[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]








                       EXAMINING THE DESIGNATION
                         AND REGULATION OF BANK
                         HOLDING COMPANY SIFIS
=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              JULY 8, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-38



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                   RANDY NEUGEBAUER, Texas, Chairman

STEVAN PEARCE, New Mexico, Vice      WM. LACY CLAY, Missouri, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  RUBEN HINOJOSA, Texas
MICHAEL G. FITZPATRICK,              DAVID SCOTT, Georgia
    Pennsylvania                     CAROLYN B. MALONEY, New York
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
MARLIN A. STUTZMAN, Indiana          STEPHEN F. LYNCH, Massachusetts
MICK MULVANEY, South Carolina        MICHAEL E. CAPUANO, Massachusetts
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANDY BARR, Kentucky                  DENNY HECK, Washington
KEITH J. ROTHFUS, Pennsylvania       KYRSTEN SINEMA, Arizona
FRANK GUINTA, New Hampshire          JUAN VARGAS, California
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
MIA LOVE, Utah
TOM EMMER, Minnesota



























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 8, 2015.................................................     1
Appendix:
    July 8, 2015.................................................    37

                               WITNESSES
                        Wednesday, July 8, 2015

The witnesses presented no oral testimony at this hearing. Due to 
  time constraints, the Members gave opening statements and 
  proceeded directly to questioning the witnesses. All of the 
  written statements that the witnesses submitted can be accessed 
  in the Appendix (see below)....................................

                                APPENDIX

Prepared statements:
    Luetkemeyer, Hon. Blaine.....................................    38
    Neugebauer, Hon. Randy.......................................    39
    Barth, James R., Eminent Scholar in Finance, Auburn 
      University; and Senior Fellow, the Milken Institute........    42
    Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship, 
      Massachusetts Institute of Technology, Sloan School of 
      Management; and Senior Fellow, Peterson Institute for 
      International Economics....................................    49
    Kini, Satish M., Partner, Debevoise & Plimpton...............    55
    Kupiec, Paul H., Resident Scholar, the American Enterprise 
      Institute..................................................    67
    Simmons, Harris H., Chairman and CEO, Zions Bancorporation...    95

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of the Regional Bank Coalition.............   105
 
                       EXAMINING THE DESIGNATION
                         AND REGULATION OF BANK
                         HOLDING COMPANY SIFIS

                              ----------                              


                        Wednesday, July 8, 2015

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Pearce, Lucas, 
Posey, Luetkemeyer, Stutzman, Mulvaney, Pittenger, Barr, 
Rothfus, Guinta, Tipton, Williams, Love, Emmer; Clay, Hinojosa, 
Scott, Maloney, Sherman, Lynch, Heck, and Vargas.
    Ex officio present: Representative Waters.
    Also present: Representative Royce.
    Chairman Neugebauer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Examining the Designation 
and Regulation of Bank Holding Company SIFIs.''
    Before we begin, I would like to thank the witnesses for 
traveling to Washington to testify today.
    For situational awareness, we are expecting 4 votes 
sometime in the next 30 or 40 minutes. This first series of 
votes is expected to last possibly over an hour-and-a-half. Per 
an agreement with the Minority, Members' oral statements will 
be limited to 1 minute per side.
    And without objection, the written opening statements of 
the chairman and the ranking member will be made a part of the 
record.
    I now recognize myself for 1 minute.
    Good afternoon.
    Over the last several years, we have seen bipartisan and 
bicameral interest in reexamining Dodd-Frank's regulatory 
framework for bank holding companies with assets greater than 
$50 billion. Dodd-Frank's arbitrary asset threshold, set under 
Section 165, does not adequately consider the systemic risk 
profiles of bank holding companies.
    Section 165's objective is to mitigate risk to the 
financial stability of the United States due to the distress 
and failure of the financial institutions. I am concerned that 
using a static asset threshold does not provide enough 
flexibility for regulators when designating systemic 
importance. Recent evidence shows vast differences in systemic 
importance between the smallest U.S. G-SIBs and the largest 
U.S. regional banks, yet they remain subject to the same 
Section 165 standards.
    Even banking regulators have highlighted the flaws in the 
Section 165 threshold. So, for example, Comptroller of the 
Currency Thomas Curry recently testified that there are 
currently nonsystemically important banks being regulated as 
systemically important due to the current threshold.
    As policymakers, we must always strive to be precise when 
improving legislation and frameworks so as to minimize 
unintended consequences. I hope that this hearing will allow 
members to begin considering different ways of measuring 
systemic importance and the regulatory consequences of being 
designated as a SIFI.
    I now recognize the ranking member of the subcommittee, Mr. 
Clay, for 1 minute.
    Mr. Clay. Thank you, Mr. Chairman.
    And I want to thank each of our witnesses for coming here 
today and testifying.
    I also would like to make clear to the subcommittee that I 
know that this is an abbreviated hearing, but if we are going 
to move forward with legislation, I look forward to having 
another hearing before that occurs.
    The financial crisis was due in no small part to 
regulators' failure to use their existing authority to rein in 
banks' risky lending and trading activities. We responded in 
the Dodd-Frank Act by clearly identifying for regulators which 
financial institutions would be subject to minimum prudential 
standards, while also granting the Federal Reserve discretion 
in its application of these standards.
    I welcome debate on regulators' efforts to tailor their 
approaches to the particular risk that individual banks 
present, but I remain skeptical of proposals that would 
eliminate Dodd-Frank's clear standard for a subjective 
activities-based designation process.
    And I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Today we have a very distinguished panel, and I appreciate 
their being here: Mr. Harris H. Simmons is the Chairman and CEO 
of Zions Bancorporation; Dr. James R. Barth is an Eminent 
Scholar in Finance at Auburn University, and a Senior Fellow at 
the Milken Institute; Dr. Paul H. Kupiec is a Resident Scholar 
at the American Enterprise Institute; Mr. Satish M. Kini is a 
Partner at Debevoise & Plimpton; and Dr. Simon Johnson is the 
Ronald Kurtz Professor of Entrepreneurship at the Massachusetts 
Institute of Technology, Sloan School of Management, and a 
Senior Fellow at the Peterson Institute for International 
Economics.
    Per an agreement with the Minority, we will waive the oral 
presentation of your testimony. And without objection, your 
full written statements will be made a part of the record.
    [The prepared statement of Mr. Simmons can be found on page 
95 of the appendix.]
    [The prepared statement of Dr. Barth can be found on page 
42 of the appendix.]
    [The prepared statement of Dr. Kupiec can be found on page 
67 of the appendix.]
    [The prepared statement of Mr. Kini can be found on page 55 
of the appendix.]
    [The prepared statement of Dr. Johnson can be found on page 
49 of the appendix.]
    Chairman Neugebauer. The Chair now recognizes himself for 5 
minutes for questioning.
    Mr. Simmons, can you compare the systemic importance 
profile between Zions and a large money-center bank?
    Mr. Simmons. I would be happy to maybe give a couple of 
examples.
    If you look at asset size, we are $58 billion in total 
assets, and so, among the kind of traditional bank holding 
companies, we are the smallest of the SIFIs. We are one 45th 
the size of JPMorgan Chase.
    But if you use other measures, it becomes even more 
pronounced. And so, for example, if you look at the data that 
we file on what is known as an FR Y-15 form every quarter 
showing systemic risk indicators, on one of the indicators for 
interconnectedness with the financial system, that measure 
being intra-financial-system assets, we are 1/264th of JPMorgan 
Chase's size. If you look at payments activity, they are 775 
times larger than we are. If you look at assets under custody, 
they are about 5,900 times our size. And if you look at 
derivatives, over-the-counter derivatives activity, they are 
about 21,260 times our size.
    So if you look at the things that we believe and that the 
Basel Committee has identified as being important in thinking 
about systemic risk, size is one factor, but when you take 
other things into account, there is even a greater disparity 
between a company like us and a company like JPMorgan Chase.
    Chairman Neugebauer. And one of the things--I believe that 
you just filed your stress-test documents recently, is that 
correct?
    Mr. Simmons. Yes.
    Chairman Neugebauer. And can you tell us how many pages 
that presentation included?
    Mr. Simmons. It was roughly 12,500.
    Chairman Neugebauer. And that is front and back, if I am 
not mistaken. Is that correct?
    Mr. Simmons. Yes. It is a pretty good stack. It is 32 
volumes of a lot of very high-level math, mostly.
    Chairman Neugebauer. Okay.
    Dr. Barth, in your testimony, you note that under the Basel 
Committee framework for measuring systemic importance, the 
metric of size is only 20 percent of the calculation, but under 
Section 165 of the Dodd-Frank Act, it says asset size is 100 
percent of the calculation.
    Can you explain the significance of this distinction and 
how an asset-size-only calculation can mischaracterize systemic 
risk?
    Mr. Barth. Yes. I would be happy to.
    As I indicate in my testimony, size per se is a totally 
inappropriate way to go about designating SIFIs. It turns out 
that--I know of no regulatory authority that would use just 
size. In fact, all the evidence that I present in my testimony 
indicates that size per se is inappropriate, that one should go 
well beyond size.
    For designating G-SIBs, there are 4 factors used, and, as 
you point out, size only represents 20 percent of what goes 
into determining whether or not a G-SIB is significantly 
important.
    So I think using just size, the $50 billion threshold is 
totally arbitrary and static, and one can come up with a much 
better way to go about designating SIFIs if one wishes to. And 
I indicate the way to go about doing that in my written 
testimony.
    Chairman Neugebauer. Thank you.
    Dr. Kupiec, some commentators have recently argued that the 
meaning of ``systemic importance'' under Dodd-Frank implies 
that a bank holding company's failure could cause credit 
intermediation issues in particular region.
    Do you consider this definition of ``systemic importance'' 
representative of Congress' original intent in Section 165?
    Mr. Kupiec. Congress' original bill designated everybody 
over $50 billion, which is a very broad-brush approach. I would 
not consider regional banks systemically important. Banks that 
are primarily engaged in deposit taking and lending in a 
certain region of the economy, even of significant size, I 
would not consider, if one of those institutions were in peril, 
that it would cause a systemic crisis.
    Chairman Neugebauer. Yes, I think my more direct question 
is, should that be one of the considerations for systemic risk, 
that one bank failure might have some adverse effect in that 
region?
    My understanding originally was to make sure that one 
financial institution didn't bring down the whole system, not 
what the impact was on a local or regional basis.
    Mr. Kupiec. Honestly, I don't think ``systemic risk'' has 
ever been defined very finely, very accurately. If a bank 
fails--there is fairly robust literature that says bank 
failures cause some economic problems. The question is, how big 
does that problem have to be before you think you have to take 
extra measures to prevent it? And, in my opinion, even a 
sizable regional bank is certainly digestible in the financial 
system that we have.
    Chairman Neugebauer. Thank you.
    I now recognize the gentleman from Missouri, Mr. Clay, for 
5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Johnson, you note in your testimony that there is 
substantial differentiation in the Fed's application of 
heightened prudential standards, dependent in part on size but 
also varying according to factors such as business model, 
complexity, and opaqueness.
    Could you provide examples of how regulators have 
differentiated their regulatory approaches toward financial 
institutions above the $50 billion threshold?
    Mr. Johnson. Yes, Congressman.
    So Dodd-Frank, as you have already stated, sets a threshold 
above which there has to be enhanced prudential supervision, 
but the exact nature of that supervision and the standards are 
very much at the discretion of the regulators.
    And we know from statements made by Federal Reserve 
Governor Tarullo and by FDIC Chairman Gruenberg that they are 
tailoring the content of the stress test, for example. The 
nature of the living wills are absolutely differentiated 
between the largest banks and what we are calling here the 
regional banks. Capital standards are also differentiated. And 
the list goes on.
    So for every single category of items that are overseen by 
regulators, to the extent that we can see this from the 
outside, there is substantial differentiation above the $50 
billion threshold. And the regulators appear to be taking into 
consideration exactly the kind of criteria that make sense, 
which is partly size but also, as the other witnesses have 
already said, interconnection; the precise nature of your 
business; is there substitutability, so if you fail, can 
someone else step in and provide the same services? So that 
seems to be exactly in line with the intent of Dodd-Frank.
    Mr. Clay. Could you contrast the litigation exposure that 
an activities-based designation process would create compared 
to the current approach in Dodd-Frank that clearly establishes 
which financial institutions are subject to heightened minimum 
prudential standards?
    Mr. Johnson. Yes, Congressman. I think this is a very 
important issue.
    If there were to be a process for banks similar to what we 
actually have for non-banks, the the Financial Stability 
Oversight Council (FSOC) would be responsible for determining 
whether or not particular institutions were designated as 
systemic and were subject to, for example, Federal Reserve 
oversight, that would be absolutely a cause for litigation. In 
fact, MetLife is litigating against the FSOC, and there are 
indications from other large non-bank financial institutions 
such as Prudential that they may be considering similar 
litigation.
    So the entire process of overseeing the financial system 
and preventing the kind of lapses that we saw apply to 2008, 
that will become tied up in all kinds of legal process. There 
is no way that would be helpful.
    Unless you think the regulators are imposing undue, 
inappropriate burdens on these small, simple businesses--and I 
don't think there is any evidence of that whatsoever--then I 
think you have, roughly speaking, the right current 
arrangement.
    Mr. Clay. Are there any areas of regulatory oversight where 
regulators have had the ability to exercise their discretion to 
tailor their application of heightened prudential standards and 
they have failed to do so? Are there any examples where they 
failed to do that?
    Mr. Johnson. They have certainly tailored. Now, there are 
complaints from the industry that the tailoring is not 
sufficient. There is a discussion around the stress-testing, 
which I think is an appropriate and sensible discussion. And 
there have been public news reports about Zions' stress test, 
for example. There seems to be a big difference of opinion 
between the Federal Reserve, on the one hand, and Zions with 
regard to the nature of those results and what is driving them.
    So those are important and, I think, legitimate and 
sensible discussions. But the basic idea is that you should 
have a category of banks that are not the largest, not the ones 
that are without question too-big-to-fail, but ones that are on 
the way to that territory.
    For example, if you look at total risk exposures of PNC, 
which is considered to be a regional bank, or U.S. Bancorp, 
these are total risk exposures; it is consolidated assets plus 
other credit exposures--these are in the categories of $460 
billion to $500 billion. Bear Stearns, when it failed, was 
somewhat over $500 billion; Lehman was about $600 billion. 
Those regional banks are already in that space where we should 
have heightened concern at least.
    And if we look at the rates of growth of regional banks on 
a total risk exposure basis over the past year, they have 
shown, with some exceptions, including present company, 
remarkably robust and resilient growth rates. So even the 
smaller ones are growing rapidly.
    Again, I am not saying this is an immediate systemic red 
flag, but it is something that you want the regulator and the 
Federal Reserve, in the first instance for banks, to pay more 
attention to. And that is what Dodd-Frank requires.
    Mr. Clay. And so it really depends on the business model 
and what kind of risk these entities take?
    Mr. Johnson. Yes, Congressman. It exactly depends on the 
business model and the risk they are taking.
    Mr. Clay. Thank you for your responses.
    I yield back.
    Chairman Neugebauer. Thank you.
    I now recognize the gentleman from New Mexico, the vice 
chairman of the subcommittee, Mr. Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    I would just start with the statement that Bear Stearns and 
Lehman were not bank holding companies and would not have been 
subject to that particular provision.
    Mr. Simmons, now, when I think about business--my wife and 
I had a small business. Certainly, we were not in the $50 
billion category, but when we got up to 50 employees, then we 
came under different rules. So we just found ourselves staying 
below $50 billion because it was so much easier.
    Do you think that banks will actually--or the financial 
institutions will decide to self-limit their size just to not 
have to hassle with it?
    Mr. Simmons. I suspect some may, although because the 
current threshold is not indexed, at some point--we asked 
ourselves the question, should we try to shrink below that, 
but--
    Mr. Pearce. Yes, so the question is on the table.
    Mr. Simmons. Yes, the question has been on the table. We--
    Mr. Pearce. And so, in the attempt to try to improve the 
economy, the Federal Government may, in fact, set the economy 
up to start limiting itself. That is a concern that I have, and 
it sounds like it is already a discussion. And I would just 
guarantee you, when people have to deal with one level of the 
government or a different level, then you do actually have to 
work that.
    Now, this idea that there are going to be two sets of 
standards--you have been in the bank business for a while. When 
regulators have different tiers, do they set two standards? Do 
they come in and identify which size you are with respect to 
regulations? Or do they just go to the highest level of 
regulations?
    Mr. Simmons. I think there are clearly some cases, for 
example in the liquidity coverage ratio, where they have 
created a modified ratio for banks under $250 billion, where 
they have differentiated. But it is hard for us to know, and, 
certainly, we don't feel like there has been the kind of 
tailoring that we hear about. I would like a new tailor, I 
guess, some days. It feels like the suit is still very large.
    Mr. Pearce. Yes. But, again, that is the comment I hear 
from banks in my district. It is New Mexico, so very few fall 
in a large category, but they all say that they get the same 
standards that are applied to the big institutions.
    Mr. Johnson, I have a curiosity about these varying 
standards. Do you see some difficulty in agencies?
    Agencies are composed of people, and they have to remember 
two different standards. I know flying airplanes, for instance, 
in the Air Force, they only want you flying one kind of an 
airplane at once because it is kind of difficult to remember 
all the different air speeds and the checkpoints and things. 
And airliners are pretty much the same way.
    And so bank regulators, are they going to memorize multiple 
sets of standards? Are they going to be tailors for individual 
clothing for the banks, or are they going to actually start 
standardizing themselves?
    Mr. Johnson. Congressman, there are already 4 categories 
above the $50 billion threshold--
    Mr. Pearce. No, I am not asking--I am asking, in practical 
application, a regulator sitting there trying to remember all 
these different standards, are they really going to do it, or 
do you think that they will probably end up ballparking 
something in their head and just doing the best they can?
    Because I don't see where that kind of a tailored process 
can work from a regulatory point of view. It requires too much 
judgement. To me, it looks very awkward, and very difficult.
    You don't think so? You think they will be able to divide 
themselves up into little squares and do one thing in one 
company and another thing in another company and not merge the 
two together in their head and their heart?
    Mr. Johnson. Certainly, everything we can see in terms of 
how the regulators operate and how they organize themselves, 
they treat the very largest, globally systemically important 
banks differently than they do the regional ones.
    Mr. Pearce. Okay. Fair enough.
    Now, on your item number five, you say that the regulators 
failed, more or less--they had a great deal of discretion, and 
they failed to protect consumers.
    What should we do from this point of view when the 
regulators fail?
    Mr. Johnson. I think, Congressman, you have to work to 
understand the cause of that regulatory failure, which will 
probably--
    Mr. Pearce. No, but should we do something?
    Mr. Johnson. Absolutely. And Dodd-Frank was an attempt to 
address that, which obviously--
    Mr. Pearce. Yes. So I really wrestle with the fact that the 
regulators were sitting right in the room with MF Global and 
they let the guy--some of these things that banks are doing, 
they don't know the difference. That guy knew the difference. 
He moved $101.5 billion out of segregated accounts, and yet 
nothing has happened to the regulators and nothing has happened 
to him. It is against the law.
    And so, I always worry that the regulators just kind of end 
up doing what they want to do when they are sitting in that 
room, and I wonder how you perceive that.
    Mr. Johnson. I think the regulators have to be held 
accountable, Congressman. And they are held accountable by this 
committee, among other things--
    Mr. Pearce. Yes. Again, I have asked the questions multiple 
times; I have asked it straight to the supervisors. Nothing has 
ever happened to anybody. So I appreciate your opinion there, 
but I understand.
    I yield back the balance of my time, Mr. Chairman. Thank 
you.
    Chairman Neugebauer. Thank you.
    And now the gentleman from Texas, Mr. Hinojosa, is 
recognized for 5 minutes.
    Mr. Hinojosa. Thank you, Chairman Neugebauer and Ranking 
Member Clay, for holding this hearing.
    As we examine the process for designating certain financial 
institutions as systemically important, SIFIs, under the Dodd-
Frank Act, we would do well to remember that during the 
financial crisis of 2007 and 2008, the American financial 
system teetered on the brink of collapse. Every major American 
financial institution either failed or was taken over by a 
larger institution or required government assistance to weather 
the storm.
    My first question is for Dr. Simon Johnson.
    In your testimony, you indicated that it would be more 
sensible to measure banks by their total exposure, as defined 
in the systemic risk reports to include on- and off-balance-
sheet items, rather than by their total consolidated assets as 
is currently done under Dodd-Frank.
    Do you think the current measure of $50 billion 
consolidated assets is a good proxy for banks that pose a 
systemic risk to our financial system?
    Mr. Johnson. Congressman, I think that is a very fair 
question. I do think we should shift the discussion away from 
consolidated assets, which are just one measure of what is on 
your balance sheet, to include other exposures through 
derivatives, credit lines, credit cards, and so on. And I 
think, when you look at that, most of the banks that are in the 
category, say, between $50 billion and $100 billion 
consolidated assets, if we look at them in terms of total 
exposures, all of them except for two, Zions and Huntington, 
are above $100 billion in total exposures.
    Now, once you get to any financial institution of any kind 
with a total risk exposure close to 1 percent of U.S. GDP, I 
think you need to pay attention to it as a potential systemic 
issue, either in isolation, perhaps, or as a cluster of similar 
firms with similar portfolios that could get into trouble.
    So most of the firms that are in this category above $50 
billion, I think, are already on this potential systemic 
interest list. Zions is an interesting, different, smaller 
entity. There is no question about that.
    Mr. Hinojosa. So with that response, would you keep a 
bright-line test, or would you suggest a qualitative 
discretionary approach with Congress outlining the factors for 
consideration?
    Mr. Johnson. You absolutely need a bright-line test, for 
the reasons that Congressman Clay already mentioned. If it 
becomes something qualitative, something involving judgment, 
for example, by the FSOC or by the Federal Reserve, it is going 
to be litigated till the end of time.
    Mr. Hinojosa. Okay.
    My next question is to Auburn University's Dr. James Barth.
    Currently, the top 33 financial institutions control 
approximately 84 percent of industry assets. The remaining 
6,400 banks control the remaining 16 percent of assets.
    So do you think the concentration of such large amounts of 
banking assets in a relative handful of firms is itself a 
systemic concern?
    Mr. Barth. Yes, I do think the concentration of assets in a 
handful of institutions may indeed be a concern. But, as I 
point out in my testimony, the 6 largest bank holding 
companies, domestic bank holding companies, control 68 percent 
of all the bank-holding-company assets in the United States as 
of the end of March of this year. The top 11 bank holding 
companies, excluding the savings and loan holding companies, 
control approximately 80 percent of all the assets of bank 
holding companies as of, again, March of this year.
    So that is a concentration, but I don't think one should 
include the regional banks as SIFIs. They do not, in my view, 
pose a systemic threat. And all the evidence that I indicate in 
my testimony concurs with the opinion that I just expressed.
    Mr. Hinojosa. Thank you.
    My next question is for Mr. Satish Kini.
    There is, at this time, a considerable amount of debate 
regarding whether the current process for designating a non-
bank SIFI by the FSOC is as transparent as it should be. So do 
you believe that to be the case? Why or why not?
    Mr. Kini. I think there is debate, Congressman, about the 
transparency of the FSOC process for non-bank SIFIs. That 
process does not necessarily need to be imported into a process 
for bank holding companies if Congress chooses a different 
threshold or a different metric by which to apply these 
enhanced prudential standards to bank holding companies.
    Mr. Hinojosa. My time has expired, and I yield back.
    Chairman Neugebauer. I recognize the gentleman from 
Missouri, Mr. Luetkemeyer, chairman of our Housing and 
Insurance Subcommittee, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I would like to start out with--we have been talking about 
the intent of Congress here with regards to Dodd-Frank. And I 
think it was interesting that when we had the former author of 
the bill, Mr. Frank himself, in this committee a little over a 
year ago, he indicated that the SIFI situation has gone well 
beyond the intent of what he and his coauthor, Mr. Dodd, had 
intended. And I think, as we go through this process, we need 
to remember that this was supposed to be about the big guys, 
not talking about regional banks.
    And it is kind of interesting that, as we are talking about 
this, I have in front of me here the Federal Reserve System 
order approving the merger of bank holding companies between 
BB&T and Susquehanna Bank. And in there, in the financial 
stability portion, it lists the metrics by which they 
determined that combining these 2 banks, which would be around 
$200 billion in assets now--they listed 5 separate things, 
which, coincidently, are almost exactly word-for-word what our 
criteria is in our bill that we are trying to talk about here, 
for designating a SIFI.
    They list those criteria, and then they go on and talk 
about in the final closing discussion here that this 
transaction would not appear to result in meaningfully greater 
or more concentrated risks to the stability of the U.S. banking 
or financial system. That is the Fed talking about this, with a 
$200-billion-asset institution.
    So what does that tell you? It tells you that--Mr. Simmons, 
you are in the business, you are in this category here we are 
talking about. What do you think about the comments I just 
made?
    Mr. Simmons. I fundamentally believe you need to look not 
only at size but a lot of other activities. The 
interconnectedness, the complexity, the funding structure--
there are a lot of things that contribute to, I think, a 
rational determination as to whether an institution is 
systemically risky to our economy. And I think an approach that 
takes all those things into account is probably a more useful 
approach than, certainly, the arbitrary--
    Mr. Luetkemeyer. It is interesting, we have had both 
Secretary Lew and Chair Yellen in the committee over the last 
year, and both of them have said that they agreed with our 
analysis that these regional and midsized banks are not 
systemically important.
    I have a chart here that I actually dug up; it is actually 
for the end of 2013, but it shows the size differential and 
puts some perspective in a graph form. You have JPMorgan over 
here on my right that makes up the entire grid. And then you 
have the next 14, other than the top 4. You go down to 5 
through 19, and it makes up all of JP Morgan. It gives you some 
idea of the size of the big guys and the size of the rest of 
the group that makes up this.
    So I know there is a question and has been concern with 
regards to regional banks, if a regional bank went down, that 
it would perhaps cause the collapse of other banks and hurt the 
region. That is not the intent of what this bill, Dodd-Frank, 
was about. It was about a big bank going down and affecting the 
entire economy.
    But, Mr. Simmons, can you address the issue of a couple of 
regional banks which would go down? Number one, are they tied 
together close enough, normally, for that to happen?
    Mr. Simmons. In my experience, there is very little 
interconnectedness between regional banks--
    Mr. Luetkemeyer. So it would be very difficult for one to 
actually affect the other?
    Mr. Simmons. I think that has proven to be the case even in 
experience.
    And I also think it is difficult to determine, if you start 
down that path, where do you stop? A community bank failing in 
a small community is going to have a systemic impact on that 
community. I believe that the language in Dodd-Frank was 
intended to focus on the U.S. economy and not on any particular 
region in the first place.
    Mr. Luetkemeyer. I didn't want to blindside you here, Mr. 
Simmons, but you wrote a letter to me, I think last year. We 
had a meeting, and then you went from there to the Fed. And you 
wrote back to me with regards to your meeting that you had at 
the Fed. And in there you said that you spent some time with 
staff at the Federal Reserve Board, and they admitted that 
around the Fed no one considers regional banks, such as Zions 
Bancorporation, to be systemically important.
    Is that--
    Mr. Simmons. That is correct.
    Mr. Luetkemeyer. --an accurate reflection of what your 
conversation--
    Mr. Simmons. It is. And I think it reflects public 
statements that have been made at the Board of Governors level, 
as well.
    Mr. Luetkemeyer. So basically what we are saying here is 
that the Fed, the Chair of the Fed, Secretary Lew, and the 
author of Dodd-Frank believe that what we are talking about 
here is a solution to an unintended consequence of their bill. 
And, hopefully, we can all agree that this is something we need 
to work on and support.
    I thank the gentleman, and I yield back the balance of my 
time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlewoman from New York, Mrs. Maloney, is 
recognized for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman, for holding this 
important debate.
    I believe, as many of you said in your testimony, that the 
$50 billion threshold doesn't accurately measure systemic 
importance. And a lot of you have said in your testimony and 
talked about the advantage of tailoring the enhanced prudential 
standards so that they are appropriate for the amount of 
systemic risk that each bank poses. And I personally think that 
is a more accurate standard. To the extent that a prudential 
standard is intended to mitigate systemic risk, it should be 
tailored to the bank's systemic risk.
    And while the Fed absolutely has the discretion to tailor 
the enhanced prudential standards based on each SIFI's systemic 
risk, that is not what they have done, unfortunately. And to 
the extent that they have tailored at all, they have based it 
purely on asset size, which even the Fed agrees doesn't 
properly measure systemic risk.
    In fact, in the Fed's proposed capital surcharge for the 
biggest eight banks, they propose to calculate each bank's 
systemic risk based on an indicator-based test that goes beyond 
mere asset size and then require higher capital surcharges for 
banks that pose more systemic risk and lower surcharges for 
banks that pose less systemic risk.
    So one idea that I think is worth pursuing is extending 
that proposal to all 33 banks with over $50 billion in assets 
and calculating their domestic systemic importance and then 
requiring the Fed to tailor the prudential standards based on 
each bank's actual systemic risk.
    So, Mr. Simmons, if your bank ended up with a very low 
systemic risk score, then the prudential standards would have 
to be tailored to reflect that lower risk. And because the 
Fed's indicator-based test is based on the same test, I 
believe, that Mr. Luetkemeyer's bill would require--and I 
believe there are four standards in it: size; 
interconnectedness; complexity; and substitutability--using 
them, I think this might be a good compromise.
    So I would like to ask each of the witnesses whether they 
think it would be helpful to extend the Fed's indicator-based 
test for systemic risk to all 33 banks over $50 billion?
    I would like to start with Mr. Kini and welcome him, 
because his firm is located in the district I am privileged to 
represent, and have each witness give your thoughts on this 
idea.
    Thank you.
    Mr. Kini. Thank you, Congresswoman.
    I do think that if the goal here and the policy objective 
is to identify as accurately as possible those banking 
organizations that pose significant risk to financial 
stability, then it is very much worth considering a more 
nuanced alternative than just flat asset size. So I do think 
that would be a useful exercise.
    Mrs. Maloney. Okay. Thank you.
    And Dr. Johnson?
    Mr. Johnson. Congresswoman, I do agree that the Fed should 
and does use this multiple-indicator approach. And I think as a 
previous speaker mentioned, they use it when looking at 
potential mergers. But I am not in favor of modifying the 
bright-line approach of Dodd-Frank. I think what you are asking 
for there, or what Congress asked for, is official--
    Mrs. Maloney. We would keep the $50 billion, but then--
    Mr. Johnson. If you wanted to move it to $100 billion total 
risk exposures, I would not complain about that. That would 
only change it for two financial institutions, two banks.
    But the point of having the threshold set at a relatively 
low level is to ask the Federal Reserve precisely to look on a 
case-by-case basis, applying its multiple indicators--there is 
no complaint about that whatsoever that I have heard--and to 
decide who is systemic and who is not.
    The problem of using Congress to place particular scores, 
Congresswoman--one problem would be, what exactly is the right 
score for systemic risk? I agree with Dr. Kupiec, who said we 
don't know exactly what is systemic risk. You can have many 
arguments for many, many hours about exactly how to weight 
those measures in there. Experts and people in the industry 
absolutely do not agree.
    So I think you are better off keeping the bright line, $50 
billion consolidated assets or $100 billion total risk 
exposures, and then pushing the Fed, as you are doing in what 
you said today, to be nuanced and sophisticated in how they 
look case by case.
    Mrs. Maloney. And Dr. Barth?
    Mr. Barth. Yes. I am in favor of a multifactor approach, as 
you mentioned. Four factors that have been mentioned earlier, I 
think that is an approach. I am opposed to identifying SIFIs or 
designating SIFIs solely on the basis of size.
    In my testimony, I point out there is indeed evidence 
indicating that regional banks, for example, do not pose a 
systemic risk. And if the Fed can tailor its supervisory 
approach or regulatory approach to banks over $50 billion in 
size, it can do that for all banks, and therefore there is no 
need for that designation of SIFIs.
    Mrs. Maloney. And, Mr. Simmons, who is on the front lines?
    Chairman Neugebauer. I'm sorry. The time of the gentlewoman 
has expired.
    Mrs. Maloney. Okay. Thank you.
    Chairman Neugebauer. I now recognize the gentleman from 
South Carolina, Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    I am confused, so help me, because I wasn't here when we 
did Dodd-Frank. And I am hearing some things that sound 
inconsistent to my layman's ear. I hear talk of tailoring, and 
I hear talk of Fed nuance. I hear Dr. Johnson saying that is 
probably one way around the concerns that we have on this side 
of the aisle.
    Yet, Dr. Johnson, in reading your opening testimony, you 
are critical of the Fed's lack of ability to apply the same 
nuance before the crisis. So I guess one of the questions I 
have--and we probably won't get a chance to get into it here 
today--is, why do you think the Fed is going to do a good job 
now, when you thought they did a lousy job before the crisis?
    So I am not sure if--if you don't like the fact of Congress 
setting the nuance, you are okay now, I guess, with the Fed 
setting this nuance, but you were unhappy with the way the Fed 
did it before the crisis. So it seems like you are taking the 
exact opposite position after the crisis as you took before the 
crisis.
    But let me start from scratch, and see if I can get a 
handle on one thing here.
    Dr. Johnson, you just said you would be okay with changing 
the number, which makes me wonder, how did we get the number in 
the first place? Does anybody know? Did we just pick $50 
billion? I wasn't here. Does anybody know why we have $50 
billion? Is it defensible?
    Dr. Kupiec?
    Mr. Kupiec. From talking to staffers at the time, 
apparently there was a proposal on the table before Dodd-Frank 
to do away with holding company supervision by the Federal 
Reserve for all banks under $50 billion and that the primary 
Federal banking regulator would become the holding company 
supervisor. And there was language drafted about that. And 
somehow that $50 billion cutout ended up in the final bill on 
the SIFI designation for the Fed.
    So I wasn't in the hearings, but, from people who were in 
the discussion, that is the way I am told, that $50 billion 
sort of came out of the air as a historical artifact.
    Mr. Mulvaney. I see a couple of people nodding their heads. 
So, unless somebody wants to disagree, I will take that for the 
sake of this discussion.
    Dr. Barth said something I am going to come back to in a 
second about evidence regarding regional banks. Let me ask--
that is a nice word to use. Is there any evidence that $50 
billion is the right number?
    Mr. Johnson. Well, Congressman--
    Mr. Mulvaney. I will go down the line.
    Very quickly, Dr. Johnson?
    Mr. Johnson. I think you should look at total risk 
exposures. That is what we learned in the crisis matters. And 
if you look at the risk reports that they have to now provide 
because of Dodd-Frank, everyone, with the exception of Zions 
and Huntington, who is above $50 billion, has total risk 
exposures over $100 billion.
    When you look at the history of financial crises in the 
United States and other places, financial institutions with 
total risk exposures close to 1 percent of GDP--
    Mr. Mulvaney. Got it.
    Mr. Johnson. --do amount to systemic risk.
    Mr. Mulvaney. I have heard that, but I have also heard you 
say that it depends on the business model and the risks they 
take, not necessarily the size of the asset.
    So I am asking again, is there any evidence, other than the 
fact that a staffer found it in a previous bill, that $50 
billion is the right number?
    Anybody else?
    Dr. Barth?
    Mr. Barth. No. I know of no evidence indicating that a $50 
billion threshold is the right number by which one would 
designate SIFIs, those institutions with greater than $50 
billion in assets, or even if one shifted to exposure basis.
    It is interesting--in my testimony, I refer to a study done 
by three New York University Business School professors, one of 
whom was a recipient of the Nobel Prize in economics, and they 
actually calculate systemic risk for banks. And when you look 
at the regional banks, their scores are less than 0.10 percent. 
The biggest money-center banks have hundreds-of-times-larger 
systemic risk scores.
    So, again, the evidence that I cite--and it is not just 
that study but other studies--indicates that there is no basis 
for using simply size per se and certainly not using the $50 
billion threshold.
    Mr. Mulvaney. Dr. Barth, that is music to my ears.
    Keep going, then. Tell me the evidence you had about the 
fact that the regional banks are not systemically important. 
Because you said the word ``evidence,'' which is something I 
pay attention to.
    Mr. Barth. Yes. The study that I just mentioned by the 
three New York University Business School professors--also, 
there is a study by the Office of Financial Research using 
multiple criteria which indicates the same, that the biggest 
banks dominate with respect to systemic risk. It is not the 
regional banks.
    There is also a Bank of Canada study indicating that no 
regulatory authorities, to their knowledge, would focus on just 
size per se.
    I don't know of anybody who is going to do a serious study 
of systemic risk who would only look at asset size per se, 
whether it be consolidated assets or exposures. There are many 
other factors, including some of the factors that have been 
mentioned earlier, the ones used for identifying--
    Mr. Mulvaney. Dr. Barth, I apologize. I have 10 seconds, 
and I want to ask one final question.
    Does anybody disagree--we have Republican witnesses, 
Democrat witnesses. Does anybody disagree with the concept that 
we should be using evidence in writing our laws?
    Okay. I will take that as a ``no'' on both sides of the 
aisle.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Sherman, is 
recognized for 5 minutes.
    Mr. Sherman. So, $50 billion is a safe harbor. If you are 
not over $50 billion, they can't designate you a SIFI, they 
can't impose additional standards.
    Everyone over $50 billion should not be treated the same 
way. And perhaps either the regulators or this committee needs 
to look at creating a process by which those who are over $50 
billion provide information, but I think most of the regional 
banks would ultimately be determined to not be SIFIs. It would 
be nice to get a few forms filled out and be in a position to 
at least take a look.
    The focus of Dodd-Frank is on asset size. I think that is 
wrong. I think Dr. Johnson focuses on total exposure. I have 
said before here we ought to be focusing on the size of the 
liabilities of an institution, not the size of the assets.
    Lehman Brothers didn't do us any harm because they had too 
many assets. Their problem was they had too many liabilities, 
particularly contingent liabilities, particularly to U.S. 
persons. So when Lehman Brothers went under, it was clear that 
a lot of American institutions would not be paid. What is a 
liability on Lehman Brothers' balance sheet as an asset--or was 
listed as an asset on the balance sheet of so many U.S. 
institutions.
    Dr. Johnson, does the law require that the FSOC impose 
significant additional standards on regional institutions that 
may just happen to be over $50 billion?
    Mr. Johnson. No, Congressman. The situation is as you 
stated it in your opening sentences. There is a safe harbor 
below $50 billion, and above $50 billion there are enhanced 
prudential standards across a number of criteria. So they can't 
be weaker than what people have below $50 billion. But the 
extent to which they are stronger depends on the decision of 
the regulator, which, in this instance, is primarily the Board 
of Governors of the Federal Reserve System.
    And I would just also emphasize, to put it in terminology 
relative to what you have said and what other members have 
said, which is this is not about designating anyone as 
systemically important. These regional banks are not designated 
as systemically important. They are subject to these enhanced 
prudential standards. There are systemically important 
institutions that have been so named by the Financial Stability 
Board, for example, and it is only a few very large 
institutions of the United States.
    Mr. Sherman. So you are saying that if you are a regional 
bank and you are over $50 billion, you don't get the honor of 
being designated a systemically important financial 
institution, with all that honor entails.
    Mr. Johnson. It is certainly not in Dodd-Frank anywhere I 
can see, and it is not a matter of regulatory practice. They 
are not putting a SIFI stamp next to these regional banks.
    They are subjecting them to additional specific scrutiny--
for example, around the capital stress test, the way they look 
at, do you have enough capital. Yes, that is different above 
$50 billion. And you can ask whether it has been applied in a 
fair and reasonable way across all these different sizes. And 
that is what Zions is--
    Mr. Sherman. So the regulators could, under the law, simply 
gather some information about institutions $50 billion to $100 
billion and decide you are a plain vanilla large institution, 
or largish institution, you don't face any additional scrutiny? 
Or do they have to impose some additional scrutiny on everybody 
over $50 billion?
    Mr. Johnson. There is some, ``scrutiny'' is a good word, 
Congressman. There is some additional scrutiny. There is--
    Mr. Sherman. But not necessarily any higher capital 
standards?
    Mr. Johnson. The capital standards cannot be lower than 
what we have below $50 billion. However, the law also says that 
there shouldn't be discontinuity, to the previous important 
point made by the Vice Chair. If you have a big discontinuity, 
people sometimes will not want to grow below that size.
    The regional banks, Congressman, are growing fast. The 
average rate of growth of total exposures last year was 6.5 
percent for the regional banks. So that doesn't seem to be an 
impediment to the growth at this stage.
    Mr. Sherman. I just have 40 seconds.
    What limits are there on bank holding companies in issuing 
credit default swaps? Because that is kind of how we got into 
this trouble to begin with.
    Mr. Johnson. Congressman, there are a variety of 
restrictions on the amount of risk that they can take. And this 
would depend exactly on what they are doing with these credit 
default swaps, to what extent they are hedging, to what extent 
they are actually taking on risk. And there are plenty of micro 
prudential regulations about that, as well as systemic 
concerns.
    And, of course, one of the issues that came out in the case 
of AIG was the way in which what appeared to be a small 
financial institution, in the sense that its banking activities 
were perceived to be small, actually was writing a lot of CDS 
and creating a huge amount of risk for that part of AIG and for 
the rest of the financial system.
    So there are additional concerns and some scrutiny by the 
regulators now on exactly this, on who has what kind of open 
positions and what kind of exposures through derivatives such 
as CDS.
    Mr. Sherman. And whether that is a bank holding--
    Chairman Neugebauer. The time of the gentleman has expired.
    Mr. Sherman. --company or otherwise.
    I yield back.
    Chairman Neugebauer. The Chair now recognizes the gentleman 
from North Carolina, Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Overall, do you believe that the SIFI designation has been 
a help or a hindrance? Has it impaired competitive markets? Has 
it given it an advantage?
    And, also, I would like to know what recommendations you 
would provide for statutory reform of SIFI at this time.
    Mr. Simmons, we will start with you.
    Mr. Simmons. As to whether it has been a help or a 
hindrance, I take the view that fundamentally, stress-testing 
is one of the really major elements that has come out of this 
designation for us. And I fundamentally believe it is a useful 
tool in risk management, but I believe it is one among many 
tools. And it has become the central focus, and we spend so 
much time and money on it that I think it has clearly reached a 
point of diminishing returns.
    The lack of transparency into the Federal Reserve's 
modeling process as compared to ours has been a source of great 
frustration that has led us to curtail some kinds of lending. 
And so, in that respect, it has been a hindrance to us.
    And as far as a legislative fix to this, I am very much in 
favor of anything that moves beyond a strict size threshold and 
looks at other factors of systemic risk which we have talked 
about earlier today.
    Mr. Pittenger. Thank you.
    Dr. Barth?
    Mr. Barth. Yes. I don't think that the SIFI designation has 
been worthwhile at all or beneficial. It seems to me that it 
misleads people about the actual systemic risk of institutions 
and categorizes too many institutions with the same catchall 
phrase as a SIFI.
    As regards reform, I would agree with Mr. Simmons that one 
should go well beyond using just size in identifying whether or 
not an institution is a systemically important financial 
institution (SIFI).
    Mr. Pittenger. Thank you.
    Mr. Kupiec?
    Mr. Kupiec. Thank you.
    The idea of a SIFI is basically that an institution is too-
big-to-fail in bankruptcy without causing a financial crisis. 
That is the whole idea behind a SIFI.
    And what has happened is over time, we have tried to 
develop a resolution process for how regulators would deal with 
a failed SIFI. And if you look at all the papers and processes 
on that by the FDIC, the Financial Stability Board, and the 
Bank of England, what they will tell you is, if a systemically 
important financial institution gets into trouble, we are going 
to take over the parent and we are going to seize its assets, 
and the way we are going to keep markets from ending up in a 
crisis is we are going to recapitalize and liquify the 
operating subsidiaries. The operating subsidiaries of bank 
holding companies are bank depository institutions--basic 
banks.
    And so, there is a huge disconnect between the idea of what 
causes a SIFI and what regulators are going to say they are 
going to do to fix the too-big-to-fail problem if a SIFI gets 
in trouble. It is not about the consolidated holding company or 
its size. It is about identifying the individual operations 
that need to continue if the SIFI gets in trouble. There is a 
total disconnect.
    So this goes back to the whole question of what should they 
be looking at? They should be taking the bank holding companies 
and looking at the operations that they are going to maintain 
and keep running in a systemic resolution.
    And that doesn't relate to the size of the SIFI; that 
relates to the specific subsidiary operations. So you could 
have JPMorgan Chase, which is a huge operation, but it may have 
only three or four subsidiaries that people would agree have to 
keep open and operating.
    So you should look down to--not at the SIFI level. The 
designation should be aimed at the operations that make 
financial markets work, the ones that regulators say they have 
to protect if that institution gets in trouble. So there is a 
huge disconnect between this whole idea--
    Mr. Pittenger. Quickly, because I am running out of time, 
on statutory reform, do you have any ideas?
    Mr. Kupiec. Oh, this is a huge--it is very much a 
Congressman Luetkemeyer approach, with a 406, the--but aimed at 
the subsidiaries and not the consolidated group. It is the 
individual activities.
    Mr. Pittenger. All right.
    Mr. Kini?
    Mr. Kini. I think the one thing that I would say is that 
the current framework puts organizations--as soon as they cross 
$50 billion, it subjects them to mandatory enhanced standards. 
That means a $51 billion bank organization has to be treated 
differently than a $49 billion institution. And there is a real 
question in my mind as to whether that approach makes sense.
    Mr. Pittenger. Thank you all very much.
    I yield back my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Massachusetts, Mr. Lynch, is 
recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    And I want to thank the ranking member.
    And I thank the witnesses for your help today.
    Dr. Johnson, I am not sure if you are familiar with Thomas 
Hoenig's proposal over at the FDIC. I know we are talking about 
regional banks that might or might not hit the tripwire of $50 
billion, but he actually came out with a broader analysis in 
talking about risk, as you are talking about exposure as well, 
as being probably the most critical factor here.
    He rolled out a proposal, and we are actually sponsoring 
legislation consistent with that. He talked about the fact that 
if you have a smaller community bank that is well-capitalized, 
it meets the liquidity coverage ratio, it holds effectively 
zero trading assets or liabilities, has no derivative exposure 
other than interest rates and foreign exchange derivatives, and 
even then has less than $3 billion in notional derivative 
exposure and maintains a ratio of GAAP equity to assets of at 
least 10 percent, and then meets the eligibility requirements 
for 4 straight quarters, he wants to propose some regulatory 
relief for those banks.
    And he talks about eliminating the stress-testing 
requirement under Section 165 of Dodd-Frank; relaxing certain 
aspects of Basel capital standards and risk-weighted asset 
calculations; eliminating entire schedules on call reports, 
including schedules related to trading assets and liabilities 
and derivatives and certain other capital requirement 
calculations; and, also, lengthening the examination schedule 
from 12 months to 18 months so they are not getting examined so 
often, because that can be expensive as well.
    What about that whole analysis? I can't ignore the 
similarity between your own comments and what Chair Hoenig is 
proposing. Is that something we could look at not only for the 
smaller community banks but also to some of these regional 
banks that might be operating prudently?
    Mr. Johnson. Congressman, I think it is a very good idea to 
look at the community bank situation and to stipulate some 
fairly stringent criteria which they can opt into and that 
would get them some regulatory relief. I think that is a very 
good idea. I think Mr. Hoenig has many good ideas, and that is 
one of them.
    Certainly, when a bank reaches the size, let's say, of 
Zions or Huntington, you might want to consider this similar 
sort of possibility. But I would caution everyone that once you 
get over $100 million, $150 billion in total assets, there 
should be a level of scrutiny and concern. It doesn't mean that 
you prevent them from growing, it doesn't mean you prevent them 
from running certain kinds of businesses, but you want the 
regulators to look at it.
    And to the previous question that was put to me, what is 
the difference between now and before 2008? The primary 
difference is we had a crisis, we had Dodd-Frank. The 
regulators are very scared about anything similar happening in 
the future, so they got the point. And I think you are 
empowering them and you are requiring them not to forget as we 
go forward.
    But, having said that, I think Mr. Hoenig's proposal is 
absolutely sound and should be taken very seriously.
    Mr. Lynch. Are there other steps that we could take with 
regional banks that would be incremental?
    I know the derivatives issue that was brought up here, 
credit default swaps, I guess riskier activity that could be 
red-flagged, that if regional banks were not involved in that 
particular activity, we could take them down a notch in terms 
of the regulatory scrutiny that would otherwise apply.
    Is there anything that we could do in--I know that it is a 
case-by-case analysis, and I am not sure if the regulatory 
framework allows for that.
    Mr. Johnson. The regulatory framework absolutely allows for 
that on a case-by-case basis.
    I think Mr. Simmons raised a good point about the stress 
test. To what extent are the stress tests fair? To what extent 
are they transparent? To what extent do people understand what 
the Fed is asking from them? And to what extent does it go 
beyond being what Mr. Simmons called a useful tool to being an 
onerous obligation?
    I think that is a very fair question. And that is the 
question that you should be putting to the Fed and the Fed 
should be explaining to you and to others exactly what their 
approach is and why it makes sense to ask what they ask from 
Zions and to ask what they ask from JPMorgan Chase.
    But I don't think you want to legislate that. I think if 
you start to legislate what should or should not be in stress 
tests, you will come up with some very strange criteria.
    Mr. Lynch. Right. I don't doubt that at all.
    Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    We are going to go to one more Member, and then we are 
going to recess for votes.
    Members, I would ask you to, as soon as the last votes are 
over, come back, and we will finish up.
    We now go to Mr. Tipton, the gentleman from Colorado, for 5 
minutes.
    Mr. Tipton. Thank you, Mr. Chairman.
    As we are talking about soundness, which we can all 
certainly support, I think we need to be mindful that we are 
impacting businesses at home and people's jobs.
    And, Mr. Simmons, in your written testimony, you establish 
that Zions has very conservative limits on some of your 
commercial lending.
    Since Zions' primary business model does involve commercial 
lending and many of the aspects of your loans being under $5 
million in size, has this regulatory regime impacted your 
ability to be able to actually make some of those loans in 
Zions' footprint?
    Mr. Simmons. What has been a significant factor in our 
thinking about some loan types and categories--I think I noted 
specifically in my written testimony construction lending, 
commercial real estate lending generally.
    We operate currently in construction lending--in 2006, 
regulators issued guidance that suggested that if you are 
operating a construction portfolio, maintaining it at under 100 
percent of risk-based capital, that they were quite comfortable 
with that, and over that limit they would allow it but wanted 
to have stronger risk management around it.
    We are at about, roughly, a little under a third of that 
level today and have basically put a cap on it. Because of the 
implications of that particular asset class and what we 
believe--the result we believe it is creating in the Federal 
Reserve stress test. Again, it gets back to concerns about 
transparency.
    Mr. Tipton. And so it is the unknown quantity sort of 
coming out of a regulatory regime.
    I would like to be able to drill down. We had had testimony 
that came in from the regulators, and there seems to be empathy 
on this panel and from the regulators in regards to not the big 
banks but the smaller banks, some of the super-regionals that 
you would qualify in.
    You had cited that you had 12,500 pages in terms of a 
stress test this year, double-sided, that the chairman had 
noted. How many pages did you have last year?
    Mr. Simmons. It was similar.
    Mr. Tipton. Similar to that?
    Mr. Simmons. Yes.
    Mr. Tipton. So are those costs impacting your ability to do 
what you are designed to do, which is to provide access to 
capital for businesses and for individuals?
    Mr. Simmons. I would say certainly the cost is--it is 
costly. We spent over $20 million last year doing that, and for 
a company our size, that is a fair amount of money.
    I think as important is the amount of internal time and 
effort and just the focus on this. I mentioned in my written 
testimony that we held 20 board meetings last year. Seventeen 
of them had as a significant item on the agenda focusing on 
stress tests.
    And that is where I think that--I think it is a useful 
tool, but I think it has the potential to be overdone.
    Mr. Tipton. How many new people have you hired for 
compliance in Zions?
    Mr. Simmons. I noted that we have hired over the last 4 or 
5 years close to 500 in risk management, internal audit, and 
compliance.
    Mr. Tipton. Do any of those people make loans?
    Mr. Simmons. None of those individuals make loans.
    Mr. Tipton. None of those people make a loan. So you aren't 
able to focus on your core business model if you want to be 
able to do it right.
    Mr. Chairman, I think it is pretty frustrating. I never 
thought I would be quoting Barney Frank, but, effectively, he 
has come out and said we didn't intend for it to be able to go 
this far, in terms of a regulatory regime. And I think that it 
really speaks to an out-of-control regulatory process, to where 
a broad-based piece of legislation is being put forward and we 
are leaving the regulators to be able to fill in the blanks.
    And now, arbitrarily, we are talking about $50 billion, and 
we are seeing the regulators and others step back and say, 
well, that may not be the right number. But I would certainly 
probably take issue in terms of some of Mr. Johnson's comments 
in terms of Congress actually getting involved--maybe smaller, 
prescriptive bills.
    And Mr. Luetkemeyer, I will certainly associate myself--I 
cosponsored that legislation. It is going to be an appropriate 
way for this to be able to address something that I think is 
impacting our ability to be able to grow our communities, to be 
able to grow jobs. We need that access to capital to be able to 
do that.
    Dr. Barth, you cited concentration as a potential problem 
in terms of some of the regulatory regime that we are seeing. 
Are we actually incentivizing concentration of banks? We are 
seeing more small banks now shut down than there are new banks 
start up. Are we actually driving the ship into creating more 
significant banking businesses rather than spreading that risk 
through small communities?
    Mr. Barth. Yes, I am concerned about concentration, but I 
don't think we have a particularly serious problem now with 
respect to concentration. The regulatory authorities can deal 
adequately with the concentration that exists here in the 
United States. My point about concentration is simply that the 
money-center banks dominate the share of assets of bank holding 
companies here in the United States.
    So, again, concentration is an issue, but I don't think it 
is the important issue. I think the important issue is the one 
that has been mentioned many times, which is that size per se 
doesn't tell us very much about systemic risk of financial 
institutions. We have to move well beyond size if we really 
want to take a serious attempt at trying to determine which 
institutions are indeed systemically important here in the 
United States.
    Mr. Tipton. Thank you.
    I yield back, Mr. Chairman.
    Chairman Neugebauer. The time of the gentleman has expired. 
I thank the gentleman.
    Without objection, this committee will stand in recess 
subject to the call of the Chair. I ask Members to return 
promptly after votes.
    [recess]
    Chairman Neugebauer. The subcommittee will come back to 
order.
    I now recognize the gentleman from Texas, Mr. Williams, for 
5 minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    And I thank all of you for being here today.
    Before passage of Dodd-Frank, the term ``systemically 
important'' barely registered for the average American. Yet 
here we are, almost 5 years later to the day, and the term 
``SIFI'' has become almost commonplace for most financial 
institutions.
    As we have discussed today, Zions Bank, which operates one 
of their community banks, Amegy, in my home State of Texas, is 
the smallest SIFI that exists. The time, expense, and energy 
that it takes a bank of their size to comply with regulation 
after regulation, in my opinion, is simply not acceptable.
    As an original cosponsor of Mr. Luetkemeyer's bill, I 
strongly support his effort to reform the SIFI designation. 
Setting arbitrary thresholds, whether that be $50 billion or 
$500 billion, to me, is counterproductive. Plain and simple, 
banks, whether they are big or small, need to be able to simply 
compete.
    So my first question to you, Mr. Simmons, is this: You 
state in your testimony that your banking activities are very 
traditional in nature--deposits, making loans, and providing 
your customer with a high degree of service, with a focus on 
lending to small businesses.
    As a small-business owner myself for 44 years--I am a car 
dealer, I am in the car business--I rely on banks for loans. 
And, in fact, there hasn't been a day--I don't know if I should 
say this braggingly or not, but there hasn't been a day in my 
business career I haven't been out of debt.
    Now, can you explain to me how being designated as a SIFI 
impacts your bank's ability to make small-business loans?
    Mr. Simmons. Sure.
    As I indicated in my written testimony, one of the things 
that we have come to realize is that the Federal Reserve stress 
tests become really our binding constraint. There are various 
methods of measuring capital in a financial institution and 
capital requirements, but the stress test and the Comprehensive 
Capital Analysis and Review (CCAR) process has become, for us, 
the binding constraint. And it is the Federal Reserve's model, 
specifically, that we are trying to manage to.
    And it is frustrating because we don't know really how 
those models work, but we can divine enough information from 
the results to determine that we believe that there are very 
high loss rates attributed, for example, to construction loans. 
So we find ourselves pulling back there.
    One of the specific areas that we find ourselves really 
thinking about right now is that in the Federal Reserve's 
models, the templates they furnish to gather data do not allow 
you to provide the detail that is required to really evaluate a 
loan, to look at collateral values, at the customer's cash 
flow, et cetera, that would allow you to really determine how 
risky a loan is. And so we just provide the loan balance on a 
supplementary schedule for loans under a million dollars or 
loans that are credit-scored for owner-occupied commercial real 
estate.
    As a consequence, we believe--we don't know, but we believe 
that there are probably high loss rates attributable to those 
loans because they have no other way of determining what the 
loss content is, and their own instruction suggests that 
missing data defaults to a high rate of loss.
    So dealing with the uncertainty and the unknowns has us, I 
think, being more conservative than we would certainly be if we 
had the detail.
    Mr. Williams. Another question, and we touched on this a 
little bit, but how has having this designation impacted your 
business model?
    And $20 million in costs associated with these stress tests 
is certainly no small sum. In other words, does having this 
designation eventually impact the services that your can 
provide your customers like me?
    Mr. Simmons. One of the ways that it is actually impacting 
our business model is we announced a month ago that we are--we 
have had seven subsidiary banks, each with its own charter, 
management team. We are consolidating those into a single 
charter to try to reduce some of the cost of--and to ensure 
that we have consistency in the way we are generating data for 
the regulators.
    And so that is an example of how we are having to adjust to 
this new world of--
    Mr. Williams. Yes. Usually overregulation affects the 
customer, is the way it works.
    Mr. Simmons. At the end of the day, we are spending a lot 
of money.
    Mr. Williams. Yes.
    Mr. Simmons. There is a lot of regulatory cost, much more 
than I had ever seen certainly before the crisis.
    Mr. Williams. We are running out of time. I have one more 
question for you. Would you support eliminating the concept of 
SIFIs altogether?
    Mr. Simmons. I think there are some very large institutions 
that present systemic risk. I am not opposed to the notion that 
we ought to try and understand what that risk is and regulate 
accordingly. I think the line was simply drawn at a level very 
arbitrarily that catches a lot of fish in the net that didn't 
belong there.
    Mr. Williams. Thank you for your answers.
    And I yield back, Mr. Chairman. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Minnesota, Mr. Emmer, is recognized 
for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chairman.
    And thanks to the panel for being here all afternoon.
    Dr. Barth, before we took the break, you testified that the 
$50 billion threshold is ``entirely inappropriate'' for 
measuring whether an entity falls within the definition of a 
SIFI. You also testified that the $50 billion threshold is 
``totally arbitrary and static.''
    Just for the record, is it possible for you to expand on 
that last statement, the ``totally arbitrary and static?''
    Mr. Barth. Yes. I would be happy to, sir.
    It turns out there is no evidence supporting the notion 
that a $50 billion threshold distinguishes between bank holding 
companies that would be systemically important financial 
institutions and those that are not.
    And as an economist, I typically turn to evidence, and as I 
point out in my testimony, there is ample evidence, indeed 
overwhelming evidence, that drawing a threshold at $50 billion 
for bank holding companies is totally inappropriate if one 
wishes to distinguish between systemically important financial 
institutions and those which are not. There is more than just 
size that would go into any calculation as to whether or not an 
institution would be a SIFI.
    Mr. Emmer. Right.
    And, Mr. Simmons, I understand that you are the chairman 
and CEO of a $58 billion bank holding company that operates 7 
community banks in 11 States. These community banks are full-
service banks, correct?
    Mr. Simmons. They are.
    Mr. Emmer. They provide, among other things, business and 
consumer loans?
    Mr. Simmons. Yes.
    Mr. Emmer. Your company recently filed this--I think the 
testimony before the break was stress-test documents. Is that 
correct?
    Mr. Simmons. Yes.
    Mr. Emmer. I don't know if they are called something else, 
but that is what they were referred to earlier. These are some 
32 volumes of over 12,000 pages?
    Mr. Simmons. Yes.
    Mr. Emmer. Do you know how many of your employees were 
dedicated to putting those 32 volumes and over 12,000 pages 
together?
    Mr. Simmons. We have a staff of about 30 employees who work 
on it pretty much full-time throughout the year.
    Mr. Emmer. How long did it take?
    Mr. Simmons. Oh, it is a process that goes on all year 
long. And then we have scores of others who contribute in one 
way or another--auditors, frontline credit people. There are a 
lot of people who are touched by it.
    Mr. Emmer. And have you put a cost to it? Are you able to 
give us an idea of how much and the hours that were put in and 
the effort?
    Mr. Simmons. The one number I am quite confident of is that 
we spent a little over $20 million in direct cost, because I 
can go through and look at bills from law firms and 
consultants.
    Mr. Emmer. Right.
    Mr. Simmons. The internal costs, I haven't really tried to 
tabulate that.
    Mr. Emmer. All right.
    Just a general question, are certain elements of Dodd-Frank 
frustrating the ability of financial institutions like yours--
and this follows in line with Representative Williams earlier. 
He was trying to get at the questions you just had, whether 
this was impacting your ability to service the consumer, the 
actual customers.
    Are certain aspects of Dodd-Frank frustrating the ability 
of financial institutions like Zions to make loans and offer 
credit to job creators?
    Mr. Simmons. Well, not specifically attributable to the 
SIFI issue, but I would tell you that trying to make a mortgage 
loan these days has become incredibly complicated. And that may 
be a topic for a different day, but the ability-to-repay rules, 
the documentation around it, and the ancillary rules around 
making a residential mortgage have become incredibly 
complicated and, I believe, are stifling the extension of 
credit to a number of creditworthy borrowers, in our firm at 
least.
    Mr. Emmer. Wow. And I know the focus today has been on 
SIFIs and the threshold and how you measure it, but I am just 
interested because it seems to all be related.
    And these are general questions, but can you tell us 
whether the law is having a disproportionately negative impact 
on Americans of modest means and business startups? I am 
interested in making sure that capital is available for the 
people on the lower end who are actually creating the new 
opportunities in their garage. And it is community banks, among 
others, that in the past have provided that capital. Are you 
seeing an impact on that?
    Mr. Simmons. It is to the extent that, like I said earlier, 
in our case we are pulling back somewhat, being conservative in 
terms of how we make loans. It is hard to say. I am not sure I 
can generalize how it is affecting others, but that is 
primarily how it is affecting our ability to serve customers.
    Mr. Emmer. Okay. Thank you. I see my time has expired.
    Chairman Neugebauer. The gentleman from New Hampshire, Mr. 
Guinta, is recognized for 5 minutes.
    Mr. Guinta. Thank you, Mr. Chairman.
    Thank you all for coming here and indulging our first vote 
series, and we appreciate it.
    As we know, Section 165 of Dodd-Frank requires the Federal 
Reserve Board to apply enhanced prudential standards to bank 
holding companies with total consolidated assets of $50 billion 
or more. Thirty-seven bank holdings currently have assets 
greater than $50 billion that are subject to enhanced 
supervision.
    Under that same section, a bank holding company with total 
consolidated assets of $50 billion or more must comply with and 
hold capital equal to--or equal with the requirements of 
regulations adopted by the Federal Reserve.
    Mr. Kini, in your testimony you stated that Section 165 
does not allow the Federal Reserve to raise the $50 billion 
threshold or to avoid applying the mandatory enhanced 
prudential standards to any set of greater-than-$50-billion 
asset bank holding companies. This provision only allows the 
Federal Reserve to vary application of enhanced prudential 
standards.
    Does this give regulators enough flexibility to ensure that 
institutions above the $50 billion threshold are not 
overburdened by tougher rules?
    Mr. Kini. Congressman, I think what Section 165 does, to 
your very good point, is it dictates that there is a mandatory 
level of enhanced standards that have to apply at $50 billion. 
So it is kind of like a toggle switch. At $50 billion, there 
has to be some sort of enhanced capital, enhanced liquidity, 
enhanced stress-testing, and other enhanced standards that have 
to apply at that level. So there has to be a distinction 
between $51 billion and $49 billion bank holding companies.
    Now, the Federal Reserve has the authority to tailor and 
differentiate once it goes above the $50 billion. But, to your 
point, at $50 billion, that is an important threshold that the 
Dodd-Frank Act sets and that the Federal Reserve does not have 
the authority to vary with respect to these core elements.
    Many people, including Federal Reserve Governor Tarullo, 
have questioned the value of applying all of these standards to 
$50 billion bank holding companies and, I think, have openly 
questioned and suggested whether this ought to be reexamined. 
The Federal Reserve does not have authority to change where 
that toggle switch fits. Only Congress can act to move that 
toggle switch.
    Mr. Guinta. Okay. So the FSOC doesn't, and the Federal 
Reserve doesn't, only Congress.
    Mr. Kini. With respect to these core elements of capital, 
liquidity, stress-testing, the Federal Reserve does have 
authority to vary and differentiate, but it can't move that $50 
billion threshold. It has to apply the $50 billion threshold 
because that is what the statute says.
    There are other parts of Section 165 where the FSOC and the 
Federal Reserve could move things, but those are outside of 
these core elements, and that is statutorily set at $50 
billion. There has to be a differentiation, according to the 
statute.
    Mr. Guinta. Okay. I thank you.
    I yield back to the Chair.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from Utah, Mrs. Love, is recognized for 5 
minutes.
    Mrs. Love. Thank you, Mr. Chairman.
    First of all, I would like to thank all of you for being 
here today, especially Mr. Simmons from the great State of 
Utah. I really appreciate having some Utah testimony here 
today, so thank you so much for being here and answering 
questions for all of us.
    I wanted to focus a little bit on the things that I have 
heard in terms of the 500 employees that have had to have been 
added. Most of those full-time employees are there for pretty 
much compliance, internal audits, credit administration, and 
enterprise risk management--there just to deal with risk 
management.
    So, I am trying to figure out the amount of effort that has 
gone in just to comply with some of the regulations when it 
comes to Dodd-Frank. Where does that--paying those 500 
additional employees, I just want to hear from you where the 
cost of that compliance ultimately ends up?
    Mr. Simmons. It is like all costs in a company; at the end 
of the day, it gets divided somehow between customers and 
shareholders. And it is all a function of pricing in the 
marketplace, but it is a cost.
    And one of my concerns, ultimately, is that all of this 
additional cost is making the entire regulated industry, 
financial institutions, or financial services industry, less 
competitive relative to the unregulated or the shadow industry.
    Mrs. Love. Right.
    Mr. Simmons. And we see evidence that business is leaving 
the regulated industry for other climes that are a little more 
hospitable in terms of the cost structure.
    Mrs. Love. Okay.
    The other question I have is--and I guess I can go down and 
ask everyone this question--when we are looking at the SIFI 
thresholds, whether they are raised or eliminated, would bank 
regulators still have the regulatory or supervisory tools 
necessary to make sure that all banking organizations are 
operated in a safe and sound manner?
    If we were to bring that down, for instance, if we were to 
bring that threshold down, do you feel that the regulators 
would still have the tools they need to make sure that you are 
operating in a safe manner?
    Mr. Simmons. I will start.
    I believe they have always had the tools to do that, 
fundamentally.
    Mr. Barth. I would agree. If the threshold were eliminated, 
regulatory authorities do indeed have the tools to be sure that 
financial institutions operate in a safe and sound manner. They 
have always had the tools.
    Mrs. Love. Okay.
    Mr. Kupiec. I would agree, too.
    Mr. Kini. I would agree, as well. I think merely raising 
the threshold or eliminating it does not take away authority 
that the regulators have. The Federal Reserve, for example, in 
the Bank Holding Company Act has broad authority and has ample 
authority to take supervisory measures that it deems fit under 
that Act both as a regulatory matter and as a supervisory 
matter.
    Mrs. Love. Okay.
    Mr. Johnson. They have always had the tools, but they 
didn't use them. The massive inability or unwillingness to use 
those tools prior to 2008 was the motivation for Dodd-Frank in 
general, and the specific threshold issue we are talking about, 
which is to say: You must use those tools or talk about how to 
use those tools above this threshold.
    Mrs. Love. That doesn't make any sense to me. So they have 
the tools and they wouldn't use them, but we have to add 
another piece of legislation in order for them to use the tools 
that they already had?
    Mr. Johnson. Congresswoman, they didn't use the tools 
because they were asleep at the wheel. Chairman Greenspan 
thought it was an inappropriate use of Federal Reserve powers 
and so on. So Congress decided to address that.
    If you think you want to go back to letting the Fed make up 
its own mind entirely about these issues, that is a pretty big 
step, and not one that I would advise.
    Mrs. Love. No, I certainly wouldn't advise that, because I 
have found out that when we give too much control to any 
regulatory agency, it actually hurts those that it vows to 
protect, as we are seeing here.
    If you think about it--my time is limited--there is a 
system that was put in place to make sure that we don't have, 
systematically, banks that are too-big-to-fail. And yet, this 
has actually created an environment where a lot of the smaller 
banks are being absorbed or are having to close their doors 
because they cannot deal with the cost of compliance.
    And I want to again make sure that everyone knows that the 
cost of compliance always goes to the consumer, those people 
who are out there trying to get a loan for their home, for a 
loan to start their business, or to purchase a vehicle so that 
they can get to and from work.
    I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentlewoman from California, the ranking member 
of the full Financial Services Committee, Ms. Waters, is 
recognized for 5 minutes.
    Ms. Waters. Thank you very much.
    I am very appreciative for this hearing for any number of 
reasons. First, I would like to say to Mr. Simmons over there, 
I visited your bank.
    Mr. Simmons. Yes.
    Ms. Waters. And I know that during the time that I visited, 
there was a little bit of a problem with the stress-testing, 
and I had just begun to focus on the centralized risk 
management systems. But I want to tell you that your employees 
and all of the people there were extremely efficient. They were 
friendly. I was welcomed there. We had a good time there.
    And so I just want you to know that, whatever it is we are 
looking at or we are questioning you about today, I know that 
the people who are employed in the bank really do care.
    Mr. Simmons. We would always love to have you back. It was 
nice to have you there.
    Ms. Waters. We will come back to visit you sometime in the 
near future.
    Let me just ask a little bit about this centralized risk 
management that we have been taking a look at. Your testimony 
states that the bank has incurred high costs due to stress-
testing and resolution-planning requirements under the Dodd-
Frank Act. But you also said that stress-testing is an 
important part of successfully running a bank, that you are not 
against stress tests, that they are important to have.
    Now, in March, Moody's issued a report that stated, and I 
will quote, ``We view Zions' relatively new centralized risk 
management system as its major rating constraint. This also 
includes the risk culture of the company, particularly as it 
relates to managing asset concentrations and adhering to the 
country's post-crisis risk limits.''
    The report adds that, ``While this function is long 
established at most banks, Zions only began this process a few 
years ago. If it weren't for the Dodd-Frank Act, the question 
becomes, would Zions be investing in such robust centralized 
risk management systems?''
    First of all, how are your risk management systems? Do you 
consider that the criticism that was levied has been corrected? 
What is going on there?
    Mr. Simmons. The first thing I would say is I fundamentally 
disagree with that statement from Moody's. I think a 
fundamental measure of risk in a traditional bank, at the end 
of the day, is what do your loan losses look like.
    And if you look at our average net charge-offs as a 
percentage of loans for the period of 2008 through 2011, which 
I would really consider to be the worst cycle we have had since 
the Great Depression, our average loan losses were 1.9 percent 
annually. That compares to a weighted average of 2.51 percent 
for all traditional bank holding companies, which excludes the 
big trust banks like Northern Trust and State Street. And it 
compares to a charge-off ratio of 2.05 percent for all 
commercial banks.
    We actually came through the downturn, despite the fact 
that we had a lot of exposure in places like Nevada and 
Arizona, which really got hurt hard in the downturn, we came 
through it in better shape than average.
    And so, yes, everyone in the industry has done a lot to 
continue to strengthen their risk management systems, ourselves 
included. I fundamentally don't believe that the $50 billion 
threshold, though, has played a particularly important role in 
getting to where we are today.
    Ms. Waters. Okay. All right. Thank you.
    Mr. Johnson, I want to ask you--I have been in and out, and 
I apologize for that. But it seems as if there has been a lot 
of discussion about designating these regional banks as SIFIs 
if they are $50 billion or more. And you are saying that our 
regulators have flexibility, and this is not automatic.
    Would you explain this again? I am sure you have said it 
several times today.
    Mr. Johnson. Yes, I think there has been some confusion 
over terminology in the discussion.
    The topic is not about systemic designational--designating 
any particular bank as systemically important, using the SIFI 
term. It is that there is a threshold in Dodd-Frank that says, 
above this threshold, there have to be standards that are--I am 
just quoting here--more stringent than the standard rate 
requirements that apply to the smaller banks. That is it.
    And then it goes on to say immediately--and I am quoting--
the Board of Governors may ``differentiate among companies on 
an individual basis by category, taking into consideration 
capital structure, riskiness, complexity, financial activities, 
size, and other risk-related factors.'' That is a lot of 
discretion or tailoring, which exactly is intended to address 
the issues that have been raised today.
    And I think Dodd-Frank anticipated this. They wanted there 
to be some minimum standards so you couldn't have the kind of 
massive lapses that we had before 2008. And, above those 
minimum standards, the way in which they are applied is 
substantially at the discretion of the regulators.
    Ms. Waters. Thank you.
    Mr. Simmons, do you understand it that way?
    Mr. Simmons. One of the things I said earlier today was 
that we don't see a lot of evidence of tailoring that is nearly 
proportionate to our size vis-a-vis the size of the largest 
institutions subject to some of these rules. And so I do 
believe that costs are falling disproportionately on smaller 
institutions which are subject to these enhanced prudential 
standards.
    Chairman Neugebauer. The time of the gentlewoman has 
expired.
    Ms. Waters. Thank you, Mr. Chairman.
    Chairman Neugebauer. Without objection, I am going to 
recognize Mr. Royce, who is a member of the full Financial 
Services Committee but not a member of the subcommittee. He has 
a bill coming up on the Floor. And without objection, he is 
recognized for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. I appreciate it.
    I am increasingly concerned about what Mr. Harris described 
as the diminishing returns of increased regulation. When a 
regional bank is spending $200 million on compliance projects, 
and hiring 500 additional non-loan-officer staff, it really 
makes you question who is benefiting. Certainly not the 
customer looking for a loan to build a home or start a business 
or pay for a child's education.
    And a lot has already been said today by Members on both 
sides of the aisle about how the current $50 billion threshold 
for enhanced prudential standards is the wrong one. And I would 
like to ask Mr. Kini: You, in your testimony, describe how this 
is not the only place that the number has been applied. In 
fact, it has become what you termed a ``systemic risk 
lodestar'' for the Federal financial regulatory agencies.
    Where else has this been applied, since you raised that 
issue? And under today's regulation, what is the difference 
between being a $49 billion bank and a $51 billion bank?
    Mr. Kini. Thank you, Congressman.
    I think you are exactly right. The $50 billion threshold is 
now used in a number of different contexts beyond what is 
dictated in Section 165.
    So, to give one example, regulators have dictated that 
certain enhanced compliance requirements apply in the 
regulations under the Volcker Rule for $50 billion banking 
entities. There is no statutory directive to do that, but this 
$50 billion concept is embedded there. It is embedded in 
certain governance and risk management standards that the 
Comptroller of the Currency has adopted.
    So it is kind of expanding and being used in a number of 
different areas that are not required by the statute. And I 
think that is because the regulators are looking at Section 165 
and pointing to it and saying, well, Congress made a choice 
here on $50 billion, so we are going to adopt a $50 billion 
threshold, as well.
    So the end result seems to be: one, kind of a continued 
proliferation of the $50 billion threshold; and two, the 
imposition of regulatory requirements that are beyond the set 
that we have been talking about up to now on bank holding 
companies once they cross that $50 billion mark.
    Mr. Royce. So you are saying that regulators have used the 
flexibility given to them under current law to apply the $50 
billion threshold on this elsewhere, even when not required, 
and they have not, as some have suggested, used the flexibility 
to tailor the regulation based on the risks posed by the bank?
    Mr. Kini. I think that is a fair statement. I think they 
have, in various contexts, used $50 billion elsewhere where 
there is no requirement to do so, and they haven't done--in 
some of those cases, like in the Volcker Rule, there are harder 
standards at $50 billion than below.
    Mr. Royce. Right.
    So here is my question, could the Federal Reserve, on its 
own, raise the CCAR level to $100 billion or $250 billion? If, 
as Dr. Johnson suggested, the $50 billion threshold is not a 
systemic risk designation, then wouldn't a higher number make 
sense for stress-testing?
    Mr. Kini. The Federal Reserve could vary different types of 
stress-testing above the $50 billion level, but it has to apply 
enhanced capital requirements at $50 billion, and it has to 
apply Dodd-Frank stress-testing, so DFAST stress-testing, at 
$50 billion. And, as a matter of fact, Governor Tarullo has 
really asked, well, does that make sense, to apply some of that 
level at $50 billion.
    Mr. Royce. Okay.
    My last question to you would be, have other countries 
around the world adopted the bright-line $50 billion asset-
based threshold here?
    And, also, did the Federal Reserve advocate for this 
approach when the Basel Committee was designing its methodology 
for determining systemic risk regulation?
    Mr. Kini. I am not aware that the Federal Reserve advocated 
for the $50 billion. As a matter of fact, the Basel Committee 
uses a much more nuanced indicator-based approach when it looks 
at globally systemically important banks, number one.
    And, number two, when the Federal Reserve has considered 
mergers under its bank holding company authority and has been 
directed by Dodd-Frank to look at systemic importance, it, too, 
uses a much richer and nuanced analysis, which suggests that 
when the Federal Reserve is not directed to use $50 billion, 
it, too, would use a much more nuanced approach and a much 
richer analysis for determining systemic importance.
    Mr. Royce. Thank you, Mr. Kini. I appreciate it.
    And thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Washington, Mr. Heck, is 
recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    Dr. Johnson, for you, sir--and I apologize for not having 
been here earlier if some of my inquiries are a bit redundant. 
Please accept my apologies.
    But I do understand you to have said in response to a 
question earlier today that you found much merit, or at least 
some considerable merit, in Mr. Hoenig's approach of making 
these determinations on the basis of the level of risk activity 
as opposed to just asset size. Is that correct?
    Mr. Johnson. I think the specific Hoenig proposal we were 
discussing is to create a safe haven, primarily designed for 
community banks but also potentially expandable, where, if you 
meet certain very stringent criteria across a range of 
dimensions, including the riskiness of your portfolio, how much 
capital you have, how much leverage you have, and so on--but if 
you meet these stringent criteria, you will opt out of a lot of 
the other regulations that currently apply to community banks. 
Yes, that idea I do support.
    Mr. Heck. And is there any point at which that size matters 
if the risk activity continues to be de minimis? And if so, 
what would you indicate as the appropriate size?
    Mr. Johnson. As I discussed in my written testimony, if you 
look at the experience in the United States with financial 
crises, and the same thing is true in other countries--I used 
to be the chief economist at the International Monetary Fund, 
for example. When the systemic footprint of an institution or 
its total risk exposure reaches around 1 percent of GDP, you 
should open your eyes and you should look at it and you should 
try to understand what is it, how does it fit in the system, 
what would happen if it collapses, would it bring down other 
similar financial institutions, for example.
    So this is an argument for scrutiny. It doesn't say that 
you should apply exactly the same standards to everybody 
irrespective of their size above that level.
    But if we take this 1 percent or .75 percent of U.S. GDP, a 
total risk exposure of about $100 billion would make sense. 
Now, that is not exactly the same as $50 billion consolidated 
assets. It would make a difference, for example, to Zions and 
also to Huntington. But, as I mention in my written testimony, 
those are the only two U.S. bank holding companies that would 
be affected by such a shift in emphasis.
    Mr. Heck. The bottom line being, if I am hearing you 
correctly, that you and I would agree that some form of 
regulatory relief geared toward lower-risk-activity 
institutions of a certain size would be appropriate and a 
prudent thing to do.
    Mr. Johnson. Look, absolutely. For community banks below 
$10 billion, below $1 billion, I have a lot of sympathy for the 
arguments that they have gotten caught up a little bit too much 
in the regulatory net. And what is nice about Mr. Hoenig's 
proposal is, let them opt out, let them choose a business model 
that is absolutely, clearly, beyond any doubt much safer, and 
then you can exempt them from a variety of other systemic 
regulatory-type requirements.
    Mr. Heck. I am going to go off-topic a little bit here, but 
I cannot resist the impulse, given your professional background 
at the IMF.
    Is the United States paying a price, directly or 
indirectly, for our failure to embrace the recommended reforms 
of, what now, 5 years ago? And if so, what do you think they 
are?
    Mr. Johnson. In terms of financial-sector reforms?
    Mr. Heck. To the IMF.
    Mr. Johnson. Oh, at the IMF. Look, I think, yes, the lack 
of support in Congress for the quota reform at the IMF is a 
problem. I think the IMF can and in many instances does play a 
helpful role in terms of stabilizing the world economy, and 
that means stabilizing our trading partners, and we care a lot 
about the stability of our export markets. And from a national 
security perspective, we absolutely do not need more failed 
states around the world.
    The IMF needs to modernize. It needs to change its 
governance. There are more proposals on the table. But you 
can't get there unless and until the U.S. Congress approves the 
quota reform that is currently on the table. It has been on the 
table for a long time.
    Mr. Heck. Dr. Johnson, do you believe our failure to 
embrace those reforms, as are supported pretty much throughout 
the rest of the globe by the participants, cedes economic 
development leadership in the world to other countries? Are we 
giving up influence, gravitas, opportunity to make a positive 
impact to other countries by virtue of our unwillingness to 
adopt these--
    Mr. Johnson. We are absolutely failing in our own 
leadership and disappointing many of our friends. Whether any 
other country can step forward and take up that leadership 
remains to be seen. I rather think that you get something more 
anarchic and something more chaotic, which is also not good.
    I don't think it is over, also, Congressman. We can step 
up; we can take more responsibility. And the situation in 
Europe, for example, is, these days, an absolutely pointed 
reminder of what happens if you let other people sort out their 
own problems. It often doesn't happen.
    Mr. Heck. All I can say is ``hear, hear'' on both points. 
Thank you very much, sir.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Pennsylvania, Mr. Rothfus, is recognized 
for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    And I would like to go back to the beginning, when the 
chairman asked a couple of questions. And, Dr. Kupiec, I want 
to address this to your attention.
    Section 165 of Dodd-Frank provides that the Federal Reserve 
shall establish enhanced prudential standards for bank holding 
companies with consolidated assets of $50 billion or more ``in 
order to prevent or mitigate risks to the financial stability 
of the United States.''
    I wonder if I have been hearing some revisionist history 
lately. With some defense of the $50 billion threshold, 
supporters have suggested that these institutions as low as $50 
billion could pose a risk, not for the financial stability of 
the United States, but pose a risk for a region of the country, 
which is sufficient for a SIFI designation. Or, in the 
alternative, they would argue that two or more of these 
institutions could fail at the same time and could collectively 
pose a systemic risk.
    I guess my question is, do SIFI designations that are 
ostensibly justified by regional risk or by the risk of 
multiple institutions all failing at the same time comport with 
the text and intent of the law, which talked about institutions 
affecting the financial stability of the United States?
    Mr. Kupiec. Congressman, I would say no. I would say the 
law is silent on the conditions that prevail.
    I think if you want guidance on this, you need to go to the 
non-bank SIFI designation part, where it talks about 
designating non-bank SIFIs. And it does not ever say the 
context of the failure. So the law is silent about whether--
because if a SIFI fails in a good time, there are plenty of 
institutions that would step up to the plate and buy it, and 
there would be no harm, no foul. Some people would lose money, 
but it wouldn't be a systemic event.
    Mr. Rothfus. It wouldn't affect the financial stability--
    Mr. Kupiec. It would not affect financial stability.
    Mr. Rothfus. And I think Mr. Simmons made a point about, 
when a community bank would go down in a small community, that 
region is going to be detrimentally impacted. And I can see 
somebody create a case where, regardless of a $50 billion 
threshold, maybe a $2 billion threshold or a $3 billion 
threshold, if you had a string of community banks that would 
encounter a difficulty, then you could make a similar argument 
to what I would consider some revisionism going on.
    Mr. Kupiec. It is creative. It is creative justification.
    And I would take issue with Mr. Simmons' characterization. 
The $50 billion threshold really is a systemic risk threshold 
for banks, and it is treated that way. You are either above the 
$50 billion club and the Federal Reserve does a bunch of things 
to you that it doesn't do to other banks, or you are not. Now, 
they may be even tougher on the biggest banks. There is really 
no way to know since they don't tell us exactly what they do at 
different levels of bank size.
    So I do think the $50 billion is a systemic threshold. And 
I do agree with you completely, that it is revisionist thinking 
to justify--
    Mr. Rothfus. If I could, I have a quick question for Dr. 
Barth. I want to make sure I get this in.
    Last July, CIT Group announced plans to purchase OneWest 
Bank. The deal would give CIT more than $70 billion in assets, 
making it the first company to voluntarily jump above the $50 
billion threshold.
    When questioned about the SIFI designation, CIT's CEO, John 
Thain, stated, ``If you are going to go over $50 billion 
anyway, it is better to be $70 billion than $52 billion,'' so 
we could capture some economies of scale. In other words, if 
you are going to be a SIFI, go big or don't go at all.
    Do you agree with Mr. Thain's analysis?
    Mr. Barth. Yes, I do. As Mr. Simmons pointed out earlier, 
for his bank--and I think it applies to other regional banks, 
as well--there are costs, but there are no offsetting benefits 
unless one gets much bigger to spread those costs over a larger 
asset base.
    Mr. Rothfus. Wouldn't this present its own risks to the 
financial system? For example, isn't the idea of consolidating 
totally antithetical to the reasons used to ostensibly justify 
the SIFI designation process in the first place?
    Mr. Barth. Yes. I agree with you. It turns out it shouldn't 
be up to the government to force an institution to become 
bigger simply because it is imposing more cost on an 
institution--an institution being free to choose its own 
business plan. And I think Mr. Simmons nicely pointed out the 
additional costs that his bank is forced to comply with or 
incur solely because of an artificial threshold.
    Mr. Rothfus. Thank you.
    I yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Kentucky, Mr. Barr, is 
recognized for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    And thank you to the witnesses.
    We have heard repeatedly today from many of you all that 
the $50 billion asset threshold is arbitrary and 
unrealistically low.
    If you take community banks in the aggregate and look at 
their assets combined and compare them, say, with Zion Bank's 
$58 billion size, and you look at the number of community banks 
that have been acquired or have failed since the enactment of 
the Dodd-Frank Act, the numbers are quite startling. By year-
end 2010, there were 7,657 banks in the United States. By the 
first quarter of 2015, that number had declined to 6,419.
    And if you look at small banks and de novo charters, newly 
formed banks, according to a March 2015 Federal Reserve Bank of 
Richmond study, there were only 4 de novo, newly formed banks 
total in the last several years, compared to a yearly average 
of more than 100 from 2002 to 2008.
    If you add all of that up and you see the consolidation and 
you see that there are about 1,200 fewer banks today than there 
were when Dodd-Frank was enacted, you are talking about a 
pretty significant loss in assets or at least concentration of 
assets in larger, more systemically important institutions.
    So what is the difference, from a financial stability 
standpoint, from a systemic risk standpoint, between the 
prospect that a failure of a $58 billion small regional bank 
would have on our economy versus the actual impact of the Dodd-
Frank Act on community banks, which has been a dramatic 
consolidation and elimination of these small community banks?
    Would anyone care to respond to that analysis?
    Does the fact that there is consolidation in the industry 
and the fact that there are very few new charters and the fact 
that there are a lot of community banks going out of the 
business, when, in the aggregate, constitute a pretty 
significant asset size, maybe larger in the aggregate than a 
$58 million bank? Does that concern anyone?
    Mr. Kupiec. It certainly concerns me. It is not a good 
environment to want to be a banker in these days, and it is not 
getting any better.
    I think it is always true--and there is lots of research to 
support it--that banks have a special place in the economy, and 
when a bank fails, of any size, bigger or small, it likely has 
negative impacts on the businesses that were being served by 
the bank. They have to spend money to go out and acquire a new 
bank relationship. It is not a good thing, but it is a matter 
of degree.
    So the failure of 700 community banks in aggregate is a 
drag on the economy, but we don't treat that as a systemic 
event.
    Mr. Barr. Let me explore the cost issue with the stress 
test with Mr. Simmons a little bit more.
    You have testified, obviously, that as a consequence of the 
stress test you have added 500 compliance officers--and 
additional regulations--you have added 500 compliance officers, 
none of whom work in the core business of banking. None of them 
are in lending. They are in compliance.
    Obviously, that is costly to the bank's profitability; it 
is costly to your shareholders. But my question is, what does 
it mean to your customer?
    Mr. Simmons. The first thing I would say--these are great 
people. And risk management is certainly fundamental and core 
to the business of banking. I think the issue is that there are 
diminishing returns to all of this. And how much safer relative 
to how much more cost you spend is something that we are 
sensitive to. Our ability to attract capital and to grow is 
hampered by all of this.
    And at the end of the day, the cumulative impact of not 
only Section 165 but of a lot of other new regulations--and I 
mentioned mortgage lending as a good example of one where we 
are spending a lot of time trying to figure out, how do we go 
about just doing what we used to do kind of naturally, which is 
make credit available to people who could pay it back, we kept 
it on our balance sheet, and serve our community?
    Mr. Barr. Can I just interject? In talking to another 
regional bank CEO, what he told me was that $100 million in 
additional compliance costs is the equivalent to a billion 
dollars in capital not deployed in the community. Does that 
ratio square with your experience?
    Mr. Simmons. Yes, given the leverage in the industry, that 
is probably about right.
    Mr. Barr. So the compliance costs mean less credit 
available to customers. And that, I would argue, is in and of 
itself a risk to the financial system, that you have that much 
less capital deployed in the economy, compromising economic 
growth.
    Mr. Simmons. And it compounds, because that is their annual 
costs, and so this compounds over time.
    Mr. Barr. My time has expired. I yield back. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And I would like to thank our witnesses today.
    Without objection, I would like to submit the following 
statements for the record: the opening statement of Chairman 
Randy Neugebauer; the opening statement of Representative 
Blaine Luetkemeyer; the opening statement of Ranking Member 
William Lacy Clay; and the written statement of the Regional 
Bank Coalition.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And with that, we are adjourned.
    [Whereupon, at 4:21 p.m., the hearing was adjourned.]

                            A P P E N D I X



                              July 8, 2015



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