    [House Hearing, 113 Congress]
    [From the U.S. Government Publishing Office]

                            WHO IS TOO BIG TO FAIL?
                            GAO'S ASSESSMENT OF THE
                         FINANCIAL STABILITY OVERSIGHT
                             COUNCIL AND THE OFFICE
                             OF FINANCIAL RESEARCH

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                          OVERSIGHT AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 14, 2013

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 113-7

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                    _____

                      U.S. GOVERNMENT PRINTING OFFICE

    80-873 PDF                WASHINGTON : 2013
    -----------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
    area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC
    20402-0001

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking
        Chairman                             Member
    SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
        Emeritus                         NYDIA M. VELAZQUEZ, New York
    PETER T. KING, New York              MELVIN L. WATT, North Carolina
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
    SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
    MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
    KEVIN McCARTHY, California           AL GREEN, Texas
    STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
    BILL POSEY, Florida                  GWEN MOORE, Wisconsin
    MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
        Pennsylvania                     ED PERLMUTTER, Colorado
    LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
    BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
    BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
    SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
    ROBERT HURT, Virginia                BILL FOSTER, Illinois
    MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
    STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
    STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
    MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
    MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
    RANDY HULTGREN, Illinois             DENNY HECK, Washington
    DENNIS A. ROSS, Florida
    ROBERT PITTENGER, North Carolina
    ANN WAGNER, Missouri
    ANDY BARR, Kentucky
    TOM COTTON, Arkansas

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel
                  Subcommittee on Oversight and Investigations

                  PATRICK T. McHENRY, North Carolina, Chairman

    MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
        Pennsylvania, Vice Chairman      EMANUEL CLEAVER, Missouri
    PETER T. KING, New York              KEITH ELLISON, Minnesota
    MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
    SEAN P. DUFFY, Wisconsin             CAROLYN B. MALONEY, New York
    MICHAEL G. GRIMM, New York           JOHN K. DELANEY, Maryland
    STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
    RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
    DENNIS A. ROSS, Florida              DENNY HECK, Washington
    ANN WAGNER, Missouri
    ANDY BARR, Kentucky

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 14, 2013...............................................     1
    Appendix:
        March 14, 2013...............................................    57

                                   WITNESSES
                            Thursday, March 14, 2013

    Berner, Hon. Richard, Director, Office of Financial Research,
      U.S. Department of the Treasury................................     7
    Clowers, A. Nicole, Director, Financial Markets and Community
      Investment, U.S. Government Accountability Office..............    10
    Gerety, Amias M., Deputy Assistant Secretary, Financial Stability
      Oversight Council, U.S. Department of the Treasury.............     9

                                    APPENDIX

    Prepared statements:
        Berner, Hon. Richard.........................................    58
        Clowers, A. Nicole...........................................    65
        Gerety, Amias M..............................................    89

                  Additional Material Submitted for the Record

    Berner, Hon. Richard:
        Written responses to questions submitted by Representative
          Heck.......................................................    94
        Written responses to questions submitted by Representative
          Maloney....................................................    95
    Gerety, Amias M.:
        Written responses to questions submitted by Representative
          Heck.......................................................    97

                            WHO IS TOO BIG TO FAIL?
                            GAO'S ASSESSMENT OF THE
                         FINANCIAL STABILITY OVERSIGHT
                             COUNCIL AND THE OFFICE
                             OF FINANCIAL RESEARCH

                                  ----------

                            Thursday, March 14, 2013

                 U.S. House of Representatives,
                              Subcommittee on Oversight
                                    and Investigations,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2128, Rayburn House Office Building, Hon. Patrick McHenry
    [chairman of the subcommittee] presiding.
        Members present: Representatives McHenry, Fitzpatrick,
    Duffy, Grimm, Fincher, Hultgren, Ross, Wagner, Barr; Green,
    Cleaver, Ellison, Perlmutter, Maloney, Delaney, Sinema, Beatty,
    and Heck.
        Ex officio present: Representatives Bachus and Waters.
        Also present: Representative Garrett.
        Chairman McHenry. The subcommittee will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the committee at any time.
        This hearing today of the Subcommittee on Oversight and
    Investigations is entitled, ``Who is Too Big to Fail? GAO's
    Assessment of the Financial Stability Oversight Council and the
    Office of Financial Research.'' It is the first meeting of this
    subcommittee in this Congress. I want to welcome the new
    ranking member of this subcommittee, Mr. Green of Texas. We
    both came in, in the same class, and it is an honor that we
    have risen together.
        Today, we have distinguished witnesses, and after we
    recognize Members for opening statements, we will introduce the
    witnesses.
        I now recognize myself for 5 minutes for the purpose of an
    opening statement. With that, you can start the clock.
        In the summer of 2009, a year before the passage of the
    Dodd-Frank Act, President Obama announced his vision of
    financial regulatory reform. From the East Room of the White
    House he described a Council that would, ``bring together
    regulators across markets to coordinate and share information,
    to identify gaps in regulation, and to tackle issues that don't
    fit neatly into an organizational chart.''
        He said, ``We are going to bring everyone together to take
    a broader view and a longer view to solve problems in oversight
    before they become a crisis.'' This was a moment where the
    urgency of passing financial regulatory reform and these
    necessary changes became very urgent in order to prevent
    another crisis.
        Two and a half years after the enactment of Dodd-Frank,
    however, fewer than half of the mandated rules have been
    finalized. In fact, significant pieces of Dodd-Frank have yet
    to be promulgated, such as the Volcker Rule, the over-the-
    counter-derivatives regulation, the Qualified Residential
    Mortgage (QRM) rule, and the definition and designation of
    systemically significant non-bank financial companies.
        Granted, Dodd-Frank issued a huge mandate requiring
    collaboration and consistency across several agencies, but
    there was a promise made in the creation of the Financial
    Stability Oversight Council (FSOC). It was a promise of
    coordination and an effort to thwart a future crisis.
        However, after reviewing the GAO audit, the GAO being
    responsible for overseeing the Executive Branch putting best
    practices and principles like private enterprises do with
    hiring consultants, the GAO is our consultant to review that
    and they do a yeoman's task of that. The GAO audit of the
    Council and the Office of Financial Research (OFR) indicates
    that these entities are far from delivering on that promise
    made by the President over 4 years ago.
        First, GAO's examination of the Council's transparency
    policies and its process to designate non-bank financial
    institutions for supervision by the Federal Reserve illustrates
    the fact that it has not provided the marketplace with a clear,
    rules-based framework within which to work.
        Second, by examining FSOC's efforts to coordinate
    regulatory action among agencies and to identify systemic
    risks, including OFR's efforts in aid of those functions, it
    seems that neither of these agencies are presently equipped to
    discover potential future threats to the financial system and
    to proactively mitigate them. I find it especially
    disconcerting that after 2\1/2\ years, GAO has found that the
    Council lacks systemic processes to identify future threats to
    the financial system in its annual reports; that it fails to
    distinguish future from current threats; and that it has failed
    to prioritize those threats that it has identified.
        I think it is important to point out that as a part of the
    GAO review process, the entity under review is given 60 days
    prior to publication of the report to issue a response letter
    addressing the GAO's findings. This is what it does with all
    agencies across the government.
        I thought it interesting that after 60 days, the response
    letter included in this report came from Assistant Secretary of
    the Treasury Mary Miller, acting on behalf of the Treasury
    Secretary, and not as an official acting on behalf of the
    Council itself.
        This begs the question: If it is not even possible for the
    Council, at the Council level, to come to some level of
    consensus and agreement on a GAO report that is 63 pages long,
    how exactly do we expect the Council to coordinate actions
    across these existing regulators, and to act nimbly in
    anticipating systemic-wide financial threats?
        The GAO has offered 10 recommendations in its review of the
    Financial Stability Oversight Council and the Office of
    Financial Research. I look forward to hearing from today's
    witnesses on whether it is possible for the OFR and FSOC to
    work collaboratively with the institutions that currently
    exist. It is clear at the outset of reading the report that the
    FSOC, as currently designed, isn't getting the job done.
        So with that, I recognize for 5 minutes the gentleman from
    Texas, Mr. Green.
        Mr. Green. Thank you, Mr. Chairman.
        And this is my first opportunity to sit as ranking member.
    I think it appropriate that I take this opportunity to thank
    the many persons who made it possible for me to have this
    opportunity, and I want to assure all that I take this
    opportunity seriously.
        And I also want to let those who are consumers know that I
    understand that consumers have rights, and those who are in the
    financial services community understand that I am very much
    aware that members of the financial services community have
    needs. And it is our responsibility, our duty, to balance the
    needs and the rights, the rights of consumers and the needs of
    those in the financial services community. And I am honored to
    have this opportunity to do so.
        I also want to thank the chairman.
        Mr. Chairman, thank you so much for the amiable, amicable
    way that we have been able to work thus far. For those who may
    be interested, he and I had dinner together. It was most
    enjoyable, I must tell you. And we plan to have dinner again,
    assuming that our schedules can match up, and I believe that we
    can do this.
        Chairman McHenry. And I certainly appreciate you purchasing
    the dinner as well.
        Mr. Green. Thank you.
        Chairman McHenry. It was very kind of you, and I will buy
    next time.
        Mr. Green. This is why we are having dinner again.
        I also would like to thank you, Mr. Chairman, for your
    opening statement, and the sense of while you and I may not
    agree in our opening statements, you have stayed to the topic
    that you called to my attention for this hearing today. And I
    think it is exceedingly important that we do our very best to
    stay on target, stay on focus.
        If we do this, while I am sure this hearing will be
    exciting to a good many of us, it may be boring to a lot of
    other people, because it really deals with a report that we
    have received from GAO, which contains recommendations. And we
    understand that a newly instituted organization of the
    magnitude and size of FSOC has to have time to get up to speed
    so that it can work efficaciously.
        The truth be told, if you go back to 1933 and you look at
    the FDIC, which is probably the forerunner to what we have
    today, it is a quite similar paradigm. If you go back, you will
    find that it took years for the FDIC to get up and running to
    the extent that it was as effective as it ultimately has been.
    And it has been quite effective.
        So today, we have this opportunity to look at FSOC. We will
    also look at the Office of Financial Research, and we will look
    at the recommendations that have been made. I am going to ask
    my colleagues to do as best as we can to pay as much attention
    to what is being said and to take seriously the recommendations
    of GAO. But I am also going to look closely at what FSOC and
    the Office of Financial Research have by way of responses.
        I have had an opportunity to peruse the report and I don't
    find anything in that report which is exceedingly detrimental.
    The truth is, they have made some recommendations that we have
    to take seriously. And I look forward to our working with the
    two entities and with the other members of this committee to
    make sure that we find a good way to move forward with an
    institution that is dearly needed for the benefit of consumers
    and the financial services community.
        With a minute and 28 seconds left, let me just share one
    final thought. These are not easy times, they are not the worst
    of times, and they are not the best of times. But these are the
    times that will enable persons who mean well and who want to
    work across lines to work together.
        I am going to do all that I can to work with the chairman
    and members across lines so that we can work together for the
    benefit of the American people. While we may have opinions that
    will differ, it is my belief that there is so much more that we
    can agree on and we ought to try to find the things that we
    agree on and work together.
        With that, I will yield back the balance of my time, Mr.
    Chairman. And thank you very much for convening the hearing.
        Chairman McHenry. I thank the ranking member.
        The Chair will now recognize for 2 minutes the vice
    chairman of the subcommittee, the gentleman from Pennsylvania,
    Mr. Fitzpatrick.
        Mr. Fitzpatrick. Thank you, Mr. Chairman. And I look
    forward to the panel discussion here this morning.
        I look forward to learning more about the steps that FSOC
    and the Office Of Financial Research plan to take to increase
    transparency. Transparency is a pillar of representational
    government. And the important work of the FSOC should be
    submitted to vigorous public scrutiny, so we expect to see how
    we can all improve in that area.
        I am also concerned about the FSOC's expansive authority to
    designate non-bank institutions as systemically important
    financial institutions (SIFI). A SIFI designation is likely to
    have affects on the markets and the economy as a whole, but the
    GAO report states that the FSOC has no plans to examine that
    impact. I hope that they will quickly correct course and adopt
    policies and procedures to measure the impact of their
    designations.
        And finally, I plan to ask the witnesses about coordination
    between the FSOC and its member agencies. Although the GAO
    report found that collaboration has been lacking, I actually
    find it troubling that the FSOC appears to be inserting itself
    into deliberations at the SEC with regards to money market
    funds. If an agency is continuing to consider a matter and it
    has the expertise to give it proper contemplation, then I
    question the need to have yet another agency subvert that
    process. So I look forward to the testimony in considering the
    answers to some of these questions. And I yield back.
        Chairman McHenry. I thank the gentleman.
        Mrs. Maloney of New York is recognized for 2 minutes.
        Mrs. Maloney. Thank you, Mr. Chairman, and thank you,
    Ranking Member Green.
        And welcome to the witnesses. I thank you all for your
    service.
        The Financial Stability Oversight Council and the Office Of
    Financial Research were two key pillars of the Dodd-Frank
    reforms that we passed and the President signed into law. They
    are a direct result of the work we did to fill in the gaping
    holes in regulatory oversight that led to an estimated $22
    trillion in losses to the U.S. economy.
        They are a response to the realization that our regulators
    did not have the ability to look across the financial system
    and to detect financial instability before it ballooned out of
    total control.
        The FSOC is simply a council of regulators who meet and
    coordinate regulatory and oversight efforts, and it is
    dependent upon data that it receives from the Office of
    Financial Research to help them do this job.
        The OFR was created to spot trends within the financial
    services industry through the collection and analysis of near-
    time financial industry data. Dodd-Frank details specific
    information that the office is supposed to collect from the
    financial services institutions. The language was specific in
    saying, ``The office shall collect data using the same
    protocols the industry does.''
        The reasoning behind this was to get the office up and
    running in the quickest possible fashion so that we can
    continually assess the overall health of the U.S. financial
    markets, spot trends, or an oversaturation of a particular
    financial instrument--we all remember the credit default swaps.
    And it was supposed to proactively alert and work with the
    effective brokers in an orderly fashion, proactively dealing
    with any problems that may arise so that that we don't
    experience another run on the markets and near failure, like we
    had in 2008.
        So, I look forward to your testimony and your responses to
    the GAO report. Thank you.
        My time is up.
        Chairman McHenry. The gentleman from Missouri is recognized
    for 3 minutes.
        Mr. Cleaver?
        Mr. Cleaver. Thank you, Mr. Chairman.
        I appreciate you and the ranking member for calling this
    hearing together.
        And I would like to join my colleagues in welcoming the
    witnesses to this Subcommittee on Oversight and Investigations
    hearing on the Financial Stability Oversight Council and the
    Office Of Financial Research today. I look forward to this
    hearing. I look forward to hearing your comments.
        Both FSOC and OFR are a relatively new part of our
    regulatory framework created by Dodd-Frank. The Council
    provides, for the first time, comprehensive monitoring to
    assure the stability of our Nation's financial system.
        Years without accountability for Wall Street and big banks
    brought us the worst financial crisis since the Great
    Depression: the loss of 8 million jobs; failed businesses; a
    drop in housing prices; and wiped-out personal savings.
        The process we had in place for previous problems was
    insufficient, to say the least. The Council is charged with
    nothing short of seeing the next crisis coming down the road
    and helping regulators find ways to stop it from arriving at
    our doorstep.
        Together with OFR, the Council identifies threats to the
    financial stability of the United States, promotes market
    discipline, and responds to emerging risk to the stability of
    the United States' financial system.
        Today's testimony reminds us that FSOC and OFR can improve
    and augment the existing efforts. Key FSOC missions--to
    identify risk and respond to emerging threats to financial
    stability--are, at a fundamental level, inherently challenging,
    in part because risks to financial stability do not develop in
    the same way in successive crises.
        The GAO has identified several areas in which these key
    organizations can better fulfill their mission.
        I look forward to hearing more from the GAO, the FSOC, and
    the OFR today as we work together to ensure fulfilling our
    mission.
        Members of the panel, thank you for your testimony today.
        I yield back.
        Chairman McHenry. The gentleman from Florida, Mr. Ross, is
    recognized for 3 minutes.
        Mr. Ross. Thank you, Mr. Chairman.
        And being from Florida, where sunshine is very important,
    sunshine and the--arena has to do with transparency. And I note
    that the GAO report found that the public cannot easily monitor
    FSOC's progress toward fulfilling its statutory purpose because
    it does not maintain sufficiently detailed records of its
    meetings and has not implemented a satisfactory policy to
    disclose those records.
        For example, FSOC's many important committees, which
    consider policy matters before presenting such matters to
    FSOC's council of voting and non-voting members, keep neither
    transcripts of their meetings nor minutes.
        The Council also does not transcribe its meetings, though
    it does keep certain meeting minutes. However, the minutes do
    not provide meaningful insight into the perspectives and
    insights shared at Council meetings due to vagueness.
        In addition, the Council does not publish a public agenda
    prior to each meeting, and FSOC's one-and-a-half-page
    transparency policy is completely silent on the matter of
    public notice.
        Finally, the public generally cannot monitor the Council's
    activities in person because it has historically conducted
    approximately two-thirds of its meetings in private in
    executive session, even though it is required to hold public
    meetings whenever possible.
        The Council's meeting minutes do not provide a basis to
    determine whether the Council met in executive session
    consistent with FSOC's transparent policies.
        With that, I yield back, Mr. Chairman.
        Chairman McHenry. I thank the gentleman.
        We will now welcome our distinguished set of witnesses for
    today.
        We have, for his first appearance on the House side of the
    Capitol, the Honorable Richard Berner, the Director of the
    Office of Financial Research (OFR). Prior to his confirmation
    as the OFR Director, Dr. Berner served as a Counselor to the
    Secretary of the Treasury with a responsibility for standing up
    the OFR. He has held various positions in the public and
    private sector and on the public sector on the research staff
    of the Federal Reserve Board.
        He has a Ph.D. from the University of Pennsylvania, and has
    an undergraduate degree from a place called Harvard.
        Thank you, Dr. Berner, for being here.
        Mr. Amias Gerety is the Deputy Assistant Secretary for the
    Financial Stability Oversight Council. He previously worked for
    private consulting firms, as well as a Washington group, the
    Center for American Progress. He also has an undergraduate
    degree from Harvard University.
        And Ms. Nicole Clowers is the Director of the Financial
    Markets and Community Investment Division of the Government
    Accountability Office. She has been with the GAO for 14 years.
    She has a bachelor's degree from Virginia Tech and a master's
    in public administration from the University of Georgia--thank
    you for being the southern representative on the panel--and is
    a 2009 recipient of the Arthur S. Flemming Award for
    outstanding public service.
        Thank you all for your service to our people and within our
    government.
        Each of you will be recognized for 5 minutes. We have a
    lighting system that is very similar to what you see on the
    roads today. I hope you will recognize these lights more than
    we do those other lights on the public roads. There will be no
    red light cameras, but we ask you to summarize your statements.
    And for the record, your opening statements will be included in
    the record.
        And like the roads, green means go, yellow means hurry up,
    and red means stop, so you will have 1 minute to go when the
    yellow light comes on.
        With that, we will begin with Dr. Berner.

    STATEMENT OF THE HONORABLE RICHARD BERNER, DIRECTOR, OFFICE OF
          FINANCIAL RESEARCH, U.S. DEPARTMENT OF THE TREASURY

        Mr. Berner. Chairman McHenry, Ranking Member Green, and
    members of the subcommittee, thank you for the opportunity to
    appear today on behalf of the Office Of Financial Research.
        In my remarks this morning, I will provide an overview of
    the OFR's major accomplishments and priorities. I will also
    describe actions the OFR has taken in response to a report by
    the Government Accountability Office in September 2012.
        My written testimony provides more details on the
    significant progress that the OFR has made in fulfilling its
    primary data and research responsibilities, as well as in
    enhancing its transparency and accountability.
        As you know, Congress created the OFR through the Dodd-
    Frank Act to improve the quality of financial data available to
    policymakers, and to develop better tools and analyses to
    understand the risks in the financial system.
        The OFR supports the activities of the Financial Stability
    Oversight Council--also known as the Council. The OFR, the
    Council, and Council member organizations have complementary
    mandates, and our different perspectives are mutually
    beneficial. They enable us to conduct comprehensive assessment
    and monitoring of threats to financial stability while avoiding
    duplication through regular collaboration and coordination.
        The OFR has built a new organization from the ground up,
    assembling a talented workforce and developing a technology
    infrastructure with the highest level of security. The Office
    is still a young organization, but it is now delivering on its
    mission in concrete ways.
        For example, the OFR is reporting regularly to the Council
    through its Systemic Risk Committee on developments in
    financial markets and activities, on financial stability
    measures, and on macroeconomic indicators. The OFR is also
    providing data and analysis to inform the work of the Council's
    non-bank designation committee, including analysis of the asset
    management industry.
        And the OFR is providing data and staff support for the
    Council's 2013 annual report. Last July, the OFR published its
    first annual report, and will release its second one later this
    year.
        Many of the OFR's early accomplishments involve
    collaboration on research and on data standards. In addition to
    its mandate to serve the needs of the Council, the OFR is
    required by statute to cultivate a network of academics,
    researchers, data scientists, and others to enrich and expand
    OFR capabilities.
        We are collaborating with the research and data communities
    through our research working paper series, our seminars and
    conferences, and our financial research advisory committee.
        We are also collaborating internationally on data standards
    which improve the quality of financial data and help reduce the
    reporting burden for industry. These standards facilitate our
    analysis of interconnections among financial firms and their
    counterparties, and help us to understand the transmission and
    amplification of stress across the financial system. In
    particular, the OFR has played a central role in the
    international initiative to establish a global legal entity
    identifier, a code that uniquely identifies parties to
    financial transactions and links their basic business card
    information.
        As we pursue the OFR's agenda, we are committed to the
    highest level of transparency and accountability to the
    Congress and the public. We strongly support the GAO's
    important oversight function and appreciate its constructive
    work in conducting its review.
        In response to the GAO report, the OFR has improved its
    communication with the public, further developed its strategic
    planning and performance management, and worked with the
    Council to assure a coordinated approach to achieving our
    shared mission.
        Chairman McHenry and other members of the subcommittee,
    thank you again for the opportunity to appear today. We welcome
    the oversight of this subcommittee, and we look forward to
    working with you and your staff to continue the critical task
    of promoting the stability of this Nation's financial system.
        I would be happy to answer your questions.
        [The prepared statement of Dr. Berner can be found on page
    58 of the appendix.]
        Chairman McHenry. Thank you, Dr. Berner.
        Mr. Gerety?

       STATEMENT OF AMIAS M. GERETY, DEPUTY ASSISTANT SECRETARY,
     FINANCIAL STABILITY OVERSIGHT COUNCIL, U.S. DEPARTMENT OF THE
                                TREASURY

        Mr. Gerety. Thank you.
        Chairman McHenry, Ranking Member Green, and members of the
    subcommittee, thank you for the opportunity to appear here
    today to discuss the Financial Stability Oversight Council's
    role in implementing key reforms of the Dodd-Frank Wall Street
    Reform and Consumer Protection Act.
        This month marks the 5-year anniversary of the failure of
    Bear Stearns and the start of the financial crisis, and the
    biggest recession our country had experienced since the Great
    Depression. Those events in turn led to President Obama signing
    the most comprehensive set of financial reforms in 80 years
    into law in the summer of 2010.
        One of the Dodd-Frank's key reforms was the creation of the
    Financial Stability Oversight Council, the first Federal entity
    vested with clear responsibility for comprehensive monitoring
    of the stability of our Nation's financial system.
        The Council's statutory mission is to identify risks to the
    financial stability of the United States, promote market
    discipline, and respond to emerging threats to the stability of
    the U.S. financial system. Since its creation, the Council has
    worked to fulfill this mission and promote coordination among
    its members.
        To that end, one of the Council's first actions was the
    development of an organizational structure that fostered open
    and frank discussion, collaboration, and coordination. Through
    the creation of standing interagency staff committees, the
    Council's work draws upon the collective policy and supervisory
    expertise of its members.
        The Council has convened 28 times, has published 2 annual
    reports and 6 additional studies or reports, and has designated
    8 financial market utilities as systemically important.
        The Council has also played an active role in coordinating
    the regulatory response to significant events, such as
    Superstorm Sandy. The Council is also firmly committed to
    operating in an open and transparent manner. At its first
    meeting, the Council adopted a transparency policy which
    provides that Council meetings will be open to the public
    whenever possible and not less than twice each year. The
    Council has had 9 open sessions in its first 2\1/2\ years.
        The Council's annual report is also a key accountability
    mechanism that provides transparency to the public and to
    Congress about the Council's activities over the previous year
    and its forward-looking assessment of the Council's priorities.
        The Council's rulemakings on designations of non-bank
    financial companies and financial market utilities also
    demonstrate its commitment to transparency. Although these
    rules were not statutorily required, the Council believed it
    was important to provide the public with insight into how the
    Council intended to evaluate these potential designations.
        The Council is now in the final stages of evaluating an
    initial set of non-bank financial companies for a potential
    designation which will subject them to enhanced prudential
    standards and supervision by the Federal reserve, closing an
    important regulatory gap.
        During the past 2\1/2\ years, the Council staff has also
    been pleased to work with a number of teams from the Government
    Accountability Office as they have conducted multiple reviews
    of the Council's activities.
        The GAO report published in September 2012 highlighted a
    number of examples of how both the Council and the OFR have
    demonstrated transparency and accountability while carrying out
    their respective missions to safeguard the stability of our
    financial system.
        The reports also made a number of recommendations to
    further enhance the progress that each organization has made in
    these important areas. The Council and the OFR provided a joint
    response to Congress and the GAO outlining the actions taken
    and planned in response to each recommendation, described in
    more detail in my full written testimony.
        The Council remains firmly committed to promoting
    transparency and accountability in connection with its
    activities, and takes the GAO's recommendations seriously.
        I appreciate the invitation to appear here to provide this
    update on the Council's responses to the GAO report, and I look
    forward to your questions.
        Thank you.
        [The prepared statement of Mr. Gerety can be found on page
    89 of the appendix.]
        Chairman McHenry. Ms. Clowers, you are recognized for 5
    minutes.

    STATEMENT OF A. NICOLE CLOWERS, DIRECTOR, FINANCIAL MARKETS AND
      COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Ms. Clowers. Good morning, Chairman McHenry, Ranking Member
    Green, and members of the subcommittee. Thank you for the
    opportunity to be here today to discuss our work on FSOC and
    OFR.
        As you know, the Act established FSOC and OFR to address
    regulatory weaknesses highlighted by the recent financial
    crisis, namely the lack of an agency responsible for monitoring
    risk across the financial system and a shortage of timely
    information to facilitate that oversight.
        Although Congress set up some accountability mechanisms for
    FSOC and OFR, Members of Congress have questioned whether more
    needs to be done to ensure FSOC and OFR use their authorities
    as Congress intended.
        In my comments today, I will discuss three issues: first,
    the challenges that FSOC and OFR face in carrying out their
    missions; second, the steps the entities have taken to carry
    out their responsibilities; and third, GAO's recommendations to
    FSOC and OFR. My comments are based on our September 2012
    report.
        First, FSOC and OFR face several challenges as they work to
    achieve their missions, namely the Dodd-Frank Act left most of
    the fragmented regulatory structure in place. As a result,
    FSOC's ability to provide a more comprehensive view of the
    threats to financial stability hinges on the collaboration
    among its many members, almost all of whom have their own
    independent regulatory viewpoint.
        Second, despite this and other challenges, FSOC and OFR
    have taken steps to carry out their responsibilities. For
    example, FSOC established multiple standing committees to carry
    out the business of the Council. One of the committees, the
    Systemic Risk Committee, is responsible for monitoring risk for
    the Council. OFR participates on this committee. OFR is also
    building capacity to monitor threats to financial stability.
        The third and final topic that I would like to discuss
    today is the recommendations from our September report. We made
    10 recommendations to FSOC and OFR, and I would like to briefly
    highlight a few of those recommendations that are related to
    the agencies' core missions: transparency; and accountability.
        To better position FSOC to achieve its core missions, we
    recommended that FSOC develop a systematic approach to help
    identify potential threats to financial stability. While the
    Systemic Risk Committee may help FSOC analyze known risk, it
    does not take full advantage of member agency resources to
    identify new threats.
        In addition, we found that FSOC does not have a process for
    consistently identifying new threats, separating them from
    well-known threats, or prioritizing them. As a result,
    policymakers and market participants do not have the
    information they need to develop effective and timely
    responses. Therefore, we recommended that FSOC develop more
    systematic, forward-looking approaches for reporting on
    emerging threats.
        Related to transparency, we recommended, among other
    things, that FSOC keep detailed records of closed-door
    meetings. While no specific level of detail is required in FSOC
    minutes, the limited documentation of the discussions makes it
    difficult to assess FSOC's performance. For instance, the
    meeting minutes typically describe agenda items for the
    meetings, and information on the presenters for each agenda
    item, but lack additional detail. As a result, the Congress and
    the public receive limited information on the FSOC's decision-
    making.
        Finally, related to accountability, the Congress intended
    that the designation of the financial companies for enhanced
    supervision would lead to greater financial stability. The
    designations will likely have other significant benefits and
    costs for the designated companies as well as potentially the
    Nation's economy.
        Given these potential impacts, we recommended that FSOC
    should comprehensively evaluate whether the designations, once
    made, are having their intended impact.
        In conclusion, Mr. Chairman, although fully addressing our
    recommendations may take time, doing so will help FSOC and OFR
    shed more light on their decision-making and allow the Congress
    to hold them accountable for results.
        Furthermore, addressing our recommendations can help FSOC
    and OFR to enhance collaboration among its FSOC members, which
    is critical to their ability to achieve their missions.
        We will continue to monitor the entities' progress in
    implementing our recommendations, and we stand ready to assist
    Congress as it continues its oversight.
        Chairman McHenry, Ranking Member Green, and members of the
    subcommittee, this completes my prepared statement. I would be
    happy to answer questions at the appropriate time.
        Thank you.
        [The prepared statement of Ms. Clowers can be found on page
    65 of the appendix.]
        Chairman McHenry. Thank you all for your testimony.
        I now recognize myself for 5 minutes.
        The GAO report was issued in September of last year. The
    FSOC has met 8 times since then.
        Mr. Gerety, has the GAO report been discussed at the
    Council level?
        Mr. Gerety. Thank you, Mr. Chairman.
        The GAO report has been discussed at length among the staff
    committees, in particular among the deputies' committee, but
    has not been discussed by the Council members itself, as our
    minutes suggested. The Council is aware of the oversight, and
    so we presented on that topic more generally, rather than the
    specifics of this report.
        Chairman McHenry. At the subcommittee level. How many
    subcommittees are there?
        Mr. Gerety. In particular, the deputies' committee has
    discussed this topic as it has discussed a significant number
    of topics before this.
        Chairman McHenry. Is there a transcript I could find of
    those discussions?
        Mr. Gerety. The Council does not keep transcripts of staff
    meetings.
        Chairman McHenry. Is there an agenda of those staff
    meetings that I could find?
        Mr. Gerety. Congressman, the Council endeavors to--
        Chairman McHenry. Is the answer no?
        Mr. Gerety. We do not publish agendas of staff meetings.
        Chairman McHenry. Okay. Now, at the full FSOC committee,
    there are 10 recommendations from the GAO on a very important
    agency. Two and a half years after Dodd-Frank was passed, we
    still don't have the ability, we have the minutes that are
    typically two to five pages, one is actually a page-and-a-half
    if you include the number of attendees. Do you have any
    intention of providing transcripts of the FSOC meeting?
        Mr. Gerety. Congressman, I can't speak on behalf of the
    Council. The Council is actually made up of its members and--
        Chairman McHenry. Certainly. But you are here on behalf of
    the Chairman of that Council at the direction of the FSOC.
        Mr. Gerety. That is correct. What I can say is with respect
    to the issue of transparency, and I think that the
    recommendations that the GAO made are ones that we take
    seriously, and we have--
        Chairman McHenry. How do we know that you take them
    seriously if we have no documentation you have had these
    discussions?
        Mr. Gerety. Sir, for example, in the Council's letter to
    the Congress and to the GAO, we talk about the steps already
    taken and additional steps. For example, one of the GAO's
    recommendations was about the transparency of our Web site. In
    December of 2012, the Council made a number of steps to improve
    that Web site to make it more navigable, to provide updates
    that people can sign up for e-mail updates based on--
        Chairman McHenry. I appreciate that. That is nice. And that
    is a nice step. To your point about the Mary Miller letter on
    behalf of the Treasury Secretary, the Assistant Secretary of
    the Treasury, the response to the GAO report, that 60 days that
    I acknowledged in my opening statement, I find it peculiar that
    it was on behalf of the Treasury Secretary. Was there a vote of
    the FSOC for this response by a Treasury official?
        Mr. Gerety. Sir, this response was prepared in consultation
    with all of the FSOC members.
        Chairman McHenry. Okay. Where can we find documentation of
    that consultation?
        Mr. Gerety. Congressman, the consultation process is
    consistent with a very collaborative and open framework among
    the Council members, so the natural process of course is to
    circulate drafts, collect comments, and then to produce that.
        Chairman McHenry. And this is what the GAO has designated
    as a problem area within the 10 recommendations, that there is
    not transparency within FSOC to the public or the regulated
    communities. This is what is so deeply disturbing about the
    intention of FSOC to mitigate the next financial crisis when
    you can't even disclose the meeting minutes, like the Federal
    Reserve does, the transcripts of your meetings. When the
    Federal Reserve is a greater discloser of information than you
    at the FSOC, I think that is a major concern.
        Now, Ms. Clowers, is it fairly typical that the regulated
    agency, when you give a report, actually have consultation on
    your report?
        Ms. Clowers. Yes. When we provide a report for comment,
    typically the agencies will respond within 30 days. And in
    doing so, they will have consulted with people within their
    agency.
        Chairman McHenry. Does the fact that a Treasury official
    has to respond for the FSOC raise some of your concerns within
    your report?
        Ms. Clowers. Who signs the report can vary by agency and
    the topic at hand. So the fact that Ms. Miller signed for the
    chairperson is not that unusual. But I think that it does
    reflect some of the issues we raised in the report in terms of
    the Council and the decision-making, trying to reach consensus
    on certain issues.
        Chairman McHenry. Okay. Thank you for your testimony.
        This highlights the fact that the current FSOC measure of
    disclosure is simply not working, as the GAO report highlights
    and as my questions illuminate.
        I now recognize the ranking member for 5 minutes.
        Mr. Green. It is our tradition to recognize the ranking
    member of the full committee whenever the ranking member is
    present. So I will yield to the ranking member of the full
    committee, Ms. Waters.
        Ms. Waters. Thank you very much, Mr. Green.
        FSOC and OFR are central to the overarching objectives of
    Wall Street reform, and I want to have you further expound on
    the work that your standing committees are undertaking to
    assist in the Council's goals and objectives.
        How do these committees collaborate and facilitate
    communication between individual member agencies?
        Mr. Gerety. Thank you, Congresswoman.
        I think this is an important topic, and one of the first
    actions of the Council was to create an open and collaborate
    framework through these interagency staff committees. In
    particular, the FSOC's deputies' committee meets biweekly. It
    covers a range of topics. Most importantly, it covers topics
    related to coordination, the Council's agenda, and how to
    address issues before the Council.
        In addition, the deputies' committee helps facilitate the
    work of the other staff committees that are dedicated to
    particular topics. The Systemic Risk Committee--which we have
    already mentioned this morning--meets monthly and creates a
    framework for all of the supervisory and market expertise of
    the regulatory members of the FSOC. The non-voting members come
    together and discuss risks to the financial system, trends in
    financial markets, and macroeconomic indicators, and use that
    process to develop and understand potential threats to
    financial stability. Those processes obviously build into a
    really important accountability document, which is the FSOC's
    annual report. The FSOC's annual report is a comprehensive
    document. It looks at significant financial market
    developments, significant regulatory developments, and it tries
    to identify potential emerging threats and to make
    recommendations.
        In addition, each of the members of the Council is required
    to sign a statement to Congress identifying the recommendations
    that they believe are necessary to promote our financial
    stability. And over the past 2 years, each of those members has
    signed a statement, along with the FSOC's annual report, saying
    that those recommendations are the most important to promote
    financial stability.
        Ms. Waters. The GAO expressed concerns with FSOC and OFR's
    lack of transparency in its decision-making process. While the
    GAO report makes good recommendations, I am concerned about how
    FSOC will balance transparency with its responsibility to
    maintain the confidentiality of market-sensitive information.
        Can you discuss how FSOC has attempted to strike the right
    balance?
        Mr. Gerety. Yes, Congresswoman.
        I think this is an important issue, which is the balance
    between the confidentiality of supervisory information, the
    confidentiality of market sensitive analysis, and the
    importance of being transparent and accountable. I think the
    GAO has recommended a number of areas where we can improve that
    transparency and accountability.
        I think we have already taken some steps, and I think on
    the basis of this conversation and the continuing dialogue with
    the GAO, there are certainly more steps that we can consider
    over time and revisit that transparency and policy over time to
    make sure that balance is struck correctly.
        However, I would also note that on a number of the topics
    that have been discussed here today, there has been tremendous
    pressure on the other direction. For instance, in the non-bank
    financial company designations process, the companies have
    expressed, and market participants have expressed deep concern
    about the nature of confidential information and the nature of
    those deliberations.
        And so in striking that balance the Council has always
    tried to strive to protect confidential supervisory information
    so that we have an open dialogue within the regulatory
    community, while also publishing and getting public input on
    decisions made by the Council through a notice and comment
    process, which we have done in significant studies in the past.
        Ms. Waters. Thank you very much.
        In testimony before the Senate, Fed Governor Dan Tarullo
    expressed concerns with areas of systemic risk that remain a
    challenge for the Fed on financial stability. Can you discuss
    OFR's research and analysis of the tri-party repo market, as
    well as current proposals to address the clearing of banks'
    significant exposure to credit risk?
        Mr. Berner. Thank you, Congresswoman.
        That is an important issue, our work on the tri-party repo
    market and on short-term funding markets in general are
    extremely important for the analysis of financial stability.
    Those issues have been discussed at length in both FSOC annual
    reports and in our OFR annual report that was published in July
    of last year.
        We continue to do work on those issues. As you know, steps
    have already been taken to mitigate some of the risks in the
    tri-party market. In the United States, however, there are
    three parts to the repo market. And the other two parts--namely
    the bilateral or so-called DVP market, and the GTF market--are
    less widely discussed, but they may contain their own risks.
        In seeking to analyze and to measure the risks in those
    markets, we are working with other Council member agencies, in
    this case specifically the Federal Reserve, to improve the
    quality and scope of data on those markets, to analyze the data
    that are available, which as far as we know have not yet been
    analyzed. And--
        Chairman McHenry. The gentlelady's time has expired.
        If you can summarize?
        Mr. Berner. Sure. And we plan to do further work in that
    area for the benefit of the Council and for the Fed.
        Ms. Waters. Thank you very much, Mr. Chairman. I yield
    back.
        Chairman McHenry. Let the record reflect that the time was
    not appropriately recognized. This was the gentlelady's time,
    not the ranking member of the subcommittee's time. I just want
    that to be reflected, and without objection, that is so
    ordered.
        We will now recognize the chairman emeritus of the full
    committee, the gentleman from Alabama, Mr. Bachus.
        Mr. Bachus. Thank you.
        Director Clowers, coordinating or facilitating coordination
    between the agencies for rulemaking and supervision enforcement
    actions and reporting requirements as part of FSOC's explicit
    duties, if you were to assess FSOC's ability to coordinate
    agency rulemaking as of the time you completed your recent
    study, what would your assessment be?
        Ms. Clowers. This was related to one of the recommendations
    that we did make for FSOC, that we have seen steps that they
    have taken to promote collaboration and coordination, including
    development of the road map and the consultation framework. But
    we thought more could be done.
        And in fact, in 2011 we recommended that FSOC develop a
    formal policy that would outline when coordination should take
    place, who should be involved, and what to do when you have
    conflicting views.
        We think that there is a greater role for FSOC to play in
    coordinating the many Dodd-Frank rulemakings. FSOC has told us
    that they lack the authority to force members to coordinate.
    The regulators have also expressed some concerns about
    maintaining their independence.
        But we think that the balance can be struck in both
    maintaining a regulator's independence and still have FSOC play
    a greater role in this area.
        Mr. Bachus. All right.
        Deputy Secretary, could you write to the committee and tell
    us what you think your lack of authority is? Because I think
    you will agree that coordinating between the agencies is--if
    you don't, you are going to have a fragmented market. And you
    are also going to have migration of certain activities to
    unregulated areas, like you had in 2006, 2007, and 2008.
        Would you do that?
        Mr. Gerety. Congressman, I would be glad to respond in more
    detail.
        However, I would note that there is a distinction between
    the responsibilities that the Council has, which are to
    collaborate and coordinate across its member agencies, and the
    authority that it may have--
        Mr. Bachus. Yes, and I am just saying, lay out in your
    letter what you think your duties are, what you think you lack,
    and what you say that the Director has said that some of the
    agencies have expressed a pushback against you. We would like
    to know the specifics.
        Mr. Gerety. Importantly, the Dodd-Frank Act, when creating
    the Council, did not change the fundamental statutory
    independence of the regulatory agencies that make up the
    Council's membership.
        Mr. Bachus. Yes, but you were actually designated by
    statute to coordinate that rulemaking. So just tell us what
    your limitations are, what you need, or why you can't.
        A follow up to that is if they fail to coordinate
    rulemaking, both internally with domestic regulators and with
    foreign regulators, and I know the E.U. has expressed some real
    concerns in this regard, could that lead to disruptions in the
    U.S. economy? Director Clowers, for instance, with the CFTC
    rulemaking on derivatives, I think it has already, according to
    The Wall Street Journal and others, led to some fragmentation.
        Ms. Clowers. Right. We have done a series of reports
    looking at the importance of coordination among agencies, both
    in their normal activities as well as rulemaking. And when
    agencies aren't appropriately coordinating, it can lead to
    conflicting rules, duplication, or even potential gaps.
        Mr. Bachus. Thank you.
        Do you agree with that, Deputy Secretary?
        Mr. Gerety. Congressman, I think the importance of
    coordination across the implementation of Dodd-Frank is
    crucially important.
        I would note on the issue that you raised, it was an issue
    the Council takes seriously and was discussed by the Council
    members in December of last year.
        Mr. Bachus. Sure. And issuing no-action letters is not a
    solution. You understand that?
        Mr. Gerety. Congressman, I think what you are referring to
    are actions by the CFTC.
        Mr. Bachus. Yes. But you would agree that is not what is
    intended?
        Mr. Gerety. Congressman, I don't think I can comment on the
    specific regulatory actions by the CFTC. But I think the
    important points that you raised about the importance of
    regulatory coordination, both domestically and internationally,
    are central to the Council and to the Treasury as well.
        Mr. Bachus. Yes. Would you be willing to sit down with the
    subcommittee chair, Chairman McHenry, and staff and our
    committee Chair, and tell us what you believe we can do, or if
    there are failures in the Act or the statute, let us know what
    those are?
        Mr. Gerety. Congressman, we would be glad to work with you
    or with your staff to talk about challenges in implementation
    of the Act. I think that there is a lot of good work being done
    and most importantly, I think there is a lot of evidence that
    regulators are working through the issues that you are raising.
        Mr. Bachus. Thank you.
        Chairman McHenry. I thank the former chairman of the full
    committee, and I will now recognize the ranking member of the
    subcommittee, Mr. Green.
        Mr. Green. Thank you, Mr. Chairman.
        Let me start with our representative from GAO. You have
    indicated that some things ``can lead to,'' but you did not say
    ``have led to,'' nor have you said they ``will lead to.'' And I
    want to use this moment to clarify, because this coordination
    issue is something that is important, but it is not something
    that has led to anything that is negative. Is this a correct
    statement?
        Ms. Clowers. I would give one example of where better
    coordination in terms of the sequencing and timing could have
    been improved. Specifically, FSOC put out its rule on
    designating non-bank financial companies before the Federal
    Reserve had defined what it means to be predominantly engaged
    in financial activities.
        And so, that is an example of where we heard from the
    industry this isn't helpful in terms of the sequencing.
        Mr. Green. I understand.
        But the point is that nothing has been done that has led to
    an adverse impact on the economy. That was what the question
    had to do with when you addressed it. Is this a fair statement?
        Ms. Clowers. This is a fair statement.
        Mr. Green. Okay.
        And you have also indicated that some good things have been
    done with FSOC. Reiterate, if you would, some of the good
    things that have been done.
        Ms. Clowers. Certainly. One example, as Mr. Gerety has
    talked about already, is the committee structure that FSOC set
    up in terms of interagency makeup of those committees and the
    work that gets done at the committee level.
        In addition, FSOC has met all its mandated study
    requirements and issued two annual reports that are
    comprehensive and contain information for the public.
        OFR has been working to stand up an agency while fulfilling
    its mission, which is a challenge, and they have been working
    to hire and retain top talent.
        In addition, OFR has developed a working paper series to
    examine critical issues facing the Nation.
        Mr. Green. And while you have some recommendations, is it
    fair to say that you did not and your report does not connote
    or denote any fatal flaws?
        Ms. Clowers. We identified a number of areas where we think
    improvements could be made--
        Mr. Green. I understand improvements, but you haven't
    identified any fatal flaws.
        What I am trying to do is make the record clear as to
    your--you have recommendations, but you have not concluded that
    there are fatal flaws in this process and that they will take
    some time to work out the recommendations that you have called
    to our attention. Is this a fair statement?
        Ms. Clowers. Yes.
        Mr. Green. Thank you. And the truth is that with new
    startups the size of FSOC and OFR, it takes some time to
    develop systems and techniques and methodology. Is this true?
        Ms. Clowers. Yes.
        Mr. Green. And is it true that while you have given your
    recommendations, you also understand that as time progresses,
    they will have greater opportunities to do greater things. And
    when you re-examine, conceivably these things can be remedied.
    Is that a fair statement?
        Ms. Clowers. We believe all the recommendations we have
    made could be implemented and would improve both agencies.
        Mr. Green. Now, let me go quickly to the representative
    from FSOC.
        You indicated that you have issued two annual reports. You
    have designated two entities as significantly important. And
    you have had nine open session meetings. Is that correct?
        Mr. Gerety. That is correct.
        Mr. Green. Can you just elaborate a little bit on how you
    work with the various entities to produce the work product that
    you have called to our attention?
        Mr. Gerety. Thank you, Congressman. I think that the work
    products process that we have established, as Ms. Clowers
    identified, is primarily through interagency standing
    committees.
        The Council has 15 members--10 voting members, 8 of whom
    are independent regulatory agencies, plus the Treasury
    Secretary and an independent member with insurance expertise.
    In addition, there are three members from the State regulatory
    community, as well as Dr. Berner and the Director of the
    Federal Insurance Office.
        So we have a very wide diversity of views and we have
    benefited greatly from an open and collaborative process that
    runs through committees that allow all 15 members of the
    Council to engage, even on topics that are a little bit outside
    of their natural expertise.
        And we think that is very important, because one of the key
    lessons of the crisis is that sometimes things that are
    happening in one area of the financial system could have
    impacts in other areas of the financial system.
        One of the great examples of this, in terms of the
    Council's recent history, is in Superstorm Sandy. And what you
    saw is that the Council met at the principal-level 2 times in 2
    days.
        And what we really saw in that instance was the benefit of
    having Federal regulators, both securities and banking, on the
    same phone call together, and also the benefit of State
    regulators, so we were able to get the State banking
    commissioner perspective on the operational challenges in New
    York, New Jersey, and other affected areas, as well as
    preliminary loss estimates, both at the Federal and State
    levels.
        I think we have seen that this open and collaborative
    approach allows that vast expertise of the membership of the
    Council to really contribute on a range of issues that come
    before the financial system.
        Chairman McHenry. The gentleman's time has expired.
        Mr. Green. Thank you, Mr. Chairman.
        Chairman McHenry. I thank the ranking member.
        Now, we will recognize the vice chairman of the
    subcommittee, Mr. Fitzpatrick, for 5 minutes.
        Mr. Fitzpatrick. Thank you, Mr. Chairman.
        As I indicated in my opening statement, the FSOC is
    currently considering subverting at least one lawful
    deliberative decision that the Security and Exchange Commission
    is making or is in the process of making regarding rulemaking
    and money market funds.
        So my question is to you, Mr. Gerety--and I would ask that
    any of the panelists consider responding if you agree or
    disagree--do you believe that an FSOC designation of money
    market funds for enhanced Fed supervision is an appropriate and
    adequate alternative to the SEC changing the rules that apply
    to these funds?
        Mr. Gerety. Congressman, I think that you raised an
    important issue, which the Council has discussed on a number of
    occasions and in its annual report, which is the question of
    further reforms to address structural vulnerabilities in money
    market funds.
        I think the points that you make are important, for the
    following reasons: One--and the Council has recognized this
    repeatedly, the SEC has clear statutory and regulatory
    authority to address money market funds.
        The second thing that I think I would highlight in the
    Council's actions is that the Council has worked very closely
    with the SEC staff and SEC Chairman Schapiro and now Chairman
    Walter on the consideration of these reforms.
        Moreover, what the Council did last fall was not an action
    that would subvert the process of the SEC but rather encourage
    a public dialogue on the reforms that the SEC has considered
    and is considering.
        We thought that by putting forward public recommendations
    consistent with Section 120 of the Dodd-Frank Act about an
    issue that relates specifically to money market funds from a
    regulatory perspective, but could have broader impacts on the
    financial system, we were able to get public comment, public
    input, and also create a more public dialogue about these
    reforms under consideration.
        Obviously, the first choice is for the SEC to take action.
    That is something that the Council has made clear.
        Mr. Fitzpatrick. The SEC process at this point, would you
    call it deliberative, the process that agency is engaged in?
        Mr. Gerety. As I understand it from the conversations with
    SEC staff, and with Chairman Walter and Chairman Schapiro, they
    are engaged in collaborative and a deliberative process within
    the SEC.
        Mr. Fitzpatrick. Certainly, it is lawful, correct?
        Mr. Gerety. That is my understanding--
        Mr. Fitzpatrick. And it is currently in process, isn't that
    right?
        Mr. Gerety. That is correct.
        Mr. Fitzpatrick. So is it appropriate to recommend that an
    agency take a particular action under Section 120 of Dodd-Frank
    in cases where the agency is still considering the matter and
    is still in deliberation?
        Mr. Gerety. Under the authority in Dodd-Frank, the
    recommendation authority under Section 120 authorizes the
    Council to make recommendations to an agency when it feels that
    there is an issue that could pose a threat to financial
    stability. The proposed recommendation that the Council put out
    is precisely to make a proposed recommendation and to engage in
    a public dialogue and get public comment on that issue of
    concern.
        Mr. Fitzpatrick. Does the FSOC have greater expertise in an
    area regarding SEC's deliberation more so than that latter
    agency?
        Mr. Gerety. Congressman, as I mentioned earlier, the
    Council staff both at the Treasury and in other member agencies
    worked closely with SEC staff and with Chairman Schapiro to
    have the benefit of their expertise. But this issue, while
    directly related a particular matter of money market funds,
    also has broader implications for short-term funding markets
    and the stability of the financial system.
        Mr. Fitzpatrick. Nothing further. I yield back.
        Chairman McHenry. If the gentleman would yield?
        I certainly appreciate the gentleman yielding.
        So it is an intention of FSOC to make regulations that
    sometimes get bottled up in other regulatory--independent
    regulatory agencies?
        Mr. Gerety. Mr. Chairman, if I may, the Council's action
    was to make recommendations not regulations.
        Chairman McHenry. Okay.
        So you made recommendations on money market funds. FSOC
    made recommendations on money market funds because the SEC
    could not come to what the FSOC thought was an appropriate
    conclusion.
        Mr. Gerety. The Council's action was to make a proposed
    recommendation. It is an issue that has been highlighted in two
    previous annual reports and an issue that on which we have
    consulted closely with SEC staff and with Chairman Schapiro.
        Chairman McHenry. Is this interference by the FSOC?
        Mr. Gerety. The authority that I think you are referring to
    is a Section 120 authority. It was created by the Dodd-Frank
    Act. And what the essence of the authority says is that where
    there are issues that relate to financial stability, the
    Financial Stability Oversight Council should go through a
    public dialogue to make--
        Chairman McHenry. Is this an example of FSOC using the SIFI
    designation as a threat?
        Mr. Gerety. Mr. Chairman, I think it is important to
    distinguish between two different things. One is the Section
    120 authority, which the Council has done, has made a proposed
    recommendation, engaged in a public dialogue about further
    reforms to money market funds. The second thing that you are
    referring to is a question about how the Council may use its
    non-bank designation authority.
        Certainly, the Council has the authority to designate any
    non-bank financial company whose material financial distress
    would pose a threat to financial stability. The Council has not
    decided whether to use that authority in that instance. The
    Council has not decided whether to use that authority in any
    instance at this point.
        We have laid out a rulemaking process and guidance on that.
    And I would further say that the statute makes clear that any
    non-bank designations must be firm-specific rather than to the
    industry as a whole.
        Chairman McHenry. All right, but those two powers wouldn't
    be mixed? No one would mix two powers?
        We will just yield to the gentleman from Missouri for 5
    minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Let's stay on the non-banks. I want to actually--all three
    of your comments, but maybe Mr. Gerety and Mr. Berner more so.
        Do you believe that non-banks should be declared
    systemically important financial institutions, Mr. Berner?
        Mr. Berner. Congressman, thanks for your question.
        It is really up to the Council to decide on this process,
    as Mr. Gerety indicated. That is firmly embedded in the
    rulemaking process for the Council.
        Mr. Cleaver. Okay. Maybe the question is--maybe we have to
    go back to go forward. I am thinking AIG, which is a non-bank.
    We sat on this committee after the failures began with Lehman
    Brothers and we--whether we had a lot of time to think about it
    or not is irrelevant at this point. I am thinking about what we
    did, because we thought that this was the end of the world
    coming when George Bush sent over his Secretary of the
    Treasury, Fed Chairman Bernanke, and SEC Chairman Cox, sitting
    right there at that table telling us what they saw coming.
        So it important, at least to me, to find out whether you
    think there was a contagious run or whether there was a
    connectivity that could have rippled and continued to do
    devastation to the economy.
        Mr. Gerety. Congressman, I think the issue that you are
    raising is really central to one of the authorities that was
    given to the Council in Dodd-Frank. I think there are three
    really important points to make about the non-bank
    designations.
        First, we generally believed that the institution that
    posed the largest risk should be subject to the toughest
    standards.
        Second, we have to understand that the institutions that
    posed such risk may or may not be structured in a way that they
    would be prudentially regulated. They may or may not be banks
    or bank holding companies.
        And third, we have to recognize that the financial system
    is naturally going to change over time. When you put those
    three things together, what you realize is that--and what, I
    think, is embedded in Dodd-Frank, is a perspective that the
    Council must have the authority to regulate firms based on the
    risk that they pose and not the corporate form that they
    choose.
        So when going through the non-bank designations process,
    what the Council is deliberating on is which firms pose
    significant risk, and therefore should be subject to tougher
    liquidity, tougher capital, and tougher supervision by the
    Federal Reserve. And that is the nature of the designation. It
    is not some sign one way or another. But what it says is that
    firms which pose a significant risk should be subject to tough
    standards.
        Mr. Cleaver. Thank you.
        Ms. Clowers?
        Ms. Clowers. GAO has recognized that risk can come from all
    sectors of the financial system, including non-banks.
        Mr. Cleaver. Thank you.
        With my little time remaining, I am concerned because,
    unfortunately, there is a lot of bashing of Federal employees
    that goes on. You can always get an ``attaboy'' if you say
    something negative about Federal employees. And I would like to
    know from you, Mr. Gerety, whether or not you think that you
    have the capacity to go out and compete with the private sector
    to get the very best people possible to work with the Federal
    Government, realizing that they could make much, much more in
    the private sector?
        And do you think that when we disparage the workers in the
    public sector, and then constantly say you can't get any pay
    increases, that is in any way helpful to the country or to your
    operation, Mr. Gerety?
        Mr. Gerety. Congressman, we have had success attracting
    very talented people, but I agree that the payscale of Federal
    Government employees is lower than what comparably talented
    people would achieve in the private sector.
        But the passion that people bring to public service is
    something from which we benefit.
        Mr. Cleaver. That is exactly what I expected you to say.
    And it is also something that is troublesome to me.
        Just continuing to see what you didn't address, and I
    understand why you didn't do it, the kind of battering that you
    take.
        Thank you, Mr. Chairman.
        Chairman McHenry. Thank you.
        And we will now go to Mr. Ross, of Florida.
        Mr. Ross. Thank you, Mr. Chairman.
        Mr. Gerety, I want to address an area of non-bank financial
    companies with you, specifically with regard to insurance
    companies. Even though they are regulated by State pursuant to
    the McCarran-Ferguson Act, it is your understanding and, of
    course, FSOC's appreciation that they are systemically
    important financial institutions, correct?
        Mr. Gerety. Congressman, I wouldn't say the Council has
    made that determination.
        Mr. Ross. But it is true in your example that you just had
    there that you coordinated it with Hurricane Sandy in dealing
    with the solvency, I guess, of these institutions, being able
    to meet their risk when they had the issues in the Northeast
    with the catastrophe of Hurricane Sandy.
        Now, my concern is that you probably have at least two
    companies, insurance companies, that may be considered SIFIs,
    is that true?
        Mr. Gerety. Congressman, the Council has made a decision
    not to comment on specific companies until final determination.
        Mr. Ross. Do you think that insurance companies at all are
    considered systemically important financial institutions?
        Mr. Gerety. Congressman, I think that, as I mentioned a
    moment ago, the issue is not whether the--
        Mr. Ross. Wait a second now--but you also talked about
    risk. And there is a different element of risk with regard to
    insurance companies. They base on risk-based capital in terms
    of what their long-term risk is going to be as opposed to just
    statutory accounting principles that apply to most financial
    institutions.
        So my question to you is, if you have insurance people on
    the Council, is it your testimony today that insurance
    companies are not going to be considered systemically important
    financial institutions?
        Mr. Gerety. I would make a distinction between the
    importance of insurance in the financial system, which is
    undeniable--
        Mr. Ross. Would that be why the GAO report, then, explains
    that there is insufficient staff support for these insurance
    people who are on the committee?
        Mr. Gerety. The Council has three members with insurance
    expertise--
        Mr. Ross. But you agree that the GAO report indicated that
    they have insufficient staff support? Is that true?
        Mr. Gerety. So--
        Mr. Ross. Ms. Clowers, is it true that your report
    indicates that?
        Ms. Clowers. Right--in our report we note that the
    insurance representative, for example, doesn't have the entire
    agency as the other member agencies would have to draw on those
    resources.
        Mr. Ross. Mr. Gerety, has the Council gone out to the
    National Association of Insurance Commissioners to ask for
    advice and guidance as recommended by Dodd-Frank?
        Mr. Gerety. The Council has on its membership, as you know,
    three--
        Mr. Ross. I know it has the membership, but has it gone
    out? Has it reached out to the public? Has it reached out to
    any associations with expertise for guidance in terms of trying
    to determine whether insurance companies are going to be
    systemically important financial institutions?
        Mr. Gerety. Congressman, it has reached out, both to the
    public and to insurance experts--
        Mr. Ross. Are there any records of that?
        Mr. Gerety. Yes, sir, absolutely. The--
        Mr. Ross. Are there just minutes or are there records?
        Mr. Gerety. The non-bank designations process took--made an
    affirmative decision to go through a rulemaking and get public
    comment, not just on an ANPR, an advanced notice of proposed
    rulemaking, but on two separate proposed rulemakings.
        And in addition, we have started, with the help of Director
    Huff, who sits on the Council, to create information-sharing
    agreements--
        Mr. Ross. So this is--most likely, they are going to be
    SIFIs. But let me move on to another issue, and that is the
    Volcker Rule. I firmly agree that banks should not be involved
    in proprietary trading when they are using insured deposits.
    There is no question about that. When we are talking about
    making markets, it gets a little bit more difficult. But where
    we are running into real difficulty is the diversity of
    opinions from agencies as to what and when the Volcker Rule
    will apply.
        And I direct your attention to a letter of December 20th
    from the Bipartisan Policy Center--and I believe you may have a
    copy of this--but their concern is that the adoption of the
    Volcker Rule should be consistent among all agencies. Would you
    not agree?
        Mr. Gerety. Congressman, I think that is an important
    point, and the Treasury has a statutory coordination rule on
    the Volcker Rule. I think one thing that is key to note in the
    experience that we have seen so far--although the statute
    doesn't require substantively identical rules--
        Mr. Ross. But the impact of not having a consistent rule is
    going to be devastating on the financial industry. Would you
    not agree? There has to be some consistency, in not only
    interpretation, but also the application of the Volcker Rule.
    And I think that is what this letter requests.
        But more importantly, I understand that just the other day,
    Mary Miller indicated that she thought it would be best if
    there was a joint rule delivered. Would you not agree that a
    joint rule of all the agencies, the SEC, everybody involved on
    the Volcker Rule be given?
        Mr. Gerety. We agree that a consistent Volcker Rule would
    be very important.
        Mr. Ross. Would you commit the FSOC to making sure that a
    joint rule is issued with regard to the Volcker Rule?
        Mr. Gerety. I can't commit on behalf of the Council, and
    more importantly, I can't--there are statutorily independent
    agencies that are given the authority to write rules.
        However, I would note that in the proposed rule stage, all
    five of those agencies, notwithstanding their statutory
    independence, did deliver substantively identical proposed
    rules. So there is, I believe, evidence of a commitment to the
    point that you make about a consistent Volcker Rule.
        Mr. Ross. And do you believe that there will be a joint
    rule then?
        Mr. Gerety. I can't predict the future.
        Mr. Ross. Mr. Chairman, I will yield back my time.
        Chairman McHenry. On that note of not being able to predict
    the future, we now recognize the gentleman from Colorado, Mr.
    Perlmutter, who I predict will have a good series of questions.
        [laughter]
        Mr. Perlmutter. I am not sure your prediction will come
    true, Mr. Chairman, but I thank you for the time.
        And I appreciate Mr. Ross' questions. To the panel, it is
    like you are in a deposition. We are going to say, ``Isn't it
    true that,'' ``Wouldn't you agree that.''
        So, Ms. Clowers, I will start with you.
        Isn't it true that Section 112(c)(5) requires that much of
    what the FSOC does has to remain confidential?
        Ms. Clowers. Correct.
        Mr. Perlmutter. Okay. So just going back to your
    transparency piece, your transparency recommendation is more on
    general principles and not so much in the regulatory arena
    where they are saying to an institution or to a group of
    institutions, ``We have trouble here,'' but it is more, ``We
    think these might be emerging threats,'' or, ``We are worried
    about a bubble over here.''
        Where do you think the transparency needs to be more--where
    does it need to be clearer? Where do their records need to be
    clearer?
        Ms. Clowers. We think the records could be improved at the
    principals level, for example. Again, the minutes taken at
    those meetings are very limited. Often, it will just provide
    information on who presented, what the agenda item is, and then
    it will say, ``The agenda--the issues were discussed and
    questions were''--
        Mr. Perlmutter. But in the accounting arena--and I
    appreciate the desire for more information.
        Ms. Clowers. Yes.
        Mr. Perlmutter. But you would admit that they have to
    balance between confidentiality of the information they might
    receive from an institution or a group of institutions versus
    making that open and declaring it to the world.
        Ms. Clowers. Yes, and anyone dealing in the financial
    markets arena--any of the regulators recognize the importance
    of maintaining confidential information and the impact that
    releasing certain information could have on the markets. And we
    recognize that in our report, as well.
        We think there is a balance that could be struck, and we
    point out the other entities such as the Federal Reserve, the
    Federal Open Market Committee. The way they release information
    could be a model for FSOC.
        Mr. Perlmutter. Okay, thank you.
        Mr. Gerety, just sort of going back to basics, before the
    crash of 2008, when, in my opinion, the Bush Administration
    allowed the regulators to turn a blind eye to a number of
    bubbles that were appearing in the economy, the different
    regulators sort of operated in silos, and weren't really
    speaking to one another or collaborating, as is described in
    the statute, or you have described in your testimony.
        How many meetings--you said there have been eight meetings
    since the September report of FSOC?
        Mr. Gerety. I believe that is correct. I don't have the
    exact number at the top of my head.
        Mr. Perlmutter. About how many meetings overall have they
    held since the passage of Dodd-Frank?
        Mr. Gerety. The Council has met 28 times at the level of
    the principals.
        Mr. Perlmutter. Okay. So that alone, in my opinion, having
    sat through the testimony and the trauma of the crash of 2008,
    is a huge step in the right direction so that these agencies
    are speaking to one another so that they can, Ms. Clowers,
    determine from their conversations whether a bubble is
    developing, whether a threat is emerging.
        So to you two, I would ask, what would you suggest they do
    differently to pinpoint emerging threats?
        And maybe, Ms. Clowers, I will start with you.
        Ms. Clowers. In the report, we describe the current
    processes that FSOC uses, which is through the Systemic Risk
    Committee in which the agency members come together and
    identify potential issues and pass them up through the deputies
    and to the principals.
        What we had recommended is they take a more systematic and
    comprehensive approach using both quantitative and qualitative
    tools to look across all the sectors. Because again, going to
    your point, that is what was missing before the crisis--that we
    were too siloed. The current process that they use at the
    committee level could result in the silos again if agency
    members bring only what they identify as risk and then discuss
    amongst themselves.
        We want them to be more horizontal in their reviews.
        Mr. Perlmutter. Okay.
        Mr. Gerety, do you have any comment on what she just said?
        Mr. Gerety. Sir, I think what Ms. Clowers has just
    described is actually consistent with the processes that the
    Council has adopted. And certainly on the basis of that
    recommendation, things that we strive to do more and more so.
        I think in response to the question of how do we make sure
    we have a horizontal review, that is actually one of the great
    benefits of the Systemic Risk Committee. We have a member from
    the National Credit Union Administration. We have a member from
    the FDIC. We have staff coming from the insurance and other
    sectors to make sure they are sharing a perspective from any
    group, and also comparing across.
        And in addition, one of the things we work closely with the
    Office of Financial Research on is to develop some more
    systematic sharing of financial stability and other macro
    economic factors--
        Mr. Perlmutter. Thank you, Mr. Chairman.
        And I thank the witnesses for your testimony.
        Chairman McHenry. The gentlelady from Missouri, Mrs.
    Wagner, is recognized for 5 minutes.
        Mrs. Wagner. Thank you, Mr. Chairman.
        And thank you to our witnesses for coming here.
        I am not an attorney, I am just married to one, so I will
    be very direct.
        Mr. Gerety, would you agree that uncoordinated action by
    multiple regulatory agencies imposes a cost on the financial
    system of the United States?
        Mr. Gerety. Congresswoman, I think what's important is that
    agencies coordinate as they implement their independent
    statutory duties.
        Mrs. Wagner. I was interested in Ms. Clowers' testimony and
    some of the recommendations that were given in your GAO report
    that talked about meeting a cost-benefit analysis.
        Could you comment on that?
        Mr. Gerety. I think that the issue raised is the question
    of how do we make sure that the implementation of Dodd-Frank is
    effective, but also needs to be considered in the context of
    the financial crisis that we just experienced and the
    tremendous costs it imposed on the economy.
        Mrs. Wagner. Have you studied--FSOC, OFR--what the
    potential costs of non-coordination are, sir? And if so, how
    much would that be?
        Mr. Gerety. I think the issue of coordination is very
    important, but as we go through the implementation of Dodd-
    Frank, I think there is plenty of evidence of very significant
    coordination among the financial regulatory community, and the
    importance that they value making sure that the rules are
    consistent.
        Mrs. Wagner. But you have not looked at the costs regarding
    this?
        Mr. Gerety. We accept that the importance of coordination
    is very high and that is why we are very focused on making sure
    that--
        Mrs. Wagner. Is the answer yes or no on the cost-benefit
    analysis?
        Mr. Gerety. Congresswoman, I think what you are asking
    about is the importance of coordination. We think it is very
    important, and we are working to promote that coordination
    between agencies.
        Mrs. Wagner. Let me go back to a comment that you made
    earlier, then, sir. I believe your testimony was that you could
    not comment on the actions of other regulatory agencies, like
    the CFTC. Sir, wasn't that why you were created?
        Mr. Gerety. Congresswoman, I was speaking for myself. I
    can't speak to the specific decisions made by the CFTC in terms
    of how they promote their international regulatory approach.
        Mrs. Wagner. I will move on.
        Ms. Clowers, how has FSOC coordinated agency rulemaking to
    this point in time?
        Ms. Clowers. We had made a recommendation in 2011 that we
    thought FSOC could play a greater role in coordinating the
    rulemaking process. We recommended that they develop a formal
    policy that would indicate when coordination should take place,
    who should be involved, and how to reconcile conflicting views.
    We think there is a role for FSOC to play as a traffic cop, so
    to speak.
        Mrs. Wagner. How did FSOC fulfill its very specific
    statutory duty to facilitate coordination during the process
    that led to the proposal of the Volcker Rule in 2011?
        Ms. Clowers?
        Ms. Clowers. In working through our audit on FSOC, we saw
    that a lot of the coordination takes place at the committee
    level in terms of working through specific issues. I don't have
    an answer on the specifics on the Volcker Rule, but I can get
    back to you.
        Mrs. Wagner. I would appreciate that. And I believe that
    the report indicated that there was significant room for
    improvement. Is that correct, ma'am?
        Ms. Clowers. That is correct.
        Mrs. Wagner. Okay, thank you.
        Next, Dr. Berner, and then Mr. Gerety, can you describe to
    what extent FSOC and OFR have developed comprehensive and
    systematic mechanisms for identifying and monitoring systemic
    risk?
        Mr. Berner. Thank you, Congresswoman.
        We are working hard in the OFR, in collaboration with the
    Council and its member agencies, in order to do just exactly
    that. As Mr. Gerety mentioned, we work through the Systemic
    Risk Committee to develop risk hypotheses to try to identify
    emerging risks, not just those risks that have occurred in the
    past. And we try to do that by looking at structural
    vulnerabilities in the financial system, such as the ones that
    have been discussed here today.
        It was referred earlier to risks in the tri-party repo
    market and short-term funding markets generally, in money funds
    and other areas, as well as cyclical risks that may emerge,
    such as the build-up of leverage or maturity transformation in
    the financial system.
        Mrs. Wagner. Thank you, sir.
        Mr. Gerety, could you answer that question, please?
        Mr. Gerety. The Council has developed a number of processes
    to make sure that we have very strong interagency collaboration
    and identification of issues. In addition, the Council's annual
    report is a comprehensive document that looks systematically
    across the financial sector, both in terms of significant
    financial market developments, financial regulatory
    developments, and then also uses that as a basis to develop
    hypotheses about potential recommendations--
        Mrs. Wagner. If I may interject here, I believe that the
    GAO report indicated, however, that in fact FSOC lacked a
    systematic process to identify future threats. And that perhaps
    it had failed to distinguish future from current threats.
        If you could respond to that?
        Mr. Gerety. Congresswoman, the approach that we have taken
    in the annual report is to identify developments, to identify
    vulnerabilities, and to identify potential shocks that could
    interact with those vulnerabilities and create threats. In that
    sense, I think we have a very systematic approach to
    identifying issues that the financial regulatory community and
    market participants need to address.
        Mrs. Wagner. I think my time has expired. I appreciate the
    Chair's indulgence.
        Chairman McHenry. Ms. Clowers, did you have a response to
    that?
        Ms. Clowers. Yes. We did report in our September report
    that we thought FSOC could do a better job in identifying and
    reporting on both current and emerging threats in its annual
    report. At times, it is commingled together, so it is difficult
    to determine what is a current threat versus an emerging
    threat. An example would be the eurozone crisis that was talked
    about in the annual report as an emerging threat, when in
    general most market participants have known about eurozone
    issues for a number of years.
        Mrs. Wagner. And the prioritization of those threats.
        Ms. Clowers. Absolutely. They have identified a number of
    threats each year, and we believe prioritizing those threats
    could help better focus policymakers as well as market
    participants on the key issues. But when everything is a
    priority, nothing is.
        Mrs. Wagner. Correct.
        Chairman McHenry. Mr. Ellison, from Minnesota, is
    recognized for 5 minutes.
        Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member
    Green. I appreciate you calling this hearing.
        Sometimes when we discuss these issues about Dodd-Frank and
    the legislation that came as a result of it, including FSOC,
    the discussion sort of makes me think that there wasn't a
    financial crisis, that we didn't see 4 million foreclosures,
    that we didn't see leading financial institutions either
    collapse or have to be consolidated. All of these crises didn't
    happen. It almost feels like we are pretending Congress just
    passed a bunch of regulations for no good reason.
        Anyway, we have had the GAO report which made some
    recommendations and observations. And I guess my question is
    for Mr. Berner and Mr. Gerety.
        Mr. Gerety, your organization was fully staffed just this
    past year. Mr. Berner, you were just confirmed in January, and
    according to your office, your staff is only half of what it
    will be in the coming year. I think that you are doing okay.
        Where would you say you are in terms of building the
    infrastructure you need and the tools that you need to carry
    out your mandate? And does the sort of embryonic nature of the
    work you are doing explain part of the analysis that GAO may
    have done?
        Mr. Berner. Congressman, thank you for your question.
        We are well along in the standing up of our office. As you
    indicate, however, it is a challenge both to build an
    organization from scratch, as well as to fulfill the mandates
    with which we are charged. We hope that we are doing a good job
    on both of those.
        I indicated in my written testimony some dimensions of both
    of those things. And in response to the report, which we very
    much appreciate, and appreciate the engagement with the GAO, we
    are taking steps to implement many of the recommendations that
    the GAO has given us.
        I would point to my written testimony, for example, to set
    a performance metric that we have developed in response to that
    need. We are committed to transparency and accountability in
    the performance of our obligations.
        Moreover, I would say that we are really starting to
    deliver on our mandate. For example, just last night we
    published the 6th working paper in our working paper series
    that deals with issues that go across the financial system, not
    just focused on one part of it. But as Mr. Gerety indicated,
    and I indicated earlier, that kind of horizontal approach to
    look across the financial system is extremely important for
    carrying out our mandate.
        Mr. Ellison. Thank you.
        Mr. Gerety?
        Mr. Gerety. Congressman, I would add that the points you
    make are important, and I think the engagement that we have
    been able to have with the GAO has been very helpful. In the
    example of the Council's annual report, we certainly are
    learning as we go, becoming more effective in considering a
    wide range of reports, and providing even more transparency and
    accountability into our analysis of that.
        We are working through and drafting this year's report as
    we speak. And so, I think the GAO's recommendations in that
    area are going to be something we take very seriously as we
    work to improve that product.
        Mr. Ellison. Thank you.
        Would you like to respond, Ms. Clowers?
        Ms. Clowers. Certainly. I would agree with you that the
    agencies face challenges. And as we recognized in our report,
    for the OFR in particular, trying stand up an organization
    while carrying out their mission is challenging. FSOC is tasked
    with an inherently difficult job of identifying and monitoring
    risks. And so, we recognize those challenges. And the
    recommendations that we make are designed to improve these
    important institutions.
        Mr. Ellison. Thank you.
        I think it is just important to point out that your
    recommendations are not indictments; they are designed to help.
        Ms. Clowers. Correct.
        Mr. Ellison. Yes. And with the short time I have remaining,
    could you all identify what challenges you think the sequester
    might present to you carrying out your mission?
        Mr. Berner. Congressman, I would just respond by saying
    that the Financial Research Fund, which funds both the FSOC and
    the OFR, is subject, according to OMB, to the sequester. And
    so, that has resulted in some cut in our ability to fulfill our
    mission--to spend money to fulfill our mission.
        Mr. Gerety. We are working with OMB to develop a plan for
    how to operate consistent with the sequester. It certainly will
    affect us, and we are developing a plan to make sure that we
    are as effective as we can be, given the loss.
        Mr. Ellison. It might be helpful to us to know how it is
    going to affect you. If you all can just communicate with the
    committee and my office on problems such as: we are going to
    have reduce this number of staff; what it is going to actually
    mean in terms of your ability to deliver on the mandate.Thank
    you.
        I yield back, Mr. Chairman.
        Chairman McHenry. The gentleman's time has expired.
        And if I might concur with the gentleman, we would
    certainly appreciate your response to the committee on those
    effects from OFR and from FSOC as well.
        Mr. Berner, in particular, I know you operate through an
    industry assessment that funds your operations in large part.
    It is a different funding mechanism so you have slightly
    different processes on getting your budget, and so to detail
    that would be helpful as well, and the challenges associated
    with that.
        With that, we now recognize a new member of the committee,
    Mr. Barr of Kentucky.
        Mr. Barr. Good morning.
        And thank you, Dr. Berner, Mr. Gerety, and Ms. Clowers for
    your testimony here today and for your efforts in providing
    oversight and contributing, hopefully, to the financial
    stability of our financial system.
        Mr. Gerety, in February, or last month of this year, the
    Bipartisan Policy Center issued a report on housing reform
    which specifically requested the President to work with the
    Secretary of the Treasury to appoint an adviser to force
    coordination of the rules related to mortgages.
        I know forcing coordination is inconsistent with Secretary
    Geithner's analysis of the authorities of the Council. But
    given the fact that this Bipartisan Policy Center issued a
    report advocating for more coordination on rules related to
    mortgages, and given the fact that facilitating coordination is
    one of the statutory duties of the Council, will you commit to
    coordinating the release of new mortgage regulations?
        And will you use Dr. Berner's organization, the OFR, to
    help evaluate the impact of the flurry of mortgage rules
    emerging from Dodd-Frank, including but not limited to the
    Qualified Mortgage rulemaking coming out of the CFPB?
        Mr. Gerety. Congressman, I can't commit on behalf of the
    Council. Obviously, that is up to the Council members.
        But I can say that the importance of housing-related rules,
    mortgage-related rules is a topic that has been very important
    and central to the Council's work in its analysis of the
    financial system and in its thinking about the implementation
    of rules under the Dodd-Frank Act. This has actually been a
    topic that the Council has discussed a number of times and has
    made public recommendations about the importance of in the
    Council's annual report.
        I think that the points you make are things that are
    already very central to the Council in terms of focusing on
    reforms to the housing market in a way that work together and
    that work effectively to promote the safety and soundness of
    that market.
        Mr. Barr. Ms. Clowers, can you respond to Mr. Gerety's
    testimony a little bit, specifically on what benefits could we
    anticipate and what unintended consequences could be avoided if
    these rulemakings on mortgages were better coordinated?
        Ms. Clowers. We have done a body of work on the importance
    of coordination among agencies, not only in looking at
    coordination at the FSOC level, but also at particular Dodd-
    Frank rulemaking.
        And what we have found is that although the regulators are
    coordinating, especially when Dodd-Frank requires that they
    coordinate on certain rules, much of the coordination is ad hoc
    and informal.
        And while that could be sufficient in some circumstances,
    we recommended that the agencies develop formal policies for
    coordination, because in the press of business, if things are
    just ad hoc or informal, that is when coordination can break
    down. Or if there are conflicting views, that is when
    coordination can break down if it is ad hoc and informal.
        Thus, we recommended more formal policies to guide this
    coordination.
        Mr. Barr. Mr. Gerety, I hope that you take seriously the
    GAO's concerns regarding the ad hoc nature of the coordination.
        But let me ask you another question, Mr. Gerety, really
    quickly. Does the Council internally prioritize the
    significance of current and emerging threats to the economy
    which are listed in its annual report?
        And does the Council devote staff and budgetary resources
    accordingly to that important effort of prioritization?
        Mr. Gerety. The Council's annual report is a record of the
    issues and recommendations that the Council members feel are
    necessary to promote financial stability. That is the language
    of the statute and that is the threshold by which the Council
    prioritizes. So I think what we see in this is there is a large
    membership among the Council. They each have statutory
    responsibilities and capabilities to address issues.
        And so, while the number of recommendations and the number
    of issues is large, it reflects the importance and the dynamics
    within the financial system.
        And I think that is how the Council thinks about this
    problem, is to make sure that across the regulatory community,
    issues are identified and that agencies and market participants
    work to address them.
        Mr. Barr. I am not sure I heard an answer in that to the
    specific question of how does the Council prioritize the
    emerging threats.
        It seems to me your answer was, we identify emerging
    threats. The question was, how does or does the Council at all
    prioritize those emerging threats that you do identify?
        Mr. Gerety. Congressman, the language of the statute--and
    when you think about threats in the financial system, it is not
    always possible to identify which threat is likely to emerge
    sooner rather than later.
        We have seen over the course of the last few years, at
    certain times global growth has been a larger concern. At
    certain times, issues in Europe have been larger concerns.
        So in that sense, what the Council aims to do and what the
    statute suggests the Council needs to do is to identify the
    broad range of threats that could pose a threat to financial
    stability and then to work to address them.
        And I think that is the standard by which the Council
    operates.
        Chairman McHenry. The gentleman's time has expired.
        Mrs. Maloney, from New York, is recognized for 5 minutes.
        Mrs. Maloney. Thank you, Mr. Chairman.
        And I thank all of the panelists.
        Dr. Berner, the Dodd-Frank statute requires you to develop
    tools for risk management and monitoring. So, what criteria are
    you using to identify systemic risk?
        Mr. Berner. Thank you, Congresswoman.
        We are using a variety of criteria to identify threats to
    financial stability. As I indicated earlier, we are working in
    the context of the Systemic Risk Committee of the Council to
    develop a product and several products that will look at those
    various measures of risk.
        Some of them are well-known. Some of them are, for
    example--
        Mrs. Maloney. But what are they? Can you list them?
        Mr. Berner. Some of them are reflective of indicators that
    we listed in our annual report. There were 31 there. Measures
    such as the so-called CoVaR, which illustrates the joint
    contribution of a financial institution's contribution to a
    threat to financial stability. Others that have been developed
    in the academic community which are known variously as MES or
    SCS.
        Mrs. Maloney. But can you tell me what they are? I don't
    know what MES is or SCS.
        Mr. Berner. Sure.
        Mrs. Maloney. What, specifically, is it? What are the
    systemic risk indicators that you are looking at, in plain
    English?
        Mr. Berner. Sure. These indicators attempt to measure
    empirically what the shortfalls might be, and the losses that
    might be accumulated by an institution under stress and how
    that might spread across the financial system.
        These are--
        Mrs. Maloney. Such as? Are you going to identify these
    risks to see how they go over the financial system? What are
    they? Is it capital? What, specifically, are you looking at to
    identify systemic risk?
        Mr. Berner. Congresswoman, capital might be a remedy for
    some of those risks, but the metrics that we use attempt to
    identify whether there is excessive leverage in the system,
    whether there is a buildup of maturity transformation, whether
    low volatility is leading to the buildup of those two things in
    the financial system or in the part of a group of financial
    companies, wherever they might be located in the financial
    system--
        Mrs. Maloney. If you could get to the committee the list of
    the 31 and more specifics in this area, I would like to study
    it more.
        But I want to know if the technology that you are
    developing, will it allow or does it allow for adjusting this
    criteria to reflect the changes in the market over time or
    incorporate best practices or lessons learned as the project
    matures?
        Because one of the criticisms during a financial crisis is
    that regulation did not keep up with innovation and with the
    new--will you be flexible in changing this in the technology
    that you are developing?
        Mr. Berner. That is a really important question that you
    raise, Congresswoman. The evolution of the financial system and
    financial innovation means that the system is ever-changing. It
    means that the metrics can't be considered as always reliable
    from the past as they might be in the future.
        Mrs. Maloney. So are you incorporating technology to
    adjust?
        Mr. Berner. We are constantly looking at innovations in
    financial markets and financial institutions to try to take
    account of whether or not these indicators are reliable.
        Mrs. Maloney. The statute also asks for you to collect the
    data that then goes to FSOC for them to look at. And I have
    asked for this before, maybe it came into my office, but I
    don't recall seeing it. What specific data elements are you
    collecting? And could you get it to the committee, so we can
    all look at it?
        And how many have you already collected, are you giving to
    FSOC? What is the list that you would like to get? And very
    importantly, where are you getting it from? Are you getting it
    from other agencies? Are you getting it from a financial
    institutions? Where are you getting it?
        That is an in-depth, longer question, but I do want to talk
    about the Legal Entity Identifier (LEI) project, which some
    have described--one of my constituents described it as the
    ``black hole project'' that will never be completed.
        So I want to know, what is the projected timeline for the
    implementation of the Legal Entity Identifier within the
    financial industry?
        Mr. Berner. Congresswoman, the Legal Entity Identifier
    project is very important because it uniquely helps us to
    identify parties to financial transactions. That is an
    important part of standardizing data in the global financial
    system.
        Mrs. Maloney. But my question was, what is the timeline for
    implementation and completion?
        Mr. Berner. That timeline actually involves a launch of the
    system this month. There are some issues to wrap up before--
        Mrs. Maloney. You mean the project is completed then? You
    are going to launch it? It is completed?
        Mr. Berner. I would describe the process as a process. The
    implementation and diffusion through the financial system has
    begun. The CFTC, for example, has--
        Mrs. Maloney. My time is almost up. What is the estimated--
        Chairman McHenry. The gentlelady's time is--
        Mrs. Maloney. Could you get that to the committee, the
    estimated cost of the project?
        Thank you.
        My time is up.
        Chairman McHenry. As I pledged to the witnesses, you do
    have time to answer--I will give you time to answer the
    question.
        Dr. Berner, what is the estimated time of completion of the
    LEI? Is there a date?
        Mrs. Maloney. And, Mr. Chairman, also the cost to both
    government and the private sector.
        Chairman McHenry. That was not what the gentlelady asked,
    but we will be happy--is there a date you have for completion?
        Mr. Berner. Congressman, we don't have a specific date for
    completion--
        Chairman McHenry. Do you have a year?
        Mr. Berner. This is an ongoing--
        Chairman McHenry. Do you have a year?
        Mr. Berner. This is an ongoing process. The project is
    well--
        Chairman McHenry. Do you have a hope for a date of
    completion?
        Mr. Berner. I wouldn't describe, Congressman, that there is
    a specific date for completion--
        Chairman McHenry. Okay, thank you. And that suffices.
        I will be following up, and I pledge to follow up with my
    colleague from New York on this question of--
        Mrs. Maloney. Thank you, Mr. Chairman.
        Chairman McHenry. With that, I will now recognize the
    gentleman from Tennessee, Mr. Fincher.
        Mr. Fincher. Thank you, Mr. Chairman.
        Dr. Berner, these questions are going to be geared, I
    guess, toward you.
        With transparency being consistent, the OFR has been asked
    by FSOC to conduct a comprehensive study on the asset
    management industry and analyze if these firms could pose
    systemic risk. Can you tell us the process that OFR is using to
    examine asset managers?
        Mr. Berner. Yes, Congressman. Thank you for your question.
        We are taking a comprehensive look at the asset management
    industry and its activities. The process involves engagement
    with the industry to learn about its practices and business
    models and the mix of businesses in that industry.
        The process also involves looking at data on that industry
    to try to understand empirically both the size and scope of
    those activities in the industry.
        And last, the process involves full engagement with Council
    member agencies to get their views on how the asset management
    industry and its activities, from their perspective, might be
    analyzed.
        So this is a great example of coordination across the
    Council.
        Mr. Fincher. Can you tell me specifically who you have met
    with and what you have learned from the meetings so far?
        Mr. Berner. We have met with a number of asset managers,
    Congressman. I can get you the list of--
        Mr. Fincher. Would you please do that?
        Mr. Berner. But I just want to say, Congressman, if I may,
    that in the process of engagement with the industry, we have
    welcomed the opportunity to engage with any and all who want to
    meet with us. So we have engaged both with industry groups as
    well as with specific firms.
        Mr. Fincher. Are there specific activities that you are
    looking for engaged by the asset managers that you are really
    concerned about that may pose systemic risk?
        Mr. Berner. Congressman, the analysis is not yet complete,
    but in looking at activities, we look back to the fundamental
    services in the financial system and where there might be
    evidence of a build-up of risk in those activities,
    specifically a build-up of maturity transformation,
    connectedness across the financial system so that we look at
    those activities not just as the origin of any threat to
    financial stability but for the possibility that it might
    transmit or amplify a threat to financial stability.
        Among those would include reliance on short-term funding,
    along with a portfolio of longer-term assets. Among those would
    be other evidence of those kinds of activities that might pose
    a threat.
        Mr. Fincher. How long is it going to take to complete the
    study?
        Mr. Berner. Congressman, we don't have a specific date to
    complete the study because it is, in the work that we are doing
    to study the industry, the process is well under way, and it is
    being discussed within the committee.
        Mr. Fincher. General framework--how long has the process
    been?
        Mr. Berner. The process has been ongoing, Congressman, for
    about a year, and we hope to complete it in the next few
    months.
        Mr. Fincher. But before the end of the year?
        Mr. Berner. Before the end of the year.
        Mr. Fincher. Okay. Good deal.
        I yield back the balance of my time.
        Thank you, Mr. Chairman.
        Chairman McHenry. Will the gentleman yield?
        Mr. Fincher. I will yield.
        Chairman McHenry. To follow up with Dr. Berner on the
    question my colleague from New York had on the cost of the LEI,
    that process, do you have any analysis you could give us, any
    estimate?
        Mr. Berner. Congressman, we don't have a specific estimate
    of the cost of the LEI project at this point in time. But what
    I would say is that the benefits to industry and to regulators,
    in my judgment, far exceed the cost. And I think the evidence
    for that is--
        Chairman McHenry. How do you know that the benefit will
    exceed the cost if you do not yet know the cost?
        Mr. Berner. The industry has told us that the benefits are
    likely to exceed the cost.
        Chairman McHenry. And what if the industry said that
    everything is fine and hunky-dory, do you even need to collect
    data if they just tell you that?
        You understand the question arising out of this? How do you
    know how much to request from the industry to fund your office
    on a program for which you don't know the cost.
        Mr. Berner. Congressman, the project is a global project.
    We have full global engagement around the world with global
    regulators under the auspices of the Financial Stability Board.
    And so the cost have been spread across all those agencies
    and--
        Chairman McHenry. Do you know the cost for your agency?
        Mr. Berner. Congressman, I can get back to you and tell you
    the resources that we have used in prosecution of the--
        Chairman McHenry. And would you also disclose your
    anticipated resources that you will need for the remainder of
    this year and next year?
        Mr. Berner. Congressman, I can do that.
        Chairman McHenry. Thank you.
        With that, I now recognize Mr. Delaney of Maryland.
        Mr. Delaney. Thank you, Mr. Chairman.
        I have two questions. My first relates to data and
    information that you are tracking to determine whether
    institutions that are designated as systemically important are
    actually getting benefits in the market for that designation
    from a cost of capital or access to capital perspective.
        So I am not sure who would be the best to--either Mr.
    Gerety or--
        Mr. Gerety. Congressman, I think the question that you are
    asking is a question about perception, how do market
    participants think about risks of firms?
        Mr. Delaney. Yes.
        Mr. Gerety. What I can say is from the perspective of Dodd-
    Frank and the actions taken in Dodd-Frank, that perception that
    the government will prevent the failure of any firm is
    incorrect, and Dodd-Frank is very clear that no taxpayer losses
    shall be incurred in the use of the Orderly Liquidation
    Authority (OLA) and that no financial firm, no matter how large
    or complex, will be prevented from failure--
        Mr. Delaney. But firms which have that designation have
    emergency funding available to them should there be a crisis,
    is that correct?
        Mr. Gerety. That is not correct, sir. The designation of a
    non-bank financial company does not give that company access to
    any emergency funding. In fact, what it does is it imposes
    significant capital liquidity and enhanced supervision on that
    company.
        Mr. Delaney. What about a bank that is designated
    systemically important?
        Mr. Gerety. The Council doesn't designate any banks or bank
    holding companies as systemically important. The Dodd-Frank Act
    in its terms on the statute imposes heightened standards on any
    bank holding company with a larger than $50 billion balance
    sheet.
        Mr. Delaney. And so, there is no emergency funding
    available to financial institutions which are designated
    systemically important to manage their liquidation?
        Mr. Gerety. Congressman, I think we have to separate--
        Mr. Delaney. Right.
        Mr. Gerety. --two distinct authorities. The question that
    you are asking, I think, is related to the Council's authority
    to designate a non-bank financial company.
        Mr. Delaney. Yes.
        Mr. Gerety. The action of that designation is simply the
    imposition of enhanced supervision by the Federal Reserve.
        Now, separately, Dodd-Frank created an Orderly Liquidation
    Authority for financial companies, both non-bank financial
    companies and bank holding companies. The designation is
    actually not required for the use of that Title II authority.
        Mr. Delaney. Right.
        Mr. Gerety. So there is no direct statutory link between
    designation and the use of Title II.
        Importantly, what the statute makes very clear is that
    taxpayers cannot bear losses and that liquidation cannot be
    prevented through the use of government funds.
        Mr. Delaney. Right. But do you track any data to determine
    if the market perception is actually becoming reality, and
    firms have enhanced access to capital either at lower rates or
    just greater depth of market because of various designations?
        Mr. Gerety. Congressman, I think the question is an
    important one. There is actually a lively academic debate about
    how to measure what that looks like, and where it is going. I
    think the evidence is in some ways mixed.
        Importantly, if you just look at the simple measures of
    risk before the crisis and post-crisis, what you see is that
    the market is pricing much more significant risk and that is
    reflected in a number of metrics in the financial system.
        Mr. Delaney. But I am talking about relative; I am not
    talking about absolute risk. Obviously, they are pricing risk
    differently than they did before the crisis. But on a relative
    basis, do you track firms which receive various designations
    within the government and their access to capital versus
    similarly situated firms which do not to see if there is any
    reinforcing market perception based on designations?
        Mr. Gerety. The most important thing from the perspective
    of the Council is that that perception as it exists is
    incorrect, and that the action of Dodd-Frank is to prevent any
    firm from having a--
        Mr. Delaney. Whether they are making it correctly, because
    to some extent, if the market assumes that, it becomes reality.
    So putting aside how they should interpret the actions, do you
    track whether they do actually interpret the actions the way
    the academics think they should determine the actions?
        Mr. Gerety. Congressman, there is a very wide range of
    academic opinion and other studies on this matter. We are
    certainly aware of that debate. But the thing that I think is
    important to note is that the action of Dodd-Frank does not
    allow that perception to become reality. The action of Dodd-
    Frank is to prohibit in law the use of any taxpayer losses to
    prevent the liquidation of any firm.
        So whether that perception exists or not in the market, it
    is incorrect.
        Mr. Delaney. But doesn't it also by law require the
    industry to set aside funds to be available for institutions
    during their orderly liquidation?
        Mr. Gerety. Congressman, I think what you are asking about
    is whether firms themselves need to plan for their liquidation,
    and that is true both in terms of capital and liquidity
    standards and in terms of the creation of what are commonly
    called ``living wills.''
        Mr. Delaney. Right
        Mr. Gerety. So firms being required to plan for their
    resolution in bankruptcy is the standard Dodd-Frank imposes on
    that.
        Mr. Delaney. But industry-wide, funded by industry
    financing that is available through a liquidation, you are
    saying does not exist?
        Mr. Gerety. Dodd-Frank does not create an industry
    assessment to fund liquidation.
        Chairman McHenry. The gentleman's time has expired.
        It is done through the FDIC. And if the FDIC runs out of
    funds, it can tap the Treasury.
        Mr. Delaney. No, I am not talking about--
        Chairman McHenry. On a technical basis, the gentleman is
    correct in his answer. But I understand the point, and I would
    love to have further conversations with the Member.
        And now, we will recognize the gentleman from Wisconsin,
    Mr. Duffy.
        Mr. Duffy. Thank you, Mr. Chairman.
        Mr. Duffy. Per Dodd-Frank, a non-bank SIFI designation must
    meet the definition of ``predominantly engaged in a financial
    activity.'' That definition in Dodd-Frank was set forth in
    Section 4(k) of the Bank Holding Company Act.
        That was also the Pryor-Vitter amendment in the Senate that
    came forward.
        Now, the Fed has come out with a proposed rule that
    potentially expands the definition of ``predominantly engaged
    in financial activities,'' expanding that definition of Section
    4(k), as it was set forth in Dodd-Frank. My concern is that the
    Fed's definition of ``predominantly engaged in financial
    activity'' is going to cast potentially a far wider net and
    grab, maybe, large manufacturers and retailers in the country.
        FSOC is in the final stages of evaluating an initial set of
    non-bank SIFI designations. Is it possible, Mr. Gerety, that
    those designations can take place before the Fed submits its
    rule and definition?
        Mr. Gerety. I don't believe the statute requires that rule
    to be complete before designations. However, we are working
    very closely with the Federal Reserve. They have consulted with
    the Council on that rule. And we expect them to finalize that.
        Mr. Duffy. My question: Is it possible that FSOC will come
    out with its non-bank SIFI designations before the Fed submits
    its final rule and definition?
        Mr. Gerety. Congressman, I can't speak for the Council's
    timing in its decision, but--
        Mr. Duffy. Is it possible?
        Mr. Gerety. --there is no statutory--
        Mr. Duffy. But is it possible?
        Mr. Gerety. There is no statutory--
        Mr. Duffy. I know. But is it possible? You are the
    representative of Treasury. Is it possible that those
    designations may come out before the Fed's rule?
        Mr. Gerety. The definitions require a two-thirds majority
    vote of the Council. I can't speak for two-thirds of the
    Council.
        Mr. Duffy. Okay. So let's talk about it maybe in a little
    different way. Are you committed that if FSOC comes out with
    these non-bank SIFI designations--are they committed to using
    the rule as set forth in 4(k) for Dodd-Frank? Or are they
    potentially going to use the rule that might be expanded from
    the Fed?
        Mr. Gerety. The Fed has the authority to interpret the
    definition of ``predominantly engaged in financial activity''
    as you have identified. Section 4(k), which you are referring
    to, is in the Bank Holding Company Act--
        Mr. Duffy. That is right.
        Mr. Gerety. The Federal Reserve has the statutory authority
    to interpret that section of the Bank Holding Company Act as it
    relates to the definition of ``predominantly engaged in
    financial activity.''
        Mr. Duffy. I don't know if you have seen the letter that
    was sent by Senators Vitter and Pryor, basically setting forth
    that it was quite clear what the intent of their amendment was,
    which was to strictly follow Section 4(k).
        And now, the Fed is going to potentially expand that rule.
    Are you saying that FSOC is not going to follow the will of
    Congress, but potentially an expanded interpretation by the
    Fed?
        Mr. Gerety. Congressman, the Federal Reserve has the
    authority to interpret the Bank Holding Company Act. It is
    given the rulemaking authority under Dodd-Frank. And so, I
    anticipate that we would follow the Federal Reserve's rule as
    it interprets the statute.
        Mr. Duffy. So when there is a conflict between what the
    directive of Congress was and then its interpretation by the
    Fed, FSOC will go forward with the interpretation of the Fed,
    as opposed to what Congress has specifically delineated in
    Dodd-Frank.
        Mr. Gerety. Congressman, I can't speak to the--a commitment
    that I think you are asking on behalf of the Council. But I can
    say that my understanding is the Federal Reserve has the
    authority to interpret the Bank Holding Company Act and write
    rules in that, as given by Dodd-Frank.
        Mr. Duffy. Let's try another way. Can you assure Congress
    that FSOC will not designate any non-bank an SIFI that doesn't
    meet the definition as set forth in Section 4(k)?
        Mr. Gerety. Congressman, as I understand it, you are asking
    if the FSOC will consider the statutory standard, which is that
    any company needs to be a non-bank financial company
    predominantly engaged in financial activity, and we intend to
    follow that standard in our designation.
        Mr. Duffy. You understand the concern? Congress was very
    focused and very concerned about an expansion of this law to
    encompass companies that have nothing to do with the financial
    sector. There are retailers and manufacturers. And if you
    expand it, basically FSOC can have some impact on all of these
    large companies across the country. And that was our concern.
        And now we see this--the Fed expanding the rule that can go
    far beyond the intent of Congress. That is our concern.
        Mr. Gerety. Congressman, if I can just respond briefly, two
    points. First, the statutory standard is at 85 percent of
    revenue--
        Mr. Duffy. That is right.
        Mr. Gerety. --or 85 percent of assets are financial in
    nature, as defined as we have just been discussing.
        And second, that is only the limit of what the Council can
    do. The Council has set up a very robust process to assure that
    any non-bank financial company designated by the Council is one
    that poses risk to the financial markets.
        Mr. Duffy. My point is that Congress was clear in what we
    wanted. And it is being expanded. I want to know that FSOC will
    follow the directive of Congress, not an expanded definition by
    the Fed.
        Chairman McHenry. The gentleman's time has expired.
        We will now recognize Mrs. Beatty for 5 minutes.
        Mrs. Beatty. Thank you so much, Mr. Chairman, and Mr.
    Ranking Member.
        Let me first thank you for being here today, and for taking
    the time to go over how you operate and also in such a short
    period of time being able to respond to the many things that
    not only we have put on you, but what have come up in the
    report.
        As I have listened to the dialogue today, as we talk about
    whether it is strategic planning or whether we are talking
    about how you meet all of the standards, I guess many of the
    things I was going to ask have been addressed.
        So let me pose this question to you. When we look at the
    FSOC and the OFR, they are central to the overarching
    objectives of the Wall Street Reform. And they must--I believe
    you must also be given the opportunity to redefine--the
    research we talked about, the rulemaking, and certainly a
    deliberative process. Can you share with the committee what you
    have done so far to establish a working relationship with some
    of your foreign counterparts, or can you talk about any of the
    metrics established in your new roles with what you are doing
    with FSOC or the OFR as you employ or monitor measures of
    systemic risk?
        Mr. Gerety. Congresswoman, let me address the international
    coordination issue first. The statute gives the Council the
    responsibility to coordinate domestically and suggests that the
    Treasury Secretary should coordinate on behalf of the Council
    internationally.
        The Council has been very active in discussing amongst
    itself the international developments, whether they be on
    derivatives regulation, whether they be through the Federal
    Insurance Office and in collaboration between Treasury and the
    State insurance commissioners on progress in the international
    dialogue on insurance.
        So those are the types of topics that the Council has
    really made sure that it uses its domestic conversation to be
    coordinated with the international activities of U.S.
    regulators, whether they be the market regulators, the
    insurance community or the banking regulators.
        So I think we have been very active in using the Council to
    facilitate a dialogue about the importance of and the progress
    of international coordination on regulatory issues.
        Mrs. Beatty. Thank you. I appreciate that.
        Mr. Berner. Congresswoman, thanks for your question. As I
    mentioned in my testimony, we are taking steps to coordinate
    internationally.
        First, data standards is one area where I talked about
    that. The coordination globally on the data standards is
    extremely important. The standard would not be a standard
    without global coordination in the Legal Entity Identifier and
    other related projects.
        Second, we do regularly coordinate with our counterparts
    globally under the aegis of the Council, in order to exchange
    information and the way that we approach looking at information
    and filling gaps in data. That is extremely important for all
    of us, because some of those gaps exist on a global basis.
        So we regularly compare our work with that of other central
    banks and with other macro prudential, if I can use that term,
    agencies in Europe and Asia and around the world.
        That is an important part of our work. It has only begun,
    and we have a lot more to do in that area.
        Mrs. Beatty. Let me ask one other thing. My colleagues have
    asked you a lot of questions about how you will respond to
    whether it is an administrative rule or how you will respond to
    Congress. Is there anything that you have not shared with us
    that you would like to add that would let us know how you will
    notify Congress and the public about potential threats to the
    financial system and to the economy?
        Mr. Gerety. Congresswoman, I think that the issue you
    raised is an important one. Although there are some regular
    ways for the Council required in Dodd-Frank to report to
    Congress on its activities, and to publicly state its view
    about both its activities and its priorities with respect to
    risk, we also have to recognize that risks may not arise on a
    natural calendar-year cycle.
        I think in light of that, what you have seen in the work of
    both the Council and the OFR is a determined effort to address
    risks as they arise, to meet on those risks, and if necessary,
    to make public recommendations or public proposals for
    recommendations, as you saw last fall with money market funds.
        Mrs. Beatty. Okay. Thank you.
        Chairman McHenry. I thank the gentlelady, for her
    promptness, especially.
        Thank you.
        We will now recognize Mr. Grimm of New York for 5 minutes.
        Mr. Grimm. Thank you, Mr. Chairman.
        And I want to thank you all for testifying today. I
    appreciate your time.
        Just to follow up, Mr. Gerety, you were just mentioning
    derivatives regulations and the coordination internationally
    and how important it was and how you had been very active, the
    Council has been very active.
        So, given that the FSOC's role to promote this
    international competitiveness, I wanted to ask about Basel III.
    The Basel III implementation specifically related to
    derivatives, since you mentioned that.
        It is my understanding that the international Basel III
    agreement introduced a new derivatives capital requirement, the
    credit valuation adjustment (CVA), which is intended to
    minimize counterparty exposure for uncleared swaps.
        But it is also my understanding that the E.U. recently
    proposed in its implementation to Basel III, I think that is
    CRD IV, that based on that proposal it would create an
    exemption to CVA capital--the capital mandate for European
    banks transacting with corporates, sovereigns, pension funds.
        So, obviously, U.S. proposals reflecting Basel III that
    include CVA, it looks like the E.U. wants to exempt a lot of
    that. So the question is, has the FSOC done any analysis on the
    impact of this inconsistency? Would both U.S. firms at home and
    abroad, and U.S. businesses that use derivatives be at a
    disadvantage, and has the FSOC looked at that?
        Mr. Gerety. Congressman, I am not specifically aware of the
    particular exemptions that you are talking about in the E.U.
    proposals, but I think the general point is an important one,
    which is Basel III, as you know, is not binding in its
    agreement itself. It is promulgated through rules in the United
    States, and then in rules around the world.
        Therefore, the question about how that agreement is
    interpreted and implemented in a consistent way is very
    important, both to the competitiveness issues that you talked
    about, but also to the financial stability issues, which is, if
    the aim of these international agreements is to assure a level
    playing field, both on risk and on competition, then it is very
    important that the financial system is adequately protected in
    each area.
        Mr. Grimm. I have limited time. You are basically just
    regurgitating the purposes. We all get that. My question is--
    and if you don't have it with you, if you could please submit
    it to the committee--has the FSOC specifically looked at it?
    The E.U. has come out with their proposals and said, ``We are
    carving out an exemption.'' And I think I listed pension funds
    is one example. Sovereigns, another. Corporates, another.
        That would certainly put U.S. entities at a big competitive
    disadvantage, so I would ask that you submit that to us to see
    if FSOC is--if they haven't looked at it, if they intend on
    looking at it, what analysis--the impact that it would have.
        If U.S. financial firms have a mandated capital charge that
    is separate from margin. I want to be clear about that. It is
    the new CVA--effectively impacting the pricing that they can
    extend clients. Would you agree that if the E.U. does this
    exemption, it would limit the competition in services for U.S.
    businesses in an undesirable way?
        Is that something you would agree with?
        Mr. Gerety. Congressman, I don't want to comment on a
    specific exemption. I am not totally familiar with the point
    that you raise. However, I do think the general point of the
    consistency, both in terms of risk and in terms of competition,
    is something we value.
        Mr. Grimm. You don't need to know the exact exemption, but
    would you at least say that if the rules are not consistent,
    that it is certainly going to put U.S. institutions at a
    disadvantage? Is that fair to say, which is what the FSOC is
    trying to avoid? Isn't that your whole purpose?
        Mr. Gerety. To the issue of consistent rules, it is
    certainly something that we take very seriously. And I think
    working across a whole range of issues, not just the specifics
    that you are raising, consistency has been something that the
    Council has discussed. How is Basel III implementation going
    and what is going to be the impact, both domestically and
    internationally.
        Mr. Grimm. Okay. So, I would like for you to submit to the
    committee some type of analysis of the impact that, if the E.U.
    is, in fact, going to exempt--have a major exemption to CVA,
    that impact on the U.S. institutions. Can you do that?
        Mr. Gerety. Congressman, I am glad to get back to you and
    your staff with more on this issue.
        Mr. Grimm. Is that a ``yes?''
        Mr. Gerety. I am glad to get back to you on this issue.
        Mr. Grimm. You hate the words ``yes'' and ``no?'' Okay.
        I yield back.
        Chairman McHenry. The gentleman from Washington, Mr. Heck,
    is recognized for 5 minutes.
        Mr. Heck. Thank you, Mr. Chairman.
        I just want to make an observation about Reverend Cleaver's
    question and concern earlier about, have recent congressional
    actions, with respect to Federal employee compensation,
    deterred or harmed our ability to attract and retain a
    sufficient caliber of talent in order to undertake this very
    important task. I share that concern, but based on your
    respective presentations here today, I am sleeping better
    tonight, and I thank you for your public service.
        Mr. Gerety, I have had the great privilege to spend a great
    deal of my career in both the public sector and the private
    sector, and I find that the public sector elevates certain
    process values pretty consistently. And the GAO report,
    frankly, is exhibit A: transparency; accountability; and
    collaboration.
        In the private sector, we elevate certain other values:
    clarity; and the value of time. And in that spirit, I kind of
    went looking for some indication of when FSOC would designate
    non-bank financial institutions--SIFIs. I couldn't find it, so
    can you either disabuse me of it, or alternatively, indicate as
    specifically as you can when that might happen?
        Or, lastly, if you cannot do that, at least give us a
    range, or an estimate as to when that designation will occur.
    Because it matters.
        Mr. Gerety. Personally, I think it is an important
    question. While I can't speak on behalf of the Council, as I
    mentioned earlier, the designation standard is that a two-
    thirds majority vote of a Council vote, I can say that we
    expect those proposed designations to happen in the next few
    months.
        Mr. Heck. Thank you.
        My second and last question--I am fascinated by this
    question of living wills. And I guess we have the experience of
    the first tranche of that over on the big, big, big, big banks.
    I am wondering if you have had any feedback or input or
    questions or conversations with potential non-bank financial
    institutions about that requirement, which, I believe, would be
    associated with their designation as an SIFI, and what kinds of
    concerns you are hearing, and what particular challenges you
    would anticipate for them in that regard, especially given that
    the business models of the non-banks is so fundamentally
    different in many cases than bank financial institutions.
        What are you hearing? What wisdom can you share with us?
    And, lastly, just how long is it going to be before you think
    we are at the point where we have really good living wills that
    make sense and fulfill the statutory objective?
        Mr. Gerety. Congressman, on the question of how non-bank
    financial companies have thought about the living will
    requirements specifically, I think that actually has been less
    of a significant area of concern. One of the best public
    records of this is the comment processes that we have gone
    through in the non-bank financial companies.
        We did an Advance Notice of Proposed Rulemaking, our first
    proposed rule. We actually, based on that comment, did a second
    proposed rule, and then finally, finalized the rule.
        So we did get a very wide range of input from industry
    academics and others on how non-bank financial companies were
    thinking about designation. In particular, they were very
    focused, as you note, on the differences in business model and
    making sure that when the Fed applies enhanced credential
    standards, it does so in a manner that respects and reflects
    those different business models.
        I think within that, the living will requirement is a
    significant requirement, but it asks the firms to design on the
    basis of their operation how they would go through an orderly
    liquidation in bankruptcy, and therefore, I think that
    requirement can be applied to a very wide range of business
    models. So we haven't heard a significant concern about that
    requirement, but rather, more on the general imposition of
    enhanced prudential standards and making sure they respect and
    reflect the differences in business models across the wide
    range of non-bank financial companies.
        Mr. Heck. Thank you. I yield back the balance of my time.
        Chairman McHenry. We will now recognize Mr. Hultgren of
    Illinois for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman.
        I want to return to FSOC's responsibility under Section 112
    to enhance the competitiveness of U.S. financial markets and to
    ``facilitate information-sharing and coordination'' between
    member agencies. Despite repeated assurances of coordination,
    we are beginning to see regular breakdowns in joint
    rulemakings, guidances, and definitions between the CFTC and
    the SEC--the Volcker Rule, what is a U.S. person,
    extraterritoriality rules, swap execution facilities.
        Mr. Gerety, what steps is FSOC taking to ensure these
    agencies are properly coordinating their Dodd-Frank
    rulemakings, specifically with SEFs?
        Will the FSOC commit to ensure that the SEC's and CFTC's
    proposals are substantially similar and released at the same
    time?
        Mr. Gerety. Congressman, I think the Council has been very
    active in coordinating with the SEC and the CFTC and discussing
    their progress on on rulemakings as well as rulemakings more
    generally.
        Mr. Hultgren. So do you think they will--is there a
    commitment that those will be released at the same time and be
    substantially similar?
        Mr. Gerety. Congressman, when it comes to the SEC or the
    CFTC, which are independent agencies, the Council cannot
    determine their rulemaking processes or their rulemaking
    timeline, so I can't make that commitment.
        But I can say that there is lots of evidence of the SEC and
    the CFTC working very closely together, and we think that
    coordination is very important.
        Mr. Hultgren. Ms. Clowers, I wonder if you could follow up
    on this? Are you concerned that regulatory uncertainty and
    undue complexity will result if the FSOC fails to coordinate
    important rulemaking, like the SEF rules?
        Ms. Clowers. In our report, we discuss the importance of
    coordination. And certainly, those are potential outcomes if
    rules are not properly coordinated.
        Mr. Hultgren. So, you have some concern on that?
        Mr. Gerety, Federal Reserve Chairman Bernanke has warned
    that the U.S. derivatives regulation has to be coordinated
    internationally or we risk ``a significant competitive
    disadvantage.''
        The CFTC and the SEC were instructed to coordinate
    internationally, but I heard testimony from foreign regulators
    in the Agriculture Committee that concerned me.
        What steps has the FSOC taken to ensure that none of its
    member agencies issue regulations that run counter to the
    ``establishment of consistent international standards?''
        Mr. Gerety. Congressman, I think the importance of
    coordination and consistent rules is one that the Council has
    spent energy on. However--
        Mr. Hultgren. What steps have they taken? I recognize it is
    important to them. What steps have been taken?
        Mr. Gerety. The Council has discussed this issue on a
    number of occasions. At the staff level, we are in very
    frequent conversation, both with the SEC and the CFTC and
    together. And I know that those agencies themselves are in near
    constant contact on the coordination of those rulemakings.
        Mr. Hultgren. So the steps would be just really the contact
    that has happened? There is nothing beyond that?
        Mr. Gerety. With respect to coordination, I think what you
    can expect from regulatory agencies pursuing their independent
    statutory authorities is that they work very, very closely
    together to try and promulgate consistent rules.
        Mr. Hultgren. Do you agree that substantive differences in
    rulemaking and interpretation between the SEC and the CFTC
    could increase compliance costs and hurt U.S. competitiveness?
        Mr. Gerety. I think, Congressman, this is an area that is
    quite complex, but, nonetheless, I think the importance of
    substantively consistent rules, consistent also with the
    statute, is something that we would think is very important.
        Mr. Hultgren. So you would say yes?
        Mr. Gerety. Congressman, I think--
        Mr. Hultgren. Substantial differences in rulemaking and
    interpretations could increase compliance costs. Yes, it could,
    or no, it couldn't?
        Mr. Gerety. Congressman, I think we have to look at
    compliance cost in relation to the statutory language. And both
    the SEC and the CFTC are working very hard to coordinate with
    each other--
        Mr. Hultgren. The reason they would be coordinating is
    because they would see compliance costs hurting U.S.
    competitiveness if they don't coordinate. Is that right?
        Mr. Gerety. I think not just competitiveness, but also from
    a risk perspective, we want rules to be consistent. That is
    something that the regulatory community has been very
    straightforward on, which is an important value.
        Mr. Hultgren. My time is winding down. You clearly have
    both a coordination and a competitiveness mandate. Do you or do
    you not acknowledge that this disruption which really is right
    before our eyes--certainly it is reported in The Wall Street
    Journal--Republican and Democratic Commissioners at the CFTC
    and the SEC have raised concerns, and foreign regulators came
    to Congress to cry foul and warn about the impact to U.S.
    institutions.
        Again, I wonder if you could comment on this, then, what--
    if you can't comment on this, what specifically is your role?
        Mr. Gerety. The role of the Council I think, as you
    identified, is a broad role of coordination, information-
    sharing, and to facilitate that among regulators.
        What I think you are asking about is the Council's role
    with respect to specific regulatory priorities of the SEC and
    the CFTC in the specific conduct of those rulemakings.
        I would note I think in the issues that you have raised,
    these are not final. And so, my understanding is that the
    regulators are working very closely together to take in these
    comments and to try to work--
        Mr. Hultgren. My time is up. But just to clarify, my
    concern is the confusion and lack of coordination is leading to
    hurting U.S. competitiveness and leading to uncertainty. And I
    think that is a real problem.
        My time has expired. I yield back, Mr. Chairman.
        Chairman McHenry. And, without objection, Mr. Garrett is
    recognized for 5 minutes for the purpose of asking questions.
        Mr. Garrett. I thank the chairman.
        I was going to go down one road, but Mr. Hultgren's
    questions lead me to follow up with Mr. Gerety on the--so, you
    believe that there has been substantial coordination between
    the SEC and the CFTC on the promulgation of the rules?
        Mr. Gerety. Congressman, I do believe that the Council--
    that the Commission staff both at the SEC and the CFTC have
    been in very frequent, near constant contact on the
    coordination of these rulemakings.
        Mr. Garrett. Does constant contact also mean that they are
    actually running on the same timeline?
        Mr. Gerety. Congressman, I can't speak to the rulemaking
    timelines of the CFTC or the SEC.
        Mr. Garrett. So it would not be--in order to have
    coordination, wouldn't one have to come out not before the
    other? Why has one agency come out today and then the other one
    comes out a year from now and say that we have done so in a
    coordinated manner? How can the market respond to that?
        How can that be called coordinated?
        Mr. Gerety. Congressman, I think what you are identifying
    is an issue between the nature of the process--is it a
    coordinated process, are people working together--
        Mr. Garrett. And when it is not coming out at the same
    time, would you say that is--I would say that is uncoordinated.
    Wouldn't you?
        Mr. Gerety. I think what we can recognize in the process we
    have seen to date is staff working together, the Commissions
    having joint public roundtables, the Commissions working
    together, the Council helping to facilitate dialogue in this
    area and information-sharing in this area.
        Mr. Garrett. So what you are saying is that you are looking
    at the process, but not at the end result. And so, as long as
    there is process that is going in the right direction, in other
    words everybody is having a meeting once a week or talking
    every so often, that is satisfactory. But if the end result is
    an uncoordinated timeline or an uncoordinated result, that is
    something you don't care about. Is that what you are telling
    me?
        Mr. Gerety. I think that the Council and the Treasury
    believe very firmly that it is important for the rules to be
    consistent at the level of substance as well.
        Mr. Gerety. However, I would note that the SEC and the CFTC
    are independent regulatory agencies. Each of those Commissions
    needs to make decisions about their rulemaking.
        Mr. Garrett. And so in this area, you are saying that your
    authority--the Council's authority is limited.
        Mr. Gerety. The Council's authority is limited. It cannot
    determine the rulemaking decisions of independent regulatory
    agencies.
        Mr. Garrett. Absolutely no authority in that area.
        Mr. Gerety. The Council I think--I wouldn't say--I think
    the question that you may be referring to is the Council does
    have authority to make recommendations in that area. And I
    think we have taken that and used that authority in some
    instances.
        But with respect to changing the independence of the SEC or
    the CFTC, the Council does not have authority.
        Mr. Garrett. So do you look at it from a risk basis, that
    if they operate on a different timeframe and end up with
    different--end up with basically different rules, that you
    could have arbitrage as far as which way companies will go,
    based on different rules?
        Mr. Gerety. Certainly, Congressman, the issue of
    consistency, both in terms of timing and of substance, is one
    that we think is important.
        Mr. Garrett. And if that was the case, and if you found
    that regulatory arbitrage was going to potentially be the
    State, because they are coming out on an inconsistent basis and
    they are coming out on an inconsistent timeline, wouldn't that
    give you authority to act in that case?
        Mr. Gerety. Congressman, I think we need to make a
    distinction between what the Council's actions can be. The
    Council, as you know, is made up of its members. The SEC Chair
    and the CFTC Chair sit on the Council, so we work very closely
    with them on the progress of Dodd-Frank implementation
    generally.
        And also, in terms of the Council's authority, the Council
    has authority to make recommendations to independent regulatory
    agencies with respect to issues that could relate to financial
    stability.
        Mr. Garrett. So, in other words, the timeframe is really
    not a factor for you, as far as trying to assess the risk
    assessment of the matter. As long as they come out with a final
    product that is satisfactory, then it is okay.
        Mr. Gerety. Congressman, I think the timeframe may be
    important. We certainly are working closely with the regulating
    community--
        Mr. Garrett. Does that explain why you became involved with
    the SEC in the money market fund situation, that you were not
    satisfied with the timeframe there, and you decided to insert
    your influence in that area, but you decide, where there could
    not be any regulatory arbitrage, but here is an area where you
    could have regulatory arbitrage, and some would suggest that
    you would already see it, as industry begins to, in
    anticipation of the rules, with one agency moving at a
    breakneck speed, and another agency moving at a more thoughtful
    manner, that you could see the arbitrage occurring now.
        Does that explain why you take two different approaches to
    this? Or why do you take two different approaches to it?
        Mr. Gerety. I think with the issue that you identify in
    money market funds, what the Council saw is the SEC not being
    able to take an action to have a public dialogue about the
    risks and structural vulnerabilities in money market funds.
        And the Council saw that as an issue and decided to put out
    for proposed recommendation a number of possible reforms to
    the--
        Mr. Garrett. Wait a second. Isn't that what you just said
    was the role of the regulator, that you are not--you don't have
    the authority to get into there?
        Isn't that what the SEC had said that they wanted to do as
    a regulator? Isn't that the SEC who wanted to do a study?
        And all of a sudden, you decided, as a Council, to
    interfere in that area by moving forward?
        But in this other area, much more--very complex other area
    that really is ripe for consistency, you decided to have a
    hands-off approach. I see that as being inconsistent from your
    perspective, and they are potentially causing risk to the
    market.
        But, with that, I believe my--
        Chairman McHenry. Yes, your time has expired. I appreciate
    the chairman of the Capital Markets Subcommittee.
        I will now recognize the vice chair of the subcommittee,
    Mr. Fitzpatrick, for 5 minutes.
        Mr. Fitzpatrick. Thank you, Mr. Chairman.
        Mr. Gerety, does your transparency policy include any
    requirements about giving public notice of your Council
    meetings?
        Mr. Gerety. Congressman, I don't think that our
    transparency policy speaks specifically to the public notice of
    Council meetings.
        However, I would note that the Council has established a
    process whereby when possible, the Council notices public
    meetings 7 days in advance.
        Mr. Fitzpatrick. What does that mean, ``when possible?''
        Mr. Gerety. For example, there were a number of instances
    when the Council has had conference calls in relation to
    specific market events or other concerns, and those meetings
    had not even been scheduled 7 days in advance, so it wasn't
    possible to notice those meetings 7 days in advance. In that
    instance, such as during Superstorm Sandy or in response to the
    downgrade of U.S. debt in August of 2011, the Council,
    obviously, did not provide public notice 7 days in advance. But
    the general practice that we have tried to adopt as we become
    more mature is to provide a week's notice for meetings.
        Mr. Fitzpatrick. Were there instances where you had public
    meetings but you didn't provide public notice of it during the
    superstorm?
        Mr. Gerety. During the course of the Council's development,
    I can't recall off the top of my head when we started this
    practice of noticing meetings 7 days in advance, but I can tell
    you that the general practice we have adopted is to--and I
    think we will continue going forward--is to notice meetings 7
    days in advance.
        Mr. Fitzpatrick. And what is the rationale for explicitly
    excluding any reference to a requirement for noticing public
    meetings in advance in the policy?
        Mr. Gerety. Congressman, I can't speak specifically to that
    rationale. I think at the time, the transparency policy was
    trying to address the transparency of the Council's operation.
        As we have gone through the 2\1/2\ years of the Council's
    existence, as we have had dialogue with both public market
    participants, and others like the GAO, we have looked for ways
    to improve our transparency and our accountability, and I think
    this is one of the steps that we have taken to try and improve
    our processes and be more transparent in noticing public
    meetings on a regular basis.
        Mr. Fitzpatrick. So under the policy as currently drafted
    and as it is being followed, are there any circumstances in
    which FSOC is actually required to give public notice of a
    meeting?
        Mr. Gerety. Congressman, I don't think the policy speaks to
    public notices, but I can tell you what the practice is. We
    have adopted the practice of--and I think our records show that
    we are following that practice of noticing meetings 7 days in
    advance.
        Mr. Fitzpatrick. Why doesn't FSOC transcribe the minutes of
    the meetings, the specifics other than what was referenced
    earlier in the hearing here? That you might have a public
    meeting and the entire minutes are a page-and-a-half, including
    the attendees. Why don't you transcribe them?
        Mr. Gerety. Congressman, I can't speak to the Council's
    decision about how to record and whether to transcribe minutes.
    I can say that we have heard that recommendation from the GAO
    and we are looking broadly at ways to continue to improve
    transparency and accountability, and we will consider that as
    go forward.
        Mr. Fitzpatrick. Wouldn't you agree that a transcription of
    a meeting is a much better record of the meeting rather than a
    very sparse page-and-a-half of minutes?
        Mr. Gerety. Congressman, I think the question that you are
    raising is a question about how to balance the goals of keeping
    confidential information, market sensitive discussions
    confidential while also providing sufficient transparency and
    accountability to the public. And I think that is a balance
    that the Council is working to strike.
        Mr. Fitzpatrick. Director Clowers, in your audit did FSOC
    articulate a reason that justifies its failure to transcribe
    the minutes in the meetings?
        Ms. Clowers. It was similar to what Mr. Gerety has offered
    in terms of protecting confidential information and looking to
    strike the right balance in providing the information and that
    transparency in protecting information.
        But, again, we have noted the importance of transparency in
    all the decision-making, and we point to the Federal Reserve,
    Federal Open Markets Committee, which provides more
    information. Even 3 weeks after the meeting, they will provide
    more detailed minutes and then later will release transcripts.
        Mr. Fitzpatrick. So this is how FSOC compares to the
    Federal Reserve? You are saying the Federal Reserve is much
    more transparent, provides more information, including a
    transcription?
        Ms. Clowers. Correct.
        Mr. Fitzpatrick. Director Clowers, is FSOC subject to the
    Sunshine Act?
        Ms. Clowers. This is a question that I have talked to our
    attorneys about, and it is my understanding that it goes to the
    definition of ``agency.'' And we haven't been able to find any
    type of definitive court rulings about whether FSOC would be
    defined as an agency. But it is my understanding that they
    would not.
        Mr. Fitzpatrick. Mr. Gerety, can you agree that the Council
    would subject itself to the Sunshine Act?
        Mr. Gerety. Congressman, I can't commit on behalf of the
    Council--
        Mr. Fitzpatrick. Would you agree that it would be a good
    thing to be subject to the Sunshine Act? Would you agree that
    it would be a good thing for the Council to be subject to the
    provisions of the Sunshine Act?
        Mr. Gerety. Congressman, the Council operates consistent
    with law. The Sunshine Act is a law. And I think the way that
    we have operated is consistent with the spirit. Certainly, in
    terms of public notices, we have adopted that practice, as we
    just discussed. But I can't speak to or commit to the Council's
    decisions.
        Mr. Fitzpatrick. Thank you.
        Chairman McHenry. I appreciate that.
        And I want to announce as a procedural piece here, in
    consultation with the ranking member, there was agreement to go
    into a second round, to not exceed 10 minutes per side. It was
    a failure of the Chair to not announce that.
        And by unanimous consent, that is so ordered.
        So with that, I will recognize myself for 5 minutes.
        Ms. Clowers, is the Attorney General a member of the FSOC?
        Ms. Clowers. The Attorney General? No.
        Chairman McHenry. The Attorney General is not.
        The Attorney General said in December, ``The impact on the
    stability of the financial markets around the world is
    something we take into consideration. We reach out to experts
    outside of the Justice Department to talks about what are the
    consequences of actions that we might take,'' meaning Justice,
    ``that would be--and what would be the impact of those actions.
    We want to make particular prosecutive decisions or
    determinations with regard to particular institutions.''
        Mr. Gerety, has the FSOC been consulted by the Justice
    Department as it relates to financial institutions?
        Mr. Gerety. My understanding is that the Justice Department
    reached out to Treasury but not to the Council as a whole.
        Chairman McHenry. To the Treasury Secretary?
        Mr. Gerety. I am not personally aware of the officials
    within the Treasury who engaged with the Department of Justice
    on this question. I can say that my understanding is that the
    Treasury was not able to offer a meaningful assessment of the
    impact.
        However, I think the issue that you raise--
        Chairman McHenry. Were you directly or indirectly contacted
    by the Justice Department in regard to this matter?
        Mr. Gerety. Personally, I was not engaged in those
    conversations, but I--
        Chairman McHenry. Mr. Berner, were you?
        Mr. Berner. No, sir.
        Chairman McHenry. Were any members of your staff?
        Mr. Berner. No, sir.
        Chairman McHenry. Mr. Gerety, are you the designated staff
    person within Treasury as it pertains to the FSOC?
        Mr. Gerety. There are--
        Chairman McHenry. It is not a trick question. It is simply
    yes or no.
        Mr. Gerety. I do run an office within Treasury that
    supports the Council's activity.
        Chairman McHenry. And your title is what?
        Mr. Gerety. I am the Deputy Assistant Secretary for the
    Financial Stability Oversight Council.
        Chairman McHenry. All right, I am not trying to be tricky
    with you.
        And you were not contacted by the Justice Department or any
    individuals within the Justice Department about potential
    prosecutions against institutions or individuals within
    financial institutions?
        Mr. Gerety. I was not personally contacted.
        Chairman McHenry. Okay.
        Dr. Berner, has OFR done any analysis about what the impact
    would be of a prosecution of an individual or a financial
    institution?
        Mr. Berner. No, the OFR has not done any such analysis.
        Chairman McHenry. Is the OFR planning any such data
    collection and analysis?
        Mr. Berner. The OFR is not planning any such analysis.
    However, if the Council directed us to look at any question
    related to financial stability, that would be the way in which
    we would undertake any analysis.
        Chairman McHenry. Okay.
        The Attorney General testified on March 6th before the
    Senate Judiciary Committee and said, ``I am concerned that the
    size of some of these institutions becomes so large that it
    becomes difficult for us to prosecute them when we are hit with
    indications that if you do prosecute, if you do bring a
    criminal charge, it will have a negative impact on the national
    economy, perhaps even the world economy. And I think that is a
    function of the fact that some of these institutions have
    become too large, and I think it has an inhibiting influence
    and impact on our ability to bring resolutions that I think
    would be appropriate.''
        Let me ask once again. Dr. Berner, have you provided any
    data or information to the Justice Department about potential
    impacts of prosecutions of individuals and financial firms or
    financial firms?
        Mr. Berner. No, we have not.
        Chairman McHenry. Okay. Ms. Clowers, I know you are not a
    Justice Department official, but you are a financial services
    expert.
        Is this capacity within the Justice Department?
        Ms. Clowers. We have not examined the Justice Department to
    make this type of determination.
        Chairman McHenry. Do you examine institutions that have
    financial services expertise within government?
        Ms. Clowers. Yes, we do.
        Chairman McHenry. And you have not done any analysis within
    the Justice Department?
        Ms. Clowers. That is correct.
        Chairman McHenry. Not to say the Justice Department lacks
    that authority or expertise, but you are simply not aware of
    that expertise?
        Ms. Clowers. I am not aware of that expertise, correct.
        Chairman McHenry. Okay.
        Mr. Gerety, is there any intention by your office and your
    staff to do this analysis that I have asked Dr. Berner about?
        Mr. Gerety. Congressman, I think the question you are
    asking is, would the--
        Chairman McHenry. The question, I will repeat, is, do you
    have any plans to conduct an analysis at this moment? Do you
    have any plans?
        Mr. Gerety. The Council is not taking up this matter
    specifically. However, I think the broader issue about how to
    deal with the risks of large, complex financial institutions is
    addressed comprehensively in the Dodd-Frank Act.
        Chairman McHenry. Okay. And, therefore, the Attorney
    General is wrong in his analysis?
        Mr. Gerety. I think the Attorney General is speaking to
    prosecutorial decisions. Those are his decisions to make. And
    more generally, I think the point that bears repeating is that
    no firm--no institution is above the law.
        Chairman McHenry. Thank you. My time has expired.
        Mr. Green?
        Mr. Green. Thank you, Mr. Chairman.
        Let me start with our GAO representative.
        Does your report in any way contain any information related
    to the subject matter that was just called to your attention?
        Ms. Clowers. Did the issue of--
        Mr. Green. Did you audit in any way the Attorney General or
    any of the concerns raised by the Attorney General?
        Ms. Clowers. No.
        Mr. Green. And what is the style of this hearing today, as
    you understand it?
        Ms. Clowers. I am sorry, the style?
        Mr. Green. The style--the topic--the title?
        Ms. Clowers. The title--the focus was on our report on FSOC
    and OFR.
        Mr. Green. And did you come prepared today to talk about
    the Attorney General and inquiries that he may have made to
    certain agencies?
        Ms. Clowers. No.
        Mr. Green. Is this something that is totally unexpected as
    it relates to you and your purpose for being here today?
        Ms. Clowers. Certainly over the past few months, we have
    seen this in the press, in addition to talking about it.
        Mr. Green. But I am talking about as it relates to your
    report, is this something that is totally unexpected as it
    relates to your report?
        Ms. Clowers. Correct.
        Mr. Green. Are you afraid to say this is something that is
    totally unexpected--
        Ms. Clowers. Oh, it is not related--
        Mr. Green. --as it relates to your report?
        Ms. Clowers. --to our report.
        Mr. Green. All right. So this is beyond the scope of your
    report?
        Ms. Clowers. Yes, it is outside of our scope.
        Mr. Green. You say this without hesitation, reservation, or
    equivocation?
        Ms. Clowers. Yes.
        Mr. Green. Now, let's talk to our representative from FSOC.
        Do you have a mandate that requires you to supervise in
    some way--well, do this. Give us the entities that come under
    the purview of your jurisdiction.
        Mr. Gerety. Congressman, the Council is created among its
    members to address a broad range of risk related to financial
    stability that is embodied within the non-bank designation--
        Mr. Green. Can you pull the microphone a bit closer,
    please?
        Mr. Gerety. --Sure--that is embodied within the non-bank
    designations authority within a variety of recommendation
    authorities. So in that sense, the Council has a broad mandate
    to facilitate information-sharing and coordination on issues in
    the financial system that could relate to financial stability.
        Mr. Green. And as it relates to the Attorney General, do
    you have any supervisory authority over the Attorney General?
        Mr. Gerety. The Attorney General is not a member of the
    FSOC and the Attorney General's decisions on prosecutorial
    matters are up to the Attorney General and the Department of
    Justice.
        Mr. Green. What did you come prepared to talk about today?
        Mr. Gerety. Congressman, I was prepared to speak to the GAO
    report, and also to broad matters that are before the Council.
        Mr. Green. Let's talk to our member from the Office of
    Financial Research.
        What were you prepared to talk about today, sir?
        Mr. Berner. Congressman, I came here prepared to talk about
    the role of the Office in serving the needs of the Council, as
    well as the recommendations from the GAO with respect to our
    mandate.
        Mr. Green. And finally, do this for me. Clarify, if you
    would, liquidity versus solvency. There was some information
    accorded, and I don't think clarity was provided. Can you make
    it as transpicuously clear as possible, please, in terms of
    liquidity versus solvency? Include clawback in there, if you
    would, such that people will understand that taxpayers have no
    money that will be at risk in the final analyses.
        Mr. Gerety. Congressman, I think the most important
    statements in the Dodd-Frank Act with respect to solvency and
    the actions taken in a crisis are really in Title II, which
    bears on the Orderly Liquidation Authority. And Title II makes
    it very clear that no taxpayer funds shall be used to prevent
    the liquidation of any financial company under the title.
        What that means is that no financial firm will be protected
    from its own mistakes by actions of government or the use of
    taxpayer funds.
        There is, I think, more broadly in the financial system, an
    understanding that in certain instances, like the discount
    window, the Federal Reserve is able to provide a lender of last
    resort function to banks.
        But the important action of Dodd-Frank is to make clear
    that taxpayers can bear no losses in the liquidation of any
    firm, and that the government cannot prevent the liquidation of
    any financial firm, no matter how large or complex.
        Mr. Green. Mr. Chairman, I believe that pursuant to our
    agreement, the time has expired. And if this isn't true--the
    agreement that we have--I would ask that you move to sound the
    gavel and call this meeting adjourned.
        Chairman McHenry. I certainly appreciate the ranking
    member, and I certainly appreciate the testimony of the
    witnesses today.
        Mr. Garrett. Mr. Chairman, even though I am not a member of
    the committee, I will seek unanimous consent for an additional
    5 minutes.
        Mr. Green. Mr. Garrett knows that I love him dearly, but
    unfortunately, I have an appointment with the President of the
    United States of America. We have a meeting with him. You have
    already had yours, so I am going to have to step away and
    respectfully decline the--
        Mr. Garrett. Would it be of any assistance if I told you we
    had a 2-hour meeting and not very much came out of it so that--
        [laughter]
        Mr. Green. Well, not everybody who looks at Mount Rushmore
    sees Presidents. So it depends on your perspective, I suppose.
        Mr. Garrett. I understand that, thank you. I yield back.
        Chairman McHenry. The Chair notes that some Members may
    have additional questions for this panel, which they may wish
    to submit in writing. Without objection, the hearing record
    will remain open for 5 legislative days for Members to submit
    written questions to these witnesses and to place their
    responses in the record. Also, without objection, Members will
    have 5 legislative days to submit extraneous materials to the
    Chair for inclusion in the record.
        And with that, I do want to close by thanking the witnesses
    for their service in our government. Thank you for answering
    the questions, and we certainly appreciate your willingness to
    respond to the written questions that we will certainly have as
    a follow-up.
        Thanks so much. And without objection, this hearing is
    adjourned.
        [Whereupon, at 12:43 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 March 14, 2013

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]