[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




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                 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




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