[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]





 
                       EXAMINING THE RELATIONSHIP

                     BETWEEN PRUDENTIAL REGULATION

                       AND MONETARY POLICY AT THE

                            FEDERAL RESERVE

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

                             JOINT HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                AND THE

                        SUBCOMMITTEE ON MONETARY
                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 12, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-40
                           
                           
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                 BLAINE LUETKEMEYER, Missouri, Chairman

KEITH J. ROTHFUS, Pennsylvania,      WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida              NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina     AL GREEN, Texas
ANDY BARR, Kentucky                  KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado               MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas                DENNY HECK, Washington
MIA LOVE, Utah                       GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
               Subcommittee on Monetary Policy and Trade

                     ANDY BARR, Kentucky, Chairman

ROGER WILLIAMS, Texas, Vice          GWEN MOORE, Wisconsin, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina     BRAD SHERMAN, California
MIA LOVE, Utah                       AL GREEN, Texas
FRENCH HILL, Arkansas                DENNY HECK, Washington
TOM EMMER, Minnesota                 DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 12, 2017...........................................     1
Appendix:
    September 12, 2017...........................................    43

                               WITNESSES
                      Tuesday, September 12, 2017

Calomiris, Charles W., Henry Kaufman Professor of Financial 
  Institutions, Columbia Business School, Columbia University....     5
Cecchetti, Stephen G., Rosen Family Chair in International 
  Finance, Brandeis International Business School, Brandeis 
  University.....................................................     7
Sivon, James C., Partner, Barnett Sivon & Natter P.C., on behalf 
  of the Financial Services Roundtable...........................     8

                                APPENDIX

Prepared statements:
    Calomiris, Charles W.........................................    44
    Cecchetti, Stephen G.........................................   117
    Sivon, James C...............................................   125


                       EXAMINING THE RELATIONSHIP



                     BETWEEN PRUDENTIAL REGULATION



                       AND MONETARY POLICY AT THE



                            FEDERAL RESERVE

                              ----------                              


                      Tuesday, September 12, 2017

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                       and Subcommittee on Monetary
                                  Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 2:02 p.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the Subcommittee on Monetary Policy and Trade] 
presiding.
    Members present: Representatives Luetkemeyer, Barr, 
Rothfus, Royce, Huizenga, Pittenger, Tipton, Hill, Emmer, 
Davidson, Kustoff, Tenney, Hollingsworth; Clay, Moore, Sherman, 
Scott, Foster, Kildee, and Heck.
    Ex officio present: Representative Hensarling.
    Chairman Barr. The subcommittees will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittees at any time.
    Today's hearing is entitled, ``Examining the Relationship 
Between Prudential Regulation and Monetary Policy at the 
Federal Reserve.''
    I now recognize myself for 2\1/2\ minutes to give an 
opening statement.
    Congress tasked the Federal Reserve System with 
responsibilities for both monetary policy and financial 
regulation. A fundamental question for today is whether these 
responsibilities complement or conflict with each other. The 
stakes are much more than academic. Monetary policy and 
financial regulation play foundational roles in the economic 
opportunities that can and should be available to every 
American household.
    To fully realize these opportunities, we need monetary 
policies and financial regulations to build from the ground up. 
Only in that way can real goods and services, which include 
labor, reliably find their most promising opportunities and do 
so in a timely and efficient manner.
    Today, we will examine how this most basic of economic 
services can be produced more consistently and distributed more 
broadly. We will examine whether monetary policy and financial 
regulation should be housed under the same roof as it is in our 
Federal Reserve System or if monetary policy and financial 
regulation could both work better with greater independence and 
accountability.
    If monetary policy and financial regulation do not work, 
then our economy cannot work. When monetary policies and 
financial regulations lack independence and accountability, 
even the most dutiful efforts from households and businesses 
cannot bridge the gap to our full potential. Viewed in this 
light, Americans are rightly disappointed with our economic 
opportunities. Despite 8 years of recovery, growth has been 
slow and weak, and our economy has yet to realize its full 
potential. The accumulated loss of economic opportunity has 
risen to almost $13 trillion. That is almost $100,000 per 
household on average and considerably larger than China's 
economy, the world's second largest.
    Putting an end to these losses is not enough. We must 
reestablish a more vibrant and resilient economy. The 3-percent 
growth we produced last quarter is a good start. To build on 
that promising economic report, however, we must make sure that 
our institutions for monetary policy and financial regulation 
are effectively organized.
    I look forward to testimony from this afternoon's 
distinguished witnesses on how we can do just that.
    The Chair now recognizes the ranking member of the 
Subcommittee on Monetary Policy and Trade, the gentlelady from 
Wisconsin, Gwen Moore, for 5 minutes for an opening statement.
    Ms. Moore. Thank so much, Mr. Chairman.
    Good morning to our witnesses. I have to warn you to 
prepare yourself for a discussion on the dual mandate of the 
Fed, despite the title of this hearing. The other side always 
wants to challenge the propriety of being concerned about 
employment, which sounds like a good idea to me. I don't know 
why we would turn employment into a bogeyman.
    But that being said, the central question that the 
Republicans will be asking here today is whether Congress 
should hamper the Federal Reserve's bank supervision authority. 
Now let me really quickly address the bad idea of creating a 
distinction between monetary policy and supervisory functions 
of the Fed as a raison d'etre for the GOP to cripple banking 
regulations through the appropriations process so that they can 
come in and just take money away from the Fed if they don't 
like what regulations come down the pike.
    First, the Fed sets a single interest rate, and then those 
rates are transmitted to dealer banks. So the Fed uses the 
institutions it regulates as agents in transmitting monetary 
policy.
    Secondly, the Fed acts as a lender of last resort. So it 
makes sense for it to oversee and have supervisory functions 
over those institutions that may one day need liquidity 
support, unless you want the Fed playing behind the eight ball 
in a crisis.
    Thirdly, the Fed in its function as a central bank sets 
leverage requirements and underwriting standards. These are 
both supervisory and useful and targeted tools to combat market 
bubbles.
    Fourth, the supervision provides valuable insight on the 
economic outlook, which plays a role in how the Fed sets the 
monetary policy.
    Finally, the Fed, of course, is the systemic regulator of 
our financial system. Following the 2008 financial crisis, 
Dodd-Frank corrected a glaring hole--no, let me just call it a 
crater--in making the Fed the regulatory agency of systemically 
significant firms.
    The U.S. economy has grown post-Dodd-Frank, and the 
financial system is far safer and fairer for consumers. So the 
``wrong choice'' Act was a little more than a poisonous tonic 
for a healthy system.
    And I would reserve the balance of my time, Mr. Chairman.
    Chairman Barr. The Chair now recognizes the chairman of the 
Subcommittee on Financial Institutions and Consumer Credit, the 
gentleman from Missouri, Blaine Luetkemeyer, for 2\1/2\ minutes 
for an opening statement.
    Chairman Luetkemeyer. Thank you, Mr. Chairman. I appreciate 
the opportunity to hold this hearing with you. And thank you 
for your leadership on these issues.
    The Financial Institutions Subcommittee has examined the 
growing role and influence of Federal financial regulators in 
the post-Dodd-Frank and Obama era. The Federal Reserve in 
particular seems to be taking its supervisory authority to 
unparalleled heights. Financial institutions operate in a world 
of ambiguous guidance and aggressive enforcement. There is a 
near unanimous feeling that document productions fall into a 
black hole with the Fed providing little to no meaningful 
feedback on supervisory issues.
    Financial institutions also recognize that Fed policies are 
inconsistent. Several weeks ago, I had a conversation with two 
financial institutions that offered a nearly identical product. 
One Fed district expressed interest in seeing the product 
offered more widely. Another said the product was a danger to 
consumers and should be shut down. I have also shared the story 
of small town and mid-Missouri that I represent, which has been 
in Fed purgatory for 5 years. The Fed staff decided it didn't 
like certain products, products to which the FDIC and State of 
Missouri did not object and in fact suggested be made more 
readily available. This inconsistent approach to regulation has 
a negative effect on the economy at the local, national, and 
global levels. Federal Reserve officials have said their work 
as prudential regulators informs their monetary policy 
decisions, helping them to meet the charge to ensure global 
financial stability. But the reality is that the Federal 
Reserve's regulatory regime does not necessarily translate to a 
more stable economy. So we ask ourselves whether or not it is 
appropriate for the Federal Reserve to be both a prudential 
regulator and the sole dictator of monetary policy.
    As I said in the past, it is time to take the power out of 
Washington and demand a reasonable financial regulatory 
structure. It is time to ensure that monetary policy decisions 
that impact the daily lives of our constituents are made in a 
sound, unbiased manner. We have a distinguished panel with us 
today, and I look forward to the testimony.
    Thank you, Mr. Chairman.
    And I yield back the balance of my time.
    Chairman Barr. The gentleman yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 2 minutes for an opening statement.
    Mr. Sherman. When we are talking about the structure of the 
Fed, we see a dramatically antidemocratic institution 
exercising governmental power. First, the New York Bank gets a 
seat on the Open Market Committee, whereas the California Bank, 
with twice as many people, doesn't. Second, substantial Fed 
powers in the hands of those who are put on the Board in an 
election by banks. This is the only institution of governmental 
power in our country where we have the one--not ``one person, 
one vote'' but ``$1 billion in banking, one vote.''
    Second, our system does not provide capital to small 
businesses, other than SBA. Small businesses are told: Use your 
credit cards to finance business expansion or get some sort of 
shadow bank 36 percent loan. This is where the jobs, 
technology, and innovation is going to come from, but it won't 
come from small business if we tell people, tell banks they 
can't make a prime-plus-5 loan. That is in effect what we have 
done. Back in the old days, you used to be able to go to a 
business that had a 1 in 20 chance, 1 in 40 chance of failure, 
and still make a loan and charge a few extra percentage points. 
Now we have crushed that out of the banking system to the huge 
disadvantages of small business.
    Speaking of huge, too-big-to-fail is too-big-to-exist. And 
as the Wells Fargo example shows us, it is too-big-to-manage.
    Finally, when it comes to the Fed, we need lower interest 
rates to create the labor shortage necessary to create major 
increases in wages in our country. And we have low inflation, 
so we can do that instead. In this committee room, the Fed is 
often told to raise interest rates, and that is antithetical to 
creating the labor shortage that is necessary to help most 
Americans. And, of course, we need more, not less, quantitative 
easing.
    Finally, the Fed was able over to turn over $100 billion of 
profit to the United States Government. We usually have the 
debt clock in back of our witnesses, and now we have been 
pressuring the Fed to stop giving us the $100 billion by 
reducing its balance sheet.
    I yield back.
    Chairman Barr. The gentleman's time has expired.
    We will now turn to our witnesses.
    Dr. Charles Calomiris is the Henry Kaufman professor of 
financial institutions at the Columbia Business School, 
director of the Business School's Program for Financial Studies 
and its Initiative on Finance and Growth in Emerging Markets, 
and a professor at Columbia's School of International and 
Public Affairs. His research spans the areas of banking, 
corporate finance, financial history, and monetary economics. 
He is a distinguished visiting fellow at the Hoover 
Institution, a fellow at the Manhattan Institute, a member of 
the Shadow Open Market Committee and the Financial Economists 
Roundtable, and a research associate of the National Bureau of 
Economic Research. He received a BA in economics from Yale 
University, magna cum laude, and a Ph.D. in economics from 
Stanford University. Professor Calomiris holds an honorary 
doctorate from the University of Basel.
    Dr. Steven G. Cecchetti is the Rosen Family Chair in 
International Finance at the Brandeis International Business 
School, a research associate of the National Bureau of Economic 
Research, and a research fellow of the Center for Economic 
Policy Research. His research interests include monetary 
policy, the economics of financial regulation, macroeconomic 
theory, and price and inflation measurement. From 2008 to 2013, 
Professor Cecchetti served as economic adviser and head of the 
Monetary and Economic Department at the Bank for International 
Settlements. During his time at the Bank for International 
Settlements, Dr. Cecchetti participated in numerous post-
crisis, global regulatory reform initiatives. Professor 
Cecchetti holds an undergraduate degree from the Massachusetts 
Institute of Technology, a doctorate from the University of 
California, Berkeley, and an honorary doctorate in economics 
from the University of Basel.
    Mr. James Sivon is a partner in the Washington, D.C., law 
firm of Barnett, Sivon & Natter, and is testifying today on 
behalf of the Financial Services Roundtable as a specialist on 
financial services law and regulations. Mr. Sivon is a member 
of the Executive Council of the Federal Bar Association's 
Banking Law Committee and the Executive Committee of the 
Exchequer Club. He is a former senior vice president and 
general counsel for the Association of Bank Holding Companies, 
and he served as the staff director for the Republican Members 
of the U.S. House Committee on Banking, Finance, and Urban 
Affairs. He received his undergraduate degree from Denison 
University, and his law degree from Georgetown University Law 
Center.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Dr. Calomiris, you are now recognized for 5 minutes.
    Mr. Calomiris. Thank you, Mr. Chairman.

 STATEMENT OF CHARLES W. CALOMIRIS, HENRY KAUFMAN PROFESSOR OF 
  FINANCIAL INSTITUTIONS, COLUMBIA BUSINESS SCHOOL, COLUMBIA 
                           UNIVERSITY

    Chairman Barr, Chairman Luetkemeyer, Ranking Members Moore 
and Clay, it is a pleasure to be with you today, and I will 
deliver a summary of my written testimony, which I have 
submitted.
    The Federal Reserve is now more politicized than it has 
been at any time in its history, and, consequently, it is also 
less independent in its actions than almost any time in its 
history.
    As the Fed accumulates more and bigger political lightning 
rods of discretionary power, the Fed finds itself increasingly 
politicized and less independent, both in the realm of monetary 
policy and in regulatory and supervisory reactions. With 
discretionary power inevitably comes attacks by special 
interests seeking to manipulate those powers. The Fed finds 
itself making political deals with special interests and their 
representatives largely as a result of its burgeoning 
discretion.
    Also, Fed leaders routinely offer distorted and self-
interested opinions about reform proposals while pretending 
that their opinions should be viewed as unbiased professional 
analysis. Fed Chair Janet Yellen's August 2017 Jackson Hole 
speech was a full-throated defense of the status quo of 
financial regulation. But that speech ignored scores of studies 
that contradict the narrative that she offered. Many of the 
studies she ignored were written by economists working at the 
Federal Reserve Board, the various Federal Reserve banks, the 
OFR, as well as top academic researchers.
    Don't be fooled by the charade: Financial regulatory policy 
is unbalanced, unlikely to prove effective in achieving its 
stated objectives, and fails to meet basic standards of due 
process for a democracy operating under the rule of law.
    Reforms can fix those problems. And I want to emphasize I 
am here to talk about reform, not just deregulation.
    The ideal set of reforms would include clear rules to guide 
both monetary policy and regulatory policy, would avoid 
undesirable conflicts of interest, especially by placing day-
to-day regulatory and supervisory authority in an agency other 
than the Fed, and would establish administrative and budgetary 
discipline over the process of regulation supervision.
    A less drastic set of reforms that wouldn't remove the Fed 
from those activities could still accomplish a great deal of 
improvement. Specifically, if it were possible to establish 
clear rules governing both monetary and regulatory policy and 
impose administrative and budgetary discipline on the process 
of regulation, then, even if regulatory and supervisory powers 
remained vested in the Fed, the problems associated with Fed 
conflicts and politicization would be substantially reduced.
    Requiring Congress to weigh the social costs and benefits 
that arise in regulation likely would limit special interest 
manipulation of regulatory discretion after regulations are 
passed. I would refer you to a recent paper by two political 
scientists, Gordon and Rosenthal, for a discussion of how the 
delegation to regulatory discretion undermined the intended 
risk-limiting provisions of Dodd-Frank with respect to the 
mortgage market.
    Most importantly, to improve and depoliticize regulation, 
Congress must establish clear rules that limit the use of 
unaccountable discretion, must establish budgetary authority 
for regulatory implementation, and must limit the abusive 
reliance on guidance in regulatory actions by requiring a much 
greater reliance on formal rulemaking consistent with the 
Administrative Procedures Act. If this were done alongside the 
establishment of a flexible monetary policy rule, that would go 
a long way toward restoring balance in the regulatory process, 
depoliticizing the Fed, and ensuring accountability of 
monitoring regulatory policy. These changes would have major 
positive consequences for the economy.
    Only by clarifying the goals of the Fed and requiring it to 
work within clear rules can regulatory and monetary policy be 
improved to make those policies focus on long-run objectives, 
avoid short-run politicization, ensure appropriate balance and 
due process in regulation supervision, and make the Fed 
accountable to the will of the people. Thank you.
    [The prepared statement of Dr. Calomiris can be found on 
page 44 of the appendix.]
    Chairman Barr. Thank you.
    Dr. Cecchetti, you are now recognized for 5 minutes.

   STATEMENT OF STEPHEN G. CECCHETTI, ROSEN FAMILY CHAIR IN 
INTERNATIONAL FINANCE, BRANDEIS INTERNATIONAL BUSINESS SCHOOL, 
                      BRANDEIS UNIVERSITY

    Mr. Cecchetti. Thank you, Chairman Barr, Ranking Member 
Moore, Ranking Member Clay, and members of the subcommittees. 
Thank you for inviting me to present my views on the 
relationship between prudential supervision and monetary 
policy.
    The U.S. financial system is far more resilient today than 
it was a decade ago. And the likelihood of another systemwide 
crisis is now lower. As a consequence of post-crisis regulatory 
reforms, banks have more loss-absorbing equity capital than 
they had in 2007, and they also face liquidity requirements. 
And the biggest among them must meet rigorous stress tests. 
Importantly, this new environment ensures that all large 
complex financial organizations are much less likely to become 
a burden on the taxpayer.
    It is important that we build on this progress. Regulations 
must remain sufficiently strict and supervisors must interpret 
and imply the rules rigorously.
    My comments today focus on governance. I will make two 
points. First, prudential supervision needs to be an 
independent function sheltered from day-to-day political 
influence with control of its own budget. And, second, the 
central bank should be a lead supervisor, supervising 
systemically important institutions.
    Starting with independence, we all agree that, because of 
their ability to take a long view, independent central banks 
deliver lower inflation without sacrificing higher employment 
and higher growth. What is true for monetary policy is true for 
supervisors. Supervisors can maintain a long-term view if they 
are sheltered from political influence, including having 
control over their own budget. This form of independence gives 
them the ability to credibly enforce rigorous regulatory 
standards, thereby promoting financial resilience and reducing 
public costs.
    It is equally important that the central bank be a leading 
supervisor. Supervision is integral to the central bank's core 
functions as the lender of last resort, the monetary authority 
and the organization responsible for the health and stability 
of the overall financial system. Let me explain why.
    To protect the integrity of the system and the public 
finances, the lender of last resort needs to be able to 
determine a borrowing institution's solvency and the value of 
the collateral being posted to back a loan. That is, a lender 
needs to know whether the borrower will be able to repay. This 
requires confidential financial assessments, knowledge of the 
firm's business practices, and the skills to value illiquid 
assets--all things that supervisors generally have.
    Importantly, this information has to be available to high-
ranking central bank officials on very short notice. In some 
cases, decisions have to be made in a matter of minutes. So the 
quality of data must be without question, and it cannot be in 
the hands of people who may or may not choose to share it.
    Turning to the relationship between monetary policy and 
prudential supervision, to quote from Paul Volcker's testimony 
before the Financial Services Committee in May of 2010, these 
two functions are inextricably intertwined. As a practical 
matter, it is impossible to say where one stops and the other 
one starts. This is true because the people engaged in these 
functions operate as a team, sharing knowledge and expertise 
that each requires from the other. That is, monetary 
policymakers require supervisory information to evaluate the 
state of the financial system and supervisors use monetary 
policymakers' understanding of economic prospects to evaluate 
the safety and soundness of individual institutions.
    Finally, there is the fact that the central bank is 
responsible for systemic stability. The Federal Reserve does 
not have an explicit financial stability mandate, but without a 
stable financial system, the Fed would surely fail to achieve 
their statutory objectives of maximum employment, stable 
prices, and moderate long-term interest rates.
    Identifying threats to the financial system requires a 
specialized set of skills as well as day-to-day access, all 
things that the Federal Reserve has information on.
    In closing, let me emphasize my firm belief that when 
supervisors are independent of political interference, complete 
with budgetary autonomy, the financial system is more stable 
and taxpayer costs are lower. Furthermore, a supervisory 
function is essential for effective and efficient execution of 
core central bank functions. As the lender of the last resort, 
the monetary policy authority, and the guardian of health and 
stability of the overall financial system, it is essential that 
the Federal Reserve remain a leading supervisor, especially for 
systemically important institutions. The American public would 
be ill-served if that were to change.
    Thank you. And I would be pleased to respond to questions.
    [The prepared statement of Dr. Cecchetti can be found on 
page 117 of the appendix.]
    Chairman Barr. Thank you.
    And Mr. Sivon, you are recognized for 5 minutes.

 STATEMENT OF JAMES C. SIVON, PARTNER, BARNETT SIVON & NATTER 
      P.C., ON BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Sivon. Chairman Barr, Ranking Member Moore, Chairman 
Luetkemeyer, Ranking Member Clay, and members of the 
subcommittees, my name is Jim Sivon, and I am appearing on 
behalf of the Financial Services Roundtable (FSR). Thank you 
for inviting FSR to participate in the hearing.
    A decade ago, gaps in regulations contributed to a 
financial crisis. Subsequent actions by Congress and regulators 
in the industry itself have restored the stability of the 
financial system. Since the crisis, large bank holding 
companies have increased their capital levels by $700 billion 
and increased their aggregate holdings of highly liquid assets 
by more than 50 percent.
    Yet some of the regulations put in place since the crisis 
are holding back a more robust recovery. Data on loans to 
mortgage borrowers and small businesses illustrates this 
problem. Also, an analysis of post-crisis lending conducted by 
the Federal Reserve Board has found that lending growth by the 
more heavily regulated large banks lags behind lending growth 
of small banks.
    FSR believes that the goal of prudential regulation should 
be to promote both financial stability and economic growth. FSR 
appreciates the steps the Board has taken to tailor some 
regulations. However, more could be done.
    I will briefly describe some of FSR's recommendations for 
tailoring existing regulations, starting with the capital 
planning and stress testing rules.
    The capital planning and stress testing rules have helped 
FSR members build stronger capital positions and improve risk-
management practices. Recent stress test results show that 
large bank holding companies can withstand an economic downturn 
even more severe than the 2008 financial crisis. However, the 
rules could be adjusted without impairing their fundamental 
purpose. FSR supports more disclosure regarding the models used 
by the Board in conducting stress tests. Disparities in loss 
projections between the models used by FSR members and those 
used by the Board create a level of uncertainty that impacts 
lending practices.
    The stress test results also indicate that we have reached 
a point where the capital and liquidity rules could be adjusted 
to promote more economic growth without jeopardizing financial 
stability. For example, FSR recommends that the supplementary 
leverage ratio exclude risk-free assets from the calculation of 
a company's total assets and that the liquidity rule be revised 
to give more favorable treatment to certain securities and the 
runoff assumptions in that rule be aligned with the historical 
experience.
    Resolution planning has helped FSR members rationalize 
operations and contracts, yet this requirement, combined with 
separate recovery planning requirements, is an area where 
greater coordination among the agencies is needed. As a result 
of the Dodd-Frank Act, the Board gained regulatory authority 
over a number of insurance companies. While the Board has 
indicated a willingness to tailor regulations for those 
companies, FSR believes the Board could be more attentive to 
the differences between the business of insurance and the 
business of banking.
    FSR recommends that the Board and other Federal regulators 
revisit the Volcker Rule. For example, FSR recommends that the 
Rule exempt institutions that are not complex or interconnected 
and that the prohibitions on trading and investments be 
narrowed.
    FSR also has three general recommendations for better 
aligning financial regulation with economic growth. First, FSR 
recommends that prudential standards be based upon risk 
assessments, not arbitrary asset thresholds. Second, FSR 
encourages Congress to promote greater coordination among 
Federal financial regulators. Enhancing coordination would not 
require restructuring of the agencies. Greater coordination 
could be achieved through the enactment of a set of guiding 
principles, such as those proposed by the Executive Order on 
core principles for regulating the U.S. financial system.
    Finally, FSR recommends that Congress evaluate the impact 
of the current expected credit loss, or CECL, accounting 
standard, which we believe will require an adjustment on how 
bank capital standards are calculated.
    Thank you again for the opportunity to address the Board's 
role as a prudential regulator, and I would be pleased to 
answer any questions.
    [The prepared statement of Mr. Sivon can be found on page 
125 of the appendix.]
    Chairman Barr. The gentleman yields back.
    And the Chair now recognizes himself for 5 minutes for 
questions.
    Dr. Calomiris, in Dr. Cecchetti's testimony, he argued that 
monetary policy and prudential supervision are complementary, 
and I believe he quoted former Chairman Volcker in making the 
argument that the two are inextricably intertwined. And I hear 
this frequently when I have conversations with Fed officials 
who make the argument that their supervisory activities inform 
their monetary policy decisionmaking.
    There are dissenting views on this argument. Vincent 
Reinhart, the former Secretary of the Fed's Monetary Policy 
Committee, observed that if the FOMC made materially better 
decisions because of the Fed's role and supervision, there 
should be instances of informed discussion of the linkages. 
Anyone making the case for beneficial spillovers should be 
asked to produce numerous relevant excerpts from that 
historical resource. I don't think they will be able to do so.
    Lars Svenson, who served on the faculty of Princeton and as 
a Deputy Governor for the Central Bank of Sweden, presented 
research to the Federal Reserve Bank of Boston in 2015, arguing 
that, ``monetary policy cannot achieve financial stability.''
    And even former Fed Chairman Ben Bernanke expressed concern 
about expanding the Fed's dual mandate to also include 
responsibility for ``reducing risks to financial stability.''
    So my question to you, Dr. Calomiris, is, could we enjoy 
better monetary policy and financial regulation if there was 
more independence and accountability?
    Mr. Calomiris. Absolutely. And I think there is a confusion 
between--that often comes up among three different activities. 
One of them is called regulation. The other is called 
supervision. And the third one is called examination. Now, in 
the Treasury White Paper of 2008, where they proposed removing 
the Fed from day-to-day control over regulation, supervision, 
they specifically pointed out that that would not mean that the 
Fed would be removed from constant contact with financial 
institutions and from the participation examination process 
which is necessary to its role as lender of last resort. And 
that is what Paul Volcker was referring to. And when Paul 
Volcker was testifying about those matters, he also pointed 
out, very much consistent with my testimony, that the increased 
regulatory functions that were envisioned in Dodd-Frank for the 
Fed were going to be a politicization problem.
    Chairman Barr. Can I follow up right there?
    Mr. Calomiris. It is a very important distinction.
    Chairman Barr. In the argument about politicization, can 
you give a concrete example or two of how the combination of 
Fed regulation and monetary policy politicizes each of them?
    Mr. Calomiris. Yes. Well, the most common pattern over the 
past few decades has been that Fed officials are extremely 
concerned about insulating their independence in monetary 
policy, and they often basically use regulatory policy as a 
sacrificial lamb. So they make political deals on the 
regulatory policy side in order to preserve the monetary policy 
autonomy. Now they wouldn't need to do that if monetary policy 
actually followed rules, because then that would ensure, that 
would defend them against those attacks.
    So, by combining the regulatory policy and the monetary 
policy, basically, the Fed has often been put into a position--
I am not attacking individual Fed policymakers--where they make 
concessions to special interests on regulatory policy in order 
to try to defend their discretion in monetary policy.
    I can give you a few recent examples. I think the Fed's 
complicity in Operation Choke Point was a disgrace. That was 
true of the other regulators too, by the way. But this is 
something where basically if we can have our regulatory 
officials engaging in Operation Choke Point, there is pretty 
much nothing that we can't have them engaged in. We are not 
protected in any way for living in a country, a popular 
sovereignty country under rule of law. And that was clearly 
under political pressure and, again, deals that are being made 
with certain constituencies.
    And I think that there are other examples. There have been 
rumors at the highest levels of the Federal Reserve, people I 
know, that actually Members of Congress have been very involved 
in trying to get appointments to occur in certain Federal 
Reserve presidencies. I can go on. There is a long list.
    Chairman Barr. In the remaining time, do you think that 
funding the Fed's regulatory and supervisory responsibilities 
through appropriations would strengthen monetary policy 
independence?
    Mr. Calomiris. Absolutely. And it would because it would, 
again, help defend the Fed policymakers as all rules do against 
this kind of special interest interventions.
    I would also--
    Chairman Barr. My time has expired on that so I am going to 
have to cut you off there. Thank you for the testimony.
    The Chair now recognizes the distinguished ranking member, 
Congresswoman Gwen Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    As I expected, this is a tremendous panel, a tremendous 
knowledge base, and I appreciate the witnesses for being here.
    I am just feeling a little bit puzzled and confused because 
this hearing is talking about the supervisory responsibilities 
of the Fed and setting monetary policy and discussions about 
the independence of the Fed. And it is not clear to me how 
subjecting them to the appropriations process makes them more 
independent. I have meetings in my office all the time with 
bankers who--people who want us to do this or to do that. And 
if you can get the ear of whomever is in the Majority at any 
given time, and the appropriators, then you can wield your 
weight. So it is not really clear to me how subjecting them to 
the appropriations process makes them independent. It is kind 
of oxymoronic.
    Wouldn't you agree with that, Dr. Cecchetti?
    Mr. Cecchetti. Yes, I would. I think that--
    Ms. Moore. And please give us the examples you weren't able 
to give us during your short testimony about how this works.
    Mr. Cecchetti. Yes, there is a set of very straightforward 
examples. First of all, let my start by saying that one of the 
Basel Committee's core principles for effective supervision is 
independence of the supervisors, including independent 
budgetary authority. I agree with you that it is very difficult 
to understand how giving politicians the control of budget is a 
way of improving people's independence.
    I do agree, however, that in a Congressional, in a 
democratic process with the Congress, that it is your role to 
give objectives to independent authorities and then to hold 
them accountable for meeting those objectives.
    The examples that I would point to would be primarily--
there are two examples that I would point to domestically and 
several internationally. So the Federal Home Loan Banks were 
subjected to the appropriations process, and we ended up with 
the savings and loan crisis. OFHEO was subjected to the 
appropriations process, and we ended up with Fannie Mae and 
Freddie Mac on the government's--as being in conservatorship.
    If I look internationally, I can point to the cases in 
Korea, Indonesia where the crises in the late 1990s occurred, 
and those were crises that occurred as a consequence of 
supervision being political. And, finally, I would say--
    Ms. Moore. How about Zimbabwe?
    Mr. Cecchetti. Zimbabwe has even bigger problems. They 
don't have independent monetary policy either. So I think that 
these--in most of these other examples, we at least independent 
monetary--
    Ms. Moore. Let me ask you this follow-up question. Unless I 
am hearing wrong, it almost sounds to me that people are 
challenging the role of central banks globally. If we are 
suggesting a model where we create some new ghost agency that 
does the supervision versus our central banks, what are we 
proposing to model for the rest of the world, and how would 
this work? Central banks typically have the credibility because 
they are independent--can you just weigh in on that?
    Mr. Cecchetti. Yes, I think that is an extremely good 
point. And I think that--one of the things that I would say is 
that the lender--I emphasized in my comments and you did as 
well in your introduction about the lender-of-last-resort 
function. I think the lender-of-last-resort function relies 
extremely heavily on supervisory information, on the 
information about the safety and soundness of an institution 
and about the quality of the assets that it has on its balance 
sheet. If someone else is doing that, then what that means is 
that you are going to have the lending being done outside the 
central banks. So, as you point out, you would need to create a 
shadow central bank somehow. And I can't imagine having a 
second central bank.
    Ms. Moore. One last question in my remaining seconds here 
that is a source of confusion for me. If we are pushing for 
independence of the bank--I keep hearing this notion that we 
need to have some sort of monetary rule. We had Dr. Taylor 
here, for example. How does having some kind of rule square 
with a bank being independent?
    Mr. Cecchetti. I think we are out of time, but the answer 
is it doesn't really square with that. And what we need is an 
objective that is set by you, the Congress, and then 
accountability for meeting that objective.
    Ms. Moore. Thank you for your indulgence and thank you.
    Chairman Barr. The gentlelady's time has expired.
    The Chair now recognizes the chairman of the Financial 
Institutions and Consumer Credit Subcommittee, Mr. Luetkemeyer, 
for 5 minutes.
    Chairman Luetkemeyer. Thank you, Mr. Chairman.
    Before I begin my questioning, I would like to recognize 
that we are missing a few of our colleagues today. Some, like 
Mr. Posey and Mr. Ross, are home in Florida dealing with the 
aftermath of Hurricane Irma. Our thoughts are with them and all 
those impacted by not only Irma but Hurricane Harvey as well.
    Our prayers are also with our friend and colleague, Barry 
Loudermilk, who was injured in a car accident early this 
morning. Both Congressman Loudermilk and his wife were 
transported to the hospital with non-life-threatening injuries 
and have been released. We will keep both of them in our 
thoughts, and pray for a speedy recovery for both Barry and his 
wife, Desiree.
    As we can see, life goes on, but life is affected, and it 
is very, very important. As important as this hearing is, keep 
it in perspective.
    Thank you, gentlemen, for being here today. It is certainly 
an honor to be able to discuss with you some concerns and some 
information we would like to get from you with regards to Fed 
regulation and monetary policy.
    Mr. Sivon, last month, I sent a letter to Chair Yellen 
expressing concern over the FBO rule and the impact it would 
have, not only on foreign banks in the United States but also 
on U.S. banks operating internationally. We are on the cusp of 
seeing capital unnecessarily ring-fenced across the globe. Does 
that really contribute to global financial security? As a 
follow-up, is there any argument to be made that the Fed's 
actions have dampened the global economy?
    Mr. Sivon. Thank you, Congressman.
    In my testimony, I expressed that one of the major concerns 
of the Roundtable is a lack of coordination and cooperation 
here domestically among the various Federal financial 
regulatory agencies. That applies globally as well. And so the 
issue that you have raised is illustrative of the fact that 
there is a lack of sufficient coordination among international 
regulators that is leading to some consequences, and one of 
those consequences is ring-fencing, where institutions are 
asked to trap certain assets and capital in certain locations 
and then do not have the ability and flexibility to move those 
as business needs.
    Chairman Luetkemeyer. And in your judgement, I assume you 
believe that does affect the global economy?
    Mr. Sivon. Yes, I do, and I would suggest that there is a 
need for some kind of overarching principles that international 
regulators, including the Fed, could agree upon to avoid that 
type of consequence.
    Chairman Luetkemeyer. You talked about the coordination not 
only globally, but you also mentioned within our country here. 
And one of the things--I point to the Treasury report recently 
put out back in, I think it was June. And in the back of the 
report here, it has a lot of recommendations, and one of them 
deals with trying to stop the overlap of regulations, to find 
more coordination between all the different regulatory 
agencies. And I guess in here, it talks--it lists the agency 
that it should be applicable to, and it has gotten the Fed in a 
lot of these situations. Have you seen the report? And do you 
believe that this is a pretty good synopsis of what needs to 
transpire to improve our financial structure?
    Mr. Sivon. Yes, sir. We have looked at that report. FSR 
submitted its own set of recommendations to Treasury as they 
prepared that report. And many of our recommendations in fact 
are reflected in the final report. We do think there is a need 
for greater coordination among the regulators. And one of the 
specific suggestions that we have in the testimony today is 
that Congress could adopt some overarching principles to guide 
the regulators in their separate missions. The core principles 
that were put out in the Executive Order on financial stability 
would provide some guidance for them.
    Chairman Luetkemeyer. Our good friend, the ranking member, 
seems to worry about the independence of the regulators. I can 
tell you, being a former regulator, there is no reason for them 
not to have some oversight as well. Everybody needs to have 
oversight. And regulators need to have oversight as well. I 
think it is important.
    You also made a comment in your testimony with regards to 
systemically important financial institutions and indicated 
that you preferred a risk-based assessment model versus a 
threshold. Could you elaborate just for a few seconds?
    Mr. Sivon. Yes, I would be happy to. In fact, FSR 
specifically supports the legislation that you introduced that 
would provide for the designation of systemically important 
institutions through some type of risk methodology rather than 
a simple asset threshold. We think that is a more constructive 
and tailored approach than what exists today.
    Chairman Luetkemeyer. Very quickly, you also talked about 
CECL. Could you elaborate on it just a little bit and explain 
what it is and your thoughts?
    Mr. Sivon. CECL was a fundamental accounting change that 
changes the way banks have set up reserves for the past 40 
years. Previously, banks have, and today they still set up 
reserves based on the probability of a loss, and then when the 
loss occurs, they will book the reserve.
    Chairman Luetkemeyer. How does that affect the monetary 
policy?
    Mr. Sivon. Let me just finish with what CECL does. What 
CECL does is, it says: You have to put up your reserve at the 
beginning of the loan. You have to estimate where the economy 
is going, forecast then the amount to put into your reserve.
    Our concern is that CECL doesn't hit monetary policy as 
much as it hits capital requirements. We think that what this 
does is it creates the loss reserve to be the equivalent of 
capital, and so the loss reserve, in our opinion, should get 
tier 1 capital treatment under the capital rules.
    Chairman Luetkemeyer. So you think one of the tools for 
being a banker today is having a crystal ball?
    Mr. Sivon. It is very difficult to predict the future.
    Chairman Luetkemeyer. That would seem to be the approach.
    Thank you very much. My time has expired.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the ranking member of the 
Financial Institutions Subcommittee, Mr. Clay from Missouri.
    Mr. Clay. Thank you, Mr. Chairman.
    Dr. Cecchetti, as you know, the Dodd-Frank Act, among other 
things, significantly enhanced the macroprudential 
responsibilities of the Federal Reserve. In testimony by former 
Vice Chairman Donald Kohn before this committee back in 2009, 
Vice Chairman Kohn wrote, ``The Federal Reserve's monetary 
policy objectives are closely aligned with those of minimizing 
systemic risk. To the extent that the proposed new regulatory 
framework would contribute to greater financial stability, it 
should improve the ability of monetary policy to achieve 
maximum employment and stable prices.''
    Do you agree with Dr. Kohn's assessment?
    Mr. Cecchetti. I do agree with his assessment. I think that 
this is true for several reasons. The first one is that 
financial stability is necessarily the basis for stability in 
the entire economic system. And so, if it is the case that the 
monetary policy is to achieve its mandated objectives of stable 
prices and maximum sustainable employment, then financial 
stability is a foundation for that.
    The second thing that I would say is that, if it is the 
case that the financial system becomes unstable and monetary 
policy needs to react to that financial instability, it takes 
away from its ability to do its primary job. And I think what 
that means is that there is really another set of tools that we 
need. And this is why it is that many people have focused on 
trying to generate tools that would ensure financial stability 
and allow interest rates especially to be the instrument that 
is used for price stability and maximum sustainable growth.
    Mr. Clay. And if you had the Federal Reserve and its 
leadership in one of your courses at the university, what grade 
would you give them for the past 4 or 5 years? How have they 
performed?
    Mr. Cecchetti. I think they have performed extremely well. 
You have to take into account that they did it in real time. 
Maybe, in hindsight, we could give them an A-minus, but if we 
had to grade them along the way, we would give them an A.
    Mr. Clay. Mr. Chairman, that is a pretty good grade from 
what I know about school and educating people.
    Let me ask all of the witnesses: In addition to 
strengthening the capital positions of the Nation's banks, can 
each of you comment on how the collection of a standardized 
data set from the largest financial institutions in the U.S. is 
likely to help inform the Fed's various policymaking roles, 
including its supervisory and monetary policy function?
    Starting with you, Dr. Calomiris, 30 seconds.
    Mr. Calomiris. Yes. That's an interesting question. I have 
actually been pointing to some deficiencies in the data that is 
being collected and used that I think should be remedied. The 
most obvious one is, for example, Fed stress tests are 
currently based on Y-14 and Y-9 data, which are pretty 
irrelevant for stress test purposes. They should be collecting 
information based on the managerial accounting of the bank, 
which would allow them to really understand the bank as a 
business. They don't do that.
    Mr. Clay. Dr. Cecchetti?
    Mr. Cecchetti. I think the Fed is the guardian of financial 
stability and needs to be able to measure aggregate systemic 
risk, and to judge how it is distributed in the financial 
system. And this requires, in my view, access to 
intermediaries' exposure information, which is more than we are 
getting right now. All we have is accounting of assets and 
liabilities, primarily in some derivatives. The degree to which 
they are going to be able to transmit shocks, so we need to be 
able to create network models of how banks are related to each 
other. This is extremely detailed, and I think it would be very 
valuable.
    Mr. Clay. Thank you.
    Mr. Sivon, how would data collection--
    Mr. Sivon. As Professor Calomiris indicates, the Fed stress 
tests today are based on FRY-14 data that is collected. And we 
have some concerns about the manner in which--while the Fed 
is--and the FSR have had a nice dialogue on the manner in which 
it is collected, we do have some concerns that the monthly 
reports are not really needed and that institutions need some 
additional time to implement changes in those reporting 
requirements.
    We would also like to see the release of some of that data 
on aggregated basis.
    Mr. Clay. Thank you.
    My time is up. I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from Pennsylvania, Mr. 
Rothfus.
    Mr. Rothfus. Thank you.
    Mr. Sivon, in your testimony, you brought up some of the 
challenges associated with the supplementary leverage ratio, or 
SLR, and how it is calculated. I share your concerns about this 
problem. I have introduced legislation, H.R. 2121, the Pension, 
Endowment, and Mutual Fund Access to Banking Act, to address 
this issue for custody banks. Many members of this committee 
are cosponsors of this bill. In your testimony, you wrote, 
``Banking regulators should revise the calculation of the 
supplementary leverage ratio to exclude risk-free assets from 
the calculation of a company's total assets for purposes of the 
ratio. This would include reserves held at the Federal Reserve, 
cash, and Treasury securities.''
    As you may know, the Treasury Department's recent report on 
banks and credit unions also endorses this idea. Governor 
Powell and Chair Yellen have also expressed openness to this 
concept. Why do you believe that excluding risk-free assets, 
like cash held at central banks, from SRL makes sense?
    Mr. Sivon. First of all, FSR supports your legislation and 
would like to see it expanded to cover all types of banks, not 
just custody banks, because we do think it makes sense. It 
would free up some assets that could then be put into more 
productive use. These are risk-free assets that, in our 
opinion, do not need to be counted as part of the leverage 
ratio.
    Mr. Rothfus. Is there a specific impact for custody banks 
with respect to this?
    Mr. Sivon. It poses a special issue for custody banks 
because that is the very nature of those institutions. They are 
holding a lot of deposits, and so they place them at the Fed 
for security purposes.
    Mr. Rothfus. Dr. Calomiris, as you know, Professor 
Cecchetti takes a very different view of the extent and 
benefits of interaction between monetary policy and supervisory 
and regulatory functions at the central bank. In his testimony, 
he writes that, ``a supervisory function is essential for 
effective and efficient execution of core central bank 
functions.''
    However, in your testimony, you assert, ``There is no 
evidence of any synergy between monetary and regulatory 
policy.'' Why do you take a different view from the professor?
    Mr. Calomiris. Again, I think language is very important. 
People often confound the informational or examination with the 
regulatory role. Regulation is setting the rules. There is 
absolutely no connection between making law and doing monetary 
policy. There is a lot of connection between having an ongoing 
access to examination to participate in examinations. Again, 
this was exactly the distinction that was made very clear in 
the 2008 Treasury White Paper, and I support that distinction. 
So I think there is a little bit of confounding of language 
here.
    Mr. Rothfus. If I could go back to Mr. Sivon, in your 
testimony, you suggested that an assessment of the impact of 
the current expected credit loss, or CECL, accounting standard 
on lending and economic growth should be conducted. What 
impacts do you anticipate as this standard is implemented?
    Mr. Sivon. As I mentioned, the new standard requires 
institutions to forecast forward where the economy may go and 
set up at a reserve. Needless to say, that becomes much more 
difficult when you get into longer-term loans, such as a 30-
year mortgage. So we are concerned that it could have an impact 
in pulling--causing institutions to make fewer mortgage loans 
or maybe fewer small business loans. We think one way to offset 
this is to give institutions credit for this reserve as part of 
capital.
    Mr. Rothfus. If I could go back to Dr. Calomiris. This 
didn't jump out at me from your testimony, but I am curious 
about it, and that has to do with the Fed's balance sheet, 
which is, frankly, a consequence of the Fed's unconventional 
monetary policy. Does that balance sheet raise any conflict of 
interest with respect to its regulatory side of work, and how?
    Mr. Calomiris. Yes. There are multiple conflicts of 
interest that have come from the new Fed powers that the Fed 
has taken on in the last several years. One obvious one that is 
actually related to the supplementary leverage requirement is 
that the Fed has become a competitor in the repo market. And it 
was, in fact, a strange coincidence that the supplementary 
leverage requirement rule was passed at the exact same time 
that the Fed entered--which applied to repos--was passed at 
exactly the same time that the Fed became a competitor in that 
market. And the Fed profited from that rule.
    Now I am not saying that the Fed did it only to profit, but 
there is no question that there was a clear conflict of 
interest.
    Mr. Rothfus. Does that have anything to do with the nature 
of the assets in the Fed's balance sheet, Treasuries and GSEs--
GSE notes?
    Mr. Calomiris. This has to do with the repo function that 
the Fed has entered.
    With respect to the assets, there is a different conflict.
    Mr. Rothfus. What is that?
    Mr. Calomiris. And that is, mortgage-backed securities that 
the Fed is holding, as you raise interest rates, if the Fed 
sells those securities, it will experience capital losses, 
which have political consequences for the Fed through their 
ramifications for the Fed's contribution to the budget deficit. 
They are extremely worried about that. So that could actually 
keep them from selling off mortgage-backed securities as 
quickly as they might otherwise. So these are the reasons why 
it is good to have a monetary authority that is not doing 
fiscal or regulatory policy.
    Mr. Rothfus. I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for a word before his time begins.
    Mr. Scott. Sure. Thank you very much.
    I, too, want to join with my Republican colleagues and 
certainly from this side of the aisle in wishing a speedy 
recovery to our good friend, Congressman Loudermilk. 
Congressman Loudermilk, as we know, was in a car accident. The 
car flipped over 2 or 3 times. He was en route up from, and the 
accident occurred near, Knoxville, Tennessee, and they have 
been flown back to Atlanta for further medical treatment. So we 
will get a report on that.
    And this is just the second time in a matter of a short 
period of time that very near-death incidents have happened. As 
you will recall, he was there on the ball field when our 
Republican colleague, Steve Scalise, was shot. So I just ask 
everybody that we join in a prayer for him and wish him a very 
speedy recovery. And thank you for giving me that time.
    Chairman Barr. Thank you.
    Mr. Scott. Barry Loudermilk and I not only share--
    Ms. Moore. I would love to associate myself with the 
comments of Members on both sides of the aisle and make it part 
of the record that we are prayerful during this hearing.
    Mr. Scott. Thank you very much. What I wanted to say was in 
addition, it is very important that Barry Loudermilk and I not 
only serve Georgia together, but we share counties together. We 
share Cobb County together. And so we work very closely on very 
important issues for our joint constituencies.
    Thank you, Mr. Chairman.
    I have been sitting here listening to this debate, and it 
called to my mind the great words of--we had a great many 
Founding Fathers, and none more valuable or greater than the 
great Alexander Hamilton. And it was Hamilton who said that a 
strong centralized national banking system shines at its most 
brilliant in a time of national crisis.
    And that is what happened when we suffered the Wall Street 
bailout situation, and we were very fortunate to have that 
strong national banking system there. And we responded by 
establishing Dodd-Frank. And in that we were able, because we 
had, which was represented by the Federal Reserve, the 
apparatus there. And we put stress testing there. And it 
surprises me that some of my Republican colleagues might not be 
as mindful of how that benefitted us.
    So, Dr. Cecchetti, what do you make of all this? It is my 
understanding that the Federal Reserve is not only doing a 
great job with stress testing, but it is because of that that 
our banking system is flourishing now.
    Mr. Cecchetti. Yes, thank you.
    Let me just start, your colleague Congressman Clay asked me 
to grade the Federal Reserve only over the last 4 or 5 years. 
If I were to grade them from 2007, 2008, 2009, I would have 
given them an A-plus. And that is not unrelated to your 
question, because stress tests grew out of the crisis.
    Stress tests came in the winter and spring of 2009 when the 
banking system was on the verge of collapse. And what happened 
was that by stress testing the banks, what the Federal Reserve 
did was it made everybody more confident that those banks were 
healthy. And so I think that it is absolutely essential.
    Stress testing, which we discovered then by accident 
essentially as a crisis management tool, I think has now become 
the most important crisis mitigation tool and the tool that we 
use to ensure the resilience of the financial system more 
broadly.
    Mr. Scott. Yes. And Hamilton went on to say that the 
greatness of this system is that it had the power, it has the 
authority, and it is free from persuasive, divisive politics. 
And that is why it is so important to have this away from the 
regular appropriations process for their funding.
    Now, my staff tells me that the Fed has hundreds of Ph.D. 
economists who constantly are combing over data so that 
talented folks like Chair Yellen can make informed decisions, 
and her predecessors, and people will follow her.
    So let me ask you about this idea of how important it is to 
keep the Fed independent away from what Hamilton refers to as 
this political persuasiveness and division?
    Mr. Cecchetti. I think it is absolutely essential. I think 
what is essential is that monetary policy and supervision both 
be done by people who can have long horizons, that they not be 
under the influence of short-term political pressures or those 
of constituencies that would want them to behave differently 
from what is in the long-term interest.
    My view of this is that if we are to minimize the cost to 
taxpayers in the long run we need to make them independent, 
accountable to all of you surely for meeting their objectives, 
but independent in terms of their daily actions and in terms of 
the budgets to get their work done.
    Mr. Scott. Right. And you mentioned the key word. It is who 
determines their budget, who determines their money. As the guy 
said in the great movie, ``Follow the money.'' That is what 
determines your power and authority.
    And I thank you for your comments there on how important it 
is to keep the funding in an independent way. Thank you, sir.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank each of you for joining us today.
    Just a comment in reference to my good friend Mr. Scott's 
perspective on the net effect of the regulatory policy from the 
Fed as a result of the Dodd-Frank bill. In North Carolina, we 
have lost 50 percent of our banks since 2010 because of the 
compliance requirements. And of course that has resulted in 
less capital and credit for small businesses so important for 
our economy.
    Mr. Sivon, the Volcker Rule with its immense complexities 
ensures full employment, it appears to me, for the Washington 
lawyers and consultants and bureaucrats, but it continues to 
really harm others who are in small and medium-sized companies 
that aren't able to expand their businesses.
    In your testimony you stated and suggested that the Volcker 
Rule would ``impair liquidity in the Nation's capital markets, 
which as a consequence would force business to face higher 
borrowing costs, resulting in less economic activity and 
translating into fewer jobs.''
    Having said that, do you believe this still to be a valid 
concern? And specifically, what actions should Congress take to 
remedy this situation and help these businesses ensure full 
economic opportunity?
    Mr. Sivon. Thank you, Congressman.
    When the rule was contemplated, there were concerns that it 
could have some impact on liquidity, and recent studies are 
starting to bear that out. In fact, studies by the Federal 
Reserve itself have started to bear that out.
    So we recommend that the rule be revisited. We are not 
alone in making this recommendation. The agencies themselves 
and the Treasury Department are starting to acknowledge that it 
is overly complex and there could be some improvements.
    In my own practice I have helped a number of mid-sized 
banks develop their compliance programs for this rule, and what 
that exercise turns out to be is a demonstration that they are 
not engaged in proprietary trading, they are not making 
investments, so it becomes proving the negative.
    Clearly, there is a category of institutions that this rule 
should not apply to, the scope of the prohibitions could be 
narrowed, the compliance requirements could be more 
streamlined.
    Mr. Pittenger. What role then should the Fed play in trying 
to implement any changes?
    Mr. Sivon. The Fed is one of the five agencies that are 
responsible for writing this rule. So the Fed could coordinate 
with the other agencies in helping to streamline and address 
these issues.
    Mr. Pittenger. Thank you.
    Mr. Calomiris, as you are well-aware, the Fed was 
established more than 100 years ago. According to the Board of 
Governors website, it says that it was established to provide a 
safer, more flexible, and more stable monetary and financial 
system. Yet the research suggests that the U.S. has been the 
most financially unstable developed economy in the world for 
two centuries.
    As you know, Dr. Calomiris, Dodd-Frank gave the Fed a 
prominent role in the prudential regulation of our financial 
system. Should we believe that this time is different, that we 
finally found the optimal regulatory structure for a crisis-
prone financial system, or is the new regulatory structure the 
same as the old one, fragile by design?
    Mr. Calomiris. I don't think that it is very promising 
looking forward. I agree with my colleagues here who have said 
the banking system right now is more stable than it was before. 
That is not really the interesting question. The interesting 
question is, when we go through the next unstable period, will 
these regulations work better than the last ones? And I think 
it is pretty clear that they won't.
    I have just completed a book that I know all of you have 
because I made sure you all got a copy explaining why I don't 
think it is going to work.
    And that also underlines my point that this shouldn't just 
be a discussion about deregulation, this should be a discussion 
about strengthening regulations that are not credible. And I 
would say that the implementation of Dodd-Frank is not very 
credible.
    We are already seeing mortgage markets looking very similar 
to what they were doing in the late 1990s and early 2000s. That 
is the result of government decisions, FHA decisions, FHFA 
decisions. These were political decisions. They are putting us 
back into the same direction.
    We saw the QM and the QRM standard, because they were given 
to the regulatory agencies to decide the details of, we saw 
those being whittled away. And we saw, of course, what Barney 
Frank has bemoaned as the loophole that ate the standard.
    So I think that we have a lot of reasons not to be very 
confident.
    Mr. Pittenger. Thank you.
    My time has, unfortunately, expired. Thank you very much.
    Mr. Calomiris. I'm sorry if I went on too long.
    Mr. Pittenger. I appreciate your testimony.
    Chairman Barr. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Illinois, Mr. 
Foster.
    Mr. Foster. Thank you, Mr. Chairman.
    And thank you to our witnesses.
    There have been two great financial crises, I guess, in our 
lifetime: the 2008 crisis; and the savings and loan crisis. In 
which one of these did the taxpayer have to write a bigger 
check? Anyone who wants to answer it? Just roughly?
    Mr. Calomiris. The first one.
    Mr. Foster. That is my impression, that it was the check 
was about 2 percent of GDP, right?
    Mr. Calomiris. A little bit more. But it is a tough one 
because if you are asking write a check, that is a complicated 
question to answer. The total exposure of the taxpayer, 
potential loss exposure, was greater in the second crisis, but 
the actual--
    Mr. Foster. Potential, but the actual losses were higher. I 
think they were--the nominal losses at least were near zero--
    Mr. Calomiris. I agree with that, yes.
    Mr. Foster. So I think that is a significant point. And I 
am trying to get back to your point, Dr. Cecchetti, about what 
we are hearing here is that the solution to our problems is to 
subject regulators to the appropriations process, which is 
something you pointed out had been done to the regulators of 
the S&L. And we are also talking about the crosstalk between 
monetary policy and regulation.
    And it is my sort of simpleminded understanding of the S&L 
crisis is it was a bunch of smaller institutions getting on the 
wrong side of an interest rate bet, and then when the Fed made 
a big move in monetary policy they were in big trouble. And it 
was the lack of any communication between the regulators and 
understanding what sort of stress that would put the regulated 
institutions under when the Fed made a big interest rate move 
that actually was the driving mechanism. Of course it spiraled 
into fraud and everything else.
    But I was just wondering, is that a fair evaluation of how 
useful subjecting regulators to the appropriations is?
    Mr. Cecchetti. I believe that it is. And let me just say 
that I think you have exactly the right pathology in mind, 
which is to say that interest rate increases generally harm 
bank profitability and bank equity positions.
    It is important, therefore, for the people who are 
contemplating those increases to understand what their overall 
impact is likely to be. They are going to be in the best 
position also to ensure that when they do raise interest rates, 
which they will ultimately have to do under circumstances in 
order to ensure that prices remain stable and that growth 
remains stable, that they understand what the consequences of 
those actions are going to be at a relatively detailed level.
    Mr. Foster. And that had there been better communication 
between regulators and monetary policy actually would have been 
our best shot at preventing that largest taxpayer bailout of 
history in the savings and loan crisis.
    Mr. Cecchetti. I am not sure I would go quite that far. But 
I do believe that what was missing, especially in the last 
crisis, was having someone who was clearly responsible for the 
financial system as a whole and especially for the largest, 
say, three or four dozen financial intermediaries that are 
systemic where any one of them failing had large consequences 
for the system as a whole.
    Mr. Foster. Okay. Thank you.
    And, Dr. Calomiris, you have written extensively on 
contingent capital, which you are aware I am a big fan of as a 
mechanism, a market-based mechanism to make sure that it is not 
the taxpayer who is left holding the bag.
    Could you just say a little bit about what you think the 
experience has been internationally with using these and what 
the prospects should be for avoiding future bank bailouts?
    Mr. Calomiris. Very quickly, the right instrument that I 
have been proposing has never been created yet. What we do 
know, however, is that the demand for contingent capital-type 
instruments has turned out to be very high by ultimate 
investors, so I think that is the evidence that is the most 
promising.
    What we also know, though, is that we have created this 
total loss-absorbing capital concept, which the contingent 
capital could be used now in the context of that concept as the 
form required at the bank holding company. But it has to be 
required in a much larger amount than is currently present. So 
I think we have a lot of inadequacies that the contingent 
capital could help.
    Mr. Foster. But there is also an important difference here, 
that the TLAC triggers that insolvency not violation of capital 
requirements.
    Mr. Calomiris. Exactly.
    Mr. Foster. And so a market-based instrument that warns the 
banks two steps back from the cliff rather than at the point of 
insolvency has real merit.
    Mr. Calomiris. That is exactly right. And I think that is 
the essence of why this is so important, because I don't have 
confidence in the FDIC's ability to resolve these very large 
institutions, despite what they say under Title II. So we have 
to keep them far away from that point so we don't test that.
    Mr. Foster. Thank you, and keep on this subject. I am a big 
fan.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Tipton.
    Mr. Tipton. Thank you, Mr. Chairman.
    And I thank the panel for taking the time to be here.
    Mr. Sivon, I would like to return back to a question, and 
maybe get a little more comment from you, that Chairman 
Luetkemeyer had raised in regards to rules and regulations and 
the overlaps that we have had.
    We sent a letter to Secretary Mnuchin, 31 members of this 
committee, asking him in his capacity regarding the FSOC to be 
able to address rule and regulation overlap, to be able to 
streamline some of those processes. We have had Chair Yellen 
before this committee on numerous occasions, also noting that 
regulatory policy does have a trickle-down effect that is 
impacting smaller institutions, as well.
    Can you maybe speak a little bit to some of the costs that 
are going to be associated with having that duplicative 
overlapping regulatory policy and how that impacts people 
literally at home?
    Mr. Sivon. Yes, thank you. It is a major issue for the 
members of the roundtable, which are larger institutions. But 
you are absolutely correct that there is a trickle-down effect. 
Even though rules may be tailored, they are often applied to 
institutions below the specific rule.
    Some examples. Today, institutions have to prepare 
resolution plans for a holding company. They also have to 
prepare resolution plans at the individual bank level. Some 
recovery planning is required by some regulators, which is a 
plan that before you get into a failing situation. There are 
duplicating requirements on risk management standards that the 
OCC and the Fed have put out.
    So there are examples of instances where we are quite 
concerned that the agencies are not coordinating as much as 
they should be. FSOC could play a role here as an organization 
where all these agencies do sit, and maybe in the new 
Administration it will play more of a coordinating role.
    Mr. Tipton. Thanks. I appreciate that. I think that is a 
lot of the challenge, particularly at the community bank level, 
that we are seeing, our smaller institutions. Best practices. 
It may not be theoretically applicable to you, but indeed it 
becomes applicable to you, and that tends to flow down the 
list.
    And I just had an opportunity during the August break to be 
able to visit with a lot of our community banks, and I think a 
number of them would actually be applauding you when you are 
saying make the loan loss reserves Tier I capital. You used to 
think of this as something separate and unto itself to be able 
to deal with it, but it is now impacting that ability really to 
be able to make some loans and to be able to help our folks at 
home to be able to grow the economy.
    Would you maybe talk a little bit more--I thought it was 
interesting when you were talking about some of the modeling on 
the stress tests, to be able to reveal some more information so 
that you our banks--we understand we don't want anybody to be 
able to game the system. But would you maybe speak to that just 
a bit more?
    Mr. Sivon. Yes. I would agree with others on the panel that 
stress testing is one of the more important reforms that has 
been put in place since the crisis. And, in fact, if you look 
at the results of the latest stress tests, they do demonstrate 
that large institutions could survive a crisis of worse 
magnitude than we went through in 2008.
    The problem that we see with the manner in which the stress 
tests are operated today, though, is the models that the board 
maintains are not shared, they are not transparent with the 
industry. So you have bankers who are trying to estimate what 
the board's model may show and modifying their loan activity to 
try to meet that standard, whereas that may not be the most 
appropriate manner in which they should be engaging in their 
particular community given their risk profile and the market in 
which they operate.
    So we think there is a little disconnect between the lack 
of transparency under the current structure.
    Mr. Tipton. Thank you.
    And, Dr. Calomiris, I would like to maybe just return a 
little bit to the ability to be able to use a little bit of the 
power of the purse, the appropriations process, in terms of 
some questions that have been asked in terms of making the Fed 
actually more accountable.
    When we look at 15 percent of the U.S. mortgage market 
securities are currently held in the Fed, is that going to 
impact some of theirs? Is there an appropriate way or would 
using that monetary policy be negative?
    Mr. Calomiris. I am very worried about the Fed keeping 
those on its balance sheet. And I support a recommendation, 
which I also have made a long time ago, and that Charles 
Plosser has also been pushing, for us to engage in a swap 
between the Treasury and the Fed, to swap those for Treasury 
securities so that we get the Fed out of the mortgage business.
    And that is also an inappropriate fiscal intervention. The 
Fed is clearly intending to affect the relative cost of 
particular financial instruments. That is not monetary policy.
    Mr. Tipton. Thank you very much, Mr. Chairman. The time has 
expired. I yield back.
    Chairman Luetkemeyer [presiding]. The gentleman yields 
back. We are playing musical chairmen here today, so I will be 
chairing for a little bit, for the rest of the hearing.
    So with that, we also have an important moment here. The 
gentleman from Indiana is going to be recognized to question 
for 5 minutes. But I understand it is a very, very important 
day in his life.
    Happy birthday. Is that correct, sir?
    Mr. Hollingsworth. Yes, that is correct. Thank you. Very, 
very important may be overstating it.
    Chairman Luetkemeyer. It is very important, very important.
    Mr. Hollingsworth. I am happy to make another milestone.
    Chairman Luetkemeyer. Older and wiser. There you go.
    The gentleman is recognized for 5 minutes.
    Mr. Hollingsworth. Good afternoon, gentlemen. I really 
appreciate you taking the opportunity to come talk to us today. 
And so far it has proven enthralling, I can tell you. And for 
the dozens of my constituents back home watching this, it is 
indeed enthralling for them, I am sure, right?
    But I wanted to come back to something because I have heard 
it implied or even explicitly stated a few times, that the lack 
of a crisis in the last 9 years is somehow evidence that this 
extra regulatory burden will forever and always keep us safe 
from a crisis instead of some recognition that by the same 
logic the fact that we had regulators and regulations before 
the last crisis seems to be some evidence that regulation, and 
especially by edict out of D.C., instead of enabling and 
empowering lenders to be able to pursue their own business 
models, it might in fact be one of the root causes for some of 
the instability.
    And I would love it if Dr. Calomiris would comment on that.
    Mr. Calomiris. There are so many pieces to it. Of course, I 
wrote a book that went through that in some detail.
    But it is important to remember that as we are worried 
about too-big-to-fail institutions, we are running up 
inordinate risks having to do with the mortgage market, that 
the Fed was the institution that first of all was managing the 
merger process that created too-big-to-fail institutions, and 
it was the Fed that was also managing the prudential regulatory 
process that decided whether they had adequate capital. And I 
would say the Fed was extremely politicized.
    Mr. Hollingsworth. Right.
    Mr. Calomiris. And that its extreme politicization led it 
to approve of mergers in a way that created mortgage risk and 
then therefore could not set capital requirements that would 
have created adequate capital.
    So that was, to my way of thinking, probably the single 
best example of the kinds of problems that come from a 
politicized regulator that is a central bank.
    Mr. Hollingsworth. One of the deep challenges I have--and 
again, my statistics is rusty--but the use of the 
counterfactual here, somehow saying because we have not had a 
crisis that we are okay. But what we haven't talked about is 
the tremendous costs on the U.S. economy of the misallocation 
of capital across it because of government intervention, 
government distortion, and excessively burdensome government 
regulation, which continues to misallocate capital and not get 
it in the hands of those that could most productively use it, 
and the economy has suffered because of that. People back home 
have suffered because of that. And I would love it if you would 
comment a little bit on that.
    Mr. Calomiris. The most obvious area has been small 
business lending, especially because small banks have a lot to 
do with small business lending, and small banks have been 
really hit a lot by the overhead costs of the regulatory 
burden. That is one part of it.
    Mr. Hollingsworth. And just what I hear from my small 
bankers in the community is what they say is: We have been 
essentially forced to combine because the regulatory burden is 
so heavy and that fixed cost is so heavy we have to amortize 
that over more and more customers, more and more loans, more 
and more products, and so we have combined and gotten larger. 
And thus, they find themselves less capable of serving the 
communities and find themselves more and more, in their 
feeling, in servitude of a bureaucracy in D.C. instead of 
focusing on enabling and empowering their customers.
    Mr. Calomiris. It shows in all the statistics I have quoted 
in my various work. One thing that I would also point out is we 
are going to great lengths through a variety of measures to 
push mortgages rather than small business lending, is what 
small banks do.
    Mr. Hollingsworth. Right.
    Mr. Calomiris. And so it is not just that small banks have 
been hurt, it is also that if we actually required banks to be 
more diversified across their lending we would help small 
businesses quite a lot.
    Mr. Hollingsworth. Indeed.
    And, Mr. Sivon, I wanted to ask you specifically about a 
bill that I have recently introduced. This bill, H.R. 3179, the 
Transparency and Accountability for Business Standards Act, is 
really simple. It is about harmonizing regulation across 
jurisdictions. And the fact is that the United States has gold-
plated many of the standards coming back from overseas. And I 
wondered if you could talk a little bit about the global 
competitiveness of U.S. institutions in the face of a heavier 
regulatory burden here at home than others may face in other 
jurisdictions.
    Mr. Sivon. Thank you, Congressman. It is one of the issues 
highlighted in our testimony. We do think that the layering on 
of additional requirements for the larger U.S. institutions 
does raise competitive issues for them in global markets. And 
the legislation that you have introduced provides for the 
regulators to do a cost-benefit analysis before imposing that 
kind of a standard.
    We strongly support that. We think the idea of cost-benefit 
analysis makes sense there as well as in other regulations that 
the agencies are proposing.
    Mr. Hollingsworth. So the net-net is, when I think about 
the regulatory burden in this country, the misallocation of 
capital is costing opportunities for higher economic growth, 
for people to realize meaningful wages. And then in addition, 
that regulatory burden is costing U.S. companies 
competitiveness around the world to be able to export some of 
the great things that we have developed here to other 
countries.
    And with that, I will yield back, sir.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We now go to the gentleman from Minnesota, Mr. Emmer, who 
is recognized for 5 minutes.
    Mr. Emmer. Thank you very much, and thanks to the panel for 
being here.
    I just don't even know where to start. So much of this has 
been covered. It is a very interesting discussion. But I think 
I want to start with Dr. Calomiris.
    You had talked about one of the reforms being budgeting 
authority, having more oversight on budgeting authority. What 
about the argument that we hear constantly, and I think Dr. 
Cecchetti made this argument at some point, that this would 
impact the Federal Reserve's independence, putting their budget 
under the supervision of Congress, for instance? How would you 
respond to that?
    Mr. Calomiris. I think the important first step is to ask, 
when we talk about Fed independence, what are we talking about? 
Independence in the literature for decades has always meant 
independent of special interest pressures, independent of 
short-term pressures coming from the Administration. It has 
never, ever meant that laws that the Fed administers should be 
made independently of the United States Congress.
    So I just want to be clear, when I use the word, 
``independence,'' I don't think that it is consistent with our 
Constitution to think that the Fed should be writing 
regulations that are not overseen by the U.S. Congress. I think 
that is a very radical and new idea that seems to me to be just 
wrong.
    So the question then is, well, what is the role of 
budgetary discipline? Congress under the Constitution is the 
only agency, is the only institution that is supposed to be 
sending funds for whatever purpose in the government. So I 
don't really understand how you can read the Constitution and 
find this authority for the Fed to have a blank check to spend 
money any way it wants.
    Mr. Emmer. Thank you.
    Dr. Cecchetti, you had testified, and I wrote it down, 
early this afternoon that you need to have an objective and 
then there need to be guidelines on how to get to that 
objective. How is that different from having a rule in place 
which is in effect a guideline? I think the proposal from this 
Congress or this committee has been, one of the proposals, to 
put a rule in place so that at least people in the public know 
what to expect. But it doesn't have to be followed, and if it 
is not followed then it would require an explanation as to why 
we are not following it. How is that different?
    Mr. Huizenga. I am so sorry, but would the gentleman yield 
for just a second?
    Mr. Emmer. Absolutely.
    Mr. Huizenga. As the author of the FORM Act, and I know 
Chairman Barr has been working on this, we actually had said 
that the Fed could make up their own guideline and just have it 
out there and then explain when they were going to deviate from 
that. So that was not even anything that we on this panel or 
the House or the Senate or anybody else would put forward, it 
would actually be a guideline created by the Fed and measure 
themselves.
    So I yield back.
    Mr. Emmer. Great context. How is that different from what 
you said?
    Mr. Cecchetti. So what I was trying to say is that I view 
the job of the Congress as to set the objectives and to hold 
the Federal Reserve accountable for meeting those objectives. I 
do not believe that it is worthwhile for the Congress to be 
involved directly in setting policy.
    Mr. Emmer. But actually, to interrupt, because we are going 
to run out of time, that is exactly what my colleague just said 
that they were proposing, is go ahead and set the objective, 
you do the policy so all of us know what it is, and then you 
have the guidelines, the policy guidelines and you explain. It 
sounds to me, sir, as though we actually agree on this.
    I have to go back with the limited time I have left to Dr. 
Calomiris, because I have some concerns with this conflict of 
interest and the politicizing of the Federal Reserve. We have 
lost so many community banks, family-owned community banks and 
credit unions over the last 7 years since Dodd-Frank was in 
existence, and, in fact, it started even before that, but it 
has been accelerated in the last 7 years.
    And it seems as though, looking at it and reading your 
testimony, listening to you here today, and perhaps your 
colleague might weigh in as well, in order to exist with this 
regulatory function and the monetary policy function you have 
to have a lot of resources in order to exist, and we are not 
creating new banks. Is there a favoritism towards the larger 
institutions?
    Mr. Calomiris. I just have a new volume coming out that I 
am editing on this. And some of the rules are hitting the large 
institutions, of course. Some of the rules are hitting the 
small institutions. The main problem with the small 
institutions is, how do you spread the overhead from having to 
comply with these things over a small balance sheet? And I 
think that is why it just becomes existential for them.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from Arkansas, Mr. Hill, is recognized for 5 
minutes.
    Mr. Hill. I thank the chairman. I thank both chairmen for 
this interesting topic, to continue our exploration of the Fed 
and the role of the Fed both in monetary policy and in 
regulatory policy. And I am sorry I have been in and out today. 
It is one of those days on Capitol Hill.
    I would like to talk and follow up with my friend from 
Indiana's comments about misallocation of capital and get your 
views just from a little different perspective. Obviously 
market prices provide a lot of information to market 
participants. And you have had the Fed really over the last few 
years be unprecedented in sustained decline of zero interest 
rates, plus doubling down with QE1, QE2, QE3.
    And we have the third most expensive S&P 500 now in 
history. Only 1997 to 2001 and 1929 exceed the price earnings 
multiple on the S&P 500 right now. And we have historically low 
cap rates for long-tailed commercial real estate properties, 
for example. And I think at the last count something like $13 
trillion of sovereign debt is at a negative yield.
    So these are clearly unprecedented times.
    But one of the key components of that was back in 2012 the 
Fed established an inflation target of 2 percent, which we have 
not hit. And I wonder if that calls into question whether they 
should even have set such a target if they can't hit it. I 
think Gary Shilling said, and I am paraphrasing, if you can't 
hit a target, maybe we need to question our authority to even 
try to do that.
    So I am interested in your views on that inflation target. 
Should that be maintained or should we, as we normalize the 
balance sheet or attempt to, also let that go by the wayside as 
a test for the last years? Each of you, if you would comment on 
that, please?
    Mr. Calomiris. I will be quick. I would have preferred a 1 
percent target rather than a 2 percent target, which is the one 
Alan Greenspan, as I read it, suggested in 2006. But now that 
they have stated the 2 percent target, I think it is important 
that it not be subject to change. I think that they need to 
stick with it because they have now said that that is their 
long-run target. That should be subject, of course, to your 
approval, but I think that it is a good idea to stick with it.
    I also don't agree with people who say the Fed has 
undershot its target, because this is a long-run target. It is 
not clear yet whether being at 1.5 percent for current 
inflation means that they are pursuing policies that are long 
run below the target. So I don't think that we want to be too 
critical of the Fed for coming in at 1.5 rather than at 2.
    Mr. Hill. I just want to add one nuance to that. At 1.7 
percent, should we just declare victory and say we have hit 2 
percent if it is going to not let us take other policy 
decisions in the monetary policy arena surrounding the balance 
sheet that maybe we should because it is just one factor 
considered, not the only factor?
    Mr. Calomiris. So just very quickly, monetary policy 
remains accommodative. In real English what that means is 
monetary policy is still pushing toward going to a higher rate 
of price growth. And that is appropriate given that the Fed has 
a 2 percent objective. I think it should be less accommodative 
than it is.
    So I think the Fed is basically doing behavior that is so 
far consistent with a 2 percent policy objective, and I think 
that we shouldn't beat them up too much.
    Mr. Cecchetti. I agree with my esteemed colleague that 2 
percent, now that you have it, I think you have to keep it. If 
you start changing it then everybody is going to wonder when 
you are going to change it.
    And the most important thing, I think, for all of us and 
for individuals, for small businesses, for households, for 
investors is that they be able to have some security in what 
inflation will be over the long run. And in this I think Dr. 
Calomiris and I completely agree that these modest deviations 
over relatively short periods of time are not a problem.
    Mr. Hill. Mr. Sivon, quickly, sir?
    Mr. Sivon. On monetary policy, the members of the FSR will 
operate in any interest rate environment.
    Mr. Hill. Thank you, Mr. Chairman. I yield back.
    Chairman Barr. The gentleman's time has expired.
    The gentleman from California, Mr. Royce, is recognized for 
5 minutes.
    Mr. Royce. Thank you very much, Mr. Chairman.
    Dr. Calomiris, as you may know, I have spent a lot of time 
concerned about the drug of leverage, as you referred to it. In 
fact, when the House considered GSE reform back in legislation 
in 2005, I introduced an amendment to give the regulator the 
authority to curtail the systemic risk posed by Fannie and 
Freddie's portfolio. The regulator would have had the ability 
to deleverage those portfolios.
    That amendment was defeated by a large margin, leaving the 
underlying legislation incapable of curtailing the risk 
exposure from these portfolios. The opponents of my amendment 
on both sides of the aisle claimed Fannie and Freddie posed no 
threat to the financial markets and that systemic risk was, in 
one of these debates I remember here, a theoretical term.
    In reality the opposition was looking to preserve the 
status quo. They were looking to allow Fannie and Freddie to 
grow at a very alarming rate without any meaningful 
constraints, and I would add without any oversight from this 
institution.
    You have said we need the political courage to give up the 
drug. Do you think we have learned from that crisis? Have we 
brought transparency to the GSEs and the Federal Reserve and 
the role they play in terms of subsidizing our housing markets, 
do people really understand that, or is the moral hazard that I 
pointed out then still in play today?
    Mr. Calomiris. It has gotten worse. So let me remind you 
that as soon as Mr. DeMarco was replaced by Mr. Watt, one of 
the first things Mr. Watt did was to lower the downpayment 
requirements for GSE mortgages from 5 percent to 3 percent. 
Five percent is way too low. Three percent is unbelievably low. 
The FHA also cut insurance premiums.
    Has the FSOC, who is supposed to be looking for systemic 
risk, ever used the word, ``mortgage'' or the words, ``real 
estate'' in any of their discussions? Almost none. Why? The 
Secretary of the Treasury is the head of the FSOC, so why would 
the Administration that appointed Mr. Watt then also say that 
Mr. Watt just created risk. They wouldn't, right?
    So the problem is the FSOC is politicized and is not going 
to be honest about mortgage risk. And it is currently a threat. 
It is going to get worse.
    Mr. Royce. Let me ask Mr. Sivon a question, because you are 
someone who has opined on insurance regulation for many years.
    Could you take a minute or 2 to describe how we ended up 
where we are today? Because this is no longer a discussion 
about State versus Federal regulation. It is now a discussion 
about layered regulation. That is the difference. The Federal 
Reserve now plays a pronounced role in this regulation.
    And I can think of some of the possible positives from the 
outcome. You could argue that maybe now on the monetary policy 
side the Fed better understands the impact prolonged low 
interest rates have on life insurers trying to plan for the 
long term. That is a positive. But on the regulatory side, it 
is unclear what the proper role for the Fed is in the future. 
So I offer you the floor here with the remaining minutes.
    Mr. Sivon. One of the major changes in the Dodd-Frank Act 
was to give the Fed regulatory and supervisory authority over a 
number of insurance companies. In fairness to them, I think 
they have been moving slowly in the manner in which they have 
been exercising that authority.
    On the other hand, as I noted in my testimony, we think it 
is very important for the agency to appreciate the distinction 
between the business of insurance and the business of banking, 
and some of the supervisory policy statements that they have 
put out have been more aimed at banking than recognizing the 
distinct issues that an insurance company faces.
    The most recent action that they took last year was to 
propose capital standards for the insurers that they regulate. 
They proposed two alternative standards: one called the 
consolidated approach for the very largest insurers that they 
regulate; and another called a building block approach for the 
savings and loan holding companies that are owned by insurance 
companies.
    The building block approach is based upon State insurance 
regulation. And so it is our strong view that as the Fed moves 
forward in regulating capital requirements for the insurers 
that it regulates it doesn't layer on yet a new type of capital 
requirement, but look to what the States have done and build on 
this building block approach for capital requirements for 
insurance companies.
    Mr. Royce. Thank you very much.
    And I thank you again, Mr. Chairman, and I thank our 
witnesses.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We have a situation where we are truly enthralled by your 
expertise today, and we have another round of questions that we 
would like to ask if you guys have some time. We would like to 
impose on you to be able to do that. Or do you guys have some 
other places to go shortly? No? Okay.
    Otherwise, we would like to start a second round, and we 
will start with the gentleman who is the chairman of the 
Oversight Subcommittee, the gentleman from Kentucky, Mr. Barr.
    Chairman Barr. Thank you, Mr. Chairman.
    And I appreciate the indulgence of our witnesses. We 
appreciate the very interesting exchange of ideas here today. 
What I have heard from all of the witnesses is a general 
agreement that Fed independence, a Fed free from politicization 
is a goal that we share.
    But I think a strong argument can be made that the Fed's 
aggressive implementation of the Dodd-Frank Act, that their 
zealous supervisory activities, their overregulation arguably, 
that that has, in fact, diminished economic growth, that that 
has undermined credit availability in capital formation, and 
that that process, that process of being engaged in the 
regulatory supervisory process, has actually induced the Fed to 
pursue a radically unconventional and accommodative monetary 
policy to offset the growth-destroying effects of the 
regulatory policies.
    And that obviously, that monetary policy has distorted 
financial asset values. It has discouraged financial capital 
from freely engaging in its most promising opportunities. And 
witnesses in this committee, in this subcommittee, have 
expressed concern about the Fed's balance sheet stepping out of 
what is necessary for the conduct of monetary policy and 
obviously into unprecedented unchartered credit policy.
    So the point I am trying to make is that this conduct, I 
would submit, does not really look like a government agency 
free of politics. That to me looks like a government agency 
that is totally politicized. And so I invite your feedback on 
that observation.
    Dr. Calomiris?
    Mr. Calomiris. I think that it is true. It is inevitable. 
When you get into things like mortgage-backed securities 
markets and you are making changes in relative interest rates 
for different financial instruments, that is what we economists 
call fiscal policy. That is a decision to subsidize some kinds 
of uses of funds at the expense of others.
    So when you get engaged in that, just like any political 
institution, you become a political institution and you become 
a lightning rod for influence. This is one of the reasons why 
monetary policy just has to stay away from those kinds of 
things.
    Chairman Barr. Just to follow up to your answer there, and 
I want to hear from the other witnesses on that, but I think 
you have made the point, Dr. Calomiris, that as an owner of 
over 15 percent of U.S. mortgage market securities, the Fed's 
monetary policymakers are quite conflicted when it comes to 
interest rate policy.
    Mr. Calomiris. That is right.
    I also just want to say I think your analysis of the 
motivation of the Fed is right, that the Fed having been part 
of the problem of creating the growth slowdown has actually 
tried to do things to try to prop things up. It is not working 
very well. And Marco DiMaggio, my former colleague, his study 
found that the only part of QE that really had a positive 
effect of QE2 and QE3 was the mortgage-backed security part.
    Chairman Barr. Dr. Cecchetti, I do want to give you an 
opportunity to respond. And as you respond, could you also 
address the testimony that you offered earlier that the job of 
the Congress is to set objectives and hold the Fed accountable? 
But how do you hold, how does Congress hold the Fed accountable 
on rulemaking if they are completely immune from the meaningful 
oversight of the appropriations process?
    Mr. Cecchetti. I believe that you can hold them accountable 
with--let me start with your first points. I think there are 
two points.
    First of all, on the mortgages, I think that many people, 
including me, are uncomfortable with the fact that the Federal 
Reserve owns so many mortgages, the mortgage-backed securities. 
But these were purchased as the Fed was trying to support the 
mortgage market during a collapse, and I think that they will 
let those run off as soon as they practically can.
    On the issue of stringent capital requirements, I think it 
is important to understand that capital requirements facilitate 
lending. Strong banks lend. Banks that have strong underlying 
capital positions are lending, and they are doing it now, and I 
think that that is a very, very important thing that I hope 
that everybody appreciates.
    There is an issue which has come up a number of times which 
I will comment very briefly on, and that is that I think there 
is also broad agreement that a $1 trillion bank and a $1 
billion bank should not be treated identically. And the 
question then is how do you change that treatment?
    Chairman Barr. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We now go to the ranking member of the Financial 
Institutions Subcommittee, the gentleman from Missouri, Mr. 
Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    And, Dr. Cecchetti, the outlook of the economy, including 
whether financial conditions are likely to lead to faster or 
slower future growth, has a significant impact on both 
inflation and employment. Given this, can you talk about how 
the information that the Fed learns through its supervision of 
the financial system would inform and enhance the Fed's outlook 
on how it may need to adjust its monetary policy stance in 
order to achieve its statutory full employment and price 
stability objectives?
    Mr. Cecchetti. Yes, Congressman, I would be happy to.
    The Federal Reserve's interest rate actions operate through 
the banking system. So it is essential when they set their 
interest rate to know what it is that the banking system is 
doing.
    The information that the Federal Reserve has access to 
today prior to making those decisions includes information 
about individual borrowers and individual lenders. They know 
about the size of loans, they know who it is that is doing the 
borrowing, and they know what the terms are of those loans. 
They use that information--aggregating it, obviously--in a way 
that then informs them on how it is they need to set their 
policy in order to ensure that the easing or tightening of the 
policy has the desired impact.
    Mr. Clay. And to what extent does the Fed's forecasting 
function tend to rely on analysis of supervisory data?
    Mr. Cecchetti. I think the answer to that is that we are 
going to know more and more about that over the next few years.
    As Dr. Calomiris pointed out, the Federal Reserve as part 
of its accountability mechanism releases transcripts of the 
Federal Open Market Committee meetings with a 5-year lag. So 
right now we don't actually have access to the discussions and 
the meetings for the past 5 years, but my understanding from 
speaking to some people inside of the Federal Reserve is that 
the kind of information that we are describing here now has 
found its way in that time period, because it hasn't been 
collected in a consolidated and consistent way until the last 
few years, that it is now finding its way into those decisions 
and into those discussions.
    Mr. Clay. Thank you for that.
    And, Dr. Calomiris, considering the performance of the U.S. 
economy over the last year, do you think the Federal Reserve 
has made the correct moves as far as being able to lower 
unemployment and the strong market indicators that we see now? 
Do you give them any credit for that performance?
    Mr. Calomiris. Absolutely. As I said, I think we are below 
our long-run inflation target. I think that according to the 
Fed's own measures, though, of unemployment, it has been a 
moving target. So the Fed doesn't really have a very good sense 
of what the long-term right level of unemployment is, and that 
has been one of the things we have been learning.
    So it has been a tough job. I think that qualitatively they 
have done a fair job. My friend, Mr. Cecchetti, is an easier 
grader than I am. But I would say that they have done a decent 
job under a circumstance of extreme uncertainty about the long-
run unemployment rate.
    Mr. Clay. Thank you for your response.
    I would prefer to take a course from Dr. Cecchetti, I 
think.
    And with that, Mr. Chairman, I yield back.
    Chairman Luetkemeyer. The gentleman from Missouri yields 
back the balance of his time. As the gentleman who actually got 
an A or two in school, we are okay with either one of these 
guys. I think we could make it work.
    With that, we go to the gentleman from Indiana, Mr. 
Hollingsworth, for 5 minutes.
    Mr. Hollingsworth. I really appreciate the testimony again, 
and thank you for being here.
    So one of the things that was said a few minutes ago was 
that strong banks make loans, and I don't doubt that loan 
growth hasn't been zero, but it certainly hasn't been as robust 
as it otherwise would be.
    When we look back at prior recessions and loan growth post-
recessions, we have continued to see this one lags back behind 
by many, many dozens of statistics and measures, and that is a 
real challenge.
    It is a real challenge because capital formation out in 
especially where I come from, in the heartland, is really, 
really poor, and we have to fix that.
    So that is one thing that I talk a lot about, which is kind 
of the wet blanket effect of all of these regulations.
    The other thing, which isn't talked about as much but I 
have been pushing really hard, is the effect on bank balance 
sheets of these many intrusive regulations. And let me tell you 
what I think I mean, which is the more and more that we develop 
a higher and higher regulatory threshold in a variety of 
different areas, the more and more we force institutions to 
look more and more similar to each other. By government saying 
we are going to weight these and not these, we are pushing 
banks into a corner.
    And you have to be really careful when you line banks up 
like that because you better hope you got everything right, 
because now you have lined them up to where the moment there is 
an issue it is a very quick transmission from institution to 
other institutions because their balance sheet looks very 
familiar.
    What I fundamentally believe is that robustness and 
resiliency are emergent qualities from a system, not qualities 
that can be demanded by fiat.
    And so Mr. Sivon had talked about this a little bit 
earlier, just allowing for diversity of businesses to exist 
within the financial landscape and a diversity of business 
models. And I wondered if you might touch on that again and 
talk about how maybe a resilient, robust system, one that can 
withstand shocks, probably derives from that diversity of 
business models, risks, and profiles.
    Mr. Sivon. Yes. Thank you. Clearly, the system is stable 
today in part because of many of the steps that have been taken 
by the industry and regulators and Congress.
    Our view is that we probably have some excess capital and 
some excess liquidity requirements today that could be put to 
more productive use and help economic growth. And that is the 
nature of the recommendations that we make in our testimony in 
terms of adjusting the capital requirements and the liquidity 
rule and the Volcker Rule and the supplemental leverage ratio 
and so on. There are quite a number of changes that could be 
done in a fine-tuning way to help economic growth.
    Mr. Hollingsworth. Dr. Calomiris, could you comment?
    Mr. Calomiris. I will, like a broken record, just point out 
that it can't possibly be a good thing that, putting aside the 
largest banks, that the banks throughout our country have about 
three-quarters of their loans in real estate.
    When you are asking, are we in a situation that is going to 
be resilient, when all those balance sheets are basically 
lending to one sector that is very correlated with the business 
cycle and has a very hard time selling assets during a 
downturn, how are we dealing with systemic risk? I think it is 
kind of a joke.
    Mr. Hollingsworth. Dr. Cecchetti?
    Mr. Cecchetti. Two quick comments.
    First of all, I think it would be very difficult to 
disagree with your comment about the need for what I would call 
a diverse ecology in the financial system in order to ensure 
its resilience. I think that is absolutely, absolutely 
essential. And to the extent that the regulatory environment is 
overly constraining in certain ways, it will decrease that 
diversity and reduce the resilience.
    I would, however, want to comment on the issue of the 
lending levels. I think that we did not come into the crisis 
with levels of debt that were sustainable. And so the fact that 
levels of debt today are lower and that growth rates during the 
recovery have been lower than those in previous recoveries I 
think is something that we should not be terribly upset about.
    The distribution of those loans is a separate issue, as my 
colleague just described. And so I might--I would agree that if 
all you are doing again is lending to real estate, that that is 
an issue.
    Mr. Hollingsworth. I certainty understand that perspective, 
but back home in Indiana there are a lot of people who feel 
like it is something to be upset about.
    And the lack of loan growth, and especially loan growth to 
the incremental individual who might be on the bubble of 
creditworthiness but is trying to start that business, trying 
to make a difference, trying to build a better financial future 
for themselves, to them the lack of loan growth or credit 
growth or credit availability has been a real challenge, and 
they feel like it is being more and more directed by 
bureaucrats in a fashion towards others and not towards 
empowering them across the heartland.
    And with that, I will yield back, Mr. Chairman.
    Chairman Barr. The gentleman's time has expired.
    The gentleman from Georgia, Mr. Scott, is recognized for 5 
minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Cecchetti, it seems to me that some of my Republican 
friends want to strip the Fed of its supervisory and regulatory 
functions and leave the Fed, in my opinion, and I want your 
opinion on this, wouldn't that leave the Fed ill-equipped to be 
able to judge the conditions of the financial institutions that 
they are in business to do? Wouldn't that make it very 
difficult, particularly when the Fed has a role of being the 
lender of last resort?
    Mr. Cecchetti. I certainly believe that. Making a loan to a 
bank--for the central bank to make a loan to a bank I think is 
a very important financial stability tool. At the same time it 
is extremely important that the central bank, the Federal 
Reserve, not make a loan to an insolvent bank. You cannot be in 
the business of lending money to people who are already 
bankrupt.
    Mr. Scott. Right.
    Mr. Cecchetti. There are many reasons for that. The first 
one is that is basically a bailout. The second one is that you 
are subordinating existing debt holders. Because the Federal 
Reserve is going to require collateral, it is going to come in 
senior to everybody else that is out there.
    The second thing you are going to do is you are going to 
make the cleanup more costly.
    And the third thing is that if you make loans to bankrupt 
institutions, what is going to happen is that people are going 
to come to know that you make loans to bankrupt institutions, 
and then others are going to assume that if you go for a loan 
you are bankrupt, and nobody is going to want to go for a loan, 
so it is going to be very stigmatizing.
    So I think that the only way to ensure that the Federal 
Reserve or any central bank does not make loans to insolvent 
institutions, to bankrupt institutions, is to have supervisory 
information, because you need things that are very, very 
current, and you need people who you can trust providing you 
with that information.
    Mr. Scott. And it seems to me that they want to take it 
away from the Fed and put it to some outside entity. What 
outside entity are they talking about?
    Mr. Cecchetti. I think you would have to create a new one. 
Either that or you are going to have to combine the Federal 
Reserve's supervisory and regulatory authority with an existing 
agency, and I don't see anyone suggesting that. But I don't see 
how you could do it.
    Mr. Calomiris. There are many ways to do it. Let me remind 
you that in 2009 Senator Dodd, that was his vision of how we 
should have crafted the Dodd-Frank Act, and I agree with that. 
I think we should have gone in that direction.
    Furthermore, that the 2008 Treasury Blueprint that I keep 
referring to specifically made the same distinction. It seems 
like Professor Cecchetti and I are sort of in agreement, 
because the key point is you want the lender of last resort and 
the monetary authority to have continuous unfettered access to 
all information and to participate actively in the examination 
process, that aspect of supervision.
    But you don't need them to be deciding who gets to merge 
and who doesn't. You don't need them to be setting laws down. 
It is a different function.
    Mr. Scott. But it just seems to me that if you are the 
lender of last resort and that power and authority rests with 
you, you are the fulcrum of the welfare of the entire economy. 
But if you take away that ability to give it to an outside 
source, that really is a mystery. You just can't pluck it out 
the air here and give it to it. I would think it would be 
devastating turbulence to our whole economy.
    Mr. Cecchetti. I think that I am not the historian that Dr. 
Calomiris is, but I will say that the Federal Reserve was 
started in 1914 by the Congress in order to actually do this. 
And so it is hard for me to see how you would organize this in 
a different way.
    Mr. Scott. Let me just ask you on the appropriations 
process, Mr. Cecchetti, what will subjecting the Fed's 
nonmonetary functions to the appropriations process, in your 
opinion, do to the economy?
    Mr. Cecchetti. I think it would be bad, but I think you 
have run out of time.
    Mr. Scott. You did say it--
    Mr. Cecchetti. It would be bad. I think it would not serve 
us well.
    Mr. Scott. All right. Thank you.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Foster, is recognized for 
5 minutes.
    Mr. Foster. Thank you, again.
    One of the issues in the inflation target is whether we 
actually measure inflation properly. I guess Larry Summers and 
others have been going around giving talks that we are making a 
bad mistake in how we--one simple example that everyone points 
out is this supercomputer in my hand here is the equivalent to 
a couple-million-dollar Cray-1 supercomputer. And so everyone 
in my family can now afford their own private supercomputer 
that used to cost a million dollars in 1970 dollars.
    And so we are not doing inflation--or Wikipedia. Every 
middle- class family used to put 500 bucks down into World Book 
Encyclopedias for their children that they now get for free or 
essentially free.
    And so that especially in items having to do with the 
digital economy, it is not at all clear we are doing inflation 
right. And if you look at people's leisure time, it is going 
more and more into free things on the internet that we used to 
pay a lot for. Just a long list of these things.
    And you can make a case that we are badly mismeasuring 
inflation. If that is true, it has real implications for 
monetary policy.
    And I was wondering what your attitude is on this part of 
the debate, because the digitalization of our economy is 
accelerating, and this is going to be more important in the 
future.
    Anyone?
    Mr. Cecchetti. We are trying to pass this around.
    I think this is an extremely difficult question. And my own 
view is that these problems have existed to one degree or 
another for a very long time. Television is very much like some 
aspects of the internet. So television comes on in the 1950s 
and provides us with free television in exchange for 
advertising.
    Google provides us with free lots of things in exchange for 
advertising, which then the advertising, of course, costs get 
impounded into the costs of all of the other products that we 
have, that we purchase.
    So the question is whether or not that has gotten 
materially worse. I love my supercomputer in my pocket, as 
well, and I use it quite a lot, and it is it is much more than 
a--I would have put the price at more like $30 million in 1970 
dollars than $1 million. It is a lot.
    But I think that are we today worse than we were, say, 
during the time there was the Boskin Commission in the 1990s 
that estimated the bias in the Consumer Price Index at roughly 
1 percentage point per year. One percentage point seems to me 
to be a reasonable number. That means that actual inflation is 
closer to 1 than--when it reads 2 it is closer to 1.
    Mr. Foster. That has real implications, for example, 
politically where there is a narrative that real wages have not 
gone up in the last generation. And if you change that by 1 
percent, that is a big change in that narrative.
    Mr. Cecchetti. I agree with that completely. And the person 
whom I would point to as the biggest champion of that is 
actually Martin Feldstein, who I think normally testifies for 
your Republican colleagues.
    Mr. Foster. Let's see. I guess there is a line of 
commenting actually that has been happening about the 
politicization of the Fed. I was just wondering when in the 
past have Presidents seen fit to appoint political operatives, 
campaign operatives and speechwriters, to Chair the Federal 
Reserve. I am only aware of that happening one time in my 
historical knowledge. Any other example than Chair Greenspan?
    Mr. Calomiris. I can't think of a--
    Mr. Foster. Of a second example.
    Mr. Calomiris. Just to answer that more constructively, I 
don't think it is about the personalities or the backgrounds of 
the people as much as it is about the incentives of the 
institution.
    Mr. Foster. I presume you have read Chair Greenspan's book, 
I take it you probably all have, and you see he talked in 
glowing terms about his experience as a campaign operative and 
also his sadness when George Herbert Walker Bush, George Bush, 
Sr., accused him of being responsible for George Bush, Sr.'s 
losing the election because he appropriately tightened credit 
at the wrong time.
    Mr. Calomiris. I know a little bit about that story if you 
want to hear about it.
    Mr. Foster. Did he correctly report it, in your belief, in 
his book?
    Mr. Calomiris. So Nicholas Brady told me, and he told me 
because he knew I was a financial historian and he wanted the 
record to contain this, that Alan Greenspan had made a promise 
to him that he reneged on. And I think that was the nature, 
that, in fact, George Bush's promise to or willingness to 
consider tax increases was premised on that agreement.
    That is how Washington works, which you know better than I. 
And so I think a lot of the bitterness had to do with the fact 
that President Bush actually made a concession on tax policy 
expecting the Fed to do something that they then backed out on.
    Mr. Foster. I see. And is it fair to say, though, my last 
question, that for President Bush II, when he had the 
opportunity to tighten credit at a time that you could make a 
strong argument for, that he did not repeat his mistake?
    Mr. Calomiris. Which Bush are we talking about?
    Mr. Foster. We are talking about Bush II and the question 
of whether keeping the housing bubble inflating potentially to 
influence the reelection of George Bush, Jr.
    Mr. Calomiris. I don't know whether that was part of the 
calculation.
    Mr. Foster. Okay. Well, thank you. I appreciate it.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, we are going to wrap up the questioning. I have 
a few comments and a few questions here. So we will try and be 
brief here.
    Mr. Sivon, all large banks have on-site examiners from the 
Federal Reserve. How have the Federal Reserve supervisory 
practices changed since the crisis? Have the supervisors been 
adequately transparent?
    Mr. Sivon. Thank you, Congressman.
    Chairman Luetkemeyer. I know you represent a lot of big 
banks with the Financial Services Roundtable.
    Mr. Sivon. Thank you, Congressman. It is true that the 
larger banks have on-site examiners.
    I think, in fairness, the supervisory policies of all the 
agencies have tightened since the crisis, the Fed included. And 
where we are at this juncture and what our testimony is trying 
to indicate is that we are at a tipping point where we think 
that there could be some refinement both in regulation and in 
supervisory policy.
    Chairman Luetkemeyer. I have just a few thoughts here. We 
have had a very lengthy discussion today, and I don't want to 
drag this out any longer, but just a couple of little thoughts 
here with regards to some of the comments that were made and 
some of the testimony that we have heard.
    I think, Mr. Sivon, you made the comment with regards to 
stress test models, and I am kind of concerned sometimes that 
the stress testing that is being done doesn't actually reflect 
a stressed or a situation that could actually occurred. That is 
my concern with some of the stress tests.
    I know there are some difficulties in modeling because the 
Fed doesn't tell the banks how to do this. They are kind of 
doing it on a guesstimate way of going about it. But at the 
same time I am kind of concerned at the way the Fed's modeling 
on these things is going, that they are really not modeling a 
real situation that could actually occur in today's world, and 
that is a concern of mine.
    Mr. Sivon. One of our recommendations to address that 
specific concern is that the Fed's stress test scenarios be put 
out for public comment so that they could be scrubbed and the 
Fed could benefit from that type of input from people on this 
panel.
    Chairman Luetkemeyer. Dr. Calomiris, do you have--
    Mr. Calomiris. I agree with that. I have a specific version 
of that, which I have proposed.
    But I also want to come back to the point of the stress 
test. The stress test using the current data can't answer the 
question they want to answer. What they want to answer is, how 
will we be able to tell whether banks might be suddenly losing 
their economic value? That is what causes a crisis.
    The failure of banks to be able to roll over their short-
term debt and to be able to behave normally reflects a sudden 
loss of economic value. That is not going to be captured unless 
you model the creation of economic value. You can't model the 
loss of it.
    Relying on book value of equity ratios and using the kind 
of data that are used in these financial reports simply cannot 
answer the question.
    So I would say that stress tests are close to useless as a 
forecasting tool for the sudden loss of economic value, and I 
don't believe the scenarios are very meaningful. So I do think 
currently they are not helpful, but they are currently for most 
of the banks the binding constraint on capital. So I think that 
is very troubling.
    I am a big fan of stress tests as an idea, but the current 
procedures have the secrecy problem, which is unaccountability, 
and therefore bad modeling is quite likely. But even more 
deeply, conceptually they are just not addressing the right 
question, and they don't have the data to address them.
    Mr. Cecchetti. I would just like to be the defender of what 
is going on today. I believe that the Federal Reserve is doing 
a reasonable job of this. I think they are trying to improve 
every day that they go to work to do a better job. I think they 
are trying to do that both on the modeling side, the scenario 
side, and on the side of the data that is being collected.
    What I would say is that I think we want to be very, very 
wary of transparency on the scenarios and on the models. I 
think that the idea that people are going to game the system is 
a very real one and that we want to guard against that.
    Chairman Luetkemeyer. It is interesting, because in this 
very committee, in that far corner over to the left, we had a 
stack of paper to represent 20,000 pages, what is sometimes a 
small stress test for some of these institutions, and it took 
up that whole table and then some. And yet, I don't know that 
anybody even reads it when it gets to the Fed.
    And so as a former regulator, the Fed already has all this 
information. This is one of my concerns with the stress tests. 
To me it is an exercise where they don't seem to be willing to 
do their job, which is to assess risk themselves. The Fed does 
its own systemic risk analysis for all those institutions, yet 
I am not sure why we need a stress test. It is done by the bank 
itself, which seems to be a game of ``gotcha.'' Am I wrong?
    Mr. Calomiris. If it were done properly the stress test 
could answer questions, a well-posed question: In the event 
that these things happened, would you suffer a very large 
sudden loss of value?
    So I think it does have a function that is unique. I am not 
against stress tests as an exercise. I just don't think they 
are currently ready for primetime.
    Chairman Luetkemeyer. My time has expired here, so we need 
to move on. I will let you gentlemen get home. And again, thank 
you for your expertise and your willingness to be with us and 
share your knowledge today. It has been a great hearing.
    And I thank the chairman of the Oversight and 
Investigations Subommittee, Mr. Barr, for all his hard work and 
participation in putting this together and his great comments.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 4:15 p.m., the hearing was adjourned.]

                            A P P E N D I X



                           September 12, 2017
                           
                           
                           
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