[Senate Hearing 113-42]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-42
 
  THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS

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



                                HEARING

                               before the

                              COMMITTEE ON

                   BANKING,HOUSING,AND URBAN AFFAIRS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 REVIEWING THE FINANCIAL STABILITY OVERSIGHT COUNCIL'S ANNUAL REPORT, 
   DISCUSSING FSOC'S EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS, AND 
   CONTINUING ITS OVERSIGHT OF THE IMPLEMENTATION OF DODD-FRANK WALL 
               STREET REFORM AND CONSUMER PROTECTION ACT

                               __________

                              MAY 21, 2013

                               __________

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


                 Available at: http: //www.fdsys.gov /





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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

                Mike Piwowar, Republican Chief Economist

       Hope Jarkowski, Republican Senior Counsel and SEC Detailee

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)



                            C O N T E N T S

                              ----------                              

                         TUESDAY, MAY 21, 2013

                                                                   Page

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

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

                                WITNESS

Jacob J. Lew, Secretary, Department of the Treasury..............     4
    Prepared statement...........................................    34
    Responses to written questions of:...........................
        Chairman Johnson.........................................   223
        Senator Crapo............................................   226
        Senator Menendez.........................................   229
        Senator Merkley..........................................   233
        Senator Shelby...........................................   236
        Senator Vitter...........................................   236
        Senator Coburn...........................................   239

                                 (iii)


  THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS

                              ----------                              


                         TUESDAY, MAY 21, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:15 a.m., in room 538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    I would like to start by saying that my thoughts and 
prayers are with the families of Moore, Oklahoma, and our 
colleague here on the Committee, Senator Coburn. It is a 
difficult time as families mourn the loss of loved ones and 
begin rebuilding their community.
    Today, we welcome Secretary Jack Lew to the Committee for 
the first time since he was confirmed.
    While this Committee lacks jurisdiction over the IRS, I 
must personally express my sincere disappointment and anger 
regarding the recent revelation that some IRS employees were 
targeting political organizations. Democrats and Republicans 
agree that politics has no place at the IRS, and I commend 
Secretary Lew and President Obama for taking swift action last 
week. As should be the case, the DOJ is looking into whether 
any laws have been broken and the appropriate Senate committees 
of jurisdiction are holding hearings so that we can get to the 
bottom of this.
    With that said, this Committee has the duty to oversee 
efforts to strengthen U.S. financial stability, especially in 
light of the costly crisis our economy continues to recovery 
from. So today, Secretary Lew will focus on the Financial 
Stability Oversight Council's Annual Report to Congress, as 
required by the Wall Street Reform Act.
    I am pleased that this year's FSOC report notes progress in 
key areas that this Committee has devoted attention to over the 
last year, including money market funds, the tri-party repo 
market, the housing market, LIBOR, and the economic situation 
in Europe. The report also highlights emerging operational 
risks for financial companies like cybersecurity attacks, new 
technologies in the equity markets, and financial services 
preparedness for natural disasters. Furthermore, the FSOC has 
made important recommendations in many of these areas to 
further safeguard our economy that should be considered.
    All indicators point to a well-coordinated FSOC, and I will 
note that since the last report, the Senate has confirmed the 
first Director of the Office of Financial Research, a key 
position and office that is assisting FSOC with critical 
research and analysis.
    But more needs to be done to improve our Nation's financial 
stability, and some high-priority rules await completion by 
potential regulators. These include enhanced prudential 
standards for large systemic firms required by Wall Street 
Reform, the Basel III agreements, and the Volcker Rule. FSOC 
itself also continues to work on the nonbank SIFI designations. 
We also expect additional reforms and action from the 
regulators on money market funds, the tri-party repo market, 
and other proposals to curtail systemic risk and ensure no firm 
is too-big-to-fail.
    While it is always important to get the rules right, the 3-
year anniversary of Wall Street Reform becoming law and the 5-
year anniversary of the financial crisis are fast approaching. 
The remaining pieces of Wall Street Reform must be finalized 
soon so that Congress can appropriately assess whether it is 
necessary to do more.
    Mr. Secretary, I look forward to hearing your testimony and 
learning what specific steps you are taking as FSOC's chair to 
strengthen financial stability and seeing to it that key Wall 
Street Reform rules are completed in the next few months, not 
the next few years.
    With that, I will turn to Ranking Member Crapo for his 
opening statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman, and before moving 
on to my opening statement, I, too, want to join with you in 
extending my deepest condolences to the families of those who 
were killed yesterday as a result of the devastating tornadoes 
in Oklahoma. All of us keep the people of Oklahoma in our 
hearts and in our prayers, and I appreciate your mentioning 
that.
    Today, Secretary Lew comes before the Committee to testify 
in his first hearing as the Secretary of the Treasury. The 
Secretary of the Treasury wears many hats. He is responsible 
for formulating and recommending a number of domestic and 
international financial, economic, and tax policies for the 
Administration. As FSOC Chairman, he is required to appear 
before this Committee annually to testify on the activities of 
the Council and to answer questions concerning the Council's 
most recent annual report.
    The Council's 2013 Annual Report covers many areas of the 
Council's activities and lists a number of potential emerging 
threats to the financial stability of the United States. I want 
to focus my opening statement on one particular area, Mr. Lew, 
that needs your personal attention.
    The U.S. capital markets must remain the preferred 
destination for investors throughout the world. Capital is the 
lifeblood of U.S. businesses, which, in turn, are the engines 
of job creation and economic growth. And, unfortunately, 
infighting among U.S. financial regulators and their overseas 
counterparts is causing investors to look elsewhere for 
productive investment opportunities.
    The list of problematic cross-border issues that need to be 
addressed is growing, and the frustration from foreign 
regulators over the lack of international coordination on 
financial reform measures has reached an unprecedented level. 
After the so-called Volcker Rule was proposed in 2011, a number 
of foreign regulators submitted a letter to the Treasury 
Department expressing concerns that the proposed rule could 
reduce the liquidity of the sovereign bonds and damage 
international cooperation efforts.
    More recently, a number of foreign regulators have weighed 
in on the Federal Reserve's proposed rule to implement enhanced 
prudential standards for foreign banking operations. For 
example, the European commissioner in charge of financial 
regulation, Michel Barnier, warned in a letter to Federal 
Reserve Chairman Ben Bernanke that the Fed's proposed rules 
affecting European banks doing business in the United States 
will duplicate work already done in Europe and create 
additional cost. Commissioner Barnier also warned that the 
Fed's proposal could risk a protectionist backlash and threaten 
the global economic recovery.
    The frustration reached a new level when nine finance 
ministers wrote to Secretary Lew expressing their concerns 
about the lack of progress in developing workable cross-border 
rules as part of reforms of the OTC derivatives market. They 
warned that without clear direction from regulators working 
together, derivatives markets will recede into localized and 
less efficient structures. Derivatives end users will find it 
more difficult to manage risk and suffer from burdensome 
regulatory conditions.
    I look forward to hearing from you, Secretary Lew, about 
the specific steps you intend to take to avoid these cross-
border conflicts and the unnecessary costs imposed by them.
    Finally, although this hearing is focused on Secretary 
Lew's role as Chairman of the FSOC, I would be remiss if I did 
not take this opportunity to question him about the recent IRS 
scandal. We are literally conducting an investigation into the 
IRS circumstances about three floors below us in this building 
at this moment as we meet, and I may need to step out, Mr. 
Chairman, to get down to that hearing on an occasion or two 
here.
    The largest bureau within the Treasury Department is the 
Internal Revenue Service. Last week, the Treasury Inspector 
General for Tax Administration issued a report that documents a 
number of troubling and disturbing actions regarding the 
targeting of conservative groups by the IRS. These actions 
should never be tolerated. President Obama has directed 
Secretary Lew to make sure that all of the Inspector General's 
recommendations are implemented quickly. I look forward to 
hearing how the Secretary will carry out this Presidential 
directive. I also look forward to hearing what additional steps 
Secretary Lew is taking to ensure that no future income tax 
audits will be conducted in such a discriminatory manner ever 
again.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    In order to get to Secretary Lew's testimony and Member 
questions, opening statements will be limited to the Chair and 
Ranking Member today. I want to remind my colleagues that the 
record will be open for the next 7 days for opening statement 
and any other materials you would like to submit.
    Today's witness is the 76th Secretary of the U.S. 
Department of Treasury. Secretary Lew, welcome to the 
Committee.
    Before you begin your statement and the FSOC Annual Report, 
there is understandably a lot of concern regarding previous 
actions at the IRS. If you would like to say a few words on 
that matter, please do that before you begin your testimony. 
You may begin.

    STATEMENT OF JACOB J. LEW, SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Mr. Lew. Thank you, Mr. Chairman.
    I would like to begin by expressing my own condolences to 
the people of Oklahoma who are suffering so much today and to 
say that the families are in our thoughts and prayers as they 
go through the recovery from the devastating tornado in 
Oklahoma City.
    Chairman Johnson, Ranking Member Crapo, Members of the 
Committee, thank you for the opportunity to testify today on 
the Financial Stability Oversight Council's 2013 Annual Report.
    Before I address the report, I would like to say a few 
words about the Treasury Inspector General for Tax 
Administration's report last week that showed that some 
employees at the IRS used outrageous methods to determine if 
certain groups qualified for tax-exempt status.
    As the Inspector General's report indicates, while this 
conduct was not politically motivated, it was unacceptable and 
inexcusable. Administering the tax code without any hint of 
bias is a solemn obligation that must be carried out with the 
highest of standards. That is why I moved quickly to take steps 
to restore confidence in the IRS. Within 24 hours of the report 
coming out, I asked for and received the resignation of the 
Acting Commissioner. And within 24 hours later, the President 
appointed a new Acting Commissioner. He is a person of high 
integrity and he has earned the confidence of Democrats and 
Republicans for his professionalism.
    I have directed incoming Acting Commissioner Daniel 
Wuerffel to carry out a thorough review of this conduct and to 
take action on three specific things. First, making sure that 
those who acted inappropriately are held accountable for their 
actions. Second, examining and correcting any failures in the 
system that allowed this behavior to happen. And, third, taking 
a forward-looking view and determining whether the IRS has 
systemic problems that need to be addressed.
    The Acting Commissioner will hit the ground running on 
Wednesday. That is tomorrow. He is going to take actions as 
they are needed, and he will report back to me on his progress 
within 30 days so that we can report back to the President. And 
we are going to make sure that nothing like this ever happens 
again.
    I would like to turn to the Council's Annual Report, which 
is the subject of this hearing. This report represents 
extensive collaboration among Council members, agencies, and 
staff. And it gives us a chance to provide the Congress and the 
public with the Council's assessment of significant financial 
market and regulatory developments, potential emerging threats 
to financial stability, and recommendations to strengthen the 
financial system.
    I want to point out that the strength of our financial 
system depends greatly on the strength of our economy. Now, 
there is no doubt that we have made significant progress 
recovering from the worst economic crisis since the Great 
Depression. The economy has grown for 15 consecutive quarters. 
The private sector has been creating jobs for 38 straight 
months. The housing market is healing. Our deficits are falling 
at the fastest rate in decades. But there is more work to do. 
We need to keep our foot on the accelerator, and economic 
growth and job creation need to be more rapid.
    The President has put forward a comprehensive jobs and 
growth plan. His path forward strengthens the recovery by 
making needed investments in manufacturing, innovation, 
infrastructure, and worker training while taking a balanced 
approach to restoring our long-term fiscal health. This 
strategy will not only help grow our economy now and well into 
the future, it will replace the sequester with sensible deficit 
reduction measures.
    Since the Council's last Annual Report, our financial 
system has grown stronger in a number of ways. Capital and 
liquidity levels for the largest financial institutions have 
increased. Regulators have taken additional steps toward 
improving transparency and risk mitigation in derivatives and 
other markets. And the implementation of the Dodd-Frank Act and 
international coordination on G-20 reform priorities have 
brought significant progress toward establishing a more 
resilient and stable financial system, both domestically and 
globally.
    On the topic of Dodd-Frank implementation, the Council and 
its member agencies continue to put reforms in place. It is 
important to note that while additional work remains, we are 
much closer to the end of the process than we are to the 
beginning. We have seen a good deal accomplished recently, 
including progress on the Council's evaluation of an initial 
set of nonbank financial companies for potential designation. 
Progress on a new framework for the consolidated supervision of 
large financial institutions, progress on a new framework for 
the orderly liquidation authority, progress on implementing 
provisions relating to living wills, progress on reducing risk 
and increasing transparency in the derivatives markets, and 
progress on enhancing protections for borrowers and other 
participants in the mortgage markets.
    Despite these positive developments, there are still risks 
to U.S. financial stability. The Council's report identifies 
those risks and makes specific recommendations to mitigate 
them. For instance, it is our judgment that the market 
participants and regulators need to take steps to reduce 
vulnerabilities in wholesale funding markets; that Government 
agencies, regulators, and businesses need to address 
operational risks posed by technology failures, natural 
disasters, and cyber attacks; and that reforms are needed to 
address the reliance on self-reported reference interest rates, 
like LIBOR.
    Mr. Chairman, I want to thank the other members of the 
Financial Stability Oversight Council and all the staff 
involved with the 2013 Annual Report for their hard work and 
dedication. This is an ongoing effort and we look forward to 
continuing to work with you, this Committee, and Congress to 
make sure we have a more resilient and stable financial system.
    With that, I thank you and look forward to answering your 
questions.
    Chairman Johnson. Thank you very much for your testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Mr. Secretary, the Wall Street Reform Act provides 
regulators, including FSOC, a number of tools to enhance 
financial stability. Do you believe Wall Street Reform provides 
the needed tools to not only strengthen our financial system, 
but also to end too-big-to-fail?
    Mr. Lew. Mr. Chairman, I think that the Wall Street Reforms 
enacted in the Dodd-Frank legislation provide powerful tools 
for the regulators, and by creating FSOC, which I chair. I 
think that the policy of Dodd-Frank was very clear, that too-
big-to-fail is an unacceptable policy and it had to end and it 
provided the tools so that it could end.
    As I indicated in my testimony, we have made substantial 
progress in the implementation of Dodd-Frank, but there is 
still more progress to be made. I think that there are a number 
of issues where the different agencies are still determining 
how to set the levels in various areas so that, in the end, we 
will be able to say that too-big-to-fail has ended.
    But one of the principles that I think is very important is 
we must implement Dodd-Frank, and we need to do it quickly, but 
we are also going to need to take an ongoing look at the 
system. One of the problems between the Great Depression and 
the financial crisis of 2008 was that too long a period went by 
when the markets evolved and the regulatory authorities did not 
evolve with the markets and we lost our ability to see what was 
going on and to regulate it effectively.
    So one of the things that, as we implement Dodd-Frank, we 
need to do is make the resolve, the determination to keep 
asking the question, as we finish implementing it and going 
forward, whether we still have the tools we need or whether we 
need more.
    Chairman Johnson. What are you, Mr. Secretary, and FSOC 
doing to ensure key rules that strengthen financial stability 
and end too-big-to-fail are completed as soon as possible? Will 
we see final rules later this year? And when should we expect 
to see SIFI designations made?
    Mr. Lew. Mr. Chairman, I have been Secretary for just under 
3 months and I have had three meetings of FSOC, and in between 
the meetings, I have had numerous conversations and meetings on 
various matters that are still outstanding to implement the 
Dodd-Frank legislation. I have made clear to all of the members 
of FSOC that it is a matter of enormous priority that we 
complete the rules to make the rulemaking process one where all 
the participants in the market know what the policy is and 
where we have taken the steps that we have the tools to use now 
to protect the public from another financial crisis.
    I think that there will be progress this year. We have 
indicated at the last public meeting that we are making 
progress on the nonbank designations. I am hoping that we are 
soon going to be in a position to make a final determination in 
that area. I think that there is ongoing work in all the areas 
that I mentioned in my opening statement, and one of the things 
that I see as my role as Chairman of the FSOC is to make sure 
that we do not measure our progress in months and years, but we 
start to measure our progress in weeks and months.
    Chairman Johnson. How soon do you see SIFI designations 
made specifically?
    Mr. Lew. Well, I do not want to jump ahead of a decision 
that requires a vote of the Council, but we have substantial 
staff work going on between meetings. We have another meeting 
scheduled the week after next. And we are trying to get this 
matter up for a decision as quickly as possible.
    Chairman Johnson. Mr. Secretary, international coordination 
and cooperation is important for successful financial reform. 
Are there specific areas regarding cross-border resolution, 
enhanced prudential standards, insurance, or derivatives where 
more can be done to strengthen coordination with our global 
counterparts?
    Mr. Lew. Mr. Chairman, I actually think we have seen a 
substantial improvement in international cooperation as we have 
gone through this process. The G-20 is working hard on trying 
to coordinate in this area. There are informal groups of 
regulators and central bankers and finance ministers 
coordinating on this. And these are tough issues. They are 
tough issues for each of us within our borders. They are tough 
issues between countries.
    And one of the principles that we are making paramount is 
that our mandate is to protect the U.S. taxpayer and the U.S. 
economy by setting standards at the level that we think is 
appropriate. We are trying very hard in the international 
community to make it a race to the top, not a race to the 
bottom. If we can all agree on high standards, a lot of these 
issues are resolved by having compatible high standards. And I 
think we are making a lot of progress in that regard.
    I know that these are going to be challenging times for 
competition in the financial markets. It is important to us 
that the United States remain a competitive financial market, 
but it is equally important to us that it remain a competitive 
financial market where we have the safeguards to protect 
against having taxpayers left in the position they were in 
after the economic crisis in 2008.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    And, Secretary Lew, I would like to start with a few 
questions about the IRS situation. When did you first become 
aware of the allegations that the IRS was targeting 
conservative groups?
    Mr. Lew. Senator, I first became aware that there was an 
audit underway on March 15, when I had a meeting with the 
Inspector General. It was in my early weeks at the Treasury 
Department. It was a process of really having initial getting-
to-know-you meetings.
    The Inspector General flagged a number of items without 
going into great detail. He mentioned that there was an audit 
of 501(c)(4) activity, told me that there might be troubling 
findings, did not describe them in detail. I then did not learn 
any more about it until it became public.
    Senator Crapo. So, that was my next question. When did you 
first receive confirmation that those allegations were, in 
fact, true?
    Mr. Lew. Well, the first I heard was when it was publicly 
reported a week ago Friday. I was actually at the G-7 meetings 
in the United Kingdom and I was outraged at the time. I did not 
yet have the IG report. I did not actually get the IG report 
until Tuesday, and I was--when I got the report, my immediate 
reaction was to take the steps that I noted in my opening 
statement, to ask for and receive the resignation of the Acting 
Commissioner, to help as the President made the decision to 
appoint a new Acting Commissioner, and then to charge the new 
Acting Commissioner with the responsibilities that I described.
    Senator Crapo. As I am sure you are aware, in Congressional 
testimony last week, the Acting IRS Commissioner admitted that 
the agency planted a question at the American Bar Association 
Conference in order to reveal its actions before notifying 
Congress. Were you personally involved in that decision?
    Mr. Lew. No.
    Senator Crapo. Do you believe that was an appropriate way 
to make the information public?
    Mr. Lew. You know, Senator, as the news reports overnight 
indicated, there were some conversations at a staff level 
between Treasury and IRS. It was the discretion of the IRS to 
decide how to manage this matter. The guiding principle for the 
Treasury Department in IRS investigations is to not interfere 
in any way, to not interfere with the IG's ability to find 
facts, to interview people, to find records, and in no way to 
color the outcome. So I am not aware of any action that was 
taken at the Treasury Department that is inconsistent with that 
well-established practice.
    You know, I was not asked about this. I would have advised 
against doing that. But it was a decision for the IRS to make.
    Senator Crapo. Thank you. And my time is quickly running 
out and I probably will not get to the questions on FSOC in 
this round, but one last point with regard to the Internal 
Revenue Service. As revelations about actions of different 
Federal agencies come forward in any administration, it is 
clear to me why revelations of the type we are seeing relating 
to the IRS bring such concern to the American public, because 
there is a very real and, I think, justified perception among 
the people of the United States that the Internal Revenue 
Service is in many real ways the prosecutor, the judge, the 
jury, and the executioner.
    Now, I understand that there are legal points in the 
process of the IRS exercising its activities at which people 
can get some review. But there is a very real concern, in my 
opinion, that the IRS has such incredible power that abuses at 
the IRS are viewed by the American public with great concern.
    And my question to you is, given the fact the President has 
directed you to quickly implement the Inspector General's nine 
requests, or nine recommendations----
    Mr. Lew. Recommendations.
    Senator Crapo.----what additional steps have you taken to 
restore public trust in the integrity of the IRS and the 
Treasury Department and, frankly, to ensure that no future 
income tax audits will ever again be conducted in this kind of 
a manner?
    Mr. Lew. Well, Senator, first, I cannot say strongly enough 
how unacceptable this behavior was and how outraged I was when 
I learned about it. I think that the IRS process or tax 
administration system has to be beyond politics.
    Now, there is a certain distance between Treasury and the 
IRS in the administration of the tax system for proper reasons. 
The IRS has a semi-independent character because there is the 
concern that in past decades, there was political interference 
in the IRS.
    I will take every step that I can to make sure that in the 
management structure and in the way the IRS conducts its 
business that it is set up in a way to prevent this from 
happening in the future. I have already had that conversation 
with the new Acting Commissioner, who takes over tomorrow, and 
he has a very short period of time to help identify who should 
be held accountable, how we get to the bottom of how the 
management and communication systems broke down to permit this 
to happen, and to look systemically at what other steps need to 
be taken.
    The thing I will not do, I will not cross that line into 
the administration of the tax system because the cure could be 
worse than the disease. We need to make sure that there is no 
political involvement in the administration of the tax system, 
and the management of the IRS is very much the responsibility 
of the Treasury Secretary. The administration of the tax system 
has to be within the IRS and apart from politics.
    Senator Crapo. Thank you. I see my time is up.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman. 
Thank you, Mr. Secretary.
    Mr. Secretary, one of the issues raised by the FSOC's 
report is the systemic risk potentially caused by the default 
of broker-dealers that were relying on tri-party repos. They 
urge, and your report urges, that the markets respond to this. 
Which specific policies or regulatory tools does the Council 
suggest be employed to deal with this potential systemic risk?
    Mr. Lew. Senator, this is a serious systemic concern and it 
is part of a broader set of systemic concerns that have to do 
with wholesale funding, the short-term funding for longer-term 
obligations, because there is a very real risk that if the 
short-term funding ceases to be available and it is not well 
collateralized, that there begins an unraveling process that 
could become systemically very, very damaging.
    The regulation in this area is kind of--is in different 
parts because it is--tri-party repo is three different parties. 
I believe the Fed, Federal Reserve Board, is looking at the 
rules that govern the banks that do the short-term lending to 
the broker-dealers and it is looking at the adequacy of 
collateral and other issues to try and make sure that they are 
taking prudential steps in this area.
    I think the FSOC report identified this along with money 
market funds as a source of real concern, and I must say, it is 
something that I have put a fair amount of attention into as 
Treasury Secretary as Chair of the FSOC.
    Senator Reed. Thank you, Mr. Secretary.
    Following on, in some respects, the Chairman's discussion 
of the SIFIs, in Section 171 of Dodd-Frank, there were enhanced 
capital requirements for the bank-holding companies. In fact, 
Senator Collins of Maine was, I think, instrumental in getting 
this very sensible piece of legislation included in the 
legislation. But as you look at SIFIs, you go beyond the 
typical notion of the bank-holding company that may have 
deposit-taking activities, commercial lending, even investment 
banking activities, and get into the realm of, frankly, some 
large insurance companies. Have you given any thoughts to the 
applicability of this section with respect to the insurance 
companies, in particular?
    Mr. Lew. Senator, I think that the first step is to make 
the determination as to whether or not these nonbanks should be 
designated because they are significant, and the standard is 
whether they--the material distress in those institutions is a 
threat to U.S. financial stability.
    So we have been going through the process in a very orderly 
way of reviewing the potential designations against that 
standard. If the designation is made, the regulation--the 
authority to regulate will go to one or another institution. 
The Federal Reserve Board would have a substantial 
responsibility in this area. I know that there are questions 
that have been raised as to whether or not the tools are 
perfectly fitting for nonbanks and I think that is an issue 
that they will look at and we will look at if designations are 
made.
    Senator Reed. Thank you. You have already indicated in the 
report and in your public comments that the LIBOR, because it 
is a self-reporting and highly subjective measure, probably has 
to be replaced. Any thoughts about, in the short run and the 
long run, how we should replace it and how quickly they have to 
move to replace it?
    Mr. Lew. Senator, the urgency that the FSOC report notes is 
the need for there to be a replacement, because, frankly, there 
is not a ready replacement. LIBOR is something that the markets 
self-designated and it is contractually something that parties 
have signed onto, and there is not an immediate substitute that 
would be available.
    There is an international process that involves regulators 
from multiple nations and market participants from multiple 
nations, and the FSOC report, I think, properly noted the 
urgency of developing an alternative so that if there is a 
transition, there can be an orderly transition, because LIBOR 
is a reference rate that is included in millions of contractual 
agreements, and if there is a move to another rate, it will 
have to be pursuant to those contractual terms.
    So I think there is a great deal of importance that that 
process move speedily and that a reference rate as an 
alternative be available in the event that there is a need to 
move.
    Senator Reed. Just a quick follow-up question, Mr. 
Secretary. It is there. It is ubiquitous. It is in every 
contract--most every contract.
    Mr. Lew. Yes.
    Senator Reed. This is being regulated very loosely, I 
presume, by the British authorities, and are they being very 
aggressive in ensuring, even though it is subjective, that it 
is less subjective than before?
    Mr. Lew. Well, Senator, obviously, there were cases of 
manipulation that were totally unacceptable. I think the 
British authorities have recognized that that was an 
unacceptable set of events and they are determined to not let 
that be repeated.
    I think the challenge is that the rate is an inherently 
uncertain one because it is referenced to overnight lending 
between banks at a time when there is much less overnight 
lending between banks, which is one of the reasons there needs 
to be a reference rate that is less susceptible to 
manipulation.
    Senator Reed. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary.
    Mr. Lew. Good to be here.
    Senator Shelby. Mr. Secretary, it is my understanding that 
the set up at the Treasury Department is the IRS Commissioner 
reports to the Treasury Secretary through the Deputy Secretary 
of the Treasury. Is that correct?
    Mr. Lew. That is correct.
    Senator Shelby. Who was the Deputy Secretary of Treasury in 
2012?
    Mr. Lew. The current Deputy Secretary, Neal Wolin.
    Senator Shelby. Neal Wolin. Have you talked to him about 
the IRS situation?
    Mr. Lew. Yes, I have.
    Senator Shelby. Did he relate to you any knowledge that he 
may have had about what was going on in Cincinnati, where the 
IRS was targeting these conservative groups?
    Mr. Lew. He and I both received the IG's report at the same 
time last Tuesday, and we have had numerous conversations about 
it since then.
    Senator Shelby. OK. But you also testified that you met 
with the Inspector General in March, several months back, 
shortly after taking office, and that the Inspector General 
presented a list of ongoing investigations, including the IRS 
targeting of conservative groups, is that correct?
    Mr. Lew. Well, what he indicated to me was that there was 
an audit taking place of the 501(c)(4) Determination Unit, and 
he did indicate that there were potentially----
    Senator Shelby. Did you pursue that? Did you ask him, why 
would they do such a thing----
    Mr. Lew. Senator----
    Senator Shelby.----or anything? What did you do?
    Mr. Lew. Senator, the practice at Treasury, quite 
appropriately, is when you are notified of an IG investigation, 
you allow the IG to do their work. You do not get in the way. 
You make sure that they have access to whatever they need 
access to to complete their audit. And that is what Treasury 
was doing. I do not think he expected me to take any action at 
that time because I was awaiting his report, which I received 
last Tuesday.
    Senator Shelby. Before you were named Secretary of the 
Treasury and confirmed and in your present job, you were the 
Chief of Staff at the White House, correct?
    Mr. Lew. Correct.
    Senator Shelby. And when did you become the Chief of Staff 
at the White House?
    Mr. Lew. In January 2012.
    Senator Shelby. Twenty-twelve. So when this was going on in 
Cincinnati, you were the Chief of Staff at the White House?
    Mr. Lew. Correct.
    Senator Shelby. And you had no knowledge whatsoever of 
anything amiss dealing with the IRS approval, disapproval, 
delay, or anything of specific groups?
    Mr. Lew. I was not aware of this audit until I met with the 
Inspector General on March 15, 2013.
    Senator Shelby. Had you heard anything at the White House 
regarding----
    Mr. Lew. I was not aware of any specific facts. You know, I 
know the questions had been raised. The fact is, this audit was 
a publicly posted audit in October 2012. So the fact that an 
audit was going on was a matter of public record. I had no 
specific knowledge.
    Senator Shelby. Do you believe that someone at the 
Cincinnati office would just, on their own, start targeting the 
conservative groups, slowing them down, or is that part of a 
culture at the Obama White House?
    Mr. Lew. Senator, I think--I have read the IG report quite 
carefully and I think it is very important to note that there 
is no suggestion of any political interference with the process 
of making these determinations. There is unacceptable behavior 
that happened at the IRS. That has to stop, and it cannot 
happen again. But there was no suggestion of any political 
intervention. And, frankly, the way we manage IG reports is 
meant to keep politics out of any review and to make sure that 
IGs have complete freedom to find whatever facts they find.
    When I met with the IG and he raised the list of concerns 
with me, I said to him what I have said to every auditor I have 
ever worked with. You have my support. If there are problems, I 
want to know about the problems and I want to fix them.
    Senator Shelby. Is the IG report complete now? Is that 
finished?
    Mr. Lew. Well, the audit is complete.
    Senator Shelby. The audit. So could the IG, if he saw fit, 
recommend to the Justice Department possible prosecution of 
people that were abusing the public trust and abusing IRS 
regulations and, perhaps, laws?
    Mr. Lew. Well, the IGs do have the power to make 
recommendations. I am not aware of any recommendation in this 
case, though I am aware that the Attorney General has indicated 
that they will investigate whether or not there has been any 
criminal activity.
    Senator Shelby. As Secretary of Treasury, do you have the 
power to recommend things to the Justice Department for 
possible prosecution of people who abuse the IRS for political 
reasons?
    Mr. Lew. Senator, I believe in this and all matters that 
nobody is above the law. So I think the first question that we 
have is who is responsible and holding people accountable for 
their actions.
    We started the day after the report was made public by 
asking for and receiving the resignation of the Acting 
Commissioner. We will continue, as the new Acting Commissioner 
takes over tomorrow, to hold people accountable for their 
actions because it was unacceptable and we have to restore 
confidence in the IRS and the IRS has to be free of any bias.
    Senator Shelby. Are you concerned at all from your position 
as Secretary of the Treasury that some of this criteria that 
was used in Cincinnati to target conservative political groups 
could have been explicitly or implicitly endorsed by 
individuals higher up in this Administration?
    Mr. Lew. Senator, I have seen no suggestion of any 
political involvement at all. What I have said and what I 
believe is that it was unacceptable and whoever is responsible 
should be held accountable.
    Senator Shelby. But you do not think it just happened out 
of thin air. There was something triggering all this. Was it 
either a culture or somebody pushing it inside? Do you not 
think that happened?
    Mr. Lew. Senator, what I think is that the Cincinnati 
office exercised very poor judgment and used criteria that are 
unacceptable, and we have made it clear that the IRS has to be 
beyond any suspicion of bias.
    Senator Shelby. The IRS should be above suspicion, period. 
Should it not?
    Mr. Lew. Yes.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, and I appreciate your answers 
with reference to the IRS. I think they are pretty forthright 
and determined to make sure we have an agency the American 
public can have faith and confidence in.
    I want to call to your attention as an element of that 
something that I am concerned about which talks about the more 
broader structure and how the agency pursues their 
determinations. You know, in April, the Citizens for 
Responsibility and Ethics in Washington filed a petition with 
the Treasury Department and the IRS looking for a revision in 
their regulations which they believe would clean up the mess we 
are dealing with today, because the statute that Congress 
passed for eligibility says civil leagues or organizations not 
organized for profit but operated exclusively--exclusively for 
the promotion of social welfare are eligible for 501(c)(4)s. 
The IRS regulation for the statute, however, says an 
organization is operated exclusively for the promotion of 
social welfare if it is primarily engaged in promoting in some 
ways the common good and general welfare.
    I do not think that Congress meant ``primarily'' when they 
passed a statute that says ``exclusively.'' And so that is an 
example of how an agency gets away from the Congressional 
intent, and something I hope that when we are looking at the 
totality of this problem, we are pursuing, as well.
    Mr. Lew. Senator, one of the recommendations that the IG's 
report made was to take a look at this very issue, which is 
something that will be going on immediately with the new Acting 
Commissioner coming in.
    Senator Menendez. Now, with reference to what this hearing 
is about, which is the FSOC, let me ask you and follow up on 
something Senator Reed talked about, which I have raised in 
previous hearings on FSOC, which is the LIBOR interest rate. 
And I heard your response, but I want to get a sense of how 
much effort are we putting into finding alternatives here, 
because even you noted that in referencing the LIBOR, you said, 
quote, ``It diminishes market integrity and will be 
unsustainable in the long run.''
    So, how much effort are we putting in seeking alternatives 
to the LIBOR, because if it is not sustainable in the long run, 
we should be starting to deal with that challenge now.
    Mr. Lew. I totally agree, Senator. There is an enormous 
amount of effort being put into it. The Chair of our 
Commodities Futures Trading Commission has been working with 
international regulators on this for some time. I have been at 
several international meetings where finance ministers and 
central bank heads have discussed it. There is a common sense 
that there is an urgency to develop an alternative, because any 
transition has to be orderly. The fact that there is a problem 
is one part of the analysis. There has to be a solution. And at 
the moment, there is not an easy alternative, which is why it 
is so critical, and as the FSOC report noted, a matter of high 
priority to develop a reference rate that could be used as an 
alternative to LIBOR.
    Senator Menendez. I am looking forward to that, because I 
am seriously concerned about LIBOR interest rate manipulation 
and the consequences it has in ensuring the integrity of 
interest rates. That affects everybody, consumers, businesses, 
and communities.
    Second, more broadly, I am also interested in whether any 
of the Federal Reserve or Financial Stability Oversight Council 
projections are based in whole or in part on surveys or 
estimates made by institutions with a financial stake in the 
outcome. In other words, are the projections about inflation 
and other trends in the economy that the Fed uses to take 
monetary policy decisions, or that FSOC uses to make decisions 
about risk to the overall economy, susceptible to the same 
risks of manipulation as LIBOR?
    Mr. Lew. Senator, I would actually have to take that 
question. I read the Federal Reserve Board's economic 
projections. They have a very talented team of economists that 
work there and they, I know, consult all of the major forecasts 
as we do when we do our economic forecasts. What specific 
forecasts they use, I would have to check.
    Senator Menendez. Well, I would like to hear back from the 
Department on that because it makes me concerned that if, you 
know, those who have an interest at the end of the day are 
giving the information that makes the determination, it raises 
the question as to a bit of is this the fox guarding the 
chicken coop. So if we are going to have transparency and 
greater confidence in our financial institutions, we want to 
have that across the spectrum.
    Mr. Lew. Yes, and Senator, I can tell you, from the point 
of view of the Administration's economic assumptions, we do our 
own economic assumptions and we then compare them to the blue 
chips. We compare them to the CBO economic assumptions. We test 
them against the Fed's economic assumptions. So the general 
practice is you do your own economic projections and you see 
where they fit on the spectrum of others, because if there is 
an outlier estimate, that suggests there are questions that you 
would like to ask.
    Senator Menendez. And, finally, I would like to just call 
your attention to two things. One, which has been endorsed by 
the Administration, is Senator Boxer and my Responsible 
Homeowner Refinancing Act. We think we could help millions of 
families unlock economic potential, as well, and we hope that 
this will be an advocacy point because the window is only open 
for so long as interest rates remain historically low and, as 
well, the whole question of our efforts, which I have mentioned 
to you before, on making sure that we unlock the potential, 
which the Administration also has acknowledged, in FIRPTA. 
Those are things that actually will not cost the Federal 
Government money at the end of the day and have a tremendous 
potential to help us move this economy and help homeowners.
    Mr. Lew. Senator, I have to strongly agree that opening the 
opportunity to refinancing to more homeowners who are 
creditworthy is an urgent matter. The window will not remain 
open forever. We do not know exactly when interest rates will 
go up, but when you are at historically low interest rates, the 
thing you know for sure is that, over time, interest rates will 
go up, and it would be just profoundly unfair if middle class 
working Americans who, through no fault of their own, are 
either underwater or have lost some of the value in their home 
because of the financial crisis while they are still 
creditworthy are unable to refinance at lower interest rates. 
It would be hugely beneficial to them in terms of the 
affordability of their housing. It would be hugely important to 
the economy in terms of promoting economic growth. And it is 
something that we do believe legislation like yours would help 
fix and we would very much like to work with you to get that 
enacted.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and Mr. Secretary, 
thank you for being here today.
    I may surprise you in that I am going to mostly stick to 
the subject at hand today.
    I do want to say on the IRS issue, it is my understanding 
when the FBI comes to a company that is accused of corrupt 
practices, a lot of times, they will go to the top, even though 
they may not have known specifically of the activities, and, in 
essence, engage them because of the culture that they have 
created there. And, therefore, they end up being culpable for 
some of the activities at the lower levels.
    I know that you have not been at the Treasury long. I do 
want to say that the indignation that you showed on the front 
end, to a degree, is kind of laughable in that when you have 
the President of the United States and the Vice President and 
other leading folks in our Administration using the type of 
language to describe the folks that were targeted, demonizing, 
villainizing, I think you would expect that bureaucrats at 
lower levels are going to act in a way that they acted. It is 
reprehensible what happened, but it will be interesting to see 
as this goes about whether this culture--really, where it came 
from.
    And again, I know that you have not been there long, but I 
do think that the demonizing and the type of language that was 
used probably caused these bureaucrats to feel empowered to go 
out and do the things that they did, which really offend all of 
our sensibilities, including yours, as you stated on the front 
end.
    Mr. Lew. Senator, I have to say that the President's 
reaction to this was exactly the same as mine. It was outrage--
--
    Senator Corker. I am just saying, it should not have been a 
surprise.
    Mr. Lew. He has taken no step, ever, to condone this kind 
of behavior----
    Senator Corker. I understand.
    Mr. Lew.----and would never. There has been no political 
action that I am aware of.
    Senator Corker. I understand. It is the culture that is 
created when you demonize enemies like that.
    Mr. Lew. And the issue that we are dealing with is whether 
or not the IRS engaged in unacceptable behavior in screening 
applications for----
    Senator Corker. I know exactly what we are----
    Mr. Lew. We are not discussing the merits of the activities 
of the organization. That is a separate issue.
    Senator Corker. I understand.
    Mr. Lew. It is irrelevant. There should be no bias in the 
review of applications.
    Senator Corker. I could not agree more, but I think when 
people, just like in a corporation, when they hear the CEO 
saying things, it affects people on down lower levels. That is 
typically what happens in a case against a company. And I am 
not trying to implicate. I am just saying, people should not be 
surprised that bureaucrats at lower levels took it upon 
themselves to do what they did when, at the highest levels, 
people were being demonized and villainized in the way they 
were.
    So, let us move on to the subject at hand. I wrote a letter 
to the FSOC on March 12 and asked about Section 121, and the 
question is--I have not received a response--do you believe 
that the FSOC has the ability to break up a company that is 
healthy but one that they believe could pose systemic risk 
because of the kind of activities or the size that they are? I 
have not received a response and I am wondering if you might do 
so.
    Mr. Lew. Senator, I have not seen the letter. I apologize. 
I will make sure that I do see the letter. You know, the 
authorities that the FSOC has are to coordinate the activities 
of the different agencies that make up the membership of the 
Council. There are some limited areas where there is the 
authority to take actions, such as the nonbank designations. 
You know, I am happy to look at your letter and get back to 
you.
    Senator Corker. I appreciate that.
    One of the things--Title II in Dodd-Frank talked about 
orderly liquidation, and I think that most of us thought that 
when a company failed, they were going to be liquidated. And I 
think that the FDIC, and I understand for good reason--I had a 
lot of conversations with them about this--they have realized 
these organizations are so complex that you really cannot 
orderly liquidate. And so they have decided, or at least as 
they sit today, you cannot orderly liquidate them. So they have 
come up with a single point of entry where what they are going 
to do is basically attack the shareholders and the creditors, 
rightfully so, at the holding company level.
    One of the things we have been pursuing is making sure that 
there is enough long-term credit held at the holding company. 
We still have not received a response, but I think that--I 
would just love to hear your thoughts on that. I think, 
obviously, what people are going to do is start loaning to the 
subsidiaries, knowing that they are going to stay intact, and 
not at the holding company level if something does not change, 
and I just wondered if you would address that issue.
    Mr. Lew. Senator, the orderly liquidation authority and the 
single point of entry is a huge improvement in terms of our 
ability to manage any future crisis or problems that develop. I 
totally agree that there has to be adequate capital available 
in order for that to work. In general, raising capital 
standards has been a big part of the activity of the last 
couple of years. It is a combination of the things, the 
combined looking at capital, what the content of investment 
activities are, how much leverage there is.
    But the creation of a single point of entry will only work 
if there is the ability to attach the assets that are in the 
equity and the credit, and we would be happy to follow up and 
work with you on that.
    Senator Corker. And I know that, right now, this is not 
your most expert area, if you will. But you would agree, 
generally speaking, that we need to have a certain amount of 
capital at the holding company level. Otherwise, the single 
point of entry will not be useful.
    Mr. Lew. There needs to be sufficient capital at the point 
when there is a liquidation in order for the process to work, 
and how it gets there and how it is maintained is something 
that they are working through right now.
    Senator Corker. And just one more question. I know some 
other people have gone over slightly. We talked a little bit in 
our office, and I was a little disappointed by the meeting, 
about trying to make our financial regulation work a little bit 
better. The community banks around our country are dealing with 
Basel III. It is very complex. And there has been some 
discussion about just a minimum capital ratio for our community 
banks. We still have not resolved that, but I know it is a big 
issue to them and it, candidly, could make them far more secure 
if we just had a simpler capital ratio. I think many of us 
would like to see them raised even at other levels. But is that 
something that you would consider doing, is bifurcating Basel 
III from the smaller community banks around our country and 
allowing them to have a simplified capital ratio that would be 
better for them to operate under and, candidly, better for our 
country?
    Mr. Lew. Senator, I have met with representatives of the 
small- and medium-sized banks. I have listened to their 
concerns, as many Members of this Committee have. And I have 
shared the concerns that I have heard with the regulators who 
have the direct responsibility to take action in that area. I 
think that they share the concern. They have listened, as they 
finalize their regulations, looking for ways to make 
appropriate distinctions to have the burdens be commensurate 
with the risk and not have small institutions that are not a 
source of risk be treated the same as large institutions that 
have a great deal of risk.
    One thing I would be cautious about is history did not 
begin in 2008. We had a financial crisis in the 1980s, which 
was a savings and loan financial crisis. So I think all of the 
regulators have to make sure that they are looking ahead and 
taking prudential steps that address all of the potential 
sources of systemic risk. And there is not a one-size-fits-all 
approach. There are many, many provisions, both of law and of 
rule, that reflect the differences between large and small 
institutions, between money center banks and community banks.
    And I have shared my concern with the regulators. I have 
heard that they share those concerns. And I think we have to 
leave them with a little bit of time to complete the process.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, and welcome, Mr. Secretary.
    I want to make a couple comments on the remarks just a 
second ago from Senator Corker. Our legislation, Senator 
Vitter's and my legislation, Brown-Vitter, addresses a lot of 
that. It sets capital standards at 15 percent for the banks 
over $500 billion. For those over 50, it sets it at 8 percent. 
That is why community banks support this legislation. It also 
pulls us out of Basel III, so it deals with a lot of those 
issues in a way that I want to ask Secretary Lew about.
    FSOC's Annual Report cites risk taking at large 
interconnected banks, what we would call the too-big-to-fail 
banks, those that--the six banks over $500 billion in assets. 
It cites risk taking as a threat to our economy. The report 
says, and I will quote, ``Market participants may continue to 
perceive that some institutions receive special treatment by 
virtue of their size.'' You acknowledged at your confirmation 
hearing that this perception gives the megabanks a funding 
advantage to the capital markets. That is pretty clear. The 
FSOC report shows that the large megabanks get a one or two 
notch up, if you will, boost in their credit rating.
    Standard and Poors said that Brown-Vitter, our legislation, 
which calls for higher capital requirements, will, in fact, 
eliminate the too-big-to-fail funding advantage they get. Dodd-
Frank requires, as you know, FSOC to make recommendations in 
its annual report to promote market discipline.
    So my question, Mr. Secretary, is why has FSOC failed to 
meet this requirement by recommending higher capital 
requirements for these six largest too-big-to-fail banks?
    Mr. Lew. Well, Senator, I think that a number of the issues 
that you have raised or that are raised in your legislation are 
issues that the regulators are working on right now. The 
capital standards have not been finally set. The Basel III 
rules at the Fed have not been finalized. Basel III is a floor. 
It is not a ceiling. There are a number of regulatory 
approaches that would considerably raise the cost of being a 
large bank, and I think we have to see where that process ends 
in order to be able to answer the question whether we have 
fully solved the problem.
    It is certainly the objective to be able to say at the end 
that we have ended too-big-to-fail and that we have eliminated 
any subsidy that might exist. The fact that the market implies 
a subsidy when we have said as a matter of policy that too-big-
to-fail is not our policy is a bit of a challenge, and we are 
saying it as often as we can, but we are going to have to 
demonstrate it with the rules we put in place that make it 
quite costly to be a large bank in terms of the requirements 
that are put in place.
    You know, the one issue that I would like to kind of take a 
little bit of issue with is in replacing Basel III. I worry 
that--Basel III is a floor, not a ceiling, but for a lot of the 
world, it becomes an aspirational goal and we are trying to 
encourage the world to race to the top, not race to the bottom. 
And Basel III is actually working to pull a lot of other 
countries up.
    Right now, when we look at the sources of financial risk, 
one of the things that we worry about, given the global 
interconnection of our financial institutions, is the risk that 
is presented to the United States from undercapitalized 
institutions around the world. So I think we have to get a 
balance in the approach and we look forward to working 
together----
    Senator Brown. Mr. Secretary, you are a sophisticated guy, 
and to make that statement that if we back out of Basel III but 
build 8 percent capital standards for mid-size banks and 15 
percent for large banks when Britain is doing what it is doing, 
and, I mean, London and New York have incredible influence, 
Basel III aside, I mean, incredible influence--but you said 
something else, that the market implies that too-big-to-fail 
may still be around. It is more than implying. It does not 
really matter what Jack Lew or Sherrod Brown or David Vitter 
thinks about this. It is what the markets think, and the 
markets continue to say that too-big-to-fail is alive and well.
    Several members of FSOC have agreed that too-big-to-fail 
banks should have more capital. A recent Huffington Post report 
said the U.S. Treasury has avoided publicly weighing in on this 
debate. This is not really a question, it is more sort of a 
summary statement. But your legal responsibility as FSOC 
Chairman is to promote market discipline and eliminate the 
perception. The perception is still there.
    Dodd-Frank--as I said, you are a sophisticated guy. You 
have seen what has happened when one of the leading bank 
lobbyists after the legislation was signed said, this is 
halftime, and then put an even larger, more powerful legion of 
lobbyists on ways to weaken these standards at the same time 
Basel III may be better than now, but with what it has done 
with risk adjustment and risk assessment and all, you know that 
Basel III is not going to be very strong capital standards. It 
is minimal compared to what the market says we should do. And I 
just hope you take this legal responsibility as Chair of FSOC 
to promote market discipline and eliminate that perception of 
too-big-to-fail.
    Mr. Lew. I want to emphasize things that I think we are 
agreeing on, and I think if you look at the statements made by 
many of the regulators, what I am saying is consistent with the 
statements made by Fed Governor Tarullo, for example.
    We, as the final rules are put in place, need to set 
adequate capital standards and put other requirements in place 
that meet our standard so that we can fulfill the obligation of 
ending too-big-to-fail. I totally agree with that.
    What the market is assuming is partially a political 
judgment. It is a political judgment that the Government would 
jump in again if there is a problem. Our job is to make sure 
that there is a thick enough layer of capital and that there is 
no need to even get to that point. And we are committed to 
making that happen.
    Senator Brown. But the market understands what Basel III is 
about, and the market assumes Basel III will go into effect, 
likely, and that probably Brown-Vitter will not any time in the 
next few months, minimally, and the market still says--
Bloomberg says $83 billion. Lots of other analysts have said 
70, 80, 90 basis points advantage. We are seeing the incredible 
concentration, $2 trillion among the largest banks, increase in 
assets. The largest six banking institutions in this country 
have 60 percent of assets. You know these things. The market 
sees these. Again, it does not matter what you and I and 
Senator Vitter think. It matters what the market is seeing. 
Their fears are not allayed in this and their worst nightmares 
may be realized if we do not act on this.
    Mr. Lew. Well, the only thing I would respond by saying is 
that we are not yet completed in the process. We should make 
more progress this year. We need to make substantially more 
progress this year. And the challenge be, when we have 
completed--when all the rules are completed, can I sit here and 
have this discussion saying that we have made the progress----
    Senator Brown. Well, but the market has also seen how long 
this has taken to implement these rules----
    Chairman Johnson. Senator Heller.
    Senator Brown.----and the weakening of these rules and the 
dilution of them as they are being made.
    I am sorry, Mr. Chairman. Thank you.
    Senator Heller. Thank you, Mr. Chairman.
    Mr. Lew, thank you for being here. Could you repeat the tag 
line that you explained to Mr. Shelby about when you had 
knowledge of the IRS issues and when you had discussions with 
the auditor?
    Mr. Lew. Senator, I had one conversation with the Inspector 
General. It was on March 15. It was a session that was one of 
many meetings I had to meet with senior officials at the 
Department soon after becoming Secretary. I then saw the 
results of the report when they became public.
    Senator Heller. Were you curious to ask, when you talked to 
the Inspector General, about what the impact of that may have 
been?
    Mr. Lew. Senator, what I said to the Inspector General was, 
you have my full support. I want to know the findings when you 
have them and I am going to take actions to fix any problems 
you find.
    Senator Heller. What did the Inspector General say 
specifically, though, that caught your attention?
    Mr. Lew. Senator, it was a very brief conversation on this 
matter. It was noting that there was an audit underway, 
suggesting that there might be troubling findings, and that was 
it.
    Senator Heller. And you did not ask any additional 
questions?
    Mr. Lew. Senator, you know, the IG process is one where a 
head of an agency ought not to be in any way getting in 
between----
    Senator Heller. See, I disagree with that.
    Mr. Lew.----the Inspector General and their work.
    Senator Heller. I have been through a number of audits in 
my political career through Government agencies, and any time--
and you always have preliminary findings and you sit down and 
talk to them before they issue their final report. And I am 
just surprised that you had no additional questions if there 
were troubling findings.
    Mr. Lew. Senator, I think that there is a well-established 
practice at the Treasury Department of not bringing audit 
findings to the Secretary until they are final. Audit findings 
in preliminary form change frequently. They change in 
direction. They change in degree. They are not actionable until 
they are final. At the moment they are final----
    Senator Heller. I understand----
    Mr. Lew.----they come to the Secretary.
    Senator Heller.----but I would think you would be curious 
enough to ask additional questions and want to know more if 
there are troubling findings.
    Mr. Lew. Senator, I said to the IG what I have said to 
every auditor I have ever worked with, which is you need to 
complete their work. If there is a problem, you have my 
commitment of support and we will fix anything that is wrong.
    Senator Heller. Why is Sarah Hall Ingram still employed 
with the IRS?
    Mr. Lew. Senator, the individual you are describing is not 
working in the area that is certainly at issue.
    Senator Heller. She was at the time.
    Mr. Lew. Well, the chronology matters, and she was at the 
time assigned to work on the implementation of the Affordable 
Care Act, which she has been doing since. So she was actually 
not working on this, to the best of my knowledge.
    Senator Heller. That is not----
    Mr. Lew. I can say this, Senator, that any individual who 
is responsible will be held accountable, but we also have to 
wait until the facts are clear.
    Senator Heller. Yes, but she testified in 2011 that she was 
the Commissioner of the Tax-Exempt and Government--while all 
this was going on. She also said in 2012 testimony before the 
Senate Finance Committee on Indian Tribes that she was Tax-
Exempt Status. So she has testified over the last couple years, 
up until recently, that she was the Commissioner over this.
    You know, you named some employees. Will she be held 
accountable?
    Mr. Lew. Senator, what I have said is our policy. Anyone 
whose actions are such that they should be held accountable 
will be held accountable. There will be a new Acting 
Commissioner as of tomorrow. His first order of business is to 
make the factual determinations of who is to be held 
accountable.
    Senator Heller. Thank you. You know, we are talking 
financial security here. This is what this is all about, is 
financial security. You know, there is probably spent more time 
around the kitchen table talking about their finances between 
Mom and Dad and the grandparents than any single issue, and 
probably more so in Nevada, where the highest unemployment, 
highest foreclosures, highest bankruptcies. So you can imagine 
the kitchen table talk that is going on. And there is not any 
agency in America that probably has more control or more input 
on your ability to win or lose, your ability to have financial 
security or not have financial security.
    I just did a tele-town hall meeting recently, over 6,000 
calls. This was last week. And we asked the question about 
hiring 16,000 new IRS agents after everything--by the way, the 
adjectives in this tele-town hall meeting was that the IRS is 
biased, they are corrupt, they are politicized, and they are 
eager to attack White House adversaries. This is coming out of 
my State.
    In essence, I believe the IRS has violated the trust of the 
American people, and when you ask them a question, should we 
hire 16,000 new IRS agents, 61 percent say, absolutely not. So 
I am concerned. If you cannot trust them, if you cannot trust 
them with your own taxes, if every businessman that comes up to 
me that gets audited is wondering if the IRS is doing it for 
political reasons or for reasonable steps and following their 
own regulations, that is a difficult question for me today to 
answer.
    Mr. Lew. Senator, I have said, the President has said, that 
the actions here were unacceptable. But I think it is important 
to note, there is nothing in the Inspector General report to 
suggest in any way that there was any political direction or 
political pressure brought to bear.
    These actions were unacceptable. They have to be corrected. 
They cannot be allowed to happen. We have to restore confidence 
in the IRS. The IRS has to be beyond any suspicion of bias.
    Senator Heller. Do you oppose a Special Counsel?
    Mr. Lew. Senator, there are a lot of investigations going 
on right now. I have made clear----
    Senator Heller. Do you think the IRS is good enough to 
police themselves?
    Mr. Lew. I think that we--there are many committees of 
Congress now looking at it. The Justice Department is looking 
at it. And we have a new Acting Commissioner coming in who is 
going to do a top-to-bottom review beginning tomorrow.
    Senator Heller. For the record, let me just be very clear 
that I want my name in those who are asking for a Special 
Counsel for the IRS.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and thank you, Mr. 
Secretary.
    When Senator Shelby asked a question about the IRS, you 
replied--this is more or less accurate--``I believe in this and 
all matters that no one is above the law.'' And as you said 
that, I was thinking about the situation with HSBC, where, 
essentially for 10 years, they laundered money repeatedly. They 
were admonished to stop doing it. The money laundering was 
related to countries where we have basically embargoes because 
of their policies to acquire nuclear weapons, Iran 
specifically. These were terrorist organizations which put at 
risk our men and women around the world, our companies around 
the world. These were drug organizations in Northern Mexico, 
and some 40,000 people have died from the operations of those 
drug operations. This money laundering took place continuously 
after multiple efforts to stop it and our AG decided not to 
prosecute.
    When you think about your statement that no one should be 
above the law and you look at what HSBC did, are you deeply 
disturbed that this prosecution free zone has been created for 
HSBC and other large financial institutions?
    Mr. Lew. Senator, there were civil penalties that the 
Treasury Department was responsible for that were brought to 
bear.
    Senator Merkley. Well, let us pass that, the civil side, 
because I am talking--these were criminal activities.
    Mr. Lew. It is not my responsibility as Treasury Secretary 
to make decisions on criminal matters. I can tell you my view 
is that no one is above the law, and where there is criminal 
wrongdoing, investigations are appropriate and prosecutions are 
appropriate. I cannot speak to the prosecutorial decisions that 
were made. I was not at Treasury at the time, obviously. But it 
is also not--it is not in my area of responsibility to make 
criminal----
    Senator Merkley. Is it your sense that when a major 
organization is engaged in such longstanding money laundering--
which they have admitted to, so that is not the question, it is 
not a question of the facts--and they are given a free pass on 
criminal prosecution, that that draws into question whether or 
not, in fact, there are organizations that are above the law, 
and what does that convey to ordinary Americans?
    Mr. Lew. Senator, I have testified on a number of occasions 
that my view is no one is above the law. I can state it again, 
but I cannot comment on specific prosecutorial----
    Senator Merkley. OK. Well, I would encourage you to weigh 
in, because your world is a world involving large financial 
institutions, so there is an overlap between your world and the 
AG's world in this regard.
    I wanted to turn to the IG's report regarding the IRS, and 
Senator Menendez noted that we have this unusual situation 
where the statute of the law says that with a 501(c)(4), 
donations will be used exclusively--the word is 
``exclusively''--for charitable activities. But the IRS 
regulation says, and this is the most bizarre thing I have 
encountered in public life, that the word ``exclusively'' means 
``primarily.''
    Now, the IRS has not identified what percentage is 
associated with ``primarily,'' but mathematically, that is 
considered 50.1 percent, if you will. And so how is it 
acceptable that an IRS regulation completely ignores and 
overturns the 100 percent standard set in the law?
    Mr. Lew. Senator, as I responded to Senator Menendez, this 
is one of the issues coming out of this matter that is going to 
have to be reviewed. It is something that we would look forward 
to working with Congress on as we look at it, because this is a 
controversial area. Any action one takes one way or the other 
to change the policy is something that really requires careful 
consideration.
    Senator Merkley. Well, let me be clear. Congress has 
already written the law and it says ``exclusively.'' It is the 
IRS regulation. That is under your jurisdictions.
    Mr. Lew. I understand, and what I am saying is the process 
of reviewing that policy will begin immediately and we will 
consult as we go through it.
    Senator Merkley. OK. It has been noted by many that we have 
a political organization under the law called 527. We have a 
charitable organization called 501(c)(3). We have another 
charitable organization, 501(c)(4), but in that case, the IRS 
regulation has created enormous confusion about what can be 
done, because once you say ``primarily,'' it means half your 
activity can be noncharitable activity, contrary to the clear 
language of the law. That confusion has now sown enormous 
problems, and is it not important in your leadership and 
oversight of the IRS to end that confusion and make the 
regulation consistent with the law for the benefit of all 
concerned?
    Mr. Lew. Senator, there is no doubt that there is confusion 
in this area and it is something that we are now going to need 
to look at, and I will be in a position to respond after there 
is a review.
    Senator Merkley. Thank you.
    Chairman Johnson. Senator Kirk.
    Senator Kirk. Mr. Secretary, I would like to take you back 
to something----
    Chairman Johnson. Turn your microphone on.
    Senator Kirk.----which is Iran's progress toward a nuclear 
weapon and sanctions that Steve on my staff has put together a 
chart showing the effect of the Kirk-Menendez Amendment. I do 
not think I have ever seen actions by the U.S. Senate that have 
been so effective against a rogue nation. This shows the value 
of the Iranian currency, which is called the rial, against the 
dollar, a 74 percent drop since Menendez-Kirk passed the Senate 
on December 1, 2011.
    I would just like to add on that we have a next step for 
you, to follow a Dutch initiative to restrict access to Iranian 
Euro-denominated accounts which would cost the Iranians about 
$30 billion. I hope that you could help the Senate move on to 
take that next step, which is to adopt the Manchin-Kirk 
legislation, S. 892. We already have 21 Senators and several 
Members of this Committee on this legislation.
    If you look at what has happened to the rial, if you look 
at the details, you will see that Iran has lost 50 percent of 
their oil purchasing power, meaning we have significantly 
impacted the purchasing power parity of the mullahs in Iran.
    Mr. Lew. Senator, you and I have discussed this on a number 
of occasions and I agree with you that our sanctions policies 
and the implementation of them on a unilateral and multilateral 
basis has had an enormous impact on the economy of Iran and it 
is making life very hard in Iran. Now----
    Senator Kirk. I have a subset question for you, which is 
what you can do to support the Dutch initiative to cutoff 
Iranian access to Euro-denominated accounts.
    Mr. Lew. So, Senator, I was actually going to say that I 
have raised the issue of access to Euro-denominated accounts 
with many of my counterpart finance ministers in Europe.
    Senator Kirk. Thank you.
    Mr. Lew. I think that after you and I talked about this and 
I brought that to their attention, it actually heightened the 
level of awareness of the issue. It is largely an 
administrative problem in Europe. The law is a strong law and I 
think we have asked them to get that into place where it is 
working better and I would look forward to working with you on 
it going forward.
    Senator Kirk. I very much hope we back our Dutch allies on 
this EU initiative.
    Mr. Lew. Yes. I am not familiar with the specific Dutch 
initiative you are describing, but I will become familiar with 
it.
    Senator Kirk. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and Secretary Lew, 
it is a pleasure to have you here.
    In your written testimony, you made reference to the 
housing finance system. Much attention has been paid in recent 
months to the question of how to return private capital to the 
market and how to resolve the conservatorship of Fannie Mae and 
Freddie Mac. In fact, just last week, Senator Tester and 
Senator Johanns held a hearing on this topic in the Securities 
and Investment Subcommittee. Can you talk about the FSOC's 
recommendation for how to phase in a return of private capital 
to the housing market?
    Mr. Lew. Senator, this is obviously an area where there is 
considerable need for action. We in FSOC have identified it as 
an area that requires attention. It is obviously not a place 
where FSOC has put a specific plan out there. The 
Administration has laid out some broad principles in this area 
and we would look forward to working on a bipartisan basis to 
go forward with that.
    I think that the issue of winding down the conservatorship 
is going to take a while. We are making progress. We are 
determined. We are determined that we will get taxpayers as 
much of their money back as we possibly can for having bailed 
out Fannie and Freddie. It is going to take a while, but we are 
making considerable progress there. I think we are looking 
right now at a housing finance sector which is too dominated by 
Government-issued or Government-guaranteed mortgages. We need 
to get private capital back into the market.
    One of the things that I do think we need to do is finalize 
the rules that are in the qualified mortgage area so that banks 
know what the rules of the road are. I have heard from quite a 
number of bankers that we want to be in the space, we are 
willing to do our part, but we have to know how much it is 
going to cost us, what the capital requirements will be, what 
the risks will be. Those rules are being finalized.
    Going forward, I think we do need to move ahead on next 
steps. The FHFA has taken some steps to bring into place some 
common utilities for follow-on entities to use. But there are 
some big policy issues that we are going to have to grapple 
with and we are going to be continuing to work on that going 
forward.
    Senator Hagan. Do you have a figure as to how much the 
public has spent on Fannie and Freddie?
    Mr. Lew. I would be happy to get back to you with the exact 
number.
    Senator Hagan. Many Dodd-Frank rulemakings still need to be 
completed. What rulemakings--you mentioned QM and QRM--need to 
be completed to start this process? Do you have any sort of 
timeframe?
    Mr. Lew. Well, I think that----
    Senator Hagan.----because QRM Rulemaking has been going on 
for quite a while.
    Mr. Lew. You know, it has been going on for quite a while. 
Obviously, I have been Secretary for just under 3 months.
    Senator Hagan. I understand.
    Mr. Lew. I have made it a matter of enormous priority for 
me personally to be driving this process. I think we also have 
to look at what was going on in the first 2 years of Dodd-
Frank's existence. There was an enormous effort to repeal Dodd-
Frank. There was an effort to put every delay in the way of 
implementing the rules that you could imagine.
    I think, since November, that has changed. What I am 
hearing now is there is a desire for things to settle down, for 
there to be certainty. There is an acceptance that Dodd-Frank 
is the law of the land and it is not going anywhere.
    Now, I have actually stepped on the accelerator. I have 
gone to all the regulators and said, you know, this is more 
than just a question of implementing Dodd-Frank. This is a 
question of public trust in the Government's ability to 
implement important policy that it said it is going to 
implement. And I am going to, at the risk of becoming tiresome, 
keep this at the top of the agenda of all the agencies that are 
part of FSOC.
    Now, I do not have the ability to direct specific action in 
every case. This is more a question of coordination and kind of 
moral suasion. But I will use every tool that I have to get 
decisions made in these areas.
    Senator Hagan. Thank you for that. We will be following up.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman, and thank you, 
Secretary Lew, for coming in the job that you have been put 
into at a most appropriate time.
    With that being said, a lot of the questions have been 
asked and talked. I would like to talk more or less about just 
the whole premise of what is going on with the American people 
in West Virginia, how we feel. Government should be your ally 
and should be your partner, and I think people believe in West 
Virginia, Government has become the adversary relationship and 
it is basically not your friend anymore. It could be your 
enemy.
    And the IRS has always been the elephant in the room, if 
you will, and the gorilla, and just seeing how it has gotten to 
the level that we have gotten to now, thinking that people 
could be targeted. I am not taking this. I have got individuals 
that believe they have been targeted, and they might be on the 
same political--or they did not have anything political. They 
thought it was just a pervasive attitude of the institution 
that has gotten so large and how this whole was permeated.
    And I guess in saying that--and I am not talking just about 
the IRS. I am talking about Government, in general. If 
anybody--and I do not know how you would feel about this, if 
you would even want to comment about it--anybody in any agency 
that would use, for their own personal agenda or a political 
agenda against a class of people or an individual, should not 
be maybe losing their job, losing the benefits they have 
accrued, and even facing jail time. I do not know how--you 
know, right now, we are just hitting on the IRS, but it is all 
through Government.
    Mr. Lew. Senator, I have tried to state in the clearest 
terms that I possibly can how unacceptable it is for this 
behavior to have happened.
    Senator Manchin. Sure.
    Mr. Lew. I have spent most of my career in public service. 
I hold myself and everyone that I work with to a very high 
standard. There is no place, no place for bias in the 
implementation of our tax laws or our other laws. We have to be 
implementing the law fairly and equally.
    I would be reluctant to go beyond the facts that are in 
front of us now and assume any broader issue. I think that it 
is a bad enough set of facts that we are looking at, that we 
need to understand them, take the actions to fix them, look in 
the IRS and make sure that if there are systemic problems, we 
fix them.
    But I would not--I would be reluctant to accept the notion 
that this is a pervasive problem unless presented with facts to 
that effect. We have to be vigilant to make sure it does not 
ever become that. We have to be a Government of laws. We have 
to be observing standards of neutrality in the way we implement 
the laws and fairness. And that is what I believe in and it is 
what I have always tried to accomplish.
    Senator Manchin. Well, I would like to, with your 
leadership, if especially the Treasury Department could work 
more as my partner----
    Mr. Lew. I would look forward to it.
    Senator Manchin.----and my friend, I would appreciate very 
much. I know the citizens of West Virginia would be very 
appreciative of that.
    With that being said, in the late 1980s and early 1990s, we 
investigated the Keating Five, if you recall in history, for 
the savings and loan crisis. That crisis may not have been as 
big as our 2008 collapse that we had, but it was far-reaching 
and it cost the Federal Government billions of dollars. We not 
only investigated bank executives, we investigated U.S. 
Senators. And I think the people are looking back now, saying, 
why are we not--why has it gotten so big? Has it gotten to the 
point to where these banks are getting so large that they are a 
protected class or species, and the people that are involved in 
those at the highest level cannot be touched because we are 
afraid of a collapse?
    Mr. Lew. Senator, I have indicated today and on many 
previous occasions----
    Senator Manchin. Sure.
    Mr. Lew.----that I do not believe that anyone is above the 
law and I do not think that there should be any acceptance of 
that principle.
    Senator Manchin. Well, a bank that is too-big-to-fail, if 
the bank gets that big, and that is the pervasive thought, 
should it not be you all's recommendation that we should not 
let banks get to the size that they are that they get in that 
position?
    Mr. Lew. So, I think there is a question of how you make 
sure that we have ended too-big-to-fail. One approach is to say 
there is a certain limit or you can divide up what activities 
can be held, take place in any one institution.
    Another approach is you use the tools that we have in Dodd-
Frank and in other regulatory authorities to make it more 
expensive to be big and it becomes a market determination that 
limits the size.
    Senator Manchin. So the bill that Senators Brown and Vitter 
are working on, basically with capital requirements, is 
something that you are looking at?
    Mr. Lew. Well, as I said to Senator Brown, I think we have 
to see where the rules end up when Dodd-Frank is fully 
implemented to see if it solved the problem.
    Senator Manchin. You can understand the citizens' concerns, 
basically, that there is a protected--the people that caused 
the problem, and now the community banks and the regional banks 
are feeling the fallout of that and seem to be getting hit the 
hardest putting capital back on the streets to get the economy. 
But the people that caused the problem are the people that 
benefited the most from the turn of the economy.
    Mr. Lew. Well, Senator, in the aftermath of the financial 
crisis, Congress took bold action in passing powerful tools, 
which we are now using, and we are determined to be----
    Senator Manchin. I appreciate your explanation, also why it 
has taken us so long to get Dodd-Frank implemented, because 
there is a lot of criticism about why are we sitting on our 
hands, and this political toxic atmosphere that we live in 
every day is probably the reason that it has been. I hope it 
stops. Thank you, sir.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you very much, Mr. Chairman and 
Ranking Member Crapo. Thank you for having this hearing.
    I also want to say, thank you both very much and thank you, 
Secretary Lew, for starting out and taking time to remember the 
families in Oklahoma. I just want to add that I will hold them 
all in my prayers. It is a terrible catastrophe there, and 
thank you for mentioning it publicly.
    Thank you for being here, Secretary Lew. I want to start by 
talking about a different Brown Amendment, and that is you may 
remember that Senator Brown joined with Senator Kaufman back 
during the Dodd-Frank debates to introduce an amendment that 
would have broken up the country's largest banks. The amendment 
had bipartisan support behind it, but it did not pass, and we 
all know what has happened since then.
    The four biggest banks, banks that were considered too-big-
to-fail before the crisis, are now 30 percent larger than they 
were just 5 years ago, and there have been huge scandals, some 
of which have been mentioned today--the LIBOR scandal, the 
infamous London Whale, the deliberate foreclosure fraud. It has 
been one scandal breaking on top of another. And Attorney 
General Holder has said that the Justice Department cannot 
consider litigation against Wall Street banks without factoring 
in potential systemic economic impact that could result. And 
while we all know there are parts of Dodd-Frank that are there 
to address the problem, even Federal Reserve Chair Bernanke has 
admitted that too-big-to-fail is not yet over.
    So, I know you were elsewhere in the Obama administration 
during the Dodd-Frank debate and that Treasury's attention is 
now elsewhere, but I would like to read you a quote from a New 
Yorker article from that time. This is what a senior Treasury 
official said about the Brown-Kaufman too-big-to-fail 
amendment. ``If we,'' meaning the Treasury Department, ``had 
been for it, it probably would have happened. But we were not, 
so it did not.''
    So, Mr. Secretary, the Treasury Department said its 
opposition to breaking up the big banks is an important reason 
that my colleague, Senator Brown's, amendment did not pass. The 
question I want to ask now is has the Treasury Department's 
position changed or are you still opposed to capping the size 
of the largest financial institutions?
    Mr. Lew. Senator, I have tried to indicate in my response 
to other questions today that ending too-big-to-fail is our 
policy and we are determined to do it----
    Senator Warren. And let me just focus you in here, though, 
Mr. Secretary. The question is not, are we all trying to aim 
toward ending too-big-to-fail. My question is specifically 
about capping the size of the largest financial institutions. 
It was an amendment that nearly passed. It had bipartisan 
support. The Treasury opposed it, and according to the 
Treasury's own folks, it was the Treasury opposition that 
killed off breaking up the big banks, and I want to know if 
Treasury has changed its position.
    Mr. Lew. As you noted, I was not at Treasury at the time--
--
    Senator Warren. Fair enough.
    Mr. Lew.----so I cannot speak to the exact decisions that 
were made there. I think we are on a path now which is the 
right path, which is to implement Dodd-Frank and to then take 
stock when we are done implementing Dodd-Frank. I think that 
there have been a lot of calls for legislation in this area and 
I have said the same thing to people who wanted very different 
kinds of changes, that our job right now is to implement a very 
important law with very powerful tools and then to take stock 
of whether or not there are other actions that are required, 
and I think that this is not the time to be enacting big 
changes to Dodd-Frank or to the regulatory system. We need to 
implement the law.
    Senator Warren. But the question is, though, Secretary Lew, 
this was about concentration. We all said back in 2008, 2009, 
the problem that caused the financial crash, in part, was 
concentration in the banking industry, and what do we see now? 
We see more concentration. One of the tools considered for 
Dodd-Frank was a way to end that concentration.
    So let me try the question a different way. How big do the 
biggest banks have to get before we consider breaking them up? 
They are 30 percent bigger now than they were 5 years ago. Do 
they have to double in size, triple in size, quadruple in size, 
before we talk about breaking up the biggest financial 
institutions?
    Mr. Lew. Senator, there are many changes that have taken 
effect since the passage of Dodd-Frank. We have better 
capitalized banks. We have better visibility into the banks. We 
have the derivatives being traded in a way where we can see 
what is going on and understand it. So there were many things 
going on that contributed to the financial crisis and we are 
making good progress. We still have more progress to make. I--
--
    Senator Warren. So, are you saying, Mr. Secretary, that if 
we have increasing concentration in the banking industry, if 
the biggest banks double in size, that that does not worry you?
    Mr. Lew. I think that what I am worried about is have we 
taken into account the measures that prevent systemic risk from 
being the kind of threat it was in 2008. Size is one factor, 
but size is not the only factor, and----
    Senator Warren. Fair enough that it is not the only one, 
but size is one that is growing and size is one that is 
powerfully important.
    Mr. Lew. And I think if we look at what happened from 2008 
until now, part of the reason that some of those institutions 
grew is that there were other institutions that failed that had 
to be reorganized, and it was an unusual period of time where 
we were seeing, ironically, a shrinking of the number of 
players because of the failures of institutions.
    So there are many things going on, and I am not trying to 
avoid addressing the question of too-big-to-fail. I am not 
trying to--I am trying to address quite clearly that that is an 
unacceptable policy. But I think we have to take into account 
all the factors that together add up to systemic risk.
    Senator Warren. Fair enough, Secretary Lew, but I really 
think the evidence suggests that concentration is one of those 
factors and that when we see the largest financial institutions 
getting bigger and bigger, that it tells us that we are not 
clearly on the path to resolving too-big-to-fail----
    Mr. Lew. But in fairness, we have not yet seen the capital 
surcharges that will be the responsibility of larger firms 
fully in effect, and as----
    Senator Warren. Fair enough.
    Mr. Lew.----it gets more expensive, I suspect it will 
change----
    Senator Warren. But what we have also seen is one scandal 
after another in these largest financial institutions. It is 
clear they have not changed their risk-bearing practices, nor 
have they decided that they are suddenly going to start 
following the law. So I think, at best, we have evidence going 
both ways. And we are playing with the U.S. economy here, the 
worldwide economy.
    I apologize, Mr. Chairman, for running over in this 
exchange.
    Chairman Johnson. Mr. Secretary, the Ranking Member and I 
have a brief follow-up question.
    Mr. Secretary, the FSOC report highlights the growing 
cybersecurity threat to the financial sector, including the 
recent attacks. What can FSOC and each of its members do to 
ensure that the financial sector remains vigilant in guarding 
against cyber threats?
    Mr. Lew. Senator, I think cybersecurity is an enormous 
threat and it is something that is, unfortunately, going to be 
with us as a threat going forward. So it is not an issue where 
we can take an action and say we have solved it because there 
are bad forces out there that are always trying to get a step 
ahead of any protections that are put into place.
    I think that the first thing we have to do is to make sure 
that we have the kind of coordination where threats are well 
understood and communicated and where there is collaboration 
within the industry and between the regulators and the 
industry. In my first weeks in office, I met with bank 
executives to make that point and to make it clear that we 
needed them to step forward and participate and we needed to be 
part of that process.
    I think that if you look at the Executive Order that the 
President issued last year, he has gone about as far as we can 
go with administrative authority to put in place the tools to 
deal with this. It would be very helpful to get legislation 
that would make it even more likely that firms would do the 
kind of cooperative work that is needed to be as vigilant as we 
can possibly be.
    One of the things that I particularly am concerned about is 
large institutions have the capacity to do more on their own 
than small institutions do, and I think we have to be very 
concerned that the risks are not just to the big money center 
banks. The risks are much broader than that and the risks are 
faced by institutions that need the kind of collaboration and 
cooperation that we are talking about to have the full capacity 
to respond should there be a threat.
    But the short of it is, we are going to have to remain 
committed and vigilant, using all of the tools that we have, 
both to detect and address these issues, and it is going to 
take real cooperation between the financial services sector and 
the Government officials.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman, and Mr. 
Secretary, I had just two questions to follow-up on, one on the 
IRS and one on FSOC.
    I will start off with the IRS. You had indicated in your 
response to Senator Heller, I believe, that the Inspector 
General's finding indicated that there was not a political 
motivation to the IRS's activities----
    Mr. Lew. I said no political pressure was brought to bear.
    Senator Crapo. And you may have noticed, I had to step out 
for a few moments. That was to go down to the Finance 
Committee, and I had an opportunity to ask some questions of 
the Inspector General at that time, and a couple of very 
important things came out there.
    First of all, he made it clear that the report does not 
make a finding that there was no political pressure or 
political motivation. It was that they were not able to find 
it. And I asked them what they looked into. He said, we asked 
the IRS employees who we interrogated, or interviewed, whether 
they had a political motivation. He said none of them admitted 
to having such. I asked him if they were under oath. He said 
no, that he had taken no testimony or information under oath, 
and that it was his opinion that--I think he said to me that he 
thought further investigation was necessary into this.
    It seems to me that at this point, what we have is a 
coalition of targeting certain politically grouped individuals 
or organizations, and I will go over again, I mean, we have 
the, as I said earlier, an agency that is perceived by many in 
America to be the prosecutor, the judge, the jury, and the 
executioner in major parts of their lives who is setting up 
criteria to look for those who are involved with the tea party, 
who use the word ``patriots,'' who use the words, ``make 
America a better place to live,'' or criticize how the country 
is run, and then later expanding this search or this what they 
call a BOLO list, a ``be on the lookout list,'' for those who 
want to educate on the Constitution and the Bill of Rights or 
who are focused on addressing social economic reform in the 
United States.
    The question I have to you is, are you or is the IRS taking 
the position that, somehow, this coalition of audits that 
focused on people from these political perspectives just 
happened accidentally or statistically came about in a way that 
was not driven by a decision that was aimed at this particular 
political philosophy?
    Mr. Lew. Senator, I am aware of no evidence that suggests 
any political interference in any way. There is a sharp wall 
between the Treasury Department and the IRS on the 
administration of the tax system. There is--you know, it is a 
well, well respected line. And no evidence has been brought to 
bear. I read the report. The report said that there was no 
evidence of any political pressure. People can ask questions 
more and more, and I am not discouraging they ask those 
questions. But there is no evidence. So we should be clear. 
There is no evidence.
    Senator Crapo. And the extent of the evidence at this point 
is interviewing those who were implementing the BOLO list and 
asking them if they were politically motivated.
    Mr. Lew. Senator, we have said that anyone who is 
accountable should be held accountable, but there has to be 
evidence to hold people accountable.
    Senator Crapo. Do you believe the lack of evidence means 
that there is no political, or----
    Mr. Lew. Senator, I am not going to speculate on facts that 
I cannot see and evidence I do not have.
    Senator Crapo. OK. Just one other real quick question, Mr. 
Chairman, please, on the FSOC.
    You had indicated that you thought there was quite a bit of 
progress being made in resolving the cross-border issues, and I 
just wanted to follow up, because on April 18, you received a 
letter from nine foreign ministers of different countries----
    Mr. Lew. Yes. I know----
    Senator Crapo. These are not regulators. These are----
    Mr. Lew. No, no. I know they are counterparts.
    Senator Crapo. Yes.
    Mr. Lew. I have spoken with many of them about it. I, 
frankly, think the letter was ill-informed, that there were 
conversations going on between the SEC and the CFTC making real 
progress on that. I am not going to speculate about the reasons 
that other political officials write letters, but I did say to 
them quite directly that it was not a helpful way to promote 
conversations with these two independent regulatory agencies, 
to write a letter like that that did not even reflect the state 
of affairs. So I would not read too much into that letter.
    The question is, where are they going to end up? They are 
making progress. They are not finished yet. But they have been 
working quite effectively to try to deal with this and I think 
that letter was something that did not reflect where this 
situation was at the time.
    Senator Crapo. All right, thank you, and thank you, Mr. 
Chairman, for that extra time.
    Chairman Johnson. Secretary Lew, I thank you for your 
testimony today and your continued focus on matters important 
to a civil financial system.
    This hearing is adjourned.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]
    [Prepared statement and response to written questions 
supplied for the record follow:]
                   PREPARED STATEMENT OF JACOB J. LEW
                 Secretary, Department of the Treasury
                              May 21, 2013
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to testify today regarding the 
Financial Stability Oversight Council's (Council) 2013 annual report.
    My testimony today will describe the conclusions and 
recommendations made by the Council in its third annual report. The 
report represents extensive collaboration among staff of Council 
members and member agencies to provide Congress and the public with the 
Council's assessment of significant financial market and regulatory 
developments, potential emerging threats to financial stability, and 
recommendations to strengthen the financial system. The annual report 
is a key way that the Council can share its collective perspective and 
provide information on its activities to Congress and the public.
    Since the Council's last annual report, our financial system has 
grown stronger in a number of ways:

    Bank capital has increased significantly in terms of both 
        quality and quantity. This substantial amount of additional 
        capital gives these companies a much stronger ability to 
        withstand a future downturn.

    Companies' liquidity and funding profiles have strengthened 
        dramatically as well. As higher liquidity and funding 
        requirements are implemented in the United States and 
        elsewhere, the financial system will be much less vulnerable to 
        the destabilizing runs that we experienced during the crisis.

    Progress on comprehensive reform of the over-the-counter 
        derivatives market has reduced risks in the system, increased 
        transparency, and strengthened investor protections. 
        Collectively, these measures help make financial institutions 
        and the financial system as a whole safer and stronger. In 
        March, mandatory central clearing of certain swap transactions 
        began. More categories of swaps and an expanded universe of 
        financial institutions will be subject to central clearing 
        requirements as the year progresses, reducing risks to the 
        financial system and to the financial institutions engaging in 
        these transactions.

    We are seeing continued strengthening of the equity, fixed 
        income, and housing markets. And implementation of the Dodd-
        Frank Act and international coordination on G-20 reform 
        priorities have achieved significant progress toward 
        establishing a more resilient and stable financial system, both 
        domestically and globally.

    On the topic of Dodd-Frank implementation, the Council and its 
member agencies continue to steadily put reforms in place. The Council 
will soon complete its initial evaluation of nonbank financial 
companies for potential designation, which would lead to supervision by 
the Federal Reserve Board (Federal Reserve) and enhanced prudential 
standards. The Council has already designated eight systemically 
important financial market utilities for similar increased oversight.
    The Federal Reserve issued a new framework for the consolidated 
supervision of large financial institutions in December. The Federal 
Deposit Insurance Corporation (FDIC) continued to implement the new 
framework for the orderly liquidation authority. The Federal Reserve 
and the FDIC are implementing provisions related to living wills by the 
end of this year. Further, U.S. regulators are continuing to make 
significant progress on implementing the Basel III accords to set 
internationally agreed heightened capital and liquidity standards, 
which are expected to be fully phased in by 2019.
    The Securities and Exchange Commission (SEC) and the Commodity 
Futures Trading Commission (CFTC) continue to fill in the remaining 
pieces of a new comprehensive oversight framework for derivatives that 
will reduce risk and increase transparency. The Consumer Financial 
Protection Bureau finalized new mortgage rules that provide additional 
protections for borrowers. And the Federal Housing Finance Agency 
(FHFA) has taken steps to facilitate increased participation by the 
private sector in the mortgage markets, including the recent 
announcement of an effort to develop a common securitization platform 
that will facilitate a more efficient and sustainable housing finance 
infrastructure.
    Despite these positive developments, there are still risks to U.S. 
financial stability. The Council's report identifies those risks and 
makes specific recommendations to mitigate them. The Council's 2013 
report focuses on seven areas in particular:
    First, market participants and regulatory agencies should 
        take steps to reduce vulnerabilities in wholesale funding 
        markets that can lead to destabilizing fire sales.

    Second, significant reform in the housing finance system is 
        still needed.

    Third, Government agencies, regulators, and businesses 
        should take action to address operational risks from internal 
        control and technology failures, natural disasters, and cyber-
        attacks, which can cause major disruptions to the financial 
        system.

    Fourth, as recent developments with the London Interbank 
        Offered Rate (LIBOR) have demonstrated, reforms are needed to 
        address the reliance on voluntary, self-regulated, and self-
        reported reference interest rates.

    Fifth, financial institutions and market participants 
        should be cognizant of interest rate risk, particularly given 
        the historically low interest rate environment of the past few 
        years.

    Sixth, long-term fiscal imbalances that have potential 
        economic and financial market impacts should be addressed.

    Finally, regulators need to continue to keep a close eye on 
        potential threats to U.S. financial stability from adverse 
        developments in the global economy.

    I would now like to go into each of these areas in more depth.
Key Areas of Focus of the 2013 Annual Report
Wholesale Funding Markets
    The Council remains concerned that vulnerabilities in wholesale 
funding markets could lead to destabilizing fire sales. Specifically, 
run-risk vulnerabilities related to money market mutual funds (MMFs), 
which became apparent during the financial crisis, still remain, 
despite an initial set of reforms implemented in 2010. In November 
2012, the Council issued proposed recommendations for public comment to 
implement structural reforms of MMFs to reduce the likelihood of runs. 
Council members should also examine whether similar reforms are 
warranted for other cash management vehicles.
    Vulnerabilities to fire sales also remain in the tri-party repo 
market, particularly with respect to borrowers such as securities 
broker-dealers. The Council's report recognizes the positive steps that 
have been taken in the last year to reduce the reliance on 
discretionary intraday credit, but recommends coordinated efforts by 
market participants and financial regulatory agencies to address the 
risks associated with the tri-party repo market, notably by better 
preparing investors and other market participants to deal with the 
consequences of the distress or default of a dealer or other large 
borrower.
Housing Finance Reform
    The housing finance system requires significant reform to enhance 
financial stability and facilitate the proper functioning of 
residential lending markets. The residential mortgage market still 
relies heavily on Government support, while private mortgage activity 
remains muted. The Administration has long called for winding down the 
GSEs as part of comprehensive housing finance reform and remains 
focused on bringing back private capital into the market. Although 
progress was made in 2012, including finalization of some key mortgage 
rules, the completion of additional reforms is needed to add clarity to 
the market and attract more private capital. Specifically, the Council 
recommends that the FHFA continue to pursue changes such as a common 
securitization platform, model legal agreements, improvements to the 
mortgage recordation and title transfer system, and an improved 
compensation system for mortgage servicers.
Operational Risks
    The Council remains concerned about operational risks stemming from 
certain types of trading activities, natural disasters, and 
cybersecurity threats. Trading activity is becoming more dispersed and 
automated, raising concern among Council members about operational 
failures. The extremely high speeds at which markets operate can 
compound the overall impact of even small operational failures. In 
2012, equity markets experienced a number of control problems, 
including those related to the initial public offerings of BATS and 
Facebook, and losses by Knight Capital. The SEC has moved to strengthen 
the automated systems of important market participants, and the Council 
recommends that regulators continue to monitor the adequacy of internal 
control and corporate governance processes of financial institutions 
and market utilities.
    Additionally, Superstorm Sandy tested the financial infrastructure, 
including critical financial utilities, demonstrating the need for 
regulators to assess their policies and guidance in the area of 
contingency planning. Cybersecurity also continues to be a central 
concern, with financial institutions subject to frequent and varied 
cyber attacks. The Council recommends that senior management at 
financial institutions remain engaged on these issues, improve 
communication within and between firms, and that Government agencies 
enhance information sharing between the public and private sectors. 
However, only so much can be done without comprehensive cybersecurity 
legislation that allows for enhanced information sharing while 
addressing legitimate privacy and liability concerns. I am hopeful that 
continued bipartisan engagement will produce legislation that addresses 
these critical issues.
Reference Interest Rates
    Over the past year, the Council has actively monitored developments 
related to LIBOR and other reference interest rates and their potential 
impact on financial stability. The combination of a weak governance 
structure and a small number of actual transactions in the unsecured, 
interbank lending market underpinning LIBOR reduce market integrity and 
raise financial stability concerns.
    Investigations by regulators and law enforcement agencies across 
the globe concerning manipulations and false reporting of LIBOR and 
similar rates have exposed the structural vulnerabilities of these 
benchmarks, which provide significant incentives for misconduct.
    The Council recommends that U.S. regulators cooperate with foreign 
regulators, international bodies, and market participants to promptly 
identify alternative interest rate benchmarks that are anchored in 
observable transactions and are supported by appropriate governance 
structures, and to develop a plan to transition to new benchmarks. The 
Council recommends that steps be taken to promote a smooth and orderly 
transition to alternative benchmarks, with consideration given to 
issues of stability and to mitigation of short-term market disruptions.
Interest Rate Risk
    Yields and volatility in fixed-income markets are very low by 
historical standards, which may be providing incentives for market 
participants to ``reach for yield'' by investing in lower-grade credit, 
investing in longer-maturity assets, or increasing leverage.
    Yield-seeking behavior is apparent in several markets. The issuance 
of high-yield bonds reached a historical high in the fourth quarter of 
2012. While underwriting standards remain conservative in many markets, 
there are some examples of loosening standards. In particular, certain 
real estate investment trusts, which are highly exposed to a rise in 
interest rates, have grown considerably in recent years. The report 
makes specific recommendations to regulators and risk managers of 
banks, broker-dealers, insurance companies, and pension funds to be 
vigilant and scrutinize how potential changes in interest rates could 
adversely affect their risk profiles.
Impacts of Fiscal Policy
    The strength of our financial system ultimately depends on the 
strength of our economy. Over the last several years, political fights 
over fiscal policy in Washington--including the debt ceiling crisis in 
2011 and failure to come to bipartisan agreement on a balanced package 
to replace the sequester as required by the Budget Control Act--have 
hurt confidence, which is a key driver of economic activity. The 
sequester that went into effect earlier this year was intended to be a 
policy so painful and mutually disagreeable that it would ensure 
bipartisan action to replace it, but instead, the harsh and 
indiscriminate across-the-board spending cuts were triggered, creating 
a self-inflicted drag on economic growth and job creation. According to 
the nonpartisan Congressional Budget Office, sequestration will shave 
off more than half a percent of economic growth in 2013 and cost as 
many as 750,000 full-time equivalent jobs. To guard against future 
threats to our economy and financial stability, policymakers should 
avoid using last-minute resolutions to fiscal policy matters such as 
the debt ceiling and deficit reduction as a negotiating tactic.
    It is important to note that since 2011 the President and Congress 
have ultimately been able to come together to enact a series of 
agreements that have resulted in historic reductions to our budget 
deficits. Taken in combination, these bipartisan reforms--not counting 
the effect of sequestration--have locked in more than $2.5 trillion in 
deficit reduction over the next 10 years, with more than two-thirds of 
that reduction coming from spending cuts. And today, because of these 
policies and other factors, the deficit is falling at the fastest rate 
in decades. Now, while more can and should be done to reduce the risk 
of long-term fiscal imbalances through sensible measures, shrinking the 
budget deficit cannot be the only focus of fiscal policy. Job creation 
and economic growth have to be a top priority.
Global Economic and Financial Developments
    Although external financial threats appear to have decreased over 
the past year, they remain a risk to U.S. financial stability and 
economic activity. Global demand has slowed and the euro area economy 
is on course to contract for the second year in a row. In the advanced 
economies, there is a need to recalibrate the pace of fiscal 
consolidation to promote economic growth and employment. Fiscal 
sustainability remains a concern, but is much easier to achieve in a 
growing economy. The lack of demand rebalancing also remains a risk to 
the U.S. economy. China, for example has avoided an abrupt slowdown, 
but concerns persist about its ability to transition away from its 
export and investment-driven growth model toward increased domestic 
consumption. Nevertheless, Council members and member agencies will 
continue to monitor global economic and financial developments to 
respond to any threats that may arise.
    In addition to those seven key areas that the Council has focused 
on, I would now like to spend a little time describing the Council's 
work over the last year and the progress that has been made on 
financial reform.
Activities of the Council
    Since its 2012 annual report, the Council has continued to fulfill 
its core mission. The Council met 12 times in 2012 to discuss and 
analyze emerging market developments, threats to financial stability, 
and financial regulatory issues. There were public sessions at three of 
those meetings. Through regular meetings of the Council and its staff 
committees, the Council plays an important role in facilitating 
coordination among Federal and state financial regulators.
    The Council is working to evaluate nonbank financial companies for 
potential designation for supervision by the Federal Reserve and 
enhanced prudential standards. The Council publicly announced that, in 
September and October 2012, it advanced an initial set of nonbank 
financial companies to the third and final stage of the evaluation 
process. The Council discussed its ongoing analysis at its most recent 
meeting on April 25, and it expects to vote on proposed designations of 
an initial set of nonbank financial companies in the near term.
    The Council is also authorized to issue recommendations to a 
regulatory agency when financial activities and practices are creating 
risk for U.S. financial markets. In November 2012, the Council issued 
for public comment proposed recommendations to the SEC with three 
alternatives for reform to address the structural vulnerabilities of 
MMFs. The Council is currently considering the public comments on the 
proposed recommendations. If the SEC moves forward with meaningful 
structural reforms of MMFs before the Council completes its process, 
the Council expects that it would not issue a final recommendation to 
the SEC. However, if the SEC does not pursue additional reforms that 
are necessary to address MMFs' structural vulnerabilities, the Council 
should use its authorities to take action in this area.
    Finally, the Council has authority to designate systemically 
important financial market utilities for enhanced risk-management 
standards. The Council designated eight systemically important FMUs 
last summer, and those entities are now subject to increased oversight 
by the SEC, CFTC, and Federal Reserve.
Progress on Financial Regulatory Reform
    The annual report also discusses the significant progress that 
Council members and member agencies, both individually and 
collectively, have made implementing Dodd-Frank Act reforms. As a 
result of these activities, consumers have access to better information 
about financial products and are benefiting from new protections. 
Financial markets and companies have become more transparent. And 
regulators have become better equipped to monitor, mitigate, and 
respond to threats to the financial system.
    Since the Council's 2012 annual report, Dodd-Frank Act 
implementation included further strengthening of supervision, capital, 
and risk-management standards for financial institutions and financial 
market utilities; procedures for stress tests of financial 
institutions; rulemakings related to the orderly liquidation authority; 
regulation of the derivatives markets to reduce risk and increase 
transparency; new standards to protect mortgage borrowers and reduce 
risks in the mortgage market; and other measures to enhance consumer 
and investor protection.
    Nevertheless, important work remains to complete the implementation 
of financial reform. The Council, its members, and its member agencies 
will continue to strengthen coordination of financial regulation both 
domestically and internationally. In developing and implementing the 
international financial regulatory reform agenda, the Council members 
support the development of policies that promote a level playing field, 
mitigate regulatory arbitrage, and address regulatory gaps primarily 
through members' engagement with the G-20 and the Financial Stability 
Board (FSB). In particular, the Council is focused on:

    Strengthening the regulation of large, complex financial 
        institutions. The Council supports global efforts led by the 
        FSB, to impose consistent standards on large, complex financial 
        institutions across jurisdictions.

    Developing an international framework to resolve global 
        financial institutions. Effective cross-border cooperation will 
        be essential to implementing the FDIC's orderly liquidation 
        authority under Title II of the Dodd-Frank Act. The United 
        States has substantially satisfied the FSB's Key Attributes of 
        Effective Resolution Regimes for Financial Institutions, and 
        continues to work with international counterparts to ensure 
        robust resolution coordination.

    Increasing the transparency and regulation of over-the-
        counter (OTC) derivatives. The Council encourages continued 
        development of these reforms, as they are essential to increase 
        transparency and to mitigate risk, including cross border 
        spillovers, that could arise from the OTC derivatives market. 
        The FSB has been critical to facilitating international 
        coordination on this issue.

    Data resources and analytics. The Council continues to 
        recommend that improvement in data standards should be a high 
        priority for financial firms as part of their risk management 
        process and for the regulatory community--not just in the 
        United States, but globally. The Council recommends that the 
        Office of Financial Research continue to work with the 
        Council's member agencies to promote data standards for 
        identification of legal entities, financial products, and 
        transactions, and to improve access to standardized, aggregate 
        data by the regulators. The Council also recommends that cross-
        border exchange of supervisory data among supervisors, 
        regulators, and financial stability authorities continues to be 
        facilitated in a manner that safeguards the confidentiality and 
        privacy of such information.
Conclusion
    The actions of the Council and its member agencies have made the 
financial system more stable and less vulnerable to future economic and 
financial stress. The Council will continue to focus on the risk areas 
I have discussed today, while remaining vigilant to new risks, to 
promote financial stability and strengthen the U.S. financial system.
    I want to thank the other members of the Financial Stability 
Oversight Council, as well as the staff of the members and their 
agencies, for the work they have done over the past year and their 
efforts in preparing the 2013 annual report.
    We look forward to working with this Committee, and with Congress 
as a whole, to continue to make progress in creating a more resilient 
and stable financial system.

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RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM JACOB J. 
                              LEW

Q.1. Last year, FSOC used its Wall Street Reform powers to 
propose money market fund reform recommendations to the SEC. It 
is expected that the SEC will take action on money market funds 
the week of June 5th. Does FSOC expect to do more regarding 
money market funds?

A.1. As noted in the Council's Proposed Recommendations 
Regarding Money Market Mutual Fund Reform, the SEC, by virtue 
of its institutional expertise and statutory authority, is best 
positioned to implement these reforms. We commend the SEC for 
continuing the work to address remaining vulnerabilities to our 
financial system presented by MMFs. I don't want to prejudge 
the outcomes of the administrative procedures process, and I 
encourage public comment on the proposals.

Q.2. Regarding the low interest rate environment, what steps 
are FSOC and its member agencies taking with regulated entities 
to ensure that the appropriate risk management controls are in 
place if there is a sudden rise in rates or a widening of 
credit spreads?

A.2. The Council's 2013 annual report makes a number of 
recommendations to regulators and risk managers of banks, 
broker-dealers, insurance companies, and pension funds to be 
vigilant and scrutinize their risk management practices 
concerning interest rate risk. With respect to banks and 
broker-dealers, the report recommended that regulatory agencies 
and private sector risk managers should scrutinize whether 
potential sudden changes in interest rates could adversely 
affect the risk profiles of financial firms. For insurance 
companies, the report said that the Federal Insurance Office 
and State insurance regulators should continue to monitor the 
interest rate risk of insurance companies, and State insurance 
regulators should continue to ensure that the interest rate 
risk scenarios run by insurance companies are sufficiently 
robust and appropriately capture these and other economic 
risks. The Council also recommended that the appropriate 
authorities continue to examine how a prolonged period of low 
interest rates has affected risk management practices and 
preparedness of pension funds in the event of a sudden reversal 
of these historic trends.
    The Council's Systemic Risk Committee, as part of its 
ongoing work, will continue to work with its members to monitor 
this threat in addition to the activities undertaken in 
response to the Council's recommendations.

Q.3. The 2012 FSOC annual report identified the euro area 
crisis as one of the major threats to financial stability, with 
large U.S. financial institutions being highly interconnected 
with euro area banks and bearing a high degree of exposure to 
European markets. The report noted that such interconnectedness 
exposed U.S. financial institutions to contagion and spillover 
effects from a systemic event in the euro area. The 2013 FSOC 
annual report does not identify the euro area crisis as a major 
threat to financial stability noting that such threats 
decreased in 2012, but the euro area crisis is far from 
resolved. Why does the FSOC view the euro area crisis as less 
of a threat to U.S. financial stability? What measures has FSOC 
or individual agencies taken to reduce such exposures of U.S. 
institutions to contagion from a systemic event in the euro 
area?

A.3. Europe is in a more stable position today because the 
European Central Bank and euro area leaders have demonstrated 
their shared commitment to stand behind the euro, and have put 
in place a powerful set of financial tools in support of member 
states undertaking difficult reforms. Nonetheless, risks remain 
in some eurozone countries where unemployment is high and 
reforms will take some time to complete.
    As our largest economic partner, Europe is an important 
source of investment and jobs for the United States, and our 
recovery has been affected by headwinds from the euro area. 
Europe's financial crisis has curbed demand for exports from 
the United States, reduced foreign direct investment (FDI) at 
home, and adversely affected the retirement savings of American 
workers. Direct U.S. financial sector exposure to the countries 
in the euro area with IMF programs, such as Greece, is limited, 
although it is difficult to estimate all possible exposures to 
the euro area more broadly.
    As a result of the significant actions we took after the 
crisis, particularly ensuring that our banks have strong 
capital bases and improving our regulatory systems, our 
financial system is better prepared to handle a Europe-driven 
financial shock or shocks from other external sources. 
Furthermore, many U.S. financial institutions, including our 
major banks and money market funds, have substantially reduced 
their exposure to the European economies most under pressure. 
Direct money market exposure to banks in peripheral Europe has 
been effectively eliminated. Finally, U.S. regulators are in 
active dialogue with U.S. financial institutions to not only 
ensure that financial exposures to Europe are being monitored 
appropriately, but to also improve their ability to withstand a 
variety of possible financial contagion stress scenarios 
emanating from Europe.
    The Financial Stability Oversight Council (FSOC) and its 
member agencies will continue to carefully monitor the 
potential risks that could emerge from the peripheral European 
sovereign debt crisis.

Q.4. The 2013 FSOC report noted progress on two of the three 
key vulnerabilities in the tri-party repo market--intraday 
credit and risk management. It also highlights fire sales in 
the aftermath of a broker-dealer failure as a major 
vulnerability. What steps are the FSOC and its member agencies 
planning to take to address and mitigate risks from fire sales?

A.4. The Council's 2013 annual report recognizes that a major 
broker-dealer's default could threaten financial stability as 
the broker-dealer's creditors liquidate the collateral pledged 
against their tri-party repo lending. The fire sales of this 
collateral could destabilize financial markets and amplify the 
negative consequences of such a default. Reforms made since the 
financial crisis, such as higher capital and liquidity 
requirements, a significant reduction in intraday credit 
provided to broker-dealers by clearing banks, and other 
operational improvements, have reduced the risk of a dealer 
default. However, the Council urged continued coordinated 
efforts by market participants and financial regulatory 
agencies with relevant authority to address the remaining risks 
associated with the tri-party repo market, particularly a 
potential fire sale of sizable collateral by lenders in 
reaction to the default of a large broker-dealer borrower. The 
report recommended better preparing investors and other market 
participants to deal with the consequences of a dealer's or 
other large borrower's distress or default.

Q.5. Please discuss FSOC's analysis of the short-term wholesale 
funding market as a potential systemic risk. Is there inter-
agency coordination of rules and reforms underway, such as MMF 
reform, tri-party repo reform, enhanced capital & liquidity 
requirements, and others, to help mitigate the risks if it is a 
concern?

A.5. The Council's 2013 annual report explains how, although 
many of the least-stable funding structures that failed in the 
crisis have disappeared, important risks associated with 
wholesale funding markets remain. In particular, run risks in 
sectors such as money market mutual funds (MMFs) and broker-
dealers continue to persist.
    In the past year, the Council took concrete steps in 
supporting the implementation of structural reforms to reduce 
the likelihood of run risks of MMFs by issuing proposed 
recommendations for reform under Section 120 of the Dodd-Frank 
Act.
    On June 5, 2013, the SEC approved a notice of proposed 
rulemaking for MMF reform that contained elements of the 
Council's recommendation. The Council will actively monitor the 
SEC's progress implementing these necessary reforms to 
determine whether further Council action may be necessary to 
adequately mitigate the run risk described in the Council's 
2013 annual report.
    Similarly, there has been some progress in reforming the 
tri-party repo market and increasing the resiliency of that 
market. The reliance on intraday credit extended by the 
clearing banks has begun to decline, and as additional changes 
are made to the settlement process this reliance should be 
largely eliminated by the end of 2014.
    The Council's work related to wholesale funding markets is 
a good example of the Council's collaborative approach, as it 
works with its members and member agencies to implement and 
coordinate reforms to short-term funding markets.

Q.6. Please describe how the Office of Financial Research is 
fulfilling its analytical support role for FSOC as envisioned 
by the Wall Street Reform Act.

A.6. The OFR has been active in providing key data and analysis 
that have supported the Council's work. These activities have 
included and will continue to include:

   LSupplying data and analysis for the work of the 
        Council and its Nonbank Financial Company Designations 
        committee, including calculation and analysis of 
        threshold metrics for Stage 1 of the Council's nonbank 
        financial company designations process, and analysis of 
        the asset management industry;

   LSupporting the Council's Systemic Risk Committee by 
        reporting regularly on developments in financial 
        markets and activities, in financial stability 
        measures, and in macroeconomic indicators;

   LAcquiring, managing, protecting, and securely 
        making available to the Council and to its own 
        researchers data needed for assessing and monitoring 
        threats to financial stability;

   LLeading meetings of and supporting the Council's 
        Data Committee and associated work regarding data gaps 
        and data standards;

   LProviding data, analysis, and staff support for 
        producing the Council's 2013 annual report; and

   LConducting in-depth analysis and reporting on risks 
        related to short-term funding markets, money market 
        funds, credit default swaps, and other areas.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM JACOB J. 
                              LEW

Q.1. In a September 2012 report, GAO recommended that the 
Secretary of Treasury take 10 specific actions to improve the 
accountability and transparency of the FSOC. As the FSOC 
Chairman, what specific steps have you taken to address GAO's 
recommendations?

A.1. The GAO's report made a number of constructive 
recommendations on ways in which the Council could further 
enhance its transparency, including improving the Council's Web 
site. Subsequently, the Council's Web site was reintroduced, in 
December 2012, to improve transparency and usability, to 
improve access to Council documents, and to allow users to 
receive email updates when new content is added. Additionally, 
the Council will continue to refine the appropriate approach in 
balancing its responsibility to be transparent with its central 
mission to monitor emerging threats to the financial system. 
Council members frequently discuss supervisory and other 
market-sensitive data during Council meetings, including 
information about individual firms, transactions, and markets 
that require confidentiality. In many instances, regulators or 
firms themselves provide nonpublic information that is 
discussed by the Council. Continued protection of this 
information, even after a period of time, is often necessary to 
prevent destabilizing market speculation or other adverse 
consequences that could occur if that information were to be 
disclosed.
    The Council also took into account the GAO's 
recommendations during the drafting of the Council's 2013 
annual report, including by more clearly articulating the 
Council's intent to assign responsibility for acting on 
recommendations to specific member agencies. Where applicable 
and appropriate within the Council's authority, timeframes were 
also included.
    The GAO also recommended that the Council adopt a more 
formal and quantitative approach to identifying risks to 
financial stability. The Council's Systemic Risk Committee has 
worked with the OFR to develop a monitor of key financial and 
economic data and to highlight areas of potential concern.
    The Council will continue to examine and refine, as 
appropriate, its governance and other processes to ensure it is 
operating efficiently and effectively.

Q.2. The FSOC 2013 Annual Report states ``The SEC, by virtue of 
its institutional expertise and statutory authority, is best 
positioned to implement reforms to address the risks that money 
market funds present to the economy.'' It is my understanding 
that the SEC is likely to propose additional money market fund 
reforms this summer. At that time, how will the FSOC make it 
clear that it will take no further action on money market 
funds?

A.2. We commend the SEC for continuing the work to address 
remaining vulnerabilities to our financial system presented by 
MMFs. We don't want to prejudge the outcomes of the 
administrative procedures process, and we encourage public 
comment on the proposals. If the Council elects not to issue a 
final Section 120 recommendation, it will consider what, if 
any, public comment is appropriate at that time.

Q.3. GAO has recommended that FSOC prioritize the threats to 
the financial system that are identified in its annual reports. 
However, none of the FSOC annual reports provide any such 
prioritization. As FSOC Chairman, what do you believe are the 
top two or three threats to U.S. financial stability?

A.3. In its 2013 annual report, the Council organized its 
recommendations around a framework of seven specific themes 
that require attention. First, market participants and 
regulatory agencies should take steps to reduce vulnerabilities 
in wholesale funding markets that can lead to destabilizing 
fire sales. Second, significant reform in the housing finance 
system is still needed. Third, government agencies, regulators, 
and businesses should take action to address operational risks 
from internal control and technology failures, natural 
disasters, and cyber-attacks, which can cause major disruptions 
to the financial system. Fourth, as recent developments with 
the London Interbank Offered Rate (LIBOR) have demonstrated, 
reforms are needed to address the reliance on voluntary, self-
regulated, and self-reported reference interest rates. Fifth, 
financial institutions and market participants should be 
cognizant of interest rate risk, particularly given the 
historically low interest rate environment of the past few 
years. Sixth, long-term fiscal imbalances that have potential 
economic and financial market impacts should be addressed. 
Finally, regulators need to continue to keep a close eye on 
potential threats to U.S. financial stability from adverse 
developments in the global economy.
    These seven themes represent the risk areas most in need of 
attention in the coming year, based on the Council's collective 
judgment.

Q.4. The final rule describing the procedures that the Council 
intends to follow when making nonbank SIFI determinations 
states that the Office of Financial Research (OFR) is analyzing 
the extent to which there are potential threats to U.S. 
financial stability arising from asset management companies. 
Will you commit to making that analysis public and allowing 
public comment before FSOC takes any action based on the 
results of that analysis?

A.4. The Council, its member agencies, and the Office of 
Financial Research (OFR) are analyzing the extent to which 
asset management companies may present potential threats to 
U.S. financial stability. As part of this analysis, OFR staff 
have met with market participants, including asset managers, to 
learn more about their activities and business models. This 
work is ongoing and the Council has not yet determined the 
extent to which the research may be made public. However, were 
the Council to determine that it would be appropriate to 
develop additional metrics that would be used to identify asset 
management firms for further evaluation and potential 
designation, it intends to provide the public with an 
opportunity to review and comment on any such metrics and 
thresholds, in accordance with past practice.

Q.5. Does FSOC plan to make any recommendations to the Federal 
Reserve for tailoring the prudential standards for nonbank 
financial firms, such as asset managers, insurance companies 
and broker-dealers? Do you believe that a Basel III capital 
standard is a proper standard to be applied to nonbank 
financial firms?

A.5. The Council is responsible for designating nonbank 
financial companies for Federal Reserve supervision and 
enhanced prudential standards. Section 165 specifically permits 
the Federal Reserve to take into account differences among 
nonbank financial companies under its supervision when 
prescribing prudential standards. We expect that the Federal 
Reserve will consider this discretionary authority when 
finalizing its rulemaking.

Q.6. If the lack of international coordination on financial 
reform measures leads to a protectionist backlash, does this 
present a threat to the financial stability of the United 
States?

A.6. Strong global coordination on financial reform is 
occurring in the G-20, Financial Stability Board (FSB), 
standard setting bodies, and among nations. The United States 
has taken a leading role in an extensive international effort 
to improve financial regulation around the globe, and Federal 
banking and markets regulators are playing an important part in 
coordinating this effort globally so that implementation across 
national authorities is consistent and timely.
    We support existing efforts by major financial centers in 
Europe and Asia to adopt strong measures similar to our Dodd-
Frank Act and encourage further progress where needed to help 
maintain a level playing field for U.S. firms and to reduce the 
opportunity for regulatory arbitrage, while raising standards 
globally. Without international consensus, we risk a race to 
the bottom.
    Just as we have international standards for capital 
requirements for banks, we have proposed establishing global 
standards for margin requirements for over-the-counter 
derivatives, and this work is underway among the G-20. Uniform 
margin requirements will provide buffers against future shocks, 
while supporting a level playing field.
    A protectionist backlash could lead to reduced cross-border 
capital flows and less than optimal economic growth. 
International coordination is essential to avoid this outcome.

Q.7. While you were at the White House, you had the opportunity 
to look into the Department of Labor's (DOL's) Employee Benefit 
Security Administration's (EBSA's) proposed change to the 
definition of fiduciary. DOL is currently working on its 
planned re-proposal. Among the items lacking in the original 
proposal was a comprehensive cost-benefit analysis. In 
addition, the rule proposal by the EBSA has significant 
ramifications for all Individual Retirement Accounts (IRAs), 
including those that are not employee benefits. As you know, 
the IRA is a retirement tax account overseen by the IRS. As 
Treasury Secretary, will you cede IRS authority and oversight 
of IRAs to DOL in light of the fiduciary rule proposal? As FSOC 
Chairman, how will you ensure that any DOL re-proposal contains 
cost-benefit analyses for the new rule proposal as well as any 
class exemptions issued in conjunction with the rule that 
includes an assessment of the impact on the availability and 
cost of investment advice, particularly in rural areas? How 
will you ensure that any DOL re-proposal contains a cost-
benefit analysis that includes an assessment of the impact on 
the Securities and Exchange Commission's ability to fulfill its 
mission as the primary regulator charged with protecting 
investors?

A.7. The Department of Labor (DOL), not the Treasury 
Department, has the authority to define who is a fiduciary with 
respect to retirement plans and IRAs. This definition applies 
to both the ERISA Title I provisions enforced by DOL and to the 
Internal Revenue Code. Accordingly, Treasury and DOL have 
engaged in discussions regarding some aspects of the DOL's 
original proposal. The two agencies will continue to be in 
contact with one another regarding any re-proposal with respect 
to the fiduciary definition, including any issues within IRS's 
jurisdiction. My understanding is that DOL will continue to 
coordinate with the Securities and Exchange Commission, the 
Commodity Futures Trading Commission, and others as well to 
ensure that rulemakings relating to investor protection are not 
inconsistent or unduly burdensome. Questions concerning the 
details of that coordination are best addressed to DOL.
    We also understand that DOL, in connection with its effort 
to assess the costs and benefits of re-proposed regulations, 
requested information from the financial services industry and 
received somewhat limited data in response, and that it has 
been in the process of assessing costs and benefits using all 
available data.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JACOB J. 
                              LEW

Q.1. I was pleased to hear the HARP program was extended an 
additional 2 years, through 2015. However, many of my 
constituents are left out of the program because of the HARP 
eligibility cutoff date of June 2009. The deadline has already 
been changed once from March 2009 back to June 2009, and I 
would say that the program extension itself represents a 
substantive change that nullifies any perceived, ``Covenant 
with Investors''. Can you explain the impact that an extension 
of the HARP eligibility date would have on homeowners, 
investors, and the overall housing market? Do you think leaving 
the cutoff date as is, makes it appear that the FHFA weighs 
investors? interests above borrowers, who contractually are 
equals? What would be the benefits to the overall economy if we 
let millions of responsible homeowners take advantage of 
today's historically low interest rates by removing barriers to 
HARP refinancing?

A.1. The enhancements to HARP have made a significant impact. 
These changes were designed to simplify eligibility and 
valuation requirements, make deeply underwater borrowers (above 
125 percent LTV) eligible for refinancing, lower the fees 
associated with refinancing, harmonize representation and 
warranty standards, and resolve mortgage insurance concerns. 
Since the program's inception in 2009, nearly 2.5 million 
homeowners have lowered their monthly payments by refinancing 
through HARP. The continued high volume of HARP refinances is 
attributed to record-low mortgage rates and the program 
enhancements implemented in 2012.
    The Administration is committed to ensuring that all 
responsible homeowners have the opportunity to refinance and 
take advantage of today's low interest rates. As you know, the 
President has called for broad-based refinancing to provide 
access for all borrowers who are current on their payments to 
refinance without the many barriers currently faced by 
homeowners including underwater borrowers. Since many borrowers 
who purchased their homes within the past 4 years have built up 
positive equity, they should be able to refinance without a 
program such as HARP that was designed to help underwater 
borrowers.

Q.2. In April, I held a hearing on the foreclosure abuses that 
have, and continue, to go on. I was pleased to see the CFPB 
adopted new rules on mortgage servicing standards in January 
2013. I have long advocated for increasing consumer protections 
on borrowers before foreclosures, encouraging loan 
modifications, eliminating dual tracking, placing limits on 
foreclosure fees, and creating an appeals process for those 
denied loan modifications as well as a mediation program. In 
the FSOC report, you note that this rulemaking, along with 
others, is critical to improving mortgage origination. Can you 
explain how these mortgage servicing standards impact the 
housing market, mortgage originations, and the overall economy?

A.2. As you know, in its 2012 Annual Report, the FSOC 
recommended that ``the FHFA, HUD, CFPB, and other agencies, as 
necessary, develop comprehensive mortgage servicing standards 
that require consistent and transparent processes for consumers 
and promote efficient alternatives to foreclosure where 
appropriate.''
    In January 2013, the Consumer Financial Protection Bureau 
(CFPB) issued mortgage-servicing standards for bank and nonbank 
mortgage servicers. Some of the changes were specifically 
mandated by Dodd-Frank, but many were a response to improper, 
and in some cases illegal, default-servicing practices, 
observed following implementation of the Administration's 
foreclosure prevention efforts in early 2009. The CFPB 
standards were modeled in part on the standards set by 
Treasury's Making Home Affordable Program, which also served as 
a basis for the National Mortgage Settlement standards.
    The national mortgage servicing standards being implemented 
by CFPB and prudential banking regulators will align incentives 
and provide clarity and consistency to borrowers and investors.

Q.3. As you know, in April, I held a Subcommittee hearing on 
the settlements that stemmed from the major mortgage servicer 
foreclosure abuses. It seems as though the consumers are 
getting the short end of the stick, while the major banks are 
continuing to see record profits. We know the Independent 
Foreclosure Review was a failure, and there are reports that 
homeowners are not getting the ``consumer relief'' that the 
regulators anticipated with the National Mortgage Settlement. 
Can you tell me what you will do to ensure these borrowers are 
finally placed at the front of the line? What do you plan to do 
get more money into the hands of these borrowers?

A.3. Treasury shares your commitment to ensuring that all 
Government foreclosure prevention programs reach eligible 
borrowers in need of assistance. Toward that end, we recently 
extended the Making Home Affordable Program (MHA) until 
December 31, 2015, and continue to work with States in 
Treasury's Hardest Hit Fund program to make sure relief is 
provided while the need is still great.
    Treasury supports the objectives of the National Mortgage 
Settlement and the Independent Foreclosure Review; however, we 
are not involved in monitoring the compliance or implementation 
of these programs. While Treasury did provide technical 
assistance on MHA mortgage servicer compliance during the 
negotiations of the National Mortgage Settlement, Joseph Smith, 
the Monitor of the National Mortgage Settlement, is responsible 
for compliance, monitoring, and enforcement of the agreement.

Q.4. What can be done to improve the Financial Stability 
Oversight Council's identification of both the financial risks 
facing the American people and solutions to lessen those risks?

A.4. The Council's assessment of threats to the financial 
system is a collaborative process, driven by review of the best 
information available from the markets, institutions, industry, 
academia, and expertise from Council members and their 
respective agencies and staffs. Council members have been and 
continue to be highly engaged in assessing emerging threats and 
vulnerabilities.
    The Council committee structure includes a standing 
Systemic Risk Committee established to identify, analyze, and 
monitor vulnerabilities in the financial system and emerging 
threats to stability. This committee, which is composed of 
staff of Council members and their agencies with supervisory, 
examination, data, surveillance, and policy expertise, gathers 
information from Council members and their agencies to assess 
risks that affect financial markets and institutions. The 
Systemic Risk Committee is responsible for interagency 
coordination and information sharing regarding issues that 
could affect financial stability, and reports to the Council's 
Deputies Committee. Also, as noted above, the Council's annual 
report is a product of the Council's risk-monitoring function. 
It reflects the ongoing work of the Systemic Risk Committee and 
the collective judgment of the members of the Council.
    The Council is also supported by the Office of Financial 
Research (OFR), which was created by the Dodd-Frank Act to 
improve the quality of financial data available to 
policymakers, and to develop better tools and analysis to 
understand the risks in the financial system. The Council's 
Systemic Risk Committee has worked with the OFR to develop a 
monitor of key financial and economic data and to highlight 
areas of potential concern, and it continues to be refined. The 
monitoring tool, now known as the OFR Markets Monitor, is 
shared across Council members and member agencies and provides 
a systematic approach to sharing key financial risk indicators.
    The Council continually seeks ways to improve how it 
identifies and acts on risks to financial stability.

Q.5. In October, Superstorm Sandy hit the coast of New Jersey, 
eventually leaving nearly 6 million people in 16 States without 
power, and taking the lives of many Americans. As a result of 
the storm, your report identified a few areas of improvement to 
strengthen business continuity and resiliency. You found that 
clear communication between market participants, at all levels, 
is essential to strengthening resiliency. You also found that 
the proper planning and testing of contingency systems, key 
operations, and personnel would enhance the reliability of our 
markets. Can you detail some of the deficiencies that were 
found, and what role you play in ensuring these recommendations 
are followed?

A.5. The 2013 FSOC Annual Report identified several areas where 
further improvements in the resiliency and business continuity 
of individual financial institutions would strengthen the 
financial system. The sector would benefit from further 
development and coordination of protocols for determining if 
and when to open or close markets and if and when to deploy the 
use of back-up sites. Similarly, institutions should continue 
to develop and implement business continuity plans that take 
personnel considerations into account. Expanded planning and 
testing, involving major market participants as well as 
financial market utilities and providers of services from other 
sectors, would enhance reliability and market-wide confidence 
in back-up systems. Continual assessment of cross-industry and 
cross-sector interdependencies will further ensure reliable 
redundancy. The Treasury, in its capacity as the Sector-
Specific Agency for the Financial Sector and as Chair of the 
Financial and Banking Information Infrastructure Committee, 
will continue to engage with industry and government partners 
to address these necessary improvements. Additionally, the 
Federal financial regulators are working with financial 
institutions to increase the resiliency of the sector.

Q.6. The National Housing Trust Fund was authorized in 2008, 
and the law called for the Trust Fund to be funded by 
contributions from Fannie Mae and Freddie Mac (the GSEs). 
However, the GSEs went into conservatorship shortly after the 
Trust Fund was authorized, and FHFA temporarily suspended the 
contributions due to the financial conditions experienced by 
the GSEs at the time. The GSEs have reported profits for 
several consecutive quarters. Given this return to 
profitability, will FHFA be directing the GSEs to start making 
contributions to the National Housing Trust Fund? If not, why 
not? Do you have the legal authority to continue suspending the 
payments considering that the GSEs are now profitable?

A.6. It is more appropriate for FHFA to answer this question. 
FHFA is an independent regulator, and, as conservator of Fannie 
Mae and Freddie Mac, is exclusively responsible for making 
decisions related to their operations, including whether to 
fund the National Housing Trust Fund.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MERKLEY FROM JACOB J. 
                              LEW

Volcker Firewall
Q.1. Nearly 3 years since Dodd-Frank became law, the Volcker 
Firewall and many other key reform provisions are still not 
final and in effect.
    Please provide an update on your coordination activities 
relating to the Volcker Firewall and identify any obstacles to 
issuing a final rule in the near term.

A.1. Since the issuance of the Council's study on the Volcker 
Rule in January 2011, Treasury has been working hard to fulfill 
the statutory mandate to coordinate the regulations issued 
under the Volcker Rule. Although not a rule-writing agency, 
Treasury has been focused on achieving a consistent rule across 
the five rulemaking agencies. Treasury is working with the 
rulemaking agencies to review the 18,000 public comments and 
finalize the rules. As I have said publicly, the Volcker Rule 
is a particularly important priority to complete this year. I 
will continue to push for swift completion of a rule that keeps 
faith with the intent of the statute and the President's 
vision.
Trade
Q.2. Recent news reports indicate that some are pressing trade 
negotiators in the United States and Europe to include 
financial regulation as a major topic of upcoming trade 
negotiations between the United States and Europe.
    Considering the important work already underway at the 
Financial Stability Forum, the Basel Committee, and other 
international financial regulatory cooperation venues, do you 
believe that trade agreements should be used for the 
international coordination of financial regulations and 
regulators, or remain focused on the traditional matters of 
market access for trade in goods and services? Are you 
committed to ensuring that any provisions included in a trade 
agreement do not undermine the independence and high standards 
of U.S. financial regulation and regulators, including their 
ability to make determinations regarding substituted compliance 
of foreign regulatory systems or to establish prudent 
regulation of foreign institutions operating in the United 
States?

A.2. The United States and European Union have launched 
negotiations on a Transatlantic Trade and Investment 
Partnership (TTIP). In these negotiations, as in all our free 
trade agreements, the Administration intends to pursue robust 
market access commitments for financial services.
    Prudential and financial regulatory cooperation should 
continue in existing and appropriate global fora, such as the 
Financial Stability Board (FSB), the Basel Committee on Banking 
Supervision, and the International Organization of Securities 
Commissions, as well as through the G-20. We will continue this 
ongoing, intensive process toward regulatory and prudential 
convergence with ambitious deadlines, alongside the TTIP 
negotiations. Our objective is to achieve consistent, robust 
international standards similar to those embodied in our own 
financial laws and regulations.
International
Q.3. During the financial crisis, 10 of the top 20 banks that 
received Federal Reserve emergency lending assistance were 
foreign financial institutions. Similarly, many of the 
beneficiaries of the rescue of AIG were foreign financial 
institutions. At the same time, the losses relating to AIG's 
Financial Products unit and JPMorganChase's ``Whale'' 
demonstrated how quickly risks from overseas activities can 
flow back to the United States. The collapse of Long-Term 
Capital Management demonstrated similar lessons.
    Do you believe that it is important for the United States 
to maintain a strong regulatory floor for U.S. financial 
institutions operating globally and for foreign financial 
institutions operating in the United States, as well as work 
with foreign regulatory counterparts to prevent weaknesses 
emerging in foreign markets that could flow back to the United 
States? Should this regulatory floor include the ability to 
safely wind down failed financial firms?

A.3. Since finance is inherently borderless, strong and 
consistent regulations at home and in foreign jurisdictions are 
important to prevent regulatory arbitrage, and to protect 
against vulnerabilities emanating from outside our borders that 
could flow back to the United States.
    The Dodd-Frank Act gives U.S. regulators the tools they 
need to maintain strong prudential standards for U.S. financial 
institutions and foreign financial institutions operating in 
the United States. Further, international financial regulatory 
reform commitments made by the members of the G-20 and 
international peer reviews on implementation of these mutually 
agreed reforms by the FSB mitigate financial vulnerabilities 
emanating outside our country that could flow back to the 
United States.
    There is broad international agreement on the need to be 
able to safely resolve large financial institutions that 
operate internationally, and the United States has taken a 
strong lead in this area by putting in place the Orderly 
Liquidation Authority as part of the Dodd-Frank Act. The FDIC, 
other regulators, and Treasury staff are closely engaged with 
their foreign counterparts to build the capacity, mutual trust, 
and strong communication networks necessary to make resolution 
of large internationally active financial institutions 
possible. This effort seeks to address all institutions, 
whether those institutions are U.S. banks based domestically 
and also operating overseas, or foreign banks that maintain 
significant operations within our borders.
Emerging Systemic Risks
Q.4. Identifying emerging financial risks is one of the most 
important obligations that Congress gave the FSOC. Given that 
the regulators apparently only became aware of trading losses 
and model manipulation in the London Whale case from public 
news reporting, are you satisfied with the level of insight 
FSOC and the regulators have into financial institutions and 
financial markets, especially related to their trading 
activities?
    In my view, one of the important aspects of the proposed 
Volcker Rule regulation is the data collection requirements 
that will give regulators a view into the granular trading 
risks that firms are taking firm-wide. Isn't it critical that 
regulators get access to that data and knit together risks 
across markets?

A.4. It is critically important that regulators have the data 
and analytical tools to understand and mitigate the risks faced 
by institutions and by the financial system and economy as a 
whole. Regulators will receive significantly more and better 
data as they continue to implement provisions of the Dodd-Frank 
Act related to living wills, derivatives, the Volcker Rule, and 
hedge fund activity, among others. This is also one of the 
goals of the Office of Financial Research (OFR), which is 
acquiring and making available to regulators and to the public, 
more and better financial data. With better data and a more 
substantial commitment of resources to research and analysis, 
we can not only improve how supervisors do their jobs, but also 
improve market discipline. The Council and its members, 
supported by the work of the OFR, will continue to identify 
areas where better data and more research offer the best 
return.
Cost-Benefit Analysis
Q.5. Mr. Lew, given the slow pace of rulemaking coming out of 
the agencies, are you concerned that agencies are increasingly 
being subjected--by industry comments, by some at the agencies, 
and ultimately by the courts--to cost-benefit analysis that is 
so burdensome that it effectively strangles necessary financial 
reforms? Are you committed to ensuring that independent 
agencies have the necessary independence and judicial deference 
to do the jobs that Congress directed them to do in the Dodd-
Frank Act and other legislation?

A.5. The costs of financial reform must be considered relative 
to the cost of another financial crisis. It is important to 
remember how close the financial system came to collapsing 5 
years ago, the trillions of dollars of wealth destroyed, and 
the millions of jobs and homes that were lost.
    The financial regulators have made important strides in 
issuing proposed and final rules for some of the most important 
financial reforms. As required under the Administrative 
Procedure Act, agencies solicit and review comments from the 
public in order to fully understand a rule's impact. In going 
through this process, regulators analyze and think through the 
implications and dynamics of new rules.
    The President has issued executive orders requiring 
executive agencies to engage in an analysis of the costs and 
benefits of economically significant regulations, and 
encouraging the independent regulatory agencies to do the same. 
At the same time, the independence of our financial regulators 
is an important feature of our regulatory system. Consistent 
with this independence, the individual agencies are best placed 
to conduct the appropriate economic impact analyses that are 
consistent with their legal mandates. We understand from OMB 
that while independent agencies attempt to quantify costs and 
benefits wherever possible, when this is not possible, this is 
explained in qualitative terms.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM JACOB J. 
                              LEW

Q.1. How many applications for nonprofit status were approved 
and how many applications were denied for conservative-leaning 
groups between January 2010 and December 2012?

Q.2. How many applications for nonprofit status were approved 
and how many applications were denied for liberal-leaning 
groups between January 2010 and December 2012?

Q.3. What was the average time it took for the Determinations 
Unit to complete processing applications for nonprofit status 
that conservative-leaning organizations submitted to the IRS 
between January 2010 and December 2012?

Q.4. What was the average time it took for the Determinations 
Unit to complete processing applications for nonprofit status 
that liberal-leaning organizations submitted to the IRS between 
January 2010 and December 2012?

A.1.-A.4. As a general matter, Treasury oversees the IRS with 
respect to matters of broad management and tax policy. 
Treasury's longstanding practice, spanning administrations of 
both political parties, is not to be involved in the details of 
tax administration and enforcement.
    With respect to your specific questions, a series of 
independent reviews began in the weeks following the release of 
the TIGTA May 14 report. The purpose of those reviews is to 
determine exactly what happened at the IRS, and those reviews 
are ongoing. A number of Congressional oversight committees--
including the Senate Committee on Finance, the Senate Permanent 
Subcommittee on Investigations, the House Committee on Ways and 
Means, and the House Committee on Oversight and Government 
Reform--have initiated investigations. Those Committees have 
held several hearings and received a substantial amount of 
public testimony on some of the very same questions that you 
raise. Additional hearings are scheduled, and Treasury and the 
IRS have received and are responding to document requests. In 
addition to Congress, TIGTA is now conducting a formal 
investigation of the IRS, and the United States Justice 
Department is conducting a criminal investigation. Treasury 
fully supports the ongoing investigations.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM JACOB J. 
                              LEW

Q.1. Secretary Lew, as a member of the Financial Stability 
Board (FSB), what has been your involvement regarding the 
designation of G-SIBs (global systemically important banks) and 
in determining what nonbanks meet the G-SIFIs (global 
systemically important financial institutions) distinction? 
What will the process be for a firm who is not designated a 
SIFI under FSOC but then gets labeled as such by the FSB? Do 
you anticipate there being any discrepancies between a domestic 
designation and a global one?

A.1. Treasury has been actively involved in the global 
systemically important financial institution (G-SIFI) 
designation process--which encompasses both G-SIBs and global 
systemically important insurers (G-SIIs)--through its 
representation on the FSB. Both the FSB and national 
authorities, in consultation with the relevant global standard 
setters, determine which nonbanks are designated as G-SIFIs, as 
well as which banks are designated as G-SIBs. It is up to 
national authorities to implement FSB recommendations, and they 
have several years to do so.
    Treasury is taking a constructive leadership role in 
shaping the international designation process for G-SIFIs. 
Through the G-20, FSB, and global standard setting bodies, we 
are working with our international counterparts to promote 
alignment of the Council and international G-SIFI 
identification and designation processes such that they remain 
consistent, in both the timing of the decisions and the key 
substantive judgments made in each process. We aim to set a 
high regulatory standard and to provide a level playing field 
that will both protect the United States and allow U.S. 
financial companies to compete fairly around the world.

Q.2. Secretary Lew, much attention has been given to the 
insurance industry and the possibility that several of the 
largest insurers could be designated systemically significant, 
despite the fact that their capital structure is wholly 
different from banks. How do you establish an identical regime 
for all SIFIs, both banks and nonbanks, which include minimum 
capital and liquidity standards, in addition to counterparty 
credit exposure limits?

A.2. The Council's responsibility to consider whether a nonbank 
financial company could pose a threat to U.S. financial 
stability and should be subject to Federal Reserve supervision 
and enhanced prudential standards is set forth in Section 113 
of the Dodd-Frank Act. The Federal Reserve Board is responsible 
for promulgating rules, such as enhanced prudential standards, 
applicable to designated nonbank financial companies. Section 
165 of the Dodd-Frank Act authorizes the Federal Reserve to 
take into account differences among nonbank financial companies 
under its supervision when prescribing prudential standards. We 
expect that the Federal Reserve will consider this 
discretionary authority while finalizing its rulemaking.

Q.3. Secretary Lew, wouldn't it be prudent to establish stress 
tests for insurance company SIFIs under a unique (as opposed to 
bank) set of standards?

A.3. The Council is responsible for designating nonbank 
financial companies for Federal Reserve supervision and 
enhanced prudential standards. Section 165 of the Dodd-Frank 
Act authorizes the Federal Reserve to take into account 
differences among nonbank financial companies under its 
supervision when prescribing prudential standards. We expect 
that the Federal Reserve will consider this discretionary 
authority while finalizing its rulemaking.

Q.4. Secretary Lew, since this Committee is currently 
considering the nomination of Fred Hochberg to be Chairman of 
the Ex-Im Bank, and given the response to my question for the 
record for Fred Hochberg's confirmation hearing below, what 
assurances can you give this committee that you and Chairman 
Hochberg will work together to actually begin discussions with 
the European Export Credit Agencies to substantially reduce or 
eliminate export credit financing for wide body aircraft? Can 
you please explain to us what your plan is to comply with the 
requirement in the 2012 Reauthorization Act, especially as the 
Administration begins its wider discussions with the EU on an 
U.S.-EU Free Trade Agreement?

        Vitter QFR to Hochberg and Hochberg Answer:

        Q. The last Ex-Im Bank reauthorization required the Department 
        of the Treasury to begin negotiations with the European Export 
        Credit Agencies supporting Airbus to ``substantially reduce or 
        eliminate'' export credit financing for wide body aircraft. The 
        first report on this--which Congress received in November--was 
        far from a report on negotiations and more of a history of 
        Export Credit financing. How will you push these required 
        negotiations moving forward and what kind of substantive 
        reports can we expect to see on the negotiations from the 
        Administration moving forward?

        A. In Ex-Im Bank's 2012 Reauthorization, Congress mandated that 
        Treasury initiate and report on the negotiations described in 
        the question, therefore, Ex-Im Bank is not in a position to 
        comment on the content of future Treasury reports. Separately, 
        Ex-Im Bank will continue to play an important role in 
        supporting Treasury and Administration efforts in the 
        International Working Group on Export Credits, which represents 
        an important effort to bring China and other emerging economies 
        into a multilateral rules-based framework for official export 
        credits. Ex-Im Bank agrees with Treasury and the Administration 
        that getting all of the major providers of official export 
        credits to negotiate and ultimately abide by a common set of 
        international guidelines is the first step in the process of 
        reducing, with the ultimate goal of eliminating, trade 
        distorting export financing programs, and will help ensure that 
        official export credit support complements market financing, 
        rather than crowding it out.

A.4. Over the years, Treasury has actively worked to make the 
international guidelines on official export financing as 
market-oriented as possible. For aircraft, Treasury has sought 
to reduce official export credit financing; for example, most 
recently Treasury negotiated the 2011 Aircraft Sector 
Understanding (ASU) to include terms and conditions that are 
more market-oriented, thereby helping to ensure that such 
support is used only when market financing is not available and 
thus complementing rather than crowding out the market. Since 
the 2011 ASU was negotiated, Treasury has continued to engage 
regularly with the European Airbus-supporting governments to 
discuss possible limitations on the provision of official 
export financing support for aircraft. Reducing U.S. financing 
support for aircraft exports alongside concurrent reductions by 
the European governments would be necessary to help ensure our 
objective of maintaining a level playing field for all U.S. 
stakeholders.
    Moreover, with many major emerging market countries, such 
as China, providing more and more official export financing 
support, Treasury launched last year the International Working 
Group on Export Credits. The working group is a multilateral 
effort to negotiate a common rules-based framework that is a 
necessary first step in the process of reducing, with the 
ultimate goal of eliminating, trade distorting export financing 
support in a manner that does not disadvantage U.S. 
stakeholders.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM JACOB J. 
                              LEW

Q.1. While the annual report identifies the symptom of recent 
central bank policies, a prolonged period of unusually low 
interest rates, did the Council have any discussions or have 
any recommendations for handling the continued proactive role 
central banks have assumed in the global economy? Moreover, did 
the Council have any discussions on the inflation threat that 
the continuance of massive asset purchases by central banks or 
the adverse impacts of an eventual exit without marked recovery 
have on financial stability?

A.1. The Council's annual report included a discussion of risks 
posed by the low interest rate environment. Among the factors 
explaining the current low level of yields is the market 
expectation of future short-term interest rates, which is 
driven primarily by monetary policy expectations. Globally, 
central banks have been easing monetary policy in order to aid 
the recovery from the global financial crisis, and the Federal 
Reserve has provided explicit short-term rate guidance tied to 
economic conditions. The annual report makes a number of 
recommendations to regulators and risk managers of banks, 
broker-dealers, insurance companies, and pension funds to be 
vigilant and scrutinize their risk management practices 
concerning interest rate risk. With respect to banks and 
broker-dealers, the report recommended that regulatory agencies 
and private sector risk managers should scrutinize whether 
potential changes in interest rates could adversely affect the 
risk profiles of financial firms. For insurance companies, the 
report said that the Federal Insurance Office and State 
insurance regulators should continue to monitor the interest 
rate risk of insurance companies, and State insurance 
regulators should continue to ensure that the economic 
scenarios run by insurance companies are sufficiently robust 
and appropriately capture interest rate and other economic 
risks.

Q.2. The implementation of Basel III to enhance capital 
standards to support the soundness of financial institutions 
utilizes risk-weighting standards. Do you believe the existence 
of any security or instrument with a zero risk weighting for 
capital standards promotes a sound global financial system?

A.2. The use of risk-weightings promulgated under Basel III is 
an important part of the effort to promote and monitor the 
safety and soundness of financial institutions. Risk-weighting 
assets allows regulators and supervisors to account for 
differences in the risk presented by particular assets. For 
example, you would not want to have a regime in which the same 
amount of capital is held against a U.S. Treasury security as 
against a highly risky asset. Of course, risk-weighting should 
not be the only tool supervisors use to determine capital 
requirements, and the U.S. banking agencies have a series of 
tools for that purpose, including the leverage ratio and stress 
testing.

Q.3. GAO found a lack of transparency with the public as an 
issue the Council should address, suggesting keeping detailed 
records of closed-door sessions and developing a communication 
strategy with the public. What steps has FSOC and the Office of 
Financial Research (OFR) taken to increase transparency and 
accountability to the public since the September 2012 findings?

A.3. GAO's report made a number of constructive recommendations 
on ways in which the Council and the OFR could further enhance 
their transparency and accountability, including improving 
their Web sites. Subsequently, both Web sites were reintroduced 
in December 2012, to improve transparency and usability, to 
improve access to Council documents, and to allow users to 
receive email updates when new content is added. The OFR has 
also assembled dedicated staff to support effective 
communications with the public, as well as outreach to industry 
and other key partners. Continued enhancements to promote 
further transparency are expected over time. However, the 
Council must continue to find the appropriate balance between 
its responsibility to be transparent and its mission to monitor 
emerging threats to the financial system. Council members 
frequently discuss supervisory and other market-sensitive data 
during Council meetings, including information about individual 
firms, transactions, and markets that require confidentiality. 
In many instances, regulators or firms themselves provide 
nonpublic information that is discussed by the Council. 
Continued protection of this information, even after a period 
of time, is often necessary to prevent destabilizing market 
speculation or other adverse consequences that could occur if 
that information were to be disclosed.

Q.4. In its September 2012 report, GAO found that FSOC has not 
identified a forward-looking process for emerging threats. To 
what extent is FSOC capable of anticipating potential threats 
to financial stability and what capabilities does the 
organization have to eliminate or mitigate looming threats? 
What tools does FSOC have that the regulators did not leading 
up to the 2007-08 crisis?

A.4. The Council's assessment of threats to the financial 
system is a collaborative process, driven by review of the best 
information available from the markets, institutions, industry, 
and academia, and expertise from Council members and their 
agencies and staffs. Council members have been and continue to 
be highly engaged in assessing emerging threats and 
vulnerabilities.
    The Council committee structure includes a standing 
Systemic Risk Committee established to identify, analyze, and 
monitor vulnerabilities in the financial system and emerging 
threats to stability. This committee, which is composed of 
staff of Council members and their agencies with supervisory, 
examination, data, surveillance, and policy expertise, gathers 
information from Council members and their agencies to assess 
risks that affect financial markets and institutions. The 
Systemic Risk Committee is responsible for interagency 
coordination and information sharing regarding issues that 
could affect financial stability, and reports to the Council's 
Deputies Committee. Also, as noted above, the Council's annual 
report is a product of the Council's risk-monitoring function. 
It reflects the ongoing work of the Systemic Risk Committee and 
the collective judgment of the members of the Council.
    The Council is also supported by the Office of Financial 
Research (OFR), which was created by the Dodd-Frank Act to 
improve the quality of financial data available to 
policymakers, and to develop better tools and analysis to 
understand the risks in the financial system. The Council's 
Systemic Risk Committee has worked with the OFR to develop a 
monitor of key financial and economic data and to highlight 
areas of potential concern, and it continues to be refined.
