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





                      WHO IS TOO BIG TO FAIL: DOES
                        DODD-FRANK AUTHORIZE THE
                         GOVERNMENT TO BREAK UP
                        FINANCIAL INSTITUTIONS?

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

                                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

                               __________

                             APRIL 16, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-14




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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
KEITH J. ROTHFUS, Pennsylvania

                     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:
    April 16, 2013...............................................     1
Appendix:
    April 16, 2013...............................................    43

                               WITNESSES
                        Tuesday, April 16, 2013

Alvarez, Scott G., General Counsel, Board of Governors of the 
  Federal Reserve System.........................................     5
Wigand, James R., Director, Office of Complex Financial 
  Institutions, Federal Deposit Insurance Corporation, 
  accompanied by Richard J. Osterman, Jr., Acting General 
  Counsel, Federal Deposit Insurance Corporation.................     7

                                APPENDIX

Prepared statements:
    Alvarez, Scott G.............................................    44
    Joint prepared statement of James R. Wigand and Richard J. 
      Osterman, Jr...............................................    52

              Additional Material Submitted for the Record

McHenry, Hon. Patrick T.:
    Letter to the Financial Stability Oversight Council from 
      Senator Bob Corker, dated March 12, 2013...................    61
    Written responses to questions for the record submitted to 
      the FDIC...................................................    63
    Written responses to questions for the record submitted to 
      the Federal Reserve........................................    66

 
                      WHO IS TOO BIG TO FAIL: DOES
                        DODD-FRANK AUTHORIZE THE
                         GOVERNMENT TO BREAK UP
                        FINANCIAL INSTITUTIONS?

                              ----------                              


                        Tuesday, April 16, 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 2:29 p.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick T. 
McHenry [chairman of the subcommittee] presiding.
    Members present: Representatives McHenry, Fitzpatrick, 
Duffy, Grimm, Hultgren, Ross, Wagner, Bachus; Green, Cleaver, 
Ellison, Delaney, Sinema, Beatty, and Heck.
    Also present: Representative Rothfus.
    Chairman McHenry. The subcommittee will come to order.
    And without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Also, without objection, members of the full committee who 
are not members of this subcommittee may sit on the dais and 
participate in today's hearing.
    So, welcome. This is the second in a series of hearings on 
ending ``too-big-to-fail'' and actually defining ``too-big-to-
fail.'' And this hearing is entitled, ``Who is Too Big to Fail: 
Does Dodd-Frank Authorize the Government to Break Up Financial 
Institutions?''
    With that, I will now recognize myself for 5 minutes for an 
opening statement. Let's start the time here.
    The Dodd-Frank Act was enacted in July of 2010, nearly 3 
years ago. The Dodd-Frank Act's drafters claimed that the Act 
would end the phenomenon of ``too-big-to-fail'' by, among other 
things, authorizing the regulators to take certain actions to 
reduce both the likelihood that a large financial company would 
fail and the impact if such a failure were to occur.
    Our last hearing exploring ``too-big-to-fail'' focused on 
the Financial Stability Oversight Council's failure to get up 
to speed in a timely manner, as well as its inability to 
identify and respond to emerging threats that risk the 
stability of the U.S. financial system.
    Today's hearing focuses on two sections of Dodd-Frank, 
Sections 121 and 165. Our witnesses represent the two agencies 
given what we believe to be enormous power under these 
provisions, the FDIC and the Federal Reserve.
    Section 121 of the Dodd-Frank Act authorizes the Federal 
Reserve Board to act, with the approval of the FSOC, to 
restrict a large financial company's activities or to require 
it to divest assets or operations if the company imposes ``a 
grave threat'' to the U.S. financial system, ``grave threat'' 
being used only one time within the Dodd-Frank Act, making it 
potentially a special phrase.
    Those who interpret this section broadly question whether 
the Fed could use this authority against an institution that 
may not presently pose a threat but, due to their size, 
structure, or interconnectedness or perhaps some other reason 
that we have not even dreamed up yet, they could pose a future 
threat to the economy.
    Section 165 gives the FDIC and the Federal Reserve 
authority to demand so-called living wills to ensure that large 
financial companies provide on a yearly basis how they can be 
quickly resolved, and safely done so, under the Bankruptcy Code 
in the event of financial distress. It also states, in the 
event of a deficient living will, that the FDIC and the Fed 
``may jointly impose more stringent capital leverage or 
liquidity requirements or restrictions on the growth, 
activities, or operations of a covered company.'' And then it 
further continues, giving authority that it ``may jointly 
direct by order to divest certain assets or operations.''
    To date, the Fed and the FDIC have not judged a living will 
deficient. However, certain Federal officials have indicated 
that the Fed and the FDIC are prepared to use their authority 
under Section 165 to impose substantive changes on company 
structures. Even some government officials, interest groups, 
news media sources, and other parties have argued that the 
government should order certain large financial institutions to 
divest assets or operations, break them up, as a means to 
further reducing systemic risk. Large banks, they argue, derive 
an unfair competitive advantage relative to firms that are not 
deemed ``too-big-to-fail'' because their status allows them to 
secure lower borrowing costs.
    Now, we have heard these arguments before, and this is 
certainly not news to our witnesses today, at least I would 
hope not, based on their roles. This hearing is one of a series 
of hearings to better understand the authority vested in the 
Federal Reserve and the FDIC to order large interconnected 
financial institutions to divest assets or operations, and the 
potential legal ramifications of those actions that could 
result from attempting to carry out this authority; also, for 
the panel to be able to clarify whether respective agencies 
view these provisions within Dodd-Frank as a broad authority to 
break up financial institutions or, alternatively, a narrower 
interpretation of this authority to operate in limited 
circumstances.
    Now, there is a lot to understand from policymakers on the 
Hill about the ramifications of the law as written, not what we 
had hoped the law to be, the phrases that we had hoped the law 
would have, but to actually tell us what that text, how you and 
the respective agencies interpret that, your planning for it, 
and the process going forward. We need some clarity on this. 
And this is why we are having this Oversight and Investigations 
Subcommittee hearing, for both oversight purposes and to 
investigate the actions that you have taken.
    So, with that, I will recognize the ranking member of the 
subcommittee, Mr. Green of Texas, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I also want to thank the witnesses for appearing today.
    Also, Mr. Chairman, if I may, I would like to take just a 
moment and express my deepest sympathies for those who are 
victims of this horrific tragedy that has occurred in Boston. 
My prayers are with them. And I believe that our government is 
doing all that it can as quickly as it can to bring justice to 
this situation.
    Mr. Chairman, ``too-big-to-fail'' is the right size to 
regulate, not replicate. Please allow me to explain.
    GAO has reported that the 2008 crisis cost the United 
States $13 trillion in lost economic output and $9.1 trillion 
in home equity and wealth. In 2008, the options were less than 
few, there were two: bankruptcy or bailout. Lehman's collapse 
proved that bankruptcy didn't work. And in addressing the 
bailout option, columnist Allan Sloan stated it well in the 
title of his July 8, 2011, article. It was styled, ``It was a 
lowdown, no-good, god-awful bailout. But it paid.'' And 
although taxpayers came out ahead, tax dollars should not have 
been put at risk.
    Dodd-Frank takes taxpayers off the hook. It does so by 
repealing the Fed's Section 13(3) lending authority. It 
explicitly prohibits any taxpayer loss. It provides bankruptcy 
as a first option. Some things bear repeating: It provides 
bankruptcy as a first option. And I emphasize this because it 
seems to get lost in the messaging that bankruptcy is still an 
option.
    With FDIC-like orderly liquidation, FDIC-like--prior to 
Dodd-Frank, we did not have the ability to wind down these huge 
institutions that we had with banks, generally speaking, 
because with banks, we had the FDIC. We could go in on Friday 
and close a bank, and open it up on Monday under a new name. 
But we didn't have that type of authority. Well, now we do. We 
have FDIC-like orderly liquidation authority if bankruptcy 
would result in a Lehman-like broad, systemic disruption. In 
the event of these huge institutions possibly creating systemic 
disruption, we have this wind-down authority.
    It provides the Financial Stability Oversight Council with 
authority to minimize and/or downsize ``too-big-to-fail'' 
institutions. It requires lending institutions to provide 
living wills to demonstrate how they would be resolved under 
bankruptcy laws. It limits the amount of their Tier 1 capital--
that is their core capital, primarily common stock--it limits 
the Tier 1 capital a bank can invest in hedge and private 
equity funds.
    Some want to eliminate or undermine Dodd-Frank. To do so 
will not end ``too-big-to-fail.'' Ending Dodd-Frank would take 
us back to a future without the tools to deal with ``too-big-
to-fail,'' the same future that produced a $13 trillion loss in 
economic output and a $9.1 trillion loss in home equity and 
wealth.
    ``Too-big-to-fail'' is the right size to regulate, not 
replicate. And, quite frankly, that is what Dodd-Frank does: It 
regulates the ``too-big-to-fail'' institutions.
    I yield back the balance of my time.
    Chairman McHenry. I thank the ranking member.
    And, with that, I will recognize Mr. Ross of Florida for 3 
minutes.
    Mr. Ross. Thank you, Mr. Chairman. I appreciate you holding 
this important hearing today.
    Today's hearing explores the authority of the Federal 
Reserve and the Federal Deposit Insurance Corporation to break 
up financial institutions under Sections 121 and 165 of the 
Dodd-Frank Act. After over 2\1/2\ years, the Fed and the FDIC 
have yet to clarify this authority and the circumstances under 
which they would use it. Today, I look forward to hearing how 
the Fed and the FDIC view their authority to break up financial 
institutions under Dodd-Frank.
    It is particularly important that we hold this hearing 
today because, as recent congressional actions seem to 
acknowledge, ``too-big-to-fail'' still exists, and Dodd-Frank 
did not end ``too-big-to-fail.'' Under Section 121 of Dodd-
Frank, if the Fed determines that a bank holding company with 
$50 billion or more in assets or a systemically important 
nonbank financial company poses a ``grave threat'' to U.S. 
financial stability, the Federal Reserve, with a two-thirds 
vote of the FSOC, can take certain actions to limit or restrict 
a company's activities. As a last resort, if restricting those 
activities doesn't work, the Federal Reserve must require the 
company to sell assets or off-balance-sheet items.
    I, and I think the American people, have many questions 
about how the Federal Reserve would decide if a company poses a 
grave threat to our economy, since the term is not defined in 
the Dodd-Frank Act. I also have many questions about whether 
and under what circumstances the Federal Reserve will use this 
authority. Unfortunately, the written testimony of the Federal 
Reserve witness today does not reveal how the Fed construes 
this power.
    I look forward to the witnesses' answers to these 
questions, and I thank the witnesses for testifying today.
    Mr. Chairman, I yield back the balance of my time.
    Chairman McHenry. I thank the gentleman.
    I now recognize Mrs. Maloney for 3 minutes for an opening 
statement.
    Mrs. Maloney. Thank you very much, Chairman McHenry, and 
Ranking Member Green.
    And welcome to all of our witnesses today.
    This is the second hearing we have had on the question of 
``too-big-to-fail'' and whether Dodd-Frank ended the implicit 
government guarantee. And while the last hearing looked at the 
role of the FSOC and the OFR in identifying systemic risk, this 
hearing is looking at the amendment that came to be called the 
Kanjorski Amendment, Section 121, probably the most debated one 
during the conference committee. We are also looking at Section 
165, which imposes heightened prudential standards on larger 
institutions, requiring them to complete living wills and to 
present their plans for orderly liquidation.
    So this is an important hearing as we look at these two 
proposals and the specific tools that regulators are given now 
through Dodd-Frank. During the crisis, they basically had two 
roads they could go down. They could either close down an 
institution, as we did with Lehman--not a good choice--or you 
could bail them out. We bailed out AIG, again, not a good 
choice.
    This basically gives regulators the ability to go into a 
troubled institution and force them to unwind and restructure 
and really confront the crisis. The FDIC had these tools during 
the crisis, and I believe they performed incredibly well in 
taking steps to really stabilize the economy and to help 
institutions to survive to continue serving the public.
    So I look forward to this hearing--I think it is a very 
important one--and to listening to the comments today. Thank 
you for calling it, Mr. Chairman, and Mr. Ranking Member.
    I yield back. Thank you.
    Chairman McHenry. I certainly appreciate that.
    And I appreciate the Members' timeliness for opening 
statements, since we were delayed with the votes.
    We will now recognize our distinguished panel of witnesses.
    From the Federal Reserve Board of Governors, we have Mr. 
Scott Alvarez, who serves as General Counsel of that 
institution, and previously served as the Board's Assistant 
General Counsel from 1989 to 1991. He earned a B.A. in 
economics from Princeton, and a J.D. from Georgetown Law 
Center.
    Mr. James Wigand is the Director of the FDIC's Office of 
Complex Financial Institutions, where he oversees planning for 
resolving systemically important financial companies. He 
previously was Deputy Director within the FDIC's Division of 
Resolutions and Receiverships for 14 years. He received a B.S. 
from the University of Maryland, and an MBA, with a 
specialization in finance, from the University of Chicago. I 
appreciate an ACC school being represented on the panel.
    And Richard Osterman is currently serving as acting General 
Counsel for the FDIC, and is otherwise the Deputy General 
Counsel for the FDIC's Litigation and Resolutions Branch. He 
has held several positions within the FDIC's Legal Division. 
Before the FDIC, he worked at the Federal Home Loan Bank Board 
and the Interstate Commerce Commission. He has a B.A. from 
Swarthmore, and a J.D. from the University of Baltimore School 
of Law.
    Because we have two institutions represented today, and by 
prior agreement, we will only have two testimonies today. We 
will recognize Mr. Alvarez first for 5 minutes for his oral 
opening statement, and then we will recognize Mr. Wigand for 5 
minutes to give an opening statement on behalf of the FDIC.
    And, without objection, each of your written statements 
will be made a part of the record.
    You know the deal with the lights: green means go; yellow 
means hurry up; and red means stop. We want to make sure 
Members have time to ask questions.
    With that, Mr. Alvarez, you are recognized for 5 minutes.

   STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Alvarez. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you very much for the 
opportunity to testify on the provisions of the Dodd-Frank Act, 
designed both to address the risks posed by systemically 
important financial institutions and to ensure that no 
institution is ``too-big-to-fail.''
    The perception that an institution is ``too-big-to-fail'' 
reduces the incentives of the firm and its shareholders, 
creditors, and management to limit risk-taking and distorts 
competition by enabling the firm to fund itself more cheaply 
than its competitors.
    Dodd-Frank contains a number of provisions that address the 
risks posed by these systemically important institutions. The 
goal of the Federal Reserve in implementing these provisions is 
to substantially reduce the probability of failure of our 
largest, most complex financial firms and to minimize the 
social losses if such a firm should fail. The steps we are 
taking would also minimize the advantage these firms enjoy 
based on perceptions of their systemic importance.
    A critical way to reduce distortions from ``too-big-to-
fail'' is for our most systemic banking firms to have 
substantial capital buffers. We are, therefore, strengthening 
the basic bank regulatory capital framework and specifically 
increasing capital requirements on the most systemic banking 
firms.
    Last year, the Federal Reserve and the other U.S. banking 
agencies issued proposals to implement BASEL III capital 
standards. These proposals would introduce a new common equity 
requirement, raise the existing Tier 1 capital requirement, 
implement a capital conservation buffer, and improve the 
quality of regulatory capital. The largest banking firms would 
also be subject to a supplementary leverage ratio, a 
countercyclical capital buffer, and higher capital charges for 
derivatives and trading exposures.
    In addition, the Federal Reserve conducts an annual stress 
test of the largest U.S. bank holding companies. Our stress-
test regime has helped produce a significant strengthening of 
the capital bases of the largest U.S. banking firms since the 
onset of the crisis. The aggregate Tier 1 common equity ratio 
at the 18 largest banking firms has more than doubled, from 5.6 
percent at the end of 2008 to 11.3 percent at the end of 2012, 
reflecting an increase of about $400 billion in capital.
    Dodd-Frank also requires the Federal Reserve to establish 
enhanced prudential standards for large bank holding companies 
that increase in stringency based on the systemic footprint of 
those companies. Consistent with this mandate, the Federal 
Reserve helped negotiate an international framework of capital 
surcharges for the most systemic global banking firms and will 
soon issue capital surcharge proposals for systemic U.S. bank 
holding companies.
    In addition, the Federal Reserve has proposed a broad set 
of enhanced prudential requirements for the largest U.S. 
banking firms and foreign banks operating in the United States.
    Another Dodd-Frank provision empowers the orderly 
liquidation of a major financial firm to reduce the potential 
damage to the broader economy from the failure of the firm. The 
Federal Reserve continues to work with the FDIC on the 
development of the FDIC's OLA framework and is considering the 
requirement that firms maintain a minimum amount of long-term, 
unsecured debt to facilitate use of the OLA. The Federal 
Reserve and the FDIC also are working together to review firm 
resolution plans which will help identify and address 
impediments to an orderly resolution.
    Finally, the Dodd-Frank Act contains several provisions 
that limit the size and growth of financial firms. For example, 
Section 622 prohibits a firm from growing through acquisition, 
with very limited exceptions, once the firm reaches a specified 
size. And Section 121 authorizes the Federal Reserve, with the 
consent of two-thirds of the Financial Stability Oversight 
Council, to impose a variety of restrictions if a large bank 
holding company or designated nonbank financial company poses a 
grave threat to U.S. financial stability.
    The Federal Reserve has made significant progress in the 
past few years to address the risks posed by systemically 
important financial institutions and to help ensure that no 
institution is ``too-big-to-fail.'' However, more work remains 
to be done, and the Federal Reserve, working along with the 
FDIC and others, remains hard at work.
    Thank you for your attention, and I would be pleased to 
answer any questions that you may have.
    [The prepared statement of Mr. Alvarez can be found on page 
44 of the appendix.]
    Chairman McHenry. I now recognize Mr. Wigand for his oral 
statement.

   STATEMENT OF JAMES R. WIGAND, DIRECTOR, OFFICE OF COMPLEX 
FINANCIAL INSTITUTIONS, FEDERAL DEPOSIT INSURANCE CORPORATION, 
    ACCOMPANIED BY RICHARD J. OSTERMAN, JR., ACTING GENERAL 
         COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Wigand. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you for the opportunity to 
testify on behalf of the Federal Deposit Insurance Corporation 
on Sections 165 and 121 of the Dodd-Frank Act. My oral remarks 
this afternoon will summarize the FDIC's role and progress in 
implementing the resolution plan requirements of Section 165.
    Under the Dodd-Frank Act, bankruptcy is the preferred 
resolution framework in the event of a systemic financial 
company's failure. To make this prospect achievable, Title I of 
the Dodd-Frank Act requires that all large, systemic financial 
companies prepare resolution plans, or living wills. These 
plans must demonstrate how the company would be resolved in a 
rapid and orderly manner under the Bankruptcy Code in the event 
of a company's material financial distress or failure.
    The FDIC intends to make the living will process under 
Title I of the Dodd-Frank Act both timely and meaningful. The 
living will process is a necessary and significant tool in 
ensuring that large financial institutions can go through an 
orderly resolution under bankruptcy.
    In November 2011, the FDIC and the Federal Reserve Board 
issued a joint rule to implement Section 165(d) requirements 
for resolution plans. The Section 165(d) rule sets out the 
information to be included in a firm's resolution plan. Under 
the rule, among other requirements, each firm must identify 
critical operations and core business lines, map those 
operations and core business lines to each firm's material 
legal entities, and identify the impediments to a rapid and 
orderly resolution in bankruptcy.
    In addition to the resolution plan requirements under the 
Dodd-Frank Act, the FDIC issued a separate rule for all insured 
depository institutions, or IDIs, with greater than $50 billion 
in assets. This group of IDIs must submit resolution plans to 
the FDIC for their orderly resolution under the Federal Deposit 
Insurance Act.
    The Section 165(d) rule and the IDI resolution plan rule 
are designed to work in tandem by covering the full range of 
business lines, legal entities, and capital structure 
combinations within a large financial firm.
    Bank holding companies and foreign banking organizations 
with $250 billion or more in nonbank assets submitted their 
initial resolution plans on July 1, 2012. The FDIC and the 
Federal Reserve Board have reviewed this first set of 
resolution plans for informational completeness to ensure that 
all information requirements of the rule were addressed in the 
plans. The 11 firms that submitted initial plans in 2012 will 
be expected to revise and update their plans in their 2013 
submissions.
    Yesterday, the FDIC and the Federal Reserve Board issued 
guidance which provides significant detail on our expectations 
for the revised plans. The guidance focuses on key issues and 
obstacles to an orderly resolution in bankruptcy, including 
global cooperation and the risk of ring-fencing and other 
precipitous actions. The revised plans must also address the 
risk of multiple competing insolvency proceedings and the 
firm's global liquidity management, including a detailed 
understanding of funding operations and cash flows. Finally, 
the revised plans should assure the continuity of critical 
operations, particularly maintaining access to shared services 
and payment and clearing systems, and address the potential 
systemic consequences of counterparty actions.
    In addition to informational content, the FDIC and the 
Federal Reserve Board must review each plan's strategic 
analysis. If, as a result of their review, the FDIC and the 
Federal Reserve Board jointly determine that the resolution 
plan is not credible or would not facilitate an orderly 
resolution of a firm under the Bankruptcy Code, then the 
company must resubmit the plan with revisions. The resubmitted 
plan may, if necessary, include proposed changes in business 
operations or corporate structure.
    If the company fails to resubmit a credible plan that would 
result in orderly resolution under the Bankruptcy Code, the 
FDIC and the Federal Reserve may jointly impose more stringent 
capital, leverage, or liquidity requirements; restrict growth, 
activities, or operations; or 2 years after the imposition of 
such requirements and in consultation with the FSOC, order the 
company to divest certain assets or operations if the company 
has failed to resubmit the resolution plan as required.
    The FDIC's goal is to ensure that firms that could pose a 
systemic risk to the financial system can undergo a rapid and 
orderly resolution in bankruptcy. Achieving the goal that any 
institution, regardless of size, complexity, or 
interconnectedness, can be effectively resolved through a 
bankruptcy process will contribute to the stability of our 
financial system and will avoid many of the difficult choices 
regulators faced in dealing with systemic institutions during 
the last crisis.
    That concludes my opening statement. I would be glad to 
respond to your questions.
    [The joint prepared statement of Mr. Wigand and Mr. 
Osterman can be found on page 52 of the appendix.]
    Chairman McHenry. Thank you very much.
    And to restate the title of the hearing we are having 
today, ``Who is Too Big to Fail: Does Dodd-Frank Authorize the 
Government to Break Up Financial Institutions?'' This is about 
Sections 121 and 165 of the Dodd-Frank Act.
    I now recognize myself for the purpose of questioning the 
witnesses. So, with that, we will begin.
    Mr. Osterman, does Dodd-Frank give your agency the 
authority to break up big banks under Sections 121 or 165?
    Mr. Osterman. Thank you for the question, Chairman--
    Chairman McHenry. Thanks. If you will pull your microphone 
closer?
    Mr. Osterman. Certainly. Can you hear me better now?
    Chairman McHenry. Yes.
    Mr. Osterman. Thank you for your question.
    Section 121, of course, is the Federal Reserve's--
    Chairman McHenry. You don't have to define it. I 
understand. I'm sorry. Then I will--
    Mr. Osterman. Section 165 requires the filing of living 
wills and resolution plans to determine whether an institution 
can be resolved in bankruptcy. The purpose of the provision--
    Chairman McHenry. You don't have to tell me the purpose. I 
just wanted to know your authority under that section. Do you 
have the authority to break up large financial institutions?
    Mr. Osterman. The authority is to resolve them in 
bankruptcy, to determine whether they can be resolved in 
bankruptcy. If the institution can be resolved in bankruptcy, 
then it is not going to cause a systemic risk to the United 
States financial system. That is the way the statute is being--
    Chairman McHenry. So let me actually re-pose this--
    Mr. Osterman. Yes.
    Chairman McHenry. --okay? Does the FDIC have the authority, 
in conjunction with the Federal Reserve, to force the 
institution to sell assets?
    Mr. Osterman. The FDIC and the Fed through the--
    Chairman McHenry. It says in the text of the law that you 
do.
    Let me move on, to Mr. Alvarez.
    Mr. Alvarez, let me pose the same question to you. Under 
Sections 121 or 165, does Dodd-Frank give your agency the 
authority, in conjunction with the FDIC, if you will, to break 
up big banks?
    Mr. Alvarez. So, as you read, Section 121 allows the 
Federal Reserve, in consultation with the FSOC, not the FDIC, 
to require large firms to sell assets.
    However, it imposes a high hurdle on the requirement. We 
must find and the FSOC must agree, two-thirds of the FSOC must 
agree, that the institution poses a grave threat, not just any 
threat, a grave threat, to financial stability. And we are 
required by statute to consider a variety of alternatives 
first, including restrictions on growth, restrictions on 
activities, conditions on operations, many other things, as 
precursors to the sale of assets. The sale of assets is the 
last on the list.
    Chairman McHenry. Okay. Have you defined the term ``grave 
threat?''
    Mr. Alvarez. No, we have not. We think that would be a 
determination that is going to depend very much on the facts 
and circumstances of the case. It will depend very much on the 
activities the institution is engaged in, whether the 
institution is unique or has a special place in the financial 
system. Obviously, size would be one of the factors, the way in 
which it conducts activities. There is a variety of things. And 
we think because of that variety of circumstances, it is very 
difficult to have a uniform rule that would be clear in all 
circumstances.
    Chairman McHenry. So it would be situational?
    Mr. Alvarez. Yes.
    Chairman McHenry. Could it be based on what the market is 
doing at that moment, as well?
    Mr. Alvarez. It could take into account the economics at 
the time, that is correct.
    Chairman McHenry. Okay.
    Now, can you utilize this? Does the Federal Reserve 
believe, in your legal judgment, that it can use this authority 
outside of moments that are financial crises?
    Mr. Alvarez. Section 121 does not impose the requirement 
that it only be used in a financial crisis. It is very open-
ended. At any point at which the Fed and the FSOC agree that an 
institution poses a grave threat to the financial stability, 
then it could be used.
    Chairman McHenry. Okay. Now, is there a size challenge 
here? Are certain institutions more the focus of your view from 
the Fed?
    Mr. Alvarez. Oh, absolutely. Section 121 applies just to 
institutions that are $50 billion or larger or have been 
designated by the FSOC as systemically important. It would not 
apply to community banks or even regional banks.
    Chairman McHenry. So a grave threat could happen in times 
of relative peace and harmony and accord?
    Mr. Alvarez. It could.
    Chairman McHenry. Okay.
    All right. With that, I will now recognize--at the 
direction of the ranking member, I will recognize Mr. Cleaver 
for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    Mr. Alvarez, would you agree that with some different, more 
stringent accounting standards, that the so-called ``too-big-
to-fail'' banks are actually twice as large as they appear in 
the rearview mirror on the passenger side?
    Mr. Alvarez. Congressman, I am not an expert on accounting. 
The accounting changes since the crisis, in the last 2 years, 
have required institutions to bring onto their balance sheet 
many assets that before the crisis were not counted. So, for 
example, a lot of securitizations are now reflected on the 
balance sheet of banks, so their size is more transparent than 
it once was.
    And the capital requirements that we are designing, the 
BASEL III capital requirements, also take into account off-
balance-sheet items in a more robust way. So we are beginning 
to take that into account as we design higher capital 
requirements.
    Mr. Cleaver. So would you or Mr. Wigand agree that--let me 
ask you this: Did Dodd-Frank rule out the cause of the 2008 
financial crisis which resulted in massive losses in the U.S. 
economy? Was it repaired?
    Mr. Alvarez. I think what Dodd-Frank did was to provide the 
agencies with far better tools to both prevent the problems of 
large institutions and then, if there is a problem, to resolve 
the institution. So the enhanced prudential capital standards, 
Section 165, the orderly liquidation authority in Title II are 
two very valuable tools that we think help.
    Mr. Cleaver. Okay. Mr. Wigand, go ahead, and then, I have a 
follow-up.
    Mr. Wigand. Yes, sir. I would echo Mr. Alvarez's comments. 
There are two key elements that I think are substantial tools 
in ending ``too-big-to-fail.'' One is the set of enhanced 
prudential supervisory standards found in Section 161, which go 
to reducing the probability that one of these systemically 
important companies will fail.
    The second tool is the orderly liquidation authority, or 
Title II, which in the event that bankruptcy cannot handle a 
failure, serves as a backstop which then allows for a 
systemically important financial company to fail in a manner 
without cost to taxpayers, and imposes market discipline by 
forcing losses upon the creditors and shareholders of the 
institution, and also results in the management of the company 
being held accountable for the failure itself.
    These are elements that didn't exist in the early parts 
of--or at all during the 2008 crisis.
    Mr. Cleaver. But most of these banks are larger than they 
were when the crisis began, and the community banks in the 
BASEL III are experiencing much more pain and difficulty in 
operating.
    So, if the deposits are going with the larger banks and the 
smaller banks are struggling, what have we done?
    Mr. Alvarez. Congressman, that is a very good point, and 
that is one of the motivators for some of the capital and other 
requirements that we are imposing. That puts back to the large 
institutions some of the cost of their size and takes away some 
of the advantage they have as a result of their size, thereby 
more equalizing competition. So, they are no longer able to 
rely on lower capital requirements and better funding. They 
have higher capital requirements, which make up for their 
better--
    Mr. Cleaver. Those higher capital requirements have also 
been imposed by the regulators on community banks.
    Mr. Alvarez. To that point, we have--
    Mr. Cleaver. Unfortunately and tragically. But go ahead.
    Mr. Alvarez. We do have a special set of requirements that 
we are imposing only on the largest institutions, not on 
community banks, so $50 billion and up.
    We also understand that the BASEL III proposal we put out 
has had some effects on smaller institutions in ways we hadn't 
anticipated. We have been working with those smaller 
institutions to understand how to address that, and we are 
fully thinking through ways to address those problems.
    Mr. Cleaver. Yes, I appreciate that. My time is running 
out. But they don't seem to know it.
    Mr. Alvarez. We haven't finished the rulemaking yet. So 
when it is complete, they will know.
    Mr. Cleaver. All right. Thank you.
    Chairman McHenry. With that, we will recognize the former 
chairman of the full Financial Services Committee, Mr. Bachus 
of Alabama, for 5 minutes.
    Mr. Bachus. Thank you.
    This question, I think, will be for you, General Counsel 
Alvarez. And I am specifically referring to Section 165(b), 
where you require foreign banks, if they are operating U.S. 
subsidiaries, to have an intermediate holding company.
    Mr. Alvarez. Yes.
    Mr. Bachus. All right. I think you have acknowledged that 
this might increase the cost to capital and the liquidity 
requirements may cause them to have some--in some cases, 
requirements that their U.S. competitors may not have, for 
instance, if they are broker-dealers.
    Is there a negative to requiring this? I understand that 
this was in response to some of the runs, because at least some 
of these U.S. subsidiaries did rely on a lot of short-term 
lending. But is there another way to address that? Do you have 
any concerns over the fact that we may lose some of their 
services and their capital?
    Mr. Alvarez. We have a proposal out for comment, as you 
alluded to, and we are receiving comments now. The comment 
period is actually still open, so we expect we will get quite a 
lot of advice on how best to regulate the U.S. operations of 
foreign banks.
    The motivation for that proposal is that with foreign 
banks, if they are allowed to operate in the United States 
while maintaining capital back home in the foreign country, 
that capital may not be available in the United States at a 
time when the U.S. operations need the capital. And so the 
idea--
    Mr. Bachus. That would be centralized with their home 
country?
    Mr. Alvarez. Correct.
    Mr. Bachus. But isn't that true of our domestic banks 
operating in other countries, they tend to keep their capital 
here? And I am just wondering if we might--I know some of the 
international banking associations have talked about that. 
Could this cause some sort of a--those regulators in those 
countries to require that we increase capital in our 
subsidiaries operating in those countries?
    Mr. Alvarez. Yes, and that is something that we have asked 
for comment about. It is worthy of note, though, that some 
foreign countries have already begun that process. The United 
Kingdom, for example, is already requiring some 
subsidiarization in the U.K., which is a place where a lot of 
U.S. entities have operations.
    So we definitely want to be sensitive to the possibility 
that this might encourage more ring-fencing. On the other hand, 
we also have to balance that with the need to protect the 
financial stability of the United States and ensure that 
institutions in the United States have adequate capital. So it 
is a difficult question, and that is why we put a proposal out 
for comment, to see how best to balance those needs.
    Mr. Bachus. Because I think you do agree that it could 
affect banking competition in the United States and the 
competitiveness of our U.S. banks abroad if the regulators in 
those countries respond to it.
    Mr. Alvarez. Right. The competition is interesting in both 
places. So it could affect the way U.S. entities compete 
abroad, but the other thing to keep in mind is how foreign 
entities compete in the United States. And if they are allowed 
to compete in the United States without the same capital 
requirements and without the same prudential limits that apply 
to other U.S. organizations in the United States, that could 
give the foreign entities a competitive advantage here, as well 
as exposing our system to more financial risk.
    So, there are competitive balances on both sides that we 
have to weigh.
    Mr. Bachus. Yes. But you are aware of their concerns and, I 
think, are at least trying to address those in a way that at 
least addresses their concerns and at the same time protects 
our national interest not to have a--
    Mr. Alvarez. Yes. If they have visited you, you can be sure 
they have visited us at least twice as often.
    Mr. Bachus. Okay. Thank you very much.
    Chairman McHenry. I thank the former chairman.
    We will now recognize Mr. Ellison of Minnesota for 5 
minutes.
    Mr. Ellison. Thank you, Mr. Chairman.
    Mr. Chairman, and Mr. Ranking Member, I guess I have a few 
kind of basic questions for the panel.
    One is, having gone through some of the rulemaking 
requirements, would you say that Dodd-Frank takes an arbitrary 
or an objective approach to determining which financial 
institutions are ``too-big-to-fail?''
    Mr. Osterman. I will take a first shot at your question.
    I think Dodd-Frank takes a very thoughtful approach to 
addressing ``too-big-to-fail.'' There is the living will 
process, which requires promulgated regulations that would 
require resolution plans which outline how the institution 
could be resolved in the bankruptcy process.
    The resolution plan is jointly reviewed by both the Fed and 
the FDIC to determine if it meets that standard. If it does 
not, then we go back and we advise the institution of the 
things that need to be done to meet the standard of whether the 
plan is credible and shows the institution can be resolved in 
bankruptcy.
    If the resubmitted plan comes back and it doesn't meet that 
standard, again, we have to jointly determine that it doesn't 
meet those standards, and then we apply additional requirements 
such as higher capital or leverage or liquidity requirements, 
restrictions on growth. And if the plan comes back and it still 
doesn't meet that standard, then we get to the situation of 
potential divestiture.
    Mr. Ellison. But have any of the three of you ever heard 
the saying that the government should not ``pick winners and 
losers?'' Have you ever heard that terminology before?
    Mr. Alvarez. Yes.
    Mr. Ellison. I guess my question to you is, in the 
situation where you have a ``too-big-to-fail'' financial 
institution, one might argue that Dodd-Frank is trying to pick 
winners and losers, but if a firm were to be in the criteria of 
``too-big-to-fail'' and therefore draw additional scrutiny from 
the government--and the government wouldn't be picking that 
company out. That would be the features and the attributes and 
the size and the interconnectedness of that company. Am I right 
about that?
    Mr. Osterman. That is correct.
    Mr. Ellison. Would you like to add to that, Mr. Alvarez?
    Mr. Alvarez. I guess I don't think about Dodd-Frank as 
picking firms as ``too-big-to-fail.''
    Mr. Ellison. Okay.
    Mr. Alvarez. The idea is actually to get rid of ``too-big-
to-fail.''
    Mr. Ellison. Correct.
    Mr. Alvarez. And so what Dodd-Frank does is say for large 
institutions, in order to ensure that no one believes they are 
``too-big-to-fail,''we are going to do at least two things, two 
major things.
    The first is, we are going to regulate them more because 
they pose more risk, large firms pose more risk. Whether they 
are ``too-big-to-fail'' or not in some person's mind, they 
deserve extra supervision and regulatory requirements.
    And then second, we have an orderly liquidation authority 
so that no one is ``too-big-to-fail.'' We now have a mechanism 
for closing down and making shareholders take losses for any 
institution, no matter what their size.
    Mr. Ellison. But you would agree that it is not just some 
arbitrary bureaucrat saying, ``You are too-big-to-fail. We are 
going to go after you.'' There are specific criteria that might 
make a firm hit that criteria.
    Mr. Alvarez. So the small piece of arbitrariness is the $50 
billion cutoff for most of the provisions that are in the 
statute. The statute sets the $50 billion requirement. Once you 
are--
    Mr. Ellison. Right. But that requirement is not different 
for different firms. It is $50 billion, right?
    Mr. Alvarez. Right. Plus, it also gives the agencies 
authority to tailor things as they get larger--
    Mr. Ellison. Right.
    Mr. Alvarez. --so we take away some of that arbitrariness.
    Mr. Ellison. The Sunlight Foundation noted that the top 20 
banks and banking associations met with just 3 agencies--the 
Treasury, the Federal Reserve, and the Commodity Futures 
Trading Commission--a total of 1,298 times over a 2-year period 
from, say, July 2010 to July 2012. That is an average of about 
12 meetings a week. Financial reform groups met with regulators 
significantly less than that.
    How do you assess just the amount of contact that the 
entire financial services world is getting with the Federal 
Government? Do you have any concern that the larger banks are 
just flat out getting more attention from agencies like 
Treasury, the Fed, and the CFTC?
    Mr. Alvarez. Of course, you can do a lot with statistics, 
and how you group things makes a difference. That said, it 
doesn't surprise me that financial institutions meet more with 
those three agencies. We are all doing a lot of rulemaking that 
affects them directly. By law, we have to get comments from 
people who are affected by those rules. So, they are the most 
affected and would want to have the most meetings.
    I would say that the Federal Reserve, in particular, has an 
open-door policy of meeting with folks. We meet with community 
groups, we meet with consumer advocacy groups. We meet with a 
lot of folks on our rulemakings. So it is not limited to or 
even focused on financial institutions.
    Mr. Ellison. Thank you.
    I yield back.
    Chairman McHenry. Mr. Ross of Florida is recognized for 5 
minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Let's talk about ``grave threat.''
    Mr. Alvarez, you say that it is institutional as to how we 
really assign ``grave threat,'' but really we haven't defined 
it. So it really isn't only institutional, but it is also 
environmental. In other words, it depends on the current 
economic environment at the time. Wouldn't you say that is 
correct?
    Mr. Alvarez. Yes, I think those are both factors.
    Mr. Ross. So it is more or less a game-time decision as to 
determine whether a grave threat exists. How else would you 
anticipate it?
    Mr. Alvarez. Yes.
    Mr. Ross. And if that is the case, then let me ask you, are 
there any particular financial institutions today, without 
naming names, is there presently any company that poses a grave 
threat to the U.S. financial system within the meaning of 
Section 121 today?
    Mr. Alvarez. So, the other part that fits into--
    Mr. Ross. But are there--you have had 2\1/2\ years.
    Mr. Alvarez. I'm sorry?
    Mr. Ross. You have had 2\1/2\ years to determine whether 
there is a grave threat by any institution or any company. So 
are there any today, again without naming names, that you would 
consider pose a grave threat to the financial stability of the 
United States?
    Mr. Alvarez. Remember, the other thing we have to take into 
account in deciding grave threat is whether the mitigants, that 
the higher capital, restrictions on activities, other 
regulatory and statutory factors--
    Mr. Ross. But absent--
    Mr. Alvarez. --have reduced the risk of the institution.
    Mr. Ross. But absent the--
    Mr. Alvarez. So we are in the process of still doing those 
rules and getting those requirements--
    Mr. Ross. So there aren't any? Essentially, there aren't 
any, then? There are no--
    Mr. Alvarez. We have made no findings of that so far.
    Mr. Ross. Okay. Why? Because there are no quantitative 
metrics existing as to how to apply grave threat?
    Mr. Alvarez. Because we have still the Dodd-Frank Act 
provisions, the preliminary requirements to get completed and 
imposed, and then react to--
    Mr. Ross. So let me ask you this point blank. Do you have 
any quantitative metrics that you use now to determine whether 
a company may be a grave threat?
    Mr. Alvarez. We do not have a quantitative measure. That 
is--
    Mr. Ross. Do you anticipate having any?
    Mr. Alvarez. That is a possibility.
    Mr. Ross. Within the next year?
    Mr. Alvarez. It is a real--we are in the process of doing 
what the statute requires, which is to put in place the 
mitigants that then are applied to all large institutions to 
see--
    Mr. Ross. I understand the logic and reason here. How can 
you quantify the expense associated with mitigating a threat 
you can't even quantify?
    In other words, this is a situation where you have no 
standard; there is no standard, as we know, that exists for 
grave threat. You determine based on, I guess, discretion at 
the moment that what may be considered to be a grave threat 
today may not be a grave threat tomorrow.
    So if there are no quantitative metrics and there are no 
standards, what all has the Fed done in the last 2\1/2\ years 
in discussing what would constitute a grave threat?
    Mr. Alvarez. As I indicated, we are following the process 
Congress has set out for us. That includes establishing these 
mitigating factors, which are higher capital, restrictions on 
growth, restrictions on activities--
    Mr. Ross. So, it could be size. It could be capitalization. 
It could be a number of things.
    Mr. Alvarez. Yes.
    Mr. Ross. And who would the grave threat be to? Consumers?
    Mr. Alvarez. To the financial stability of the United 
States economy.
    Mr. Ross. And how did you determine that? Have you had 
discussions as to how you would determine the grave threats to 
the United States?
    Mr. Alvarez. Certainly, we think about many things at the 
Federal Reserve, including what we will do with grave threat, 
but we have not made any proposals or made any findings at this 
time.
    Mr. Ross. So does it take--under Section 121, does it 
require that a company must first be in bankruptcy as a 
precondition to be considered a grave threat?
    Mr. Alvarez. No, it doesn't.
    Mr. Ross. Under Section 165, then, you can really be a 
grave threat if you just don't have an appropriate living will? 
Is that correct? If it doesn't meet your standard?
    Mr. Alvarez. You mean, required to sell assets?
    Mr. Ross. Right.
    Mr. Alvarez. There is no connection between the grave 
threat and Sections 121 and 165.
    Mr. Ross. Right. Grave threat is under Section 121, but--
    Mr. Alvarez. Under Section 121, the institution has to have 
a plan that is not credible and refuse--and the agencies have 
to jointly determine that. We then have to impose other 
requirements on the firm. The firm has to not only not live up 
to those requirements but not put in another credible capital 
plan. And then there is a--
    Mr. Ross. But--
    Mr. Alvarez. --2-year waiting period.
    Mr. Ross. Really quick; I only have a couple of seconds. I 
guess what I am getting at, and my point is, that there are no 
standards available right now to determine grave threat for 
either a bank SIFI or a nonbank SIFI. Is that correct?
    Mr. Alvarez. That is right.
    Mr. Ross. And it seems to me, then, that we are not 
discussing whether a bank or any other institution is ``too-
big-to-fail.'' What it seems to me that we are discussing is 
that for 2\1/2\ years, having a lack or procedure and 
regulatory rule implemented, we have a situation of ``too late 
to save.'' Because you are not going to be able to save these 
institutions if you have no standards in place by which they 
know how to correct what they don't even know is incorrect.
    I believe my time is up, so I will yield back.
    Chairman McHenry. I thank the gentleman.
    Mr. Heck is recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    Depending on how you count, last Friday or Saturday was our 
100th day in the 113th session. I sometimes feel as though I 
have been sentenced to sit in a darkroom exposed to a 
continuous loop of the old beer commercial in which the two 
sides yell at each other: ``Less filling,'' ``Tastes great,'' 
``Less filling,'' ``Tastes great.''
    Look, here is what I hear when I listen to people back home 
about what all of this ``too-big-to-fail'' business means. The 
average person, they look at this and they want to know the 
answer to two questions. And the two questions are: First, what 
can you say to assure me that I am not going to have to dig 
into my pocket in order to bail out a company again, a bank 
that is teetering? And second, what can you tell me to assure 
me that some bank, either through its own imprudent business 
practices or lack of regulatory oversight will not fail so 
miserably that it materially harms the economy and I lose my 
job or I lose net worth through lower home value or whatever?
    So, gentlemen, my only question to each of the three of you 
is, what can you say to assure that person, who really only 
defines ``too-big-to-fail'' from where I sit in those two ways, 
what is it that you can say to assure them that they are not 
going to have to dig in their pocket to bail out a bank again, 
number one? And, number two, what can you say in succinct and 
cogent terms to assure them that no bank is ever going to do a 
face-plant again sufficient to cost them their home or their 
job?
    Mr. Osterman. In terms of your first question about no 
bailout, the statute now provides that no taxpayer funds can be 
used to resolve an institution.
    We have Title I that provides for living wills so we can 
try to address these institutions so they can be resolved in 
bankruptcy. And if they cannot be, we have the backup of Title 
II, which allows us to use the powers that the FDIC has used 
for the last 80 years to successfully resolve institutions and 
maintain confidence in the financial system.
    Mr. Wigand. I would reiterate Mr. Osterman's remarks that 
Title II contains a provision which explicitly prohibits any 
losses being borne by taxpayers associated with the use of 
Title II authority. With respect to orderly liquidation 
authority and its application, a provision within the statute 
itself prohibits the use of taxpayer dollars in the application 
of that authority. With respect to at least an application of 
Title II, there is an assurance that authority will not use 
taxpayer funds in a resolution process.
    Additionally, what is important--and I think all of the 
panelists spoke to this at some level--is that Title I puts 
enhanced prudential supervisory requirements and regulatory 
requirements upon institutions to reduce the probability or the 
likelihood that these institutions will fail. And--
    Mr. Heck. Sir, is that what you would recommend I say to my 
constituents back home? Using those words, that is what you 
would recommend I say to assure them?
    Mr. Wigand. Title I imposes new standards upon these 
institutions that they were not subject to before. Hopefully, 
as a result of those standards, the probability or the 
likelihood that these companies will fail has changed.
    Mr. Alvarez. I think that is the answer we are using, all 
the powers Congress gave us in the Dodd-Frank Act to reduce the 
likelihood that a large firm is going to fail. And the things 
we are doing are very substantial: the higher capital 
requirements; liquidity requirements; new stress tests; new 
management requirements; the living will provisions to have a 
glide path towards resolution. Those are all very important. 
They are all new.
    I think the second part is we can't guarantee that a large 
firm is not going to fail. Something will go wrong someday, 
somewhere. But what we have now that we did not have in 2008 is 
an orderly liquidation authority. We can now put a large firm 
into a resolution authority and cause the shareholders to take 
those losses, the creditors to take those losses, reduce the 
cost to society of that failure, and do it without taxpayer 
expense.
    Mr. Heck. Thank you, gentlemen, very much.
    Chairman McHenry. Mr. Hultgren of Illinois is recognized 
for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Thank you all for being here.
    I think the one thing that has become clear to me over the 
last few minutes is how much still is unclear in this, and that 
concerns me. Really, there is a lot of uncertainty even in how 
this is going to be applied. I know there is a lot of power 
that you all have, but how it is actually going to be applied, 
I think, pushes off a great amount of uncertainty on the 
markets and I think adds to some of the instability out there.
    So I am hoping just to get a few more answers to my 
questions. And really following up on some of Mr. Ross' 
questions, we have already talked a little bit about under 
Section 121, how FSOC must approve the Federal Reserve's 
determination to restrict a company's activities or divest 
assets by a two-thirds vote. My question, and I will address 
this to Mr. Alvarez, is what information will the Federal 
Reserve provide to the FSOC to justify the Federal Reserve's 
actions under Section 121?
    Mr. Alvarez. We have a very good relationship with the 
FSOC. Of course my chairman is a member of the FSOC, so we 
share information with the FSOC and its member agencies on a 
regular basis. As we move towards making the determination to 
Section 121, we will be sharing all the information we have 
that would provide a basis for the determination of grave 
threat with the FSOC so we can make a reasonable determination.
    Mr. Hultgren. Particularly beyond that, will the Federal 
Reserve prove to the FSOC that a company poses a grave threat? 
Is there a proof standard?
    Mr. Alvarez. Proof is a very legal term and it has a 
context in a court--
    Mr. Hultgren. But I think it also provides some certainty. 
I get back to people understanding where are we at, and I think 
that is where we need. So, we need to know what to expect.
    Mr. Alvarez. The way I think about it is the FSOC will have 
to have enough information that it is satisfied that it can 
make this determination. The FSOC has not been and will not be 
a rubber stamp. It will make its own determination, and we will 
provide whatever information we have so that the FSOC can make 
that determination, and it will agree or disagree as it wants.
    Mr. Hultgren. So you provide information from your 
perspective that would prove that an action should be taken to 
follow up whether it is again divesting or whatever, but 
proving the grave threat, but it is up to them if they actually 
will agree with you or not with the information that you 
provide, but you are not sure what that information is right 
now.
    Mr. Alvarez. Right. The other thing I would point out is 
the FSOC has its own independent source of information. It can 
use the OFR, which is set up by Congress to gather information 
as well about markets and individual participants. And the 
other members of the FSOC agencies have windows into these 
firms as well, so they would be able to provide information. So 
the FSOC is not going to be narrowly limited to just what the 
Federal Reserve decides to provide it. We will share robustly 
with them, but they will have many sources of information.
    Mr. Hultgren. Let me move on quickly. The gentlemen from 
the FDIC, either one of you, whoever is better equipped to 
answer this, the FDIC does not have authority under Section 
121, however FSOC does have authority and the FDIC's Chairman, 
as Mr. Alvarez said, is a voting member. He talked about more 
of the Fed side, but also the FDIC's Chairman is a voting 
member of the FSOC.
    Accordingly, what does the FDIC Chairman understand his 
obligation to be when voting to authorize an action by the 
Federal Reserve under Section 121? And does the Chairman 
believe that the FSOC must make particular findings or 
determinations before authorizing that action?
    Mr. Osterman. I will attempt to answer your question, sir. 
I can't speak for our Chairman, but knowing him, he is very 
thoughtful, and I am sure that we will look at both the 
information that the Fed provides, as well as our own 
information. We have our own research group which will provide 
information, and it will have to meet standards of showing that 
there is a grave threat to the financial stability of the 
United States.
    In the last crisis, we addressed systemic risk several 
times in determining that there was a grave threat to the 
financial stability of the United States but it was only after 
very careful--
    Mr. Hultgren. Okay. So it is unclear, but you trust that he 
would use that authority well.
    Let me switch really quick; I only have 45 seconds left. 
Mr. Alvarez, a quick question for you, how does the Federal 
Reserve's authority to restrict a company's activities or to 
order it to divest assets under Section 121 differ from its 
authority under other statutes that it administers? Is it 
broader? And how so?
    Mr. Alvarez. We have authority under the Bank Holding 
Company Act, 5(e) of the Bank Holding Company Act, to require 
bank holding companies to divest subsidiaries or assets. The 
two authorities are different, though, because under 5(e), we 
can only require divestiture if the nonbank activities or 
affiliate poses a risk to the safety and soundness of an 
insured depository institution affiliate. So, it is a very 
narrow authority.
    Mr. Hultgren. So you would say authority under Section 121 
is broader?
    Mr. Alvarez. Broader. Yes.
    Mr. Hultgren. Okay. My time is up. I yield back, Mr. 
Chairman. Thank you.
    Chairman McHenry. I thank my colleague.
    We will now recognize the ranking member for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Let me start with Section 121 and the grave threat 
authority. Is it true that this requires a two-thirds vote? I 
think it has been said, but I just like to make sure that we 
agree. Let's talk about two-thirds and who are we talking about 
when we say two-thirds vote? Would you list the members of the 
FSOC, so that there can be some clarity as to who would be 
casting these votes?
    Mr. Alvarez. Certainly. First of all, you are right that it 
requires a two-thirds vote in the affirmative by the FSOC. The 
FSOC voting members include the Secretary of the Treasury, the 
Chairman of the Federal Reserve, the Chairman of the FDIC, the 
Comptroller of the Currency, the Director of the CFPB, the 
Director of the FHFA, the Chairman of the SEC, and the Chairman 
of the CFTC. There is an independent insurance member, and 
there is one more that I have forgotten.
    Mr. Osterman. The Chairman of the NCUA.
    Mr. Alvarez. The Chairman of the NCUA.
    Mr. Green. And suffice it to say that we are talking about 
persons--
    Chairman McHenry. If the gentleman would yield--and I will 
give you the time--it is pretty amazing that he actually went 
through that. I think we could put that in the record. And I 
will yield back.
    Mr. Green. Thank you. I thought he would have a written 
list myself to be quite candid with you. So my compliments to 
you as well.
    But the point is that the two-thirds vote comes from the 
heads of these various Federal agencies, and this is done only 
after some deliberation, after reviewing empirical evidence. 
And this is an evolving system. You are right now in your 
infancy, and you are currently drafting and crafting these 
various rules, regulations and standards. Is that a fair 
statement?
    Mr. Alvarez. That is correct.
    Mr. Green. And is it true that as you go through this 
process, you do allow input from various other agencies or 
entities?
    Mr. Alvarez. Yes. There are several nonvoting members of 
the FSOC, including State banking and securities and insurance 
regulators.
    Mr. Green. And one can conclude that you don't do this 
arbitrarily and capriciously, that you are doing it in a 
systematic way so as to come to reasonable conclusions?
    Mr. Alvarez. That is right.
    Mr. Green. Let's move now to the notion of divestiture. 
This was mentioned. There is a 2-year window involved with 
divestiture, is that correct?
    Mr. Alvarez. That is under Section 165, the living wills 
provision.
    Mr. Green. Yes. Explain that please, so that we can 
understand that this does not just happen overnight.
    Mr. Wigand. I will take the question. There has to be a 
joint finding by the FDIC and the Federal Reserve Board of 
Governors that the living will is deficient, meaning that it 
does not provide for or facilitate an orderly resolution under 
the Bankruptcy Code or is otherwise not credible.
    Upon that finding of deficiency, the firm has an 
opportunity to correct their deficiency. If the firm fails to 
do, so the first course of action is for the FDIC and the 
Federal Reserve to jointly impose higher capital or liquidity 
requirements, and restrict growth activities or operations. 
These actions are what we characterize as customary supervisory 
enforcement actions that could be undertaken.
    If, upon after the imposition of those actions, there is a 
failure still to remediate the problem associated with the 
firm's lack of resolvability, then the FDIC and the Federal 
Reserve Board, after consultation with the FSOC, may order 
divestiture of assets or operations of a firm.
    Mr. Green. And we are talking about institutions that have 
assets at above $50 billion, is that right?
    Mr. Wigand. Those are the only ones that are subject to 
this provision.
    Mr. Green. And a billion is still a thousand million, is 
that correct?
    Mr. Alvarez. It still is.
    Mr. Green. Still a thousand million. So, you are talking 
about 50,000 million companies.
    Mr. Alvarez. Yes.
    Mr. Green. And we can also note now that prior to Dodd-
Frank, we didn't have a means of dealing with these 50--what 
did I say?--50,000 million. That seems like a rather large 
number, and it seems like we ought to have the ability to wind 
down a $50,000 million business that may pose a threat to the 
economic order, we call it a grave threat. But it just seems 
that we have provided that. And with this, I will yield back 
the balance of my time.
    Chairman McHenry. I thank the ranking member.
    I now recognize Mrs. Wagner from Missouri.
    Mrs. Wagner. Thank you. Thank you, Mr. Chairman. I would 
also like to take this opportunity to welcome our newest member 
of the Financial Services Committee, the gentleman from the 
12th District of Pennsylvania, Keith Rothfus, who has joined us 
today as a new Member of the 113th Congress freshman class. 
Welcome to you, Congressman Rothfus.
    In our quest for more clarity here, Mr. Alvarez, let me 
take a little different tack. During the debate over Dodd-
Frank, the Financial Times described an early version of 
Section 121, the Kanjorski Amendment, as having ``potential 
parallels with the Sherman Antitrust Act of 1890,'' creating 
the legal basis for preemptive action against overly powerful 
big business, and also noted that the early version of Section 
121 would allow regulators to break up even healthy financial 
companies.
    In your view, are there potential parallels between Section 
121 and the Sherman Antitrust Act, sir?
    Mr. Alvarez. If you look hard enough, there are parallels 
between any two things.
    Mrs. Wagner. So, that is a ``yes?''
    Mr. Alvarez. I think that there are some parallels. It is 
true that Section 121 can apply to institutions that are 
healthy and not failing, so there is a parallel there. I think 
it is also true that the Sherman Act prohibits monopolization, 
so it is a forward-looking as well as backward-looking statute. 
I think the difference there is that Section 121 requires that 
the institution actually pose a grave threat. It is not, 
``might pose a grave threat'' or ``could at some time pose a 
grave threat.''
    Mrs. Wagner. Let me pick up on that, then. Does it have to 
pose a grave threat, Mr. Alvarez, or in fact does Section 121 
give regulators the authority to break up a healthy financial 
company?
    Mr. Alvarez. Only if it actually poses a grave threat. That 
is the standard set out in the statute.
    Mrs. Wagner. And going back again to the definition of 
grave threat, as so many have tried to get some kind of clarity 
on here, do you still agree with your comment that it is in 
fact a very open-ended definition?
    Mr. Alvarez. I don't think I said that it was open-ended in 
the sense that it has no meaning. I think it has to be 
considered in the context of the other parts of the Dodd-Frank 
Act. There are a number of provisions, and the chairman alluded 
to this in his opening remarks. ``Grave threat'' is unique in 
its use in Section 121. The rest of the Dodd-Frank Act speaks 
about risks to financial stability. And so, those standards are 
much less. We are allowed to take actions under other 
provisions if there is a risk to financial stability; Section 
121 says not a risk to financial stability, a threat to 
financial stability, and not any threat, but a grave threat to 
financial stability. So it is a very high standard in 
comparison to the other standards.
    Mrs. Wagner. A standard that has no quantitative measure at 
this point in time.
    Let me move on, Mr. Alvarez. Dodd-Frank opened a whole host 
of issues when it comes to interacting with foreign-based 
financial institutions and foreign regulators. And I would like 
to address some of those here as well. What are the challenges, 
Mr. Alvarez, of applying Section 121 to foreign SIFIs and how 
is the Federal Reserve addressing those challenges?
    Mr. Alvarez. The challenge in applying any of the Dodd-
Frank provisions to foreign organizations is the difference in 
their organizational structure. Foreign organizations tend to 
have their capital and liquidity outside the United States. 
They could be very, very large, $1 trillion, $2 trillion, $3 
trillion, so as large as U.S. organizations, but have only a 
small piece in the United States. So you have to take into 
account both their large size worldwide and their presence in 
the United States. That requires a different kind of balancing 
than, for example, looking at a U.S. organization.
    Mrs. Wagner. And to that point, Section 165 of Dodd-Frank, 
regarding it, does the Federal Reserve plan on consulting with 
home regulators of foreign-based companies when determining 
whether that company's living will, for instance, is deficient?
    Mr. Alvarez. The living will provision is under Section 121 
and can take care of that.
    Mrs. Wagner. Under Section 165, correct?
    Mr. Alvarez. But under Section 121, I would expect we would 
have consultations with foreign supervisors because a condition 
of Section 121 is that we take a variety of steps short of 
requiring breakup before we are allowed to even consider 
breaking up the firm. So we would want to have discussions with 
foreign supervisors before we took those steps.
    Mrs. Wagner. My time is running out, but what if the Fed 
imposes sanctions as a result of a deficient living will? Would 
you consult with those home regulators?
    Mr. Wigand. Yes.
    Mrs. Wagner. Thank you.
    Mr. Chairman, I yield back.
    Chairman McHenry. I thank my colleague.
    We will now recognize Mr. Grimm for 5 minutes.
    Mr. Grimm. Thank you, Mr. Chairman. And I thank the 
witnesses for being here today.
    Just to throw it out there to get the frame of mind of 
where we are, and I will ask all three of you, in your opinion 
should we break up the banks?
    Mr. Alvarez. The Dodd-Frank Act lays out a game plan for 
dealing with the large institutions. It includes a lot of 
provisions, and Section 121 is one of them, but Section 165 has 
a variety of steps that the agencies must take in order to 
reduce the probability that firms, large firms, will fail, and 
to improve the chances that if they do fail, they won't harm 
the economy--
    Mr. Grimm. I was actually asking just your opinion in 
general.
    Mr. Alvarez. My opinion is that we can make a lot of 
progress in addressing ``too-big-to-fail'' if we implement the 
program that is in Dodd-Frank.
    Mr. Grimm. That is a nice way of saying, ``I am not 
answering your question.'' Is anyone else willing to answer my 
question?
    Mr. Wigand. I think it is an open question. It is a very 
important question, and it is certainly beyond my pay grade. 
And this issue I believe was debated when financial reform 
legislation was being discussed, and I think that perhaps the 
Congress is the appropriate place, given the importance of that 
question, for that type of debate.
    Mr. Osterman. I would concur with Mr. Wigand's statement.
    Mr. Grimm. Okay. So it is okay to say you are not going to 
opine. But that is fine. I appreciate your candor.
    Looking at Section 165, is there any concern if the Federal 
Reserve, these enhanced prudential standards, I want to make 
sure I use the right terminology, for the foreign banking 
organizations, is there a concern that it is going to make it 
very challenging, if not, some would say impossible, for 
foreign firms to manage their capital effectively across 
borders? I know it was touched on before, but I would like to 
dive into that a little bit more. Mr. Alvarez?
    Mr. Alvarez. I don't think that makes it impossible. It 
certainly raises the costs for foreign firms. There is no 
question about that. Just as it has raised the costs for U.S. 
firms in the foreign jurisdictions that have taken this 
approach. So it is more expensive for U.S. firms operating in 
London--
    Mr. Grimm. So that begs the question, does it concern you 
that some of these organizations will just not do as much 
business here in the United States, which will lead to less 
product and less availability for Americans?
    Mr. Alvarez. We have very competitive markets here and very 
many institutions that are competing in these markets. So 
competition is clearly something we have to take into account. 
But there is also on the other side the need to ensure 
financial stability and that there isn't a failure of 
institutions in the United States.
    We could greatly increase competition if we removed all our 
restrictions on folks competing here, and that would be 
something for Congress to decide. Right now, we are 
implementing the rules that Dodd-Frank requires us to do, and 
trying to do it in both a fair way and a way that protects the 
financial stability here in the United States.
    Mr. Grimm. Is there any concern, and are you speaking about 
the fact that some of these other foreign sovereigns may 
increase their requirements on U.S. banks, making it much more 
difficult for the U.S. banks to compete abroad?
    Mr. Alvarez. Yes, there is concern about that. As I 
mentioned, some have done that before the Federal Reserve 
proposal was put out. But that is something we have to weigh 
and something we have to consider and something we are 
watching.
    Mr. Grimm. Okay. Most of the other stuff was already 
covered on Section 121, so I am going to yield back, Mr. 
Chairman.
    Chairman McHenry. Would my colleague yield to me?
    Mr. Grimm. Absolutely, Mr. Chairman.
    Chairman McHenry. I appreciate it. Thank you.
    Mr. Alvarez, I asked this before, but just to make sure we 
have this on the record correctly, has the Federal Reserve 
developed a set of metrics to evaluate whether a firm poses a 
grave threat?
    Mr. Alvarez. No, sir. We have not.
    Chairman McHenry. Okay. Do you anticipate putting together 
metrics for that?
    Mr. Alvarez. As I mentioned earlier, this is a decision 
that depends very much on the facts and circumstances, so it is 
very hard in this area to set a uniform rule. I don't know 
whether the Board will at some point do that. My immediate 
expectation is that we would not.
    Chairman McHenry. I would assume the Board would ask you 
and your staff to define that term?
    Mr. Alvarez. Yes, if we wanted to go in that direction, 
that is correct.
    Chairman McHenry. Okay. I will now recognize my colleague 
from Wisconsin, Mr. Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    Going back to the chairman's last question, you are saying 
you are not going to set out metrics, and it is very 
complicated. Isn't all of this complicated? All of the metrics 
that are set out within Dodd-Frank, it is all very complicated 
stuff. But are you telling us that you guys can't come forward 
with a metrics that is going to set up a standard for a grave 
threat? Explain that. Is this more complicated than everything 
else that we have seen in Dodd-Frank?
    Mr. Alvarez. Some things are easier to measure than others, 
even though they are complicated. Capital is something, for 
example, that we have been measuring and restricting for many 
years. I think folks have a very good understanding of how to 
make capital rules, even though they are complicated, 
effective.
    We don't have experience with the grave threat idea. That 
is something we will have to gain some experience on, and think 
through carefully. We also, as I mentioned, are required by the 
statute to put in place these other provisions and see if those 
mitigate the risks that these large firms pose, and it is only 
if they don't mitigate the risks--
    Mr. Duffy. Reclaiming my time, so you don't have a 
standard, and you don't have metrics. It has been 2\1/2\ years 
since the law was passed, and you have no intent of setting 
forth standards or metrics for a grave threat under Section 
121?
    Is the standard really that, ``I will know it when I see 
it?'' When I see it, I will know it, and then I am going to put 
it under the grave threat category? Isn't that what the 
standard is?
    Mr. Alvarez. ``Grave threat'' is a standard itself. So just 
like many other--
    Mr. Duffy. Isn't that metrics? You will know it when you 
see it?
    Mr. Alvarez. We do not have a metric.
    Mr. Duffy. So when you see it, you will know it, right?
    Mr. Alvarez. And it may depend on many things--
    Mr. Duffy. Is that it? When you see it, you will know what 
a grave threat is? You can't tell me today what a grave threat 
is because there is no metrics for it. When you see it, you 
will know it.
    Mr. Alvarez. Yes.
    Mr. Duffy. The answer is yes?
    Mr. Alvarez. Yes.
    Mr. Duffy. And so for those who want to breed stability 
within the sector, does your standard of, when I see it, I will 
know it, really breed that stability and certainty?
    Mr. Alvarez. I think stability gets built by the other 
pieces of Dodd-Frank that we are putting together, the enhanced 
prudential standards, the capital requirements, liquidity 
requirements, building up and working out details on the 
orderly liquidation authority, the resolution plans, those 
things are what build stability.
    Mr. Duffy. I think people who are subject to Section 121 
would disagree with you.
    Listen, there is the ability to have a written hearing or 
an oral hearing, oral testimony, right?
    Mr. Alvarez. That is correct.
    Mr. Duffy. And have you set up a standard for which someone 
would get a written hearing versus an oral hearing with oral 
testimony?
    Mr. Alvarez. The Board's rules provide for a written 
hearing as a default matter, for most matters presented to-- 
decisions--
    Mr. Duffy. What is the standard to get an oral hearing or 
oral testimony?
    Mr. Alvarez. Oral testimony is something the Board allows 
whenever the circumstances indicate that you can't provide the 
arguments effectively in writing.
    Mr. Duffy. When you see it--
    Mr. Alvarez. We had oral hearings before, but very few 
institutions actually ask for oral hearings. Almost all 
institutions--
    Mr. Duffy. There is no standard in place. There is no 
standard to dictate when it is written and when it is oral.
    Mr. Alvarez. There is a standard.
    Mr. Duffy. What is the standard?
    Mr. Alvarez. The standard is when the Board believes that 
oral testimony would be most useful.
    Mr. Duffy. So the standard is when the Board believes.
    Mr. Alvarez. Yes.
    Mr. Duffy. And that is a standard that you think people can 
readily understand and use?
    Mr. Alvarez. Yes.
    Mr. Duffy. Okay. I think many of us would disagree with 
that standard.
    Mr. Alvarez. It is has worked very effectively for the last 
50 years at the Federal Reserve.
    Mr. Duffy. I am sure it has.
    With regard to Section 121, it is fair to say that this 
section doesn't really work in times of crisis, right? When we 
have a crisis, we have a review process, 30 days, a hearing 
process. So if, for instance, Lehman took place, this Section 
121 wouldn't really work. This is really a pre-crisis mechanism 
to find those SIFIs or large banks that are a grave threat, 
yes?
    Mr. Alvarez. I think Congress did set up Section 121 more 
as a pre-crisis arrangement and Title II as the crisis 
management stage.
    Mr. Duffy. I am sure you have seen this petition by Public 
Citizen, yes?
    Mr. Alvarez. I don't know.
    Mr. Duffy. You haven't seen a petition that has been made 
with regard to Public Citizen in regard to a very large bank, 
Bank of America?
    Mr. Alvarez. I have not.
    Mr. Duffy. You haven't seen that. Have you guys responded 
to any petitions that have been filed under Section 121?
    Mr. Alvarez. No, we have not.
    Mr. Duffy. I yield back.
    Chairman McHenry. I thank my colleague. And at this point, 
we will now recognize Mr. Rothfus for his first series of 
questions as a brand new member of the Financial Services 
Committee.
    Mr. Green. Mr. Chairman, just a point of clarification 
please. Mr. Delaney has arrived, and he has not been heard 
from. May he now be heard?
    Chairman McHenry. I'm sorry, I didn't recognize his 
arrival. I'm sorry, Mr. Rothfus, you are going to have to wait 
5 minutes. Welcome to the committee. Mr. Delaney, go right 
ahead.
    Mr. Delaney. Thank you, Mr. Chairman.
    My question is slightly more of a high-level kind of lift-
up question dealing with the orientation of the various 
regulators in light of the general concern that the actions 
within Dodd-Frank have somehow made the notion of ``too-big-to-
fail'' permanent in our financial system. Whether people agree 
or disagree with that concept, there is obviously a fair amount 
of discussion, and this hearing is first evidence of that.
    So the question I have--and I have been hearing a lot from 
the industry about a sense of kind of capital creep that is 
occurring with respect to the regulations of individual 
institutions. In other words, the new normal for well-
capitalized institutions with respect to a capital standard 
continues to move up both as reflected in specific rulemaking, 
but also but in practice in terms of being implemented with the 
regulators.
    In other words, the new normal for a well-capitalized 
institution is 8 percent in terms of capital to assets, but 
there is a sense that number is moving to 10, but that is not 
specifically memorialized in any set of rulemaking or 
legislation.
    And so I am interested in the panelists' view as to whether 
they think that is actually occurring in the industry, in other 
words, are regulators moving up capital in light of the concern 
that we have somehow made ``too-big-to-fail'' permanent as a 
way of mitigating concerns that we have, in fact, done that. I 
will let each of the panelists respond to that.
    Mr. Alvarez. Congressman, we clearly are intentionally 
raising the capital requirements on large institutions. We are 
doing that in rulemakings; it is a very public process. We have 
already done that in several areas, for example institutions 
that have large trading books have had their capital increase. 
We have proposed various surcharges, increases in the quality 
and type of capital at a variety of levels, and we are 
negotiating some further increases with Basel that we probably 
will put out for comment shortly.
    So the capital requirements are being increased. It is 
focused on the large institutions. There are some capital 
proposals that are more broad. And to anticipate part of where 
you were heading with your question, we are considering whether 
some of those proposals need to be modified to address small 
banks that haven't had the same problems as the large banks.
    But I would say that we have been up front about the 
capital increases that we are doing at the large institutions. 
We haven't done those behind the scenes.
    Mr. Delaney. Where do you think the standard for an under 
$10 billion in assets institution is to be considered well-
capitalized right now in terms of capital as a percentage of 
assets, not risk-based capital but just--
    Mr. Alvarez. What is the leverage ratio--
    Mr. Delaney. Yes. What do you think the well-capitalized 
ratio is right now?
    Mr. Alvarez. I think the minimum leverage ratio is 4 
percent.
    Mr. Delaney. But what is considered well-capitalized for an 
under $10 billion in your judgment?
    Mr. Alvarez. I have no judgment on that. And we don't have 
a definition for well-capitalized for a leverage ratio for 
well-capitalized.
    Mr. Delaney. Maybe one of the other panelists?
    Mr. Wigand. I echo Mr. Alvarez's comments.
    Mr. Osterman. Addressing the ``too-big-to-fail'' issue, the 
capital requirements are part of the heightened prudential 
standards that Title I addresses. In the last crisis and before 
we had these Dodd-Frank provisions, we didn't have these tools. 
We were left with either the bailout situation or the 
bankruptcy situation, neither of which worked. I do think we 
have the tools now to address ``too-big-to-fail,'' and I find 
it interesting that people think Dodd-Frank actually 
institutionalizes what I think we had before.
    Mr. Delaney. So, Mr. Alvarez, back to your earlier comment, 
you think 4 percent is the minimum capital standard for an 
under $10 billion institution?
    Mr. Alvarez. The leverage ratio. You said putting aside the 
risk-based ratio.
    Mr. Delaney. Right. So 4 percent capital as a percentage of 
the total assets on an institution?
    Mr. Alvarez. Right.
    Mr. Delaney. And so the notion that is common in the 
regulatory world that 8 percent is considered well-capitalized, 
where do you think that comes from? Just kind of--
    Mr. Alvarez. A large part of capital, particularly at the 
smaller institutions, under $10 billion institutions, depends 
on their activities and their needs. I am hesitant to try to 
answer that without reference to the risk-based capital--
    Mr. Delaney. Right. So what do you think the risk-based 
capital minimum is?
    Mr. Alvarez. The risk-based capital minimums are 6 and 8 
percent, and they are--
    Mr. Delaney. 6 and 8 percent?
    Mr. Alvarez. Yes.
    Mr. Delaney. Okay. Do you think those are moving up?
    Mr. Alvarez. Yes, they are.
    Mr. Delaney. Okay. Where do you think they are going to?
    Mr. Alvarez. That is what we are doing a rulemaking about. 
So we will--
    Mr. Delaney. I see.
    Mr. Alvarez. So we are in the process of thinking that 
through.
    Chairman McHenry. The gentleman's time has expired.
    We will now recognize Mr. Rothfus for his first round of 
questions. Delayed but not deterred, Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman, and thank you to our 
panel for being here today and going through some fairly 
complicated issues.
    I wanted to focus a little bit on, again, the grave threat 
as we try--or as I personally try to get my arms around it. As 
part of Dodd-Frank, several clearing and settlement financial 
utilities were deemed systemically important financial 
institutions that are now eligible to receive government 
support in the event of a potentially destabilizing failure.
    One of these ``too-big-to-fail'' institutions, the National 
Securities Clearing Corporation (NSCC), after consultation with 
its regulators, has put forward a proposal where many of our 
Nation's biggest banks will be able to make a loan commitment 
to the NSCC as part of a program to enhance collateral at the 
utility, while the banks broker-dealer competitors, who also 
clear through the facility, would have to post cash in the 
amount of billions of dollars. Posting cash is clearly a much 
more burdensome requirement.
    Mr. Alvarez, isn't the proposed cash collateral requirement 
from the broker-dealers to collateralize the NSCC simply 
another bank subsidy?
    Mr. Alvarez. If I could back up just a little bit to talk 
about the facts that you have presented, Dodd-Frank requires 
that there be more clearing on exchanges. And so, it is 
requiring institutions to do more business on these exchanges.
    In order to do that safely, the exchange has to require 
collateral by the institutions. These central clearing 
organizations take away risks and make the system safer because 
they are able to get good collateral and they deal with each 
counterparty separately with the clearing corporation in the 
middle.
    Dodd-Frank recognized that. Dodd-Frank builds quite a lot 
on that. It is not unusual that counterparties would provide 
collateral, but the central institution itself would not be.
    Mr. Rothfus. But there is different collateral there. The 
broker-dealers are going to be asked to put up cash--
    Mr. Alvarez. Because they are clearing on--they are 
clearing.
    Mr. Rothfus. --versus the bank would be able to--
    Mr. Alvarez. I think they deal with all of their 
counterparties in the same way. So perhaps because this is a 
complicated issue, it may be one that is best--that maybe we 
could talk with you about and provide you some information on 
how--
    Mr. Rothfus. Absolutely. But it appears that the banks are 
being asked for a different type of collateral. It is not a 
direct collateral. And wouldn't the Fed's apparent 
unwillingness to ask banks for direct collateral be an 
indication that the banks can't spare the collateral?
    Mr. Alvarez. I don't think that is quite right. I think 
there isn't a difference between the broker-dealers and the 
banks when they are dealing with these central counterparties.
    Mr. Rothfus. Again, I looked at it, okay, the types of 
collateral that are going to be put up, and if the banks are 
not able to have the direct collateral that the broker-dealers 
are going to be required to do, would that indicate that the 
banks pose a grave threat because they don't have that capacity 
for the direct collateral?
    Mr. Alvarez. I think the premise of the question is not 
correct as a factual matter. So that is why I think it might be 
helpful if we had a discussion, because I don't understand the 
situation to be the way you presented it.
    Mr. Rothfus. Thank you. I look forward to following up with 
you.
    I yield back, Mr. Chairman.
    Chairman McHenry. I thank my colleague for yielding back. 
We will now move on to an additional round of questions. I 
recognize myself for 5 minutes.
    So, Mr. Alvarez, does Section 121 allow regulators to 
determine the ideal size of a financial institution?
    Mr. Alvarez. I think Section 121 was designed to be a fact-
specific determination about a particular institution and 
whether that institution, its activities, the risks of its 
activities, the capital complexity, size, all of the various 
factors for that institution pose a grave threat to the 
economy. So I think that makes it difficult to say one size 
fits all institutions because complexity and risk and other 
things would factor into the determination.
    Chairman McHenry. So, a very complex institution. Let me 
ask this in a different way: Does Section 121 allow regulators 
to determine, in essence, the ability of a financial 
institution to do what it is doing? I am trying to ask this in 
a different way to elicit a different answer from you. Your 
blank look tells me I am not succeeding. So, I am going to try 
again.
    The question about an ideal size of an institution, or, in 
a different way, a cap on a size of an institution, is that a 
decision that could be contemplated under Section 121 and 
therefore limit the size of an institution or institutions?
    Mr. Alvarez. Congress has already set caps on the size of 
financial institutions, so I would expect that Section 121 
would apply to institutions that are below the caps set by 
Congress. There are two already. One is a longstanding cap on 
interstate banking.
    Chairman McHenry. Yes, cap on deposits.
    Mr. Alvarez. That is in the Bank Holding Company Act. And 
then the second cap is one put in Dodd-Frank, that no 
institution may have more than 10 percent of the total 
liabilities of financial institutions in the United States. So, 
the caps have already been set by Congress.
    Chairman McHenry. Let me, because you are not saying no, it 
cannot be provided, so under Section 121, you say you could set 
a lower cap than that?
    Mr. Alvarez. As I said, I think that Section 121 is 
designed to be an institution-by-institution kind of 
determination. A universal cap doesn't fit very well there. In 
order to meet a universal cap, the Board would have to show and 
the FSOC would have to agree that everybody who meets that size 
automatically poses a grave threat to the economy, so that 
would be a difficult decision.
    Chairman McHenry. But would that be one they would be able 
to make under the existing law? If your boss comes to you and 
says, do I have the legal authority to cap the size of all 
institutions because I deem them to be a grave threat to the 
financial--I am sorry--stability, I thank my colleague--would 
you advise him or her, whoever it may be, whatever time it may 
be, that is something under operation of law that they could 
do?
    Mr. Alvarez. So, as I said, the other thing that we have to 
take into account--and Section 121 requires this--is how that 
particular institution has mitigated the risks of its 
activities through restrictions that we impose on activities, 
through conditions we impose on the institution. I find it very 
hard in that context to see how a blind cap could work well. As 
a policy, I have a hard time seeing how it would work.
    Chairman McHenry. Okay. Let me ask you a different 
question. Is there a law that prevents you from setting a 
maximum size for an institution?
    Mr. Alvarez. Of course, we have to be able to sustain 
ourselves under Section 121, and that would be the authority. 
So if an institution were to challenge our determination on 
Section 121 because we didn't take into account the 
characteristics of the firm, that would be very difficult.
    Chairman McHenry. So you would say it is very difficult but 
not barred?
    Mr. Alvarez. I am having a hard time imagining a world 
where it would work.
    Chairman McHenry. Okay. But under operation of law, there 
is no limitation on the Federal Reserve from setting a maximum 
size for an institution?
    Mr. Alvarez. Congressman, I resist because I don't think 
that is a fruitful way to think about Section 121.
    Chairman McHenry. I understand. And your answer is actually 
answer enough.
    And so with that, I will now yield to my ranking member for 
5 minutes.
    Mr. Green. Thank you very much, Mr. Chairman.
    A lot has been said today about the grave threat. And in my 
opening statement I mentioned that we accorded FSOC, or Dodd-
Frank accords FDIC-like authority. And I would like to just 
talk a moment about the FDIC. It was formed in 1933, about 80 
years ago, and there are people who would like to know when a 
bank is going to fail. The FDIC does not announce that a bank 
is going to fail.
    Similarly, the power granted under Dodd-Frank would not 
require, and I don't think they should announce that an 
institution is ``too-big-to-fail'' or about to fail.
    The point is it seems to me that there is a desire to be 
able to predict certain things with a certain definition. But 
with the FDIC, many things will go into deciding whether or not 
a bank will fail. And no one has ever lost any insured deposits 
in 80 years, and we still don't--we cannot predict what FDIC 
will do. It is done on a Friday, banks open up on Mondays, 
usually. Now, is this a fair statement, Mr. Osterman?
    Mr. Osterman. Yes, it is, sir.
    Mr. Green. And with 80 years of experience and the FDIC not 
predicting or you can't really predict when a bank will fail--
you can't always, sometimes you can. In fact, there are rating 
agencies that try to do this, and they fail in trying to do it.
    So my point is we are not going to be able to codify a 
definition that is going to allow onlookers to predict how FSOC 
will behave when it is confronted with a possibility of a grave 
threat. FSOC will have to do some internal thought processes, 
and after this, after having an internal thought process, a 
deliberation, then a decision will be made, and it can't just 
depend on the size of an institution.
    One of our very capable and competent assistants has 
indicated to us that complexity has a lot to do with it, how it 
fits into the financial markets.
    So with all of these things going into the equation, it is 
very difficult to have one metric that is going to give an 
onlooker an absolute indication as to whether or not an 
institution will be declared a grave threat.
    Mr. Osterman, since I brought the FDIC into this, I would 
like for you to respond, please.
    Mr. Osterman. Yes. We have, as you indicate, had the 
authority to resolve failing financial institutions for the 
last 80 years. Actually, we are not even the entity that 
determines whether the institution is going to fail. It is 
typically the primary Federal regulator or the State regulators 
who make that call. Then, we come in and we have to determine 
the least costly approach for addressing that failure under the 
law, which requires either a payout of deposit insurance or a 
purchase and assumption agreement.
    The bottom line is that through this process--and I think 
during this last crisis we handled over 470 failures--no one 
has lost a penny of their insured deposits. I think one of the 
things that Dodd-Frank does is it gives us the ability now, 
which we did not have when this crisis began, to resolve one of 
these large systemically important financial institutions, and 
we now have the tools to address ``too-big-to-fail.''
    Mr. Green. Thank you.
    Would anyone else care to respond? Yes, sir?
    Mr. Wigand. I would just add to Mr. Osterman's remarks that 
the process that the FDIC has used to resolve failing 
depository institutions is one that now has become actually 
predictable in that there is confidence by insured depositors 
that their funds are protected. And even though the sequence 
leading up to the failure itself is one that is only known to a 
handful of regulators and perhaps other participants or 
stakeholders associated with the particular failure itself, the 
reality is that it is the confidence of knowing how deposits 
will be treated and that insured depositors are protected that 
provides the financial stability that is the FDIC's purpose as 
part of our financial system.
    Mr. Green. And Dodd-Frank provides that same confidence for 
taxpayers knowing that taxpayer dollars will not be used to 
bail out institutions, is that correct?
    Mr. Osterman. The law is explicit that Title II cannot use 
taxpayer funds in its application.
    Chairman McHenry. I thank the ranking member.
    Mr. Duffy for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    I want to go back to Section 121, which obviously we have 
covered quite exhaustively today, and the grave threat standard 
and your comment that it is, ``I will know it when I see it.''
    One of my concerns, and I think this was brought up in the 
initial hearings on Dodd-Frank, is that when we don't have a 
clear standard, when we can't point to clear, bright line 
specifics, it can allow for situations that don't provide for 
good governance.
    And so, could you use Section 121 to apply political 
pressure? I am not saying that you would. But political 
pressure could be applied just by the threat of finding that a 
financial institution is a grave threat. That is substantial 
pressure on that institution to do what the Fed would like it 
to do.
    Can you strong-arm them into doing something that they may 
not ordinarily want to do but for the threat of being a grave 
threat under Section 121? That is pretty powerful stuff, and I 
am not saying, I am not accusing anyone of doing that. But when 
you don't have clear standards in place, I think it opens the 
door for bad governance.
    And the fact that you guys haven't put out a clear standard 
and there is no intent to put out a clear standard, that 
concerns me. And then when we look and say, well, petitions 
have been filed and they haven't been answered, we are really 
sitting here in the dark. And I don't think that bodes well for 
anybody who sits in your seat or sits in the seat of one of 
these financial institutions.
    Mr. Alvarez?
    Mr. Alvarez. I take your point. I understand that very well 
and I understand that uncertainty can be very difficult for 
firms to deal with. There are some protections in Section 121 
that I think help in this regard. One is you have the FSOC and 
a two-thirds vote of the FSOC. That is a very strong protection 
against the Federal Reserve being arbitrary in what it does.
    I think the second protection is actually that Congress 
requires us to go through this list of other mitigants before 
we can get to selling assets. So we have to start with the idea 
of restricting their activities, or imposing conditions on 
operations, or limiting growth. They are expressly laid out in 
the statute. So that helps, too, because a firm will know if we 
are moving down this path because we have a long road to go to 
before we can get to selling assets.
    Mr. Duffy. And I understand there is a long road and I 
understand the protection of FSOC--
    Mr. Alvarez. And then, there is the hearing requirement 
which Congress has built in. So there is a lot of protection in 
Section 121.
    Mr. Duffy. There is, but the threat of Section 121, to have 
to go down that path is a very, very powerful threat. I don't 
know anyone who would minimize the threat of Section 121. And 
that is my concern. I am not saying that we would get through a 
two-thirds vote on FSOC, but to make any organization go 
through it is a very, very powerful threat.
    Mr. Alvarez. I appreciate that.
    Mr. Duffy. In regards to petitions that have been filed, 
you indicated there have been several, is that right? You are 
not familiar with any of them, but petitions have been filed 
under Section 121?
    Mr. Alvarez. I am not certain of numbers. You mentioned 
one. I haven't read that. I can look into that.
    Mr. Duffy. But you have read others?
    Mr. Alvarez. No, I have read none.
    Mr. Duffy. Okay. If you would look into that and give me 
your opinion on the one I referenced? I can ask that to you in 
writing so you have the information on it. I would appreciate 
that. Is that a yes?
    Mr. Alvarez. I will do the best that I can. I am a staff 
person. My opinion on a particular thing may have no value 
whatsoever. As long as you keep that in mind.
    Mr. Duffy. You were sent here today, so it must have some 
value.
    Just quickly to get your opinion on this one, and for its 
value, if the Fed concluded that a large financial company paid 
less to borrow funds because the market perceived that the 
government would bail out the company if it became distressed, 
would that benefit be relevant in determining whether the 
company posed a grave threat under Section 121? So if we have 
this benefit of saying, hey, if I fail, I have a government 
guaranty here, is that a characteristic that could--
    Mr. Alvarez. First of all, we are doing an awful lot of 
work to remove that potential advantage, to reduce that 
subsidy. And that is where I think the Section 165 provisions 
that we have been talking about today are really important.
    Mr. Duffy. But could that be a trigger?
    Mr. Alvarez. I would have to think about that. I don't see 
how that itself poses a grave threat.
    Mr. Duffy. In itself, it does pose a grave threat, right?
    Mr. Alvarez. No. If a firm has some operational benefit 
because of its size, the subsidy itself may be an indication 
that it is large and may be an indication that it is viewed by 
the markets as important and having government support, but I 
am not sure how that indicates that it poses a grave threat.
    Chairman McHenry. The gentleman's time has expired.
    Mr. Duffy. I yield back.
    Chairman McHenry. Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Osterman, if you had a kind of sleazy cousin who was 
interested in going into banking, would you advise him to try 
to get hired at the Kansas City Community Bank or at the Bank 
of Universality? Understanding he is sleazy.
    Mr. Osterman. I would advise him not to get into banking, 
because that is something that we really don't want or need. It 
is a very important position, and it is one that we review in 
terms of the standards. We provide training for people who are 
interested in getting into banking, in terms of directors and 
officers and other professionals, so that they can understand 
the very important undertaking that they are assuming and the 
responsibilities that they take on when they take on those 
important positions.
    Mr. Cleaver. But do you agree that complexity is the slick, 
sleazy person's greatest friend in banking?
    Mr. Osterman. I see. Certainly, complexity makes it a lot 
easier to slip things by somebody. If it is complex, it is a 
lot harder to understand, and that definitely can complicate 
things.
    Mr. Cleaver. The Attorney General has said that one of the 
obstacles to prosecuting folks who might have done things that 
resulted in the 2008 economic collapse in this country is 
complexity, that these banks are so huge and complex that they 
can't prosecute. So you swindle money in a little bank and you 
are going to probably get caught. And so in the big banks, the 
Attorney General is saying it is tough to find out what someone 
did and how they did it. Go ahead?
    Mr. Osterman. We certainly don't agree that the fact that 
somebody is involved in a large institution means that they 
shouldn't be prosecuted. We think--
    Mr. Cleaver. Of course, they haven't.
    Mr. Osterman. Understood. But that is certainly not 
something that we would agree with.
    Mr. Cleaver. My fear is that when all of this is over, 
nothing will have happened to the people who did the greatest 
amount of damage to the U.S. economy, that they are going to 
get--they will be buying new homes on Venus and living the 
grand life because they knew how to rip off the biggest 
financial institutions while community banks--I am really 
concerned about what is happening to community banks. As Moses 
would say, let my community banks go. They are getting beat up. 
They have all of the problems and the burdens, and the bigger 
banks seem to be getting away with everything.
    The other issue that I am somewhat concerned about is that 
the rulemaking is seemingly very slow. And I know Mr. Alvarez 
talked about how you are trying to get things worked out. But 
many of these banks, at least in my district and the rural 
parts of Missouri, are just being overwhelmed, and survival 
depends on how much time it is going to take. I have a 
photograph in my office--I didn't bring it with me--of one of 
my bankers holding up regulations so thick that he needs to 
hire new people to come in. This is a little, small bank. And 
if we continue to do that, I think it is just one of the great 
shames of our time.
    Mr. Chairman, I would like to yield back the balance of my 
time to the ranking member.
    Mr. Green. Thank you, Mr. Cleaver.
    Let's talk for a moment about the living wills. This is 
something that we are currently putting in place, and it is a 
part of the process. And I would like for you to explain how 
the living will can help us to determine whether or not banks 
or large institutions are subject to being declared a grave 
threat.
    Mr. Alvarez. To start with, the living wills don't tie into 
the grave threat provision directly. But what the living wills 
do provide is a supervisory tool for the Federal Reserve, it 
may be slightly different for the FDIC, but for the Federal 
Reserve it is a window into how firms think about their 
resolution. We know a lot about how they plan for their healthy 
operation, that has been the focus of our supervision over the 
last few years. Now, we are getting a view into how they plan 
for their death. And that is a different way of thinking about 
the supervisory problems. It focuses you on structure, on 
complexity, on internal operations, on resiliency of 
operations. All those things help point out, help you, help 
accent the way firms might fail. So we are learning a lot about 
that. And that could provide information that would help us 
understand if the firm poses a grave threat, because we would 
know more about the likelihood of its failure, the spillover 
effects of its failure and things like that, which I think is 
important.
    At the same time, the living wills give us an opportunity 
to fix some of those problems. And we in the FDIC are very 
focused on translating what we learn from the living will 
process into changes in our examination process to require 
institutions to simplify themselves, to remove obstacles for 
their resolution, and to become safer institutions.
    Chairman McHenry. The gentleman's time has expired.
    Mr. Heck?
    Mr. Heck. Thank you, Mr. Chairman. First of all, I want to 
say how very, very sorry I am that Congressman Rothfus has 
left, insofar as his arrival renders me no longer the 61st most 
senior member out of 61 members of this committee. I welcome 
him.
    Chairman McHenry. Congratulations. I sat next to Debbie 
Wasserman Schultz on your side of the aisle. That was my first 
seat--
    Mr. Heck. Peas in a pod.
    Chairman McHenry. Yes. And so, I will give you back your 
time.
    Mr. Heck. It is all right.
    Mr. Alvarez, in your submitted testimony you said the 
following: Our goal in working with other U.S. regulators and 
our counterparts around the world is to produce a well-
integrated set of rules and supervisory practices that 
substantially reduce the probability of failure of our largest, 
most complex financial firms and that minimizes the losses to 
the financial system and the economy if such a firm should 
fail.
    These steps also force large firms to internalize the costs 
that their failure would impose on the broader financial 
system, minimize the advantage these firms enjoy due to market 
perceptions of their systemic importance, and give the firms 
regulatory incentives to reduce their systemic footprint.
    My question, Mr. Alvarez, is if your objective is to manage 
the regulatory process to reduce the advantage in the 
marketplace, I assume that you have some quantifiable notion as 
to what that advantage is that you are trying to manage to, and 
I would ask you to talk about that if you would, please, sir.
    Mr. Alvarez. We do not have a quantitative measure that we 
are managing to, as far as the advantage that a firm might 
have. In fact, I think the way we think about it is we are 
trying to make the--the overall objective is to end ``too-big-
to-fail'' and to make firms more resilient against failure even 
in bad economic times. There are various ways you can measure 
the kind of subsidy that firms get or have--
    Mr. Heck. Do you have a range? Can you look at a range?
    Mr. Alvarez. You can look at CDS spreads. You can look at a 
variety of different metrics of that. And we are concerned that 
they have a subsidy, and we are trying to eliminate that 
subsidy by imposing higher capital requirements, which cost the 
firms some money and makes them more resilient against failure. 
We are trying to reimpose liquidity requirements, which make 
them more resilient against failure, but also come with a cost. 
Those things all reduce their subsidy.
    But the goal here isn't just to eliminate the subsidy. The 
goal here is to make the firms more resilient. And what I have 
in mind here is, even if you reduce the subsidy to zero, the 
failure of these large firms will have a cost on society. And 
so we want to minimize the potential that society will have to 
bear the cost of a failure of an institution. Even if they put 
it through OLA, it will have ramifications for the economy, and 
you want to minimize as much as possible that failure.
    So that would indicate you should have prudential 
requirements and financial stability requirements that may be 
greater than would be necessary to eliminate the subsidy. We 
want to get instead to making them as resilient as possible 
while allowing them to operate efficiently. So that is why we 
focus less on the--we do not manage to the elimination of that 
subsidy.
    Mr. Heck. Your point here, however, in your presented 
testimony is that it would in fact minimize--
    Mr. Alvarez. It does do that.
    Mr. Heck. --the subsidy, but if you don't know how large it 
is, how will you know whether or not it has been minimized?
    Mr. Alvarez. There is a variety of ways to look at how it 
is being reduced. For example, as we have begun already with 
Dodd-Frank, we have noticed that the uplift that the credit 
rating agencies give to large firms, so the subsidy they get on 
the credit rating side, has been reduced. So that is one thing 
we will look at.
    My point is that, suppose we eliminate the credit rating 
uplift altogether? Does that mean, and I took your question to 
mean you have now managed to get rid of that subsidy. Should 
you stop? And at that point, I think we have to assess whether 
there is another goal, and the goal is the protection of the 
financial system.
    Mr. Heck. Understood. Thank you, sir.
    Chairman McHenry. I thank my colleague. And without 
objection, we will have 5 additional minutes of questioning on 
each side. Thank you. And so with that, I will recognize myself 
for 5 minutes.
    Mr. Alvarez, since you are a representative from the 
Federal Reserve, I will ask you a question. I sent Chairman 
Bernanke a letter dated March 20th and asked for a response by 
April 3rd. We had spoken with the Federal Reserve's legislative 
affairs staff on April 9th. They said the response has not been 
finalized, and they would advise when it is ready. Any ideas on 
when this response will be ready?
    Mr. Alvarez. So this is the letter that you have written 
on--
    Chairman McHenry. I will give you the details. Yes. I wrote 
Chairman Bernanke to get more information on the analysis 
relied upon by the Justice Department making prosecutorial 
decisions in cases involving large financial institutions.
    Governor Powell testified before the Senate that the 
Justice Department asked the Federal Reserve for information 
about whether certain statutes would inhibit investment 
activity in a company that was convicted of a felony.
    In my letter, I asked Chairman Bernanke to provide the 
names of persons who were contacted within the Federal Reserve 
from the Justice Department, and furthermore asked for who 
contacted them within the Justice Department. We have very 
little information on that, so we are just trying to nail down 
what this question that my colleague, Mr. Cleaver, asked about 
in terms of Attorney General Holder's comments that certain 
institutions were just, in essence, were a lot deemed as too 
big to jail.
    Mr. Alvarez. I will look into that as soon as I get back.
    Chairman McHenry. Okay.
    Mr. Alvarez. And I will get you a response right away.
    Chairman McHenry. I certainly would appreciate it. And 
since you are a representative of the Federal Reserve, I felt 
the obligation to ask you.
    Mr. Alvarez. I would be happy to do that. Thank you very 
much.
    Chairman McHenry. By any chance, have you been contacted by 
the Justice Department on this issue?
    Mr. Alvarez. I have not personally been contacted by the 
Department of Justice. I will say I talk to them all the time 
about a whole variety of matters, but, no, I haven't been 
contacted by them.
    Chairman McHenry. Okay. And is there anything that would 
prevent the Federal Reserve from providing economic analysis 
for the Justice Department on this issue of prosecuting large 
financial institutions?
    Mr. Alvarez. We share a lot of information with the 
Department of Justice. If they asked for some information like 
that, we would do our best to provide them what we could.
    Chairman McHenry. Okay. And would you recommend that the 
FSOC or the OFR instead perform this type of analysis for the 
Justice Department?
    Mr. Alvarez. I think actually all the agencies should 
cooperate with the Department of Justice whenever they are 
asked by the Department.
    Chairman McHenry. That is a good ``lawyerly'' answer.
    Mr. Alvarez. It is a very difficult job to do, and we 
should help them.
    Chairman McHenry. Okay. So, I covered those areas in 
particular. Now, I do want to just ask briefly about a 
deficient living will. Has the Federal Reserve determined what 
a deficient living will is?
    Mr. Alvarez. We have been through one round, so far.
    Chairman McHenry. With how many institutions?
    Mr. Alvarez. With 11 institutions.
    Chairman McHenry. Okay.
    Mr. Alvarez. And we are just now starting our second round 
with those same 11 institutions. I think we all learned a lot 
from the first round. The firms have been taking this very 
seriously. They have been very diligent in responding to our 
questions and providing information, and they have provided 
thousands of pages of information. So this has been a good 
process, from our perspective. We have learned quite a lot from 
the institutions, and we think the firms are giving us the 
information that we are asking them for.
    Chairman McHenry. Okay. Within this provision, there is the 
question of it is deficient if it is not credible.
    Mr. Alvarez. Right.
    Chairman McHenry. You have two different cases here that 
would not result in orderly liquidation under the Bankruptcy 
Code.
    Are those different standards, just in your opinion, Mr. 
Osterman?
    Mr. Osterman. I think they can be. The statute reads 
``or,'' so, credibility could be, for example, in the guidance 
we put out just yesterday, talks about certain assumptions. You 
can't rely on provision of extraordinary support from the 
United States, for example. If we had a plan that did rely on 
that, it wouldn't be credible.
    And then in terms of resolution under the Bankruptcy Code, 
there it is pretty clear we are looking at how the institution 
would be resolved. If resolving it under the Bankruptcy Code 
meant that we would need our special powers to do this in order 
to avoid impact on financial stability. If our special powers 
aren't needed, then it would meet the standard. If they are, 
then it would not.
    Chairman McHenry. Is liquidity a part of that, though? If 
it is being resolved under the Bankruptcy Code, you have to 
have liquidity support to keep the institution going. So is 
liquidity a part of that?
    Mr. Osterman. Yes.
    Mr. Wigand. Yes. It certainly would be a factor, 
absolutely.
    Chairman McHenry. Mr. Alvarez?
    Mr. Alvarez. Yes. Absolutely. We asked for a lot of 
information on liquidity even at the entity level throughout 
the organization.
    Chairman McHenry. Okay. So being resolved in a Bankruptcy 
Code and a requirement within the living will has to be some 
capacity for liquidity support as they are unwound under the 
Bankruptcy Code, or resolved.
    Mr. Wigand. More specifically, what is required is for the 
firm to outline how they will handle the liquidity management 
of the bankruptcy process. We aren't asking the firms to 
specifically identify where that liquidity support will be 
drawn from, but it is a liquidity analysis to indicate how the 
firm can unwind itself or go through the bankruptcy process 
without posing systemic consequences. It is a very case-by-case 
analysis because of the different business models these 
institutions operate under and their needs for liquidity and 
how their strategic application of the bankruptcy process 
affects both the sources of liquidity and the demands for it.
    Chairman McHenry. Any objection to that, Mr. Alvarez?
    Mr. Alvarez. [Nonverbal response.]
    Mr. Green. Mr. Chairman, allow me, as ranking member, to 
note that we are 6 minutes and 31 seconds into your 5 minutes.
    Chairman McHenry. I appreciate that. I certainly was 
generous with the ranking member and would endeavor to do so in 
the future. And with his kindness, I now give him 6 minutes and 
39 seconds. The gentlemen can use it up.
    Mr. Green. No, sir. I will return some of it to you.
    Let me start with you, Mr. Alvarez. You were very kind, and 
I appreciate the way you responded to the chairman's inquiry 
with reference to a letter to the Chairman of the Fed. My 
suspicion is that you don't maintain his calendar. Is that a 
fair statement?
    Mr. Alvarez. That is definitely true.
    Mr. Green. My suspicion is that you don't write his letters 
or respond to his letters. Is this correct?
    Mr. Alvarez. Sometimes, I do.
    Mr. Green. Is it a fair statement that the best person to 
ask about a letter written to Mr. Bernanke might be Mr. 
Bernanke?
    Mr. Alvarez. I am happy to take the message back and look 
for it, get a response to the letter.
    Mr. Green. I understand. But nothing precludes the 
chairperson from talking to Mr. Bernanke or contacting Mr. 
Bernanke about his inquiry. Is that a fair statement?
    Mr. Alvarez. That is true, but I would rather take the 
message back than to disturb both of them.
    Mr. Green. I appreciate your doing so.
    Now, let's go back to the living wills. The living wills 
have a specific purpose. They are to give us some insight as to 
how one of these mega-corporations can be wound down. Is this a 
fair statement, Mr. Alvarez?
    Mr. Alvarez. Yes. That is right.
    Mr. Green. Does anyone differ on that?
    Mr. Wigand. No.
    Mr. Osterman. No. We agree.
    Mr. Green. And the living will also, as you have indicated, 
while it does not directly relate to the notion of an 
institution being a grave threat, but you can get some insight 
into how it would have to be wound down, and as a result you 
can understand the complexity of the institution and it would 
help you to understand whether or not it can become a grave 
threat if it is not properly capitalized or if it is not 
properly adhering to certain standards and regulations. Is that 
a fair statement?
    Mr. Alvarez. Yes, sir.
    Mr. Green. So what we are trying to do is give the American 
public the same level of confidence in these mega-institutions 
that we have given in banks by using the FDIC. And that is what 
Dodd-Frank hopes to accomplish, and I believe it is 
accomplishing this.
    Are we better off with Dodd-Frank than without it, Mr. 
Alvarez?
    Mr. Alvarez. We certainly have gotten some very useful 
tools in Dodd-Frank that I think were tools we asked for and 
tools that we think will help us to make firms more resilient.
    Mr. Green. And do you agree, the other two witness, please? 
Either of you can respond, one at a time.
    Mr. Wigand. Yes. We believe there are tools that are 
available as a result of the financial reform legislation that 
the government did not have before, and that these tools can be 
used both to reduce the likelihood that one of these companies 
will fail and to lower the cost in the event that one of these 
companies fails.
    Mr. Osterman. I agree.
    Mr. Green. And let's just quickly look at some of the 
tools. You have enhanced capital requirements. Is that a fair 
statement? You can do this?
    Mr. Wigand. Yes.
    Mr. Alvarez. Yes.
    Mr. Green. New liquidity requirements?
    Mr. Alvarez. Yes.
    Mr. Green. Enhanced prudential regulations for large banks?
    Mr. Alvarez. Yes.
    Mr. Green. A new resolution process for systemically 
important financial institutions, these SIFIs, as they are 
called?
    Mr. Wigand. Yes.
    Mr. Green. Required resolution plans, the living will; 
capital surcharges on systemic firms; proprietary trading ban 
through the Volcker Rule; size limits and restrictions on 
mergers. So you have these new tools that you can impose and 
that you can use, and these will help you to prevent an 
institution from failing and, in the process, causing the 
entire economic order to have a downturn. Is that a fair 
statement? If properly used.
    Mr. Alvarez. Yes. I think I would caution--
    Mr. Green. Yes, sir.
    Mr. Alvarez. --that doesn't mean no firm will fail. We 
can't make it absolutely certain that no one will ever fail.
    Mr. Green. No.
    Mr. Alvarez. But that is why the OLA is an important tool 
as well, the orderly liquidation authority.
    Mr. Green. Right. No guarantee that you won't have a 
failure, but what you can do is try to minimize the impact that 
it will have on the economy. Is that a fair statement?
    Mr. Alvarez. That is right.
    Mr. Wigand. Yes.
    Mr. Green. All right. I thank you for your attendance 
today. And I am absolutely convinced that Mr. Bernanke will 
have an opportunity to come before us and respond to questions 
that are of concern. Thank you very much.
    Chairman McHenry. I thank the ranking member. And I guess, 
at the ranking member's request, the natural request would be 
if the Chairman of the Federal Reserve would come before this 
subcommittee. Now, I am smiling, because your head of 
Legislative Affairs is giving a very wry smile to that.
    But I thank you all for your--
    Mr. Green. Mr. Chairman, if I may. Since you bothered to 
give a commentary, I would like to give one. My comment was if 
that he might go before the committee, and you are a part of 
the full committee and you will have your opportunity to ask 
your questions when he is before the full committee.
    Chairman McHenry. Great.
    So, I thank the witnesses for testifying today. And I want 
to thank the three of you for your service to your government 
as civil servants. I thank your staffs as well for the 
preparation today.
    Oversight is very important, and we are trying to 
understand the components of Dodd-Frank and actually have a 
deeper conversation. This is the first hearing about Sections 
121 and 165. We learned a few things today. One in particular 
is that the Federal Reserve has not defined grave threat nor 
the metrics of measurements.
    Mr. Green. Mr. Chairman, if I may, a point of inquiry: Are 
we giving summaries, each of us today, as to what we have 
ascertained from this hearing?
    Chairman McHenry. Well, if the ranking member doesn't wish 
to hear what the next hearing is, then I will stop right here, 
and thank the witnesses for their testimony.
    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 without objection, this hearing is now adjourned.
    [Whereupon, at 4:45 p.m., the hearing was adjourned.]





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                             April 16, 2013




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