[Senate Hearing 114-6]
[From the U.S. Government Publishing Office]


                                                          S. Hrg. 114-6


           EXAMINING THE REGULATORY REGIME FOR REGIONAL BANKS

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE IMPACT OF THE EXISTING REGULATORY FRAMEWORK ON REGIONAL 
                                 BANKS

                               __________

                             MARCH 19, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                 Available at: http: //www.fdsys.gov /
                 
                               ____________
                               
                       U.S. GOVERNMENT PUBLISHING OFFICE
93-950 PDF                  WASHINGTON : 2016                       

________________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].  





            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MICHAEL CRAPO, Idaho                 SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                    Jelena McWilliams, Chief Counsel

                    Dana Wade, Deputy Staff Director

                       Beth Zorc, Senior Counsel

                Jack Dunn III, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

              Phil Rudd, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 19, 2015

                                                                   Page

Opening statement of Chairman Shelby.............................     1

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

                               WITNESSES

Daniel K. Tarullo, Governor, Board of Governors of the Federal 
  Reserve System.................................................     4
    Prepared statement...........................................    32
    Responses to written questions of:
        Senator Brown............................................    44
        Senator Vitter...........................................    51
        Senator Toomey...........................................    53
Thomas J. Curry, Comptroller, Office of the Comptroller of the 
  Currency.......................................................     5
    Prepared statement...........................................    35
    Responses to written questions of:
        Senator Toomey...........................................    57
Martin J. Gruenberg, Chairman, Federal Deposit Insurance 
  Corporation....................................................     7
    Prepared statement...........................................    39

              Additional Material Supplied for the Record

Systemic Importance Indicators for 33 U.S. Bank Holding 
  Companies: An Overview of Recent Data, submitted by Chairman 
  Shelby.........................................................    61
BCBS Systemic Importance Indicators, submitted by Chairman Shelby    68
Tailored Key Elements of Enhanced Prudential Regulation, 
  submitted by Senator Brown.....................................    69

                                 (iii)

 
           EXAMINING THE REGULATORY REGIME FOR REGIONAL BANKS

                              ----------                              


                        THURSDAY, MARCH 19, 2015

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard C. Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This week and next, the Committee will examine the impact 
of the existing regulatory framework on regional banks. Today, 
we will hear from regulators on the current regulatory 
construct and whether it should be imposed on these 
institutions.
    Regional banks fulfill a critical role in their 
communities. They represent what we all recognize as 
traditional banking. They, for the most part, take deposits so 
that they can provide residential, small business, and 
commercial loans. This is the fuel that drives local and 
regional economic growth.
    Unfortunately, these banks have been placed in a regulatory 
framework designed for large institutions because of an 
arbitrary asset threshold established by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act. The title of the Act 
says ``Wall Street,'' but today, we are talking about banks 
that call Birmingham, Alabama, and Cincinnati, Ohio, home. The 
Dodd-Frank framework subjects all banks with assets of $50 
billion or more to enhanced prudential standards, which carry 
heightened capital requirements, leverage, liquidity, 
concentration limits, short-term debt limits, enhanced 
disclosures, risk management, and resolution planning. Five 
years after this new regulatory framework was conceived, I 
believe it is appropriate today to revisit its suitability for 
these particular institutions.
    Many experts have expressed concern about an arbitrary $50 
billion threshold as an automatic cut-off for systemic risk. I 
share their concerns. It has been said that regulators should 
not apply macroprudential rules to those institutions that do 
not pose macroprudential risk. I could not agree more.
    I have also been a proponent of prudent regulation and 
strong capital requirements. I believe we must, however, 
consider the economic impact of subjecting banks that are not 
truly systemically risky to enhanced prudential regulation. I 
think we also must ask whether the existing regulatory 
framework is the best use of the regulatory resources.
    Today, I would like to hear from the witnesses whether the 
$50 billion threshold is the appropriate and most accurate way 
to determine systemic risk in our banking sector. For example, 
a recent paper by the Office of Financial Research examines 
broad indicators used by global bank regulators to determine 
when a bank is systemically important. In fact, global bank 
regulators do not focus strictly on asset size. Rather, they 
take a broader view of the bank's total exposures that captures 
activities beyond assets.
    The Office of Financial Research report takes into account 
the bank's size, interconnectedness, complexity, among other 
factors, and applies this criteria to regional banks in the 
U.S. The results of this analysis show that regional banks 
generally pose a small fraction of the risk to the financial 
system compared to the largest banks. The report states that 
the data set, quote, ``is a significant step in quantifying 
specific aspects of systemic importance.''
    What this analysis reveals is in stark contrast with the in 
or out approach mandated by the $50 billion threshold. Some 
supporters of this automatic in or out approach to systemic 
risk argue that the regulators can tailor requirements based on 
the institution's size. I believe what this argument fails to 
take into account is that the law that established this 
regulatory framework is very prescriptive on how the regulators 
can tailor their regulations.
    For example, under the current system, a $51 billion bank 
must receive disparate treatment from regulators compared to a 
$49 billion bank. This statute, I believe, effectively ties 
regulators' hands from taking into account a holistic view 
similar to that employed by the Office of Financial Research in 
its analysis on systemic risk.
    A regulatory system that is too constrictive is not a 
system that will allow our banks to thrive or our consumers and 
businesses to have access to affordable credit. Moreover, a 
system that directs regulators' resources away from issues of 
systemic importance raises questions of whether regulators are 
adequately focused on protecting the economy and American 
taxpayers from the next crisis.
    When the Ranking Member and I first met to discuss the 
agenda of the 114th Congress, I thought we shared a common 
interest that the SIFI threshold was one of a number of topics 
on which we should focus. Today, we will begin that effort.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Chairman Shelby, and thank you to 
the witnesses today and thank you all for your public service 
over the years.
    I appreciate the Chairman calling this hearing to examine 
the regulation of regional banks. It is an important topic. We 
held a hearing last July on a similar topic. Unfortunately, it 
seemed to raise more questions than it provided answers. I hope 
these next two hearings, this week with the regulators and next 
week with banks, will help us to advance the conversation as we 
work to ensure that prudential regulations for regional banks, 
for midsize banks, are crafted appropriately.
    This is a topic that is important to me because I have seen 
the effects on a community when a regional bank takes excessive 
risks. National City Corporation was a super-regional bank 
founded in Cleveland in 1845. It weathered all the bank panics 
of the 19th century and the Great Depression of the 20th, but 
it no longer exists today. In 2007, National City was the ninth 
largest U.S. commercial bank, having $140 billion in assets. 
Less than a year later, it had been sold to PNC in Pittsburgh 
with the assistance of $7 billion in taxpayer dollars.
    National City's downfall is a case study in management 
mistakes and regulatory failures. The OCC, for example, allowed 
the bank to buy back $3 billion of its own stock in early 2007, 
months before its failure. A Federal Reserve witness before my 
subcommittee in 2011 called the events at National City, quote, 
``a collective failure of imagination by the banks and by the 
regulators.''
    Even near-failures have costs. Though National City did not 
technically fail, 4,000 people lost their jobs, many of them in 
my hometown in Cleveland. National City's management and our 
regulators failed those workers and communities across my State 
and across a number of States.
    Congress responded to this and the failures of other 
institutions by passing Dodd-Frank and directing agencies to 
institute standards like capital and liquidity and risk 
management and stress testing to lower the likelihood and the 
costs of large bank holding company failures.
    In 2010, American Banker wrote that many of the powers in 
Title I of Dodd-Frank were not new. They were put there as a 
directive from Congress to the regulators to use their 
authorities in ways that have teeth. That is why one bank 
lobbyist said, ``When the President signed the financial reform 
law, that was halftime. The legislators left the field. Now, it 
is time for the regulators to take over. We want to see that we 
do not over-regulate here,'' unquote.
    I agree, we should not over-regulate. So did the authors of 
Dodd-Frank. We often hear that a $50 billion bank should not be 
treated the same way as JPMorgan Chase. I agree on that, too. 
Dodd-Frank did not go as far as I would have liked in some 
respects, but in other respects, it struck a pretty good 
balance. It called for heightened rules for large bank holding 
companies but directed regulators not to take a one-size-fits-
all approach. These rules were not meant to cover just the too-
big-to-fail banks nor just the systemically important banks. 
They were meant to cover institutions like National City.
    That is why enhanced prudential standards increase in 
stringency as institutions grow larger. Regulators have 
proposed or implemented different rules that apply to banks 
with $50 billion or more in assets, rules that apply to banks 
with 250 or more in assets, and rules that apply to banks with 
700 or more in assets, the way it should be. Further, the law 
allows regulators--and this is key, I believe--the flexibility 
to lift the thresholds for some of these standards.
    I hope that in the process of these hearings and our 
discussions we explore the benefits and the burdens of specific 
regulations and whether issues are being caused by the law or 
its implementing regulations. Enhanced prudential standards are 
important, not just to respond to the last crisis, but also to 
prevent the next one. The failure of a single large institution 
can create systemic risk, but so can multiple failures of 
similar small or medium-size institutions.
    The term ``too big to fail'' originated from the failure of 
the $40 billion bank Continental Illinois in 1984. In today's 
dollars, it would have been a $90 billion bank.
    I look forward to hearing our witnesses are using their 
authority to tailor their regulations to the institutions and 
activities that present the most risk while not becoming 
complacent and taking their eyes off of all potential sources 
of risk. Our imaginations have failed us more than once when it 
comes to anticipating problems. We should make sure we do not 
let it happen again.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Without objection, I would like to enter into the record 
now the Office of Financial Research Brief 15-01 and the OFR 
Table of Systemic Importance Indicators.
    Our witnesses today include Governor Daniel Tarullo, a 
member of the Board of Governors of the Federal Reserve System, 
who is no stranger to this Committee; Comptroller Thomas Curry 
of the Office of the Comptroller of the Currency, who is no 
stranger, either; and also Martin Gruenberg of the Federal 
Deposit Insurance Corporation, who was a longtime staffer here. 
Welcome, gentlemen.
    Governor, we will start with you.

STATEMENT OF DANIEL K. TARULLO, GOVERNOR, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you very much, Mr. Chairman, Senator 
Brown, and other Members of the Committee.
    In response to your request for comments on possible 
adjustments to statutory thresholds for mandatory application 
of certain forms of prudential regulation, let me begin with 
three comments.
    First, Dodd-Frank's creation of different tiers of 
prudential regulation was a very important step forward in 
dealing with the problem of too-big-to-fail and larger 
institutions. The approach of requiring enhanced prudential 
standards for larger, significant institutions is an important 
method of promoting financial stability, assuring the 
availability of credit for American businesses and households, 
and countering moral hazard, while taking into account the 
relative costs and benefits of different forms of regulation to 
banks of different sizes and scope of activities.
    Second, it is worth considering whether the threshold as 
applied to smaller institutions within this range might be 
adjusted in light of experience to date. As I have said before, 
it may be sensible to exempt community banks completely from 
certain regulatory requirements where this would reduce 
compliance costs with little or no cost to safety or soundness. 
It is also worth thinking about some adjustment to the $50 
billion threshold in Section 165, a point to which I will 
return in a moment.
    Third, any possible change in these thresholds should be 
limited to specifying the universe of banks for which it is 
mandatory that certain regulations apply. It is critical that 
the three banking agencies in front of you today retain 
discretion to require prudential measures, including things 
such as more capital or liquidity, for specific firms or groups 
of firms when necessary to ensure the safety and soundness of 
those institutions.
    Coming back now to the issue of the $50 billion threshold, 
let me first note that we have implemented the enhanced 
prudential standards requirements in accordance with the 
Section 165 criterion of increasing stringency depending on the 
systemic importance of the banks as determined through 
application of the relevant statutory factors. In essence, we 
have created three categories for firms in that group, that 
universe of banks of $50 billion or more. So, there is already 
a good bit of tiering as we have taken advantage of the 
flexibility granted to us.
    Now, one might debate whether even the less restrictive 
forms of those standards as applied to a $50 billion 
institution should be mandatory or just left to supervisory 
discretion. But, I would say, in trying to be responsive to the 
questions the Committee is asking, that the issue is most 
clearly joined with respect to supervisory stress testing. The 
incremental supervisory costs for us of doing this entire 
universe of banks are significant. The resource demands on the 
institutions are substantial. The marginal benefits for safety 
and soundness for that group of $50 to $100 billion 
institutions seem rather limited. And, finally, our ability to 
tailor to these smaller institutions is more constrained in the 
context of a supervisory stress test with the three required 
scenarios than in those other enhanced prudential standards 
areas I was referring to a moment ago.
    That is, even though we do vary some of the qualitative 
expectations we have for the smaller banks in the stress test, 
the basic application of supervisory scenarios, comparable loss 
functions, and other elements of the test create a baseline of 
a considerable amount of detail and resource expenditure for 
the affected banks. So, I think this is an example of where 
things are less susceptible to significant tiering and, thus, 
the decision at its root tends to be a bit more of a binary 
one, that is, the bank is either in or it is out.
    Thank you for your attention, and I would be pleased to 
answer any questions you might have.
    Chairman Shelby. Thank you.
    Mr. Curry.

   STATEMENT OF THOMAS J. CURRY, COMPTROLLER, OFFICE OF THE 
                  COMPTROLLER OF THE CURRENCY

    Mr. Curry. Chairman Shelby, Ranking Member Brown, and 
Members of the Committee, thank you for the opportunity to 
discuss the OCC's experience with Section 165 of the Dodd-Frank 
Act and our approach to tailoring our regulatory and 
supervisory expectations to the size and complexity of the 
individual institutions we supervise.
    Because the focus of Section 165 as it applies to the 
banking sector is on bank holding companies, almost all of the 
authorities under this section are assigned to the Federal 
Reserve System. The only area in which the OCC has direct 
rulemaking authority involves the mandated company-run stress 
tests for banks with consolidated assets of more than $10 
billion.
    To the extent permitted by the statute, we tailored our 
requirements to distinguish between those that apply to banks 
with assets between $10 and $50 billion in assets and those 
with assets in excess of $50 billion. Otherwise, the OCC's role 
in Section 165 is limited to a consultive one on matters 
affecting national banks.
    However, national banks typically comprise a substantial 
majority of the assets held by bank holding companies with 
consolidated assets of $50 billion or more, and the national 
bank is typically the dominant legal entity within each 
company. Consequently, I would like to focus my remarks on how 
we use our existing supervisory tools that are similar to the 
provisions of Section 165 in our prudential oversight of 
national banks and Federal savings associations.
    It is very important that the OCC retain the ability to 
tailor and apply our supervisory and regulatory requirements to 
reflect the complexity and risk of individual banks. As my 
written testimony describes, we have taken a number of 
initiatives to ensure that banks that pose heightened risk to 
the financial system are subject to much higher requirements 
than those with lower risk profiles. While a bank's asset size 
is often a starting point in our assessment of appropriate 
standards, it is rarely, if ever, the sole determinant.
    For example, while most banks in our midsized portfolio 
fall into the $8 billion to $50 billion range, this portfolio 
also includes several banks that exceed $50 billion in assets. 
These banks have business models, corporate structures, and 
risk profiles that are very different from other institutions 
in our large bank portfolio, which typically have national or 
global operations, complex corporate structures, or extensive 
exposures in the wholesale funding and capital markets. This 
flexible approach, which considers both size and risk profiles, 
allows us to transition and adjust the intensity of our 
supervision and our supervisory expectations as a bank's 
profile changes.
    Our approach of tailoring requirements to different types 
of institutions can also be seen in our implementation of 
capital, liquidity, and risk management standards for the banks 
we supervise. While our standards are separate from the 
enhanced prudential standards that the Federal Reserve issues 
under Section 165, we believe they are consistent with the 
statute's intent and provisions.
    For example, the interagency capital requirements 
applicable to national banks, including those related to market 
and operational risks, and the enhanced leverage ratio 
requirements, generally only apply to the largest banks that 
have significant trading activities and complex operations. The 
capital rules, however, also allow the OCC to require 
additional capital based on an individual bank's circumstances, 
regardless of its size. This ability to require an individual 
bank to maintain capital levels above regulatory minimums is 
especially important when we encounter banks that have 
significant concentrations in certain loan products or market 
segments, and we regularly exercise this discretion.
    For our largest banks, generally those over $50 billion in 
assets, we have also developed a set of heightened standards 
for risk management and corporate governance that reflect the 
greater size, complexity, and risk that these institutions 
represent. For example, these standards focus on the need for 
an engaged board of directors that is capable of providing an 
independent perspective and a credible challenge to management. 
The standards also address the need for a robust audit function 
and a compensation structure that does not encourage excessive 
risk taking.
    Finally, let me reiterate that there are very considerable 
differences not just between community banks and large 
institutions, but among the large banks themselves. Our 
approach recognizes the differences in size, complexity, and 
risk among the large banks and thrifts we supervise and it 
ensures that the appropriate degree of supervisory rigor is 
targeted to each institution.
    Thank you, and I look forward to answering your questions.
    Chairman Shelby. Thank you.
    Mr. Gruenberg.

  STATEMENT OF MARTIN J. GRUENBERG, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Mr. Gruenberg. Chairman Shelby, Ranking Member Brown, and 
Members of the Committee, I appreciate the opportunity to 
testify on the regulatory regime for regional banks.
    Section 165 of the Dodd-Frank Act requires enhanced 
prudential standards for bank holding companies with total 
consolidated assets equal to or greater than $50 billion, while 
providing regulatory discretion to tailor standards to the size 
and complexity of the companies. The companies that meet the 
$50 billion threshold represent a significant portion of the 
U.S. banking industry and also represent a diverse set of 
business models.
    As part of its research on community banks, the FDIC 
developed criteria to identify community banks. Based on that 
criteria, 93 percent of all FDIC-insured institutions with 13 
percent of FDIC-insured institution assets currently meet the 
criteria of a community bank. This includes over 6,000 
institutions, of which nearly 5,700 have assets under a billion 
dollars. By contrast, regional banks are much larger in asset 
size than a typical community bank and typically have expanded 
branch operations and lending products serving several 
metropolitan areas and may do business across several States. 
In addition, the Deposit Insurance Fund would face a 
substantial loss from the failure of even one of these 
institutions.
    Section 165 provides the FDIC with explicit 
responsibilities in two substantive areas related to prudential 
standards: resolution plans and stress testing. In both areas, 
the FDIC has tailored requirements to fit the complexity of the 
affected institutions.
    Resolution plans, or living wills, are an important tool 
for facilitating the orderly failure of these firms under the 
bankruptcy code. In 2011, the FDIC and the Federal Reserve 
jointly issued a final rule implementing the resolution plan 
requirements for bank holding companies with assets equal to or 
greater than $50 billion in consolidated assets. The agencies 
used their statutory discretion to develop a joint resolution 
planning rule which recognizes the differences among 
institutions and scales the regulatory requirements and 
potential burdens to the size and complexity of the 
institutions subject to the rule.
    For their initial submissions, bank holding companies with 
less than $100 billion in total nonbank assets and 85 percent 
or more of their assets in an insured depository institution 
were generally permitted to submit tailored resolution plans 
that simplify the task of creating a living will. Nearly all 
the U.S. institutions in this category filed tailored plans. 
The joint rule also allows the agencies to modify the frequency 
and timing of required resolution plans, which we have done.
    The Dodd-Frank Act also requires the Federal banking 
agencies to issue regulations requiring financial companies 
with more than $10 billion in total consolidated assets to 
conduct annual stress tests. The FDIC's stress testing rules, 
like those of the other agencies, are tailored to the size of 
the institutions, consistent with the expectations under 
Section 165 for progressive application of the requirements. 
Under the agencies' implementing regulations, organizations in 
the $10 to $50 billion asset size range have more time to 
conduct the tests and are subject to less extensive information 
requirements as compared to larger institutions.
    Section 165 establishes the principle that regulatory 
standards should be more stringent for the largest 
institutions. Certainly, degrees of size, risk, and complexity 
exist among the banking organizations subject to 165, but all 
are large institutions. Some of the specializations and more 
extensive operations of regional banks require elevated risk 
controls, risk mitigation, corporate governance, and internal 
expertise than what is expected from community banks.
    That being said, it is appropriate to take into account the 
differences in the size and complexity of large banking 
organizations when forming regulatory standards. The agencies 
have made appropriate use of the flexibility built into section 
165 thus far, and where issues have been raised by industry, we 
have tried to be responsive.
    However, we do recognize that more could be done. For 
example, the statutory language governing stress testing is 
more detailed and prescriptive than the statutory language on 
other prudential standards, leaving the regulators with less 
discretion to tailor the stress testing process. The FDIC would 
welcome the opportunity to work with the Committee on language 
that would permit greater flexibility in the stress testing 
process.
    The FDIC also remains open to further discussion on how 
best to tailor various enhanced prudential standards and other 
regulations and supervisory actions to best address risk 
profiles presented by large institutions, including regional 
banks.
    Mr. Chairman, thank you, and I would be happy to answer any 
questions.
    Chairman Shelby. I thank all of you.
    I want to ask this question--a couple of questions to begin 
with to all of you, and I would like a yes or no answer to 
these questions. We are going to have a lot of questions.
    Should a bank that is systemically risky be regulated like 
a bank that is, one?
    Two, are there any nonsystemically risky banks currently 
being regulated as if they were systemically risky because of 
the statutory $50 billion threshold?
    Governor, we will start with you.
    Mr. Tarullo. Senator, could I ask you to clarify just a bit 
the two questions. Is the systemic importance issue----
    Chairman Shelby. Let me just ask the question again. Should 
a bank that is not systemically risky be regulated like a bank 
that is?
    Mr. Tarullo. I know you want yes or no, and I am going to 
begin by saying no, but I just do want to point out that there 
are varieties of systemic riskiness or importance.
    Chairman Shelby. I understand. You can elaborate.
    Mr. Tarullo. OK.
    Chairman Shelby. What about are there any nonsystemically 
risky banks currently being regulated as if they were 
systemically risky because of the statutory $50 billion 
threshold?
    Mr. Tarullo. I would say, to a degree, yes, in the stress 
testing area.
    Chairman Shelby. Yes, basically.
    Mr. Curry.
    Mr. Curry. I would answer no to the first question, and 
potentially yes to the second.
    Chairman Shelby. OK.
    Mr. Gruenberg.
    Mr. Gruenberg. Can you repeat the question, because I want 
to be careful----
    Chairman Shelby. Yes, I will. Should a bank that is not 
systemically risky be regulated like a bank that is? That is 
question one. Yes or no?
    Mr. Gruenberg. No.
    Chairman Shelby. Are any nonsystemically risky banks 
currently, to your knowledge, being regulated as if they were 
systemically risky because of the $50 billion threshold?
    Mr. Gruenberg. As a general matter, from my standpoint, no, 
Mr. Chairman.
    Chairman Shelby. OK. Another question for all of you. We do 
not get this opportunity every day. I mentioned in my opening 
statement a recent report by the Office of Financial Research 
that examines broad indicators to determine whether a bank is 
systemically important. Do you have any concerns with the 
methodology described by the OFR report to measure systemic 
risk, and do you believe that the automatic $50 billion 
threshold is superior to analytic methodology described in the 
OFR report to measure systemic risk? Governor.
    Mr. Tarullo. Thank you, Mr. Chairman. Here is where this 
issue of systemic importance comes in----
    Chairman Shelby. Sure.
    Mr. Tarullo. ----and there are two ways you can think about 
it. One is systemic importance in the sense that high stress or 
failure of that particular firm might itself lead to a 
financial crisis. So, that is the sort of systemic risk, too-
big-to-fail concern that we are thinking about----
    Chairman Shelby. Absolutely.
    Mr. Tarullo. ----from 6, 7 years ago.
    The second form of systemic importance is, if you just 
reverse the syntax, importance to the financial system, and 
that is where just the sheer size of an institution, the fact 
that it has a big footprint across the country, the fact that 
its credit intermediation is important for American businesses 
and households, gives it an importance that, for example, does 
not attach to a community bank. So, that is where it is 
important to take account of those differences.
    Now, the OFR report is, to a considerable extent, focused 
on the institutions at the very top of the scale, what we have 
in our LISCC, Largest Institution Supervision Coordinating 
Committee portfolio at the Fed, and the institutions which 
internationally have been identified as of global systemic 
importance.
    Now, there, as I think you all know, we do distinguish, 
first off, by segregating that group of eight and have special 
requirements applicable to them, and second, even among those 
eight, we vary the requirements, for example, in our proposal 
on capital surcharges. So, depending on size, complexity, 
interconnectedness, and substitutability, the proposed 
surcharge may be greater or lesser even among those eight 
banks.
    So, although one will have a different set of views, maybe, 
on exactly what the right set of criteria are, and a lot of 
academics and people internationally, people at the Fed, OFR, 
have tried to give their own precise formulas, I think all of 
those people are engaged in the same exercise, which is to say, 
let us identify the systemic importance of those institutions 
whose failure would really put the whole system at risk.
    Chairman Shelby. Governor, again, do you disagree with the 
methodology in the OFR report to measure systemic risk?
    Mr. Tarullo. We might have some questions about the 
methodology. I know you know this, Mr. Chairman, because you 
have heard me on this for 10 years now, but I am very focused 
on the vulnerabilities created by short-term wholesale funding 
at large capital market institutions, and I, at least my 
understanding of the OFR report is it does not weight that as 
heavily as I would. But, as I said earlier, I think we are 
engaged in the same broader exercise.
    Chairman Shelby. Governor, as part of the Financial 
Stability Board and the Basel Committee for Banking 
Supervision, the Federal Reserve participated in devising what 
we call a multifactor approach for assessing the systemic risk 
for financial institutions. You are very familiar with this. 
Could you briefly explain here this multifactor approach, and 
do you believe that this approach is a valid way to determine 
systemic risk?
    Mr. Tarullo. Yes. I have already alluded to it, but let me 
be a bit more specific.
    Chairman Shelby. Yes.
    Mr. Tarullo. What the Basel Committee did, and the Fed 
participated very heavily in this, was to try to construct a 
set of indicators, which, as I say, addressed issues like size, 
interconnectedness, the degree of cross-border activity----
    Chairman Shelby. Uh-huh.
    Mr. Tarullo. ----and then to assign some weights to those 
factors. Then we took a broad range of large internationally 
active banks and ran their characteristics through that 
template----
    Chairman Shelby. Uh-huh.
    Mr. Tarullo. ----to come up with a ranking of institutions 
that might be considered of global systemic importance. That 
was the basic exercise.
    But, again, I just want to emphasize, that effort was 
oriented toward the institutions whose failure in and of 
themselves might create a domino effect and have a financial 
crisis as a result. So, we were trying to do that assessment 
for the very significant additional regulations that are 
associated with those very largest institutions.
    Chairman Shelby. Governor, you are familiar with Secretary 
Lew's testimony before the House Financial Services Committee, 
I assume, on Tuesday. He said that he is not convinced 
legislation, quote, ``is required right now to raise the $50 
billion threshold until we determine administrative flexibility 
is inadequate.''
    My question to you, does either the FSOC or the Federal 
Reserve currently have administrative flexibility to raise the 
$50 billion threshold with respect to prudential standards in 
Section 165? It is my understanding that is statutory.
    Mr. Tarullo. That is statutory, and the FSOC has authority 
to raise some but not others.
    Chairman Shelby. Not that.
    Mr. Tarullo. And not stress testing, right.
    Chairman Shelby. Thank you.
    Senator Brown.
    Senator Brown. This chart to the witnesses' right, and all 
my colleagues should have a copy at their desks, highlights 
significant tailoring of enhanced prudential standards by the 
regulators for bank holding companies above $50 billion in 
total assets. This is an easier yes or on question than the two 
directed from the Chair. Just to each of you, if you would just 
say yes or no, does this look accurate to you?
    Mr. Tarullo. No, it does not, Senator.
    Senator Brown. Why is that?
    Mr. Tarullo. Well, there are at least two reasons I see, 
looking at it quickly. I do not quite know where the $700 
billion category came from. We have breaks for statutory and 
supervisory reasons at 1, 10, 50, 250, and then the LISCC 
portfolio, but this other one, they may have inferred it from 
some other things, but it is not one of our categories. Also, I 
do not see single counterparty credit limits up there, either. 
There may be others.
    Senator Brown. Mr. Curry.
    Mr. Curry. I think, generally, it is correct, Senator. I 
believe the $700 billion figure may reflect the cut-off in the 
enhanced supplemental leverage ratio.
    Senator Brown. Mr. Gruenberg.
    Mr. Gruenberg. Senator, since the enhanced prudential 
standards are, in significant measure, a bank holding company 
set of standards under the Fed, I think I would probably defer 
to Governor Tarullo on the evaluation of this particular chart.
    Senator Brown. OK. Let us get back to that. Let me go in a 
slightly different direction.
    Governor Tarullo and Chairman Gruenberg observed the 
statute allows for tailoring. You have said that. But, there 
are practical challenges to tailoring stress tests. Governor 
Tarullo said the supervisory benefits of stress testing for 
banks around $50 or $60 or $70 billion are relatively modest. 
Chairman Gruenberg alluded to this when he discussed capital 
and liquidity, but Section 165 also includes some standards 
that are central to preserving safety and soundness and 
financial stability.
    And, questions for all of you, again, start with you, 
Governor Tarullo. How concerned should we be by proposals that 
would limit your agency's longstanding authority to preserve 
safety and soundness and financial stability of all bank 
holding companies, regardless of size? And, let us go down, 
starting with you.
    Mr. Tarullo. Very concerned, Senator. That is why I 
included that as one of my introductory points, that it has 
been a longstanding practice of the three agencies in front of 
you, as validated by Congress, let me see, 32 years ago, that 
the Federal banking agencies have discretion to apply 
specifically stronger expectations for particularly banks or a 
group of banks that pose safety and soundness risk. Any 
constraint upon that would be highly problematic.
    Senator Brown. Mr. Curry.
    Mr. Curry. I would agree with Governor Tarullo. The items 
that are in Section 165 really are tools, longstanding tools, 
established tools that the supervisors have used. So, any 
direct or, by implication, limitation on our ability to use 
those tools on a selective basis would be problematic.
    Senator Brown. Mr. Gruenberg.
    Mr. Gruenberg. Senator, I agree with the points made by 
Governor Tarullo and Comptroller Curry, and it goes to, to me, 
an important issue, as to what the purpose of these enhanced 
prudential standards are. As I read them, they basically 
preserve the underlying prudential authorities that the 
agencies have had and are basically saying to the agencies, for 
institutions over a certain size, they may present particular 
risk to the financial system. They are basically telling the 
regulators to pay attention and, if necessary, impose more 
stringent standards. I think that is the purpose and that is, 
in significant measure, the value. But, I think the premise was 
that the underlying prudential authorities that we had would be 
preserved, and I think that is probably for us the threshold 
issue here.
    Senator Brown. Thank you.
    One financial sector analyst's note about this hearing said 
that raising the $50 billion threshold, and I quote, ``would 
open the door to more freedom for banks to distribute capital 
to shareholders in the form of buy-backs and dividends and 
would pave the way to more M&A activity as banks worry less 
about crossing the $50 billion threshold designation.''
    Should we be giving a priority, then, to dividends and buy-
backs and consolidation at the expense of financial stability? 
And, I will start with Mr. Gruenberg this time.
    Mr. Gruenberg. No, Senator.
    Senator Brown. Mr. Curry.
    Mr. Curry. No.
    Mr. Tarullo. So, Senator, obviously not. I mean, that is 
not what motivates it. I think what should motivate it is the 
question of how much safety and soundness benefit do we get out 
of this particular approach, which is the stress testing. I 
think that as you saw by looking at the stress test results 
this year, in fact the smaller regional banks are very well 
capitalized. So, it is really just a question of the 
expenditure of resources and how much safety and soundness 
benefit you get for that.
    Senator Brown. Mr. Gruenberg, one more question, if I 
could. The failure of the $30 billion thrift IndyMac, a 
traditional lender under $50 billion in assets, cost the FDIC 
fund about $12 billion. What did their failure mean for the 
market and for the DIF and which enhanced prudential 
regulations would help mitigate those effects in the future for 
a bank that size?
    Mr. Gruenberg. It is a good question, Senator. As you know, 
IndyMac was the most costly failure during this recent crisis 
to the Deposit Insurance Fund, and, I think, may have been the 
most costly failure the Fund has ever experienced for a single 
institution. And, it presented significant resolution 
challenges, because, frankly, the institution was in such bad 
shape that there was no available acquirer for it. We had to 
establish a bridge company to manage it over a period of 
several months to have an orderly wind-down, which is one of 
the reasons for the cost of the failure.
    And, it certainly had consequences. It was a California 
institution, and it had consequences for the community and 
region in which it operated. It is fair to say, given the 
fragile financial environment generally at the time, it may 
have had broader impacts in terms of perceptions about the 
vulnerability of the mortgage market.
    The point is that an institution even of that size could 
have, certainly, significant consequences for the Deposit 
Insurance Fund and considerations for the financial system more 
broadly. Among the provisions of Dodd-Frank, of the enhanced 
prudential standards, the stress test is the one provision that 
would have applied, and in retrospect, had they had stress 
testing as well as a risk committee for the institution, I 
would argue that a stress test for that institution and a risk 
committee would not have had value for that institution.
    Senator Brown. Thank you.
    Chairman Shelby. Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and thanks for 
holding this hearing on regional banks.
    I also want to thank the banking agencies for being here, 
also, for taking time and listening to our concerns.
    Before I get started with my questions, I would like to 
find out where that chart came from. Maybe I would ask the 
Ranking Member----
    Chairman Shelby. The source of it.
    Senator Heller. ----what is the source of this chart?
    Chairman Shelby. Senator Brown, I think he is directing 
this question to you.
    Senator Brown. I am sorry. Yes. It came from Better 
Markets.
    Chairman Shelby. From what, now?
    Senator Brown. Better Markets.
    Chairman Shelby. It does not have where it came from.
    Senator Brown. I apologize for it not showing that.
    Senator Heller. I mean, it is unusual to have a chart that 
is passed around that has no validity.
    Senator Brown. Well, it has got lots of validity. I 
apologize for----
    Senator Heller. Well, the banking agencies themselves said 
it had no validity to it.
    Senator Brown. Well, they had--we had talked to the Fed 
about this and we----
    Senator Heller. I just hope it is not the practice of 
this----
    Senator Brown. Well, I----
    Senator Heller. ----this Committee to pass around charts 
that have no validity----
    Senator Brown. ----do not think it has----
    Senator Heller. ----nor does it have any source connected 
to it.
    Chairman Shelby. It is not the practice of the Committee. 
We generally--I have never known anything that did not have a 
source on it.
    Senator Brown. OK. I apologize for not putting the source 
on it. It was--there were some slight problems with it, but not 
major problems with it. I apologize for that.
    Senator Heller. All right.
    Governor, can you explain to me, based on current 
standards, the difference in the risk of a $49 billion bank and 
a $50 billion bank? Why is a $49 billion bank less risky than a 
$50 billion bank?
    Mr. Tarullo. Well, Senator, obviously, the risk of a 
particular institution is going to depend substantially on the 
underwriting practices and quality of capital of that 
particular institution. I think if you are getting at the 
question of why a threshold at $50 billion, I mean, to a 
considerable extent lines do have to be drawn. And, so, with 
respect to, as Comptroller Curry was explaining, the 
supervisory portfolios that we all have, we do have these asset 
thresholds to make sure that we are not requiring community 
banks to do more than makes sense for them to do with their 
limited portfolios.
    And, so, you draw a line at some point that seems sensible, 
but there is not always in supervisory practice a radical 
difference. There is a gradation of differences in what the 
expectations are. There are some things that do vary when you 
cut across a line that has been established in the statutory 
sense, like $50 billion. But, let me just say----
    Senator Heller. Governor, let me ask you a question----
    Mr. Tarullo. Yes.
    Senator Heller. ----because I do not have a lot of time. 
You floated the idea of raising that to $100 billion.
    Mr. Tarullo. Mm-hmm.
    Senator Heller. Do you endorse that?
    Mr. Tarullo. I endorse it in the sense that with stress 
testing, in particular, I think that is the one area where the 
administrative flexibility we have got seems not to allow us to 
do something that we think is a win-win on all sides.
    Senator Heller. Do you think risk matters or size? Which 
matters more, measuring risk or the size of the capital----
    Mr. Tarullo. Well, the two interact with one another, 
obviously, because the riskiness associated--the larger the 
institution, a given quantum of riskiness associated with that 
institution's portfolio will translate into a greater or lesser 
impact on the community and on the country. So, you really have 
to take the two things together.
    Senator Heller. You mentioned in your testimony that there 
was a lot of cost in these stress tests, a lot of stress to the 
agencies, obviously, quite a bit for the banks themselves. Is 
there a better way? Is there a better way that the Feds could 
be more transparent, perhaps communicate better to these 
regional banks as to what your expectations are?
    Mr. Tarullo. Oh, I think we have got a substantial back and 
forth with the community banks--excuse me, the regional banks. 
We have frequent meetings at the supervisory level before, 
during, and after the stress tests. With respect to this group, 
the $50 to $100 billion group, we have met with them on several 
occasions and will again once the supervisory letters go out to 
try to, to the degree we can, to tailor things to make the 
expectations a little clearer. So, sure, there is always more 
that can be done.
    Senator Heller. Just one more follow-up question, or just 
one last question. Do you think it is necessary to have a new 
living will every year if there are no material changes in a 
bank's organization?
    Mr. Tarullo. Well, you do not necessarily have to have a 
new one every year, and as Chairman Gruenberg was noting, we do 
have a gradated set of requirements. I think for the largest 
institutions, it is almost inevitable that there are going to 
be changes that one wants to take into account on an annual 
basis, just the same way we update stress tests and we update 
other things.
    Senator Heller. Governor, thank you.
    Mr. Chairman, thank you.
    Chairman Shelby. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. Thank you all for 
being here.
    I agree with Ranking Member Brown, that while certain 
regional banks may pose different risks than the too big to 
fail banks, that Dodd-Frank already gives the Fed a great deal 
of discretion to tailor its regulation and supervision to 
account for these differences. Where there is discretion, I do 
not think Congress should take away that discretion from the 
Fed and simply exempt certain large regional banks from 
increased Fed scrutiny. That is a recipe for missing the 
buildup of excessive risk in the financial system and it 
reflects the kind of ``let the banks run free'' mindset that 
created the last financial crisis. I just do not want to go 
there again.
    Now, we have heard a lot today about ways to roll back 
Dodd-Frank, but surely there are areas where we need to 
strengthen Dodd-Frank to address new concerns or to address old 
problems that were previously overlooked.
    Governor Tarullo, are there specific steps that you think 
Congress should take to strengthen or complement Dodd-Frank?
    Mr. Tarullo. Well, Senator, there are certainly discrete 
areas that would be worthy of consideration. Let me mention 
one, which probably many of you read about in connection with 
the commodities issues that have been looked at by this 
Committee.
    You know, there is a provision, Section 4(o), of the Bank 
Holding Company Act which exempts two institutions, 
essentially, from the restrictions on commodities activities 
that are generally applicable to bank holding companies. This 
resulted from an anticipatory grandfathering clause in the 
Gramm-Leach-Bliley Act. It basically said, if any institution 
becomes a bank holding company at some point in the future, 
they can continue to engage in all the commodities activities 
they have been engaging in, and as all of you know, two such 
entities did become bank holding companies as a result of the 
crisis.
    So, right now, those two firms are, by statute, allowed to 
engage in the extraction and transportation of potentially 
highly combustible materials with substantial risks associated 
with them. I think it would be very much worth considering 
treating those two firms the way we treat all other bank 
holding companies.
    Another thing that certainly occurred to me when I was back 
teaching banking law was that the structure of civil money 
penalties that we have right now puts dollar limits on those 
civil money penalties that are basically on a daily basis, you 
know, for each day that you can find the violation, and there 
are two issues there.
    One, the caps had to be set by the Congress with smaller 
banks in mind, obviously. So, the caps, particularly that 
middle tier cap, is really quite low. I think it is $37,000 a 
day for certain forms of safety and soundness problems where 
there was a recklessness associated with it. And, as you can 
imagine, that does not allow for the kind of penalty that would 
have an impact on a much larger institution. So, that is one 
issue.
    A second related issue is it is not quite clear to me why a 
thing should be calibrated on the number of days that the 
violation was in place as opposed to the relative seriousness 
of it.
    So, Senator, if the Committee was thinking in terms of 
discrete changes on all sides, I think it would be worth 
revisiting that so that our civil money penalty authority is 
effective for very large institutions.
    Senator Warren. Thank you very much, Governor Tarullo. I 
hope that the Chairman will be looking into concerns about the 
banks taking on more risks by speculating in commodities like 
aluminum and gold and oil, and also about increasing civil 
money penalty caps as two more ways to try to reduce risk in 
the system.
    Since the day Dodd-Frank was enacted, banks have been 
looking for ways to chip away at it, roll it back. But, if 
anything, the last 5 years have shown that we need to 
strengthen our financial reforms. The too big to fail banks 
have grown bigger than ever and banks take on new kinds of 
risks every day. Just last summer, the Fed and the FDIC 
declared that if any one of 11 banks started to falter, they 
would require a taxpayer bailout to avoid bringing down the 
entire financial system. If Congress thinks enough time has 
passed to reopen Dodd-Frank, then we should consider ways to 
protect taxpayers and the economy, not grant give-aways that 
further tilt the playing field toward the bigger banks and make 
our financial system less safe.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    I do not think there is a single community in the United 
States today that can consider themselves to have an 
opportunity to grow unless they have access to capital, to be 
able to borrow money, to be able to magnify what they could 
otherwise do with the resources at hand. We have got about 300 
towns, small towns, in South Dakota. On a day-to-day basis, 
they are impacted by the availability of their small town banks 
to be able to loan money.
    If you look at what has happened since Dodd-Frank, there is 
a continued concern expressed in many rural communities about 
the additional cost of compliance, and that cost of compliance, 
while it has been laid out because of a failure, I am not so 
sure that the failure has occurred in the banks that serve many 
of our small and regional communities. And, yet, we still talk 
about the need to identify a particular $50 billion number as 
the right number.
    I am just curious, when you take a look at it, and in this 
particular case, Governor, I would like to start with you, 
there is clearly a need to consider the impact to the economy 
with the availability of credit versus the need to protect the 
financial system that we have in place today. What is the 
impact--and you see this, you have discussed it regularly--how 
is the growth in our economy going based upon the ability of 
communities throughout the United States to access credit, and 
is it being impacted by the reduction in the availability of 
credit based upon the need for more capital at the bank level?
    Mr. Tarullo. Senator, it is obviously always a difficult 
matter to disentangle all the causes of a particular 
phenomenon, but I would say that at this juncture, the areas in 
which credit intermediation has seemed a bit sluggish probably 
have as much to do with demand for credit, meaning the relative 
amount of growth in the economy, growth in wages, which 
produces consumer demand, and the lingering effects of the 
crisis and the Great Recession, which caused many households 
and businesses to have to repair their own balance sheets where 
they had a lot of debt.
    I think, actually, the efforts that the three agencies in 
front of you have made to boost the capital of all of our banks 
will, over time, provide a much sounder basis for providing 
that credit intermediation because they are going to be strong 
and stable institutions.
    Marty was referring earlier to an institution that got 
itself in so much trouble that it was not able to provide that 
credit intermediation long before the FDIC had to shut it down. 
They had already reduced their activities. So, I think in that 
sense, we are headed in the right direction.
    The compliance cost issue that you note is a real one, 
though, for the community banks, in particular. That is why I 
advocated that the Congress adjust some of the limits on us in 
raising our small bank holding company exception, and I was 
delighted that you acted as quickly as you did in doing so. 
And, we will continue to look for ways to reduce compliance 
burden on smaller institutions that, again, just is not worth 
it for the safety and soundness benefits. I think we are all 
looking to try to do that.
    Senator Rounds. Gentlemen.
    Mr. Curry. Let me just elaborate on the cost and trying to 
eliminate some unnecessary burden on community banks. That has 
really been a focus of the three agencies, particularly in the 
EGRPRA context that we are currently engaged in, where we are 
actually reviewing rules and regulations and statutes to see 
whether there is an undue or unnecessary burden, particularly 
on the community bank sector.
    From a supervisory standpoint, we are constantly looking at 
our community bank division at the OCC, and how we can do a 
better job in supervising and being less intrusive and creating 
additional direct and indirect burden reductions for small 
community banks, particularly in rural areas.
    We are also looking at how can we offer a means of reducing 
the costs for necessary regulatory burden. The OCC issued a 
white paper on the opportunities for collaboration. We think 
that may be particularly helpful for smaller institutions that 
can share a compliance officer, share some of those costs that 
necessary regulation may be imposing upon them.
    Senator Rounds. Sir.
    Mr. Gruenberg. Senator, briefly, two points. One, the FDIC 
issues a quarterly banking profile every 3 months on the 
condition of the industry. The industry has been gradually 
improving now for several years and community banks' 
performance in particular has been improving. The banking 
industry, generally, and community banks in particular have 
made efforts over these last several years to strengthen their 
capital and liquidity. We actually believe that they are well-
positioned to take advantage of expanding credit demand and 
credit opportunities. Hopefully, if we get some increased lift 
from the economy, our banks should be well-positioned to 
respond to that.
    On the community bank side, though, I think there is, as 
has been mentioned by my colleagues, particular reason to take 
a look at regulatory burden and ways we can simplify and reduce 
costs for community banks to better enable them to respond to 
the credit demands from their communities. We are undertaking 
this EGRPRA process, which is really a comprehensive review of 
this. I do think there are going to be a number of ways that we 
are going to be able to come forward to suggest reducing 
regulatory costs, particularly for smaller institutions.
    Senator Rounds. Thank you.
    Mr. Chairman, I know my time has expired. I would just make 
the point that as we talk about the regulations involved in 
these banks and where they go, the one thing that seems to be 
lacking is a discussion about the impact, the economic impact 
on the entire economy, the whole thing, with whether or not 
when these banks can provide the necessary capital to 
businesses and individuals across the entire program of rural 
and urban areas. I think that should be an integral part of any 
discussion that we have about the regulation on these 
institutions.
    Chairman Shelby. The Senator is absolutely right. This is 
going to be part of the discussion and should be part of your 
concern, all three regulators, the impact on the economy, 
everything.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman.
    Good morning to the panel. Thank you for taking the time to 
have this conversation. Mr. Chairman, thank you for holding 
this hearing, very important hearing----
    Chairman Shelby. I apologize for skipping you, Senator 
Menendez.
    Senator Scott. ----about the adequacy of the current asset 
threshold for considering a bank to be a systemically important 
financial institution.
    For me, as I translate it into what I think is important 
for my constituents back at home in South Carolina, this is 
really about the cost and the availability of small loans and 
consumer credit at home in South Carolina. Many of my 
constituents are served by a number of regional banks because 
they can travel throughout the State or the region and have 
access to banking services and ATMs. So, it is really a simple 
process for most of my constituents.
    A regional bank, for my constituents, is a community bank 
with simple operations that simply expanded its footprint. We 
are not talking about the Wall Street banks. We are talking 
about banks that serve South Carolina that did not--did not--
contribute to the financial crisis.
    We have heard a lot of conversation today already about the 
$50 billion threshold, whether it is necessary and if it by 
itself is important for us to consider using that. I think 
Senator Heller asked a question about $49 billion versus $50 
billion, what is the difference in the business operations, and 
your question had a lot to do with complexity and 
interconnectivity, it sounded like to me.
    I personally would consider no asset threshold and 
designation on a case by case basis in a process that uses 
objective risk data and gives a bank clear notice of what it 
can do to choose or not to choose to be a SIFI. If objective 
criteria were used, I think many banks would amend their 
behavior to avoid SIFI-land, so to speak. They would be able to 
choose whether to become less risky on their own or allow the 
regulators to make that decision.
    Governor Tarullo, I appreciate the Fed's efforts to date to 
tailor supervision, but I think they are no substitute for 
raising the $50 billion threshold. Some supervision stress 
testing, in particular, has certain fixed compliance costs at a 
bank. The big banks can weather these costs more easily than 
smaller regional banks that serve my constituents, as I have 
described earlier. So, these fixed compliance costs become like 
a regressive tax to my folks in South Carolina. You referred to 
the cost as considerable challenge in your testimony, and that 
regressive tax is passed right on to everyday South 
Carolinians.
    In light of this outcome, do you believe that the $50 
billion asset threshold for prudential standards and stress 
testing is too low, and my second question is, has the Fed done 
any cost-benefit analysis on the stress test requirement for 
banks right around that $50 billion bubble, as Senator Heller 
talked about earlier?
    Mr. Tarullo. Senator, what I have been trying to suggest is 
that with respect to those banks around that size, it is what I 
described as a win-win situation because this is not a case in 
which we have to tradeoff some safety and soundness benefits 
against compliance costs. I think this is a case in which, for 
a $50 or $60 or $70 billion bank, our normal supervisory 
processes, the capital requirements that we have all put in 
place, the examinations that one of our three agencies does, 
will provide adequate protection for that kind of institution. 
So, that is where I think the nub of the issue is.
    I do want to say, I certainly agree with you on the issue 
of relative amount of burden for smaller and regional banks, 
and I would just supplement that by saying that, again, we do 
want all banks to be safe and sound, because when the economy 
turns down and the balance sheets of all banks look worse, as 
they always do, because they have to reserve more, some loans 
go into nonperforming status, we want to make sure that every 
one of those banks is in a position to continue to lend to the 
businesses and the households that are still going to need 
credit. And that is why we want them to have these buffers, to 
protect the Deposit Insurance Fund, but also to make sure that 
they are viable institutions.
    The bigger they get, just sheerly in asset terms--when you 
have a $300, $350, $400 billion bank, think how many States 
that bank's operations cover, how many households and 
businesses are dependent on that bank being able to provide the 
credit. So, that is the other thing to keep in mind, but it 
does not detract from any of the points that you made.
    Senator Scott. I think you make a very good point there, 
sir. I will tell you, though, that having been in business for 
myself for a long time, about 15 years, the fact of the matter 
is that the market changes. The business cycles change. The 
threat and the challenges to a business changes. And, so, the 
business itself should go through the process of, as we call in 
this hearing, the living wills--should go through the process 
of understanding and appreciating it, the risk that they have 
to their consumers, as well.
    I think the question that we are really talking about has 
more to do with SIFIs. So, it is, in fact, economically on the 
Nation as a whole, and what those thresholds should be.
    I do appreciate the fact that you and I both see the fact 
that smaller banks that have very consistent profiles of risk--
the question that I would have for you is, if those banks--
should those banks go through an annual testing, or should they 
be every other year? Would you recommend it or suggest that if 
the banking business model does not change, that the costly 
annual reporting should be the same or not?
    Mr. Tarullo. Well, there may be a couple of different 
issues there. In terms of the stress testing, if one is going 
to be in the stress testing, it does make sense to do it 
annually. The systems have to be in place year-round no matter 
what. The cost is spread over the course of the year. 
Resolution plans, some other things, may be susceptible to 
going biannual rather than annual. But, I think on the stress 
testing itself, as I said, it is probably more of a binary 
decision. You are either in or you are out.
    Senator Scott. Thank you.
    Chairman Shelby. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    You know, from my perspective, regional and midsized banks 
are different from the smallest community banks and credit 
unions, and the largest, as well, most complex financial 
companies. During the crisis, we saw how institutions like 
Countrywide, Washington Mutual, IndyMac, that were outside the 
largest view, but not considered small, could impose stress on 
the financial system and costs on taxpayers. At the same time, 
midsized and regional banks generally have different 
structures, activities, risk profiles from the largest 
institutions.
    So, I recognize, as someone who sat here during that whole 
period of time and was part of the Wall Street reform 
legislation, that no legislation is perfect, and the Wall 
Street Reform Act is no exception. As stockholders and our 
regulators gain experience with the rules, I think we can and 
should look for ways to improve the law. We should be open to 
calibration, however, in both directions, areas where 
protections may need to be strengthened and areas where the law 
may need careful tailoring to reduce costs of compliance and 
unintended consequences.
    As the Committee considers whether to make changes to the 
Wall Street reform law, a law that many on this Committee 
fought and bled for, I hope we can strike the right balance 
between reducing compliance costs without undermining 
regulatory objectives. That would give business sufficient 
freedom to operate, but at the same time ensure strong 
protections for taxpayers, consumers, and investors.
    And, as our economy continues to recover and parties get 
through the initial costs of complying with the new rules, I 
also hope we can distinguish between the impacts of new 
regulations as opposed to other external factors that may be 
affecting access to credit or business performance. For me, 
that is the framework in which I come to these hearings and 
these issues with.
    So, with that as my objectives in mind, I have a few 
questions for our witnesses, who I appreciate both your service 
and your testimony here today.
    Let me ask the three of you, you discussed in your 
testimony some of the steps your agencies have taken to tailor 
regulation and supervision for banks and bank holding companies 
within the enhanced prudential standards regime based on the 
different types of risks and challenges they present. And, 
while it is true that a bank does not have to engage in 
derivatives or complicated trading operations to create risk 
for taxpayers on the financial system--making bad loans can be 
enough, obviously--the appropriate supervisory tools may be 
different if a bank has a relatively simple organizational 
structure and transparent activities.
    Can you discuss how your agencies take into account factors 
such as organizational structure and activities when making 
decisions about how to tailor your regulatory and supervisory 
standards.
    Mr. Curry. I think we do, and the particular area that I 
would like to focus on is what our expectations are for risk 
management. There, we are taking a very tailored approach to 
that individual institution. We are looking at their ability to 
identify the level of risks inherent in their business lines, 
what types of mechanisms do they have in place to detect and to 
address those issues and to basically have a strong, 
independent, credible risk management function that is 
buttressed by an equally strong audit function and strong 
corporate governance. That is a highly tailored view, basically 
focusing in on the structure of the institution, and by its 
very nature is tailored.
    Mr. Tarullo. Yes, Senator. I would endorse what Tom just 
said, and let me just add that I think this is probably true 
for all three of our agencies. I know it is true in ours, which 
is to say when you think about what supervisory portfolio a 
bank belongs in, the asset amount is the starting point, but if 
you see a smaller institution that is engaged in derivatives 
activities to a substantial degree, we will change the kind of 
supervision that we do with that institution and hold them to 
different kinds of risk management standards.
    But, by the same token, we do not want to say, OK, so all 
banks at $50 billion have to meet these supervisory 
expectations, because, in many instances, the risk is just not 
present in any significant degree.
    The point all three of us were making in our testimony, is 
that in our regulation, by definition, something we do, we put 
in place, those are the rules people have to abide by. Our 
supervision, which is the important supplement to that 
regulation, is where I think we all exercise a lot of 
discretion in the kinds of expectations based on not just group 
but individual firm profiles, as well.
    Senator Menendez. So, when we have a, well, I will call it 
private panel, I think it is next week, they would say that 
they feel that they are----
    Mr. Tarullo. Oh, I suspect----
    Senator Menendez. ----supervised in a way that is tailored 
in accordance with their realities of their organization and 
their functions?
    Mr. Tarullo. I suspect a large number of bankers will think 
that we all pay a bit too much attention to them, but I think 
that is what you all want us to do, actually, is to be paying 
attention. I think when they can identify areas in which 
efficiencies can be gained through the supervisory process, not 
undermining our supervisory and regulatory ends of safety and 
soundness, I think we are certainly very receptive to those, 
and that is what we will continue to do.
    Senator Menendez. Well, let me ask----
    Mr. Tarullo. I cannot guarantee you that banks are going to 
come and say they think we are just fine.
    [Laughter.]
    Senator Menendez. I did not expect that, either.
    Let me, if I may, Mr. Chairman, just follow up in a 
different--a follow-on question. As the Committee considers 
proposals to change financial stability measures, it is 
important, in my view, to distinguish between those that are 
aimed to reduce costs or prevent unintended consequences, which 
I would be inclined to support, and those that would create 
opportunities to evade or roll back fundamental protections.
    Very clearly, not every proposal, I think, will be pure in 
its motives, but there are areas where improvement is possible 
without undermining core regulatory objectives or 
effectiveness. For example, are there ways to harmonize 
reporting requirements or streamline reporting based on the 
type of activities an institution is engaged in?
    Mr. Tarullo. There are, and we are thinking about some of 
them, part of them through the FFIEC, the Council that all 
three of us belong to, some of them we are doing with bank 
holding companies reporting to the Fed. The only thing I will 
point out there, Senator, is that there sometimes is a bit of a 
tradeoff, which is to say if we get more information, that 
sometimes allows us to have fewer examinations. And, if the 
bank is giving us regular information in a broad swath of 
areas, our supervisors can sit in a particular Reserve Bank and 
do an assessment which does not require them to go out, do the 
onsite, which takes up a lot more of the bank's resources. So, 
sometimes the net supervisory burden can be reduced a little 
bit paradoxically through providing more information.
    Having said that, we are looking for ways to streamline all 
the reporting.
    Senator Menendez. Mr. Gruenberg.
    Mr. Gruenberg. Senator, there has been a particular focus 
through the FFIEC on the call reports and ways we may be able 
to identify to reduce reporting burden while still providing 
the information necessary to carry out supervision. I think 
there may be other opportunities.
    Just to come back to your previous question on the 
resolution plans or living wills, we have really made an 
effort, particularly for those institutions under $100 billion, 
are to focus 165 plans on the nonbank, the holding company 
operations. For those under $100 billion, it is really the bank 
that is the principal activity of the institution. We have 
provided tailored plans for that universe of institutions that 
really simplifies the reporting and planning obligation, and 
almost all the institutions under $100 billion have taken 
advantage of that tailored plan opportunity.
    Senator Menendez. Thank you, Mr. Chair. Thank you for your 
answers. I just hope you will remain open to looking at all of 
those possibilities, because I think there is a desire by many 
of us to see that happen.
    Thank you, Mr. Chairman.
    Chairman Shelby. I am going to recognize Senator Cotton, 
and then Senator Cotton, I believe that Senator Scott would 
want you to yield to him for a quick question.
    Senator Scott. Just a quick question.
    Chairman Shelby. I will recognize you, and then it is up to 
you to yield, if you so choose.
    Senator Cotton. I would be happy to yield to Senator Scott.
    Senator Scott. No pressure. Thank you, sir.
    Governor Tarullo, just one final thought and question for 
you. It is possible that a regional bank with $51 billion in 
assets could offer traditional simple banking services abroad 
as a service to its U.S. customers who travel. I would like 
your thoughts, please, as to whether the $10 billion in foreign 
exposure threshold for advance approaches regulation should 
remain a strict asset size test or whether it, too, should be 
based on factors that better predict systemic risk.
    Mr. Tarullo. If you have a $50 billion bank that has $10 
billion in international activity, that does not look like an 
oversized community bank. That is going to be a different kind 
of banking institution. My sense is that the $10 billion in 
foreign activity has worked pretty well in identifying a 
relatively small number of institutions that do pose different 
kinds of risks than a bank with a similar size balance sheet, 
almost all of whose activities are domestic.
    Senator Scott. Thank you. Thank you, sir.
    Chairman Shelby. Senator Cotton.
    Senator Cotton. Thank you.
    I will note that since Senator Scott and I share an 
apartment building and my wife is due with our first child in 5 
weeks, I am going to take that as a return favor for one night 
of babysitting.
    [Laughter.]
    Senator Scott. For the sake of your child, I would say no.
    Senator Cotton. That is a fair point.
    [Laughter.]
    Senator Cotton. So, thank you, Mr. Chairman, thank you, 
gentlemen, for appearing before us today.
    When you consider the automatic SIFI threshold as a 
somewhat arbitrary number, but we have to draw arbitrary 
numbers in the law all the time, at $50 billion, you could 
imagine that it is also going to be diminishing in a way that 
monetary thresholds do but nonmonetaries do not because of 
inflation or expanding economy. The same could also be the case 
for other Dodd-Frank thresholds. And, I would just like to go 
down the line, if we could, and ask if you would support 
indexing thresholds in Dodd-Frank to inflation, to real GDP 
growth, or to any other kind of economic measure.
    Mr. Tarullo. It is probably worth considering, Senator, but 
as the very last clause of your question suggested, it may not 
be as straightforward a matter to think what you would index it 
to. You know, would you index it to inflation, to GDP, to the 
total size of institutions, to concentration. So, I think it is 
worth thinking about, but my instinct is that inflation 
probably would not be the right thing to index it to.
    Senator Cotton. Do you have an instinct on what would be?
    Mr. Tarullo. If there were one, it would be GDP, but I 
would want to think about that a little bit more.
    Senator Cotton. OK. Mr. Curry.
    Mr. Curry. I think indexing has some opportunities, as 
Governor Tarullo mentioned. But, again, I think the theme in 
our testimony is that we think that the asset threshold is one 
consideration in determining whether or not an institution is 
systemically significant or of heightened supervisory concern. 
There is a balance, I think, between the activities that the 
bank is engaged in and other factors that have to be 
considered, as well.
    Mr. Gruenberg. Senator, I think, conceptually, it is worth 
thinking about, and in some sense is hard to argue against, 
although the methodology may raise issues. On the other side of 
that, the clarity of having a clear threshold without adjusting 
it, in particular if there are sensitivities--because when you 
have a threshold, there are always going to be institutions on 
both sides of it. Having a clear threshold is clear and 
transparent and understood and may have some value.
    I do think the key issue goes to providing some flexibility 
for the agencies, if you are going to set a threshold, to 
differentiate among firms that may be above the threshold, 
because wherever the threshold is, there are clearly going to 
be distinctions. Even if additional scrutiny is warranted, you 
want an ability to distinguish among the institutions to apply 
the appropriate standards.
    Senator Cotton. OK. Governor Tarullo, I was not here in 
September. I was in the House, on the Financial Services 
Committee. But, in your opening statement to this Committee 
last September, you had said, quote, ``There could also be some 
benefit from some statutory changes. One would be to raise the 
current $50 billion asset threshold that determines which banks 
are in the systemic category,'' end quote. Just 2 days ago, in 
front of my old colleagues on the House Financial Services 
Committee, Secretary Lew said that he opposes raising that 
threshold.
    Did Secretary Lew or any other administration official take 
issue with your statement in front of the Financial Services 
Committee last fall?
    Mr. Tarullo. Not directly to me, no, and I have not read 
the transcript of what Secretary Lew said. I read the press 
accounts of it. I think he was pointing to the discretion, the 
administrative flexibility that we do have. What I have been 
particularly focused on is the stress testing threshold.
    Senator Cotton. When he says, not directly to you, 
indirectly to----
    Mr. Tarullo. Well, he is saying----
    Senator Cotton. ----anyone on your team, or----
    Mr. Tarullo. No. Whatever he may be saying publicly, yes. 
That is----
    Senator Cotton. OK. Thank you. I will yield back the 
balance of my time.
    Chairman Shelby. Governor Tarullo, conceptually, would you 
support the redrawing of the threshold lines, but with the 
discretion remaining with the regulator to decide whether a 
particular institution is systemic or not? In other words, you 
would keep that power.
    Mr. Tarullo. Again, Senator, so long as we have the 
understanding that systemic is broader than just the failure of 
that institution bringing down the financial system.
    Chairman Shelby. Oh, yes.
    Mr. Tarullo. I think that is when the thinking of the 
threshold makes some sense. The two qualifications, again, are, 
one, and I think you just said this, that our discretion should 
under no circumstances be removed to do more, and second, this 
has not come up in the hearing today, but just so that we 
remind ourselves of what is important for the Congress to do.
    What the Congress has done following each financial crisis 
that we have had in the country, whether it was Latin American 
debt crisis in the early 1980s----
    Chairman Shelby. Sure.
    Mr. Tarullo. ----late 1980s, S&Ls, Congress has stepped in 
and tried to adjust the behavior of the regulators and, in some 
sense, made some things mandatory. Prompt corrective action--
and you were there, Senator to help with that--prompt 
corrective action made sure that we all had to take action when 
capital fell below a certain standard because of what happened 
in the S&L crisis.
    In Dodd-Frank, what the Congress said was there are some 
areas where we think the regulators should be required to take 
action. That is, they want to take some discretion out of our 
hands and say, you must have this kind of regulation. I think 
that is a sound idea. The only issue, to me, is really around 
those midsized regionals with the stress testing.
    Chairman Shelby. Mr. Curry, in September of last year, you 
were quoted in an American Banker article as saying, quote, and 
I am going to read it to you, ``Fifty billion dollars was a 
demarcation at the time, but it does not necessarily mean you 
are engaged in that activity that the rules are trying to 
target. The better approach is to use an asset figure as a 
first screen and give discretion to the supervisors based on 
the risk in their business plan and operations. It is just too 
easy to say, this is the cut-off. I am a little leery of just a 
bright line.'' Do you stand by your words?
    Mr. Curry. Yes, Senator.
    Chairman Shelby. Thank you.
    Mr. Curry. I do think that is the approach that we have 
consistently applied at the OCC. Thank you.
    Chairman Shelby. Well, I do not think anybody up here has 
even, I hope, not even alluded to weakening your power to 
regulate. You have got to do that. We are just trying to give 
some relief where we think maybe it is--you could still 
intervene in a dangerous situation. And, if you do your job, 
you will. You will know, would you not, Governor? If you do 
your job as a regulator, you are going to know what banks are 
doing.
    Mr. Tarullo. I hope so.
    Chairman Shelby. Yes. Do you agree with that, Mr. Curry?
    Mr. Curry. Yes.
    Chairman Shelby. Senator Warren mentioned a minute ago that 
two banks were grandfathered in in the legislation. Of course, 
that is politics. We know that. And, they are still in the 
commodities business. Does that--could that pose a risk to 
the--systemic risk to the banking system? Governor.
    Mr. Tarullo. So, I think it is----
    Chairman Shelby. Could it?
    Mr. Tarullo. You need to understand what Section 4(o) 
permits.
    Chairman Shelby. Uh-huh.
    Mr. Tarullo. What Section 4(o) permits is not just, for 
example, taking title to physical commodities, the part of 
trading----
    Chairman Shelby. Sure.
    Mr. Tarullo. It would allow the banks, for example, to own 
oil tankers, to own copper mines, to own extractive industries 
themselves. And, I think the issue here for you and for us is 
that with some of these activities, which certainly seem 
substantially to breach the wall between banking and commerce, 
they are the sort of things that are very hard to get a risk 
management handle on----
    Chairman Shelby. Oh, yes.
    Mr. Tarullo. ----as a banking regulator. When you are 
talking about oil spills or you are talking about collapses of 
mines, it is very different from----
    Chairman Shelby. You would have to regulate commerce, in a 
way.
    Mr. Tarullo. That has been my concern, Senator.
    Chairman Shelby. Uh-huh. But, you only have two banks that 
can do that.
    Mr. Tarullo. That is correct.
    Chairman Shelby. And the others, no matter how big or how 
powerful or how well run, they could not do that.
    Mr. Tarullo. That is correct.
    Chairman Shelby. OK. Senator Brown, do you have any more 
questions?
    Senator Brown. Thank you. A couple more questions. Thank 
you, Mr. Chairman.
    Thank you for your comments about the commodities. We did a 
couple of hearings about that last year. I appreciate the Fed's 
engagement in that, and those were done some years ago, and 
those two institutions became bank holding companies, which 
changed all that. But, the comment you made about risk, oil 
tankers and others, to the safety and soundness--I mean, to the 
financial stability of the system is really important, so thank 
you for that comment.
    Comptroller Curry, a question for you. We have talked both 
privately and publicly about the culture and environment of the 
banks and how banks pretty clearly over the years paid less 
attention to risk than they do now, partly because of 
regulators, partly because we maybe have a more independent OCC 
now, partly because of your insistence in discussions with them 
about a risk officer. We hear complaints, though, from banks 
about the time that their management and their board members 
dedicate to compliance issues and risk management. As we have 
discussed institutions tend not to like business lines that do 
not bring in revenue, understandably.
    Talk to us for a moment about the value to institutions and 
to the public of having more management and board time spent on 
risk management.
    Mr. Curry. Thank you for raising the subject, Senator. We 
think it is critical in terms of having an internal framework 
that identifies risks and takes appropriate steps to mitigate 
those risks. We also think it implicates corporate governance. 
You need to have a board that is capable and willing to 
interject and to challenge management. So, we pay close 
attention to the dynamic between the board and operating 
management to make sure that there is a healthy risk culture.
    Another area that we have emphasized is improving the 
stature of the Chief Risk Officer of an organization and their 
ability to help guide the decision making at the organization.
    At the OCC, we have promulgated heightened standards that 
apply to the largest banks in our portfolio that mandates an 
appropriately robust risk management system for those 
institutions. And, it also has enforcement mechanisms tied into 
it so that it has teeth.
    In terms of culture, it is really important, and this is 
something we look at in the context of risk management, is 
making sure that management of the organization establishes and 
enforces standards of conduct, that the failure to do so can 
result in significant financial and reputational losses to the 
institution.
    Senator Brown. Thank you. And, stature, the risk officer's 
stature, I assume, implies everything from compensation to seat 
at the table, the background with a company, to all the things 
that make that person one among equals in decision making at 
the highest levels of all kinds of banks, correct?
    Mr. Curry. Exactly, and that is what we are looking at from 
a corporate governance standpoint.
    Senator Brown. Thank you.
    Governor Tarullo, I have been concerned about banks' 
ability to calculate their own internal risk weights and use 
that to game their capital ratios. It is a bit like a professor 
letting her students grade their own tests. Last week, you 
released the latest round of bank stress tests. Once again, the 
largest banks' internal loss projections were significantly 
rosier than the Fed's calculations. The industry complains this 
makes the tests a black box, of sorts. It seems they want the 
Fed to provide them with the answer key for the stress test.
    Talk about the value of the Fed's projections. Why should 
we continue to rely on the independent evaluations?
    Mr. Tarullo. OK. So, a couple of things there, Senator. 
First, I like the conclusion, which is you should continue to 
rely on our evaluations, because the evaluations we do are, 
first off, consistent. Second, they include an appropriate 
conservativism, I think, which is thinking on behalf of the 
country about what could happen under unlikely but still 
plausible adverse scenarios.
    I think some of the reasons why you see those gaps between 
our assessment and some of the other banks vary, and some of 
those reasons are some cause for concern and others are less 
cause for concern. If you see the gap and it is because, for 
example, as you know, we do not allow the assumption in our 
stress test that banks would stop paying dividends and stop 
making share repurchases even during a stress period. That 
experience that we all went through in 2007 and 2008 was one 
that we all took to heart, and so when we do our very 
conservative assumptions, we assume that the banks will do what 
some of them did in 2007 and 2008, which is continue to 
distribute capital.
    In their own idiosyncratic stress testing, banks sometimes 
do not do that, and it would be, believe me, a sensible thing 
for the bank to do, to cut back on its capital distribution. 
So, if that is a reason for variance, that is not of great 
concern to us because we put it in the supervisory test, but 
they have got to test for other purposes.
    When we see problems that result from the inability of a 
bank to understand its own risks, to aggregate the data, that 
is when we are concerned and that is why we will come forth 
with supervisory action.
    So, the reason why you want to look at our tests is 
because, obviously, we do not have an interest in shifting the 
loss parameters to help a particular bank's balance sheet, 
because we do it in a way that is comparable for everybody. We 
review it and we subject what we are doing to the review of 
outside experts. We try to improve it every year, and I believe 
it really has become a critical supervisory instrument for us, 
for the bank's own self-assessment, for the ability of outside 
analysts and investors to understand banks, and ultimately for 
all of you to keep watch on us.
    Senator Brown. Thank you.
    If I could have one more question, Mr. Chairman.
    Chairman Shelby. Go ahead.
    Senator Brown. And, each of you give brief answers to this, 
if you would. Some have suggested the advanced approach regime 
is out of date and should only apply to the global, 
systemically important banks. Do you all continue to support 
the current advanced approaches regime? Mr. Gruenberg, start 
with you, a brief answer, and just go right to left.
    Mr. Gruenberg. Yes, Senator.
    Senator Brown. Yes. OK.
    Mr. Curry.
    Mr. Curry. Yes.
    Mr. Tarullo. I do, Senator.
    Senator Brown. OK. Thanks. Thank you.
    Chairman Shelby. Senator Rounds.
    Senator Rounds. Mr. Chairman, thank you.
    I have got to go back into this a little bit. Very seldom 
do we have an opportunity to have a group like this in front of 
us and not at least delve a little bit into the causal effects 
that we see in the economy today. I think some of the numbers 
that I had seen over a period of years was that since 2009, 
there has been an increase in employment in the financial 
services area of about 300,000 individuals throughout the 
United States, which would seem to be a positive thing, and 
which normally would suggest economic growth, and yet the vast 
majority of those 300,000, if my numbers are correct, were in 
the areas of compliance, which most individuals would suggest 
is not an indication of economic growth but one of costs 
directly back into the financial services sector.
    If my numbers are correct, and if I am wrong, I would have 
you correct me, but if those numbers are correct, it seems to 
me that we add a burden within the financial services industry, 
we add an additional cost to all of those businesses and 
individuals that would need those services, because they are 
going to get passed on.
    But, second of all, and there is a second part that it 
seems that we sometimes do not look at, and that is the 
regulatory impact on the economy itself. Governor, I am 
curious, because the Federal Reserve clearly has recognized 
that even after a time in which we had a significant slowdown 
in the economy, our expectation would be that there would be an 
increased period of economic activity, and yet over the last 4 
or 5, 6 years, the Fed has continued to maintain a very 
inexpensive money policy, seemingly because there is the need 
to make this economy start to move.
    Any possibility that the cause and effect of this is the 
Dodd-Frank Act and the impact that it has had on the 
availability of capital because of the regulatory environment 
that financial institutions find themselves in today?
    Mr. Tarullo. So, Senator, let me just begin by saying that 
you did not really ask a question about monetary policy, but we 
are still in our blackout period, so I am not going to comment 
on the monetary policy.
    Senator Rounds. OK.
    Mr. Tarullo. Happy to comment on the regulatory issue, and 
let me begin with the compliance point. And, here again, I want 
to really draw a distinction between compliance function at a 
community bank and compliance function at those largest 
institutions, and I am going to do it, if you will bear with me 
a bit, with an anecdote.
    Back in 2009 at the height of the crisis, when we were 
conducting the first set of stress tests, we sent out in 
February a request for data to, at that time, the 19 largest 
financial institutions in the country. Some of those 
institutions more or less immediately were able to get back to 
us and say, here is the data, and it proved to be pretty 
accurate. Most took a while and then eventually gave us 
something that was more or less accurate. And, some of them, 
after a number of days, were still unable to put together an 
accurate picture of what their risks actually were.
    The lesson I drew from that is that the inattention to risk 
management, which is the most important compliance function for 
the safety and soundness of institutions, had led to a 
situation in which the banks did not really know their own 
risks, much less allow us to do the job that Chairman Shelby 
just indicated we need to do, which is to go in and make sure 
we understand those risks.
    I understand that there has been a big run-up in the number 
of people devoted to compliance at these institutions, at the 
big institutions, and I do not know whether the precise numbers 
are what we need, but I do know we needed a lot more attention 
to that.
    Now, on the other end of the spectrum, I am concerned when 
I hear stories like the following, which is a community 
banker--I think he was about a $2 billion bank--and he said, 
``You know, we thought we would merge. We did merge with a bank 
just about our size. We thought that in doing so we would get 
some benefits of some modest economies of scale, serving a 
slightly bigger area while retaining the same business model.'' 
And, then, he sort of shook his head and he said, ``So, our 
examiner comes in and says to us, `Well, you are twice as big 
now. You should add a second compliance officer.' '' That was 
what he was trying to avoid, and I have a lot of sympathy for 
that. I do have a lot of sympathy for that.
    Tom mentioned the EGRPRA process. I think that is where our 
efforts are really focused, because the size of the portfolios 
of those community banks are sufficiently small that they 
cannot amortize those costs very well. But, this is, again, 
where I really do want to draw a distinction between the most 
complex institutions with heavy capital market activities, on 
the one hand, and the small bank, as Senator Scott was saying, 
in Columbia or Charleston or Orangeburg, that has a very 
limited base of assets.
    Senator Rounds. I think in many cases, on the smaller 
banks, they feel as if their examiners are looking at them 
saying a lot of the things are coming downstream to them that 
are being applied to the larger banks.
    Mr. Tarullo. The trickle down? The supervisory trickle-down 
effect?
    Senator Rounds. I had a similar discussion with a small 
town banker who literally said, ``Look, I cannot do home loans 
anymore. I just cannot do the compliance.'' And, when you start 
to see that in small communities in places like South Dakota, 
these are not the folks that were involved in any of the 
problems to begin with, and yet they are the ones that are 
feeling the impact of this regulatory activity.
    Thank you, sir. Thank you.
    Chairman Shelby. I am looking at the systemic importance 
indicators reported by large U.S. bank holding companies, $5 
billion or more, and if you look at the methodology in the OFR 
report--this is part of it, we have referred to it--to measure 
systemic risk, the table here shows those two banks that we 
were talking about that were grandfathered in as being 
significantly more systemically risky than the regional banks 
to our system. Do you think that the methodology that the OFR 
report works here? Do you have a comment?
    Mr. Tarullo. Senator, here, I would say the Basel Committee 
methodology, the Fed methodology for our SIFI surcharge, and 
the OFR methodology would all agree with that proposition.
    Chairman Shelby. OK. Thank you.
    Do you disagree with that?
    Mr. Curry. No.
    Mr. Gruenberg. No, Mr. Chairman.
    Chairman Shelby. Thank you. I think we all basically agree 
here, we want banks that are healthy, that are strong, 
capitalized, well regulated, well managed, because without 
that, the economy, as Senator Rounds alluded to, it is all tied 
into our economy, the ability to access capital. Everybody--
you, as regulators, know this. So, let us hope we can work 
together and try to give some relief here. Although Dodd-Frank 
was legislation, no legislation is perfect. Even Senator 
Menendez referred to that. Maybe we can work together. I hope 
so.
    This concludes the hearing.
    [Whereupon, at 11:39 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF DANIEL K. TARULLO
       Governor, Board of Governors of the Federal Reserve System
                             March 19, 2015
    Chairman Shelby, Ranking Member Brown, and other Members of the 
Committee, I appreciate the opportunity to testify on the threshold in 
section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) for application of enhanced prudential 
standards to bank holding companies. In my testimony this morning I 
will try to provide, from a regulator's perspective, some context for 
the Committee's consideration of this subject by explaining how the 
Federal Reserve has differentially implemented prudential regulations 
based on the size, scope, and range of activities of banking 
organizations, as well as how we have organized our supervisory 
portfolios. In both our supervisory and regulatory practices, we are 
pursuing a tiered approach to prudential oversight.
Regulatory Differentiation in the Dodd-Frank Act
    Traditionally, statutes creating prudential regulatory requirements 
or authorities generally took what might be termed a unitary approach. 
That is, the statutes simply made a particular requirement or authority 
applicable to banks or banking organizations generally, with few clear 
distinctions based on the characteristics of the regulated entities. 
The Federal banking agencies did adopt some regulations with 
requirements that applied only to larger institutions. And, as I will 
describe a bit later, through supervisory practice they administered 
some statutory requirements differently based on the size of banks and 
the scope of their activities. But the starting point was a more or 
less similar set of statutory requirements.
    The Dodd-Frank Act explicitly broke with this traditional approach 
by creating prudential requirements that vary with the size or systemic 
importance of banking organizations. Of particular importance is the 
Dodd-Frank Act emphasis on financial stability, both in markets 
generally and with respect to the largest financial firms, which had 
been associated with market perceptions that they were too big to fail. 
The law created some new authorities for financial regulators and 
instructed regulators to use authorities they already had to put in 
place regulations to contain systemic risk. As to regulations 
applicable to individual firms, the Dodd-Frank Act creates thresholds 
for various prudential regulations at asset sizes of $1 billion, $10 
billion, and $50 billion. Of special note is that section 165 of the 
Dodd-Frank Act requires the Federal Reserve to establish enhanced 
prudential standards for bank holding companies with total assets of 
$50 billion or more and other financial firms designated as 
systemically important by the Financial Stability Oversight Council. 
Among other areas, these standards include capital, liquidity, risk 
management, resolution planning, and single-counterparty credit limits. 
Of particular significance is the section 165 requirement that these 
enhanced standards increase in stringency depending on the size, 
interconnectedness, role in credit intermediation, and other factors 
specified in the law. In addition to these enhanced, graduated 
standards, section 165 requires that firms with greater than $50 
billion in assets be subject to annual supervisory stress tests.
    The Federal Reserve has implemented the section 165 requirement of 
graduated stringency for enhanced prudential standards by creating what 
are, in effect, three categories within the universe of banking 
organizations with $50 billion or more in assets. As required by 
statute, all firms within this universe are subject to basic enhanced 
standards. Firms with assets of between $50 billion and $250 billion 
are subject only to these basic enhanced standards. Firms with at least 
$250 billion in assets or $10 billion in on-balance-sheet foreign 
assets are also subject to more stringent requirements, including the 
advanced approaches risk-based capital requirements, the supplementary 
leverage ratio, the countercyclical capital buffer, and the fullscope 
liquidity coverage ratio.
    Finally, the eight U.S. bank holding companies that have been 
designated as global systemically important banking organizations will 
be subject to an additional set of regulatory requirements. An enhanced 
supplementary leverage ratio, equally applicable to all eight firms, 
has already been adopted. We are also working on two requirements that 
will vary in stringency even among these eight firms, based on their 
relative systemic importance. One is the set of risk-based capital 
surcharges for which we issued a notice of proposed rulemaking late 
last year. The other, on which we anticipate issuing a notice of 
proposed rulemaking in the coming months, is a long-term debt 
requirement designed to support effective orderly resolution processes.
    In sum, the stringency of the Federal Reserve's prudential 
regulations increases in proportion to the systemic importance of the 
banking organizations. With this tiered approach to regulation, the 
Federal Reserve aims not only to achieve the Dodd-Frank Act goal of 
mitigating risks to U.S. financial stability, but to do so in a manner 
that limits regulatory costs and the expenditure of supervisory 
resources where not needed to promote safety, soundness, and financial 
stability.
Tiered Regulatory and Supervisory Experience
    The Federal Reserve also takes a tiered approach to supervision. We 
organize the firms we supervise into portfolios based predominately, 
although not exclusively, on asset size. We have four such groups: (1) 
community banking organizations, which are generally those with $10 
billion or less in total assets; (2) regional banking organizations, 
which have total assets between $10 billion and $50 billion; (3) large 
banking organizations, which have total assets over $50 billion but are 
not among the largest and most complex banking organizations; and (4) 
firms overseen by the Large Institution Supervision Coordinating 
Committee (LISCC), which are the largest and most complex banking 
organizations. \1\
---------------------------------------------------------------------------
     \1\ For more information on the LISCC, see http://
federalreserve.gov/bankinforeg/large-institution-supervision.htm.
---------------------------------------------------------------------------
    As with tiered regulation, our tiered supervision is intended to 
take into account differences in business models, risks, relative 
regulatory burdens, and other salient considerations. Where specific 
regulatory goals for the different portfolios vary, the supervisory 
programs reflect those differences. And even where the goals are 
similar across portfolios, supervisory programs should nevertheless 
take account of the differences among the firms in the four portfolios. 
In general, we shape our supervisory expectations for each portfolio by 
considering the increase in safety and soundness that we are likely to 
achieve through a specific practice or requirement, in light of the 
regulatory costs for the banking organizations in the portfolio and the 
impact that the stress or failure of those institutions would likely 
have on credit intermediation, the deposit insurance fund, and 
financial stability.
    So, for example, there are heightened expectations with regard to 
corporate governance for large banking organizations that are not 
applied to regional or community banking organizations. Among other 
areas, the Federal Reserve expects the boards of directors of these 
larger firms to set direction and oversight for revenue and profit 
generation, risk management, and control functions; to ensure that 
senior management has the expertise and level of involvement required 
to manage core business lines, critical operations, banking offices, 
and other material entities; and to maintain a corporate culture that 
emphasizes the importance of compliance with laws, regulation, and 
consumer protection. While strong corporate governance is important at 
all banking organizations, it is vital at large banking organizations, 
given that their systems and operations are typically much broader and 
more complex than those of the smaller-scale and more localized 
regional and community banking organizations.
    While asset size is the principal determinant of the general 
supervisory program for a banking organization, other factors are taken 
into account as appropriate. For example, if a regional banking 
organization were to become involved in activities typically undertaken 
only by larger banking organizations, we might add to that firm's 
supervision an expectation or practice drawn from the large banking 
organization portfolio. Moreover, in determining which banking 
organizations belong in the LISCC portfolio, the Federal Reserve has 
focused on the risks to the financial system posed by individual 
firms--size has not been the dispositive factor. For example, three 
large banking organizations are not in that portfolio, even though they 
have larger balance sheets than the processing- and custody-focused 
bank holding companies that are in the LISCC portfolio. The stress or 
failure of these large, essentially regional banking organizations 
could have a serious effect on credit intermediation across a 
significant part of the country and, in some situations of generalized 
stress, might have consequences for the financial system as a whole. 
However, we judge that the functions of the two processing- and 
custody-focused LISCC firms implicate systemic concerns to a greater 
extent than the substantial balance sheets of the larger regionals.
The Role of Statutory Thresholds
    As I hope by now is apparent, the Federal Reserve has done 
considerable work to tailor our supervision of banking organizations by 
reference to their size, business model, and systemic importance. 
Similarly, using the statutory discretion granted us, and frequently in 
cooperation with other regulatory agencies, we have also tailored the 
application of certain statutory requirements to different groups of 
banks. The question of statutory thresholds is thus a fairly narrow 
one: Does a threshold specify a cut-off point that is appropriate for 
mandatory application of a particular regulatory requirement, taking 
into account whatever discretion is given to the implementing 
regulatory agencies?
    In answering this question, it is first worth noting the case for 
establishing such statutory thresholds. In the past, Congress has at 
times not simply given the banking agencies authority to engage in a 
particular form of prudential regulation, but has required that they do 
so. Capital regulation and prompt correction action are two examples. 
Not coincidentally, I think, congressional action followed banking 
crises that revealed possible shortcomings in the regulatory and 
supervisory structures that had existed preceding the crisis. In 
requiring certain kinds of prudential regulation, Congress was in 
effect protecting against memories of those problems fading and the 
consequent possibility of supervisory relaxation, which might allow for 
a recurrence of similar banking problems in the future.
    The creation of mandatory thresholds for certain enhanced 
prudential standards is an important advance in the traditional 
congressional role of specifying a set of mandatory regulations. This 
statutory structure recognizes the substantially divergent risks 
presented to the economy and the financial system by the potential 
stress or failure of banking organizations of different sizes and with 
different activities, while preserving considerable discretion for the 
banking agencies in implementing those regulations. Here again, 
statutory enactment of mandatory measures for banking organizations of 
a certain size or systemic importance serves as a form of safeguard 
against the erosion of prudential oversight that could occur were 
predominant reliance to be placed on the details of firm-specific 
supervision, which are sometimes hard for the public to discern. 
Removal or change of such thresholds, as with generally applicable 
prudential requirements, will thus require congressional action and an 
occasion for considered public debate on the merits of such change.
    Experience to date, however, suggests that there are some statutory 
thresholds that might bear reexamination. One pertains to the 
applicability of some Dodd-Frank Act provisions to community banks. For 
example, the Volcker rule and the incentive compensation requirements 
of section 956 of the Dodd-Frank Act are directed at concerns generally 
present only with larger institutions, but the Volcker rule by its 
terms applies to all banking organizations, and the incentive 
compensation provisions apply by their terms to all banking 
organizations with $1 billion or more in assets. The banking agencies 
have done their best to tailor the application of these rules to 
smaller banks and, indeed, to make clear the limited extent to which 
they should affect those banks. However, some compliance effort on 
these rules is still needed at community banks. Raising the asset 
threshold for these two requirements to $10 billion would eliminate 
this compliance burden, the cost of which is probably not worth 
whatever incremental prudential benefits might be gained at these small 
banks. Even in the relatively unusual circumstance in which a practice 
at a smaller bank might raise safety and soundness concerns, the 
supervisory process would remain available to rectify any problems.
    The second threshold that is worth discussing is the $50 billion 
level established by section 165 of the Dodd-Frank Act. As noted 
earlier, the import of this threshold is to require enhanced prudential 
standards and supervisory stress testing for banking organizations 
whose assets exceed that amount. As also noted, the Federal Reserve has 
tailored those standards in accordance with the increasing stringency 
requirement of section 165, so that they are more flexible for 
institutions closer to the $50 billion threshold and most demanding for 
the eight firms of global systemic importance. It has been somewhat 
more difficult to customize supervisory stress testing. While some 
elements of the test, such as the market shock and single-counterparty 
default scenarios, are applied only to larger firms, the basic 
requirements for the aggregation and reporting of data conforming to 
our supervisory model and for firms to run our scenarios through their 
own models do entail substantial expenditures of out-of-pocket and 
human resources. This can be a considerable challenge for a $60 billion 
or $70 billion bank. On the other side of the ledger, while we do 
derive some supervisory benefits from inclusion of these banks toward 
the lower end of the range in the supervisory stress tests, those 
benefits are relatively modest, and we believe we could probably 
realize them through other supervisory means.
    These are the factors that lay behind my suggestion last year that 
it might be worth thinking about the level of this threshold, which I 
understand to be a purpose of today's hearing. That said, I want to 
emphasize a few points. First, consideration of potential increases in 
the threshold for mandatory prudential measures should not remove the 
discretion of the banking agencies to require additional measures--
including such things as more capital or liquidity--for specific firms 
or groups of firms in appropriate circumstances. That is, while it is 
sensible to limit mandatory measures for classes of firms where most 
banks in that class are unlikely to present a particular kind of risk, 
it would be very ill-advised to preclude supervisors from requiring 
such measures of firms where that risk may become more of a concern.
    Second, any consideration of raising the threshold to take account 
of the factors I mentioned earlier should not extend to removal of the 
application of enhanced standards and other rules to the largest 
banking organizations. As senators and regulators have discussed many 
times before in this Committee, the tasks of combating the reality and 
the perception of too big to fail, and of vulnerabilities in broader 
financial markets, are crucial and ongoing.
Conclusion
    The innovation in the Dodd-Frank Act that requires tiered 
regulation is central to our shared goals of protecting financial 
stability and ensuring the availability of credit. Smaller banks do not 
pose risks to financial stability, though they can suffer collateral 
damage when stress builds throughout the financial system. And, while 
enhanced prudential standards are important to ensure that larger banks 
can continue to provide credit even in periods of stress, some of those 
same enhancements could actually inhibit credit extension by rendering 
the reasonable business models of middle-sized and smaller banks 
unprofitable. The Federal Reserve will continue to use statutory 
authorities to calibrate our regulation and supervision to the risks 
posed by the different classes of banks, avoiding a one-size-fits-all 
approach. We and, I believe, many others are committed to the dual 
goals of protecting systemic stability and fostering the efficient 
intermediation of credit by the overwhelming majority of American banks 
that do not pose systemic or far-reaching risks.
    Thank you. I would be pleased to take any questions you may have.
                                 ______
                                 
                 PREPARED STATEMENT OF THOMAS J. CURRY
         Comptroller, Office of the Comptroller of the Currency
                             March 19, 2015
Introduction
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, thank you for the opportunity to discuss the Office of the 
Comptroller of the Currency's (OCC) experience with, and views on, 
section 165 of the Dodd-Frank Act and the OCC's approach to tailoring 
our regulatory and supervisory expectations, especially with respect to 
regional banks, which include banks in the OCC's midsize program and 
many of those in our large bank program. Because the focus of section 
165, as it applies to the banking sector, is on bank holding companies, 
almost all of the authorities under this section are assigned to the 
Board of Governors of the Federal Reserve System (Federal Reserve). The 
OCC's only direct rulemaking authority under section 165 is with 
respect to the company-run stress test requirements under section 
165(i)(2). Otherwise, the OCC's role in section 165 is limited to a 
consultative one on matters affecting national banks. Nonetheless, the 
provisions of section 165 are extremely important to the OCC and our 
supervisory programs as national banks typically comprise a substantial 
majority of the assets held by bank holding companies with consolidated 
assets of $50 billion or more. Indeed, the national bank is typically 
the dominant legal entity within each company. Consequently, the 
provisions of section 165 have a significant effect on national banks 
and our supervisory oversight of those institutions.
---------------------------------------------------------------------------
    Statement Required by 12 U.S.C. 250: The views expressed herein 
are those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
---------------------------------------------------------------------------
    My testimony today provides a brief overview of the key provisions 
of section 165 as they apply to bank holding companies. I then describe 
how the OCC's supervisory and regulatory tools complement and support 
the objectives of these provisions. As I will discuss, the OCC believes 
that the supervisory areas addressed in section 165 for which the 
Federal Reserve is required to develop prudential standards are 
fundamental to safe and sound banking and are essential elements of our 
ongoing supervision of national banks and Federal savings should 
reflect the complexity and risk of a bank's activities. This is why the 
OCC has tailored its supervisory programs into three distinct 
portfolios--community banks, midsize banks, and large banks. It is also 
why the OCC seeks to tailor the application of our supervisory 
standards and expectations to the size and complexity of each 
individual bank. In some areas, such as capital standards, we do this 
by setting explicit regulatory minimums that apply to all banks. We 
then augment these minimums with additional requirements for the 
largest banks that reflect the complexity and risk of their operations 
and their interconnections with the broader financial market. In other 
areas, such as corporate governance, while our approach is more 
qualitative, we have higher expectations and apply higher standards as 
the complexity, risk, and scale of banks' operations increase. The OCC 
believes this flexibility to tailor supervisory and regulatory 
requirements to reflect our assessment of the risk of individual banks 
promotes an effective and efficient supervisory regime while minimizing 
undue burden.
    As the Committee considers and evaluates the effectiveness of 
section 165 and the banks that are affected by its provisions, I would 
stress two points. First, I believe it is essential for the OCC to 
retain the ability to tailor and apply our supervisory and regulatory 
requirements to reflect the complexity and risk of individual banks. We 
believe our risk-based supervisory approach is consistent with the 
tailored application that Congress provided for in section 165. While a 
bank's asset size is often a starting point in our assessment of 
appropriate standards, it is rarely, if ever, the sole determinant. For 
this reason, we would be concerned with any proposal that would inhibit 
our ability to apply specific regulatory or supervisory tools to an 
individual bank or group of banks. We need access to these tools should 
we, through our supervision, determine that they are needed to address 
a bank or a group of banks' risk. Second, although the OCC in our role 
as the primary supervisor of national banks. We would be happy to work 
with the Committee should the Committee determine that changes are 
needed to make the application of section 165 more effective and 
efficient.
Overview of Key Section 165 Standards and Requirements for Bank Holding 
        Companies
    Section 165(a) of the Dodd-Frank Act authorizes the Federal Reserve 
on its own or pursuant to recommendations from the Financial Stability 
Oversight Council (FSOC) to establish certain heightened prudential 
standards for bank holding companies with total consolidated assets 
equal to or greater than $50 billion. Standards are required for five 
areas: (1) leverage and risk-based capital; (2) liquidity; (3) overall 
risk management; (4) resolution plan and credit exposures; and (5) 
concentration limits. The Federal Reserve is given discretionary 
authority to establish standards for: (1) contingent capital; (2) 
enhanced public disclosures; (3) short-term debt limits; and (4) any 
other prudential standards that the Federal Reserve, on its own or 
pursuant to a recommendation by the FSOC, determines are appropriate.
    Section 165 directs that the standards should be more stringent 
than those required for bank holding companies that do not present 
similar risks to the financial stability of the United States (and 
thus, are not covered by section 165), and that the standards should 
increase in stringency, based on various qualitative risk factors. It 
also permits the standards to be tailored to individual or groups of 
banking organizations based on their capital structure, riskiness, 
complexity, financial activities, size, and any other risk-related 
factors that the Federal Reserve deems appropriate. Finally, section 
165 permits the Federal Reserve, pursuant to a standards related to the 
discretionary standards, listed above, and for the resolution plans and 
credit exposure reports.
    Section 165 has two provisions that use a lower asset threshold 
than is used for the other prudential standards. These are the stress 
testing requirements in section 165(i) and the risk committee 
requirements in section 165(h). Under section 165(i), all banks and 
other financial companies (not just bank holding companies) with assets 
above $10 billion are required annually to conduct and publicly report 
the results of stress tests using scenarios developed by their primary 
Federal financial regulator. Section 165(h) requires publicly traded 
bank holding companies with assets of $10 billion or more to establish 
risk committees.
The Complementary Nature of Section 165 and the OCC's Supervisory 
        Approach
    A key principle underlying section 165 is that the rigor of 
capital, liquidity, and risk management standards and the intensity of 
supervisory oversight should increase with, and be reflective of, the 
risk and complexity of a banking organization's structure and 
activities. This principle also underlies the OCC's risk-based 
supervisory approach and programs, and it is one that we fully support.
    As noted earlier, we begin the application of this principle by 
structuring our bank supervisory activities into three distinct 
portfolios--community banks, midsize banks, and large banks--to reflect 
the inherent differences in these banks' business models, risk 
profiles, and complexity. In this respect, while asset size is 
important and is generally the starting point in determining to which 
portfolio an individual bank is assigned, it is not the sole 
determinant. Thus, for example, while most banks in our midsize 
portfolio fall into the $8 to $50 billion range, model, corporate 
structure, and risk profile that are distinctly different from the 
banks in our large bank portfolio, which typically have national or 
global operations, complex corporate structures, extensive activities 
and exposures in the wholesale funding and capital markets, or are part 
of a larger, complex financial conglomerate. This flexible approach, 
which considers both size and risk profiles, allows us to transition 
and adjust the intensity of our supervision and our supervisory 
expectations as a bank's profile changes.
    Our midsize bank program is an example of how we tailor and 
transition our supervisory expectations as a bank's size and complexity 
increase. As noted above, the banks in this program range in size and, 
at the low end, may overlap with some banks that are in our community 
bank portfolio, and at the high end, overlap with banks that are in our 
large bank portfolio. Banks in our midsize portfolio are generally 
those that through growth and mergers have acquired a regional or 
multistate footprint, yet do not present the same level of complexity 
and interconnectedness as banks in our large bank program. A major 
focus of midsize supervision is ensuring that as the scale of each 
bank's operations and activities increases, so does its risk management 
and control systems. Banks in this program have a dedicated examiner-
in-charge and a team of specialists for each core risk function that 
provide ongoing monitoring and continuity in our supervision of each 
bank. The individual examination program for each bank is tailored and 
may, depending on the complexity and risks of the particular area, draw 
examiners and blend examination procedures from both our community bank 
and large bank programs.
    As I noted earlier, section 165 requires the development of 
prudential standards in various areas, including capital, liquidity, 
risk management, and concentrations. The OCC has, areas that we expect 
national banks and Federal savings associations to meet. This 
combination is reflected, for example, in our approach to assessing 
capital adequacy. Through regulation, we have established explicit, 
minimum capital requirements that all banks must meet. There are 
additional, explicit requirements related to market and operational 
risks that generally apply only to the largest banks that have 
significant trading activities and complex operations. Our capital 
rules, however, also allow us to require additional capital based on 
factors that are not explicitly covered by our quantitative capital 
rules, including for example, exposures to interest rate risk and 
credit concentrations. Our supervisory guidance on interest rate risk, 
concentrations, and capital planning set forth factors that examiners 
will consider when determining whether additional capital may be 
needed. The ability to require an individual bank to maintain capital 
levels above regulatory minimums is especially important when we 
encounter banks, regardless of size, that may have significant 
concentrations in certain loan products or market segments.
    In the aftermath of the financial crisis, we, along with our U.S. 
and international supervisory colleagues, have been revising the 
standards for many of the areas specified in section 165 to strengthen 
those that apply to the most complex banking organizations and to 
better align them with risk in the system. With respect to leverage and 
risk-based capital requirements, the OCC, along with the Federal 
Reserve and the Federal Deposit Insurance Corporation (FDIC), has 
implemented a number of enhancements that improve the quality and 
quantity of capital and impose additional, more stringent leverage 
ratio requirements for large, internationally active banks, with even 
higher levels required for the largest, most systemically important 
banks. \1\ With respect to liquidity, in 2010, the OCC and other 
banking agencies issued an interagency policy statement on funding and 
liquidity risk management. \2\ Consistent with our risk-based approach 
to supervision, the policy applies to all banks, but specifies that the 
processes and systems used by banks will vary, based on their size and 
complexity. In 2013, we, the Federal Reserve, and the FDIC augmented 
these qualitative expectations with explicit, quantitative liquidity 
requirements for large, internationally active banks. \3\ These 
requirements, known as the Liquidity Coverage Ratio (LCR), set minimums 
for the level of high-qualityliquid-assets that a bank must maintain to 
cover its projected net cash outflows over a 30-day period. \4\ The 
Federal Reserve separately adopted a modified LCR requirement for bank 
holding companies and savings and loan holding companies without 
significant insurance or commercial operations that, in each case, have 
$50 billion or more in total consolidated assets but are not 
internationally active.
---------------------------------------------------------------------------
     \1\ See September 9, 2014, testimony of Comptroller of the 
Currency Thomas J. Curry before the Committee on Banking, Housing, and 
Urban Affairs available at: http://www.occ.gov/news-issuances/
congressionaltestimony/2014/pub-test-2014-122-written.pdf for a fuller 
description of these enhancements.
     \2\ See OCC Bulletin 2010-13 available at http://www.occ.gov/news-
issuances/bulletins/2010/bulletin-2010-13.html.
     \3\ Generally, these are banks with $250 billion or more in total 
consolidated assets or $10 billion or more in onbalance-sheet foreign 
exposure and any consolidated bank or savings association subsidiary of 
one of these companies that, at the bank level, has total consolidated 
assets of $10 billion or more.
     \4\ See OCC Bulletin 2014-51 available at http://www.occ.gov/news-
issuances/bulletins/2014/bulletin-2014-51.html.
---------------------------------------------------------------------------
    As I discussed in an appearance before this Committee in September, 
\5\ the OCC also has taken action to apply heightened risk management 
and corporate governance standards to large institutions. These 
standards address: comprehensive and effective risk management; the 
need for an engaged board of directors that exercises independent 
judgment; the need for a robust audit function; the importance of 
talent development, recruitment, and succession planning; and a 
compensation structure that does not encourage inappropriate risk 
taking. We issued the final standards as a new appendix to Part 30 of 
our regulations. Part 30 codifies an enforcement process set out in the 
Federal Deposit Insurance Act that authorizes the OCC to prescribe 
operational and managerial standards and is a valuable part of our 
regulatory toolbox. Under Part 30, if an insured bank fails to satisfy 
a standard, the OCC may require it to submit a compliance plan 
detailing how it will correct the deficiencies and how long it will 
take. Rather than prescribing a ``one-size-fits-all'' remedy, this 
approach allows us and the bank to implement actions that are 
appropriate to the bank's unique circumstances. The approach, however, 
does not diminish our ability to take more forceful action: we can 
issue an enforceable order if the bank fails to submit an acceptable 
compliance plan or fails in any material way to implement an OCC-
approved plan.
---------------------------------------------------------------------------
     \5\ See September 9, 2014, testimony noted above.
---------------------------------------------------------------------------
    We believe the expectations for a strong risk management culture, 
effective lines of defense against excessive or imprudent risk taking, 
and an engaged board of directors as set forth in our heightened 
standards are essential for all large banks with significant operations 
and size. We also recognize, however, that systems and processes that a 
bank may need to implement, such as culture and risk controls, will 
vary according to the size and complexity of the bank. Thus, our 
expectations for how the largest banks implement these standards are 
substantially more demanding than our expectations for banks with less 
extensive operations. This difference in expectations is reflected in 
the phased-in compliance dates we established such that the guidelines 
were effective immediately for the largest banks but are being phased-
in for the other banks covered by our standards with lesser risk 
profiles. While our heightened standards generally apply to all insured 
national banks and Federal savings associations with consolidated 
assets equal to or greater than $50 billion, our rule provides us with 
the flexibility to determine that compliance with the standards is not 
required if a bank's operations are no longer highly are consistent 
with and complement the objectives of section 165, and they illustrate 
how we are able through our supervisory processes to apply, tailor, and 
adjust our standards to risks inherent in individual banks.
    The only provision of section 165 for which the OCC has direct 
rulemaking authority is section 165(i)(2) with respect to the annual 
company-run stress testing requirements. As previously noted, this 
provision mandates that all banks with consolidated assets of more than 
$10 billion must conduct stress tests using at least three sets of 
economic conditions. The OCC issued its final rule to implement section 
165(i)(2) in October 2012. The rule, which is consistent with and 
comparable to the stress test rules issued by the other Federal banking 
agencies, establishes methods for conducting stress tests and requires 
that the tests be based on at least three different economic scenarios 
(baseline, adverse, and severely adverse). The rule also requires banks 
to report test results in the manner specified by the OCC and publish a 
summary of their results.
    In drafting the rule to implement this provision of the Dodd-Frank 
Act, the OCC, FDIC, and Federal Reserve worked to tailor the 
requirements as appropriate for the smaller, less complex firms. Thus, 
banks with consolidated assets of between $10 and $50 billion are only 
required to conduct the stress test once per year (versus the two 
submissions per year required for bank holding companies with 
consolidated assets in excess of $50 billion). They also do not have to 
develop their own stress testing scenarios, nor are they subject to a 
supervisory stress test. The rule provided a delayed implementation 
date for banks with between $10 and $50 billion in assets, thereby 
giving them time to prepare for their first stress test submission. The 
rule also extended the annual due date for submission of stress test 
results three months beyond the submission date required for banks with 
consolidated assets in excess of $50 billion, thereby providing the 
smaller banks more time in which to conduct their stress tests and 
report the results. Additionally, we developed a substantially 
abbreviated data reporting template for these smaller banks, thereby 
reducing the amount and granularity of data the institutions are 
required to provide to the agencies. The abbreviated data reporting 
templates have a further benefit of permitting these banks to publish 
simpler, less detailed public disclosures relative to the requirements 
for the $50 billion and over banks. The rule also delayed for a year 
the initial public disclosure for banks with less than $50 billion in 
assets. In addition, to reduce burden and avoid duplicative regulatory 
requirements, the OCC's rule permits disclosure of the summary of the 
stress test results by the parent bank holding company of a covered 
institution if the parent holding company satisfactorily complies with 
the disclosure requirements under the Federal Reserve's company-run 
stress test rule.
    As the OCC noted in its final rule, the annual stress tests 
required by the Dodd-Frank Act are only one component of the broader 
stress testing activities that the OCC expects of banks. The OCC's more 
general and qualitative expectations are set forth in the 2012 
interagency guidance on ``Stress Testing for Banking Organizations with 
More Than $10 Billion in Total Consolidated Assets.'' \6\ That guidance 
emphasizes that stress tests should be an integral part of a bank's 
risk management and capital planning framework and tailored to a bank's 
exposures, activities, and risks. It also sets out the broad principles 
that we expect banks to adhere to when conducting their stress tests. 
We have tailored separate guidance and tools for community banks to use 
to assess the impact of various stress scenarios on concentrations 
within their loan portfolios. \7\
---------------------------------------------------------------------------
     \6\ See OCC Bulletin 2012-14, available at: http://www.occ.gov/
news-issuances/bulletins/2012/bulletin-2012-14.html.
     \7\ See OCC Bulletin 2012-33, available at: http://www.occ.gov/
news-issuances/bulletins/2012/bulletin-2012-33.html.
---------------------------------------------------------------------------
Conclusion
    The OCC is committed to a supervisory approach that appropriately 
tailors supervisory expectations and requirements to the scale, 
complexity, and risks of individual and groups of banks. We have 
structured our supervisory programs in a manner that allows us to 
adjust effectively and efficiently the intensity of our supervisory 
oversight as a bank's risk profile changes. We have used our regulatory 
tools and authorities to enhance and apply more rigorous capital, 
liquidity, and risk management requirements to large banks whose size, 
scope of operations, complexity, and interconnections with other 
financial institutions pose more risk to financial stability. While the 
OCC has taken most of these actions outside of Dodd-Frank section 165 
authorities, we believe our actions and supervisory approach are 
consistent with and complement the objectives of section 165. As the 
primary supervisor of the Nation's largest banks, the OCC has a vital 
interest in ensuring a robust regime of prudential standards for these 
institutions and retaining the tools we have to effect such a regime.
                                 ______
                                 
               PREPARED STATEMENT OF MARTIN J. GRUENBERG
            Chairman, Federal Deposit Insurance Corporation
                             March 19, 2015
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, I appreciate the opportunity to testify on the regulatory 
regime for regional banks. My testimony will begin with a profile of 
the large companies subject to the enhanced prudential standards 
requirements of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act). I then will describe how regulators 
have implemented the enhanced standards requirements. Finally, I will 
review various considerations important to any discussion of proposals 
to change these requirements.
Profile of Large Companies Subject to Section 165
    Section 165 of the Dodd-Frank Act requires the Board of Governors 
of the Federal Reserve System (Federal Reserve) to establish enhanced 
prudential standards for certain groups of institutions. The Act 
defines these institutions to include bank holding companies with total 
consolidated assets equal to or greater than $50 billion and nonbank 
financial companies that the Financial Stability Oversight Council 
(Council) has designated for Federal Reserve supervision.
    The companies that meet the $50 billion threshold for enhanced 
prudential standards represent a significant portion of the U.S. 
banking industry. As of December 31, 2014, 37 companies with combined 
assets of $15.7 trillion reported total assets greater than $50 
billion. They owned a total of 72 FDIC-insured subsidiary banks and 
savings institutions, with combined assets of $11.3 trillion, or 73 
percent of total FDIC-insured institution assets.
    The 37 companies represent a diverse set of business models. The 
four largest companies, holding combined assets of $8.2 trillion, are 
universal banks that engage in commercial banking, investment banking, 
and other financial services. Another 20 companies holding $3.3 
trillion in assets are diversified commercial banks that essentially 
take deposits and make loans. The remaining 13 companies, with a 
combined total of $4.2 trillion in assets, do not engage predominantly 
in traditional commercial banking activities. These companies include 
two investment banks, four custodial banks, two credit-card banks, one 
online bank, and four specialty institutions. The 37 institutions 
include eight U.S.-owned institutions that are designated as global 
systemically important banks by the Financial Stability Board. They 
include the four universal banks, two investment banks, and two 
custodial banks.
    By way of contrast, the FDIC's Community Banking Study of December 
2012 profiled institutions that provide traditional, relationship-based 
banking services. The FDIC developed criteria for the Study to identify 
community banks that included more than a strict asset size threshold. 
These criteria included a ratio of loans-to-assets of at least 33 
percent, a ratio of core deposits-to-assets of at least 50 percent, and 
a maximum of 75 offices operating in no more than two large 
metropolitan statistical areas and in no more than three States. Based 
on criteria developed in the Study, 93 percent of all FDIC-insured 
institutions with 13 percent of FDIC-insured institution assets 
currently meet the criteria of a community bank. This represents 6,037 
institutions, 5,676 of which have assets under $1 billion. The average 
community bank holds $342 million in assets, has a total of six 
offices, and operates in one State and one large metropolitan area.
    The FDIC does not have a similar set of criteria to identify 
regional banks. Regional banks may be thought of as institutions that 
are much larger in asset size than a typical community bank and that 
tend to focus on more traditional activities and lending products. 
These institutions typically have expanded branch operations and 
lending products that may serve several metropolitan areas and they may 
do business across several States. Regional banks are less complex than 
the very largest banks, which may have operations and revenue sources 
beyond traditional lending products.
    The 20 holding companies identified as diversified commercial 
banks--the subset of the 37 institutions with total assets over $50 
billion noted earlier--have a traditional banking business model that 
involves taking deposits and making loans, and they derive the majority 
of their income from their lending activities. Operationally, however, 
the 20 diversified commercial banks are much more complex than 
traditional community banks. They operate in a much larger geographic 
region, and have a much larger footprint within their geographic 
region.
    Of the 20 holding companies:

    Seven have total assets from $50 billion to $100 billion. 
        They have an average of nearly 700 offices, and operate in 12 
        States and 22 large metropolitan areas.

    Nine have assets from $100 billion to $250 billion. They 
        have an average of nearly 1,200 offices, and operate in 12 
        States and 24 large metropolitan areas.

    Four have total assets from $250 billion to $500 billion. 
        They have an average of nearly 1,800 offices, and operate in 18 
        States and 24 large metropolitan areas.

    The operational complexity of these 20 diversified commercial bank 
holding companies presents challenges that community banks do not. 
Supervisory tools and regulations need to match the complexity of these 
large $50 billion plus organizations. Any particular institution at the 
lower to middle part of the grouping may be a dominant player within a 
particular geographic or market segment and as such may require greater 
regulatory attention. If there would be a failure, the resolution of 
any one of these organizations may present challenges. In addition, the 
failure of more than one of these institutions during a period of 
severe financial stress could present challenges to financial 
stability.
Implementation of Enhanced Prudential Standards
    Section 165 provides the FDIC with explicit responsibilities in two 
substantive areas related to prudential supervision: resolution plans 
and stress testing. In both areas, the FDIC has tailored requirements 
to fit the complexity of the affected institutions.
Resolution Planning
    Resolution plans, or living wills, are an important tool for 
protecting the economy and preventing future taxpayer bailouts. 
Requiring these plans ensures that firms establish, in advance, how 
they could be resolved in an orderly way under the Bankruptcy Code in 
the event of material financial distress or failure. The plans also 
provide important information to regulators, so they can better prepare 
for failure to protect markets and taxpayers.
    In 2011, the FDIC and the Federal Reserve jointly issued a final 
rule implementing the resolution plan requirements of Section 165(d) of 
the Dodd-Frank Act (the 165(d) rule) for bank holding companies. The 
FDIC also issued a separate rule that requires all insured depository 
institutions (IDIs) with greater than $50 billion in assets to submit 
resolution plans to the FDIC for their orderly resolution through the 
FDIC's traditional resolution powers under the Federal Deposit 
Insurance Act (FDI Act). The 165(d) rule and the IDI resolution plan 
rule are designed to work in tandem by covering the full range of 
business lines, legal entities, and capital-structure combinations 
within a large financial firm.
    Bank holding companies with $50 billion or more in total 
consolidated assets and nonbank financial companies regulated by the 
Federal Reserve are subject to the requirement to prepare resolution 
plans. However, the FDIC and the Federal Reserve used our statutory 
discretion to develop a joint resolution planning rule which recognizes 
the differences among institutions and scales the regulatory 
requirements and potential burdens to the size and complexity of the 
institutions subject to that rule. The joint rule also allows the 
agencies to modify the frequency and timing of required resolution 
plans.
    Our resolution plan regulations also are structured so that both 
firms and regulators are focused on the areas of greatest risk. 
Smaller, simpler, and less complex institutions have much smaller and 
simpler resolution plans than more systemic institutions, with complex 
structures, multiple business lines, and large numbers of legal 
entities.
    In implementing the requirement for resolution plans, the FDIC and 
the Federal Reserve instituted a staggered schedule for plan 
submissions to reflect differing risk profiles. The first group of 
companies required to file plans on or before July 1, 2012, included 
bank holding companies with $250 billion or more in nonbank assets. 
This group comprised 11 institutions--seven U.S. bank holding companies 
and four foreign banking organizations. These institutions generally 
ranked among the largest institutions in the United States, although 
some equally large institutions with smaller amounts of nonbank assets, 
did not file in this group.
    The second group was comprised of bank holding companies with $100 
billion or more, but less than $250 billion, in total nonbank assets. 
These firms submitted their initial resolution plans on or before July 
1, 2013. The remaining companies, those subject to the rule with less 
than $100 billion in total nonbank assets, submitted their initial 
plans on or before December 31, 2013.
    Grouping the firms by their holdings of nonbank assets provided the 
agencies with an initial proxy for firm complexity. By delaying the 
submission of plans for those with fewer nonbank assets, less complex 
firms were given more time to prepare. The FDIC and the Federal Reserve 
also were able to focus on those firms that are more likely to pose 
serious adverse effects to the U.S. financial system should they need 
to be resolved under the Bankruptcy Code. Based on their groupings and 
measured by asset size as of December 2011, no U.S. bank holding 
company (BHC) with less than $200 billion in total consolidated assets 
was required to file with either the first or second group of filers.
    For their initial submissions, bank holding companies with less 
than $100 billion in total nonbank assets and 85 percent or more of 
their assets in an insured depository institution also were generally 
permitted to submit tailored resolution plans. Tailored resolution 
plans simplify the task of creating a living will by aligning it with 
the FDIC's IDI resolution plan requirement and focusing on the firm's 
nonbank operations. Since the initial filings, the FDIC and Federal 
Reserve have further recognized differences among institutions with 
less than $100 billion in nonbank assets and nearly all U.S. 
institutions in this category filed tailored plans.
    Though smaller firms are less systemic, appropriately tailored 
resolution plans or other enhanced prudential supervision requirements 
for these firms provide important benefits. Any particular institution 
at the lower to middle part of the grouping may be a dominant player 
within a particular geographic or market segment, and its failure would 
likely have a sizeable impact for those markets. The Deposit Insurance 
Fund also would face a substantial loss from the failure of even one of 
these firms. Finally, the size of these firms presents an obstacle in 
arranging the sale to another firm as only other larger firms would be 
likely acquirers. Therefore, the FDIC and Federal Reserve should 
continue to receive and review resolution plans in order to ensure that 
a rapid and orderly resolution of these companies through bankruptcy 
could occur in a way that protects taxpayers and the economy.
Stress Testing
    Section 165(i)(2) of the Dodd-Frank Act requires the Federal 
banking agencies to issue regulations requiring financial companies 
with more than $10 billion in total consolidated assets to conduct 
annual stress tests. The statutory language governing stress testing is 
more detailed and prescriptive than the language covering other 
prudential standards, leaving the regulators with less discretion to 
tailor the stress testing process. The Act requires IDIs and BHCs with 
assets greater than $10 billion to conduct an annual company-run stress 
test, while BHCs with assets greater than $50 billion must conduct 
semiannual, company-run stress tests and also are subject to stress 
tests conducted by the Federal Reserve. The company-run tests must 
include three scenarios and the institutions must publish a summary of 
the results.
    In October 2012, the FDIC, OCC, and the Federal Reserve issued 
substantially similar regulations to implement the company-run stress 
test requirements. The FDIC's stress testing rules, like those of the 
other agencies, are tailored to the size of the institutions consistent 
with the expectations under section 165 for progressive application of 
the requirements. Under the agencies' implementing regulations, 
organizations in the $10 billion to $50 billion asset size range have 
more time to conduct the tests and are subject to less extensive 
informational requirements, as compared to larger institutions. 
Currently, 107 IDIs are subject to the banking agencies' stress testing 
rules, with the FDIC serving as primary Federal regulator for 28 of 
these IDIs.
    Stress testing requirements are an important risk-assessment 
supervisory tool. The stress tests conducted under the Dodd-Frank Act 
provide forward-looking information to supervisors to assist in their 
overall assessments of a covered bank's capital adequacy and to aid in 
identifying downside risks and the potential impact of adverse outcomes 
on the covered bank. Further, these stress tests are expected to 
support ongoing improvement in a covered bank's internal assessments of 
capital adequacy and overall capital planning.
Other Regulatory Standards Affecting Regional Banks
    Many of the standards required under section 165 address issues 
that are within the longstanding regulatory and supervisory purview of 
the Federal banking agencies. For example, with respect to banking 
organizations, the agencies have preexisting authority to establish 
regulatory capital requirements, liquidity standards, risk-management 
standards, and concentration limits, to mandate disclosures and regular 
reports, and to conduct stress tests or require banking organizations 
to do so. These are important safety and soundness authorities that the 
agencies have exercised by regulation and supervision in the normal 
course and outside the context of section 165.
    The FDIC's capital rules are issued pursuant to its general safety 
and soundness authority and the FDI Act. In many cases, FDIC capital 
regulations and those of other Federal banking agencies are consistent 
with standards developed by the Basel Committee on Banking Supervision. 
For example, recent comprehensive revisions to the agencies' capital 
rules and the liquidity coverage ratio rule incorporated aspects of the 
Basel III accord, which was developed separate and independent from, 
and mostly before, the Dodd-Frank Act was finalized.
    These capital and liquidity rules play an important role in 
promoting the safety and soundness of the banking industry, including 
regional and larger banks. The agencies' capital rules are entirely 
consistent with the statutory goal in section 165 of progressively 
strengthening standards for the largest institutions. As a baseline, a 
set of generally applicable capital rules apply to all institutions. A 
defined group \1\ of large or internationally active banking 
organizations are subject to more extensive U.S. application of Basel 
capital and liquidity standards. In addition, eight Global Systemically 
Important Banks (G-SIBs) are subject to enhanced supplemental leverage 
capital requirements.
---------------------------------------------------------------------------
     \1\ This group consists of banking organizations with total assets 
of at least $250 billion or foreign exposures of at least $10 billion.
---------------------------------------------------------------------------
Policy Considerations
    Section 165 establishes the principle that regulatory standards 
should be more stringent for the largest institutions. This idea is 
rooted in the experience of the financial crisis, where the largest 
financial institutions proved most vulnerable to sudden market-based 
stress, with effects that included significant disruption of the real 
economy. The thresholds in the enhanced prudential standards 
legislative framework state Congress's expectation for the asset levels 
at which enhanced regulatory standards should start to apply, while 
providing for regulatory flexibility to set the details of how those 
standards should progress in stringency.
    In our judgment, the concept of enhanced regulatory standards for 
the largest institutions is sound, and is consistent with our 
longstanding approach to bank supervision. Certainly, degrees of size, 
risk, and complexity exist among the banking organizations subject to 
section 165, but all are large institutions. Some of the 
specializations and more extensive operations of regional banks require 
elevated risk controls, risk mitigations, corporate governance, and 
internal expertise than what is expected from community banks. We 
should be cautious about making changes to the statutory framework of 
heightened prudential standards that would result in a lowering of 
expectations for the risk management of large banks.
    That being said, it is appropriate to take into account differences 
in the size and complexity of banking organizations when formulating 
regulatory standards. The Federal banking agencies have taken into 
account such differences in a number of contexts separate and apart 
from section 165. Examples include asset thresholds for the interagency 
capital rules, trading book thresholds for the application of the 
market risk rule, and proposed notional derivatives thresholds for 
margin requirements. These examples and other size thresholds 
illustrate that precedents exist apart from section 165 for the 
application of different and heightened regulatory standards to larger 
institutions, and that different size thresholds may be appropriate for 
different types of requirements. Finally, many of the rules that apply 
to more complex capital market activities do not apply, as a practical 
matter, to the types of traditional lending activities that many 
regional banks conduct.
Conclusion
    Section 165 provides for significant flexibility in implementation 
of its requirements. The agencies have made appropriate use of this 
flexibility thus far, and where issues have been raised by industry, we 
believe that we have been responsive. The FDIC remains open to further 
discussion on how best to tailor various enhanced prudential standards 
and other regulations and supervisory actions to best address risk 
profiles presented by large institutions, including regional banks.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM DANIEL K. TARULLO

Q.1. Governor Tarullo, we talked about the Federal Reserve's 
tiering of enhanced prudential standards, however, there seemed 
to be some disagreement about how the tiering works.
    Please explain: Each enhanced prudential standard that 
applies to bank holding companies with $50 billion in total 
assets.

A.1. In February 2014, the Federal Reserve adopted a final rule 
implementing enhanced prudential standards under section 165 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) for bank holding companies and foreign banking 
organizations, each with $50 billion or more in total 
consolidated assets (Regulation YY). For bank holding companies 
with total consolidated assets of $50 billion or more, 
Regulation YY incorporated as enhanced prudential standards the 
previously issued capital planning and stress-testing 
requirements, and imposed enhanced liquidity requirements, 
enhanced risk-management requirements, and a debt-to-equity 
limit for those companies that the Financial Stability 
Oversight Council (Council) has determined pose a grave threat 
to the financial stability of the United States.
    For a foreign banking organization with total consolidated 
assets of $50 billion or more, Regulation YY implemented 
enhanced risk-based and leverage capital requirements, 
liquidity requirements, risk-management requirements, stress 
testing requirements, and the debt-to-equity limit for those 
companies that the Council has determined pose a grave threat 
to the financial stability of the United States. In addition, 
it required foreign banking organizations with U.S. non-branch 
assets, as defined in Regulation YY, of $50 billion or more to 
form a U.S. intermediate holding company and imposed enhanced 
risk-based and leverage capital requirements, liquidity 
requirements, risk-management requirements, and capital-
planning and stress-testing requirements on the U.S. 
intermediate holding company.
    In addition to the enhanced prudential standards in 
Regulation YY, the Board has strengthened capital requirements 
applicable to all banking organizations through comprehensive 
revisions to its capital framework (revised capital framework). 
Further, the Resolution Plans rule (Regulation QQ), adopted in 
October 2011, requires bank holding companies with assets of 
$50 billion or more and nonbank financial firms designated by 
the Council for supervision by the Board to annually submit 
resolution plans to the Board and the Federal Deposit Insurance 
Corporation (FDIC).
    Finally, as part of the liquidity coverage ratio (LCR) rule 
(Regulation WW), adopted in September 2014 as an enhanced 
prudential standard, the Board will apply a less stringent 
modified LCR requirement to bank holding companies and certain 
savings and loan holding companies that have $50 billion or 
more in total assets, but less than $250 billion in total 
consolidated assets or $10 billion in on-balance-sheet foreign 
exposure. As described in (b) below, the Federal Reserve also 
will apply the more stringent LCR requirement to all banking 
organizations with $250 billion or more in total consolidated 
assets. In addition, the banking organizations subject to the 
less stringent modified LCR requirements are required to report 
their LCR monthly rather than daily as required of those 
banking organizations with $250 billion or more in total 
consolidated assets.

Q.2. Each enhanced prudential standard that applies to bank 
holding companies with $250 billion in assets or $10 billion in 
foreign exposures; and

A.2. Regulation WW also will apply to all banking organizations 
with $250 billion or more in total consolidated assets or $10 
billion or more in on-balance sheet foreign exposure (advanced 
approaches banking organizations) and to these banking 
organizations' subsidiary depository institutions that have 
assets of $10 billion or more.
    Advanced approaches banking organizations are subject to 
heightened risk-based and leverage capital requirements under 
the Federal Reserve's revised capital framework. For instance, 
these firms must reflect changes in accumulated other 
comprehensive income in regulatory capital, and hold an 
additional buffer of capital if the Federal banking agencies 
determine that the economy is experiencing excessive credit 
growth, as well as meet a minimum supplementary leverage ratio 
requirement of 3 percent.

Q.3. Any other enhanced prudential standards that may apply, 
including the thresholds upon which that applicability is 
based.

A.3. The Board has adopted risk-based and leverage capital 
surcharges applicable to the largest, most systemically 
important U.S. bank holding companies globally systemically 
important financial banking organizations (G-SIBs). Effective 
January 1, 2016 (subject to transition arrangements), a bank 
holding company that is designated as a G-SIB is subject to a 
risk-based capital surcharge (G-SIB surcharge) above its 
minimum regulatory capital requirements. The amount of the G-
SIB surcharge is calibrated to each firm's overall systemic 
risk. In addition, effective January 1, 2018, a G-SIB must 
maintain a leverage buffer greater than 2 percentage points 
above the minimum supplementary leverage ratio requirement of 3 
percent, for a total of more than 5 percent (enhanced 
supplementary leverage ratio ). \1\ Failure to maintain capital 
above the G-SIB surcharge or supplementary leverage ratio will 
result in restrictions on capital distributions and certain 
discretionary bonus payments.
---------------------------------------------------------------------------
     \1\ IDI subsidiaries of covered bank holding companies must 
maintain at least a 6 percent supplementary leverage ratio to be 
considered ``well capitalized'' under the banking agencies' prompt 
corrective action framework.

Q.4. Governor Tarullo, we talked about stress tests.
    In a submission for the record, one regional bank stated 
that the leverage a risk-based capital requirement under 
section 165(b) of the Dodd-Frank Act ``is primarily manifested 
through higher risk-based capital standards and through the 
annual Comprehensive Capital Analysis and Review (CCAR).'' We 
have heard from other regional banks that the Federal Reserve 
is using CCAR to satisfy 165(b)'s enhanced risk-based capital 
and leverage standards.
    What is the legal authority for CCAR and which enhanced 
prudential standard does CCAR satisfy?

A.4. In the Comprehensive Capital Analysis and Review (CCAR), 
the Federal Reserve evaluates whether a bank holding company 
has effective capital planning processes and sufficient capital 
to absorb losses during stressful conditions, while meeting 
obligations to creditors and counterparties and continuing to 
serve as credit intermediaries. The Federal Reserve derives its 
authority for CCAR from the Bank Holding Company Act (BHC Act) 
and the International Lending Supervision Act. Specifically, 
section 5 of the BHC Act (12 U.S.C. 1844) authorizes the Board 
to issue regulations and orders, and to collect and require 
reports from bank holding companies. \2\ Further, the Federal 
Reserve's rulemaking authority to set regulatory capital 
requirements and standards for bank holding companies is found 
in sections 908 and 910 of the International Lending 
Supervision Act, as amended (12 U.S.C. 3907 and 3909).
---------------------------------------------------------------------------
     \2\ Section 616(a) of the Dodd-Frank Act amended section 5(b) of 
the BHC Act (12 U.S.C. 1844(b)) to specifically authorize the Board to 
issue regulations and orders relating to capital requirements for bank 
holding companies.
---------------------------------------------------------------------------
    In addition, the Dodd-Frank Act expressly directed the 
Federal Reserve to impose enhanced prudential standards on 
large bank holding companies to prevent or mitigate risks to 
the financial stability of the United States. These standards 
must include enhanced risk-based and leverage capital 
requirements, among other requirements. The capital plan rule, 
which governs CCAR, serves as enhanced risk-based and leverage 
capital standards for large bank holding companies. \3\ In 
addition, the Dodd-Frank Act mandates that the Federal Reserve 
conduct annual stress tests on large bank holding companies to 
determine whether large bank holding companies have the capital 
needed to absorb losses in baseline, adverse, and severely 
adverse economic conditions. These stress tests are integrated 
into the ongoing assessments of a bank holding company's 
required capital and are an important component of the annual 
assessment of capital plans. \4\
---------------------------------------------------------------------------
     \3\ See 12 CFR 225.8.
     \4\ See 12 CFR part 252, subpart E.

Q.5. How is the Federal Reserve satisfying the 165(b) enhanced 
---------------------------------------------------------------------------
risk-based capital and leverage standards?

A.5. The Federal Reserve has strengthened the capital 
requirements applied to all banking organizations it supervises 
and, in keeping with the mandate established by section 165 for 
progressively more stringent prudential standards to be applied 
to banks of greater systemic importance, the Federal Reserve 
has also established several tiers of enhanced requirements. 
\5\ In July 2013, the Federal Reserve issued a final rule to 
comprehensively revise the capital regulations applicable to 
banking organizations (revised capital framework). \6\ The 
revised capital framework strengthens the definition of 
regulatory capital, generally increases the minimum risk-based 
capital requirements, modifies the methodologies for 
calculating risk-weighted assets, and imposes a minimum 
generally applicable leverage ratio requirement of 4 percent 
for all banking organizations.
---------------------------------------------------------------------------
     \5\ See 12 CFR part 252. Regulation YY imposes risk-based capital 
and leverage requirements on U.S. intermediate holding companies of 
foreign banking organizations. These requirements are generally the 
same as those described above for bank holding companies.
     \6\ See 78 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
    The Federal Reserve's capital plan rule serves as an 
enhanced risk-based capital and leverage standard by helping to 
ensure that bank holding companies with assets above the 
threshold established by Congress in section 165 hold 
sufficient capital to meet obligations to creditors and other 
counterparties and serve as financial intermediaries during 
periods of stress.
    The revised capital framework imposes additional 
requirements on large, complex organizations that are 
internationally active and subject to the banking agencies' 
advanced approaches risk-based capital rules. For instance, 
these firms must reflect changes in accumulated other 
comprehensive income in regulatory capital, hold an additional 
buffer of capital if the Federal banking agencies determine 
that the economy is experiencing excessive credit growth, and 
meet a minimum supplementary leverage ratio requirement of 3 
percent. \7\ This supplementary leverage ratio is developed to 
help reduce risk to U.S. financial stability and improve the 
resilience of the U.S. banking system by limiting the amount of 
leverage that a banking organization may incur.
---------------------------------------------------------------------------
     \7\ A U.S. banking organization is subject to the advanced 
approaches rule if it has consolidated assets of at least $250 billion, 
if it has total consolidated on-balance sheet foreign exposures of at 
least $10 billion, if it elects to apply the advanced approaches rule, 
or it is a subsidiary of a depository institution, bank holding 
company, or savings and loan holding company that uses the advanced 
approaches to calculate risk-weighted assets. See 78 FR 62018, 62204 
(October 11, 2013); 78 FR 55340, 55523 (September 10, 2013); 79 FR 
57725 (September 26, 2014).
---------------------------------------------------------------------------
    Finally, the Federal Reserve has adopted both a risk-based 
and leverage capital surcharge applicable to the largest, most 
systemically important U.S. bank holding companies (G-SIBs). A 
bank holding company that is designated as a G-SIB will be 
subject to enhanced supplementary leverage ratio standards 
through application of a ``leverage buffer'' of 2 percent (in 
addition to the minimum supplementary leverage ratio of 3 
percent). \8\ In addition, the G-SIB will be subject to a risk-
based capital surcharge that is calibrated to each firm's 
overall systemic risk. \9\ These enhanced risk-based and 
leverage capital standards are designed to help reduce the 
probability of failure of systemically important banking 
organizations, thereby mitigating the risks to the financial 
stability of the United States posed by these organizations.
---------------------------------------------------------------------------
     \8\ See 79 FR 24528 (May 1, 2014). In addition, all insured 
depository institution subsidiaries of such bank holding companies 
would be subject to an enhanced supplementary leverage ratio of 6 
percent in order to be considered well-capitalized under the prompt 
corrective action framework.
     \9\ See ``Regulatory Capital Rules: Implementation of Risk-based 
Capital Surcharges for Global Systemically Important Bank Holding 
Companies'', available at: www.federalreserve.gov/newsevents/press/
bcreg/bcreg20150720a1.pdf.
---------------------------------------------------------------------------
Q.6. During the Committee hearing on March 24th, Deron Smithy, 
the Treasurer for Regions Bank, said:

        [A]t the $50 billion level, we are subject to enhanced 
        standards, which, again, as I mentioned, includes 
        stress tests, which frankly we think are a good idea. I 
        will fully stipulate that pre-crisis the banking 
        industry was in greater need of enhanced risk 
        management practices and stronger internal modeling, 
        stronger capital planning activities. I think the 
        stress test that emanated from the original SCAP and 
        have evolved into CCAR are a good thing. As a matter of 
        fact, we built our whole entire capital planning 
        process and strategic planning process around the 
        stress testing framework . . . Where it becomes more 
        challenging or restrictive is, as part of the CCAR 
        process, there is a stress test that the Fed conducts 
        on banks, and there is an outcome from that stress test 
        in terms of losses. And at the end of the day, our 
        capital levels that we must manage to, despite what we 
        calculate internally, the binding constraint becomes 
        what the Fed calculates for us. And so one of the 
        challenges--there are certain asset classes and 
        products where the Fed sees risk just inherently higher 
        than do the banks.

    Do you continue to believe that stress testing is not 
appropriate for regional banks?

A.6. Rigorous stress testing helps to compensate for the 
somewhat backward-looking nature of conventional capital 
requirements by assessing on a forward-looking basis the losses 
that would be suffered by a bank under stipulated adverse 
economic scenarios. In doing so, capital can be built and 
maintained at levels high enough for banks to withstand such 
losses and still remain viable financial intermediaries. The 
importance of this aim is reflected in Congress' mandate, via 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), to require annual supervisory stress tests 
for bank holding companies (BHCs) with $50 billion or more in 
assets and to require company-run stress tests for institutions 
with $10 billion or more in assets. These stress tests allow 
supervisors to assess whether firms have enough capital to 
weather a severe economic downturn and contribute to the 
Federal Reserve's ability to make assessments of the resilience 
of the U.S. banking system under stress scenarios.
    As I stated in my testimony, it has been somewhat difficult 
to customize the supervisory stress tests that are required by 
the Dodd-Frank Act. While some elements of the test, such as 
the market shock and single counterparty default scenarios, are 
applied only to larger firms, the basic requirements for the 
aggregation and reporting of data conforming to our supervisory 
model and for firms to run our scenarios through their own 
models entail substantial expenditures of out-of-pocket and 
human resources. This can be a considerable challenge for a $60 
billion or $70 billion bank. On the other side of the ledger, 
while we do derive some supervisory benefits from the inclusion 
of these banks toward the lower end of the range in the 
supervisory stress tests, those benefits are relatively modest, 
and we believe we could probably realize them through other 
supervisory means. This is why I have suggested that it may be 
appropriate to raise the threshold to $100 billion.
    Dodd-Frank Act stress testing is a complementary exercise 
to the Comprehensive Capital Analysis and Review (CCAR), an 
annual exercise by the Federal Reserve to assess whether bank 
holding companies with $50 billion or more in assets have 
rigorous, forward-looking capital planning processes and 
sufficient capital to continue to operate through times of 
extreme economic and financial stress. Because we generally 
believe that smaller institutions would not impose sizable 
negative externalities on the U.S. financial system in the 
event of their stress or failure and that the regulatory costs 
to these institutions of complying with CCAR far outweigh any 
supervisory benefit that might result, we do not subject them 
to CCAR. We believe, however, that all banking organizations, 
regardless of size, should have the capacity to analyze the 
potential impact of adverse outcomes on their financial 
condition.

Q.7. We discussed the importance of the Fed's separate stress 
testing evaluations. How do you respond to Mr. Smithy's 
comments?

A.7. As noted above, with the CCAR, the Federal Reserve 
evaluates whether BHCs with total consolidated assets greater 
than $50 billion have sufficient capital to continue operations 
throughout times of economic and financial market stress. To do 
so, the Federal Reserve uses its own independent, validated 
models, with detailed data provided by the banks, to project 
post-stress capital ratios that are applied consistently across 
all subject firms. By using the same set of scenarios, models, 
and assumptions, the supervisory stress test ensures the 
comparability of results across various firms. The results of 
supervisory stress tests and a BHC's own stress tests may 
differ for a number of reasons, including modeling techniques, 
key assumptions, and accounting treatments. For example, the 
Federal Reserve uses an expected loss framework for estimating 
loan losses, which pulls losses forward, while firms may 
produce accounting-based loss estimates, which tend to be more 
spread out over time. These differences can result in 
divergence in projected loan losses for the same portfolio.
    Qualitative assessments in CCAR do not consider differences 
in quantitative outcomes between supervisory stress tests and 
the banks' own stress tests, but rather focus on the banks' 
capital planning processes, including banks' internal stress 
testing practices. We want to encourage firms to think 
innovatively about risk management and that can mean adopting 
different modeling approaches. We believe that looking at 
capital adequacy from multiple perspectives and under multiple 
models is useful for understanding vulnerabilities under a 
range of scenarios.

Q.8. Should Members of the Committee be concerned by the March 
23 Wall Street Journal report that there is a $400 million 
discrepancy between the loss estimates of the Federal Reserve 
and Zions Bank related to Zions' CDO portfolio? If not, why 
not?

A.8. As noted in response to Question 2, there are numerous 
reasons why a bank's own estimate of losses may vary from the 
estimate generated in our supervisory stress tests. An 
assessment of the reasons for significant variations is part of 
our qualitative assessment of a firm's capital planning 
process. In any case, investors and the public know that the 
Federal Reserve's estimates are based on models and assumptions 
applied consistently to all CCAR banks.

Q.9. Governor Tarullo, you have said--both in speeches and your 
testimony--that it may be appropriate to lift the $50 billion 
threshold for enhanced prudential standards generally, and 
particularly for stress tests. In addition to section 165, a 
number of other provisions of Dodd-Frank use a $50 billion 
threshold.
    Would you also support lifting the $50 billion thresholds 
for the following provisions:

        a. Section 163
        b. Section 164
        c. Section 166
        d. Section 210
        e. Section 726
        f. Section 763
        g. Section 765

A.9. In the Dodd-Frank Act, Congress used the $50 billion 
threshold for the mandatory application of a number of 
regulatory requirements, including those cited above. 
Establishing such statutory thresholds is a useful means of not 
merely giving banking agencies the authority to engage in a 
particular form of prudential regulation, but requiring that 
they do so. In that way, Congress was in effect guarding 
against memories of the problems the provisions were meant to 
protect fading and the consequent possibility of supervisory 
relaxation, which might allow for a recurrence of similar 
banking problems in the future.
    The requirements for mandatory application of the 
provisions in sections 163, 164, 166, and 210 seem to me 
similar to those in section 165. Thus I would be inclined to 
raise the threshold in these sections, with the important 
caveat--as with section 165--that Congress should be clear it 
is not restricting the authority of the Federal Reserve to use 
its discretion to apply additional requirements to any bank, as 
needed for prudential reasons.
    The thresholds in Title VII have a somewhat different 
purpose and effect, more relevant to the activities of market 
regulators, to whose judgment I would defer on the issue of 
raising these thresholds.

Q.10. At our Committee hearing on March 24th, one of the 
majority witnesses, Oliver Ireland from Morrison & Foerster, 
testified: ``I find the statutory language a little bit 
confusing myself, but one of the listed criteria or 
requirements in subsection (b) which is not accepted is 
resolution plans. And so it appears that they cannot lift the 
resolution plans if they are adhering to that statutory 
language.'' As I read the text of the Dodd-Frank Act, the 
Federal Reserve has the authority to lift the $50 billion 
threshold for resolution plans because they are contained in 
section 165(d).
    Does the Federal Reserve interpret the statute as providing 
the Federal Reserve the authority to lift the threshold for 
resolution plans, pursuant to a recommendation by the Financial 
Stability Oversight Council (FSOC)?

A.10. Section 165(a)(2)(B) of the Dodd-Frank Act grants 
authority to raise the asset threshold for resolution plans, 
though only pursuant to a recommendation from the Financial 
Stability Oversight Council. While Mr. Ireland is correct that 
the statutory language is potentially a little confusing, the 
Federal Reserve believes that the adjustments authorized in 
subsection (a)(2)(B) to the enhanced prudential standards 
established in subsections (c) through (g) also apply to those 
same enhanced prudential standards generally referenced in 
subsection (b) (i.e., contingent capital, resolution plans, 
concentration limits, enhanced public disclosures, and short 
term debt limits).
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM DANIEL K. TARULLO

Q.1. Mr. Tarullo in your written statement you suggested 
raising the asset threshold to $10 billion for regulating small 
banks under the Volcker rule and the incentive compensation 
requirements of Sec. 956 of the Dodd-Frank Act.
    What criteria led you to determine that $10 billion in 
assets is an appropriate line where the benefits of compliance 
are not exceeded by the costs of the regulations?

A.1. Section 619 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), which added a new 
section 13 to the Bank Holding Company Act of 1956 (BHC Act), 
also known as the Volcker Rule, generally prohibits any banking 
entity from engaging in proprietary trading, and from acquiring 
or retaining an ownership interest in, sponsoring, or having 
certain relationships with a covered fund, subject to certain 
exemptions. Under the terms of the statute, section 13 applies 
to any banking entity regardless of its size. As a result, 
section 13 and the final rules apply to community banks of all 
sizes.
    Section 956 of the Dodd-Frank Act requires the Federal 
Reserve, the Office of the Comptroller of the Currency, the 
Federal Deposit Insurance Corporation, the Securities and 
Exchange Commission, the National Credit Union Administration 
Board, and the Federal Housing Finance Agency (the Agencies) to 
jointly issue regulations or guidelines that would prohibit any 
types of incentive-based payment arrangement, or any feature of 
any such arrangement, that regulators determine encourage 
inappropriate risks by providing excessive compensation or that 
could lead to material financial loss to a covered financial 
institution. Under the terms of the statute, covered financial 
institutions with assets of less than $1 billion are exempt; 
larger institutions, including those with assets between $1 
billion and $10 billion, would be covered.
    The Federal Reserve makes substantial efforts to tailor its 
supervisory practices in accordance with the size, business 
models, risks, and other salient considerations of the 
institutions supervised. Requirements are the least stringent 
for smaller, local institutions and increase with factors 
including the size, complexity, and geographic reach of firms. 
In general, we shape our supervisory practices by considering 
the increase in safety and soundness that we are likely to 
achieve through a specific practice or requirement, in light of 
the regulatory costs for the banking organization at issue and 
the impact that the stress or failure of that organization 
would likely have on credit intermediation, the deposit 
insurance fund, and financial stability.
    In a number of instances in the Dodd-Frank Act where 
Congress showed an intent to distinguish between smaller and 
larger, more complex institutions, a $10 billion threshold was 
used. For example, formal stress testing was required only for 
banks with total assets of $10 billion or more. In addition, 
the Dodd-Frank Act required the Federal Reserve to issue 
regulations requiring that publicly traded bank holding 
companies with more than $10 billion establish risk committees. 
Furthermore, banks with less than $10 billion in total assets 
were exempted from a number of the debit interchange 
restrictions.
    With respect to the Volcker Rule, the Agencies charged with 
implementing that statutory provision endeavored to minimize 
the compliance burden on banking entities. As part of the 
implementing rules, the Agencies reduced the compliance program 
and reporting requirements applicable to banking entities with 
$10 billion or less in total consolidated assets. This was 
based in part on information that indicated that banking 
entities of this size generally have little or no involvement 
in prohibited proprietary trading or investment activities in 
covered funds. \1\ Exempting community banks from section 13 
would provide relief for thousands of community banks that face 
ongoing compliance costs incurred simply to confirm that their 
activities and investments are indeed exempt from the statute. 
At the same time, an exemption at this level likely would not 
increase risk to the financial system. The vast majority of the 
activity and investment that section 13 of the BHC Act is 
intended to address takes place at the largest and most complex 
financial firms whose failure would have a significant effect 
on the stability of the U.S. financial system. Moreover, were 
an exemption granted, the Federal banking agencies could 
continue to use their existing prudential authority in the 
event that these small institutions engage in imprudent 
investment activities that raise safety and soundness concerns.
---------------------------------------------------------------------------
     \1\ See ``The Volcker Rule: Community Bank Applicability'' (Dec. 
10, 2013), available at: http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20131210a4.pdf.
---------------------------------------------------------------------------
    Similarly, with respect to incentive compensation, the $10 
billion threshold would reflect the fact that the types of 
incentive compensation concerns intended to be addressed by 
section 956 apply almost exclusively to larger financial 
institutions. Community banking organizations are less likely 
to be significant users of incentive compensation arrangements 
and any incentive compensation issues at these organizations 
would be less likely to have adverse effects on the broader 
financial system. While the Agencies expect to tailor 
application of section 956 to make clear the limited extent to 
which it should effect small institutions, it may be 
appropriate for Congress to consider exempting community 
banking organizations with less than $10 billion in total 
consolidated assets completely from the requirements of the 
rule.

Q.2. Mr. Tarullo, in your written statement you concluded 
``while enhanced prudential standards are important to ensure 
that larger banks can continue to provide credit even in 
periods of stress, some of those same enhancements could 
actually inhibit credit extension by rending the reasonable 
business models of middle-sized and smaller banks 
unprofitable.''
    In light of this statement, do you believe these 
regulations on smaller community banks has led to the sharp 
consolidation in their number? Are these regulations in any way 
responsible for the slow-moving economic recovery the United 
States is experiencing since the financial crisis of 2008?

A.2. Relevant data suggests that the economic reverberations of 
the financial crisis and recession were a major cause of the 
consolidation that has taken place in recent years. Figure 1 
displays the percent decline in the number of community banks 
from the prior year. \2\ The annual rate of community bank 
consolidation was generally trending lower before the financial 
crisis, but then began to increase during and after the crisis.
---------------------------------------------------------------------------
     \2\ The decline includes both failed banks and acquired banks.
---------------------------------------------------------------------------
    However, even if the main drivers of consolidation have 
been the challenges of an adverse economic environment, we 
surely do not want to add to those challenges through the 
application of regulations that are unnecessary to protect the 
safety and soundness of small banks, and in many cases, were 
developed in response to the quite different activities and 
risks at the larger banks.


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                     FROM DANIEL K. TARULLO

Q.1. Regulators clearly already have some flexibility on how 
they apply the same regulatory principles to different kinds of 
institutions. For example, the Liquidity Coverage Ratio (LCR) 
rule allows for ``modified'' applications to firms that are not 
complex enough to warrant full treatment. But even in the LCR, 
where regulators knew they had this flexibility, a line was 
drawn at $250 billion that seemed to take sheer size into 
account more than the actual business activities firms were 
engaged in. In fact, banking regulators appear to have a 
sensible methodology in place to determine which firms are 
``globally systemically important banks.''
    Testimony by the Federal Reserve for this hearing 
acknowledged that banking regulators begin with the same 
``unitary approach'' to supervising regional banks, regardless 
of their size. Why then, is this principle not followed when 
promulgating regulations?

A.1. In September 2014, the Federal Reserve adopted a final LCR 
rule which provides for different liquidity requirements based 
on the size and complexity of a banking organization. Under the 
LCR rule, large banking organizations--those with total 
consolidated assets of $250 billion or more or total 
consolidated on-balance sheet foreign exposure of $10 billion 
or more, and their bank and thrift subsidiaries with total 
consolidated assets of $10 billion or more--are subject to the 
most stringent quantitative liquidity requirement and to daily 
calculation requirements. The Federal Reserve's modified LCR 
rule applies less stringent requirements to certain depository 
institution holding companies with total consolidated assets of 
at least $50 billion but less than $250 billion. The LCR is 
designed to promote the short-term resilience of the liquidity 
risk profile of large banking organizations and to improve the 
banking sector's ability to absorb shocks during periods of 
significant stress. The LCR does not apply to community banking 
organizations.
    The Federal Reserve recognizes that, when setting an asset 
threshold in a regulation, relatively similar banking 
organizations on different sides of that threshold will be 
affected differently. Nonetheless, the Federal Reserve believes 
that the LCR rule's asset thresholds appropriately address the 
liquidity risks that covered banking organizations could pose 
to the funding markets and the overall economy taking into 
account factors such as their size, complexity, risk profile, 
and interconnectedness. In implementing internationally agreed 
upon regulatory standards in the United States, the Federal 
banking agencies have historically applied a consistent 
threshold for determining whether a U.S. banking organization 
should be subject to such standards based upon similar factors. 
The thresholds in the LCR rule are consistent with this 
approach. The Federal Reserve's modified LCR's $50 billion 
asset threshold is consistent with the enhanced prudential 
standards required under section 165 of the Dodd-Frank Wall 
Street and Consumer Protection Act.
    The LCR rule takes into account individual characteristics 
of a covered company in several ways. For example, the rule 
calibrates the net cash outflow requirement for an individual 
covered company based on the company's balance sheet, off-
balance sheet commitments, business activities, and funding 
profile. Sources of funding that are considered less likely to 
be affected at a time of a liquidity stress are assigned 
significantly lower outflow rates. Conversely, the types of 
funding that are historically vulnerable to liquidity stress 
events are assigned higher outflow rates. The Federal Reserve 
expects that covered companies with less complex balance sheets 
and less risky funding profiles will have lower net cash 
outflows and will therefore require a lower amount of high 
quality liquid assets to meet the rule's minimum standard. 
Furthermore, systemic risks that could impair the safety of 
banking organizations are also reflected in the rule, including 
provisions to address wrong-way risk, shocks to asset prices, 
and other industry-wide risks. Banking organizations that have 
greater interconnectedness to financial counterparties and have 
liquidity risks related to risky capital market instruments may 
have larger net cash outflows. Conversely, banking 
organizations that choose to rely on a more traditional funding 
profile may limit or avoid such outflows under the rule.
    In promulgating the LCR rule, the Federal Reserve 
recognized that some financial institutions could face 
operational difficulties implementing the rule in the near 
term. To address these difficulties, the LCR rule provides 
relief to non-G-SIB financial institutions by differentiating 
among the transition periods for the LCR daily calculation 
requirement. Accordingly, the Federal Reserve provided an 
extended implementation schedule for calculation of the LCR on 
a daily basis. The Federal Reserve anticipates finalizing 
liquidity reporting requirements for companies subject to the 
LCR rule in the near future. Banking organizations subject to 
the Federal Reserve's modified LCR requirements will calculate 
the LCR on a monthly basis.

Q.2. Wouldn't it be better to apply ``modified'' treatment of 
the LCR, or other rules, to banks of similar operational 
activities or risk profiles, even if their sizes differ 
substantially?

A.2. The Federal Reserve sought to calibrate the LCR 
requirement so that a banking organization holds an amount of 
highly liquid assets commensurate with both the organization's 
liquidity risk profile and the wider impact of the organization 
facing a liquidity shortfall at a time of significant stress. 
For example, the LCR rule considers not only the resilience of 
the organization's short-term funding but also the 
interconnectedness of the organization with the financial 
sector and its ability to continue lending to retail and 
corporate counterparties. The Federal Reserve fully expects 
firms with less complex, more resilient near-term funding 
profiles to have a lower requirement under the rule. Liquidity 
risk can also be a function of the scale of an organization's 
funding profile. Banking organizations with historically more 
stable funding sources, such as certain types of deposits, may 
still face significantly greater funding needs in a period of 
severe liquidity stress based on the overall volume and 
regional distribution of their funding sources. Larger banking 
institutions are typically more significant contributors to the 
provision of credit in a regional economy. The Federal Reserve 
believes that the ability of an institution to continue to be 
able to provide credit in a period of significant stress should 
be a consideration in a banking organization's wider liquidity 
risk management practices.

Q.3. Would you be open to setting a break-point for regulatory 
treatment where there seems to be a natural delineation in 
terms of the systemic risk arising from those firms? As an 
example, would you be open to reserving full treatment under 
the LCR for firms that have been designated as globally 
systemically important banks (G-SIBs)?

A.3. The Federal Reserve issued the LCR rule consistent with 
its responsibility to promulgate, on a tailored basis, enhanced 
prudential standards for large, complex banking organizations. 
The LCR ensures that important aspects of the liquidity risk 
profile of large banking organizations are addressed in a 
prudent, consistent, and sophisticated manner. While the rule 
incorporates aspects of financial interconnectedness, the 
Federal Reserve believes that such prudent practices are 
important for the continued safety and soundness of large 
banking institutions individually, beyond the wider impact of 
their failure on the financial system as a whole. The G-SIB 
designation takes into account size, interconnectedness, 
substitutability, complexity, and crossjurisdictional 
activities and is applied only to the largest, most complex 
institutions. The Federal Reserve's regulations, including 
risk-based prudential regulations such as the LCR rule, 
recognize the need to apply higher standards to a wider set of 
large and internationally active banking organizations.

Q.4. In July of 2013, the Treasury Borrowing Advisory Committee 
reported that new regulations stemming from Basel III and Dodd-
Frank will likely result in constrained liquidity in the 
market. Even well-intentioned rules like the Supplementary 
Leverage Ratio (SLR) may constrain liquidity in markets as deep 
and understood as those for U.S. Treasury securities.
    What work have you done to take into account the views of 
the TBAC and other market participants?

A.4. The Federal Reserve has a strong interest in market 
liquidity across a range of key financial markets, as 
conditions are relevant to the conduct of monetary policy and 
financial stability. Federal Reserve staff monitor a variety of 
markets on an ongoing basis to keep abreast of current 
liquidity conditions and emerging trends. Board members meet 
regularly with market participants, including the Treasury 
Borrowing Advisory Committee (TBAC), who provide their views on 
market liquidity conditions and trends.
    We have been listening to the concerns expressed about 
reduced bond market liquidity, and we are monitoring a wide 
range of indicators of liquidity. Federal Reserve System staff 
worked with staff at the Department of the Treasury, the 
Securities and Exchange Commission, and the Commodities Futures 
Trading Commission to produce the report ``The U.S. Treasury 
Market on October 15, 2014'' that analyzed reductions in market 
depth in the Treasury securities and futures markets during a 
12-minute event window that day. The report also highlights 
important changes in market structure in recent years, 
including the increased role of high-speed electronic trading 
and the reduced share of traditional bank-dealer activity in 
the interdealer market. We are committed to further studying 
liquidity in the Treasury markets, including monitoring of 
trading and risk management practices of market participants, 
assessing available data, and strengthening monitoring efforts. 
Overall, many price-based and volume-based measures do not 
indicate a notable deterioration in liquidity, although average 
trade sizes have fallen.
    There are a number of reasons for why liquidity in markets 
may be changing. Currently there are fewer active trading 
participants and an increase in ``buy and hold'' investors. 
Broker-dealers may now be willing to buy and sell bonds at the 
request of their clients because of new regulatory 
requirements, as the question suggests, but also importantly 
because of changes to risk management practices that they have 
made on their own. Technological changes also may be affecting 
the provision of liquidity. Increased reporting requirements 
have reduced trading costs, but also perhaps trading sizes. In 
Treasury markets, greater high-speed electronic trading may be 
leading to fundamental changes in trading practices. Federal 
Reserve staff, along with other regulatory agencies, are 
studying the potential role of these various factors. An 
important consideration in any analysis is that some of the 
possible changes may be transitory, reflecting an adjustment to 
new regulations and technology, and a low interest rate 
environment. As a result, fully understanding the effects of 
these various factors on market liquidity may take time so that 
a sufficient amount of data and experience can be brought to 
bear on the question.

Q.5. What has been done specifically to address concerns 
regarding market liquidity in anticipation or as a result of 
new regulations?

A.5. As noted above, Federal Reserve staff have been working 
with other agencies to monitor liquidity conditions across a 
range of key financial markets and are talking to market 
participants. As post-crisis reforms go into effect and begin 
to have perceptible impacts on financial markets, Federal 
Reserve staff will continue these monitoring efforts, including 
exploring the effects of financial reforms on market liquidity 
and financial stability.

Q.6. Given the views and commentary of the TBAC and other 
market participants, which rules have you considered 
revisiting?

A.6. Given that many of the post-crisis reforms in question 
have either recently been implemented or are still in the 
process of being implemented, the Federal Reserve is not 
actively considering any specific changes at this time. 
Changing rules shortly after their implementation can create 
confusion and uncertainty in markets that may outweigh any 
benefits that the changes might produce. As market participants 
adjust to the reforms, the Federal Reserve will consider 
whether changes are necessary to improve the regulatory 
framework's ability to achieve the goal of enhancing financial 
stability without unduly constraining market liquidity.

Q.7. As the Federal Reserve contemplates an increase in 
interest rates, wouldn't it be prudent systemic risk management 
to foster liquidity rather than hampering it?

A.7. The Federal Reserve has a strong interest in fostering a 
level of robust market functioning while maintaining financial 
stability. Some degree of liquidity risk will always be present 
in securities markets. A key consideration for financial 
stability is whether the bearers of liquidity risk are 
sufficiently resilient to provide liquidity in most situations. 
The Federal Reserve is committed to designing and implementing 
policies consistent with the objectives of fostering efficient 
markets and financial stability.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM THOMAS J. CURRY

Q.1. Regulators clearly already have some flexibility on how 
they apply the same regulatory principles to different kinds of 
institutions. For example, the Liquidity Coverage Ratio (LCR) 
rule allows for ``modified'' applications to firms that are not 
complex enough to warrant full treatment. But even in the LCR, 
where regulators knew they had this flexibility, a line was 
drawn at $250 billion that seemed to take sheer size into 
account more than the actual business activities firms were 
engaged in. In fact, banking regulators appear to have a 
sensible methodology in place to determine which firms are 
``globally systemically important banks.''
    Testimony by the Federal Reserve for this hearing 
acknowledged that banking regulators begin with the same 
``unitary approach'' to supervising regional banks, regardless 
of their size. Why then, is this principle not followed when 
promulgating regulations?
    Wouldn't it be better to apply ``modified'' treatment of 
the LCR, or other rules, to banks of similar operational 
activities or risk profiles, even if their sizes differ 
substantially?
    Would you be open to setting a break-point for regulatory 
treatment where there seems to be a natural delineation in 
terms of the systemic risk arising from those firms? As an 
example, would you be open to reserving full treatment under 
the LCR for firms that have been designated as globally 
systemically important banks (G-SIBs)?

A.1. The OCC believes that the final LCR rule is calibrated 
appropriately so that it applies in a tailored fashion to the 
financial institutions with the most significant liquidity risk 
profiles. In September 2014, the agencies adopted a tailored 
LCR regime that increases in stringency based on the asset size 
of a financial institution. Under the LCR rule, large financial 
institutions--those with total consolidated assets of $250 
billion or more or total consolidated on-balance sheet foreign 
exposure of $10 billion or more, and their bank and savings 
association subsidiaries with total consolidated assets of $10 
billion or more--are subject to the most stringent liquidity 
buffer and daily reporting requirements. The Federal Reserve 
Board separately adopted a less stringent, modified LCR 
requirement for bank holding companies and savings and loan 
holding companies without significant insurance or commercial 
operations that, in each case, have $50 billion or more in 
total consolidated assets but are not internationally active. 
Those holding companies are permitted to hold a lower amount of 
a liquidity buffer and report the LCR monthly, rather than 
daily.
    As the preamble to the final rule explains, the agencies 
believe that the LCR rules' asset thresholds appropriately 
address the liquidity risks that covered financial institutions 
could pose to the funding markets and the overall economy 
taking into account their size, complexity, risk profile, and 
interconnectedness. The LCR rule's $250 billion total 
consolidated asset and $10 billion foreign exposure thresholds 
also are consistent with the thresholds that trigger the more 
stringent capital requirements for larger financial 
institutions under the agencies' capital rules. The tailored 
LCR asset thresholds appropriately address the liquidity risks 
that financial institutions could pose to the funding markets 
and the overall economy.
    In promulgating the final LCR rule, the agencies recognized 
that some financial institutions, including regional financial 
institutions, could face operational difficulties implementing 
the rule in the near term. To address these difficulties, the 
LCR final rule provides relief to non-G-SIB financial 
institutions by differentiating among the transition periods 
for the LCR daily calculation requirement. Accordingly, 
regional financial institutions subject to the LCR rule were 
granted a delay by the agencies and do not have to calculate 
the LCR on a daily basis until July 1, 2016.

Q.2. In July of 2013, the Treasury Borrowing Advisory Committee 
reported that new regulations stemming from Basel III and Dodd-
Frank will likely result in constrained liquidity inthe market. 
Even well-intentioned rules like the Supplementary Leverage 
Ratio (SLR) may constrain liquidity in markets as deep and 
understood as those for U.S. Treasury securities.
    What work have you done to take into account the views of 
the TBAC and other market participants?
    What has been done specifically to address concerns 
regarding market liquidity in anticipation or as a result of 
new regulations?
    Given the views and commentary of the TBAC and other market 
participants, which rules have you considered revisiting?
    As the Federal Reserve contemplates an increase in interest 
rates, wouldn't it be prudent systemic risk management to 
foster liquidity rather than hampering it?

A.2. The OCC generally receives comments on proposed 
regulations from a variety of market participants, including 
U.S. and foreign firms and trade associations representing 
them, public officials (including members of the U.S. Congress 
and State and local government officials), public interest 
groups, private individuals, and other interested parties. The 
OCC carefully reviews all comments we receive to identify areas 
where changes would be appropriate, and we often modify or 
adjust a proposed rule in response to commenters' concerns. For 
example, in the LCR final rule, based on the banking agencies' 
consideration of requests by several commenters to the proposed 
rule, the agencies expanded the pool of publicly traded common 
equity shares that may be included as high quality liquid 
assets (HQLA).
    Many post-crisis regulations were developed to provide 
increased stability to the banking system and strengthen 
banking system risk management throughout the economic cycle, 
taking into account interest rates and other economic factors. 
The final LCR rule, in particular, requires banks to hold 
sufficient HQLA to cover outflows over a 30-day stress period, 
which reduces systemic risk by ensuring adequate liquidity at 
banking organizations. A bank's stock of HQLA provides a means 
of meeting obligations during times of stress and is 
independent of the current interest rate environment. It helps 
to strengthen a bank's ability to meet its obligations during 
both rising and falling interest rate scenarios. Furthermore, 
the final LCR rule requirement will enable a bank to continue 
to meet its liquidity needs during times of stress, thereby 
helping to reduce the depth and duration of the systemic 
stress.
    The OCC prepared an assessment of the economic impact of 
the liquidity rule and considered potential effects related to 
market liquidity and economic growth. Such effects are 
difficult to quantify before a regulation takes effect, but our 
assessment describes them qualitatively. The OCC's ongoing 
supervision of national banks and Federal savings associations 
facilitates our ability to monitor market liquidity, and will 
enable us to evaluate the effects on market liquidity of the 
LCR rule and other rules over time.
    The OCC, along with the Federal Deposit Insurance 
Corporation and the Federal Reserve Board, are currently 
engaged in a review of their regulations, as required by the 
Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(EGRPRA). Specifically, the EGRPRA requires that, at least once 
every 10 years, the agencies seek public comment on rules that 
are outdated or otherwise unnecessary. The agencies 
specifically request public comment on ways to reduce 
unnecessary burden associated with their regulations. The 
agencies will solicit comment on all of our regulations issued 
in final form up to the date that we publish our last EGRPRA 
notice for public comment, including the LCR, SLR, and other 
Basel and Dodd-Frank regulations.
              Additional Material Supplied for the Record
 SYSTEMIC IMPORTANCE INDICATORS FOR 33 U.S. BANK HOLDING COMPANIES: AN 
         OVERVIEW OF RECENT DATA, SUBMITTED BY CHAIRMAN SHELBY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

   BCBS SYSTEMIC IMPORTANCE INDICATORS, SUBMITTED BY CHAIRMAN SHELBY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]