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


                      SEMI-ANNUAL TESTIMONY ON THE
                   FEDERAL RESERVE'S SUPERVISION AND
                   REGULATION OF THE FINANCIAL SYSTEM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 4, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-59

                 
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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
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 4, 2015.............................................     1
Appendix:
    November 4, 2015.............................................    55

                               WITNESSES
                      Wednesday, November 4, 2015

Yellen, Hon. Janet L., Chair, Board of Governors of the Federal 
  Reserve System.................................................     4

                                APPENDIX

Prepared statements:
    Yellen, Hon. Janet L.........................................    56

              Additional Material Submitted for the Record

Barr, Hon. Andy:
    Letter to Federal Reserve Chair Yellen, SEC Chair White, FDIC 
      Director Gruenberg, and Comptroller of the Currency Curry 
      from undersigned Members of Congress, dated July 31, 2014..    70
Yellen, Hon. Janet L.:
    Written responses to questions for the record submitted by 
      Representatives Barr, Emmer, Hultgren, and Luetkemeyer.....    73

 
                      SEMI-ANNUAL TESTIMONY ON THE
                   FEDERAL RESERVE'S SUPERVISION AND
                   REGULATION OF THE FINANCIAL SYSTEM

                              ----------                              


                      Wednesday, November 4, 2015

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Lucas, 
Garrett, Neugebauer, Pearce, Posey, Luetkemeyer, Huizenga, 
Duffy, Hurt, Stivers, Stutzman, Mulvaney, Hultgren, Ross, 
Pittenger, Wagner, Barr, Rothfus, Messer, Schweikert, Guinta, 
Tipton, Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney, 
Velazquez, Sherman, Capuano, Hinojosa, Clay, Lynch, Scott, 
Green, Cleaver, Ellison, Himes, Carney, Sewell, Foster, Kildee, 
Murphy, Sinema, Heck, and Vargas.
    Chairman Hensarling. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``Semi-Annual Testimony on the 
Federal Reserve's Supervision and Regulation of the Financial 
System.''
    I now recognize myself for 3 minutes to give an opening 
statement.
    The Dodd-Frank Act requires the Federal Reserve's Vice 
Chair of Supervision to testify before our committee twice a 
year regarding the Fed's supervision and regulation of 
financial institutions. Regrettably, 5 years after the passage 
of Dodd-Frank, no such person exists. President Obama has been 
either unwilling or unable to follow the law and appoint a Vice 
Chair. We can no longer wait for the President to do his job so 
that we can be allowed to do ours. Thus, Chair Yellen appears 
before us today in substitution.
    As we know, Dodd-Frank rewarded the Federal Reserve with 
vast, new, sweeping regulatory powers despite its contributions 
to the last financial crisis. Under Dodd-Frank, the Fed can now 
functionally control virtually every major corner of the 
financial services sector of our economy, separate and apart 
from its traditional monetary policy authority.
    Disturbingly, the Fed does so as part of a shadow 
regulatory system that is neither transparent nor accountable 
to the American people. Simply put, the Fed must not be allowed 
to shield its vast regulatory activities from the American 
people and congressional oversight by improperly cloaking them 
behind its traditional monetary policy independence. This is a 
vitally important point.
    What is clear is that despite the largest monetary stimulus 
in our Nation's history and 7 years of near-zero real interest 
rates, middle-income families aren't getting ahead, and the 
poor and working class are falling further behind. Preliminary 
third-quarter GDP growth is coming in at an anemic 1.5 percent.
    Our economy, for 7 years, has limped along at about half of 
the post-war average. That means every man, woman, and child is 
thousands of dollars poorer than they should be, and millions 
could be fully employed who are not. Trillions of dollars in 
capital that could fuel robust economic growth instead remains 
sidelined due to a regulatory tsunami, much of it dictated by 
Dodd-Frank and promulgated by the Federal Reserve.
    Thus, serious questions must be asked. Why isn't the Fed 
subject to statutory cost-benefit analysis? Why has the Fed yet 
to find any connection between its Volcker Rule or any other 
rule in the precipitous drop in bond market liquidity? Why does 
the Fed's stress test resemble, in the words of Columbia 
University Professor Charles Calomiris, ``a Kafkaesque Kabuki 
drama'' in which regulators punish banks for failing to meet 
standards that are never stated, either in advance or after the 
fact.
    Combining the Fed's lack of transparency with its all-
encompassing new regulatory authority under Dodd-Frank is a 
dangerous mix. It is a threat to economic growth, not to 
mention the principles of due process, checks and balances, and 
the rule of law. If we are not careful, our central bankers 
will soon become our central planners.
    Fortunately, the House will soon have the opportunity to 
reform the Fed and make it more transparent with the Federal 
Oversight Reform and Modernization Act, offered by our 
colleague, Mr. Huizenga, and approved by this committee.
    I now yield 5 minutes to the ranking member for an opening 
statement.
    Ms. Waters. Thank you, Mr. Chairman, for holding this 
hearing. And thanks to Federal Reserve Chair Yellen for making 
herself available to testify.
    The 2008 financial crisis inflicted staggering damage to 
our economy within the months before President Obama took 
office, with employers shedding more than 800,000 jobs a month, 
unemployment topping 10 percent, home foreclosures displacing 
millions of families, and entire industries on the brink of 
collapse.
    Congress responded to this devastation by passing the most 
comprehensive overhaul of our financial system since the Great 
Depression, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. The Act entrusted significant responsibility to 
the Federal Reserve and directed the Fed to improve its 
supervisory program so that another crisis of such scope and 
depth would never happen again.
    Recognizing that the Federal Reserve failed to apply 
appropriate prudential standards to large banks, Congress 
directed the Fed to impose enhanced requirements for capital 
liquidity, resolution planning, and other factors to ensure 
that no large bank or group of banks could again endanger our 
economy.
    I am eager to hear from Chair Yellen on the progress of 
these reforms, along with a description of how the Fed is using 
the flexibility embedded in Dodd-Frank to tailor regulations 
appropriate to the sizes and risk of different types of banks.
    Congress specifically permitted the Fed to differentiate 
among companies on an individual basis or by category, 
considering their capital structure, riskiness, complexity, 
financial activities, size, and other factors. The Fed should 
use this authority.
    Likewise, Dodd-Frank provided the Fed with new 
responsibility to collectively regulate the activities of 
systemically risky non-bank entities, such as the insurance 
company AIG, whose near failure imposed dire systemic 
consequences on our economy just 7 years ago. I very much would 
like to hear from Chair Yellen about how the Fed has bolstered 
its expertise to take on these new responsibilities.
    And let me also express my deep concern about legislation 
this committee considered during a markup this week that would 
severely undermine efforts by the Fed to regulate both banks 
and non-banks. With regard to banks, the legislation would 
hamstring the Fed's ability to regulate all but the largest 
globally active banks, ignoring how the failure of many large, 
interconnected regional banks could have dire consequences for 
our economy. Similarly, other legislation would undermine the 
Financial Stability Oversight Council's (FSOC's) ability to 
identify supervisory gaps, designate non-bank firms for 
enhanced prudential regulation, and ensure that the Fed is 
regulating them on a comprehensive, consolidated basis.
    Finally, as we just have passed the 5-year anniversary of 
Dodd-Frank, I think it is important to remind the committee and 
the public of the need to be ever-vigilant of the threat of 
another crisis. Among our supervisors, we must guard against 
complacency and regulatory capture. Among our law enforcement, 
we must hold institutions and individuals accountable, 
something that former Fed Chairman Ben Bernanke, in his recent 
book, said that we did not adequately do.
    And here in Congress, we must be mindful of attempts to 
defund and defame Dodd-Frank. The American economy has made 
substantial progress since the depths of the crisis, but that 
progress will be threatened if we do not protect these reforms, 
both in statute and in practice.
    So thank you, Mr. Chairman, and I yield back the balance of 
my time.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Financial Institutions 
Subcommittee, for 2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    And good morning, Chair Yellen.
    Today marks the first time since the passage of Dodd-Frank 
that someone from the Federal Reserve has testified under the 
authorities bestowed upon the statutorily created Vice Chair of 
Supervision. Yet today, the person testifying was not appointed 
or confirmed for that position.
    I remain baffled that the President has failed to put forth 
a single name to serve in this important role. I fear it is 
largely because Federal Reserve Governor Dan Tarullo, who 
serves as Chairman of the internal Committee on Bank 
Supervision, can already exercise many of the authorities in a 
de facto capacity, free from any meaningful checks and 
balances.
    As you know, the Federal Reserve, in addition to its 
monetary policy operation, regulates and supervises financial 
institutions. Many of them are some of the largest in the 
world. Over the past few years, we have seen significant 
rulemakings, driven in large part by the Federal Reserve, that 
have significantly altered the bank capital structures and 
artificially manipulated liquidity.
    Annual stress-testing under the CCAR process, arguably the 
most important exercise a bank must do each year, remains 
completely opaque and free from any meaningful oversight. 
Further, the Federal Reserve plays an integral role in the 
forums where international banking supervision and regulation 
standards are advocated and implemented.
    Together, these important regulatory operations of the 
Federal Reserve deserve much of our needed attention and 
oversight.
    Today, I hope Chair Yellen will address some of the more 
intricate points of bank regulation and supervision. 
Specifically, I look forward to getting a better understanding 
of how she sees each major capital and liquidity rulemaking 
working together.
    Additionally, I look forward to learning how the Federal 
Reserve analyzes the market implications of institutional 
regulations. We have already seen unintended consequences in 
the bond market, where liquidity and volatility concerns have 
been raised as a result of institutional regulations like the 
liquidity coverage ratio.
    Finally, I look forward to her thoughts on how to make CCAR 
more transparent. She also must address how major regulation 
factors into and is prioritized under the CCAR stress 
environment.
    Thank you, Mr. Chairman, and I look forward to this 
important hearing.
    Chairman Hensarling. Today, we welcome the testimony of the 
Honorable Janet Yellen. Chair Yellen has previously testified 
before our committee, as all of you know, so I believe she 
needs no further introduction.
    Without objection, Chair Yellen, your written statement 
will be made a part of the record. You are now recognized for 5 
minutes to give an oral presentation of your testimony. Thank 
you for being here.

  STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mrs. Yellen. Thank you.
    Chairman Hensarling, Ranking Member Waters, and other 
members of the committee, I appreciate the opportunity to 
testify on the Federal Reserve's regulation and supervision of 
financial institutions.
    One of our most fundamental goals is to promote a financial 
system that is strong, resilient, and able to serve a healthy 
and growing economy. We work to ensure the safety and soundness 
of the firms we supervise and also to ensure that they comply 
with applicable consumer protection laws so that they may, even 
when faced with stressful financial conditions, continue 
serving customers, businesses, and communities.
    This morning, I would like to discuss how we have 
transformed our regulatory and supervisory approach in the wake 
of the financial crisis.
    Before the crisis, our primary goal was to ensure the 
safety and soundness of individual financial institutions. A 
key shortcoming of that approach was that we did not focus 
sufficiently on shared vulnerabilities across firms or on the 
systemic consequences of the distress or failure of the 
largest, most complex firms.
    In the fall of 2008, the failure or near failure of several 
of these firms, many of which we did not supervise at the time, 
sparked a panic that engulfed the financial system and much of 
the economy. Today, we aim to regulate and supervise financial 
firms in a manner that promotes the stability of the financial 
system as a whole.
    This has led to a comprehensive change in our oversight of 
large financial institutions. As my written testimony describes 
in more detail, we have introduced a series of requirements for 
the largest and most complex banking organizations that reduce 
the risks to the system and our economy that could result from 
their failure or distress. In addition, we now supervise 
financial institutions on a more coordinated, forward-looking 
basis.
    At the same time, we have been careful to make more 
measured changes in our approach to regulating and supervising 
firms at the other end of the spectrum. We are committed to 
ensuring that the supervision of smaller institutions is 
tailored to the business model and activities of individual 
institutions.
    In supervising community banks, we are refining our risk-
focused approach, which aims to target examination resources to 
higher-risk areas of each bank's operations and to ensure that 
banks maintain risk management capabilities appropriate to 
their size and complexity. Given the important role that 
community banks play in their communities, and the economic 
support they provide across the country, we recognize that 
supervision of community banks must be balanced and measured.
    The regulatory reforms we have adopted since the crisis 
address the risks posed by large financial institutions in two 
ways. First, our reforms reduce the probability that large 
financial institutions will fail by requiring those 
institutions to make themselves more resilient to stress. 
However, we recognize we cannot eliminate the possibility of a 
large institution's failure. Therefore, a second aim of our 
post-crisis reforms has been to limit the systemic damage that 
would result if a large financial institution were to fail.
    Again, my written testimony provides more detail, but I 
wish to highlight for you two examples of how we are addressing 
this ``too-big-to-fail'' challenge.
    First, to limit the systemic effect of a large 
institutions's failure, the Board and the Federal Deposit 
Insurance Corporation have adopted a resolution plan rule that 
requires large banking organizations to show how they could be 
resolved in an orderly manner under the Bankruptcy Code.
    Second, the Board just last week proposed a rule setting 
long-term debt and total loss-absorbing capacity requirements 
for the very largest banks in the United States. With the new 
requirements, if losses were to wipe out a firm's capital and 
push a firm into resolution, a sufficient amount of long-term 
unsecured debt would provide a mechanism for absorbing losses 
and recapitalizing the firm without generating contagion across 
the financial system and damaging the economy.
    In addition to strengthening the regulation of the largest, 
most complex financial institutions, we have also transformed 
our supervision of these firms. Our work is now more forward-
looking and multidisciplinary, drawing on a wide range of staff 
expertise.
    We put this new approach into operation with the creation 
of the Large Institution Supervision Coordinating Committee, or 
LISCC, which is charged with the supervision of the firms that 
pose elevated risk to U.S. financial stability.
    The LISCC program complements traditional firm-specific 
supervisory work with annual horizontal programs that examine 
the same firms at the same time on the same set of issues in 
order to promote better monitoring of trends and consistency of 
assessments across firms.
    For example, our Comprehensive Capital Analysis and Review, 
or CCAR, ensures that large U.S. bank holding companies, 
including the LISCC firms, have rigorous, forward-looking 
capital planning processes and have sufficient levels of 
capital to operate through times of stress.
    I would note that capital at the eight largest U.S. banks 
alone has more than doubled since 2008, an increase of almost 
$500 billion. Our new regulatory and supervisory approaches are 
aimed at helping ensure these firms remain strong.
    While more work remains to be done, I hope you will take 
away from my testimony just how much has changed. Our 
supervisory approach is more comprehensive and forward-looking 
while also tailored to fit the level of oversight to the scope 
of the institution and the risks it poses. The Federal Reserve 
is committed to remaining vigilant as a regulator and 
supervisor of the financial institutions that serve our 
economy.
    Thank you. I would be pleased to respond to your questions.
    [The prepared statement of Chair Yellen can be found on 
page 56 of the appendix.]
    Chairman Hensarling. The Chair now yields himself 5 minutes 
for questions.
    Chair Yellen, the first couple of questions I have deal 
with the concern, has the Fed crossed the line from being a 
regulator to being a manager?
    We have had a number of individuals come to our committee 
and tell us that Fed officials have regularly attended 
corporate board meetings of the systemically important 
financial institutions (SIFIs) under the Fed's purview. Is that 
true?
    Mrs. Yellen. I am not sure if that is true. It is not--
    Chairman Hensarling. So you are unaware of any Fed 
officials attending board meetings?
    Mrs. Yellen. It is conceivable that might have occurred. I 
am not saying that it did not occur. I would have to get back 
to you.
    Chairman Hensarling. If it did occur, what legal authority 
would you cite for having employees of the Fed invite 
themselves into corporate boardrooms?
    Mrs. Yellen. I don't know what the circumstances are in 
question, but I can, for example, tell you that when I was 
president of the San Francisco Fed, I occasionally would attend 
a portion of a board meeting of one of the firms that we 
supervised to make a presentation to the board about our 
supervisory findings and the emphasis on--
    Chairman Hensarling. But you are unaware of any Fed 
officials attending these board meetings, you have no personal 
knowledge of this, and this is not a policy of the Fed?
    Mrs. Yellen. I really don't have details about what 
officials--
    Chairman Hensarling. We would appreciate it if you could 
look into this, Chair Yellen, and get back to the committee on 
this matter.
    We have also heard from individuals with respect to the 
stress test, about which we have had both public dialogue and 
private conversation. Many of us on this committee consider 
that to be, again, a rather opaque process, and so this 
committee has a number of questions.
    We have also questioned employees of the financial 
institutions who have been on the receiving end of these stress 
tests, and we have been informed by numerous individuals that 
they have been told by the Fed not to speak to Members of 
Congress about the stress tests.
    Do you have any knowledge of this matter?
    Mrs. Yellen. I have no knowledge of that.
    Chairman Hensarling. Okay. Is it the policy of the Federal 
Reserve to instruct members of banks subject to the stress 
tests not to speak to Members of Congress?
    Mrs. Yellen. I strongly doubt that is our policy.
    Chairman Hensarling. Okay. You are unaware of that being a 
policy.
    Would you object to these people speaking to Members of 
Congress? Can you let it be known to your employees that they 
should not be telling private citizens not to speak to Members 
of Congress about the stress tests?
    Mrs. Yellen. Private citizens can interact with Members of 
Congress--
    Chairman Hensarling. So you are willing to direct your 
employees to ensure that dialogue can take place?
    Mrs. Yellen. I will certainly look into that.
    Chairman Hensarling. With respect to the stress tests--and 
again, I have great concerns about how opaque and 
nontransparent they are--I guess my first question is: We don't 
doubt that you have many serious employees, very smart 
regulatory staff who handle these matters, but we still don't 
know much about this. How are market participants supposed to 
be convinced that we have less systemic risk when they have no 
insight into these tests, since Members of Congress have little 
to no insight into these tests? How are we supposed to reaffirm 
market confidence?
    Mrs. Yellen. We do a great deal, in my opinion, to explain 
the methodologies that we employ. We have published overviews 
of the methodologies that we use, and we update those every 
year. They include detailed information about the scenarios, 
the analytic framework we use, and information on the models 
that we employ--
    Chairman Hensarling. I guess, Chair Yellen, detail may be 
in the eye of the beholder, because Members of Congress still 
don't understand this, and in our dialogue with banking 
organizations, they still don't understand the tests either.
    In my remaining time, I have one last question, again with 
respect to these tests. The stress tests really have become, in 
many respects, your main tool, your main supervisory tool for 
the large banks. But my concern is, if you have one centralized 
view of risk and you are imposing that view on our large 
banking organizations, to some extent, isn't that exactly what 
Basel II did in telling banks that they essentially had to 
reserve little to no capital against sovereign debt and 
mortgage-backed securities? Think Greek bonds and Fannie Mae 
and Freddie Mac.
    How can that lower systemic risk, if we only have one 
centralized view of risk and it may be wrong?
    Mrs. Yellen. I guess I would dispute the idea that we have 
one centralized view of risk. The purpose of this exercise is 
to help the firms develop their own analytic capability to 
model the impact of various stresses on their organizations and 
to develop a robust capital planning process, which is what we 
evaluate in our CCAR exercise--
    Chairman Hensarling. Well, Chair Yellen, I wish we could 
conclude the same thing, but we have insufficient information 
about your stress tests to be able to come to the same 
conclusion that you make.
    I am over my time. The Chair now recognizes the ranking 
member for 5 minutes.
    Ms. Waters. Thank you very much.
    I am pleased to see you, Chair Yellen.
    And, unlike the chairman, along with many of my colleagues, 
we have heard from regional banks about the Comprehensive 
Capital Analysis and Review, or CCAR, stress test, and they 
have complained that they are not sufficiently calibrated to 
the unique profile of large bank holding companies that focus 
on traditional banking activities. We have also heard that the 
new filing of living wills is cumbersome for the banks and not 
particularly helpful to the Fed's supervisory process.
    So I have no indication that they have been told not to 
talk to us. They talk to us plenty. And we are listening.
    At the same time, Congress is considering legislation that 
would do severe damage to the new standards the Fed has 
implemented and their ability to identify and respond to risk 
in the future.
    So can you discuss why H.R. 1309, a bill debated by this 
committee yesterday which addresses this topic, would be 
severely damaging to the Fed's ability to respond to systemic 
risk on an agile and comprehensive basis?
    Secondly, will the Federal Reserve commit to doing further 
tailoring using the existing authority provided by Section 165 
of the Dodd-Frank Act specifically on the two issues I cited 
earlier, the CCAR stress test and living wills?
    Mrs. Yellen. Congresswoman Waters, I am very much concerned 
about a process that would require, as I understand H.R. 1309 
would require, the Board to use a statutorily defined set of 
factors or make findings based on factors to decide whether or 
not to subject firms to higher prudential standards. I would 
see such a process as inhibiting our ability to take timely and 
necessary supervisory actions to address a firm's risk.
    We do a great deal of tailoring of our supervisory approach 
to make sure that it is appropriate to the size, complexity, 
and systemic risks posed by a particular firm. We are committed 
to doing that. And we are looking at further ways in which we 
can tailor our supervisory approach. In particular, the CCAR 
process that we were discussing, we have some ideas about how 
we might tailor it, particularly to apply to smaller firms.
    We have indicated that there are some constraints on our 
ability to tailor our supervisory approach for the smaller 
firms subject to the 165 requirements. In particular, the Dodd-
Frank Act requires that we administer stress tests and receive 
resolution plans. Our experience thus far is that the safety 
and soundness value of those requirements for the smaller of 
those firms probably is not sufficient to justify the costs 
imposed on them. And so we would value, for the firms on the 
smaller end of the spectrum, being able to relieve them of 
those requirements.
    But I do want to make clear that we do tailor our 
supervisory approach according to the complexity of the firm 
and are committed to doing that.
    Ms. Waters. I am so pleased to hear that, because what we 
heard constantly yesterday was that you do not. They kept 
talking about ``one-size-fits-all'' and that you are not using 
your tailoring authority. So thank you for explaining that to 
us.
    And we are absolutely supportive of your being able to do 
that. We think it makes good sense. And perhaps what we need to 
do is work with your staff a little bit more to understand 
whatever restraints there are involved in tailoring and 
whatever authority that you have and flexibility that you have.
    But thank you for clearing that up. That is very important. 
You know you have the authority. You understand that Dodd-Frank 
gives it to you. You use it. And you welcome any questions from 
this committee about how you use it and how you can't use it. 
So thank you very much.
    Mrs. Yellen. Thank you.
    Ms. Waters. I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, chairman of our Financial 
Institutions Subcommittee, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Chair Yellen, it seems like there are many different new 
regulations, and they are all kind of trying to drive at the 
same thing. And as an outsider, it is hard to see how they 
actually are coordinated.
    For example, just in one broad area, capital, we now have 
TLAC, we have the GSIB surcharge, the supplemental leverage 
ratio, the normal Basel risk-weighted capital regime, as well 
as the annual stress test known as CCAR.
    Can you walk me through how all of these capital rules fit 
together and what each are trying to address?
    Mrs. Yellen. Certainly. We do see these rules as fitting 
together. Most of the requirements that you just mentioned are 
imposed only on U.S. GSIBs, the eight largest U.S. firms. We 
think, given the risks that the failure of one of these firms 
would pose to the financial system, that it is important that 
they be subject to more stringent capital requirements, 
liquidity requirements, and ability to survive a very stressed 
event. And we think the various things that you mentioned 
coordinate with one another.
    In particular, we have put in place so-called GSIB 
surcharges that impose additional high-quality capital 
standards on the eight U.S. GSIBs. And it is based on our 
estimate of the impact that the failure of one of those firms 
would have on the overall financial system.
    The supplementary leverage ratio is a backup tool that 
works in a coordinated way--this has long been the case--with 
the risk-based capital charges. And so we see those as working 
together.
    Now, the stress tests that we impose on these institutions 
are a very robust, forward-looking approach to assessing 
whether or not firms could survive a very adverse stress 
scenario and continue to serve the credit needs of the U.S. 
economy.
    And so, these are coordinated approaches. The so-called 
TLAC requirement that you mentioned is a requirement that we 
think is necessary so that if one of these firms were to fail 
in spite of all of the resilience that we expect of it, it 
would be possible, as the Dodd-Frank Act requires, to resolve 
that firm under the Bankruptcy Code or, alternatively, under 
orderly liquidation.
    Mr. Neugebauer. So what kind of comes to mind here is, at 
what point does the CCAR process kind of override all of the 
other requirements? Literally, they could be in compliance with 
these other requirements, but they could fail their CCAR.
    So is CCAR driving the regulatory process, or are these 
standards that you are putting in place driving the regulatory 
process?
    Mrs. Yellen. I believe they are complementary.
    And I think that CCAR is a particularly valuable process 
because what we expect these firms to do is not simply to be 
able to meet some standard, a minimum capital standard, but 
what we want them to have in place is the internal ability to 
analyze the risks that face that unique organization and to 
have a rigorous capital planning process that that firm is 
using to make sure--whatever our rules may say, we want that 
firm to make sure that they have adequate capital to survive a 
severe stress.
    And the stress tests and the CCAR process are looking to 
make sure that they have governance and risk management 
standards in place that are designed for that organization and 
for its unique risk profiles, that they are managing their risk 
in the way we would expect a systemic firm to be able to do.
    Mr. Neugebauer. But each entity is different. And so, you 
are imposing many of these standards on all of them, I assume, 
somewhat on a consistent basis, but the CCAR for one entity--
that that entity may go under because of their business model 
is going to be differently.
    Do you need all of these others if the final test--is the 
big test here the CCAR?
    Mrs. Yellen. We believe it is a belt-and-suspenders 
approach and that they work together in a coordinated fashion.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Chair Yellen, I will get to questions about 
regulation in a moment, but, first, I would like to ask one 
question on monetary policy.
    When you testified in July, you said in response to one of 
my questions that one of the advantages to raising rates a 
little bit earlier is that, ``We might have a more gradual path 
of rate increases.''
    Of course, one of the downsides to starting to raise rates 
while inflation is still below target is that it could end up 
hurting the fragile economic recovery. Fed Governor Brainard 
recently said that raising rates too early could end up 
``prematurely taking away the support that has been so critical 
to the economy's vitality.''
    So my question is, do you think the risks of raising rates 
in December, which will very likely be before inflation reaches 
the Fed's 2-percent target, outweigh the benefits?
    Mrs. Yellen. Thank you for that question.
    Let me say that at this point, I see the U.S. economy as 
performing well. Domestic spending has been growing at a solid 
pace. Net exports are soft, but the Committee judged in October 
that some of the downside risks relating to global economic and 
financial developments had diminished. I see underutilization 
of labor resources as having diminished significantly since 
earlier in the year, although recently we have seen some 
slowdown in the pace of job gains.
    Inflation is, as you mentioned, running considerably below 
our 2 percent objective. Nevertheless, the Committee judges 
that an important reason for that relates to declines in energy 
prices and the prices of non-energy imports, and that, as those 
prices stabilize, inflation will move back up to our 2 percent 
target.
    With that sort of economic backdrop in mind, the Committee 
indicated in our most recent statement that we thought it could 
be appropriate to adjust rates at our next meeting. Now, no 
decision at all has been made on that. That decision will 
depend on the Committee's assessment of the economic outlook at 
that time, and that assessment will be informed by all of the 
data that we receive between now and then. What the Committee 
has been expecting is that the economy will continue to grow at 
a pace that is sufficient to generate further improvements in 
the labor market and to return inflation to our 2 percent 
objective over the medium term. And if the incoming information 
supports that expectation, our statement indicates that 
December would be a live possibility, but importantly, that we 
have made no decision about it.
    You asked about the timing of such a move. The Committee 
does feel that moving in a timely fashion, if the data and the 
outlook justify such a move, is a prudent thing to do, because 
we will be able to raise the Federal funds rate at a more 
gradual and measured pace. We fully expect that the economy 
will evolve in such a way that we can move at a very gradual 
pace. And, of course, after we begin to raise the Federal funds 
rate, we will be watching very carefully whether our 
expectations are realized.
    As my colleague, Governor Brainard, noted, inflation is 
currently low. If we were to move, say, in December, it would 
be based on an expectation, which I believe is justified, that 
with an improving labor market and transitory factors fading, 
inflation will move up to 2 percent over the medium term. Of 
course, if we were to move, we would need to verify over time 
that our expectation was being realized, and if not, to just 
adjust policy appropriately.
    I think I would also like to emphasize that I know there is 
a great deal of focus on the initial move. Interest rates have 
been at zero for a long time. Markets and the public should be 
thinking about the entire path of policy rates over time, and 
the Committee's expectation is that they will be on a very 
gradual path. But of course, the path will depend very much on 
the actual performance of the economy.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee.
    Mr. Garrett. I thank the chairman. And I thank Chair 
Yellen.
    So we heard the other day about all the benefits that came 
out of Dodd-Frank and all the work that the Fed is doing 
overall. I want to go back and look a little bit deeper at 
that, both individually and cumulatively.
    Back in 1994, Congress passed, and now it is the law, 
something called the Riegle Community Development and 
Regulatory Improvement Act. As you are probably aware, it 
applies to all Federal agencies, including the Fed, and it says 
that you shall consider the cost and burdens that any 
regulations would place on depository institutions, and for 
small depositories, especially, you have to look at the costs 
of regulations and also the benefits.
    Now, we do hear about the benefits. I asked Governor 
Tarullo this question, have you done those individual cost-
benefit economic analyses, and I didn't get a really clear 
answer from him whatsoever.
    So very briefly, in a sentence, do you believe that the 
Riegle Community Development Act applies to the Fed, and then, 
as such, you are required to do a basic cost-benefit analysis 
each time you do a regulation? That is a yes or no, I guess.
    Mrs. Yellen. We follow rules of the Administrative 
Procedure Act and always request public comment on costs of our 
rules.
    Mr. Garrett. Did you do an actual cost-benefit analysis, 
for example, on TLAC?
    Mrs. Yellen. We did do an actual cost-benefit on TLAC.
    Mr. Garrett. Do we have a copy of that?
    Mrs. Yellen. It is described in the proposal that we issued 
last week. So in some cases, we have done a cost-benefit 
analysis. In other cases--
    Mr. Garrett. In some cases? In other cases, you do not?
    Mrs. Yellen. Very often what we are doing is putting into 
effect a rule that Congress has directed us to write to 
implement changes that in Congress' view will be beneficial.
    Mr. Garrett. Right. But you are doing the rule, and under 
Riegle--
    Mrs. Yellen. And the question becomes, when Congress has 
directed us to write a rule, that it is judged to be 
beneficial.
    Mr. Garrett. That is not--
    Mrs. Yellen. What is the least costly way to proceed.
    Mr. Garrett. Let me just stop you there, if I may. The 
Riegle Act doesn't say that you can pick and choose as to when 
you do a cost-benefit analysis, it says you shall--not ``may'' 
but ``shall''--consider, and then it lays out those parameters. 
So it sounds as though you are doing it in some cases, but you 
are not dong it in other cases, which may explain why Governor 
Tarullo couldn't give me a clear answer.
    Let me just move on to the broader issue then, since you 
are apparently not doing it in all cases. The broader issue 
is--and I asked this of your predecessor, Chairman Bernanke, 
has anyone done an analysis of all the costs and the burdens to 
everything cumulative of Dodd-Frank, and his answer was the 
famous, ``no.'' And Treasury Secretary Lew, we asked the same 
question, and his answer was basically, no, but if Congress 
wants to do it, we can do it.
    So I will throw that question out to you as well, since 
everyone else says that you haven't done it. Have you done a 
cumulative cost-benefit analysis on the regulations as they go 
through and the burdens? Is your answer--
    Mrs. Yellen. I think the answer for the kind of analysis 
that you have in mind is probably no.
    Mr. Garrett. Okay.
    Mrs. Yellen. But we are carefully monitoring what the 
effects of these rules are.
    Mr. Garrett. So let me ask you this. If you have not done--
and I appreciate your candor on that--a cost-benefit analysis 
cumulatively--yesterday, Mr. Himes from Connecticut said FSOC 
came out with a report, and there is nothing in this report 
which shows that regulatory burdens are a cause of the negative 
effect on the economy.
    I just went through the executive summary. There are about 
a dozen different factors that the FSOC came up with, and he is 
right that regulatory burdens is not listed as a factor. But 
now I understand exactly why, because you just told us that 
FSOC and the Fed never even did a cost-benefit analysis 
cumulatively.
    If you haven't looked at it, then of course it is not going 
to be in your summary as one of the impacts, because you are 
not even studying it. So I guess this report is a little bit 
useless, isn't it, because if you are not going to study the 
problem, then you really don't know what the problem is, do 
you?
    Mrs. Yellen. I think it is important to take a step back 
here and to recognize that we lived through a devastating--
    Mr. Garrett. I will give you that.
    Mrs. Yellen. --financial crisis.
    Mr. Garrett. I will give you that.
    Mrs. Yellen. And the cost of that crisis to households, to 
businesses--
    Mr. Garrett. I get that, but--
    Mrs. Yellen. --the U.S. economy was enormous.
    Mr. Garrett. Is this summary of any benefit to us at all if 
you are not going to do the--
    Mrs. Yellen. When we have--
    Mr. Garrett. --basic analysis?
    Mrs. Yellen. We have done basic analysis. When we put in 
effect the capital rules and liquidity requirements--
    Mr. Garrett. You just told me that you did not--
    Mrs. Yellen. --we have looked--
    Mr. Garrett. Excuse me.
    Mrs. Yellen. --at the costs and--
    Mr. Garrett. I appreciate that, but you just told us what 
everyone else has told us, that you have not done an individual 
analysis and you have not done a cumulative analysis. If you 
haven't done this study, if you haven't dug into the records, 
then your analysis of what is affecting the economy is 
basically useless.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Let me give you some advice in the other 
direction. There are a host of titles and provisions in Dodd-
Frank and there are a host of other laws that you carry out. 
The fact that they come to you in a political package called 
Dodd-Frank or they come in some other package is of great 
interest to politicians.
    But those are different titles. Just because a provision 
was in Dodd-Frank doesn't link it with another provision of 
Dodd-Frank or delink it from provisions of laws that were 
passed earlier or later. So I would hope in carrying out your 
responsibilities, you would look functionally, since the 
purpose is to give us advice on how to improve derivatives 
regulation, how to improve depository institution regulation, 
and leave it to the politicians to second-guess bills named for 
politicians.
    We do get one benefit from the fact that the Vice Chair for 
Supervision has yet to take office, and that is we get to spend 
another day with you. This is a great personal joy to me. And 
from your standpoint, we get to spend another day with our 
chairman, who is the most prominent American named Jeb who does 
not use an exclamation point to spell his name. So there are 
some real benefits from that.
    I want to focus on interest rates. You came here in July, 
and I spent my 5 minutes laying out reasons why you should not 
then increase interest rates. My most gullible friends believe 
that I was successful in persuading you, and hence that is the 
reason why interest rates have not gone up. I have some 
gullible friends. But I want to keep doing it.
    As I argued then back in the summer, God's plan is not for 
things to rise in the autumn. As a matter of fact, that is why 
we call it ``fall.'' Nor is it God's plan for things to rise in 
the winter through the snow. God's plan is that things rise in 
the spring, and so if you want to be good with the Almighty, 
you might want to delay until May.
    And I know there are a bunch of things you are aware of. 
Many economists say we shouldn't move forward now; the managing 
director of the IMF has been fairly candid. We have 
deflationary risk. We just had a bad growth report. And you are 
aware of it, but you probably won't estimate it as highly as I 
will, because of my occupation, but don't underestimate the 
ability of politicians in both Europe and the United States to 
screw things up.
    I mentioned last time you were here the psychological 
advantage to retirees of nominal interest rates of 4 to 5 
percent so they can live on their retirement savings without a 
nominal invasion of principal. That psychological benefit is 
not in the GDP statistics. As a matter of fact, you reduced the 
GDP statistics, because they are not going to psychologists and 
spending money, which would be part of the GDP, but it does 
enhance.
    And then finally, as I pointed out to you, and I do want to 
talk to you privately about this, how FASB is coming up with 
this new $2 trillion change that will hurt construction, 
depress the economy.
    The other thing is that if you act too soon and you decide, 
oops, we acted too soon, you put yourself in a position first 
where you have a zigzag policy, and you will face criticism 
from that by some people I know, and second, if you then want 
to go in the other direction, you only have a quarter point to 
play with. So if you hit the brake too soon and to say, oops, I 
have to hit the accelerator, you don't have any gas.
    With that in mind, I am concerned about the effect raising 
interest rates now would have on the real estate recovery, and 
I would ask you what you would think the impact would be of 
raising interest rates on the housing recovery, and would we 
squeeze creditworthy borrowers out of the housing market and 
create a negative feedback loop with prices going down?
    Mrs. Yellen. You have made a large number of very good 
points and referred to many relevant considerations that the 
Committee is trying to weigh and has been taking into account.
    With respect to the housing market, the level of mortgage 
rates is of course relevant to housing, and we are very aware 
that, for example, a sharp rise in mortgage rates could have a 
very negative effect on housing. We do, however, have a 
recovering economy in which employment and income are rising, 
and individuals are in better shape to form households. To be 
sure, some are moving into rental properties; the millenials 
seem to have a strong preference for later house purchases. But 
we do envision gradual recovery in the economy and the housing 
sector.
    Let me come back to the point that I made earlier, which is 
the Committee anticipates a very gradual increase in interest 
rates. We are not envisioning that when we begin to raise rates 
we are going to be looking at a very steep path of interest 
rates that would cause the kind of harm that you are worried 
about for the housing sector. The whole path matters, and we 
expect it to be a gradual path--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Housing and Insurance 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    It is always interesting to listen to the gentleman from 
California. He is a very bright guy with lots of interesting 
correlations. But I have never heard God's plan for the seasons 
correlated to the Fed's plan to raise interest rates. I enjoyed 
the discussion this morning, gentlemen.
    Welcome, Chair Yellen. This morning I want to talk a little 
about a SIFI designation of insurers. I am very concerned that 
FSOC and the Fed have become a rubber stamp for the Financial 
Stability Board (FSB). It is my understanding that the FSB made 
the designations for global systemically important insurers 
without extensive analysis or information from the companies 
other than what was publicly available.
    So my question is, is that the case? And if you did not 
receive information from the companies, how did you reach the 
conclusion that they posed a risk to the global system?
    Mrs. Yellen. Congressman, in the case of the companies that 
were designated, in every case there was an extremely detailed 
evaluation that was done, and a summary of the evaluation is 
publicly available, that did involve interaction with the 
company.
    Mr. Luetkemeyer. Excuse me. Did the analysis, though, come 
from the FSB or was it your own analysis?
    Mrs. Yellen. This was the analysis of the FSOC.
    Mr. Luetkemeyer. The FSOC.
    Mrs. Yellen. The FSOC and its staff prepared very detailed 
assessments of what the consequences would be for the U.S. 
financial system of the failure of one of these firms.
    Mr. Luetkemeyer. It is interesting. That is not the answer 
that we get from the insurance side of this, from the company 
side of this. Did you solicit any of this information, anything 
from them, or did you just take FSB's information and take that 
and try and analyze that?
    Mrs. Yellen. We have detailed interactions with the 
companies.
    Mr. Luetkemeyer. You got information from them outside of 
what is publicly available?
    Mrs. Yellen. Absolutely. Part of the designation process, 
in stage 3 of the designation process, there have been detailed 
interactions with the companies. They have provided 
information, they have had every opportunity to weigh in and to 
offer their views of--
    Mr. Luetkemeyer. If I can interrupt just a second here, it 
is kind of interesting, though, that the one individual on FSOC 
who has an insurance background is the one who said, no, we 
don't need to designate them as systemically important, yet 
FSOC went ahead and did it. Can you enlighten us as to why that 
would occur? Why did the other folks who are not experts think 
that they need to be designated, where the expert said, no, we 
don't?
    Mrs. Yellen. We have a great deal of expertise in insurance 
on the FSOC and among the staff who look at this. And what I 
can assure you of is that very detailed analysis was done, 
firm-specific analysis of what the consequences of a failure 
would be, and the firms had ample opportunity to weigh in, and 
they very well understand what the logic was of why they were 
designated.
    Mr. Luetkemeyer. With all due respect, Chair Yellen, I am 
not sure they had plenty of time to respond, because now they 
are going to court to try and resolve the situation. So I think 
if they could have responded to this, surely there would have 
been an ongoing discussion that could have minimized this and 
they wouldn't be going to court. They would have agreed with 
your analysis or agreed with your designation. But let me--
    Mrs. Yellen. They may disagree, but they have had a 
detailed opportunity to weigh in. And in the case of one firm--
I was only involved myself in the designation of one firm, and 
that firm had an opportunity to meet with the entire FSOC.
    Mr. Luetkemeyer. Okay. I recently have had the opportunity 
to meet with some of the international folks who designate the 
G-SIFIs, and it was very concerning the way they went about it. 
And I think to take their analysis without our own analysis is 
very concerning.
    Mrs. Yellen. We have absolutely not taken international 
analysis to substitute for our own. We have done our own 
analysis in FSOC.
    Mr. Luetkemeyer. I will take you at your word.
    With regard to one other issue here, yesterday we passed 
out of this committee a bill to deal with the SIFI designation 
for banks. And in the bill, we have guidelines that actually 
you use, the Fed uses in their own analysis, just recently, in 
the BB&T and Susquehanna merger. And I was kind of concerned at 
the way that the questioning went and the discussion went with 
the ranking member with regards to the guidelines that are 
provided in our bill as being the only ones that are 
considered. I am sure that you take those into consideration as 
well as other ones whenever you make that sort of decision. Do 
you not?
    Mrs. Yellen. We try to tailor a supervisory program that we 
think is appropriate given our full understanding of the risk--
    Mr. Luetkemeyer. The ones that I detail in my bill are 
significant ones that you believe that need to be used to 
provide the guidelines to make the designation.
    Mrs. Yellen. We look at those factors, but we tailor an 
entire program that is specific--
    Mr. Luetkemeyer. In your previous testimony before this 
committee, you have agreed that those are important criteria 
and you supported the bill. So I thank you for that.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, for the record, I want to clarify that some 
of us do use an exclamation point after your name. And as a 
matter of fact, some of us use hash tags, star marks, and a few 
other things are in there too. So I just want to be clear. Some 
may not, but some do.
    Chairman Hensarling. As long as you spell it right.
    Mr. Capuano. Madam Chair, first of all, thank you for being 
here again. And as always, it is a pleasure to see you.
    I have a few questions, and we are going to start on one 
that kind of has been a bit concerning to me, and I think for 
the most part most of us have been pretty quiet about it, and 
that the requirements of Section 956(b) of the Dodd-Frank Act 
that requires the Fed and others to take action relative to 
executive pay at banks.
    And I want to be clear. I for one do not care how much 
anyone in this country makes. The ``how much'' is not my 
concern. The ``how'' is a concern. It is a concern in law, 
because of the incentives that may be involved. Some of us 
think that those incentives had a lot to do with the 2008 
problem. And yet the law says 90 days. Fine, okay, 90 days, 180 
days, 360 days. It is now 2015, 7 years--7 years--and we do not 
have a regulation on this issue. And I am just wondering, could 
you tell me when you think we might have one?
    Mrs. Yellen. If I might start by saying that from a 
supervisory perspective, many years ago we put into effect 
guidelines pertaining to incentive compensation, and our 
supervision is very attentive to aspects of incentive 
compensation that could lead to excessive risk-taking. It is 
not focused on the total overall level of pay, but on the 
potential adverse incentives that could be embodied in that 
pay.
    Mr. Capuano. But that is not the regulation that is called 
for by law.
    Mrs. Yellen. It has been very challenging. There are many 
agencies involved in trying to come up with this compensation--
    Mr. Capuano. So what is the holdup? How do we help? Who do 
I have to kick to get this done?
    Mrs. Yellen. I can't give you a good answer to that 
question.
    Mr. Capuano. Have you done your job?
    Mrs. Yellen. As I said, we have been working with the 
institutions now for many years to ensure--
    Mr. Capuano. Yes, I know, and the law says 90 days. At some 
point, regulators have to regulate. I am not complaining that 
it is 91 days; I am complaining that it is 365 days. And if it 
is not you, tell me who it is. If it is my friends at the SEC, 
first of all, I wouldn't be shocked, and second of all, maybe 
that is a pretty fair thing.
    Have you done what you need to do to get this regulation, 
required by law, simply to allow us to know the incentives that 
are involved and to prohibit inappropriate incentives that did 
help lead to the 2008 debacle? Have you done your job?
    Mrs. Yellen. We have tried to work constructively with the 
other agencies and we have--
    Mr. Capuano. I love when Fed Chairs never give answers.
    Mrs. Yellen. We have done--
    Mr. Capuano. I think the Fed has done a pretty good job. I 
am not complaining about the Fed. But this one is long overdue, 
and each and every regulator that comes before me, I am going 
to start asking. Again, I am not suggesting you do a specific 
item. I don't care how much they make. I care that the 
incentives are appropriately placed so that the American 
taxpayer doesn't get put on the hook again on an item that we 
have already identified as a problem, that everybody agrees was 
a problem, and that should be relatively easy to fix.
    Mrs. Yellen. I agree with your assessment that it is an 
important problem, that it is essential to address it. And as I 
said, in our supervision we have addressed it and we do feel we 
have seen very meaningful changes.
    Mr. Capuano. And I trust you do that, but I want the 
regulation that was required by law.
    Mrs. Yellen. I understand that.
    Mr. Capuano. That is what I want. I want the regulation 
done so that the American people will feel comfortable.
    Two other items, since my time is running out. One, I want 
to talk just basically, I am not pushing yet, but I am looking 
forward to the results of the current--the next iteration of 
living wills. Back a few years ago when we had them, they were 
all called--all of them were called not credible. And the 
living will provision in Dodd-Frank, as you know, was pretty 
important to many of us. We think it is a way to avoid too-big-
to-fail. We think it is a way to allow these institutions to 
say, hey, we are this big, but don't worry, we can take care of 
ourselves, we don't need any more help. And when they are all 
called not credible, that is a problem.
    I know that you are in the process now. Do you have any 
idea what the timeframe might be when you are into the second 
chance?
    Mrs. Yellen. Last year the Board, working jointly with the 
FDIC, sent very detailed evaluations of the living wills to the 
firms and directed the firms to take action to improve their 
resolvability that were quite specific, are quite specific.
    Mr. Capuano. Timeframe?
    Mrs. Yellen. We have received those plans. We are 
evaluating them jointly with the FDIC.
    Mr. Capuano. Thank you.
    Mrs. Yellen. And we will be making decisions in the coming 
months--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Monetary Policy and Trade 
Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    I am happy, Chair Yellen, to rescue you from the hostile 
questioning of my Democrat friend over there. Don't take it 
personally. He is like that with everybody.
    But I do actually want to kind of follow on on something 
that he had, which is a point of interest and frustration for a 
number of us, having to do with the speed or lack thereof where 
there have been some very specific things that were laid out 
for the Fed to do, and specifically I want to talk about 
Section 13(3). Dodd-Frank required the Fed to adopt regulations 
``as soon as practicable,'' and that was 5 years ago. There 
have not been final rules implemented to what Federal Reserve 
restrictions and guidelines you, yourself, were going to put as 
far as far as utilizing 13(3). And so I am very concerned that 
it has taken that long.
    When is the Fed is going to issue those final rules?
    Mrs. Yellen. We expect to issue the final rule by the end 
of this month.
    Mr. Huizenga. By the end of this month.
    I will point out to my friend from Massachusetts, just talk 
nicely and she will give you a great answer.
    My next follow-up question on that is, will the rules 
address the concerns that Senator Warren, Chairman Hensarling, 
and others have put forward regarding whether your earlier 
proposal leaves the door open to future Wall Street bailouts?
    Mrs. Yellen. Let me just say that we regard our emergency 
lending powers as very crucial powers. It is very important if, 
God forbid, there should be a future financial crisis. We hope 
that won't occur. But if there is, that is why the Federal 
Reserve was created, to provide liquidity when there is a 
financial panic and lenders are worried about the state of 
financial institutions and markets generally, those powers we 
used during the crisis to keep credit flowing to the economy.
    Mr. Huizenga. Sure.
    Mrs. Yellen. So we want to be very careful about what we 
do.
    Mr. Huizenga. Sure. And the words used for that are 
``unusual and exigent circumstances,'' correct?
    Mrs. Yellen. Correct.
    Mr. Huizenga. Okay.
    Mrs. Yellen. That is right.
    Mr. Huizenga. In my format, we take that and we say--we add 
upon it, raise the bar marginally, I would argue, and we use 
the language, ``Unusual and exigent circumstances exist that 
pose a threat to the financial stability of the United 
States.''
    You have come out, and some of the other Fed Governors have 
come out, opposed to that language. Why?
    Mrs. Yellen. I am not sure that we have been opposed to it. 
That is when we would use those powers, when there are unusual 
and exigent--
    Mr. Huizenga. I understand--
    Mrs. Yellen. --it is understood to mean pose a risk to the 
financial system.
    Mr. Huizenga. We have kind of added two things as a belt 
and suspenders, that it is a phrase you used earlier. One was 
to include the language, ``that pose a threat to the financial 
stability of the United States.'' And certainly informally, 
that is the pushback we have gotten. I have met with some of 
the other Fed Governors, and they have pushed back saying we 
should not address 13(3).
    The other one that we have is, in my bill, Section 11, we 
also mandate, in addition to the current requirement of 5 of 
the 7 Fed Board Governors to approve a 13(3) usage, that 9 of 
the 12 district Federal bank presidents must also approve. Any 
concern with the belt-and-suspenders approach that way?
    Mrs. Yellen. I think the approach that we have currently 
that is in Dodd-Frank is quite adequate.
    Mr. Huizenga. So you do have a concern with adding the 
district Fed Bank presidents?
    Mrs. Yellen. I might have some concern with that.
    Mr. Huizenga. What concern?
    Mrs. Yellen. This has always been a Board power to decide 
when to authorize particular Reserve Banks to engage in 
programs through the discount window, emergency lending 
programs through the discount window.
    Mr. Huizenga. But you understand there is a bipartisan 
concern and bicameral concern about how that has been used in 
the past, and that there is too big of a door open yet for 
these massive Wall Street bailouts to happen, and that what we 
are trying to address is, in addition to adequate collateral 
and solvent borrower definitions, we are trying to make sure 
that there is not just a check and there is just not a rush to 
find a solution here, but that we also have the Fed Bank 
presidents in there.
    Mrs. Yellen. Dodd-Frank clearly restricts the way in which 
this power can be used. And the rule that we finalize will 
address concerns about the definition of broad-based 
eligibility, insolvent borrowers, and penalty rates.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa.
    Mr. Hinojosa. Thank you, Chairman Hensarling and Ranking 
Member Waters.
    And welcome, Madam Chair Yellen. Thank you for your 
appearance here today. Please accept my sincere gratitude for 
your steadfast leadership at the Federal Reserve.
    The Dodd-Frank Act reforms paved the way for solid and 
steady economic growth by restoring confidence in our markets. 
It is one of the pillars of reform supporting the creating of 
13 million private sector jobs for 67 consecutive months, 
extending the longest running growth streak in our history, and 
reducing the unemployment rate to 5.1 percent, the lowest since 
2008.
    My first question is as follows. You indicated in your 
testimony that the Fed has tailored its regulatory and 
supervisory requirements for regional and community banks. 
However, I continue to hear from banks of all sizes in Texas 
and in my congressional district that they are burdened by the 
regulation and the costly stress tests required. In fact, one 
regional bank, Amegy Bank of Texas, okay, one of the facilities 
that is in Houston, spent $20 million in its stress tests 
alone.
    In your opinion, do our financial regulators currently have 
the discretion they need to correctly tailor regulatory and 
supervisory standards or should we in Congress take action?
    Mrs. Yellen. Congressman, my understanding is that stress 
tests are required of banks that are $10 billion and above, and 
the requirements for the smaller banking organizations are very 
different than those for the larger, above $50 billion 
organizations, that they are only required to do company-run 
stress tests. For the smallest organizations, there is no such 
requirement.
    Now, I did say earlier that we don't have as much ability 
with respect to stress tests to tailor as I think would be 
ideal. There are smaller banking organizations where we do see 
costs of having to participate in the stress tests and benefits 
that are probably not commensurate. So that is an area that we 
are focused on where we are tailoring as best we can, but some 
legislative change to reduce the burden on the smaller 
institutions subject to it could be useful.
    Mr. Hinojosa. My next question: Last week the Fed finalized 
its Total Loss Absorbing Capacity Rule for the largest eight 
banks. Yesterday, I read in Bloomberg where they reported that 
Standard & Poor's, as well as the other credit rating agencies, 
may cut the rating of these banks based on the prospect that 
the United States Government is less likely to provide aid in 
the case of a financial crisis.
    Can you elaborate for us how TLAC works and how it makes it 
less likely that a government bailout will be needed in case of 
a future failure of one of these very large banks?
    Mrs. Yellen. Thank you for that question. It is an 
important regulation that is intended precisely as you say, to 
mitigate too-big-to-fail. And to the extent that the ratings 
agencies recognize that, that a firm is more likely to be able 
to--allowed to fail, and they reduce--
    Mr. Hinojosa. It is my understanding that here in Congress 
there is no willingness to repeat what we did back in 2008 to 
save the banking system. So let me go to the next question.
    Yesterday, we debated replacing the $50 billion threshold 
from mandated enhanced prudential standards with a Financial 
Stability Oversight Council designation process. What is your 
opinion on what the SIFI threshold should be?
    Mrs. Yellen. We would not like to see an FSOC process that 
tells us exactly how to tailor our supervision to firms of 
different sizes. We already have an elaborate program in which 
we do tailor the requirements within the confines of law to 
match the footprint and complexity of the firms, and there are 
only a few areas where we have concerns that we may be limited 
in our ability to do that.
    Stress tests and resolution planning are two areas where I 
would say the smaller of the firms above that $50 billion 
threshold, we would like to be able to reduce the burden on 
them, but generally we have been able to tailor a different 
threshold.
    Mr. Hinojosa. Thank you for answering my questions.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    And good morning, Mrs. Yellen.
    When you were here in October, we had an exchange about a 
lawful subpoena that we made to the Fed. You were unwilling to 
comply with that subpoena. However, 2 weeks ago you did comply 
with that lawful House subpoena, and we are grateful for your 
cooperation with the Oversight Subcommittee.
    In your cover letter, when you provided those documents, 
you stated that, ``As Chair, I have implemented the practice of 
immediately referring to the Inspector General all suspected 
material security breaches involving FOMC information.'' Why is 
that your personal practice and why isn't that the policy of 
the Fed?
    Mrs. Yellen. The policy of the Fed that was adopted back in 
2011, I believe, stated that if the Chair was alerted to a 
breach, that the procedure would involve asking the FOMC's 
General Counsel and Secretary to review the matter and to 
decide whether or not it should be referred to the Inspector 
General.
    Mr. Duffy. No, no, I am aware of that, but every January 
don't you meet in regard to the leak policy on the program for 
security of FOMC information? And you set the policy every 
year. And since you have been Chair, you haven't made that the 
new policy, you have only made that your personal practice. You 
could this January change that rule and make it policy, not 
practice, right?
    Mrs. Yellen. If it seems appropriate to look at it, it is 
something that we could do.
    Mr. Duffy. So let's go--
    Mrs. Yellen. My understanding of that, of the existing 
policy, I am simply trying to say my understanding of the 
existing policy is that if there is a material breach, it 
should be referred to the Inspector General. And I have done 
that, that has been my practice, and I think that ought to be 
the understanding.
    Mr. Duffy. And you can change the policy, I think, this 
coming January. And I think with all that has happened, you 
should actually change it from personal practice to policy. But 
it brings me to a question about the policy. The way it 
currently is written, if there is a leak, you will have the 
FOMC Secretary and the General Counsel perform a review and 
then make a request potentially to the Inspector General.
    But it is fair to say that the General Counsel, who would 
make the recommendation for referral, also is privy to 
sensitive information, which would mean that there could be a 
conflict of interest, that the General Counsel could actually 
be the leaker and he is also or she is also the one who is 
responsible for referring the matter to the IG.
    Do you see the conflict there? And I think that this is 
ripe for some internal policy review at the Fed. I would 
encourage you to take that under consideration.
    Mrs. Yellen. Let me simply say that I think maintaining the 
confidentiality of sensitive information is to me a very high 
priority.
    Mr. Duffy. I know, but that is not my point. I think that 
you can see that there is an issue here on how the policy works 
internally and I think you could work on changing it. I only 
have a couple of minutes left.
    The Wall Street Journal recently reported that the White 
House and Treasury were made aware of the 2012 leak. Is that 
true, before Congress was made aware in December of 2014?
    Mrs. Yellen. Not to the best of my knowledge.
    Mr. Duffy. But you are aware that they were doing a 
background check on Mr. Carpenter for a potential nomination 
from the Fed to Treasury, correct? You are aware of that 
process? You are not aware of that?
    Mrs. Yellen. I am--I know that he was--has been nominated 
to be assistant Secretary.
    Mr. Duffy. And as part of a background review, are you 
telling me that they did not reach out to the Fed and ask about 
his access to this information that was involved in the leak 
and you did not provide that to the White House?
    Mrs. Yellen. I don't have direct knowledge of that.
    Mr. Duffy. Do you have any indirect knowledge of that?
    Mrs. Yellen. That is a particular matter pertaining to an 
employee.
    Mr. Duffy. No, no, no, no.
    Mrs. Yellen. It has to do with the Treasury--
    Mr. Duffy. Listen, come on.
    Mrs. Yellen. --and I would--
    Mr. Duffy. Madam Chair, here is my concern: That we find 
out in Congress, who have the oversight over the Fed, and we 
find out in December of 2014. However, before the nomination, 
the White House has this information about the leak. The White 
House and Treasury, that don't have any oversight over the Fed, 
are made privy to not just the internal investigation at the 
Fed, but also they received the IG investigation. And so it 
brings--
    Mrs. Yellen. I am not aware that that is correct. I think 
it would be maybe standard practice for an agency that is 
considering a nomination to do a background check, and that 
might involve asking--
    Mr. Duffy. For compliance.
    Mrs. Yellen. --asking the previous employer as part of the 
government about an individual.
    Mr. Duffy. I would agree with that. And also it is common 
practice for the Oversight Subcommittee to send subpoenas that 
are lawful to the agencies in which they oversee and that that 
agency actually comply with those subpoenas in a timely manner.
    Mrs. Yellen. I have done my best to do that--
    Mr. Duffy. Thank you.
    Mrs. Yellen. --and I believe we have now fully complied.
    Mr. Duffy. You have. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Clay, ranking member of our Financial Institutions 
Subcommittee.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for your return visit.
    H.R. 1309 would remove the Fed's ability to make safety and 
soundness decisions and place them with the FSOC. What impact 
would this dilution of your authority have on your ability to 
work with international regulators?
    Mrs. Yellen. It is important to the Fed to be able to put 
in place the supervision program that we regard as appropriate 
for a particular institution, and we would not like to see FSOC 
involved in determining exactly what that appropriate program 
would be once a firm is under our supervision. There is no real 
relationship. I am not sure when you say international 
negotiations, I am not sure what is involved there. Is there 
something--
    Mr. Clay. Let me elaborate for you. Under H.R. 1309, 
designation of banks for enhanced prudential standards can only 
be undertaken if the FSOC follows standards developed by the 
international Basel Committee made up of banking regulators 
from over two dozen countries.
    Mrs. Yellen. I see.
    Mr. Clay. Do you know of any major nation that defers their 
domestic bank safety and soundness regulations to a board of 
international regulators?
    Mrs. Yellen. No, I do not. That is a very useful committee. 
We participate actively. We want to make sure that other 
countries put in place tough safety and soundness regulations 
that will be good for our firms and for financial stability. 
But nothing is law in the United States or is adopted as a 
regulation unless we deem it to be appropriate for our firms, 
and I believe all countries behave in the same manner. These 
international bodies are coordinating bodies where consultation 
takes place, but that doesn't substitute for domestic rule-
writing efforts here in the United States.
    Mr. Clay. Sure. And that would be a highly unusual 
arrangement.
    Mrs. Yellen. It would be extremely unusual.
    Mr. Clay. Let's shift, Chair Yellen, to insurance capital 
standards. Now that the Insurance Capital Standards 
Clarification Act, which gives the Federal Reserve flexibility 
in implementing capital standards for insurance companies 
subject to enhanced supervisor, has been signed into law, can 
you please provide an update on the Federal Reserve's 
implementation?
    Mrs. Yellen. We appreciated the flexibility that law 
provides to us to design an appropriate capital regime for 
insurance-centric companies that we supervise. We are taking 
our time to really understand the business models of these 
firms so that we can tailor the regulations in a way that is 
genuinely appropriate to their business models.
    We are working on that. In the process, we are closely 
consulting with the National Association of Insurance 
Commissioners, with the Federal Insurance Office, with 
representatives of the industry and the firms. Again, to be 
clear, we really understand their business models. We want to 
get this right and we want to take the time we need to 
understand what will be appropriate.
    Mr. Clay. Right. And it sounds to me as though you are on 
the path to getting it correct.
    Mrs. Yellen. We are definitely on the path to implementing 
that.
    Mr. Clay. This week, the Federal Reserve Bank of New York 
is for the second year in a row hosting a conference to promote 
the importance of a strong culture of compliance within the 
banking industry. In light of the seemingly endless series of 
bank violations on everything from sanctions and mortgage fraud 
to LIBOR manipulation, the focus on improving bank culture 
certainly seems appropriate. Can you discuss what the Board's 
role has been in the effort to improve bank culture?
    Mrs. Yellen. We have been extremely disturbed by the 
pattern we have seen of violations in a whole variety of areas, 
such as LIBOR and foreign exchange. We have imposed 
exceptionally large fines and in a number of cases barred 
individuals from continuing to work at the supervised 
institutions or in the industry. And we do fully expect as part 
of our supervision that the boards of directors of these firms 
will put in place rules and attend to the culture so that we do 
not see a continued pattern of flagrant violations.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    And thanks, Madam Chair, for being here.
    Kind of as a continuation of the questions that Mr. Capuano 
had, do you all ever sit around as a team and assess the things 
that were within your control leading up to 2008 that you all 
were doing sort of a bad job of regulating and say, ``Hey, we 
had internal failures here. We were sitting in the room, we 
were allowing this. We saw long-term capital collapse, we saw 
the instability.'' I think Chairman Greenspan actually forced 
the banks to come in and buy the bad assets just because he 
could and because of trying to save a system. Have you all sat 
around and kind of had that discussion internally as a team, 
that we need to do better?
    Mrs. Yellen. That is a set of discussions we have had over 
many years and lessons-learned exercises about how did this 
happen and what do we need to do differently so that it doesn't 
happen again. And I have tried to describe in some detail in 
the testimony how we have changed the process of supervision, 
as well as more broadly our monitoring of financial stability 
risks in the system outside, just the portion that we regulate, 
in order to avoid the problems that occurred.
    Mr. Pearce. Right. And if I could then follow that with you 
are saying the things in the system that provide a risk. So I 
understand that--I am kind of getting mixed signals whether or 
not you have released the standards on which you evaluate 
firms, so I am not quite sure.
    But my question is, do you really look at the systems 
themselves? Your comments say that, ``We aim to regulate and 
supervise financial firms in a manner that promotes the 
stability of the financial system as a whole.'' And it is that 
financial system as a whole that I think provides maybe the 
greatest risk to the largest firms, or all of us.
    So are you really discussing that? Are you discussing the 
fact that the BRIC nations are forming the NDB or whatever they 
are forming, that other nations are trying to figure out how to 
avoid the U.S. currency because of our actions internally? Are 
you having that discussion?
    Mrs. Yellen. We are bringing together a diverse group of 
people to consider what the significant threats are that could 
affect not only individual firms, but a set of firms that are 
large and interconnected.
    Mr. Pearce. With respect, I don't--
    Mrs. Yellen. It could involve foreign threats. For example, 
when there were stresses pertaining to the euro area, a focus 
would have been how could those--
    Mr. Pearce. Could you share with me then the parts of the 
discussion that deal with China selling down its debt? With 
them selling their treasuries, they have decreased the 
percentage from 74 to 54 percent, which to me indicates a very 
strong reaction against our policies and against our dollar. 
And it is maybe the biggest threat. Forget the internal 
stresses of corporations. Think about the fact that the ground 
we are standing on literally is going to get insolvent and very 
quickly.
    So can you share with me the concerns that have been 
expressed internally about China selling its treasuries?
    Mrs. Yellen. China has been selling Treasuries because its 
currency has been under downward pressure. And in the market, 
there is a demand--
    Mr. Pearce. I understand that. And I only have a little bit 
of time. I don't mean to interrupt.
    So then, let's step aside from that if that says there is 
no concern there. Look at the fact that we are putting out $1.1 
trillion of debt and you have $300 billion being purchased, and 
so that leaves a gap of $800 billion. Forget the Chinese, 
forget everybody else. You, the Fed, are going to have to fill 
the gap with printed money for the $800 billion. $800 billion 
out of &1.1 trillion, you all should be saying, this is really 
outside the scope of what the stress tests are showing us on 
the banks. So tell me a little bit about that conversation.
    Mrs. Yellen. Congressman, we have no intention, given the 
economic outlook, of expanding. We are maintaining our holdings 
of securities that we acquired during the period that we use--
    Mr. Pearce. Let me just wrap up.
    Mrs. Yellen. --but we have no--
    Mr. Pearce. I only have 17--
    Mrs. Yellen. --intention of adding to those holdings.
    Mr. Pearce. This morning in Barron's, they compared the 
situation to Zimbabwe. This morning in Barron's, they said that 
the Federal Reserve is making itself the lender of last resort. 
These are huge warning signs to us, and we are sitting here 
talking about some relatively small stress tests inside 
different banks.
    I appreciate the work you are doing, but I really think we 
ought to be looking at it a bit deeper.
    Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mrs. Yellen, let me ask you first about Basel capital. How 
is it that the Basel capital requirements do not recognize the 
exposure-offsetting nature of segregated customer margins that 
are posted from a derivatives client? And then that goes to a 
bank. And at the bank, they then guarantee the client's 
transaction with the clearinghouse. And this is particularly 
when just 5 years ago we here in Congress through the Dodd-
Frank Act actually encouraged more derivatives clearing as a 
means of reducing clients' counterparty risk.
    So my question is, what sort of message are we sending 
these clients who post margin to offset this guarantee by not 
recognizing it as such?
    Mrs. Yellen. Congressman, I am not sure that I can respond 
properly to your question. I may need to get back to you on 
that. We certainly have required higher margin requirements, 
both initial and variation, on noncleared derivatives. Is your 
question about capital requirements on the assets that are 
being held? Is that--
    Mr. Scott. Yes. And I think it is sending a conflicting 
message to the public, particularly when we on one hand are 
encouraging more derivatives action for risk management, but 
yet the Basel capital requirements do not recognize the 
exposure-offsetting nature of the segregated customers' 
margins.
    So my point is that we need to send a clearer message to 
the public as to how Basel capital is interreacting with this 
margin requirement of posting.
    Mrs. Yellen. The important message we want to send is we 
have taken key steps to make the derivatives markets and 
transactions safer and less a source of risk. And I promise to 
get back to you with details about how that interacts with 
Basel.
    Mr. Scott. Yes, this is very important, Madam Chair, 
because, as you well know, derivatives and swaps now, as far as 
using for risk management, is now an $822 trillion piece of the 
world's economy, and we need to take a little bit better care 
of making sure we send out nonconflicting information.
    I want to go back to another question about the designated 
company. And as a member of FSOC, you are responsible for 
determining when a designated company no longer presents a risk 
to our financial system. So it would be important if you could 
tell us in a nutshell exactly when does a designated company no 
longer present a risk to the financial system and therefor 
should be de-designated?
    And in your opinion, is it not important for FSOC to 
communicate clearly and publicly with designated companies as 
to what are those specific risks that they present so that we 
can have transparency in the process so that designated 
companies and the public will know exactly what a designated 
company is and what those issues are?
    Mrs. Yellen. FSOC explains very clearly to the company and 
to the public what the basis was for designation. So it is no 
mystery at all to the companies what aspects of their business 
model caused them to be designated. The firms have that 
information.
    Every year, FSOC reconsiders whether or not designation is 
appropriate, and looks at the changes that have occurred in the 
business of those designated firms since it last reviewed them. 
If there are significant changes, then a firm can be de-
designated. Now--
    Mr. Scott. I want to get to this last bit of a question, 
because I want to know, if we here in Congress made a move to 
improve the transparency and due process designated companies 
received in the de-designation process, what would you 
recommend we do?
    Mrs. Yellen. I don't really think it is necessary to do 
anything, because these companies have every opportunity to 
provide information to FSOC, to tell us that their business 
model has changed, to ask the Council to consider de-
designation. You probably know, for example, that GE Capital 
has significantly changed its business model. It has decided 
that it is in their interest to do that. They have not come to 
FSOC yet, to the best of my knowledge, to ask to be de-
designated, but a company like GE Capital, of course, could 
present information to FSOC and when they ask, there would be 
an active discussion of whether that is appropriate.
    Mr. Scott. Thank you, Chair Yellen.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank Chair 
Yellen for appearing before us today, and I want to thank the 
chairman for holding this important hearing.
    Madam Chair, we have discussed before sort of the dynamic. 
In my rural congressional district, the rural Fifth District of 
Virginia, where access to capital is absolutely critical for 
job growth across all those Main Streets, across all that 
farmland that I represent, it is important to our small 
businesses, it is important to our farmers, and it is important 
to families. And I think that those of us who live in rural 
areas depend disproportionately on community banks.
    I appreciate your testimony up front talking about the 
efforts that you have made to try to tailor the rulemaking, 
tailor the regulation and supervision to try to accommodate the 
difference in size and complexity of these institutions. But I 
think you--I hope you would agree that despite these efforts, 
community banks have been disproportionately affected.
    UVA Law School Professor Dean Mahoney, who testified before 
our committee previously, testified that Dodd-Frank in 
significant part is designed to enhance the regulatory reach of 
bank regulators. Inevitably, that will mean increasing the 
size, market share, and political clout of the largest banks.
    I think if you looked at the trend over the last 3 decades, 
you see that it has been brutal for community banks. Just in 
the 5 years since Dodd-Frank has been enacted, we have seen a 
drop in the number of community banks, from 7,700 to 6,300, a 
whopping 20-percent loss. The rate of consolidation has 
doubled.
    This regulatory regime and the supervision has clearly 
impacted our smallest institutions. I hear from institutions 
across our district who say, you now, all I have time to do is 
do paperwork. I don't have any time to serve my customers or to 
go out and look for new business. In one instance, I have 
recently talked to a bank president who said, I realized I had 
a problem when we were up for an examination and we had more 
examiners, bank examiners, in our boardroom than we had bank 
employees.'' Those are the kind of stories that we hear as we 
travel across the district.
    So I guess my first question really deals with why you are 
here. We know that the Dodd-Frank Act included one provision 
that would create a Vice Chair for Supervision. And I guess my 
question is--or let me just tell you what Paul Volcker said--
you know what he said--after it was included. He said, ``This 
new post might turn out to be one of the most important things 
in there. It focuses the responsibility on one person.'' And we 
know this is a Senate-confirmed position.
    So I guess my first question is, would you agree that 
effective and balanced supervision is an important part of the 
role of the Federal Reserve?
    Mrs. Yellen. Absolutely. It is one of our most important 
responsibilities. And I spend a great deal of time on it, take 
it very seriously. There is--
    Mr. Hurt. I guess my next question would be, then, if there 
was, in fact, a Senate-confirmed person in that spot, how would 
that affect your ability to focus on what your other 
responsibilities are in the larger picture? Wouldn't it be 
good--in fact, as former Fed Chair Volcker said, wouldn't it be 
good to have that position filled?
    Mrs. Yellen. Congress created that position, and I would 
welcome having it filled.
    I have to say that we now have a division of labor among 
the Governors on the Board. We operate through a committee 
system. We do have a committee--
    Mr. Hurt. But the Senate-confirmed position remains after 5 
years unfilled.
    Mrs. Yellen. Yes. Governor Tarullo heads our Bank 
Supervision--
    Mr. Hurt. But he has not been confirmed for that position 
by the Senate.
    Mrs. Yellen. That is correct. But I would say that he has 
done an outstanding job of leading our work in this area. And 
all of us do need, including me, to be involved with that work.
    Mr. Hurt. Do you believe that the fact that this important 
role and Congress' important role in the appointment of that, 
does that reflect, do you think, the President's view of 
whether having a balanced and effective supervision, having 
somebody, as Chairman Volcker said, who is dedicated to this, 
striking this balance, does that reflect the President's 
priorities?
    Mrs. Yellen. You would really have to ask the White House 
why they have not yet--
    Mr. Hurt. Considering that this is the law, Dodd-Frank is 
the law of the land at this point, at this time, is it 
appropriate for you, as Chair of the Fed, to press the 
President to fill this position? Is it appropriate for you to 
do that?
    Mrs. Yellen. As I said, I think that we are carrying out 
our supervisory work in a very thorough and thoughtful fashion 
but would welcome a nomination to the position.
    Mr. Hurt. Great.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, ranking member of our Oversight and Investigations 
Subcommittee.
    Mr. Green. Thank you, Mr. Chairman.
    And thank you, Madam Chair, for your appearance today.
    Madam Chair, Dr. King, MLK, reminded us that life is an 
inescapable network of mutuality tied to a single garment of 
destiny; whatever impacts one directly impacts all indirectly. 
We found this to be eminently true with Lehman and Bear 
Stearns. The failure of these mega-institutions had a direct 
impact on us, but indirectly they impacted the global economy, 
which is integrated to an extent that many of us can't even 
imagine.
    I mention this to you, Madam Chair, because it is not just 
a failure of a bank in the United States that we have to 
concern ourselves with but the failure of one of these mega-
banks in a foreign country because of the indirect impact that 
it can have on the United States and other banking institutions 
around the world.
    I see some value in this living will for these mega-
institutions and the lesser institutions, as well, simply 
because, when we had the failure in 2008, we had a crisis such 
that banks were reluctant to lend to each other. And when banks 
won't lend to each other, you don't have a lot of options left.
    I mention all of this to you because I am getting to the 
$50 billion threshold. You have indicated a willingness to see 
that threshold lifted, but I believe you have also indicated 
that you would still prefer to have the opportunity, if 
necessary, to revisit those that are below the $50 billion 
threshold so as to ascertain whether or not they may become 
SIFIs by virtue of their activities.
    So you have mentioned lifting it. I am not going to ask you 
to tell me at what point you would go to, in terms of lifting. 
But are you saying to us that you still prefer a trigger of 
some dollar amount? Currently, we have the $50 billion trigger. 
If you lift it, do you still want a trigger in there of a 
dollar amount, or are you amenable to going to a means by which 
only the activities will determine the SIFI designation?
    Mrs. Yellen. I certainly remain amenable to having a dollar 
threshold. And to the extent that I have discussed the 
possibility of raising the threshold, I would really only 
support a very modest increase in the threshold.
    Once we get to a slightly higher threshold, we are dealing 
with institutions, even when we are looking at the large 
regional banking organizations, that are very important 
suppliers of credit to the country. Collectively, even the 
regional organizations have probably a trillion dollars or more 
of lending throughout the country. And while, conceivably, the 
failure of one of these organizations would not bring about the 
downfall of the financial system, it could impact a significant 
portion of the country and the borrowers who depend on these 
institutions for access to credit.
    So I think a threshold is appropriate, especially in which 
banks over that threshold are designated for more intense 
supervision, especially if we have the ability to tailor our 
supervision.
    And the only reason that I have said I would be supportive 
of some modest increase in the threshold is because Dodd-Frank 
does impose some requirements on the smaller institutions in 
the area of stress-testing and resolution plans where we have 
limited, insufficient flexibility to remove those requirements, 
and we really think the costs exceed the benefits.
    Mr. Green. Thank you.
    Moving quickly to the interest rates, you have a global 
economy that is weak and, by some standards, continuing to 
weaken. How much emphasis do you have to place on the global 
economy when setting the interest rates within our economy, 
given what I said about the inescapable network of mutuality?
    Mrs. Yellen. We are mutual and interconnected. We take 
global performance into account. And, at the moment, what we 
see is a domestic economy that is pretty strong and growing at 
a solid pace, offset by some weakening spilling over to us from 
the global economy.
    On balance, as we have said, we still see risks to economic 
growth and the labor market as balanced, but the global economy 
has been a drag.
    Mr. Green. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Stivers.
    Mr. Stivers. Thank you, Mr. Chairman.
    Chair Yellen, thank you for being here today.
    The gentleman to my left, Mr. Hurt from Virginia, already 
talked about the fact that the reason for this hearing is 
statutorily mandated around your supervisory roles. Normally, 
it would be the Vice Chair of Supervision here, who is supposed 
to be Presidentially-appointed, and Senate-confirmed. That 
position is still only filled by an acting person.
    Governor Tarullo is acting in that capacity. When was he 
appointed by you into that acting position?
    Mrs. Yellen. I guess I wouldn't call it an acting position. 
We have a committee system in which up to three Governors 
oversee particular functions that we carry out. Supervision is 
one of those functions. There are other areas--oversight of 
reserve banks and so forth.
    This is a longstanding practice. And the Chair of the 
Committee on Banking Supervision, who is Governor Tarullo--
    Mr. Stivers. So--
    Mrs. Yellen. --that individual has long been the person.
    Mr. Stivers. --how long has he been doing that?
    Mrs. Yellen. He has been doing that--
    Mr. Stivers. Three years?
    Mrs. Yellen. --I think he did that under Chairman 
Bernanke--
    Mr. Stivers. Okay.
    Mrs. Yellen. --since he joined the Fed. I think that was 
2009, if I am not mistaken.
    Mr. Stivers. Okay. So 5 years.
    And so, not having him here, even though he is acting in 
that role, reduces the accountability. It reduces the 
interaction that the person in that supervisory role should 
have.
    So my question for you is, will you commit to allowing him 
to accompany you to these hearings in the future, these 
semiannual hearings?
    Mrs. Yellen. Governor Tarullo has testified on many 
occasions to our oversight committees and usually stands ready 
to do so. I certainly have no concerns about having him come up 
and answer questions. And I am--
    Mr. Stivers. I hope you will bring him--
    Mrs. Yellen. --happy to do so, as well.
    Mr. Stivers. --with you next time because he is the one 
making a lot of the decisions. I know you are his boss and you 
are engaged, but we really need him here, because these are 
important.
    The next area I would like to quickly talk about is the 
impact of regulation.
    So, as you know, we don't live in a static world; we live 
in a dynamic world. And every time we take an action, there are 
responses to that action. And regulation has increased the 
compliance costs for many financial institutions, created 
barriers to entry. And, actually, the result has been a 
consolidation of assets in the too-big-to-fail banks. It has 
almost been the opposite of what we, as policymakers, would 
have liked to have seen.
    And, on the Volcker Rule, the result has been a reduction 
in the number of market makers, which is a market utility 
function that provides important liquidity during a crisis.
    And I guess I would just ask you, are you trying to look at 
these unintended consequences? Because in both of these cases, 
we are actually creating problems through unintended 
consequences.
    Mrs. Yellen. We certainly are looking at consequences. And, 
in particular, in the case of market liquidity that you 
mentioned, that is something we are looking into very 
carefully. We--
    Mr. Stivers. And I have asked the OFR to do a report. I 
hope you guys will do a report on it.
    I think there are a lot of driving forces to it. There is 
basic business simplification; there is the Volcker Rule; there 
is the coming DOL standard. There are a lot of things driving 
it.
    But I would like you to do an important analysis of it, 
because liquidity is so important to anybody, whether they are 
a small 401(k) person or a large corporate entity, because we 
all enter and exit through the capital markets. If there is no 
liquidity, the marketplace doesn't work.
    Mrs. Yellen. I completely agree.
    Mr. Stivers. Okay.
    Mrs. Yellen. And that is why we are looking at it. We--
    Mr. Stivers. And quick--
    Mrs. Yellen. --issued a report on October 15th--
    Mr. Stivers. Yes.
    Mrs. Yellen. --episode--
    Mr. Stivers. And I have one more thing--
    Mrs. Yellen. --and individual reports on--
    Mr. Stivers. --I want to get to, so--
    Mrs. Yellen. --corporate bond markets--
    Mr. Stivers. --please keep looking at it. And I hope you 
will look at the Volcker Rule as potentially--another way to 
look at Volcker is separately capitalize those activities. It 
takes away the whole argument and doesn't make it as 
complicated.
    Yesterday, your IG issued a report that showed, with regard 
to stress tests, there were six problems that were found in the 
Fed's own stress test, and, if it had been a member bank, they 
would have required immediate attention.
    I have only seen media records on this. I look forward to 
reading the report on it. But, in light of these highly 
critical things in the report, do you plan to undertake any 
changes that would create more transparency and accountability 
in the stress-testing and CCAR process with regard to the Fed?
    Mrs. Yellen. As I understand it, the IG's findings had to 
do with our model validation procedures. And those are matters 
that we certainly will look into and attempt to strengthen.
    Mr. Stivers. And I think we should probably request a more 
complete review by the IG on all of that.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, ranking member of our Housing and Insurance 
Subcommittee.
    Mr. Cleaver. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    And thank you, Chair Yellen.
    Chair Yellen, I think it has been a little over a year ago 
since Congress gave you the authority to tailor standards for 
insurance companies, those who would qualify for enhanced 
supervision. There is, as you know, a great deal of angst, 
there is maybe even panic on the part of many of the insurance 
companies over the fact that they don't know what is going on 
and fear of what may come.
    To the degree that you can speak about this publicly, I 
would present you with that opportunity, because it would also 
help us--or help me, as I am asked questions over and over and 
over again from that industry.
    Mrs. Yellen. We know that this is a very important matter. 
We understand that insurance companies are different from banks 
in important ways. In particular, the nature of their 
liabilities is, in many cases, quite different from that of 
banking organizations.
    We appreciate the flexibility that we were given to tailor 
appropriate rules, and we are working very hard to get it 
right, to understand the nature of the business, to consult 
with the firms, with the State insurance commissioners, with 
our colleagues in the Federal Insurance Office. We are 
consulting widely and thinking very carefully about what the 
appropriate regime is.
    When we have made a set of initial decisions, we will go 
out with a notice of proposed rulemaking, likely, and ask for 
comments. And so we will go through an open and transparent 
process in deciding on what the appropriate supervision is and 
allow for comments that we will carefully respond to.
    Mr. Cleaver. I don't want to ask you to give me a date 
certain, but is the process moving along?
    Mrs. Yellen. Yes. People are working very hard. And I am 
sorry, I can't give you a date certain, but this is something 
that our staff is working on very hard. It is a high priority.
    Mr. Cleaver. Kind of similarly, the Fed is a member of the 
International Association of Insurance Supervisors (IAIS).
    We have to do something about that with the Federal 
Government, especially this committee, Mr. Chairman. We need to 
do something.
    But your mission is to promote effective, global, 
consistent supervision of the insurance industry.
    And we are, I think, at a point now where--and maybe it is 
because of the 2008 collapse--everybody is nervous about 
everything, and everybody is afraid that there is a new 
regulation that is going to come in to cause the world to 
collapse and allow the Mets to win the World Series.
    But there is no need for this hysteria, is there?
    Mrs. Yellen. There is no need for hysteria at all. We are, 
as I said, looking very carefully at our own firms to design an 
appropriate regime.
    And, by participating in the IAIS, we are trying to make 
sure that we weigh in on how other countries set up their own 
regimes in a manner that will be good for U.S. firms and the 
U.S. market. It is an attempt to influence what other countries 
do and, thereby, to ensure a level playing field that is in our 
best interest.
    Mr. Cleaver. Their angst is based on the fact that they 
believe we might end up accepting standards from the 
international community that might create problems for them 
here at home.
    Mrs. Yellen. Nothing that is adopted internationally has 
any binding force in the United States. We go through our own 
rulemaking process and decisionmaking. It is our internal 
decision.
    Now, of course, given our thoughts on what is appropriate, 
we are using that and collaborating, doing this collaboratively 
with other U.S. insurance regulators. We are presenting 
positions in Basel attempting to influence the international 
decisions. But we decide here what is the appropriate regime.
    Mr. Cleaver. Thank you, Madam Chair.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Chair Yellen, thank you so much for being here.
    I have been closely following the work of the Fed and other 
regulators during the Economic Growth and Regulatory Paperwork 
Reduction Act (EGRPRA) process. In fact, I sent a letter to you 
just a couple of weeks ago when a public outreach meeting was 
held at the Chicago Fed. I am very supportive of the EGRPRA 
process, and I imagine you are hearing many of the same 
concerns that I am hearing from banks in my district.
    In addition to the report that is mandated to be provided 
to Congress, what tangible regulatory relief can we expect as a 
result from this process?
    Mrs. Yellen. We are listening very carefully to the 
concerns that are raised in the hearings and in the course of 
taking comments in this process. And I am very hopeful that 
there will be things that we can address and look to change 
that will reduce regulatory burden.
    An example of the kind of thing we are hearing, for 
example, has to do with appraisal requirements, that many 
community banks think the cutoffs are too low and make lending 
difficult, particularly in rural areas. I am sure that is 
something we will take a look at.
    Mr. Hultgren. Can I--
    Mrs. Yellen. Reporting and so forth.
    Mr. Hultgren. Can I jump in on that? Your written testimony 
notes the banking regulators have taken steps to reform the CAR 
report. As you are probably aware, it has grown from 18 pages 
back in 1986 to 29 pages in 2003 to nearly 80 pages today.
    I wondered, would you support legislation requiring the 
banking agencies to issue regulations allowing for a reduced 
reporting requirement for the first and third quarter, assuming 
they are highly rated, specifically if they have a CAMELS 
composite rating of 1 or 2?
    Mrs. Yellen. I believe that this is a matter that the FFIEC 
is studying carefully. And I think there is a mutual desire 
among the supervisors to reduce burden on smaller institutions. 
I would suggest that you let that process play out, and we are 
all trying to do what we can to reduce burden.
    Mr. Hultgren. Good. We appreciate that. And we continue to 
hear, especially from our small and medium-sized institutions, 
of feeling the weight of this and growing burden.
    As you know, the supplementary leverage ratio requires a 
banking organization to hold a minimum amount of capital 
against on-balance-sheet assets and off-balance-sheet exposures 
regardless of the riskiness of the individual exposures. These 
capital requirements yield an economic cost to financial 
institutions and are a major driver of what assets they are 
able to hold.
    Why is the supplementary leverage ratio applicable to funds 
banks deposit at the Federal Reserve despite the low risk of 
these funds?
    Mrs. Yellen. The supplementary leverage ratio is meant as a 
kind of backup ratio that works as a backup to risk-based 
capital standards to make sure that the minimum amounts of 
capital held by banks are sufficient. And it is a requirement 
that is based on the size of the entire balance sheet of the 
organization, including low-risk assets, such as accounts held 
at the Federal Reserve. It is reflective of the overall scale 
and size of a firm's balance sheet.
    For many organizations, that supplementary leverage ratio 
is unlikely to be the binding ratio. Particularly for the 
larger organizations that face SIFI surcharges, the risk-based 
capital requirements are likely to be what is binding going 
forward.
    Mr. Hultgren. Chair Yellen, do you share the concern that 
the minimum interest rate paid by the Fed on these deposits is 
far below the yield some banks would need to generate in order 
to offset the economic cost of the capital requirements and the 
supplementary leverage ratio?
    And, along with that, with just less than a minute left, I 
wonder what advice you would give to banks which, as a core 
function of their business model, hold large cash deposits for 
their institutional customer base? And, also, what advice would 
you give to their customers?
    Mrs. Yellen. I am not positive I really understood the 
question. You were asking about the level of interest that we 
pay on reserve balances?
    Mr. Hultgren. Right. That was the first part of it, and 
then I was trying to sneak in the last question of advice, 
again, where banks have a core function of holding large cash 
deposits for their institutional customer base, and yet, 
because there is a cost with that and it impacts, again, the 
ratios that they need to hold, we are hearing concern from some 
important institutions, Northern Trust, and others, that are 
feeling pressure from this.
    Mrs. Yellen. I would say with respect to interest we pay on 
reserves, that is our key monetary policy tool. And we set that 
not to cover particular costs of banks but to establish a level 
of interest rates that is appropriate for the economy.
    Mr. Hultgren. My time has expired.
    Mrs. Yellen. Sorry.
    Mr. Hultgren. I yield back. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, ranking member of our Monetary Policy and Trade 
Subcommittee.
    Ms. Moore. Madam Chair, thank you so much for appearing. It 
is always good to see you.
    I was wondering--and I hope that you haven't been asked 
this question over and over and over again, but I am curious 
about how going through another round of living wills has 
informed you and other regulators on implementing the orderly 
liquidation facility and the cross-border liquidation of large 
systemic banks and, of course, non-bank SIFIs.
    Mrs. Yellen. We have learned a lot from looking at and 
evaluating the living wills of the firms that we have reviewed. 
We have recognized that cross-border issues are among the most 
challenging.
    We have made progress in working with those firms to 
encourage them or even require them to adopt changes in a set 
of financial contracts that would, under the existing rules, 
make it difficult to resolve a firm by triggering early-
termination rights to derivatives contracts. So one of the 
things that we asked the firms to do in their most recent 
submissions is to work on that and to change the nature of 
those contracts.
    But, more generally, over several years of reviewing living 
wills, we have been able to give very detailed guidance to the 
firms about what the shortcomings of those living wills are and 
what we wanted to see in the submissions this year.
    We are working closely with the FDIC to evaluate this 
latest round of submissions. We are prepared to ask the firms 
for significant changes or, if need be, to determine that a 
living will is not credible.
    Ms. Moore. Thank you for that, Madam Chair.
    Just as kind of a followup, there have been a lot of 
critics of the stress tests. And I was wondering, how has this 
criticism informed your regulation, and has it contributed to a 
better focus in your oversight?
    Mrs. Yellen. It has been 5 years now that we have conducted 
the stress tests. We have learned things in every round and 
worked with the institutions to try to improve what we do and 
their understanding and the public understanding of these 
stress tests.
    I really want to say that this is one of the most 
significant innovations in how we conduct supervision. It is a 
truly forward-looking and comprehensive evaluation of how firms 
would fare under very stressful conditions of the type that we 
experienced in 2008 and 2009.
    The firms themselves, I think, if you were to talk to their 
executives, they would tell you that they have learned a lot 
about the risks in their organizations and how to manage those 
risks because they have been required to engage in such 
rigorous analysis. And we see some marked improvement in the 
capital planning processes that are going on in these firms. 
They are asking themselves hard questions about what capital do 
they need to make sure they are sufficiently resilient.
    So this is a very important exercise. It is a core, key 
part of our supervision of the largest firms. And we are 
reviewing our experience to see if there are some changes we 
can make to make this more effective and, where possible, to 
reduce burden, but this is a major innovation that I believe 
has resulted in much sounder supervision, especially of 
systemic firms.
    Ms. Moore. Thank you so much.
    And, Mr. Chairman, I yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chairman.
    And thank you, Madam Chair, for being here this morning.
    Madam Chair, I am going to go a different route. I don't 
think anybody has asked you about this today. Will the Federal 
Open Market Committee ever rule out going to negative interest 
rates?
    Mrs. Yellen. Rule out is something we tend not to do.
    I don't, at the moment, see a need for negative interest 
rates. The Committee is seeing a domestic economy that has been 
proceeding on a steady path of improvement. Our focus has been 
on the possibility that it will be appropriate to begin--
    Mr. Emmer. To raise.
    Mrs. Yellen. --to raise interest rates. This is something 
we are actively considering, although no decisions have been 
made.
    Of course if circumstances were to change, and the economic 
outlook were to deteriorate in a significant way so that we 
thought we needed to provide more support to the economy, then 
potentially anything, including negative interest rates, would 
be on the table. But I don't expect that to happen.
    Mr. Emmer. Thank you.
    Mrs. Yellen. I should say that we would have to study 
carefully how negative interest rates would work here in the 
U.S. context.
    Mr. Emmer. And let me ask you, because we have seen it in 
other countries when they have--
    Mrs. Yellen. That is what is new, yes.
    Mr. Emmer. Yes. When they have had economic difficulties--
    Mrs. Yellen. Yes.
    Mr. Emmer. --we have seen other countries use negative 
interest rates or go to negative interest rates.
    Mrs. Yellen. Right.
    Mr. Emmer. What impact, Madam Chair, would negative 
interest rates have on lending and economic activity? What 
impact do you believe it would have?
    Mrs. Yellen. Most loans would not have negative interest 
rates. Even if a central bank pays negative interest rates the 
bank deposits with the Fed.
    Mr. Emmer. I understand, but what impact would it have on 
lending?
    Mrs. Yellen. It would be intended to spur lending and, I 
believe, would have some at least modest favorable effect on 
banks' incentives to lend. And it would be undertaken as a 
measure to support the economy, to encourage additional 
lending, and to move down the yields on interest-bearing assets 
to stimulate risk-taking and investment spending.
    Mr. Emmer. I want to change just a little bit. I would like 
to talk about this proposal, if you could clarify it for me, 
the TLAC proposal that was discussed last week. Was that 
finalized last week?
    Mrs. Yellen. No. It is a notice of proposed rulemaking. It 
is out for comment.
    Mr. Emmer. Because it has been around for a while. You have 
been discussing it for a while.
    Mrs. Yellen. Members of the Fed, Governor Tarullo and 
others, have given speeches on this. It is something that is 
being discussed internationally in the FSB. In fact, the United 
States has been contemplating this. We are working jointly with 
the FDIC. It is an important step in ensuring that the FDIC's 
single-point-of-entry strategy would be workable in a Title II 
resolution or in a bankruptcy resolution.
    We see it as very important. It has been under discussion 
for quite a long time--
    Mr. Emmer. If I can interrupt you, because in the short 
time left, I have some specific things I would like to ask you 
about this TLAC proposal.
    In fact, some of the analysis that I have been provided 
regarding the draft proposal suggests that it penalizes firms 
for what is broadly understood to be a desirable business 
model: gathering deposits and making loans. In fact, some have 
even suggested the effect of the new rule could be interpreted 
as a tax on deposit funding.
    Would the Federal Reserve benefit? And have you done--
because I know this question has been asked before--from a 
quantitative impact study being conducted by the FSB prior to 
implementing the new TLAC proposal?
    Mrs. Yellen. So I think that is, frankly, a 
mischaracterization of this proposal. The purpose of this 
proposal is to ensure that if a firm becomes insolvent that 
there is sufficient--
    Mr. Emmer. Would you benefit--forgive me. I have 20 seconds 
left. Would you benefit from a quantitative impact study being 
done prior to implementation?
    Mrs. Yellen. We have carefully analyzed this proposal for 
cost and benefit.
    Mr. Emmer. Have you done a quantitative impact study?
    Mrs. Yellen. We have done the quantitative analysis, and--
    Mr. Emmer. Would you share that with us?
    Mrs. Yellen. There is information contained in the proposal 
that we published.
    Mr. Emmer. All right. The analysts say--well, it looks like 
my time has expired.
    Mrs. Yellen. The point is the deposits are not a liability 
that is capable of absorbing losses when a firm is in trouble. 
We have seen that in financial crises. And the point of this--
    Mr. Emmer. Thank you. My time has expired.
    Mrs. Yellen. --is to make sure there are enough assets at 
risk.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Carney.
    Mr. Carney. Thank you, Mr. Chairman.
    Over here, Chair Yellen. And thank you for coming in today 
for a hearing that you wouldn't normally do. And thank you for 
filling in for that vacant position and for listening and 
responding to all of our questions.
    There has been a lot of debate here on both sides of the 
aisle in the committee over the last several days about 
regulatory relief, mainly for midsized banks and smaller 
community banks. You addressed it a little bit in the answer to 
some of your questions from my colleagues. And I would like to 
ask some questions about that.
    Mr. Hurt talked about these banks, particularly the 
community banks, as being the lifeblood of our local 
communities in most of our districts across the country, 
particularly rural districts. Not so much my State, the State 
of Delaware. We have fairly sophisticated financial services 
institutions, some of the biggest, and we are not talking about 
regulatory relief for those firms.
    But there has been a lot of debate about what is the best 
way to do it. And one side of the argument is, well, the FSOC 
and the regulators have the flexibility under Dodd-Frank to 
tailor these enhanced prudential regulations for the size of 
the bank.
    I have a list of the bank holding companies that are $10 
billion and above, and so subject to that CCAR process, which 
is the Comprehensive Capital Analysis and Review process that 
we have been talking about. This is what we hear from our 
banks, in terms of the expense that is involved in all of that.
    Governor Tarullo said the $50 billion cutoff--these are $10 
billion and above--$50 billion and above is a SIFI designation, 
and you have even additional regulations that you are subject 
to if you are at $50 billion or above. Mr. Tarullo has said 
publicly that that number is way too low. I talked to him 
directly in my office, and he said something very far north of 
$100 billion.
    We considered a bill today in committee--I did not vote for 
it--that would have used a different approach, wouldn't have a 
size cutoff but would apply an activities-based approach. What 
is your view of that? Is there a better way to do it?
    And part of that question is, do you have the authority? I 
heard you say earlier that you do not have the authority to 
appropriately tailor the CCAR process for some of these smaller 
and community banks.
    Mrs. Yellen. So, by and large, we have considerable ability 
to tailor what we do to fit the complexity and systemic 
footprint of an institution.
    Mr. Carney. What did you mean when you said, we don't have 
the ability to tailor for smaller banks as necessary? I don't 
know if that is a direct quote, but I tried to write down the 
words that you said.
    Mrs. Yellen. So banks $50 billion and above are, under 
Dodd-Frank, subject to stress-testing requirements and 
resolution plan requirements that, while we can tailor to some 
extent, we can't completely remove. And what we found is that, 
for some of the smaller institutions, we think--
    Mr. Carney. My time is running out. So I--
    Mrs. Yellen. --the costs exceed the benefits. And that is 
why--
    Mr. Carney. --would certainly be interested in having a 
conversation about what is a better way to do that and to give 
you the flexibility and authority to enable you to provide the 
appropriate tailoring that is necessary.
    If you look at this list of banks, JPMorgan Chase, which is 
a $2.5 billion---
    Mrs. Yellen. Trillion.
    Mr. Carney. --trillion-dollar bank--excuse me--is a lot 
different than the Bank of Hawaii and some of these other--
Nordstrom, Inc., which I didn't even know was a bank. And I 
suspect that some of those that are much smaller than the top 
five or six don't have any systemic risk associated with them 
and shouldn't be, then, subject to some of these more 
expensive--they could do what they do, right, is lend money so 
that people can build businesses and buy homes and the like.
    Mrs. Yellen. We have eight banks that have been designated 
as U.S. GSIBs. And those eight banks are subject to a 
heightened set of requirements with risk-based capital 
surcharges, an enhanced leverage ratio, and TLAC requirements 
that the banks below that, those eight, are not subject to. So, 
even among the largest banks--
    Mr. Carney. Right.
    Mrs. Yellen. --we have been able to tailor our rules.
    Mr. Carney. I would be interested in hearing more about how 
we would tailor for some of the smaller banks.
    My time has run out. Thank you very much for being here.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Indiana, Mr. 
Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for joining us today.
    I would like to talk a little bit about a comment that you 
make in your written testimony regarding the lessons of the 
financial crisis that we have learned. You state, ``... to 
supervise financial firms in a manner that promotes the 
stability of the financial system as a whole and limit the 
systemic damage that would result if a large financial 
institution does fail.''
    Obviously, we always want to learn lessons from different 
situations that we have experienced. Prior to the collapse in 
2008, the Fed was focused on financial stability, but we still 
see about once per generation some support of collapse. How do 
you believe that what the Fed is doing now prevents us from 
another experience like we had in 2008?
    Mrs. Yellen. As I tried to describe in my testimony, I 
think the focus of supervision has changed and is now far more 
focused on financial stability than it ever was prior to the 
crisis.
    We are trying to diminish the risks of another financial 
crisis in a number of ways. Most important, I would say, is to 
improve the resilience of all of those systemically important 
firms so that they have much a greater ability to survive 
adverse conditions and continue to meet the credit needs of the 
economy.
    We have much more and higher-quality capital, higher 
liquidity requirements. Our stress-testing procedures, which I 
have discussed earlier this morning, are providing a much more 
robust way of attempting to detect weaknesses in these 
organizations.
    Mr. Stutzman. Okay. Thank you.
    Mrs. Yellen. So we are doing that.
    And, also, we are working very hard to address ``too-big-
to- fail'' by making sure that if one of these firms was faced 
with insolvency, we could resolve that firm in a manner that 
would not create systemic risk, would guard the remainder of 
the financial system from systemic risk.
    Mr. Stutzman. Thank you.
    So can I ask you, what portion of your time each week is 
typically spent on regulatory matters relative to monetary 
policy?
    Mrs. Yellen. A good share of my time is spent on regulatory 
matters. I am not sure I can tell you exactly, and it certainly 
varies from week to week, but a substantial share of my time is 
devoted to regulatory matters.
    Mr. Stutzman. Do you have any concern that if the focus is 
on regulatory matters that it becomes a politicized 
regulatory--the focus becomes more political, at some point, 
when you are focused on the regulatory side rather than the 
monetary side?
    Mrs. Yellen. I have never seen the focus in regulation to 
be politicized at all.
    Mr. Stutzman. All right.
    As far as the frequency of financial crises, would you say 
that any of them were successful as far as the regulations that 
were in place that kept us from some other greater collapse?
    Mrs. Yellen. And you are talking about earlier crises?
    Mr. Stutzman. Correct. Prior to 2008, the Fed was focused 
on--
    Mrs. Yellen. We were--
    Mr. Stutzman. Go ahead.
    Mrs. Yellen. I think the United States was very fortunate 
that from the Great Depression until 2008 we never suffered a 
major financial crisis. And I think conditions developed prior 
to the crisis. It was a variety of things that came together 
that provoked a very, very serious crisis.
    Mr. Stutzman. Let me ask you this quickly: Why do you 
expect Basel III to be more successful than Basel I or Basel 
II?
    Mrs. Yellen. I think that we have improved capital 
standards by raising the quantity and quality of capital we 
demand particularly of the most systemic organizations. And we 
have designed, kind of, backup leverage requirements that also 
serve to enhance safety and soundness.
    Mr. Stutzman. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster.
    Mr. Foster. Thank you, Mr. Chairman.
    And thank you, Chair Yellen.
    As you may be aware, there is a shared enthusiasm on the 
part of both the chairman and myself for contingent capital 
instruments as a way of stabilizing the banking system.
    I have a copy of a staff memo describing the actions taken 
last week, the preliminary rule. And it seems to me--I haven't 
completely digested this, but it seems to me that you are 
implementing contingent capital requirements for the U.S. 
subsidiaries of foreign-owned IHCs. Is that correct?
    Mrs. Yellen. What we have put in place or what we are 
proposing is a long-term debt requirement. I don't think I 
would use--I am not sure precisely how you define ``contingent 
capital.''
    Mr. Foster. It is defined in this memo as eligible internal 
LTD of foreign GSIBs.
    Mrs. Yellen. Oh, this is for foreign.
    Mr. Foster. Foreign. Right.
    Mrs. Yellen. We do have--
    Mr. Foster. But it is my reading of this that the Federal 
Reserve Board will be operating the trigger for the conversion 
of these. Is that correct?
    Mrs. Yellen. You are talking about for the foreign banking 
organizations?
    Mr. Foster. For the foreign banks, yes.
    Mrs. Yellen. We are making sure that the U.S. subsidiaries 
of foreign banking organizations that will be required to set 
up an intermediate holding company have enough, essentially, 
debt that has been issued to them by their parents that it will 
make it easier for--
    Mr. Foster. I understand.
    Mrs. Yellen. --them to be resolved--
    Mr. Foster. Right. They accomplish very similar things. But 
the difference--
    Mrs. Yellen. They do.
    Mr. Foster. --that I see between CoCos and just unsecured 
debt is that one triggers an insolvency so that there has to be 
a determination by the regulator that you are not a growing 
concern and you are going into resolution. Am--
    Mrs. Yellen. That is correct.
    Mr. Foster. --I right? And that is the solution that 
appears to have been chosen for U.S. companies, whereas you 
appear to have allowed or chosen the CoCo mechanism, where the 
Federal Reserve Board would say, you are in violation of your 
capital requirements, you are not insolvent, you are in 
violation of capital requirements, therefore triggering the 
conversion to equity.
    And so it seems like you have--my question is, do you have 
in place and will the Federal Reserve Board be operating that 
trigger mechanism, in the case of the foreign-owned 
subsidiaries?
    Mrs. Yellen. Clearly, in the case of the U.S. subsidiaries, 
what we want is in a Title II resolution with enough loss 
absorbency for the FDIC to be able to recapitalize--
    Mr. Foster. What I am fishing for is, why didn't--
    Mrs. Yellen. --holding company.
    Mr. Foster. Right. I view the European solution, the CoCo 
mechanism, as superior because it warns the banks when they are 
in danger of being--there is a market-based signal that warns 
the banks when they are likely to be in violation of their 
capital requirements, not that they are likely to become 
insolvent. Do you understand?
    And that I view as a major difference. I think that the 
political nature of that decision will be much easier and less 
fraught if you are talking about triggering the conversion to 
equity rather than just sending the firm into resolution. And 
so, for that reason, I think it is likely to be less 
politicized, and, moreover, it is much more likely to yield a 
going firm at this end of this.
    And so I was wondering why you had decided, then, to allow 
for foreign subsidiaries the mechanism of CoCos and yet not 
include it in the capital stack of U.S. firms and what the 
thinking was behind that?
    Mrs. Yellen. I am not sure if I am going to be able to 
explain this to your satisfaction. But we think, in the case of 
a foreign firm, many foreign regulators, if a firm got in 
trouble, would want to essentially engage in a single-point-of-
entry type of recapitalization. And the structure that we have 
proposed, I think, would make that possible. We would end up 
cooperating with a foreign supervisor who was trying to resolve 
a firm.
    Now, there will be problems--
    Mr. Foster. The CoCos don't trigger when the firm needs 
resolution, right? As I understand it, the CoCos trigger when 
the firm violates its capital requirements but is not yet 
insolvent. Is that correct?
    Mrs. Yellen. If a firm were, under our supervision in the 
United States, to violate that requirement, we would demand, I 
guess, that it be refilled so that, if the firm were to be in 
trouble and we needed to resolve it, it wouldn't operate in the 
manner you suggested.
    Mr. Foster. All right. So it sounds like you have in place 
the trigger. When I have brought this up before, the response 
that I have gotten was, ``Well, the trigger is really too 
complicated for us to set up,'' whereas, in fact, it seems like 
you plan to set up such a trigger.
    Anyway, would it be possible to get me a briefing on this 
whole--
    Mrs. Yellen. Yes, certainly. We would be glad to do it.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Madam Chair, I know it is a relatively minor issue in the 
greater scheme of things, but since this is an oversight 
hearing more than it is a monetary policy hearing, I want to go 
back to Congressman Duffy from Wisconsin's line of questioning 
regarding the 2012 leak, generally, your policies on those 
sorts of things when we are dealing with what we call 
information security rules.
    Mr. Duffy asked you a question; I don't know if we are able 
to get to the bottom of it. You said in your cover letter to 
him of about 2 weeks ago producing the documents, you wrote the 
following: ``As Chair, I have implemented the practice of 
immediately referring to the Inspector General all suspected 
material security breaches involving FOMC information.''
    I believe that is from your letter. If it is not, please 
let me know, but I think that is a fairly accurate 
representation.
    And his question was, why--and my question still is--you 
say you have implemented the practice. Why hasn't that become 
part of the formal policy of the Fed since you have been the 
Chair? Because a policy is different. A formal policy is very 
different from that, as a matter of fact. So help me reconcile 
your practice and the formal Fed policy.
    Mrs. Yellen. The formal Fed policy says that, in the case 
of a purported information security breach, there should be a 
review by the FOMC Secretary--
    Mr. Mulvaney. Correct.
    Mrs. Yellen. --and General Counsel to determine what the 
next steps should be, including whether it should be referred 
to the Inspector General.
    Now, my understanding of that policy, the way I understand 
that, is that if there is a material breach, it is appropriate 
to refer it to the Inspector General, and I have done so. If 
these rules need clarification, that is how the FOMC Chair is 
tasked with handling these investigations, and that is my 
understanding of the rules--
    Mr. Mulvaney. Right.
    Mrs. Yellen. --and how I intend to proceed.
    Mr. Mulvaney. Let me see if I can cut to the chase on this. 
I think what you are saying is that you believe that your 
practice is entirely consistent with the policy and that what 
your letter really said was, after--without saying this--after 
the General Counsel did their investigation, I would 
immediately refer it to the Inspector General.
    Mrs. Yellen. I have taken the view of, as soon as we have 
determined that there is a material breach, I have asked the 
Inspector General to look at it right away.
    Mr. Mulvaney. Right. And you wouldn't determine there is a 
material breach until after the General Counsel and the 
Secretary had done their--
    Mrs. Yellen. They need to do a review.
    Mr. Mulvaney. Correct.
    Mrs. Yellen. Let me just give you a sense of the kind of 
thing that--
    Mr. Mulvaney. I know this is a bit stunning, Mrs. Yellen, 
given our history, but I am actually agreeing with you. So if 
you want to just take ``yes'' for an answer, we can move on if 
you would like.
    Mrs. Yellen. The kind of thing that happens is sometimes 
somebody has a USB with a draft of something on it and it drops 
out of their pocket in a taxi or they lose their BlackBerry. 
Now, there are security procedures both in USBs and in 
BlackBerrys that just basically should disable them and protect 
the information. But--
    Mr. Mulvaney. Right.
    Mrs. Yellen. --the FOMC Secretary receives reports of such 
things. In general, I wouldn't refer such things to the 
Inspector General. But something that is a material breach, I 
would do so, and have done so routinely.
    Mr. Mulvaney. Fair enough.
    Mrs. Yellen. There have not been a lot of things, but I 
have--
    Mr. Mulvaney. Before going back briefly to the 2012 leak, 
let me just simply ask you the question, have you ever actually 
activated this practice since you have been the Chair at the 
Fed?
    Mrs. Yellen. The practice of referring to the--yes, I have.
    Mr. Mulvaney. Okay. And have you disclosed all of those 
referrals to Congress?
    Mrs. Yellen. I am not certain. For example, I think we did 
disclose publicly that a portion of the Fed staff's forecast 
was accidentally disclosed on a website or was included on a 
website, and--
    Mr. Mulvaney. That is fine. And, again, I am--
    Mrs. Yellen. --that was referred.
    Mr. Mulvaney. I am familiar with that example. I am asking 
if there are ones that we don't know about. Have there been 
referrals to the Inspector General that you have not notified 
Congress of, publicly or privately, since you have been the 
Chair?
    Mrs. Yellen. That we have not told Congress about it?
    Mr. Mulvaney. Yes, ma'am.
    Mrs. Yellen. I need to check on that.
    Mr. Mulvaney. Fair enough.
    Let's go back--oh, by the way, one final change. And I know 
this is splitting hairs, but I used to be a lawyer in the real 
world a long time ago, so this is the type of stuff that 
catches my eye every now and then.
    You all switched the policy on the security breaches 
somewhere about 2014-2015. You are shaking your head ``no,'' 
but you did, right?
    Mrs. Yellen. We made a small change.
    Mr. Mulvaney. Yes.
    Mrs. Yellen. And I know it has been alleged that that was a 
weakening of the requirements. It absolutely was not in any way 
a weakening of our requirements.
    Mr. Mulvaney. So if I may, Mr. Chairman, very briefly, it 
is your testimony, ma'am, that the small changes in language, 
changing ``an investigation'' from ``a full investigation,'' 
was not intended to change the scope of the rule at all?
    Mrs. Yellen. Absolutely not. And there was nothing, as far 
as I know, about ``full investigation.''
    Mr. Mulvaney. Thank you, Madam Chair.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair wishes to inform Members that Chair Yellen will 
be departing at 1 o'clock. Presently, I think we can clear the 
queue in the room. Members who may be monitoring from their 
offices, you are out of luck.
    The Chair now recognizes the gentleman from Washington, Mr. 
Heck.
    Mr. Heck. Thank you, Mr. Chairman.
    And, Madam Chair, thank you for being here. Indeed, thank 
you for your outstanding public service.
    Mrs. Yellen. Thank you. I appreciate that.
    Mr. Heck. I think you have probably heard something closely 
resembling consensus here today from both sides of the aisle 
about concerns regarding regulatory relief. Many of us share 
your commitment to providing for both prudential protections as 
well as consumer protections, as well as enabling the free flow 
of credit, but with a belief on our part that could be done 
with a bit of a lighter touch.
    I am hearing that somewhat from you today. Indeed, my 
perception is that the regulatory structure is, in fact, moving 
from what I would characterize as actively resistant to 
receptive.
    Mrs. Yellen. Very receptive. We are actively looking for 
ways that we can safely diminish burden, particularly on 
community banks but also smaller institutions that are, for 
example, subject to the 165 rules in Dodd-Frank, those over $50 
billion. So we are very receptive and actively engaged.
    Mr. Heck. So my encouragement would be that you would move 
it from receptive to being proactive. And in the spirit of that 
recommendation, I want to--and if this has been asked, I 
apologize--follow up with your testimony where on page 11 you 
indicate that the Reserve ``is giving all of these suggestions 
careful consideration and will be working closely with other 
banking agencies in developing a report to Congress at the 
conclusion of the EGRPRA review,'' which is a deregulation 
exercise.
    Mrs. Yellen. Yes.
    Mr. Heck. Approximately when can we expect the report?
    Mrs. Yellen. I am not sure. By the end of next year for 
sure.
    Mr. Heck. By the end of?
    Mrs. Yellen. By the end of next year for sure.
    Mr. Heck. By the end of 2016. Then I would encourage you to 
see if there is any distance between the pedal and the medal on 
the velocity of that effort, because I think it would play a 
very reconstructive part to move from receptive to proactive. I 
think it is important that you all be a part of this. Because, 
frankly, otherwise what I observe here is you have those who 
legitimately believe that we can do a whole lot less, but that 
which many of us believe would compromise prudential 
considerations and consumer safety considerations, and so we 
react accordingly.
    Mrs. Yellen. Yes.
    Mr. Heck. And the positive, constructive advancement on 
your part, I think, would be very helpful to--
    Mrs. Yellen. I think that is completely fair, and I pledge 
that we will try to be proactive in looking for--actively 
looking for ways that we can reduce burden.
    Mr. Heck. I have another question. We tend to think about 
the Fed's monetary policy as its big lever to deal with the 
issue of price stability and the Fed funds rate that you set, 
but if I understand this thing correctly, and I may not, you 
also have the ability to set the interest rate that you pay on 
excess reserves that member institutions have with you, which 
seems to me to have potentially the same benefit as hiking the 
Fed funds rate, because if they are incentivized to leave more 
money with you, it is less money that they lend out, which is 
tapping the brakes on inflationary pressures.
    Why would you do one over the other? What are the 
comparative benefits of doing just Fed funds rates versus 
looking at excess reserve rates?
    Mrs. Yellen. The interest we pay on excess reserves will be 
the key tool that we use in order to raise the Federal funds 
rate. The Federal funds rate is not something we can decree; it 
is a market-determined rate. And when we decide it is 
appropriate to raise that rate, we will accomplish it by 
raising what we pay on excess reserves. They are intimately 
connected, not two separate tools.
    Interest on excess reserves is critical, and we expect by 
raising it that short-term interest rates generally, or money 
market instruments, will all rise across-the-board. And--
    Mr. Heck. Can I see if I can get one more in, in 14 
seconds?
    Mrs. Yellen. Yes.
    Mr. Heck. One of the rating agencies recently indicated 
that the exercise of living wills is actually working, and they 
put it in writing. We are about to go through another round, I 
think, this winter. What is your forecast for what the impact 
will be?
    Mrs. Yellen. We have very detailed living wills. They are 
much more detailed than previous versions. They have responded 
to instructions that we carefully gave out. We are carefully 
evaluating them and we will be making decisions in the coming 
months.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And thank you, Chair Yellen. Chair Yellen, we will see if 
we can set some kind of record together and answer 5 questions 
in 5 minutes.
    I am following up on Chairman Hensarling's questions 
regarding the role of the Fed in the boardroom. And I am going 
to read a quote from the Financial Times in August of 2014 that 
said, ``Fed officials are also involving themselves in the 
kinds of decisions that company management or board directors 
usually make, including whether employees should be fired or 
disciplined, which has been surprising.''
    Mrs. Yellen, do you support this type of activity? 
Notwithstanding that you said it is not the policy, but do you 
support this type of invasive participation by the Fed? Would 
you approve of it?
    Mrs. Yellen. When there is wrongdoing, as we have seen, for 
example, in the LIBOR ethics scandals, it is appropriate for 
us, in addition to leveling fines, to try to identify 
individuals who are guilty of wrongdoing.
    Mr. Pittenger. As an ongoing process, do you think it 
should be a matter that the Fed, for example, should be opining 
on human resource decisions and so forth inside the boardroom, 
as was quoted here in the Financial Times?
    Mrs. Yellen. I'm sorry. What exactly did they quote?
    Mr. Pittenger. They just said that they were including 
whether employees should be fired or disciplined. That was one 
of the comments that was made.
    Mrs. Yellen. I am not aware that we--
    Mr. Pittenger. But would you approve of that? Would you 
approve of them opining out on whether or not this should be 
done?
    Mrs. Yellen. We should not be managing firms. We should be 
making sure that firms have--
    Mr. Pittenger. So do you all believe the Fed should--
    Mrs. Yellen. --the most appropriate systems.
    Mr. Pittenger. Should the Fed, then, be micromanaging these 
boardrooms and trying to dictate policy inside of the 
boardroom?
    Mrs. Yellen. We are not managing the firm, we shouldn't be 
managing the firm, but we need to make sure that the firm is 
managing itself properly.
    Mr. Pittenger. Chair Yellen, following up on Mr. Hurt and 
Mr. Hinojosa regarding community banks, what reforms, if you 
can give some clarity on this further, would you say that the 
Fed could do to reduce regulatory burdens on community banks? 
And, also, what would you recommend that we as a committee 
could recommend to do to provide some type of regulatory relief 
for community banks and to ensure that they can provide the 
best services and products for their consumers?
    Mrs. Yellen. There is a lot that we can do on our own and 
we have been doing it. We are trying to do more work offsite so 
that we have fewer examiners spending less time in actual banks 
doing exams. We are trying to tailor our exams to the areas 
that are really high risk, either in terms of consumer 
compliance or safety and soundness.
    Mr. Pittenger. Chair Yellen, pardon me. Have you had 
occasion to go out and visit some small community banks?
    Mrs. Yellen. Absolutely.
    Mr. Pittenger. How many have you seen?
    Mrs. Yellen. Many over the years that I have been involved 
with the Federal Reserve.
    Mr. Pittenger. In the last 2 years, have you been out to 
see any community banks?
    Mrs. Yellen. Since I have been at the Board, I haven't made 
trips to see community banks, but I meet with many community 
bankers. We have the so-called--the CDIAC, and, in fact, we are 
meeting with the CDIAC on Friday.
    Mr. Pittenger. If I could interrupt--I think the more in-
depth awareness and understanding-- I was on a community bank 
board for 10 years. And just to go visit these banks yourself, 
it would make a major statement of your own, the importance 
that you see for community banks. And I think you would get a 
sense from the staffing of what they are addressing, and you 
can hear from the CEO, the bank chairman. I would really 
encourage you to do that.
    As you look at the imposition of the regulations on the 
financial industry, it is had really indirectly a major impact 
on industry that has left our country to move offshore. We have 
seen that occur too many times.
    What do you think can be done to make sure that we can 
provide the financial resources available and not have the 
regulatory impediments on financial institutions that, frankly, 
impact our business growth and their environment? They are 
leaving here, and that is part of the problem.
    Mrs. Yellen. This is partly why we participate in 
international groups like the IAIS or the Basel Committee or 
the Financial Stability Board, to work with--
    Mr. Pittenger. And how do measure success in this approach? 
Do you think what you are doing is working now? Because we 
haven't seen the measured success that we would like to see in 
terms of being able to attract companies who want to stay 
onshore.
    Mrs. Yellen. I think we have seen success in that we have a 
much safer and sounder financial system. And other countries 
are also raising the standards that they apply to their large 
banking organizations.
    Mr. Pittenger. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. I thank the ranking member and the chairman.
    Thank you for being here, Chair Yellen. I really appreciate 
it.
    We had this big debate yesterday and the votes today on 
whether or not the $50 billion designation is the right metric 
for SIFI designation. And I have to tell you, I am sympathetic 
to changing it, but I didn't vote for either one of those 
proposals, because I feel that after there is a big crash, then 
we regulate, and then before the ink is dry, we are all trying 
to change it suddenly, and is it good or is it bad?
    And so what I want to see when a proposal comes back to 
change it from--and so people may--there may be a growing 
consensus that $50 billion could be different, but we don't 
have a consensus on what it should be.
    And I guess my point to you is, knowing that our 
constituents lean on us to do things that they want, our 
constituents aren't thinking about the system, they are 
thinking about their business, and that is a generalization, 
but I think it is generally true, I am looking for good 
guidance from people like you as to if it is not $50 billion, 
what should it be and why.
    I am sure that this issue is not going away. And so I just 
want to make that point clear, because I definitely believe 
that the $50 billion designation, the truth is that it is an 
imprecise metric, I will agree with that, but there were some 
regional banks that caused some major damage in the last go-
round. So I am not willing to just walk away without a really 
clear plan on what is going on forward.
    Do you have any reaction to that?
    Mrs. Yellen. I agree with that. And we have said modest 
increase, not a large increase, a modest increase. And while I 
think there would be some benefits to the smaller banking 
organizations that are over that $50 billion threshold and 
would save us some supervisory resources, this isn't a must 
have.
    Mr. Ellison. Okay. On living wills, the very largest banks 
in the country are even larger today than they were during the 
financial crisis. The living wills provision of Dodd-Frank was 
created to make sure these banks never threaten the economy 
again by giving regulators additional powers if banks' living 
wills are found to be not credible.
    The last time the Fed and the FDIC evaluated these banks' 
living wills, only the FDIC took the official position that the 
wills were not credible. The Fed's decision not to join the 
FDIC has slowed both regulators' ability to take additional 
action.
    Why would the Fed voluntarily give up additional 
authorities to force changes at problem banks?
    Mrs. Yellen. We took the position that this was a 
completely new process, and we stated this when we put out 
guidance on the living will process, that we expected to have 
to work with firms for a few rounds in order to understand what 
we needed to see in the plan and to give firms reasonable 
guidance on our expectations. That is why we declined to join 
the FDIC last summer and did not vote to find the plans 
noncredible.
    But we have worked closely and jointly with the FDIC over 
the last year to give very clear, very detailed, and we are 
asking for very substantial changes on the part of these firms. 
They have submitted a new round of living wills, we are 
evaluating them with the FDIC, and in the coming months we will 
make important decisions.
    Mr. Ellison. Thank you. With my last minute, I just want to 
know if you would be willing to offer your perspective on one 
of the observations of Ben Bernanke, whom, as you know, he came 
out with a memoir recently, and in there he said something like 
this: It would have been his preference to have more 
investigations of individuals' actions, as obviously everything 
that went wrong or was illegal was done by some individual, not 
by an abstract firm, and so in that respect, there should have 
been more accountability at the individual level.
    And then, of course, Loretta Lynch and the DOJ just said 
about a month ago that they are going to look into white collar 
prosecution a little bit more.
    Do you have any observation on Mr. Bernanke's observation? 
What about prosecuting some of these folks who engage in fraud?
    Mrs. Yellen. I completely agree with his assessment. Now, 
we can't engage in criminal prosecutions, but I would say, to 
the extent that we can identify individuals who have been 
responsible for wrongdoing and significant breaches, we have 
leveled big civil money fines. We are trying to take action 
against individuals as well, and that means barring them from 
working for those organizations or potentially for the banking 
industry.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    Chair Yellen, welcome back to the committee.
    We routinely hear from President Obama and Senator Warren 
and others that an absence of regulation was the principal 
cause of the financial crisis. I would like to explore with you 
today the threats to financial stability posed by too much 
regulation.
    Let me take as an example the CLO market, collateralized 
loan obligations. This market provides more than $400 billion 
in financing for hundreds of American companies that employ 
more than 5 million people. They are a crucial source of funds 
for many companies that cannot issue bonds. CLOs also performed 
extraordinarily well during the last 20 years, with a 
negligible default rate, they performed better than high-grade 
corporate bonds over that same period of time.
    Unfortunately, we are hearing from market participants that 
the risk retention rules promulgated by the Fed will cause a 
contraction in the CLO market and a credit crunch for American 
companies. Alternative sources of funds are available through 
hedge funds and the like, but they are not a stable source of 
funds and they will certainly demand a much higher interest 
rate.
    Do you believe that American businesses are better served 
with expensive short-term financing from hedge funds as opposed 
to stable long-term financing options?
    Mrs. Yellen. We want to make sure that businesses have 
stable long-term financing sources, but we also want to make 
sure that when securitizations take place that the originators 
do have skin in the game so that we avoid the kinds of problems 
that happened previously, and that is what those QRM rules are 
designed to accomplish.
    Mr. Barr. I appreciate it. I would make a distinction 
between securitized mortgages, which were at the epicenter of 
the financial crisis, as opposed to highly rated senior secured 
commercial and industrial loans that never defaulted in 20 
years.
    But I do appreciate the point about skin in the game, and I 
wanted to just ask you about a letter that we sent to 
regulators. I joined a bipartisan group of Members of Congress 
who wrote to you recommending that you support the concept of a 
qualified CLO, much like a qualified mortgage, a structure that 
would ensure the safety of these vehicles, but also ensure a 
continuation of financing to hundreds of companies that rely 
upon them.
    Is that something that you would be open to?
    Mrs. Yellen. I think it is something we could have a look 
at. I would have to get back to you on it.
    Mr. Barr. I appreciate that. I would love to have that 
discussion with you.
    Let me move on to the issue of illiquidity in the market 
generally. Secretary Lew has denied that there is a liquidity 
issue or that some of the post-crisis regulations are 
contributing to illiquidity in the market.
    In your previous testimony before this committee, you said 
that you would not rule out the possibility that regulations 
are playing a role in decreased fixed-income liquidity. 
Certainly your colleague Lael Brainard acknowledged that 
regulations may be a factor in diminished fixed-income 
liquidity, and there has been a lot of research on this.
    And I am quoting from one often cited piece of research: 
``Almost every institutional investor, in almost every market, 
seems worried about liquidity. Even if it is here today, they 
fear it will be gone tomorrow.'' They say that e-trading is 
contributing to volume, but little depth for these who need to 
trade in size. ``The growing frequency of `flash crashes' and 
`air pockets,' often without cause, adds weight to the fears 
and the most frequently cited explanation is that increased 
regulation has driven up the cost of balance sheet and reduced 
the street's appetite for risk and hence their ability to act 
as a warehouser between buyers and sellers.''
    What would lead you to doubt that increased regulation is 
actually creating a destabilizing impact in terms of liquidity?
    Mrs. Yellen. There are just a bunch of different things 
going on in these markets, and we are trying to carefully study 
them. The Treasury market and the corporate bond market aren't 
the same. The conditions are quite different and the role of 
the broker-dealers is different. High frequency trading has 
become very prevalent in the Treasury market, and--
    Mr. Barr. Let me--and I hear that explanation--just jump to 
one other potential theory here, and, again, the same piece of 
research. The more liquidity central banks add, the less there 
is in markets. In addition to regulation, central banks' 
distortion of the markets has reduced the heterogeneity of the 
investor base.
    And so the question is, is central bank liquidity forcing 
investors to view fixed income and equities as expensive, 
making markets more prone to sudden corrections?
    Mrs. Yellen. We hold significantly more assets, the Federal 
Reserve and other central banks, than we did prior to the 
crisis, but we have very deep and liquid markets in the 
Treasury securities and mortgage-backed securities that we 
hold. So I am not aware that our behavior is significantly 
influencing market functioning. I am not aware of any evidence 
suggesting that.
    Mr. Barr. Thank you for your testimony.
    Chairman Hensarling. The time of the gentleman has expired.
    To accommodate the Chair's schedule, the gentleman from 
Maine will be the last Member recognized. The gentleman from 
Maine, Mr. Poliquin, is recognized for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here. They always 
save the best for last here, that is what they say up in Maine, 
anyway. But I was thrilled to have a discussion with you in the 
lobby before we came into the hearing, Chair Yellen, where I 
had asked you specifically what your thought process is now, 
going forward, about FSOC and your involvement in FSOC as 
designating asset managers, pension fund managers, mutual funds 
as systemically important financial institutions. And if that 
happens, of course, they have to succumb to smothering 
regulations with respect to Dodd-Frank, and that can stifle 
rates of return for small savers.
    You mentioned something that was very interesting. You said 
that right now the Fed is not focused on designating asset 
managers as--
    Mrs. Yellen. The FSOC. I have said that--what I said was 
that the FSOC--
    Mr. Poliquin. I stand corrected.
    Mrs. Yellen. --was focusing on--
    Mr. Poliquin. I stand corrected.
    Mrs. Yellen. --activities and studying a set of activities 
involved in asset management, liquidity risks, redemption 
risks, potential risks that have--
    Mr. Poliquin. Thank you. I stand corrected. And you, of 
course, sit on FSOC.
    Mrs. Yellen. That is right, but that is FSOC's focus at the 
moment, it is studying these areas. The SEC is actively 
involved in rulemaking in these areas.
    Mr. Poliquin. Thank you.
    Mrs. Yellen. And that has been the focus recently in FSOC.
    Mr. Poliquin. Thank you.
    You know what would be really helpful, Chair Yellen, if I 
can make a suggestion, is if we had a written set of criteria 
that the industry, those folks who are in this space, can look 
at something on paper to say, if I had these various business 
practices that revolved around my business model, or I managed 
these sort of assets, then I know the probability of me being 
designated a SIFI is very high or low.
    Does that make sense to do something like that, instead of 
saying, well, our focus on FSOC is not to look at asset 
managers as designated as SIFIs, but maybe down the road we 
will? Do you have a written set of guidelines so folks in this 
space can see--
    Mrs. Yellen. There were a set of criteria that FSOC 
initially issued to indicate firms--
    Mr. Poliquin. And has that been updated?
    Mrs. Yellen. --that we might look at.
    Mr. Poliquin. And has that been updated, Chair Yellen?
    Mrs. Yellen. I am not certain it has been, but there was--
    Mr. Poliquin. Great. If you don't mind, we will reach out 
to your staff to see if there is any updated criteria on that. 
And do you also, Chair Yellen, have a set of criteria that 
deals with an off-ramp, such that if an institution, a nonbank 
financial institution is designated as a SIFI, and they know if 
they go down this path and derisk, in your eyes and the eyes of 
FSOC, there will be an off-ramp for them? Do you have that set 
of criteria?
    Mrs. Yellen. We evaluate each of these firms every single 
year to decide if it is no longer appropriate for them to be 
designated--
    Mr. Poliquin. But do you have a set of written criteria, 
Chair Yellen? Because if you are running a business, it is 
really helpful if you have those guidelines.
    Mrs. Yellen. We are not trying to run these businesses, and 
we are not going to--I don't think it would be appropriate for 
us to say, you need to do X, Y, and Z, to be de-designated. 
These firms understand very well why they have been designated 
and they understand what kinds of changes in their business 
model would change that assessment.
    Mr. Poliquin. As a Member, if I may--
    Mrs. Yellen. And these are firms that have decided they 
want to do this kind of business. And if they change that 
decision, of course it is possible--
    Mr. Poliquin. Here is what I worry about, Chair Yellen. And 
I don't mean to be rude, but we have a little over a minute 
left. Here is what I worry about. You have probably seen the 
study that was conducted by Mr. Holtz-Eakin, who is the former 
Director of the nonpartisan CBO.
    Mrs. Yellen. Yes.
    Mr. Poliquin. And when you have pension fund managers and 
mutual fund managers that are designated as SIFIs, he concludes 
that the long-term rate of return of these retirement nest eggs 
is likely to go down by up to 25 percent if they have to 
succumb to these Dodd-Frank regulations.
    So it is my contention that when you have a trucker in 
Bangor, Maine, or a teacher in Lewiston, Maine, in the greatest 
district, in the greatest State in the country, and they are 
doing their best to put aside $50 or $100 a month to make sure 
they plan for retirement, but because of these Dodd-Frank 
regulations over an industry that poses no systemic risk to the 
economy, if that happens and these regulations prevail, then 
these folks will have to work longer, and will have less money 
in their nest egg, and that is not fair, and it is not 
compassionate.
    So all I am asking of you is--as a Member of Congress, I 
represent 650,000 of the most honest, hard-working people you 
can find in this country. I just would like to see what written 
criteria you have such that these pension fund managers, these 
asset managers know how to be de-designated as a SIFI.
    Mrs. Yellen. None of them have been designated.
    Mr. Poliquin. I know, but wouldn't it be great if they knew 
what would cause them to be designated and how they could get 
out of it?
    Mrs. Yellen. FSOC has not designated any asset manager.
    Mr. Poliquin. And thank you for doing that, but it would be 
wonderful if we have criteria so going forward, we know what 
that will look like.
    Chairman Hensarling. The time of the gentleman--
    Mr. Poliquin. Thank you, Chair Yellen.
    Chairman Hensarling. The time of the gentleman has expired.
    And I want to thank Chair Yellen for her testimony today.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place her 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.
    This hearing stands adjourned.
    [Whereupon, at 1:05 p.m., the hearing was adjourned.]

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