisis. 
I am sure you will correct me if I am wrong, but my 
understanding is that the Fed IG took a positive view of the 
Fed's consistent application of cost/benefit principles to the 
rules we write.
    Senator Shelby. It is my understanding that the Inspector 
General of the Federal Reserve recently revealed that the Fed's 
internal written policy for rulemaking procedures is more than 
30 years out of date and, therefore, does not adequately 
reflect current statutory requirements to perform cost/benefit 
analysis. If that is not right, maybe we can both review this. 
But if that is right, then the Fed needs to step up to the 
plate there, does it not? Assuming that is right.
    Mr. Bernanke. Well, Senator, again, if that is right, that 
is a statement about written policies.
    Senator Shelby. OK.
    Mr. Bernanke. In actual practice we are very attentive to 
the costs and benefits.
    Senator Shelby. OK. Chairman Gensler, I have asked you 
twice in written questions for the record for my colleagues 
here in the whole Committee how the CFTC would exercise its 
authority under Title VIII with respect to financial 
institutions engaged in activities designated under that title. 
In both instances you responded with a discussion of the 
regulation of financial market utilities, which does not answer 
the question.
    Let me ask you again: What are the CFTC's plans with 
respect to financial institutions other than financial market 
utilities? In other words, I will ask it this way: What are the 
CFTC's plans with respect to financial institutions engaged in 
activities that are designated by the Council to be 
systemically important?
    Mr. Gensler. I thank you for clarifying. I do not think I 
really fully understood the question in written form.
    Senator Shelby. OK.
    Mr. Gensler. So I understand it now.
    Title VIII, I think, addressed itself to financial market 
utilities, and I think that through the Council there will be 
some that are designated. We currently oversee I think 16 
clearinghouses, and I assume some of them will be included. I 
do not know whether the Council will designate any activities, 
so that is why I did not envision them. Right now I would 
suspect we will focus on one, two, or three clearinghouses and 
then no other institutions will probably come under Title VIII.
    Senator Shelby. Speaking of clearinghouses, the FSOC 
recently approved rules that laid the groundwork, as I 
understand it, to determine which clearinghouses will be deemed 
systemically important. Will the CFTC provide clarity on 
whether or not it will allow clearinghouses more time before 
they must decide whether to accept or reject swap trades?
    Mr. Gensler. Well, I think that for most it is up to the 
clearinghouse and their risk committee. Clearinghouses will 
have a mandate, but it is important that they----
    Senator Shelby. Let them do it?
    Mr. Gensler. Well, they--and Dodd-Frank I think addressed 
it. They are the first line. They get to decide. A mandate then 
only happens if we then also seek public comment.
    Senator Shelby. Do you think that the ability of 
systemically important clearinghouses to access the Fed's 
discount window makes it more or less likely that 
clearinghouses will accept riskier products? Or will you try to 
make sure that they do not?
    Mr. Gensler. Well, I think it is our responsibility, each 
of us, to make sure taxpayers do not stand behind any financial 
institution, not clearinghouses----
    Senator Shelby. Like we have stood behind it before?
    Mr. Gensler. I agree with you, sir. I think the perverse 
outcome of the crisis is that some might think we are do more 
of that, and I think it is important that we do everything in 
our rulewriting to ensure that the public not stand behind the 
clearinghouses or other financial institutions.
    Senator Shelby. Thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    On Tuesday, the Chamber of Commerce released a report that 
criticized Federal agencies for not keeping up with markets and 
technology, and they noted:

        A modern, well-regulated market is one in which the regulators 
        also use current technologies and techniques to keep pace with 
        market developments.

    Chairman Schapiro and Chairman Gensler, the House 
Appropriations Committee is proposing significant cuts which I 
presume would diametrically oppose this request that you keep 
up with markets through technology. What is your perception?
    Ms. Schapiro. Thank you, Senator. Under the House 
appropriation, we would probably cut about $10 million out of 
our information technology budget, and the end result of that 
would be postponed critical investment in market surveillance 
technology. I have talked with this Committee many times about 
the Flash Crash of May of last year, the implications that had 
for investors and for public companies seeking reliable capital 
markets in which to raise money, and the fact that it took the 
two agencies many months to be able to actually diagnose what 
happened because of a lack of technology capability.
    It would also mean a delay in the modernization of the 
EDGAR System, which is absolutely critical to public companies 
who file their disclosures via EDGAR, to our staff's capability 
to analyze public company disclosure, and also to much of the 
information that we will be gathering as a result of Dodd-
Frank, which filed via the EDGAR System; and then, of course, 
our ability to bring in data, again, for our oversight of hedge 
funds, over-the-counter derivatives, and in another area, the 
consolidated audit trail and large trader reporting systems as 
the SEC is moving forward apart from Dodd-Frank. All require 
that we have the capacity to invest in technology, and we have 
not had that, and under the House bill we would not have that.
    Senator Reed. Chairman Gensler.
    Mr. Gensler. Briefly, technology is very important so we 
can be an efficient cop on the beat and efficiently provide the 
public the protections they want. We spent this year about $37 
million on technology, which is less than most of the largest 
financial institutions spend in 1 week. And the industry is 
spending $20 to $25 billion a year. It is less than they spend 
in a day. In 1 year that is what we do.
    We think it would be helpful to about double that, and we 
have only asked for about 30 percent more people. So technology 
is a way to be efficient on the people side and, of course, to 
oversee markets, which are about seven times the size.
    It is very important for this setting of aggregate position 
limits as well so that we can aggregate the data and bring it 
in and use the computers to do that which computers are good 
at. And the House appropriation bill cut us 15 percent. We 
obviously could not do any of that with the cut of 15 percent.
    Senator Reed. In effect, this is almost sort of setting you 
up for not falling behind these markets we are trying to 
create, but eventually failing to be able to even have any 
transparency or any insight to the markets.
    Mr. Gensler. I think that is right. We will complete the 
rulewriting process. It will be thoughtful. It will take longer 
than Congress had laid out. But we will finish that rulewriting 
process. But I fear that then we will not have the people to 
answer the questions, to have the transparency, to aggregate 
the market and put it out on our Web site. Public market 
transparency needs the technology and the resources.
    Senator Reed. Chairman Schapiro?
    Ms. Schapiro. Senator, can I add to that? I think we have 
said repeatedly we will not be able to operationalize the Dodd-
Frank rules. We, too, will get them done. Hopefully they will 
be reasonable and appropriate rules.
    But the other area where we will fall behind is that we 
receive about 2,000 requests a year in the form of self-
regulatory organization rule filings, requests for exemptions, 
and no-action letters. Our capacity to keep up with that kind 
of volume on a declining budget will be severely impacted. And 
those are things industry really wants from us. They need that 
guidance and that exemptive relief from time to time. And so I 
think everybody has a stake in these agencies being in a 
position to do their jobs.
    Senator Reed. It seems from your comments that the 
possibility exists of having the worse of two worlds: 
regulations on the books which will require you under Dodd-
Frank, but ineffective resources to respond to legitimate 
questions of business, to interpret the regulations, to respond 
promptly to their requests. I would think the business 
community would be worse off in this situation because, again, 
the liabilities are here on the books, but if they cannot get 
any traction or response from the agencies.
    Ms. Schapiro. I think that is right, and to follow up on 
what Chairman Bernanke said, it is in the interest of the 
industry to have expert people within the regulatory agencies 
who can, in fact, efficiently and effectively do examinations, 
provide guidance, provide information and assistance, as well 
as to enforce the law, which we are also charged with doing. 
And I think the public has to understand what the limitations 
are of a regulatory regime that has no compliance or 
enforcement behind it.
    Senator Reed. Just one final point. I think the only real 
beneficiaries are not the rank-and-file business men and women, 
but those who deliberately will try to avoid following the law 
in the hopes they will not get discovered because of the lack 
of resources. But then the unscrupulous--and I think the vast 
majority of businesses will be laboring to do what they can, 
but getting no help or guidance from the regulators.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr Chairman, and thanks to the 
witnesses for being back once again. I have two questions. The 
first I think I would like to direct to Ms. Schapiro.
    As you know better than anyone, last year the SEC developed 
a whole new set of rules and regulations regarding money market 
funds--tightened standards for credit quality, enhanced 
liquidity, shortened portfolio maturities, a number of very 
meaningful measures to basically diminish the risks and I think 
significantly reduce the risk that any kind of a run would be 
likely to occur or that there would be systemic risk from these 
funds.
    Nevertheless, we do hear a discussion from time to time 
that there is also an interest in moving to a floating NAV, and 
what concerns me about a floating net asset value is the 
complexity of administering this, keeping up with the 
paperwork, and even tax implications that could become very 
complex and onerous to what is a very large and important part 
of our financial system.
    So I guess my question is: Is imposing the net asset value 
rule still under consideration? Or is that off the table?
    Ms. Schapiro. The FSOC has taken a lot of interest, 
appropriately so, in the money market fund issues, and as you 
point out, we did do a complete overhaul of money market fund 
credit quality and liquidity standards a year ago. I think they 
have been fairly universally appraised as being very positive, 
very helpful to build the resiliency of money market funds. We 
also require reporting of shadow NAV so that investors can 
become accustomed to the idea that, in fact, the value does 
fluctuate for a money market fund.
    At FSOC we have discussed the issue several times. We held 
a public roundtable at the SEC with all FSOC members in 
attendance and members of the industry and academia to talk 
about how to prevent runs on money market funds and what are 
the options available to us. And I would say that we are 
actively discussing floating NAV as one of the ideas that has 
been floated and was raised in the President's Working Group's 
(now FSOC's), study on Money Market Funds, as well as capital 
buffers. The industry came forward with the idea of a liquidity 
exchange bank.
    So there are a number of areas where we are having 
discussions. I would say nothing has been decided, but we 
continue to seek public input and our fellow regulators' input 
on what we can do to ensure that we do not have a situation as 
we did when the Primary Reserve Fund broke the buck and 
effectively caused a run on money market funds, in large part 
because of the stable NAV. So on the issue we are continuing to 
explore.
    Senator Toomey. I hope we will keep in mind what seems to 
me an absence of empirical evidence that suggests that a 
floating NAV would solve a problem here and the fact that very 
substantial measures have already been taken.
    I have a separate question that I would like to address to 
Mr. Gensler and perhaps Mr. Bernanke, as well. This has to do 
with the proposed margin rules for swaps under Title VII. My 
understanding is that these rules would require the 
subsidiaries of American banks operating overseas and doing 
business with non-American counterparts, that these 
subsidiaries would nevertheless be required to hold margin on 
behalf of their counterparts. It is also my understanding that 
the Europeans and Asians have not imposed a comparable 
requirement, and therefore, I am concerned that that would put 
our firms at a competitive disadvantage with respect to 
transactions that do not occur on U.S. soil, do not have an 
American counterpart. So are you concerned that we are in the 
process, we are heading toward putting ourselves at a 
competitive disadvantage in this area?
    Mr. Gensler. I thank you for the question. I think not just 
in the margin area, but even more broadly, we have been working 
actively with international regulators because capital and risk 
knows no geographic border. It will move somewhere else. On 
margin, more specifically, we are reaching out and trying with 
Treasury, the Federal Reserve, and SEC to have an international 
approach to margin and regimes.
    On the specific, on the bank rules, I will defer to 
Chairman Bernanke because we are only setting margin for the 
nonbanks.
    Senator Toomey. Mr. Chairman?
    Mr. Bernanke. Senator, you are absolutely correct that if 
those margin rules for foreign operations are maintained and 
Europeans and other foreign jurisdictions do not match it, that 
that would be a significant competitive disadvantage.
    I think the best solution, which we are pursuing with some 
assiduity, is that we get some kind of global agreement on 
margin rules for swaps and other instruments. And again, we are 
working on that. If that does not happen, we will need to think 
again about how to meet Dodd-Frank's requirements for improved 
prudential safety, which is what margins are intended to 
achieve, without disadvantaging our banks in their foreign 
operations.
    So our first choice is to equalize the playing field. If 
that does not work, we will look at many of the suggestions we 
received in the comment process to think about how to address 
that issue.
    Senator Toomey. I would just like to suggest, it just seems 
to me that if we do have global uniformity, then that obviates 
the need for extraterritoriality in our regulations in the 
first place. And second, with respect to margin requirements of 
end users, as we all know, that can be very disruptive for the 
ability of the end user to hedge risks and, therefore, very 
problematic, and essentially, at the end of the day, it is a 
credit decision that presumably the banking entities are 
qualified to make, so----
    Mr. Gensler. Could I just, Senator Toomey, at least in what 
we have proposed at the CFTC, the nonbank swap dealers would 
not be required to collect or receive margin from the 
nonfinancial end users, the commercial companies.
    Senator Toomey. OK. Great. Thank you. Thank you, Mr. 
Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you to all 
the panel.
    You know, news reports came out this week from the 
Associated Press and Reuters that allege that despite the 
regulators' assurances to us that the banks' illegal robo-
signing was being fixed, the practice is still widespread, that 
it is still going on for both foreclosed homes and also for 
homes that are not in foreclosure, which basically amounts to 
forging documents and in some cases wrongfully foreclosing on 
people, which is why I and 10 of my colleagues, including 
several Members of this Committee, and a dozen House members, 
as well, have written to the OCC, the Federal Reserve, and the 
FDIC urging you that you make the foreclosure reviews and other 
foreclosure-related documents fully transparent and that you 
release the results of those reviews on a bank-by-bank basis so 
the public can evaluate the performance of each bank.
    There is a tremendous interest in the public seeing these 
problems properly resolved, so I want to ask those three 
agencies--the Fed, the FDIC, and the OCC will you release the 
results of the foreclosure reviews on a bank-by-bank basis? 
Will you release the mortgage servicers' action plans that 
respond to problems in the consent orders? And what about the 
engagement letters for the supposedly, quote-unquote, 
``independent'' consultants who are hired by the banks 
themselves to perform the foreclosure reviews of the banks?
    Mr. Bernanke. Well, Senator, we are as concerned about 
these issues as you are. As you know, we have issued cease and 
desist orders. We have told the banks that they have to engage 
independent consultants and we have been making sure that they 
are independent. They will be providing both supplementary 
diagnosis over and above the work we have done as well as 
action plans for the banks. And we will be both reviewing those 
action plans and the conformity of the banks to those plans.
    Our current plan is to provide a report that we will share 
with you that will explain what the findings were and what the 
proposals were and what the reactions were and the performance 
by the banks----
    Senator Menendez. But you are not--but, Mr. Chairman, I 
hate to interrupt you, but I only have less than 5 minutes. You 
are not going to--I have a specific question. Are you going to 
release those three entities that I have asked you?
    Mr. Bernanke. May I consult further with my legal and 
supervisory teams and get back to you on that?
    Senator Menendez. Surely. How about the other two agencies?
    Mr. Walsh. Senator, we will certainly be, as Chairman 
Bernanke indicates, releasing more information and the----
    Senator Menendez. I have a very--I hate to interrupt you--
--
    Mr. Walsh. Right.
    Senator Menendez.----but I have a very specific question 
and I do not want to be played with. Are you going to release 
the mortgage servicers' action plans that respond to the 
consent orders? Are you going to release the foreclosure 
reviews on a bank-by-bank basis? And are you going to release 
the engagement letters for the supposedly independent 
consultants? It is either yes or no.
    Mr. Walsh. We will have to evaluate the individual 
documents----
    Senator Menendez. OK.
    Mr. Walsh.----and see if there is anything that would be of 
a confidential supervisory nature, but certainly we will be 
releasing some information.
    Mr. Gruenberg. Senator, the FDIC is actually not the 
regulator of any of the servicers, so it is not something 
within our authority to make that decision.
    Senator Menendez. Well, let me just say, I hope you 
understand--I have the privilege of chairing the Housing 
Subcommittee here and I hope you understand it is incredibly 
difficult to create public trust that the companies hired by 
the banks to perform the foreclosure reviews, and those 
companies were the same companies who are already doing 
business with those banks and may get future business. I hope 
you have a little understanding that the public trust as 
regulators, when you are assuring us that the problem of the 
banks illegally forging documents to foreclose on homes more 
easily has been fixed when news reports allege that the problem 
has not been fixed and is still widespread.
    I am going to share with you the Congressional Research 
Service analysis that I asked for to see if you had the legal 
wherewithal to do this, because I figured I would get that as 
an answer, and their answer is, to synthesize it, is that our 
request, the regulators have the discretion to release the 
results on a bank-by-bank basis if they feel it is in the 
public interest and point out they can surely come to some 
middle ground when they release a report with high-level bank-
by-bank results, like a HAMP report, while still redacting loan 
level information that would be confidential to banks.
    You know, rarely around here do we get 10 members of the 
Senate to focus on a specific request for information, a dozen 
members or so of the House of Representatives. I think we need 
a little transparency in this process. If Dodd-Frank is about 
anything, at the end of the day, it is about taking and 
creating transparency and a new era of transparency and 
openness, and I am going to be like a dog on a bone on this. So 
I hope we get some good answers here, because otherwise, I am 
going to use every means possible, along with my colleagues, to 
get to the bottom of this.
    It is not acceptable--it is not acceptable--to violate the 
law. It is not acceptable to do robo-signings. There is a clear 
reason why the law dictates a procedure before you take over 
someone's most cherished, probably their biggest asset in their 
life, and that is not being pursued correctly. And the agencies 
that are responsible for that give us assurances that it is, 
and yet public reports constantly suggest that it is not. So I 
am looking forward to your responses.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Kirk.
    Senator Kirk. Thank you, Mr. Chairman, and once again, 
congratulations on your 97-to-2 win yesterday on the military 
VA bill.
    Chairman Johnson. It was teamwork.
    Senator Kirk. That is right.
    I want to focus on systemic risk, a central concept behind 
the legislation, because I am worried that while much of the 
crisis that the American people suffered from was triggered by 
Fannie Mae and Freddie Mac, in my view, because it was loaded 
with politically connected lawyers and lobbyists, the Congress 
did not reform it. The institutions pretty much with the same 
cast of rogues is still running it, even though it was 
triggered, and you guys were not allowed to touch them.
    I am worried that, so often, the Government is slow, dead, 
uninnovative, as opposed to the private sector. And also, you 
guys are politically controlled by us, by the White House, and 
not allowed to look at new risks.
    One of the risks that I am worried about is the Government 
Accounting Standards Board recently proposed that Government 
entities be required to fully disclose unfunded liabilities 
that they face, particularly with regard to promised pension 
obligations. In 2009, the Pew Center for the States published a 
trillion-dollar gap report outlining 21 States that had pension 
obligations funded at less than the 80 percent actuarial sound 
requirement that GASBI recommended. Now, this would be totally 
unacceptable for the public corporations that you are allowed 
to torture, and I am wondering, because systemic risk is now 
out there, for Mary, under Dodd-Frank and the Municipal 
Investment Act advisors that you have, would the SEC now be 
recommending that municipal debt issuers conform to the GASBI 
requirement?
    Ms. Schapiro. Senator, I would want to make sure I am on 
strong legal ground here, but let me just say that we have 
brought some enforcement cases, as you know----
    Senator Kirk. To New Jersey and Illinois, where you 
basically alleged that they were lying to their investors about 
their----
    Ms. Schapiro. New Jersey so far.
    Senator Kirk. Right.
    Ms. Schapiro. There are a number of others that are still 
under investigation with respect to the adequacy of their 
disclosure while they were doing bond issuances. So we have 
approached it that way. We do not have the authority, although 
we are preparing a report for Congress to discuss a number of 
these issues, to mandate particular disclosure requirements for 
municipal issuers.
    And you may know that we have been holding a series of 
roundtables around the country to gather thoughts of 
municipalities, Government finance officers, investors, and 
others to talk about how we might strengthen the municipal 
disclosure system, among other things. We are actually having a 
hearing in Birmingham, Alabama, next week, the home of 
Jefferson County, as we continue to work on these issues. I 
think GASB took a very important step with respect to their 
proposal for disclosure of unfunded pension liabilities, but, 
of course, not everybody is required, as you point out, to 
utilize GASB GAAP.
    Senator Kirk. Right. Thank you. I would just hope you would 
use your systemic risk authority, because I think that is your 
big ``get out of jail free'' card, to look at threats to the 
U.S. financial system, and I am worried that States are so 
powerful and so politically connected, you will hold back.
    Ms. Schapiro. We will not hold back, but----
    Senator Kirk. I am worried.
    Second, another central concept behind Dodd-Frank would be 
too-big-to-fail, and yet what we have seen from 2008 to 2010 is 
in 2008, the top 10 banks held 48 percent of all domestic 
banking assets, and in 2010, while the number of banks fell by 
3 percent, the top 10 banks' share had grown to 53 percent. 
That is Bank of America, JPMorgan Chase, CitiBank, Wells Fargo, 
U.S. Bank, PNC, FIA Card Service, Bank of New York Mellon, HSBC 
Bank USA, and TD Bank. So they are now even bigger and less 
capable of failing than they were before Dodd-Frank. Chairman 
Bernanke, what can we do about that?
    Mr. Bernanke. Senator, you make an obviously important 
observation. Some of the increase in concentration in the last 
few years was a byproduct of the events of the crisis. Several 
medium-sized firms disappeared, some others were acquired, et 
cetera. So it is not necessarily a trend that we are seeing 
here.
    There are a number of aspects of Dodd-Frank which help 
address too-big-to-fail. Directly, there is the Volcker 
concentration rule, for example. There is the authority of the 
Fed not to approve a merger if there are financial stability 
concerns.
    But I think the main issues here are that we are going to 
have much tighter oversight and prudential regulations over so-
called SIFIs, and one thing we have noticed is that banks and 
other institutions do not want to be SIFIs. They consider it to 
be this additional burden, an oversight to constrain them. And 
if it was truly a mark of too-big-to-fail, they might prefer to 
be designated as SIFIs.
    The other thing which I think is absolutely crucial, and it 
is still a work in progress, in order to get rid of too-big-to-
fail, we have to have ``fail.'' We have to have a way for the 
biggest firms actually to fail. And you have heard some 
discussion this morning about the Fed's and FDIC's work on the 
orderly liquidation authority, living wills, et cetera. I think 
it will be a sign of success when we see large firms actually 
getting themselves smaller to try to get out of some of the 
oversight, and if we see the costs of funding increasing 
because the backstop of the Government is not there. We are not 
there yet, but I do note that some of the rating agencies have 
been talking about downgrading large banks based on the 
possible absence of Government support in a crisis.
    So we are not there yet. I think we absolutely must get 
there, and there are many aspects of Dodd-Frank which, if 
carried to their fruition will help us get rid of too-big-to-
fail.
    Senator Kirk. Mr. Chairman, thank you.
    Chairman Johnson. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman. I want to 
add my welcome to the panel of regulators for our country.
    Chairman Schapiro, good to see you again. The Dodd-Frank 
Act creates the Office of Investor Advocate and it 
reestablishes the Investor Advisory Committee. I urge you to 
continue working to get this office and committee up and 
running. My question to you is what will be done to ensure that 
the past efforts of the first Investor Advisory Committee will 
inform and support the work of the Investor Advocate and the 
reestablished Advisory Committee.
    Ms. Schapiro. Thank you, Senator. We are working now to 
create the new Investor Advisory Committee, having disbanded 
the prior one so that the new committee could meet the 
statutory standards. I expect there will be some overlap in 
committee members, so that will give us a certain amount of 
continuity. Of course, the new committee will be fully briefed 
on all the activities of the prior committee. The staff support 
for the new committee will be largely the same as the staff 
support was for the prior committee. So I think that we should 
not have any--we should not miss a beat in terms of 
transitioning to our new Advisory Committee.
    What we will not have yet is the new Investor Advocate 
Office in place. We have sought reprogramming from our 
appropriators for that. We received the Senate's authorization 
for reprogramming just within the last week, so we are now 
waiting for the House. Once they have authorized it, we can go 
ahead and establish formally the Office of the Investor 
Advocate and appoint a person to that position.
    But I want to assure you that in the interim, all of the 
activities that would be engaged in by the Investor Advocate 
are being carried out by other staff throughout the SEC. We 
think of ourselves all as investor advocates, so that work is 
ongoing.
    Senator Akaka. Thank you very much.
    Mr. Wolin, one important aspect of consumer protection that 
is sometimes overlooked is financial empowerment. Through Title 
XII of the Dodd-Frank Act, we ensured that the viable 
alternatives to high-cost products and services are developed 
while protections and oversight are strengthened. Would you 
please update us on the Treasury's initiatives to improve 
access to mainstream financial institutions and services.
    Mr. Wolin. Senator Akaka, thank you for that question and 
for your leadership on these critical issues. From our 
perspective, the financial access provisions of Dodd-Frank are 
critical and these are issues that we are spending a lot of 
time working on. We are busy continuing to develop the 
infrastructure for our efforts to support community-based 
efforts at financial access.
    We have been working hard at putting together a program 
called Bank On USA, which allows us to work with communities to 
develop programs that will enable access in the communities 
tailored to the particular circumstances in each of those 
places. Our efforts on this will, of course, require some 
resources which we have requested and we hope we receive 
because we think we have, on the basis of Title XII and of work 
that we have been doing in response, an awful lot of exciting 
things that we can be doing.
    I think, Senator, in addition, you will see in short order 
from us a further public expression of how we intend to 
organize and structure our Office of Financial Education and 
Financial Access, an important office within the Office of the 
Assistant Secretary for Financial Institutions that will be 
focused on the Bank On program, but also other efforts in the 
context of Title XII to continue our work on these critical 
issues.
    Senator Akaka. Mr. Gruenberg, I have a related question for 
you, but first, I would like to congratulate you on your 
nomination. The FDIC has been a leader in working to improve 
financial access among the unbanked and under-banked. Please 
explain whether or not you believe that financial inclusion is 
a component of consumer protection, and what more can be done 
by the FDIC in this area.
    Mr. Gruenberg. Thank you, Senator. The issue of financial 
inclusion has been a significant priority for the FDIC, both 
under former Chairman Bair and myself. We established a number 
of years ago an advisory committee on financial inclusion made 
up of community leaders, financial institutions, academics, to 
focus on this issue.
    As a starting point, if I may mention, the FDIC partnered 
with the Census Bureau on the first national survey ever 
undertaken by the Census on who is unbanked and under-banked in 
the United States, just to get a handle on the dimensions of 
the issue, and the findings of the survey were quite revealing. 
It found that about 7 percent of U.S. households have no 
relationship with an insured financial institution and nearly 
another 18 percent may have an account but utilize high-cost 
nonbank providers of financial services, such as payday lenders 
and check cashers. Taken together, the survey found that about 
a quarter of U.S. households can be defined as unbanked or 
under-banked.
    So it is a substantial issue and it is a critical component 
both of consumer protection and of economic opportunity. Having 
an account at an insured institution is really, in many ways, a 
starting point for economic citizenship, to be able to develop 
a credit record, build savings, and really become a participant 
in our economy, and it has been a major priority for us. We 
have undertaken a number of initiatives in this area, including 
organizing a series of local partnerships around the country of 
financial institutions, community organizations, local 
government leaders to develop local strategies for expanding 
access to insured financial institutions. We have also 
developed model transaction and savings accounts to encourage 
financial institutions to provide low-cost services that are 
particularly suited to the needs of the unbanked.
    This has been a matter of ongoing attention to us and will 
certainly be a priority going forward.
    Senator Akaka. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Johnson. Thanks again to my colleagues and our 
panelists for being here today. This hearing and the investor 
and consumer protection hearings we have held over the past 2 
weeks highlight the need for an enhanced regulatory framework 
after the financial crisis. As I have said before, there is 
still work ahead of us, but we are making progress and it is 
important that we all get this right.
    The hearing record will be open for 7 days for Members to 
submit additional materials and questions for the record.
    This hearing is adjourned.
    [Whereupon, at 12 noon, the Committee was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

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 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM NEAL S. 
                             WOLIN

Q.1.a. A number of studies that purport to examine the tradeoff 
between increased bank capital and economic growth have been 
conducted by bankers, regulators, and academics. Some of these 
studies argue that increasing bank capital standards will 
result in substantially lower economic growth. Others argue 
that the tradeoffs are very small, and some argue that there is 
no tradeoff.
    Do we face a tradeoff between increased bank capital and 
economic growth?

A.1.a. There is a potential tradeoff between higher bank 
capital requirements and economic growth. In making 
determinations regarding appropriate capital levels, it is 
critical to strike a careful balance. Treasury has advocated 
imposing heightened capital requirements to help ensure that 
the U.S. banking system is more stable and resilient. These 
requirements must be designed to allow institutions to absorb 
losses comparable to what the U.S. and other countries faced at 
the peak of the recent financial crisis, and still be able to 
operate without special Government support.
    But while capital requirements must be high enough to 
provide strong cushions against loss, Treasury also believes 
that setting capital requirements too high could threaten the 
ability of banks to provide credit to households and 
businesses, or could drive the reemergence of risky shadow 
banking systems. Furthermore, it is important that banks be 
allowed to raise capital over an appropriate period so that 
they can continue to perform their essential function of 
providing credit to households and businesses.
    It is also appropriate for regulators setting capital 
requirements to consider the prudential effects of other 
important reforms, including those required by the Dodd-Frank 
Act. Among these other reforms are the new liquidity 
requirements, limits on leverage, concentration limits, 
activity restrictions, margin rules for derivatives, the 
stronger financial cushions being built in central 
counterparties, and greater transparency requirements.

Q.1.b. Which specific studies led you to that conclusion?

A.1.b. There is a rich and varied literature on the potential 
tradeoff between capital requirements and economic growth, and 
the views set out above do not rely on any one study.

Q.1.c. Several prominent academics have argued that banks could 
be required to maintain equity capital ratios as high as 15 
percent, or even 25 percent, of total assets (not risk-weighted 
assets) without adversely affecting economic growth. Do you 
agree with them? Please explain.

A.1.c. The Federal Reserve Board and other financial regulators 
have worked through the FSB and Basel Committee to put forward 
capital standards under Basel III that achieve a proper 
balance--creating stronger cushions against loss, but not so 
high that they could threaten the ability of banks to provide 
credit to households and businesses, or could cause the re-
emergence of risky shadow banking systems.
    These new Basel III standards include a core solvency ratio 
(Tier 1 and Tier 2) of percent; a minimum requirement of 4.5 
percent of common equity, and a 2.5 percent common equity 
capital conservation buffer. Further, countries may impose a 
countercyclical capital buffer ranging from 0 percent to 2.5 
percent of common equity, according to national circumstances.
    The Basel Committee on Banking Supervision in September 
also issued a final capital surcharge framework for globally 
important banking organizations (G-SIBs), which was endorsed by 
the Financial Stability Board in October and the G-20 at its 
Cannes meeting on November 4th. Under the designation criteria 
of the framework, G-SIBs are required to hold supplemental 
buffers of common equity in addition to the minimum Basel III 
requirements, ranging from 1 percent to 2.5 percent depending 
on the systemic risk posed by a banking organization.
    We believe these new standards are appropriate and will 
provide stronger buffers against financial shocks. It also 
important that they be applied consistently across 
jurisdictions and we are working to ensure comparable 
implementation standards.

Q.2. Along with the FHFA and HUD, each of you had a hand in 
writing the proposed risk retention rule. Dodd-Frank exempted 
FHA-insured loans from these risk retention requirements. 
However, the proposed QRM section of the rule does not exempt 
loans insured by private mortgage insurance.
    As private mortgage insurance and FHA are sometimes direct 
competitors, are any of you concerned that Dodd-Frank's risk 
retention requirements may shift more business toward FHA at a 
time when many experts believe that it should be trying to 
reduce its market share?

A.2. Although the Secretary of the Treasury, as Chairman of the 
Financial Stability Oversight Council (Council), is charged 
with coordinating the Dodd-Frank Section 941 risk retention 
rule, Treasury is not a rule writer. The joint rule writers are 
the FDIC, SEC, OCC, Federal Reserve Board, HUD, and FHFA.
    The Notice of Proposed Rulemaking (NPR) was released in 
March 2011 and the comment period closed on August 1, 2011. The 
rule writers currently are considering the comments received.
    Treasury agrees that a reduced Government role is important 
for the future of the housing finance system. We want to make 
sure that when the rule is finished, that the private market 
plays a critical role. In coordinating the agencies' writing of 
a final rule, Treasury will work to ensure that the role of the 
private market is carefully considered.

Q.3. Over a month ago, the Inspectors General from each of your 
agencies released reports that deepened my concern your 
agencies are not undertaking the type of economic analysis that 
is necessary to reveal how Dodd-Frank will affect our economy.
A.3. What specific steps have each of you taken, in response to 
the IG reports, to improve the amount and type of analysis that 
your agencies are conducting in implementing Dodd-Frank?
    Treasury's Office of Inspector General (OIG) issued a 
report on June 13, 2011, regarding economic analysis by the 
Office of the Comptroller of the Currency (OCC) related to 
rulemakings in order to implement the Dodd-Frank Act. The 
Treasury OIG concluded that the OCC has processes in place to 
ensure that required economic analyses are performed 
consistently and with rigor in connection to its rulemaking 
authority.
    The Treasury OIG recommended that the OCC: (1) develop 
procedures to ensure the coordination between the groups 
calculating administrative burden for various analyses and (2) 
update internal guidance to reflect the current statutory 
environment governing the rulemaking and related economic 
analysis processes, and develop related written procedures. The 
OCC has implemented these new enhancements to its rulemaking 
procedures including the related economic analysis.
    The Treasury Secretary also has encouraged Financial 
Stability Oversight Council (Council) members to adopt the 
principles and guidelines set forth in the President's 
Executive Order 13563 of January 18, 2011, ``Improving 
Regulation and Regulatory Review.'' Although the Executive 
Order does not apply to independent regulatory agencies, the 
Secretary encouraged all Council member agencies to adopt the 
principles and guidelines it sets forth. In addition, on July 
11, 2011, the President signed Executive Order 13579, asking 
the independent regulatory agencies, to the extent permitted by 
law, to follow the cost-saving, burden-reducing principles in 
Executive Order 13563. These priorities and guidelines can help 
strike the right regulatory balance: helping to ensure 
regulations improve the performance of our economy and protect 
consumers and investors, without imposing undue costs on 
society.

Q.4. Secretary Wolin, in a recent speech by your colleague 
Assistant Secretary Mary Miller, she mentioned that the 
Financial Stability Oversight Council is coordinating Dodd-
Frank rule-writing across agencies.
    Does the Council's coordination of agency rulemaking 
include attempting to understand the cumulative costs of all 
the Dodd-Frank rules? If so, how is this being done? If it is 
not being done, why not?

A.4. The Administration has stressed the importance of 
regulations that strike the right balance between a financial 
system that is safer and more resilient and one that is 
innovative and dynamic.
    The Administration is leading a Governmentwide effort to 
streamline, simplify, and review the costs and benefits of new 
and existing regulations. For example, in January, the 
President issued an Executive Order directing executive 
agencies to develop a plan to streamline regulations. In June, 
Secretary Geithner wrote a memo to members of the Council, 
encouraging the members that are independent agencies to adopt 
the principles and guidelines of the President's Executive 
Order. And in July, the President encouraged all independent 
regulatory agencies, to the extent permitted by law, to follow 
the key provisions of his January Executive Order.
    The Council does not conduct cost-benefit analyses on rules 
proposed by independent rulemaking agencies. However, Treasury 
believes that it is important for agencies to consider the 
economic effects of significant rulemakings. Analyzing new 
regulations' costs and benefits, both in terms of individual 
rules and rules in aggregate, is an important part of getting 
the balance right. Because not all the costs and benefits of 
potential regulations may be quantified with precision, 
agencies must retain the ability to balance quantitative and 
qualitative factors as they implement their statutory 
obligations under the Dodd-Frank Act.

Q.5. Secretary Wolin, in a Politico op-ed earlier this month, 
you stated that ``For years, regulators in Washington failed to 
make use of their authority to protect the system.''

   Which regulators failed to properly use their 
        authority to prevent the financial crisis?

   What action has the Administration taken to hold 
        these regulators accountable for their failures?
A.5. In the years leading up to the financial crisis, 
regulators failed to use fully the authority they had both to 
constrain risk in the financial system and to protect 
consumers. Moreover, in critical areas there were significant 
gaps in legal authority to set standards or respond to a 
financial shock. Because of these factors, excessive risk 
taking and harmful practices in consumer lending by financial 
companies, which were central to the financial crisis, were not 
effectively monitored or prevented.
    While Federal regulators had authority to better monitor 
risk taking by large financial institutions, no regulator had 
authority to comprehensively regulate the over-the-counter 
derivatives markets, or to impose tough prudential standards on 
companies like Lehman Brothers or AIG's Financial Products 
unit. Before Dodd-Frank, each financial regulator had authority 
to oversee particular institutions and markets, but regulators 
did not have an effective forum to work together to understand 
issues such as the risks in the securitization of subprime 
mortgages, which cut across multiple agencies' jurisdictions. 
The Financial Stability Oversight Council, which was created by 
Dodd-Frank, provides the financial regulators with a forum to 
coordinate across agencies and instill joint accountability for 
the strength of the financial system.
    Similarly, prior to the passage of Dodd-Frank, seven 
different Federal agencies had responsibility for Federal 
consumer financial protection. Increasing accountability by 
consolidating authority for consumer financial protection is 
one of the reasons for creating the Consumer Financial 
Protection Bureau. Consumer financial protection had not been 
the primary focus of any Federal agency, and no agency had 
effective tools to set the rules for and oversee the whole 
market. The supervisory framework for enforcing consumer 
protection regulations had significant gaps and weaknesses and 
generally did not cover as well as it should have the nonbank 
financial companies that make up a significant segment of the 
consumer finance market.
    The Administration has taken important, concrete actions to 
address regulatory accountability. Most notably, the 
Administration worked with Congress to enact the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, which reformed 
the supervisory framework by:

   Establishing and supporting the Financial Stability 
        Oversight Council, which enables unprecedented 
        coordination between regulators and has responsibility 
        to identify gaps in regulation that could pose risks to 
        the financial stability of the United States;

   Establishing consolidated prudential supervision of 
        federally chartered depository institutions and 
        supporting the transfer of the prudential 
        responsibilities from the Office of Thrift Supervision 
        to the Office of the Comptroller of the Currency; and

   Establishing and supporting the Consumer Financial 
        Protection Bureau, with the authority and 
        accountability to ensure that Federal consumer 
        financial protection regulations are written fairly and 
        enforced vigorously.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM NEAL S. 
                             WOLIN

Q.1. The SEC proxy access rule is the first Dodd-Frank rule 
that has been successfully challenged in the courts for failing 
to adequately analyze its economic costs and benefits. In the 
unanimous decision to vacate the rule, U.S. Circuit Judge 
Douglas Ginsburg wrote:

        The commission inconsistently and opportunistically framed the 
        costs and benefits of the rule; failed adequately to quantify 
        the certain costs or to explain why those costs could not be 
        quantified; neglected to support its predictive judgments; 
        contradicted itself; and failed to respond to substantial 
        problems raised by commenters.

How do you intend to ensure that the rules that your agency 
adopts under Dodd-Frank are supported by rigorous economic 
analysis?

A.1. Unlike the primary Federal banking and market regulators, 
Treasury has a very limited rulemaking role under the Dodd-
Frank Act. However, Treasury believes that it is important for 
Federal rulemaking agencies to consider the economic 
consequences of significant rulemakings. To that end, Treasury 
has a demonstrated history of compliance with applicable 
Federal requirements to consider the costs and benefits 
relating to significant rulemakings. Treasury is subject to the 
requirements of Executive Order 12866, which among other 
things, sets forth principles for Federal agency rulemaking, 
including that Federal agencies assess both the costs and the 
benefits of an intended regulation and, recognizing that some 
costs and benefits are difficult to quantify, propose or adopt 
regulation only upon a reasoned determination that the benefits 
of the intended regulation justify its costs. Treasury also 
complies with the requirements of the Regulatory Flexibility 
Act, under which it considers the economic impact of rules on 
small entities. Finally, Treasury is subject to the President's 
January 18, 2011, Executive Order entitled ``Improving 
Regulation and Regulatory Review'' that reemphasizes the 
principles of cost-benefit analysis, which the Office of 
Management and Budget applies as part of its review process.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM NEAL S. 
                             WOLIN

Q.1. I understand that the International Association of 
Insurance Supervisors (IAIS) has submitted questions to certain 
insurance companies in order to determine whether to designate 
them as G-SIFIs. Many U.S. insurers are concerned about the 
IAIS process, including confidentiality and their authority to 
demand such data. What is the United States position on the 
IAIS process, and how does the IAIS process fit within the FSOC 
process which also is charged with designating SIFIs? How will 
you ensure there are not duplicative or even inconsistent 
requests for data and designations?

A.1. Treasury is working to ensure that the international 
process around designations of systemically important insurance 
institutions (G-SIII) does not disadvantage U.S.-based 
insurance companies. To that end, the Federal Insurance Office 
(FIO) is participating in the IAIS to help develop a consensus 
approach with respect to the designation process and 
methodology that meets the goals of consistency and alignment 
between domestic and international designation processes. As 
part of this process, FIO is working to ensure data 
confidentiality at both the domestic and international levels. 
Also, FIO will help streamline data requests by working with 
domestic regulators and coordinating future international 
efforts to collect data from U.S.-based insurers.

Q.2.a. The Office of Financial Research (OFR) along with FSOC 
member agencies will have access to significant amounts of 
proprietary and other sensitive information about financial 
institutions.
    How do you plan to protect that information from 
unauthorized disclosures, leaks, hacking or someone who is 
trying to steal the data for competitive purposes?

A.2.a. The Office of Financial Research (OFR) is developing 
robust plans to protect information and data.
    First, the OFR uses the best available information 
technology security processes for protecting against 
unauthorized access to information through hacking, malware or 
other cyber-attacks.

  1. The OFR builds on existing, secure IT infrastructure. We 
        follow the National Institute for Standards and 
        Technologies' standards required for high 
        confidentiality, high integrity and high availability.

  2. In the future, the Office of Financial Research's 
        information security architecture will allow IT/Data 
        security personnel to customize access to data 
        consistent with their sensitivity.

  3. At the individual level, OFR laptops are protected from 
        accidental or intentional tampering. Users do not have 
        administrative rights and all updates and changes are 
        reviewed by IT security. Office of Financial Research 
        email and system access is monitored at multiple 
        levels. These controls are commonly audited as part of 
        Treasury's normal acquisition processes, and a 
        maintenance audit takes place at a minimum once a year.

    Second, the OFR will strictly limit the scope of data and 
information collected to those needed to fulfill its mission.
    Third, the OFR is working with FSOC member agencies to 
develop procedures and protocols to share data appropriately 
while limiting distribution to those who require it. Authorized 
participants in unique access programs or institutional 
agreements will be trained to manage the data at the level of 
confidentiality required by the originating agency. The OFR 
will avoid retaining records or allowing access beyond the 
mission needs for timely analysis, audits, evidentiary 
purposes, and in order to comply with records requirements.
    Finally, post-employment restrictions will reinforce the 
OFR's security processes. No employee of the OFR who has had 
access to particularly sensitive data maintained by the OFR 
about financial entities required to report to the OFR may be 
employed by or provide advice or consulting services to a 
financial company for a period of 1 year after possessing 
access to such data or business confidential information. For 
employees whose access to confidential business information was 
sufficiently limited, the regulations may provide, on a case-
by-case basis, for a shorter period of postemployment 
prohibition.

Q.2.b. What processes are you developing to govern who has 
access to information, under what circumstances it will be 
shared and penalties for unauthorized disclosures?

A.2.b. A robust, complete and mature data management discipline 
lies at the core of the OFR Operational Plan and will provide 
the backbone for its access policies. Data management is 
multifaceted. Proper enterprise data management entails 
establishing and implementing proper policies and procedures 
that address data through the entire data lifecycle--from 
acquisition to processing, storage, maintenance, validation, 
and finally access and distribution.
    The framework for the governance of sensitive data at the 
OFR has several aspects:

   Proper identification of sources,

   Understanding the technical and business processes 
        by which this information will be captured,

   Understanding the quality of these data and 
        ensuring that information is properly ``labeled'' with 
        correct and complete metadata that describes the data,

   Storing this data in an appropriate technology 
        platform built to highest possible industry 
        specifications regarding controlled access, and

   Defining the policies and procedures of 
        entitlements--the business processes that define who in 
        the community of the OFR can have access to data and 
        through what authority, and how appropriate access can 
        be made available to the designated oversight 
        authorities.

    Further, OFR governance processes will provide for 
requirements-based and role-defined access to data. Gates will 
be established at multiple levels, with associated audit 
trails.
    The OFR will also collaborate with other FSOC members in 
establishing a governance framework for sharing financial 
information. That information sharing will be facilitated in 
part by the OFR efforts to standardize types and formats of 
data. The OFR is also exploring employing a data management 
maturity model to demonstrate its adherence to best practices 
in information management and to encourage best practices in 
other financial agencies.
    The Office of Financial Research will refer suspected 
misuse of confidential information, bank secrecy information, 
credit information, or otherwise privileged information to 
Treasury's Office of the Inspector General. The OFR will also 
refer information related to gaining or providing unauthorized 
access to protected data to Treasury's Office of the Inspector 
General.

Q.2.c. What processes are in place now to protect systemic risk 
information that the SEC and CFTC have proposed to begin 
collecting early next year?

A.2.c. The SEC and CFTC are member agencies of the Financial 
Stability Oversight Council. In that capacity, the OFR will 
collaborate with the SEC and CFTC on data issues, including 
newly collected systemic risk information, where appropriate. 
Such information would be subject to the OFR data security and 
governance processes described above.

Q.3. I am concerned that U.S. institutions will bear a 
significant competitive burden vis-a-vis their foreign 
competitors. While U.S. commercial banks will be subject to the 
full weight of Dodd-Frank's heightened prudential standards and 
new systemic resolution regimes, large overseas competitors 
will be subject only to a systemic capital surcharge (sometimes 
called a G-SIFI or G-SIB surcharge) and the new Basel III 
capital requirements (both of which U.S. institutions will also 
have to meet).
    How have U.S. regulators accounted for the competitive 
impact of our heightened domestic requirements for U.S. banks 
when they negotiated the recent G-SIFI surcharge with foreign 
regulators?

A.3. Treasury and U.S. financial regulators are working through 
international forums, such as the Basel Committee and Financial 
Stability Board (FSB), to build a global regulatory framework 
to ensure a level playing field. Recently, the FSB agreed on 
systemic capital surcharges for large banks that will help 
ensure additional loss absorbency requirements will be 
implemented fairly and evenly across institutions.
    U.S. banking regulators are developing enhanced prudential 
standards for U.S. financial institutions that will take into 
account Basel III capital rules and their implications for 
domestic firms. In addition, Treasury and financial regulators 
have worked through international fora to develop standards for 
resolution regimes, similar to our own, to be applied globally. 
These efforts will help ensure an internationally level playing 
field for U.S. firms.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM BEN S. 
                            BERNANKE

Q.1. Chairman Bernanke, at the hearing I asked you about the 
Inspector General's claim that the Federal Reserve Board is 
using an antiquated methodology for conducting its cost benefit 
analysis. You stated that you did not believe that to be 
correct. On June 13, 2011, the Office of Inspector General, in 
its Response to a Congressional Request Regarding the Economic 
Analysis Associated with Specified Rulemakings, included a 
recommendation ``that the Board update the Rulemaking 
Procedures Policy Statement and broadly disseminate it to all 
employees involved in rulemaking activities.'' This 
recommendation stemmed from the Inspector General's finding 
that the only written policy related to economic analysis in 
Board rulemaking is more than 30 years old. If there is a more 
recent policy governing economic analysis in Board rulemaking, 
please provide it. If there is not a more current policy, do 
you agree that the Board should update its policy to reflect 
developments in the past three decades, including the 
President's recent executive orders with respect to economic 
analysis?

A.1. The IG's report included a positive review of our 
rulemaking activities. For example, the report notes that ``the 
Board conducts the economic analysis required by statute and 
the discretionary economic analysis necessary to support 
rulemaking.''\1\ The IG's discussion of the qualitative and 
quantitative methodologies the Board employs in rulemaking was 
also generally positive.\2\
---------------------------------------------------------------------------
    \1\ Response to a Congressional Request Regarding the Economic 
Analysis Associated with Specified Rulemakings, Office of Inspector 
General, Federal Reserve Board, June 2011, p. 18. See also, p. 15.
    \2\ Id., at 14-17, (questions 7A and 7B).
---------------------------------------------------------------------------
    The Board has long been committed to considering the costs 
and benefits of its rulemaking efforts and the policies 
incorporated in the Board's Rulemaking Policy Statement reflect 
both that longstanding commitment and the principles recently 
enumerated in Executive Order 13563, issued on January 18, 
2011. For example, like our guidance, the new Executive Order 
emphasizes the importance of public participation in the rule 
writing process, and a preference for allowing 60 days of 
public comment for proposed rules. Like our guidance, the new 
Executive Order also seeks to promote coordination among 
agencies, the reduction of regulatory burdens and an active 
consideration of alternatives. And like our guidance, the new 
Executive Order calls for retrospective, periodic review of 
existing regulations. Like the Executive Order, the Board's 
policy does not incorporate a specific formulaic approach to 
computing costs and benefits, and expects that methods used to 
determine costs and benefits will reflect the technologies and 
data available at the time.
    The Board also recognizes that its policies can be 
improved. In keeping with the IG report, the Board will 
consider expanding its written procedures to include a 
documentation standard, and to provide more explanation 
regarding the Board's philosophy and principles supporting our 
rulemaking activities and our preferred practices. We have 
begun to review the guidance with this suggestion in mind, will 
revise it if necessary, and disseminate it to all staff 
involved in rule writing.

Q.2. Some analysts have suggested that the availability of 
mortgage credit is likely to be restricted as a result of Dodd-
Frank. Specifically, they point to the interaction of laws and 
regulations such as the new Qualified Residential Mortgage 
(QRM) and Qualified Mortgage (QM), as well as changes to the 
Home Ownership Equity Protection Act (HOPEA) triggers. Are any 
of you concerned about how these regulations may adversely 
impact the availability of credit? If so, can these 
difficulties be handled administratively, or do they require 
legislative solutions?

A.2. Several provisions of the Dodd-Frank Act are intended to 
ensure that mortgage markets are sustainable and avoid the 
excesses and misaligned incentives that led to the housing and 
mortgage market difficulties that have been experienced over 
the past few years. In particular, the risk retention 
requirement, the ability-to-pay standards at the core of the 
definition of a Qualified Mortgage (QM), and the changes in the 
triggers that are established for the Home Ownership Equity 
Protection Act (HOEPA) seek to address some of the problems in 
lending practices that contributed to the financial crisis and 
the severe downturn in the housing and mortgage markets.
    Addressing incentive problems in these markets and 
establishing rules to ensure lenders carefully consider a 
borrower's ability-to-pay in extending credit are two important 
goals of the Qualified Residential Mortgage (QRM) and QM 
rulemakings. Ensuring access to credit to well-qualified 
applicants is also an essential consideration in these 
rulemakings. Under the current statutory framework, the Board 
and a number of other agencies must jointly define the QRM 
triggers, and the Consumer Financial Protection Bureau (CFPB) 
must define QM.
    When developing regulations that may impact mortgage 
lending, the Board routinely considers the potential for unduly 
constraining credit supply to qualified borrowers, including 
through regulation. The Board also routinely asks for comment 
on the extent that proposed mortgage regulations would 
constrain credit supply or increase costs for borrowers.
    The Board is currently reviewing comments received on the 
proposal to implement QRM. There are various issues involved in 
developing the definition of QRM and the Board will carefully 
consider feedback from the public as the rulemaking moves 
forward, including comments related to costs and impact on 
access to credit. Access to credit is an area of great 
importance to the Board and issues related to both access to, 
and the cost of, credit will be a focus of the Board's 
consideration of the comments and views on further development 
of the rulemaking.
    In the case of QM and HOEPA, responsibility for the rule-
making has shifted from the Federal Reserve to the CFPB, which 
is reviewing comments received on the Board's proposal to 
implement QM. Because the QRM cannot be broader than the QM 
under the Dodd-Frank Act, the final QM definition will have an 
effect on how the final QRM may be defined.

Q.3.a. A number of studies that purport to examine the tradeoff 
between increased bank capital and economic growth have been 
conducted by bankers, regulators and academics. Some of these 
studies argue that increasing bank capital standards will 
result in substantially lower economic growth. Others argue 
that the tradeoffs are very small, and some argue that there is 
no tradeoff.
    Do we face a tradeoff between increased bank capital and 
economic growth?

A.3.a. Bank capital standards affect economic growth in several 
ways, some positive and some negative. On the positive side, 
requiring banks to hold more capital increases their capacity 
to absorb losses and withstand adverse economic conditions. 
Moreover, well-designed capital standards can force banks to 
internalize to a greater extent the risks they take on, 
including the externalities associated with the failure of 
systemically important financial institutions. Both the 
increased capacity for loss absorption and the greater 
incentive to internalize risks should lead to a reduction in 
the likelihood and severity of financial instability and 
financial crises. At the same time, it is likely that there are 
also costs associated with increasing bank capital. For 
example, equity is a relatively expensive source of funding for 
banks. Unless the required return on bank equity falls 
sufficiently in response, requiring banks to fund themselves 
with more equity may both raise the cost of bank credit and 
lower the interest rate that banks pay to depositors. To the 
extent that the cost of bank credit rises, this is likely to 
result in lower investment by bank-dependent firms. In 
addition, to the extent that higher capital standards act as a 
``tax'' on regulated financial institutions, there is a concern 
that financial activities could shift to the ``shadow banking'' 
sector, which would defeat the purpose of the higher standards 
and could have unintended consequences.
    Some observers have contended that these concerns are 
exaggerated because, as banks de-lever, their equity becomes 
less risky and investors will be satisfied with a lower rate of 
return. However, the conditions needed for such a benign 
adjustment may not always be present. That said, it is possible 
that some adjustment in the expectations of investors regarding 
required return on bank equity could occur and mitigate the 
effect of higher capital standards on the cost of credit.
    While it is difficult to know precisely what level of 
capital requirements would maximize the net benefits, an 
increase in capital standards relative to those prevailing 
before the financial crisis is desirable. Indeed, the reforms 
in Basel III strengthen capital standards, and promote a higher 
quality and quantity of capital across countries.

Q.3.b. Which specific studies led you to that conclusion?

A.3.b. The Financial Stability Board and the Basel Committee on 
Banking Supervision have published two studies examining the 
macroeconomic impact of strengthening capital standards.\3\ 
These studies find net long term economic benefits from 
increasing the minimum capital requirements from their pre-
crisis levels, coupled with modest costs during the transition 
phase to the new standards. In addition, there are several 
empirical studies that directly examined the link between bank 
capital and lending. These are generally supportive of the view 
that negative shocks to bank capital lead to lower lending.\4\
---------------------------------------------------------------------------
    \3\ See ``An assessment of the long-term economic impact of 
stronger capital and liquidity requirements Basel III: A global 
regulatory framework for more resilient banks and banking systems,'' 
Basel Committee on Banking Supervision, Bank for International 
Settlements, August 2010, and ``Assessing the macroeconomic impact of 
the transition to stronger capital and liquidity requirements,'' 
Macroeconomic Assessment Group, Bank for International Settlements, 
August 2010. The former focuses on the long-term impact, while the 
latter considers the shorter-term transition phase. For related work, 
see also ``The Welfare Cost of Bank Capital Requirements'' by Skander 
J. Van den Heuvel, Journal of Monetary Economics, 55, 298-320, March 
2008, and ``Financial Capital and the Macroeconomy: Policy 
Considerations'' by Michael T. Kiley and Jae W. Sim, Finance and 
Economics Discussion Series, 2011-28, Board of Governors of the Federal 
Reserve System.
    \4\ Examples include ``The Credit Crunch'' by Ben S. Bernanke and 
Cara S. Lown, Brookings Papers On Economic Activity, 2, pp. 205-239, 
1991; ``Bank Capital and the Credit Crunch: The Roles of Risk-Weighted 
and Unweighted Capital Regulations'' by Diana Hancock and James A. 
Wilcox, American Real Estate and Urban Economics Association Journal, 
22, no. 1: 59-94, 1994; ``The International Transmission of Financial 
Shocks: The Case of Japan'' by Joe Peek and Eric S. Rosengren, American 
Economic Review, 87, no. 4: 495-505, 1997.

Q.3.c. Several prominent academics have argued that banks could 
be required to maintain capital ratios as high as 15 percent, 
or even 25 percent, of total assets (not risk weighted assets) 
without adversely affecting economic growth. Do you agree with 
---------------------------------------------------------------------------
them? Please explain.

A.3.c. As described above, there remains substantial 
uncertainty about the precise magnitude of both the benefits 
and the costs of a given increase in bank capital. The studies 
cited above are broadly supportive of somewhat higher 
standards. However, some observers claim that even greater 
increases in capital requirements are desirable.\5\ It is 
difficult to know precisely at what level of capital 
requirements the costs of raising them further start to 
outweigh the benefits to economic growth. Given this 
uncertainty and, as described above, the fact that many of the 
idealized assumptions used by some of these observers do not 
hold in practice, the more modest approach taken in Basel III 
seems appropriate, particularly since implementation is 
occurring during a time of inadequate economic growth and 
financial market fragility.
---------------------------------------------------------------------------
    \5\ See, for example, ``Fallacies, Irrelevant Facts, and Myths in 
the Discussion of Capital Regulation: Why Bank Equity is Not 
Expensive'' by Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig and 
Paul Pfleiderer, Working Paper, Stanford University, 2011; and 
``Optimal Bank Capital'' by David Miles, Jing Yang and Gilberto 
Marcheggiano, Discussion Paper 31, Bank of England, 2011.

Q.4. Along with the FHFA and HUD, each of you had a hand in 
writing the proposed risk retention rule. Dodd-Frank exempted 
FHA-insured loans from these risk retention requirements. 
However, the proposed QRM section of the rule does not exempt 
loans insured by private mortgage insurance. As private 
mortgage insurance and FHA are sometimes direct competitors, 
are any of you concerned that Dodd-Frank's risk retention 
requirements may shift more business towards the FHA at a time 
when many experts believe that it should be trying to reduce 
---------------------------------------------------------------------------
its market share?

A.4. The Federal Reserve and the other agencies involved in 
writing the QRM section of the risk retention Notice of 
Proposed Rule (NPR) carefully considered how to define the QRM 
to meet the Dodd-Frank Act's requirement that the definition 
``[take] into consideration underwriting and product features 
that historical loan performance data indicate result in a 
lower risk of default . . . ''. Although the Dodd-Frank Act 
listed mortgage guarantee insurance as one factor that the 
regulatory agencies could take into account, we were not able 
to find data that supported the view that private mortgage 
insurance lowered the risk of default. Mortgage insurance has 
certainly protected lenders from losses when borrowers do 
default, but it does not appear to substantially lower the risk 
of default. Lenders, investors and other mortgage market 
participants will likely continue to value the protection 
offered by mortgage insurance, so even without being tied to 
QRM, demand for mortgage insurance should continue. Indeed, the 
definition of the QRM was narrowly drawn with the intent that 
the non-QRM market would remain large and robust, resulting in 
little difference in mortgage rates between the QRM and the 
non-QRM markets. If this outcome is realized, the relative 
standing of the FHA is unlikely to be greatly influenced by the 
QRM definition. That said, the agencies asked for comment on 
several issues related to mortgage insurance in the risk 
retention NPR. The comment period for the NPR closed on August 
1, and the Federal Reserve, along with the other agencies, will 
carefully consider all comments we received on QRM and private 
mortgage insurance.

Q.5. Over a month ago, the Inspectors General from each of your 
agencies released reports that deepened my concern your 
agencies are not undertaking the type of economic analysis that 
is necessary to reveal how Dodd-Frank will affect our economy. 
What specific steps have each of you taken, in response to the 
IG reports, to improve the amount and type of analysis that 
your agencies are conducting in implementing Dodd-Frank?

A.5. See the response to Question 1.
                                ------                                


   RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM BEN S. 
                            BERNANKE

Q.1. The SEC proxy access rule is the first Dodd-Frank rule 
that has been successfully challenged in the courts for failing 
to adequately analyze its economic costs and benefits. In the 
unanimous decision to vacate the rule, U.S. Circuit Judge 
Douglas Ginsburg wrote:

        The commission inconsistently and opportunistically framed the 
        costs and benefits of the rule; failed adequately to quantify 
        the certain costs or to explain why those costs could not be 
        quantified; neglected to support its predictive judgments; 
        contradicted itself; and failed to respond to substantial 
        problems raised by commenters.

    How do you intend to ensure that the rules that your agency 
adopts under Dodd-Frank are supported by rigorous economic 
analysis?

A.1. Since the enactment of the Dodd-Frank Act, the Federal 
Reserve, both independently and in conjunction with other 
agencies, has made considerable progress toward adopting 
regulations designed to promote financial market stability, 
strengthen financial institutions, and reduce systemic risk to 
the financial system and the economy.
    The Board is committed to avoiding any disruption to the 
functioning of the financial system and the broader economy 
that might be caused by its rules. Each rulemaking proposal 
issued by the Board is drafted carefully to ensure that the 
congressionally prescribed mandates of the Dodd-Frank Act and 
other applicable laws are followed. Before issuing a final 
rule, the Board assesses the economic effects of the new rule 
and considers carefully the information provided by commenters 
through the rulemaking process. While this process may require 
significant staff resources, the Board values the public 
comment process and finds it very helpful in identifying and 
resolving issues raised by the proposed rules.
    For every rule, the Board also conducts an assessment and 
takes appropriate account of the potential impact that its rule 
may have on small businesses, small governmental jurisdictions, 
and small organizations as required under the Regulatory 
Flexibility Act (``RFA'') (5 U.S.C. 601 et seq.). The Board 
prepares and makes available for public comment in the Federal 
Register an initial regulatory flexibility analysis for any 
rule that will have a significant economic impact on a 
substantial number of small entities. A final regulatory 
flexibility analysis is prepared for every rule that may have a 
significant economic impact on a substantial number of small 
entities and published in the Federal Register.
    The Board also complies with its obligation under the 
Paperwork Reduction Act (``PRA'') (44 U.S.C. 3501 et seq.) to 
estimate the paperwork burden (specifically recordkeeping, 
reporting, and disclosure requirements) imposed by the Board's 
rules, and to keep this burden as low as possible. As required 
under the PRA, the Board seeks public comment on the paperwork 
burden imposed by its rules by providing notice in the Federal 
Register. The level of burden estimated under the PRA is then 
described, in detail, in the Federal Register notice for each 
final rule adopted by the Board, after taking account of the 
comments received during the public comment process. These 
Federal Register notices and final burden estimates are best 
evaluated in the context of each statutorily required rule and 
can be found on the Board's public Web site.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM BEN S. 
                            BERNANKE

Q.1. Under the proposed rule, loans insured by FHA are 
automatically exempt from the risk retention requirements. 
However, loans insured by private mortgage insurance, the 
private sector alternative to FHA, are not. Over the past 3 
years, private mortgage insurers, using private capital, have 
blunted the loss of taxpayer dollars by absorbing approximately 
$25 billion in foreclosure losses that would have otherwise 
been borne by taxpayers. Meanwhile, taxpayers are on the hook 
for over $1 trillion in loans purchased by Fannie Mae and 
Freddie Mac and insured by FHA. Shouldn't the risk retention 
rule be designed to minimize taxpayer exposure by increasing 
the role of private capital by including loans insured by 
private mortgage insurance in the QRM definition?

A.1. The Federal Reserve and the other agencies involved in 
writing the qualified residential mortgage (QRM) section of the 
risk retention NPR carefully considered how to define the QRM 
to meet the Dodd-Frank Act's requirement that the definition 
``[take] into consideration underwriting and product features 
that historical loan performance data indicate result in a 
lower risk of default . . . ''.
    While the Dodd-Frank Act listed mortgage guarantee 
insurance as one factor that the regulatory agencies could take 
into account, the agencies did not see data that supported the 
view that private mortgage insurance lowered the risk of 
default by the borrower on the mortgage, which is the standard 
set by the statute for defining QRM. The agencies asked for 
comment on this and several other issues related to mortgage 
insurance in the risk retention NPR.
    The comment period for the NPR closed on August 1 and the 
Federal Reserve, along with the other agencies, will carefully 
consider all comments we received on QRM and private mortgage 
insurance. The agencies have received several studies during 
the comment period regarding private mortgage insurance and are 
carefully reviewing them.

Q.2. The Office of Financial Research (OFR) along with FSOC 
member agencies will have significant amounts of proprietary 
and other sensitive information about financial institutions.

   How do you plan to protect that information from 
        unauthorized disclosures, leaks or hacking or someone 
        trying to steal data for competitive purposes?

   What processes are you developing to govern who has 
        access to information, under what circumstances will it 
        be shared and penalties for unauthorized disclosures?

   What processes are in place now to protect systemic 
        risk information that the SEC and CFTC have proposed to 
        being collecting next year?

A.2. The Board routinely receives highly confidential 
information from an array of sources, including market 
participants, regulated firms, and other agencies. Because the 
Board recognizes that the protection of this information is 
pivotal not only to the successful accomplishment of the 
Board's mission but also to those that provide the information 
to the Board, information security is of paramount importance. 
Accordingly, the Board protects proprietary and other sensitive 
information through appropriate security controls. In this 
respect, the Board has in place specific requirements for 
access, handling, transmission, and storage of nonpublic 
information that vary depending on the sensitivity of the 
information. These requirements are consistent with the Federal 
Information Security Management Act (FISMA) (44 U.S.C.  3541 
et seq.), which mandates that Federal agencies provide 
information security protections commensurate with risk and 
magnitude of harm from unauthorized access, use, disclosure, 
modification, or destruction for their information and 
information systems. These requirements mean, for example, that 
the most sensitive confidential business information may be 
shared only with staff with a specific need to know who are on 
an approved access list. Further, the Board also ensures that 
its information systems, including those that store or process 
proprietary and other sensitive information, have in place 
information security controls that meet the standards set forth 
by the National Institute of Standards and Technology. In 
addition, the Board's Office of Inspector General conducts an 
annual review of the effectiveness of the Board's information 
security program. The Board will apply its existing processes 
to protect the proprietary and other sensitive information that 
is provided by OFR, the CFTC or the SEC and will modify those 
processes as necessary to ensure that information provided by 
these entities is appropriately protected.
    As for penalties for unauthorized disclosures, the 
protections provided by existing law also extend to information 
provided to the Board by the OFR, the SEC or the CFTC. For 
example, the Trade Secrets Act, 18 U.S.C.  1905, makes it a 
criminal violation for officers and employees of the U.S. 
Government to disclose confidential business information 
without authorization. Bank examiners are subject to additional 
requirements, including the prohibitions under 18 U.S.C.  1906 
that make it a crime for a bank examiner to disclose the names 
of borrowers or collateral for loans without authorization. 
Further, if confidential business information were stolen or 
misused, the person who misappropriates the information may be 
subject to prosecution under 18 U.S.C.  641 which makes it a 
crime to, among other things, embezzle, steal, sell or 
knowingly convert anything of value of the Government to 
personal use without authorization. The Board would also apply 
its internal administrative processes and take appropriate 
action against any employee who discloses proprietary or other 
sensitive information without authorization.

Q.3. I am concerned that U.S. institutions will bear a 
significant competitive burden vis-a-vis their foreign 
competitors. While U.S. commercial banks will be subject to the 
full weight of the Dodd-Frank's heightened prudential standards 
and new systemic resolution regimes, large overseas competitors 
will subject only to a systemic capital surcharge (sometimes 
called a G-SIFI or G-SIB surcharge) and the new Basel II 
capital requirements (both of which U.S. institutions will also 
have to meet).
    How have U.S. regulators accounted for the competitive 
impact of our heightened domestic requirements for U.S. banks 
when they negotiated the recent G-SIFI surcharge with foreign 
regulators?

A.3. While the Federal Reserve Board has been working 
domestically to implement the enhanced prudential standards 
required by the Dodd-Frank Act, it has (together with other 
U.S. Government regulatory agencies) also been working with the 
Financial Stability Board, the Basel Committee on Banking 
Supervision, and other international groups to harmonize and 
implement enhanced standards for internationally active banks. 
These enhanced standards should improve the banking sector's 
ability to sustain shocks that may arise in a stressed 
environment, strengthen the stability of the global economy, 
and address competitive considerations. In seeking to preserve 
a level playing field that will continue to allow U.S. 
companies to compete effectively and fairly in the global 
economy, the Board has been a strong proponent of international 
alignment with regard to implementation of strengthened 
prudential requirements, such as capital standards (including 
capital surcharges applicable to G-SIFIs) and living wills, and 
strengthening cross-border resolution capabilities.
    Additionally, the enhanced prudential standards of section 
165 of the Dodd-Frank Act not only apply to U.S. bank holding 
companies but also foreign banking organizations (FBO) that 
have operations in the United States and more than $50 billion 
in global assets. The Federal Reserve Board is still 
determining how to apply the enhanced standards of section 165 
to these FBOs, but in its analysis the Board will consider the 
national treatment, competitive equality and the strength of 
the home country's supervisory regime, as required by the 
statute. Consistent with existing U.S. processes for issuing 
regulations, the Board will issue proposed rulemakings to 
solicit public comments prior to finalizing any regulatory 
requirements implementing section 165 of the Act. This will 
give domestic and foreign banking organizations the opportunity 
to comment on issues of cross-border competitiveness and the 
appropriateness of the Board's proposed rulemaking.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM MARY L. 
                            SCHAPIRO

Q.1. Along with the FHFA and HUD, each of you had a hand in 
writing the proposed risk retention rule. Dodd-Frank exempted 
FHA-insured loans from these risk retention requirements. 
However, the proposed QRM section of the rule does not exempt 
loans insured by private mortgage insurance.
    As private mortgage insurance and FHA are sometimes direct 
competitors, are any of you concerned that Dodd-Frank's risk 
retention requirements may shift more business toward FHA at a 
time when many experts believe that it should be trying to 
reduce its market share?

A.1. In developing the rules that will establish risk retention 
requirements under section 941(b) of the Dodd-Frank Act, the 
agencies were mindful of the statutory exemption granted by 
section 941(b) to FHA-insured loans, as well as the fact that 
private mortgage insurance historically has served as a form of 
credit enhancement accepted by Fannie Mae and Freddie Mac for 
mortgages with higher loan-to-value ratios that allows such 
mortgages to be securitized through mortgage-backed securities 
guaranteed by the Enterprises. As noted in the notice of 
proposed rulemaking (NPR), the risk retention requirements are 
intended to help address problems in the securitization markets 
by requiring that securitizers, as a general matter, retain an 
economic interest in the credit risk of the assets they 
securitize, thereby providing securitizers an incentive to 
monitor and ensure the quality of the assets underlying a 
securitization transaction, and also helping to align the 
securitizer's interests with those of investors.
    Section 941(b) provides that in defining a qualified 
residential mortgage (QRM), the agencies must take into 
consideration ``underwriting and product features that 
historical loan performance data indicate result in a lower 
risk of default.''. With respect to private mortgage insurance, 
the agencies carefully considered the credit risk mitigation 
effects both of this insurance and other credit enhancements 
obtained at the time of origination. As noted in the NPR, the 
agencies considered a variety of information and reports 
relative to such insurance and other credit enhancements. While 
private mortgage insurance protects creditors from losses when 
borrowers default, at the time the agencies issued the proposed 
rules, the agencies had not identified studies or historical 
loan performance data adequately demonstrating that mortgages 
with such credit enhancements are less likely to default than 
other mortgages, as required by section 941(b).
    The NPR includes many requests for comment on this aspect 
of the proposal, and specifically requested the public's input 
on whether private mortgage insurance obtained at the time of 
origination would or would not reduce the risk of a residential 
mortgage default that meets the proposed QRM criteria except 
for a loan to value ratio that is higher than the limits of the 
proposed requirements. The NPR also requests that commenters 
provide historical loan performance data or studies and other 
factual support for their views.
    The comment period for the proposed rule formally ended on 
August 1, 2011, and we are carefully considering all comments 
as we move forward with this interagency rulemaking process. As 
we work collaboratively with our fellow regulators in 
developing final risk retention rules, we will continue to take 
into consideration the role that FHA-insured loans have in the 
marketplace, as well as the concerns that demand for these 
loans could increase if borrowers do not have available 
alternatives in the private marketplace.

Q.2. Over a month ago, the Inspectors General from each of your 
agencies released reports that deepened my concern your 
agencies are not undertaking the type of economic analysis that 
is necessary to reveal how Dodd-Frank will affect our economy.
    What specific steps have each of you taken, in response to 
the IG reports, to improve the amount and type of analysis that 
your agencies are conducting in implementing Dodd-Frank?

A.2. After reviewing cost benefit analyses included in six of 
our Dodd-Frank Act rulemaking releases, the SEC's Inspector 
General issued a report in June of this year. While the Office 
of Inspector General (``OIG'') is continuing to review the 
Commission's cost benefit analyses, this report concluded that 
``a systematic cost-benefit analysis was conducted for each of 
the six rules reviewed. Overall, [the OIG] found that the SEC 
formed teams with sufficient expertise to conduct a 
comprehensive and thoughtful review of the economic analysis of 
the six proposed released that [the OIG] scrutinized in [its] 
review.'' See U.S. SEC Office of the Inspector General, Report 
of Review of Economic Analyses Performed by the Securities and 
Exchange Commission in Connection with Dodd-Frank Rulemakings 
(June 13, 2011) http://www.sec-oig.gov/Reports/
AuditsInspections/2011/Report_6_13_11.pdf at 43. We look 
forward to continuing to work with the OIG as it conducts a 
further review.
    That said, I have asked the staff to improve the process 
for integrating economic analysis into its decisionmaking 
throughout the course of a rulemaking. Commission staff from 
the division or office responsible for a rule already work 
closely with the Commission's economists in the Division of 
Risk, Strategy, and Financial Innovation (``Risk Fin'') in 
identifying and analyzing the economic impacts of our rules. 
However, we can and should make even better use of Risk Fin's 
economic expertise in our rulemaking. In fact, improving the 
agency's economic analysis capabilities was one of my primary 
goals in creating Risk Fin in September 2009. My view continues 
to be that the goal of a revised process should be to 
capitalize on that expertise by making sure that our economic 
experts are included at the earliest stages of policy 
development. This early involvement will allow them to provide 
initial economic analyses to inform policy choices, and will 
better position them to perform any additional data gathering 
and analysis needed to help the Commission prepare more 
complete economic analyses of proposed rules. In short, we are 
committed to doing what is necessary to perform robust economic 
analyses in furtherance of effective rulemaking for our pending 
rule proposals.

Q.3. Chairman Schapiro, the SEC has interpreted Dodd-Frank's 
municipal advisor registration requirement very broadly. For 
example, it would require banks to register even though they 
are already regulated by prudential bank regulators. The 
municipal advisor provision was intended to cover unregulated 
entities, not impose duplicative regulations.

   How will applying the registration requirement to 
        entities that already are regulated help investors?

   Will dual regulation merely increase the cost of 
        banking services for municipalities without providing 
        any additional benefits?

A.3. The Commission has not finalized rules delineating the 
application of the municipal advisor registration requirements 
to banks at this time. As you know, on December 20, 2010, the 
Commission proposed for public comment rules that would govern 
the registration of municipal advisors and, among other things, 
proposed guidance and solicited comments on the provision of 
traditional banking activities within the context of the 
definition of ``investment strategies.'' We have received over 
1,000 comment letters on the proposal, including approximately 
300 letters that address this important issue, and we are 
reviewing them carefully.
    The lack of a proposed exclusion from the definition of 
``municipal advisor'' for banks is consistent with the 
statutory definition of ``municipal advisor,'' which does 
exclude certain federally regulated entities, such as 
investment advisers, but does not exclude banks. That said, the 
proposing release does not specifically define any traditional 
bank products and services as constituting municipal advisory 
activities. For example, the proposing release notes that 
``money managers providing advice to municipal entities with 
respect to their bank accounts could be municipal advisors.'' 
(emphasis added).
    The proposing release asks numerous questions as to which, 
if any, of a wide variety of traditional bank activities and 
services would constitute municipal advisory activity. With 
respect to what extent banks should be excluded from the 
proposed municipal advisor registration requirements, in 
addition to reviewing the many comments received on this issue, 
Commission staff is consulting with staff at the Federal 
banking regulators regarding the appropriate scope of any such 
possible exclusion. This consultation should help promote a 
more effective and efficient implementation of the requirements 
of the Dodd-Frank Act that works to protect investors, 
municipal entities, obligated persons, and the public interest.
    Commission staff is currently preparing drafts of final 
rulemaking for Commission consideration that will discuss the 
comment letters the Commission received concerning these 
topics. The Commission will consider the costs and benefits to 
investors, municipal entities, obligated persons, and the 
public before finalizing the municipal advisor registration 
rules required by the Dodd-Frank Act. I expect that the final 
rule will provide clarity on this issue while striking an 
appropriate balance between ensuring that parties engaging in 
municipal advisory activities are registered, without 
unnecessarily requiring banks and bank employees already under 
the jurisdiction of Federal and State banking agencies to 
comply with additional regulation, examination and inspection 
burdens.

Q.4. Chairman Schapiro, in your testimony, you state that you 
``look forward to implementing'' the recommendations made by 
the staff in a study of the obligations of broker-dealers and 
investment advisors. Two of your fellow Commissioners have 
called for additional work to determine whether there is a 
problem that needs to be solved and, if there is, whether the 
staff's recommended solution was the right one.

   Has the staff completed this additional work? If 
        so, please provide it to the Committee. If not, isn't 
        it premature to call for implementation of the staff's 
        recommendations?

A.4. As you may be aware, in light of the Commission's concerns 
over the potential economic impact of any rulemaking under 
Section 913 of the Dodd-Frank Act, I requested that a core team 
of economists from the Commission's Division of Risk, Strategy 
and Financial Innovation study, among other things, available 
data pertaining to the standards of conduct in place under the 
existing broker-dealer and investment adviser regulatory 
regimes, including any data addressing Commissioners Casey's 
and Paredes' concerns. Since the Commission issued the study 
required under Section 913 (the ``Study''), this team of 
economists has been studying these issues, and staff has been 
reviewing public comments and meeting with interested parties 
to discuss their concerns and request additional data to inform 
the staff's economic analysis. This work will help to inform 
any future rulemaking. As you know, with any rulemaking, the 
Commission is required to conduct an economic analysis 
regarding the costs and benefits of any rules it proposes and 
consider, among other things, public comment on any such 
proposal, including public comment on the Commission's economic 
analysis, before adopting any final rule. I believe investors 
would be well served by the Commission moving forward in a 
studied and measured way, taking into account the work of our 
team of economists and other staff, to consider a rule proposal 
to implement the staff's recommendations to better protect 
investors as set forth in the Study.

Q.5. Chairman Schapiro, last week, Judge Rakoff issued an 
opinion in which he questioned the SEC's decision to litigate 
on ``its home turf'' by filing an administrative action, rather 
than a district court action, against one of the defendants in 
the Galleon insider trading cases. The SEC relied on the 
retroactive application of a Dodd-Frank provision to do so.

   Why is the SEC retroactively applying Dodd-Frank in 
        a manner that could compromise an important enforcement 
        action?

A.5. On March 1, 2011, the Commission instituted public 
administrative and cease-and-desist proceedings pursuant to 
Section 8A of the Securities Act of 1933, Sections 15(b) and 
21C of the Securities Exchange Act of 1934, Section 203(f) of 
the Investment Advisers Act of 1940, and Section 9(b) of the 
Investment Company Act of 1940 against Rajat K. Gupta. In these 
proceedings, the Commission sought to determine whether it was 
appropriate to enter a cease-and-desist order, and to order 
disgorgement, civil penalties, and a bar against Mr. Gupta 
serving as an officer or director of a public company. The 
request for civil penalties relied, in part, on Dodd-Frank 
amendments to the securities laws that enable the Commission to 
seek civil penalties in administrative cease-and-desist 
proceedings. The Commission also sought civil penalties against 
Mr. Gupta, however, under other provisions of the securities 
laws that existed and authorized such penalties prior to the 
enactment of Dodd-Frank.
    On March 18, 2011, Mr. Gupta filed a lawsuit against the 
Commission in the U.S. District Court for the Southern District 
of New York challenging the institution of these proceedings. 
His complaint challenged the Commission's action on due process 
grounds and also alleged impermissible retroactive application 
of the Dodd-Frank amendments to the securities laws. The court 
denied the Commission's motion to dismiss Mr. Gupta's 
complaint, but limited the theory of his complaint to one of 
equal protection, and ordered discovery and a hearing to 
determine whether the Commission's attempt to apply the civil 
penalty provisions in Dodd-Frank retroactively amounted to a 
denial of equal protection.
    On August 4, 2011, the Commission announced that it had 
determined that it was in the public interest to dismiss the 
administrative proceedings against Mr. Gupta. Subsequently, on 
October 26, 2011, the Commission filed a civil action in the 
U.S. District Court for the Southern District of New York 
against Mr. Gupta based on the same factual allegations as had 
underpinned the prior administrative proceeding. The Commission 
also asserted new insider trading claims against Raj Rajaratnam 
in the same action, based on material nonpublic information 
that Mr. Gupta allegedly provided to Mr. Rajaratnam. The 
Commission's action against Mr. Gupta and Mr. Rajaratnam 
remains pending.
    The Commission does not believe the request for civil 
penalties based on Dodd-Frank amendments to the securities laws 
made in the original administrative proceeding against Mr. 
Gupta was an impermissible retroactive application of the new 
provisions, nor does the Commission believe it was improper for 
any other reason. Nevertheless, the issue has become moot in 
light of the Commission's dismissal of the administrative 
proceeding and filing of a civil action against Mr. Gupta. 
Moreover, the Commission does not believe that the filing of 
the administrative proceeding compromised the enforcement 
action against Mr. Gupta in any way.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM MARY L. 
                            SCHAPIRO

Q.1. The SEC proxy access rule is the first Dodd-Frank rule 
that has been successfully challenged in the courts for failing 
to adequately analyze its economic costs and benefits. In the 
unanimous decision to vacate the rule, U.S. Circuit Judge 
Douglas Ginsburg wrote:

        The commission inconsistently and opportunistically framed the 
        costs and benefits of the rule; failed adequately to quantify 
        the certain costs or to explain why those costs could not be 
        quantified; neglected to support its predictive judgments; 
        contradicted itself; and failed to respond to substantial 
        problems raised by commenters.

How do you intend to ensure that the rules that your agency 
adopts under Dodd-Frank are supported by rigorous economic 
analysis?

A.1. When engaging in rulemaking, we analyze the direct and 
indirect costs and benefits of the Commission's proposed 
decisions against alternative approaches, including, the 
effects on competition, efficiency and capital formation. We 
invite the public to comment on our analysis and provide any 
information and data that may better inform our decisionmaking. 
In adopting releases, the Commission responds to the 
information provided and revises its analysis as appropriate. 
This approach helps ensure a regulatory framework that strikes 
the right balance between the costs and the benefits of 
regulation.
    As you note, however, the Court of Appeals vacated the 
SEC's proxy access rule for certain deficiencies that they 
found in our economic analysis of the rulemaking. We are 
carefully considering the court's criticisms and are taking 
appropriate steps to respond to those that may bear on pending 
and future rulemakings.
    I have asked the staff to improve the process for 
integrating economic analysis into its decisionmaking 
throughout the course of a rulemaking. Commission staff from 
the division or office responsible for a rule already work 
closely with the Commission's economists in the Division of 
Risk, Strategy, and Financial Innovation (``Risk Fin'') in 
identifying and analyzing the economic impacts of our rules. 
However, we can and should make even better use of Risk Fin's 
economic expertise in our rulemaking. In fact, improving the 
agency's economic analysis capabilities was one of my primary 
goals in creating Risk Fin in September 2009. My view continues 
to be that the goal of a revised process should be to 
capitalize on that expertise by making sure that our economic 
experts are included at the earliest stages of policy 
development. This early involvement will allow them to provide 
initial economic analyses to inform policy choices, and will 
better position them to perform any additional data gathering 
and analysis needed to help the Commission prepare more 
complete economic analyses of proposed rules. In short, we are 
committed to doing what is necessary to perform robust economic 
analyses in furtherance of effective rulemaking for our pending 
rule proposals.

Q.2. SEC Commissioners Kathleen Casey and Troy Paredes issued a 
statement calling for rigorous economic analysis on the SEC 
staff study on Investment Advisers and Broker-Dealers. The two 
commissioners stated:

        Indeed, the study does not identify whether retail investors 
        are systematically being harmed or disadvantaged under one 
        regulatory regime as compared to the other and, therefore, the 
        study lacks a basis to reasonably conclude that a uniform 
        standard or harmonization would enhance investor protection.

Have you requested that the SEC staff follow-up on this request 
before considering any potential rule changes?

A.2. Yes. In light of the Commission's concerns over the 
potential economic impact of any rulemaking under Section 913, 
I requested that a core team of economists from the 
Commission's Division of Risk, Strategy and Financial 
Innovation study, among other things, available data pertaining 
to the standards of conduct in place under the existing broker-
dealer and investment adviser regulatory regimes, including any 
data addressing Commissioners Casey's and Paredes' concerns. 
Since the Commission issued the study required by Section 913 
of the Dodd-Frank Act (the ``Study''), staff has been reviewing 
public comments and meeting with interested parties to discuss 
their concerns and request additional data to inform the 
staff's economic analysis. I believe investors would be well 
served by the Commission moving forward in a studied and 
measured way, taking into account the work of our team of 
economists and other staff, to consider a rule proposal to 
implement the staff's recommendations to better protect 
investors as set forth in the Study.

Q.3. One of the results of the recent securities subcommittee 
hearing on swap execution facilities was a bipartisan agreement 
that the SEC and CFTC need to provide greater coordination and 
harmonization to get the rules right. How do you intend to 
achieve harmonization between your two agencies on the 
treatment of request for quotes, block trades, and real time 
reporting?

A.3. We are cognizant of the goal of harmonization of our rules 
with those of the CFTC in these and other areas under Title 
VII, to the extent practicable. In drafting the SEC's rules 
relating to security-based swap execution facilities (``SB 
SEFs'') and trade reporting and dissemination for security-
based swaps, SEC staff has met regularly with their 
counterparts at the CFTC. We have consulted extensively with 
CFTC staff and market participants as well, regarding Dodd-
Frank Act implementation, and we continue to be guided by the 
objective of achieving consistent and comparable regulation, to 
the extent possible, as we move toward final rules.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM MARY L. 
                            SCHAPIRO

Q.1.a. The Office of Financial Research (OFR) along with FSOC 
member agencies will have access to significant amounts of 
proprietary and other sensitive information about financial 
institutions.

   How do you plan to protect that information from 
        unauthorized disclosures, leaks, hacking or someone who 
        is trying to steal the data for competitive purposes?

A.1.a. The SEC has invested in technologies to protect and 
monitor proprietary and otherwise sensitive data that resides 
on our systems and are transmitted to and from our systems. 
These technologies will allow the SEC to manage access to these 
data, prevent or detect changes and maintain an audit trail. 
Additional technology will allow the SEC to monitor when 
sensitive data are being sent out of, or retrieved from, its 
systems.
    The Dodd-Frank Act contemplates that the SEC will share 
certain of the data it gathers with the Office of Financial 
Research (OFR), Financial Stability Oversight Council (FSOC) 
and members of FSOC, and we expect that these agencies will 
each have their own information technology systems and controls 
for protecting proprietary and otherwise sensitive data. Under 
Exchange Act section 24(c) and rule 24c-1 thereunder, the SEC's 
practice is to require ``such assurances of confidentiality as 
the [SEC] deems appropriate'' prior to sharing nonpublic 
information with other regulators.

Q.1.b. What processes are you developing to govern who has 
access to information, under what circumstances it will be 
shared and penalties for unauthorized disclosures?

A.1.b. Under the Dodd-Frank Act, the SEC is required to collect 
information from hedge fund and other private fund advisers for 
FSOC's use in monitoring systemic risk. In a joint release with 
the CFTC, the SEC recently adopted the new Form PF, which these 
advisers will use to report information regarding the funds 
they manage. The Dodd-Frank Act established heightened 
confidentiality protections for this information, much of which 
is nonpublic. Reporting on Form PF will begin in the third 
quarter of 2012, though most advisers will not submit their 
initial reports until the spring of 2013.
    In advance of receiving Form PF data, SEC staff is working 
to design controls and systems for the use and handling of that 
data in a manner that reflects the sensitivity of these data 
and is consistent with the confidentiality protections 
established in the Dodd-Frank Act. The SEC recently announced 
that the Financial Industry Regulatory Authority (FINRA) will 
develop and maintain a filing system to receive Form PF data, 
and this system will be programmed with security features 
designed to limit access and maintain the confidentiality of 
these data. SEC staff is also studying whether multiple access 
levels can be established so that SEC employees are allowed 
only as much access as is reasonably needed in connection with 
their duties.
    The Dodd-Frank Act contemplates that Form PF data may be 
shared with other Federal agencies or with self-regulatory 
organizations, in addition to FSOC, for purposes within the 
scope of their jurisdiction. In each case, the heightened 
confidentiality protections that the Act establishes for these 
data continue to apply when the data are shared.
    Unlike the data that the Dodd-Frank Act contemplates the 
Commission will collect from hedge fund and other private fund 
advisers for FSOC's use in monitoring systemic risk, data with 
respect to transactions or positions in security-based swaps 
(``SBS'') will be collected and maintained by security-based 
swap data repositories (``SDRs'') that will register with the 
Commission under Title VII of the Dodd-Frank Act. In 2010, the 
Commission proposed rules implementing the Dodd-Frank Act 
requirement for SDRs to maintain the privacy of SBS transaction 
information. In particular, the Commission's proposed rules 
would require SDRs to establish and maintain safeguards, 
policies and procedures reasonably designed to prevent the 
misappropriation or misuse of confidential information, 
material nonpublic information, and intellectual property, 
including limiting access to such information and intellectual 
property by associated persons of SDRs. The Commission's 
proposed rules also would require an SDR to establish, 
maintain, and enforce policies and procedures designed to 
ensure its automated systems have adequate levels of security.
    In addition, the Dodd-Frank Act authorizes SDRs, on a 
confidential basis pursuant to Section 24 of the Exchange Act, 
upon request and after notifying the Commission, to make 
available to the FSOC and certain other U.S. and foreign 
regulators all data obtained by the SDR, including individual 
counterparty trade and position data. The Act requires SDRs to 
obtain a written agreement from the FSOC or regulator stating 
that it shall abide by the confidentiality requirements 
described in Section 24 relating to the information on 
security-based swap transactions that is provided and an 
agreement to indemnify the SDR and the Commission for any 
expenses arising from litigation relating to the information 
provided under Section 24. Commission staff is contemplating 
alternatives to provide the FSOC (and other appropriate 
authorities) with access to SBS data collected and maintained 
by SDRs, subject to assurances of confidentiality as required 
by Section 24.

Q.1.c. What processes are in place now to protect systemic risk 
information that the SEC and CFTC have proposed to begin 
collecting early next year?

A.1.c. As noted above, in a joint release with the CFTC, the 
SEC recently adopted Form PF to collect systemic risk 
information from hedge fund and other private fund advisers. 
Reporting on Form PF will begin in the third quarter of 2012, 
though most advisers will not submit their initial reports 
until the spring of 2013. In preparation for these filings, the 
SEC is working with FINRA to develop the Form PF filing system, 
including programming it to reflect the heightened 
confidentiality protections created for Form PF filing 
information under the Dodd-Frank Act and allow for secure 
access by FSOC and other regulators as permitted under the 
Dodd-Frank Act.
    Certain aspects of the Form PF reporting requirements will 
also help to mitigate the potential risk of inadvertent or 
improper disclosure. For instance, because data on Form PF 
generally could not, on its own, be used to identify individual 
investment positions, the ability of a competitor to use Form 
PF data to replicate a trading strategy or trade against an 
adviser is limited. In addition, the deadlines for filing Form 
PF have, in most cases, been significantly extended from the 
proposal, meaning that the filings will generally contain less 
current, and therefore less sensitive, data.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM GARY 
                            GENSLER

Q.1. Along with the FHFA and HUD, each of you had a hand in 
writing the proposed risk retention rule. Dodd-Frank exempted 
FHA-insured loans from these risk retention requirements. 
However, the proposed QRM section of the rule does not exempt 
loans insured by private mortgage insurance.

   As private mortgage insurance and FHA are sometimes 
        direct competitors, are any of you concerned that Dodd-
        Frank's risk retention requirements may shift more 
        business toward FHA at a time when many experts believe 
        that it should be trying to reduce its market share?

A.1. The question is most appropriately answered by others on 
the panel.

Q.2. Over a month ago, the Inspectors General from each of your 
agencies released reports that deepened my concern your 
agencies are not undertaking the type of economic analysis that 
is necessary to reveal how Dodd-Frank will affect our economy.
    What specific steps have each of you taken, in response to 
the IG reports, to improve the amount and type of analysis that 
your agencies are conducting in implementing Dodd-Frank?

A.2. The Administrative Procedure Act (APA) requires the CFTC 
to provide notice and an opportunity to comment before 
finalizing rules that will impose new obligations on any person 
or group of persons. The CFTC considers all of the comments it 
receives to inform its final rulemaking. To ensure that its 
final rulemakings have reasoned bases, the CFTC and its staff 
review all estimates of costs and benefits that are received 
from commenters and any data supporting them. This enables the 
Commission to adopt rules as required by the Dodd-Frank Act 
while ensuring that they do not impose unnecessary costs on 
market participants and the public.
    Through meetings with industry and the public and through 
the receipt of public comments, the Commission obtained the 
views of informed parties to improve its understanding of costs 
and benefits before many of the CFTC's more significant Dodd-
Frank rulemakings to date were proposed. CFTC staff has hosted 
public roundtables to assist in preparation of proposed rules 
in line with industry practices. This has allowed us to 
mitigate compliance costs whenever possible, while fulfilling 
the CFTC's obligation to promote market integrity, reduce risk 
and increase transparency under the Dodd-Frank Act. Information 
about each of these meetings, as well as full transcripts of 
the roundtables, is available on the CFTC's Web site and has 
been factored into applicable rulemakings.
    On May 13, 2011, the Commission's Chief Economist and 
General Counsel jointly issued guidance to CFTC rulemaking 
teams. Under that guidance, the Office of the Chief Economist 
(OCE) assigns a staff person to each rulemaking team to provide 
quantitative and qualitative input on costs and benefits of the 
final rulemaking. Under the guidance, the OCE representative 
employs price theory economics or similar methodology to assess 
associated costs and benefits.
    CFTC economists have been playing an integral role in the 
formation and analysis of cost-benefit considerations. The 
Commission is dedicated to maintaining the integrity and 
functioning of derivatives markets without imposing undue 
burdens on market participants and the broader economy.

Q.3. Chairman Gensler, this month the CFTC has adopted a number 
of final rules under Dodd-Frank. Some of these rules use the 
terms ``swap,'' ``swap dealer,'' and ``major swap 
participant.'' Dodd-Frank directed the CFTC to adopt a rule 
further defining these terms. The CFTC has not done this yet.
    How can you adopt final rules that apply to people and 
products that you have yet to define?

A.3. In December 2010, the CFTC and the SEC jointly issued a 
proposed rule to further define the terms ``swap dealer'' and 
``security-based swap dealer'' as well as ``major swap 
participant'' and ``major security-based swap participant.'' In 
May, the agencies jointly proposed rules further defining 
products covered by Title VII of the Dodd-Frank Act. With the 
substantial completion of the proposal phase of rule-writing, 
the public earlier this summer had the opportunity to review 
the whole mosaic of proposed rules. The CFTC reopened or 
extended comment periods for most of our proposed rules for an 
additional 30 days--allowing the public to submit comments 
after seeing the entire mosaic at once.

Q.4. Chairman Gensler, two of your fellow Commissioners 
expressed their frustration at the CFTC's rush to get final 
rules done without a plan for getting them done in a logical 
manner. In your testimony, you state that you want public input 
on implementation, but do not mention anything about a sensible 
plan for finalizing the rules.
    Why are you ignoring the pleas of your colleagues for a 
public plan for rule adoption?

A.4. The Dodd-Frank Act provides the Commission with ample 
flexibility to phase in implementation of requirements. The 
CFTC and SEC staff held roundtables on May 2 and 3, 2011, on 
this issue and have solicited comments from the public 
regarding such concerns. This important input informs the final 
rulemaking process.
    We've also reached out broadly on what we call ``phasing of 
implementation,'' which is the timeline for rules to take 
effect for various market participants. This is critically 
important so that market participants can take the time now to 
plan for new oversight of this industry.
    On September 8, the Commission approved two proposed 
rulemakings seeking additional public comment on the 
implementation phasing of swap transaction compliance that will 
affect the broad array of market participants. The proposed 
rulemakings provide the public an opportunity to comment on 
compliance schedules applying to core areas of Dodd-Frank 
reform. One proposal would provide greater clarity to market 
participants regarding the timeframe for bringing their swap 
transactions into compliance with the clearing and trade 
execution requirements. The second proposal approved on 
September 8 would provide greater clarity to swap dealers and 
major swap participants regarding the timeframe for bringing 
their swap transactions into compliance with new documentation 
and margining rules. These proposed rules will make the market 
more open and transparent while giving market participants 
adequate time to comply. Their purpose is to help facilitate an 
orderly transition to a new regulatory environment for swaps.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM GARY 
                            GENSLER

Q.1. The SEC proxy access rule is the first Dodd-Frank rule 
that has been successfully challenged in the courts for failing 
to adequately analyze its economic costs and benefits. In the 
unanimous decision to vacate the rule, U.S. Circuit Judge 
Douglas Ginsburg wrote:

        The commission inconsistently and opportunistically framed the 
        costs and benefits of the rule; failed adequately to quantify 
        the certain costs or to explain why those costs could not be 
        quantified; neglected to support its predictive judgments; 
        contradicted itself; and failed to respond to substantial 
        problems raised by commenters.

How do you intend to ensure that the rules that your agency 
adopts under Dodd-Frank are supported by rigorous economic 
analysis?

A.1. The Commission takes very seriously the consideration of 
costs and benefits of the rules it considers under the Dodd-
Frank Act as required under section 15(a) of the Commodity 
Exchange Act. The economic costs and benefits associated with 
regulations, especially as they pertain to commenters' 
concerns, are of utmost importance in the Commission's 
deliberation and determination of final rules.
    As noted in the guidance for cost-benefit considerations 
for final rules memorandum to rulemaking teams from the Chief 
Economist and General Counsel dated May 13, 2011, the 
rulemakings will involve quantified costs and benefits to the 
extent it is reasonably feasible and appropriate. For rules 
that do not have quantifiable costs, the Commission seeks to 
explain why such costs are not quantifiable and to explain the 
reasoning and supportive explanation of its predictive 
judgments using qualitative measures.
    The Commission further recognizes the significance of 
meaningful issues raised by commenters regarding costs or 
benefits and takes those comments seriously as it is working on 
final rules. For those comments which persuade the Commission 
to modify its proposed rule, the Commission seeks to explain 
why the proposed alternative more effectively furthers the 
goal(s) of the statute in light of the section 15(a) factors, 
not only in the cost-benefit section but throughout the rule's 
preamble. In contrast, for those comments which do not persuade 
the Commission to modify its proposed rule, the Commission 
seeks to explain its adoption of the proposed rule as the most 
effective means to further the goal(s) of the statue in light 
of section 15(a). The Commission seriously considers 
commenters' concerns regarding costs or benefits and evaluates 
the alternatives presented.
    Through the Commission's rulemaking process and its cost-
benefit considerations, the agency is committed to enhancing 
market transparency, which will improve the integrity of the 
derivatives market without imposing unwarranted costs on the 
marketplace or financial system.

Q.2.a. Chairman Schapiro testified that we must continue to 
evaluate carefully the international implications of Title VII.

        Rather than deal with these implications piecemeal, we intend 
        to address the relevant international issues holistically in a 
        single proposal. The publication of such a proposal would give 
        investors, market participants, foreign regulators, and other 
        interested parties an opportunity to consider as an integrated 
        whole our proposed approach to the registration and regulation 
        of foreign entities engaged in cross-border transactions 
        involving U.S. parties.

Do you intend to coordinate with SEC on ,this single proposal 
for the purpose of assuring regulatory consistency and 
comparability?

A.2.a. The CFTC's 31 Dodd-Frank staff rulemaking teams and the 
Commissioners are all working closely with the SEC and all 
fellow regulators. CFTC staff have held more than 600 meetings 
with their counterparts at other agencies and have hosted 
numerous public roundtables with staff from other regulators to 
benefit from the open exchange of ideas. Commission staff will 
continue to engage with their colleagues at the SEC and other 
agencies as we proceed to develop and consider final rules and 
ensure harmonization among agencies. Our international 
counterparts also are working to implement needed reform. We 
are actively consulting and coordinating with international 
regulators to promote robust and consistent standards and to 
attempt to avoid conflicting requirements in swaps oversight. 
Section 722(d) of the Dodd-Frank Act states that the provisions 
of the Act relating to swaps shall not apply to activities 
outside the United States unless those activities have ``a 
direct and significant connection with activities in, or effect 
on, commerce'' of the United States. We are developing a plan 
for application of 722(d) and are hoping to seek public input 
this fall. The Commission will continue to coordinate closely 
with the SEC and fellow regulators.

Q.2.b. Will you submit proposed rules on the application of 
Title VII rulemakings to inter-affiliate transactions, which 
are necessary for sound risk managements of global financial 
firms? In European markets, the treatment of inter-affiliate 
transactions may be different than the U.S. approach. How will 
global firms implement these conflicting regulatory 
requirements?

A.2.b. The CFTC's proposed rulemaking (jointly with the SEC) to 
further define the term ``swap dealer'' includes a discussion 
of how swaps between affiliates would be considered when 
determining if one of the affiliates is a swap dealer and 
specifically seeks public comment on that topic. The proposal 
does note that one hallmark of the definition that refers to 
holding oneself out as a dealer is that the entity has 
considerable interaction with unaffiliated counterparties.
    The CFTC has received comments in response to various 
proposed rulemakings and advance notices of proposed rulemaking 
that raise questions regarding whether and to what extent 
inter-affiliate transactions should be subject to the clearing, 
trading and/or reporting requirements of the Dodd-Frank Act.
    The Commission will take into account all comments it has 
received in determining further action.

Q.3. One of the results of the recent securities subcommittee 
hearing on swap execution facilities was a bipartisan agreement 
that the SEC and CFTC need to provide greater coordination and 
harmonization to get the rules right. How do you intend to 
achieve harmonization between your two agencies on the 
treatment of request for quotes, block trades, and real-time 
reporting?

A.3. The CFTC and SEC consult and coordinate extensively to 
harmonize our rules to the greatest extent possible. These 
continuing efforts began with the enactment of the Dodd-Frank 
Act. This close coordination will continue and will benefit the 
rulemaking process.
    With regard to the SEF rulemakings, the CFTC's proposed 
rule would provide all market participants with the ability to 
execute or trade with other market participants. It will afford 
market participants with the ability to make firm bids or 
offers to all other market participants. It also will allow 
them to make indications of interest--or what is often referred 
to as ``indicative quotes''--to other participants. 
Furthermore, it will allow participants to request quotes from 
other market participants. These methods will provide hedgers, 
investors and Main Street businesses the flexibility to trade 
using a number of methods, but also the benefits of 
transparency and more market competition. The proposed rule's 
approach is designed to implement Congress' mandate for a 
competitive and transparent price discovery process.
    The proposal also allows participants to issue requests for 
quotes, with requests distributed to a minimum number of other 
market participants. For block transactions, swap transactions 
involving nonfinancial end-users, swaps that are not ``made 
available for trading'' and bilateral transactions, market 
participants can get the benefits of the swap execution 
facilities' greater transparency or, if they wish, choose 
execution by voice or other means of trading.
    In December 2010, the CFTC published a notice of proposed 
rulemaking regarding real-time public reporting of swap 
transaction data. The proposal would implement a new framework 
for the real-time public reporting of swap transactions and 
pricing data for all swap transactions. Additionally, the 
proposed rules address the appropriate minimum size and time 
delay relating to block trades on swaps and large notional swap 
transactions.
    In the futures world, the law and historical precedent is 
that all transactions are conducted on exchanges, yet in the 
swaps world many contracts are transacted bilaterally. While 
the CFTC will continue to coordinate with the SEC to harmonize 
approaches, the CFTC also will consider matters associated with 
regulatory arbitrage between futures and swaps. The Commission 
has received public comments on its SEF rule and is evaluating 
those comments in developing a final rule.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM GARY 
                            GENSLER

Q.1. The CFTC recently released data showing that well over 90 
percent of daily futures trading volume in the most popular 
products comes from ``day trading'' accounts, not from ``large 
traders.'' For example, only 5.5 percent of crude trading 
volume on the New York Mercantile Exchange involved net changes 
in large traders' positions.
    How will the CFTC's proposed position limits reduce 
volatility in the markets, given that the proposed limits will 
only impact large traders and not the active day traders that 
are actually affecting the long-term equilibrium of the futures 
markets?

A.1. The proposed rule would establish uniform position limits 
and related requirements for all economically equivalent 
derivatives for physical commodities. Without position limits, 
a leveraged market participant can take a very large 
speculative position across multiple venues. The proposed 
position limit framework would reduce the ability of such 
leveraged entities to take such positions. In developing the 
CFTC's proposed position limits rule, the agency adhered to 
Section 4a(a)(3) of the CEA--position limits are to address 
excessive speculation and market manipulation, while taking 
into consideration the need to protect market liquidity for 
bona fide hedgers and price discovery. However, the proposed 
position limit framework would not impose restrictions on 
trading activity and, thus, would not restrict active day 
traders who do not maintain large positions.

Q.2. A number of market participants have expressed concerns 
related to the implementation of the derivative title of Dodd-
Frank. Many experts have suggested that the lack of logical 
order to the rulemaking process and the lack of final 
definitions for key terms like ``swap'' and ``swap dealer'' 
have created a lack of confidence in the new regulatory regime 
being established by the CFTC. Can you update the Committee on 
how you are going to sequence these rules so that the market 
can adjust to these changes?

A.2. The Dodd-Frank Act provides the Commission with ample 
flexibility to phase in implementation of requirements. The 
CFTC and SEC staff held roundtables on May 2 and 3, 2011, on 
this issue and have solicited comments from the public 
regarding such concerns. This important input informs the final 
rulemaking process.
    We've also reached out broadly on what we call ``phasing of 
implementation,'' which is the timeline for rules to take 
effect for various market participants. This is critically 
important so that market participants can take the time now to 
plan for new oversight of this industry.
    On September 8, the Commission approved two proposed 
rulemakings seeking additional public comment on the 
implementation phasing of swap transaction compliance that will 
affect the broad array of market participants. The proposed 
rulemakings provide the public an opportunity to comment on 
compliance schedules applying to core areas of Dodd-Frank 
reform. One proposal would provide greater clarity to market 
participants regarding the timeframe for bringing their swap 
transactions into compliance with the clearing and trade 
execution requirements. The second proposal approved on 
September 8 would provide greater clarity to swap dealers and 
major swap participants regarding the timeframe for bringing 
their swap transactions into compliance with new documentation 
and margining rules. These proposed rules will make the market 
more open and transparent while giving market participants 
adequate time to comply. Their purpose is to help facilitate an 
orderly transition to a new regulatory environment for swaps.
    Also on September 8, the Commission released an outline of 
final rules to be considered in the remainder of 2011 and next 
year.

Q.3. The Office of Financial Research (OFR) along with FSOC 
member agencies will have access to significant amounts of 
proprietary and other sensitive information about financial 
institutions.

   LHow do you plan to protect that information from 
        unauthorized disclosures, leaks, hacking or someone who 
        is trying to steal the data for competitive purposes?

   LWhat processes are you developing to govern who has 
        access to information, under what circumstances it will 
        be shared and penalties for unauthorized disclosures?

   LWhat processes are in place now to protect systemic 
        risk information that the SEC and CFTC have proposed to 
        begin collecting early next year?

A.3. The CFTC protects information from unauthorized access and 
improper use through comprehensive administrative, technical 
and physical security measures in compliance with the Federal 
Information Security Management Act (FISMA) and the Privacy Act 
of 1974. The CFTC's technical security measures include 
restricted computer access, required use of strong passwords 
that are frequently changed, encryption for certain data types 
and transfers, and regular review of security procedures and 
best practices to enhance security. Physical measures include 
restrictions on building access to authorized individuals and 
maintenance of records in lockable offices and filing cabinets. 
Administrative measures include: a strong security and privacy 
governance structure, policies and procedures for safeguarding 
confidential information and immediately reporting incidents of 
actual or suspected loss or compromise of information, annual 
mandatory training for all CFTC personnel, clearly defined 
roles for personnel with security and privacy responsibilities, 
and appropriate background checks for personnel with access to 
sensitive confidential information.
    CFTC information may be shared with the FSOC and OFR in 
accordance with Section 112(d) of the Dodd-Frank Act and the 
Privacy Act of 1974. Such information may be shared with the 
FSOC and OFR as necessary to monitor the financial services 
marketplace to identify potential risks to the financial 
stability of the United States or to otherwise carry out any of 
the provisions of Title I of the Dodd-Frank Act. The CFTC is 
working closely with the FSOC, OFR, and other member agencies 
to assure compliance with the requirements to maintain the 
confidentiality of data, information, and reports submitted 
under Title I. Penalties for unauthorized disclosure include 
disciplinary action, civil and criminal penalties.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM JOHN WALSH

Q.1. Some analysts have suggested that the availability of 
mortgage credit is likely to be restricted as a result of Dodd-
Frank. Specifically, they point to the interaction of laws and 
regulations such as the new Qualified Residential Mortgage 
(QRM) and Qualified Mortgage (QM) standards, as well as changes 
to the Home Ownership Equity Protection Act (HOEPA) triggers.
    Are any of you concerned about how these regulations may 
adversely impact the availability of credit? If so, can these 
difficulties be handled administratively, or do they require 
legislative solutions?

A.1. The QRM and QM provisions of Dodd-Frank are related in 
that they are both designed to address problems that led to the 
mortgage crisis, albeit in different ways, and both could 
impact credit availability depending on the form of the final 
rules.
    We have received comment letters on the proposed risk 
retention rules that argue that the combination of changes to 
mortgage standards required by Dodd-Frank (the QRM and QM 
provisions) and changes to HOEPA triggers and coverage may 
cause lenders to restrict their residential mortgage lending. 
The thrust of the argument is that, in order to avoid strict 
TILA liability and to be eligible for the exemption from the 
Dodd-Frank risk retention requirement, lenders will have a 
strong incentive to make only those mortgages that meet the 
criteria that satisfy both standards so the loan is both QRM- 
and QM-compliant, without becoming subject to HOEPA 
restrictions.
    The QRM and QM rules have not yet been finalized. The 
rulemaking agencies for the QRM standard are the OCC, Federal 
Reserve, FDIC, SEC, HUD and FHFA. For the QM standard, only the 
Consumer Financial Protection Bureau (CFPB) has rulemaking 
authority. It will be critically important that these two 
rulemaking initiatives are coordinated so that the net end 
result is not an unnecessary impediment to credit availability 
for credit-worthy borrowers.

Q.2.a. A number of studies that purport to examine the tradeoff 
between increased bank capital and economic growth have been 
conducted by bankers, regulators, and academics. Some of these 
studies argue that increasing bank capital standards will 
result in substantially lower economic growth. Others argue 
that the tradeoffs are very small, and some argue that there is 
no tradeoff.
    Do we face a tradeoff between increased bank capital and 
economic growth?

A.2.a. As the question indicates, there are many studies on 
either side of this issue. The tradeoff in which increases in 
bank capital beyond some level constrains economic activity and 
growth certainly is a complex question, but one that should not 
be ignored when setting standards for minimum regulatory 
capital.

Q.2.b. Which specific studies led you to that conclusion?

A.2.b. The possibility of a tradeoff follows from two bodies of 
economic research: one concluding that bank capital and capital 
requirements affect bank lending, and a second concluding that 
bank lending affects real economic activity.
    With regard to the first of these--the connection between 
capital and lending theoretical analyses such as Diamond and 
Rajan (2000) demonstrate that an increase in capital 
requirements can result in a withdrawal of credit from some 
borrowers and an increase in the price of credit for others.\1\ 
VanHoose (2007) summarizes the theoretical work.\2\ These 
theoretical predictions are supported by real-world empirical 
studies. For example, Peek and Rosengren (1995) identify a 
significant relationship between regulatory capital 
requirements and lending.\3\ They find that increases in 
required bank capital not only cause bank loan portfolios to 
shrink, but have a pronounced effect on the flow of new bank 
credit; they note that ``a large share of the shrinkage occurs 
in the bank-dependent loan category'' (such as small 
businesses) and that ``this shrinkage is not only 
statistically, but economically, significant'' (Peek and 
Rosengren, p. 691). Note that recent proposals for a 
``countercyclical capital buffer'' from the Basel Committee on 
Banking Supervision presume the existence of this type of 
connection between capital standards and bank credit.
---------------------------------------------------------------------------
    \1\ Douglas W. Diamond and Raghuram G. Rajan, ``A Theory of Bank 
Capital,'' The Journal of Finance, Vol. 55, No. 6 (Dec. 2000), pp. 
2431-2465.
    \2\ David VanHoose, ``Theories of bank behavior under capital 
regulation,'' Journal of Banking & Finance, 31 (2007), pp. 3680-3697.
    \3\ Joe Peek and Eric Rosengren, ``Bank regulation and the credit 
crunch,'' Journal of Banking & Finance, 19 (1995), pp. 679-692.
---------------------------------------------------------------------------
    An extensive body of macroeconomic research demonstrates 
that a reduction in bank credit can affect economic activity. 
This literature generally addresses the role of bank credit as 
an important channel for the transmission of the effects of 
monetary policy, and includes Bernanke (1983), Bernanke and 
Blinder (1988), and many others.\4\ Research in this area 
frequently finds that the primary impact of this channel is on 
small firms with limited access to capital markets--a reduction 
in bank credit leaves such firms with few alternative sources 
of funding, and forces them to scale back, with negative 
consequences for broad measures of real economic activity.
---------------------------------------------------------------------------
    \4\ Bernanke, Ben S. ``Nonmonetary Effects of the Financial Crisis 
in the Propagation of the Great Depression,'' American Economic Review, 
Vol. 73, June 1983, pp. 257-276; Ben S. Bernanke and Alan S. Blinder, 
``Credit, Money, and Aggregate Demand,'' American Economic Review, Vol. 
78, May 1988, pp. 435-439.

Q.2.c. Several prominent academics have argued that banks could 
be required to maintain equity capital ratios as high as 15 
percent, or even 25 percent, of total assets (not risk-weighted 
assets) without adversely affecting economic growth. Do you 
---------------------------------------------------------------------------
agree with them? Please explain.

A.2.c. It is important to note that the academic community 
itself is far from unified on this issue. A paper that has 
received significant popular attention is a manuscript by 
Admati et al (2011), arguing that banks could be required to 
hold much more capital with little economic cost.\5\ However, 
for a critical discussion of that paper by a leading banking 
scholar, see Flannery (2011); Flannery concludes that while 
Admati et al make many valid points, ``the analysis fails to 
provide suitable guidance for the ongoing debate about how much 
capital is sufficient.\6\ Given the lack of agreement within 
academia, it would be dangerous to make significant changes to 
policy without more careful analysis and consideration of all 
available evidence.
---------------------------------------------------------------------------
    \5\ Anat R Admati, Peter M. DeMarzo, Martin F. Hellwig, Paul 
Pfleiderer, ``Fallacies, Irrelevant Facts, and Myths in the Discussion 
of Capital Regulation: Why Bank Equity is Not Expensive,'' Stanford 
Graduate School of Business Research Paper, No. 2065, August 2011.
    \6\ Commentary by Mark Flannery on ``Why Bank Equity is Not 
Expensive,'' for International Journal of Central Banking, Third 
Financial Stability Conference, London, May 2011.

Q.3. Along with the FHFA and HUD, each of you had a hand in 
writing the proposed risk retention rule. Dodd-Frank exempted 
FHA-insured loans from these risk retention requirements. 
However, the proposed QRM section of the rule does not exempt 
loans insured by private mortgage insurance.
    As private mortgage insurance and FHA are sometimes direct 
competitors, are any of you concerned that Dodd-Frank's risk 
retention requirements may shift more business toward FHA at a 
time when many experts believe that it should be trying to 
reduce its market share?

A.3. As you note, the statute itself, and not the proposed 
rule, exempts the FHA from risk retention, presumably because 
the FHA has the power to set its own underwriting standards to 
control its risk exposure under the FHA's guarantee. While 
private mortgage insurers and the FHA both guarantee higher 
loan-to-value ratio loans, it is difficult to say they are 
direct competitors. The FHA's underwriting standards cover 
higher loan-to-value ratios than typically are covered by 
private mortgage insurers at a comparable premium cost to the 
borrower.
    To include private mortgage insurance in the QRM criteria, 
the statute requires the Agencies to determine that it lowers 
the risk of default. Private mortgage insurance clearly has the 
benefit of reducing the risk of loss to investors in the event 
of default, but this is a separate question from whether it 
reduces the risk of default in the first place. The OCC will be 
interested in information provided by commenters on this topic, 
and the data they have provided.

Q.4. Over a month ago, the Inspectors General from each of your 
agencies released reports that deepened my concern your 
agencies are not undertaking the type of economic analysis that 
is necessary to reveal how Dodd-Frank will affect our economy
    What specific steps have each of you taken, in response to 
the IG reports, to improve the amount and type of analysis that 
your agencies are conducting in implementing Dodd-Frank?

A.4. On June 13, 2011, the Department of the Treasury's Office 
of Inspector General (IG) issued a report on the economic 
analyses performed by the OCC with respect to three rules that 
implemented provisions of Dodd-Frank. The IG report was 
positive in its findings and identified a few issues that we 
are addressing. Specifically, the report summarized its 
conclusions as follows:

        In brief, we found that OCC has processes in place to ensure 
        that required economic analyses are performed consistently and 
        with rigor in connection with its rulemaking authority. 
        Furthermore, we found that those processes were followed for 
        the three proposed rules we reviewed.

    The report also recommended that the OCC develop procedures 
to facilitate coordination among the groups calculating 
administrative burden for various analyses and to update the 
OCC's internal rulemaking guidance to reflect statutory and 
other changes from the last version.
    In response to the IG report, the OCC has updated its Guide 
to OCC Rulemaking Procedures, which provides guidance to staff 
involved in the rulemaking process, to assist further 
coordination among the OCC groups addressing burdens for 
applicable regulatory analyses. The regulatory handbook will be 
made available to all departments in the OCC that work on 
rulewriting projects. This update includes changes to reflect 
recent statutory amendments.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM JOHN WALSH

Q.1. The SEC proxy access rule is the first Dodd-Frank rule 
that has been successfully challenged in the courts for failing 
to adequately analyze its economic costs and benefits. In the 
unanimous decision to vacate the rule, U.S. Circuit Judge 
Douglas Ginsburg wrote:

        The commission inconsistently and opportunistically framed the 
        costs and benefits of the rule; failed adequately to quantify 
        the certain costs or to explain why those costs could not be 
        quantifIed; neglected to support its predictive judgments; 
        contradicted itself; and failed to respond to substantial 
        problems raised by commenters.

How do you intend to ensure that the rules that your agency 
adopts under Dodd-Frank are supported by rigorous economic 
analysis?

A.1. The OCC currently conducts economic analyses, as 
applicable, under the Unfunded Mandates Act, Regulatory 
Flexibility Act, and Congressional Review Act. Our Policy 
Analysis Division has established procedures to address 
situations where the OCC is required to conduct an economic 
analysis. These procedures have been incorporated into 
revisions to the Guide to OCC Rulemaking Procedures and 
include, among other things, specific steps for preliminary 
impact assessments and the relevant statutory standards for 
review. These procedures also address coordination with other 
relevant OCC divisions involved in the rulewriting process.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JOHN WALSH

Q.1. Under the proposed rule, loans insured by FHA are 
automatically exempt from the risk retention requirements. 
However, loans insured by private mortgage insurance, the 
private sector alternative to FHA, are not. Over the past 3 
years, private mortgage insurers, using private capital, have 
blunted the loss of taxpayer dollars by absorbing approximately 
$25 billion in foreclosure losses that would have otherwise 
been borne by taxpayers. Meanwhile, taxpayers are on the hook 
for over $1 trillion in loans purchased by Fannie Mae and 
Freddie Mac and insured by FHA. Shouldn't the risk retention 
rule be designed to minimize taxpayer exposure by increasing 
the role of private capital by including loans insured by 
private mortgage insurance in the QRM definition?

A.1. As you know, the statute itself, and not the proposed 
rule, exempts the FHA from risk retention, presumably because 
the FHA has the power to set its own underwriting standards to 
control its risk exposure under the FHA's guarantee. To include 
private mortgage insurance in the QRM criteria, the statute 
requires the Agencies to determine that it lowers the risk of 
default. Private mortgage insurance clearly has the benefit of 
reducing the risk of loss to investors in the event of default, 
but this is a separate question from whether it reduces the 
risk of default in the first place. The OCC will be interested 
in information provided by commenters on this topic, and the 
data they have provided.

Q.2.a. The Office of Financial Research (OFR) along with FSOC 
member agencies will have access to significant amounts of 
proprietary and other sensitive information about financial 
institutions.
    How do you plan to protect that information from 
unauthorized disclosures, leaks, hacking or someone who is 
trying to steal the data for competitive purposes?

A.2.a. There is a Memorandum of Understanding (MOU) in place 
between the FSOC and its members to address the sharing and 
treatment of nonpublic information in connection with the Dodd-
Frank functions and activities of the FSOC or the OFR. The MOU 
was drafted to insure the protection of the sensitive, 
nonpublic information that will be potentially shared with the 
FSOC, the OFR and among members of the FSOC. The MOU sets forth 
the following general principles: (1) any data, information or 
reports shared among the Parties in connection with the 
functions and activities of the FSOC or OFR are ``nonpublic 
information;'' (2) Any nonpublic information transferred from 
one party to another under the MOU shall not be disclosed by 
the receiving party other than as permitted by the MOU; (3) 
nonpublic information may be shared internally by a receiving 
party only on a need-to-know basis; (4) any official, employee 
or individual under the supervision of the receiving party must 
be advised that as a condition of their access to the nonpublic 
information, they must be advised of and bound by the terms of 
the MOU and must comply with its terms; (5) nonpublic 
information may not be shared by a receiving party with any 
third party without the written permission of the providing 
party, except under limited circumstances provided in the MOU; 
(6) the receiving parties must take all steps reasonably 
necessary to preserve, protect, and maintain all privileges and 
claims of confidentiality related to nonpublic information 
subject to the MOU; (7) the parties intend that sharing of 
nonpublic information pursuant to the MOU does not constitute 
public disclosure nor a waiver of confidentiality or any 
applicable privilege; and, (8) any nonpublic information 
provided to a receiving party under the MOU remains nonpublic 
and confidential even if the receiving party is no longer a 
party to the MOU or the MOU is terminated as to all parties.
    Additionally, the MOU places certain notice and cooperation 
requirements on the parties in the event of a FOIA request, 
subpoena or other request to a receiving party by a third party 
for nonpublic information not belonging to that receiving 
party. The OCC may share nonpublic supervisory information with 
the FSOC, OFR and member agencies pursuant to confidentiality 
provisions in the MOU.
    The OCC also has robust internal security measures already 
in place for the protection of sensitive and proprietary 
information. The OCC routinely uses and protects information 
that is similar to what the OCC may receive in the context of 
FSOC activities. Such information includes, but is not limited 
to documents, records, data, and information created or used by 
the OCC in the course of conducting official business.
    The OCC utilizes the security standards established by the 
Federal Interagency Security Committee (ISC) to choose the 
location of its offices and the minimum physical security 
posture that will be implemented for each facility. Access to 
each OCC office is strictly controlled with each of OCC's 
primary facilities being protected by a combination of security 
guards, Homeland Security Presidential Directive-12 compliant 
physical access control systems, intrusion detection alarms, 
closed circuit television monitoring and strict physical 
security policies and procedures.
    Every employee and contractor granted employee-like access 
to OCC facilities or information assets undergoes a 
comprehensive background investigation for suitability that 
must be favorably adjudicated. All visitors to OCC facilities 
are required to be escorted at all times and areas containing 
sensitive information assets or equipment such as file rooms or 
Local Area Network (LAN) rooms are protected by access control 
systems and other protective measures such as locked cages.
    The OCC maintains a comprehensive Information Security 
Program that was created in response to Federal and 
departmental directives, as well as to meet its fiduciary 
responsibilities to its customers to protect the 
confidentiality, integrity and availability of its information 
and supporting technology. In support of this objective, the 
OCC Information Security Program: Policies, Standards, and 
Required Controls document establishes comprehensive, uniform 
information security policies and standards, that are 
implemented through a combination of management, operational, 
and technical controls. The policies and standards in this 
handbook augment national and Treasury directives, adapt them 
to OCC's specific circumstances, and where warranted, supply 
additional direction. Taken together, the policies, standards, 
controls, and roles and responsibilities presented in the 
handbook represent a comprehensive and uniform approach to 
protecting against loss, misuse, unauthorized access, and 
unauthorized modification of information and information 
systems essential to the OCC's mission.
    The OCC prohibits unauthorized access to or use of its 
sensitive information and information resources. Only OCC-
authorized users are allowed to access sensitive information 
and access to that information is only granted on a need-to-
know basis. Prior to being granted access to sensitive 
information, all OCC employees and contractors must sign a 
nondisclosure statement and satisfactorily complete a security 
and privacy awareness training session.
    The OCC maintains a Computer Incident Response Center 
(CIRC) that constantly monitors OCC networks and computers to 
detect, prevent and respond to external attacks and operate 
anti-virus systems. In addition, every OCC computer hard drive 
is encrypted to prevent unauthorized access to sensitive 
information on the drives and the OCC maintains the ability to 
remotely send a freeze signal to any OCC computer that falls 
into the wrong hands or a wipe signal to completely erase the 
contents of the hard drive. The OCC also utilizes an 
application that automatically encrypts any portable storage 
media, such as memory sticks or external drives that is plugged 
into an OCC computer to ensure the protection of any sensitive 
information transferred to the portable device.

Q.2.b. What processes are you developing to govern who has 
access to information, under what circumstances it will be 
shared and penalties for unauthorized disclosures?

A.2.b. The OCC has developed the internal security processes 
described above to control who has access to information. The 
MOU described above also addresses who has access to 
information shared with the OFR, FSOC or FSOC member agencies. 
In addition, the OCC also has robust internal policies and 
procedures, as well as regulations (12 C.F.R. Part 4) in place 
which govern the sharing of nonpublic OCC information, as well 
as nonpublic third-party information in the possession of the 
OCC. The OCC's delegations and policies require that the 
decisionmaking be made at a high-level when the OCC discloses 
or shares nonpublic information. Nonpublic OCC information may 
only be disclosed in consultation with the OCC's law department 
and in accordance with applicable law, including 12 C.F.R. Part 
4. Nonpublic third-party information in the possession of the 
OCC may only be disclosed with the express consent of the OCC's 
First Senior Deputy Comptroller and Chief Counsel or her 
designee, and in accordance with applicable law (with certain 
exceptions where the law requires disclosure). Part 4 
specifically prohibits the unauthorized disclosure of nonpublic 
OCC information by anyone who is granted access to the 
information, and by any OCC employee. There are numerous 
statutory civil and criminal penalties in place for the 
unauthorized disclosures of nonpublic information. Perhaps most 
relevant in this context is 18 U.S.C.  641, which provides 
that, among other things, anyone who without authority conveys 
a record belonging to an agency of the United States may be 
subject to fines or imprisonment.

Q.2.c. What processes are in place now to protect systemic risk 
information that the SEC and CFTC have proposed to begin 
collecting early next year?

A.2.c. It is our understanding that the CFTC and SEC are 
currently in the process of developing rules governing data 
collection. We defer to those agencies to comment on how they 
are addressing protection of this information.

Q.3. I am concerned that U.S. institutions will bear a 
significant competitive burden vis-a-vis their foreign 
competitors. While U.S. commercial banks will be subject to the 
full weight of Dodd-Frank's heightened prudential standards and 
new systemic resolution regimes, large overseas competitors 
will be subject only to a systemic capital surcharge (sometimes 
called a G-SIFI or G-SIB surcharge) and the new Basel III 
capital requirements (both of which U.S. institutions will also 
have to meet).
    How have U.S. regulators accounted for the competitive 
impact of our heightened domestic requirements for U.S. banks 
when they negotiated the recent G-SIFI surcharge with foreign 
regulators?
    As I have noted in past testimony before the Senate, the 
OCC is very cognizant of the need to consider the competitive 
implications and the cumulative effects of the various mandates 
under the Dodd-Frank Act and the need to coordinate the 
implementation of key provisions of the Act with the capital 
and liquidity reforms announced by the Basel Committee. While I 
support strong capital, strong liquidity, and enhanced 
supervision of systemically important institutions, I have 
cautioned that we should not regard capital as the sole 
regulatory tool, nor should we set the capitals levels, 
including the surcharge for systemically important banks, at 
such a level that it forces banking activities into other less 
regulated sectors. I believe the surcharge ranges of 1 to 2.5 
percent that the Basel Committee recently updated attempts to 
balance these considerations.
    Domestically, the Federal Reserve Board is required to 
consult with the OCC as it develops and implements the 
heightened prudential standards for bank holding companies with 
total consolidated assets over $50 billion. In our discussions 
with the FRB, the OCC has stressed the need to ensure that 
these provisions and the Basel III reforms are carried out in a 
coordinated, mutually reinforcing manner, so as to enhance the 
safety and soundness of the U.S. and global banking system, 
while not damaging competitive equity or restricting access to 
credit.

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