>> mr. mchenry for 30 seconds. >> thank you, mr. chairman. i'm deeply concerned that the accumulative effect of the regulations will be a vacuum. that will be the huge sucking

sound of capital out of our market into other markets across the globe, and this is at a very time where companies are starved for capital in order to create jobs. this week, japan's second largest bank predicted our regulations on western banks will help double their lending. this is a great example of the loss of competitiveness, and i hope that the regulators will understand this that our folks are starved for capital, and we need to get more capital on the streets so we can create jobs. i look forward to hearing from the panel. thank you, mr. chairman. >> mr. mezula? 30 seconds. >> we talk about the international context when still i have companies back home, factories with orders, business people who are unable to get their lines of credit renewed because of capricious and

arbitrary actions on the parts of the examiners. this has to stop. for years, complaining these people were in the process of trying to create jobs, solvent, never had a problem, are suddenly have loans classified and complained bitterly to the fcc, fdic, anded fete. it falls on depth ears. we better worry about the side before the international side. >> mr. graham. >> thank you for the hearing, and thank you to the witnesses. i'll be very, very brief. obviously, we're concerned the implementation of dodd frank is going to hurt the u.s. markets competitiveness, but it's u.s. competitiveness as a whole. these -- for the businesses to

grow and the entrepreneurs, everywhere you grow, you hear about job creation. we won't be able to do that if we're at a competitive disadvantage that moves industry, capital, and jobs overseas. i'm very interested in hearing the panel today in how the process goes with respect to the competitiveness throughout the world. thank you. i yield back. >> last 30 seconds. >> thank you, mr. chairman, and so our witnesses today. i appreciate that this is essentially just a discussion. on occasion, we're hear the comment of regulatory arbitrage. i'm trying to get my head around how much is folklore, how much of that exists, how much is rule for rule, variation and rule writing, but also there's another fundamental out there, actual enforcement. we may have equal rules, but this particular government, this

sovereign entity has a bad habit of never looking at the capital reserve, and that actually puts us at quite a disadvantage or creates a great instability, and that's a concern. thank you, mr. chairman. >> thank you, and at this time i'd like to welcome our esteemed panelists. several of the members have acknowledged the challenges you face, and we commend you for your hard work in industry. our first witness from my, i guess, left to right, is honorable, lael brainard. third witness is shea la b -- sheila bair, and you'll be

leaving. we wish you well in your new endeavor. next witness is mary schapiro, and our fifth witness is chairman of commodities trading commission, and our last witness is mr. john walsh, acting comptroller, and we welcome the panelists. we start with undersecretary brainard. >> well, thank you, chairman baucus,. i appreciate the opportunity. there's some who would argue the united states is moving too fast on financial reform, that we should slow it down, wait to see what other countries implement. i don't agree. by moving first and leading from a position of strength, we are eellating the world standards to ours. with financial markets that are more globally integrated than ever, we need reforms that are

globally convergent than ever. while we don't need to be the same across all issues, there are a few in scope that are needed to succeed. arbitrage carries real impact. it means a race to the bottom for standards and protections, and it means a potential loss of jobs in the american financial sector. if firms move overseas, and it may increase the possibility of future financial instate if riskier activities migrate to areas with loose transparency and a lack of supervision. agenting in concert is the best way to address arbitrage and the concerns of the american firms about competing fairly. the sooner we level the playing field, the better. let me touch on the four priority areas that are most relevant. the first priority is the strength in capital, liquidity, and leverage. these standards can make the

difference between the success or failure of firms and the jobs and livelihood they support. protection in the taxpayer dollars. the new capital framework will help ensure banks hold significantly more capital, that that capital will be able to absorb losses associated with the crisis without relying on taxpayers, and that the definition of capital is uniform across borders. the full international convergence is achieved if supervisors in all major jurisdictions make sure banks around the world measure assets similar ri. that's why the united states called on the committee to pursue greater visibility of cross borders into scrutiny of how they measure assets, and we're pleased that's now on the agenda. in addition, this includes a simple check called a ratio to protect against the possibility of weak international

implementation. a second vital issue is reducing the systemic risk from large interconnected firms. prior to the crisis, many of the firms had too too little capital and put the global sector at risk. to be sure that's not happening again, dodd-frank recommends the fed are at heightened standards, and g20 leaders adopted a commitment to have additional requirements for the firms across borders. in those negotiations, the united states was clear about our priorities. first, additional capital must consist of high quality and loss absorbing loss of common equity. it must be well collaborated to work with macrostability and apply to a wide range of the interconnected banks across the globe and be mandatory and

comparable across jurisdictions to promote a level playing field. third area is resolution. dodd-frank established a special robust resolution regime that provides federal authorities with strong authorities to resolve the institutions, but the best national regime in the world is not adequate if other countries do not adopt robust resolution tool kits and authorities. the united states is working actively in the fsb to implement an international framework. the u.k. and germany already passed resolution legislation, and we will continue to work to encourage other financial jurisdictions to do the same, and finally, international convergence is critical in derivative markets. few underthe magnitude of exposures in the system because derivatives were traded over the counter on a bilateral basis without transparency. as we learned from the crisis, we must require greater

transparency, move trading on to platforms and require them to be centrally cleared. of course, with we do not have a lineman in the firms, they move to jurisdictions with lower standards increasing risks to the system. for this reason, g20 leaders set forward principles in full alignment with dodd-frank. both the u.s. and the european commission are developing margin requirements for otc derivatives not central cleared. we think it's important for those requirements to be developed internationally and our regulators agreed to work with international regulators to do so. if we don't have a consistent merger standard or unclear trades, we run the risk activities migrate to jurisdictions that do not provide incentives for central clearing. some, we have great strides to ensure the financial system is stronger so that future generations can avoid a financial crisis of the type we just witnessed, and we

appreciate the leadership of this committee on these key challenges. >> thank you. governor tarullo. >> thank you. i'll make five points in four minutes. it's important to remember why we strengthened standards and introduced liquidity standards, the three banking agencies in front of you and regulators around the world. the financial crisis revealed that the amount of capital held by many banks institutions under prevailing capital requirements proved quite inadequate in quality and quantity. wholesale funding markets found the sources of funding dried up quickly, at times, almost overnight as market concerns rose. back in 2008, the prospect of the failure of the most systemically important institutions raised in turn the prospect of the collapse of the financial system to which none

of these large financial institutions would have been immune, and that, of course, led to t.a.r.p.. i think it's fair to say as we sit here today that no one wants another t.a.r.p.. not those who reluck at that particular timely supported it two and a half years ago, certainly not those of you who opposed it. if we are to avoid another choice between a t.a.r.p.-like mechanism on the one hand or a collapse of the financial system on the other, we have to ensure they accurate loss of capacity and can sustain markets. in a global financial market, serious problems in any sector can spread sometimes very quickly. that's why it's important to negotiate good capital and liquidity requirements for all internationals. that's what basel iii was about. that's why it's important to understand the most systemically

institutions around the world have additional capital buffer in light of the impact that their failure would have on the financial system. third point, there are a number of additional areas where there's need for more international cooperation. several of you mentioned derivatives, and i agree. fourth point, the one where i want to spend most of my time. the financial staibt benefits of basel iii and other reforms will be realized only if they are implemented rigorously across jurisdictions. leer i want to distinguish between implementation and incorporating the agreements into domestic cooperations and agreements on the other and ensuring the standards are in practiced observed by firms in all the basel committee countries. the first step, getting the agreements into laws and regulations is obviously necessary, but it is not sufficient, yet historically,

that's about all that the basel committee implementation ever have been able to achieve. as effective external monitoring of international capital and now liquidity agreements becomes hard. it is all the more important to take the second step. for example, there's been considerable external analysis in recent months of the divergence in risk weighting across countries. a number of reports issued by financial analysts both in the united states and in europe suggesting that generally speaking it appears as though rich weighted assets in similar port foal lows are more weighted here than in other european countries. they don't have access to the models that's in question. they cannot provide answers to those questions. that is where an effective

international monitoring system comes in. we raised the issue in the basel committee. i raised it last week at the financial stability board steering committee meeting, and as we move to the implementation phase of basel iii, we'll put together how international agreements can be effectively monitored at the firm level. i've provided ideas along these lines in my testimony this morning and happy to discuss them further with you. the key point is that much more needs to be done for another least three reasons. first, as i said earlier, to ensure that the financial stability benefits of the agreements are realized. second, to avoid a situation in which firms from some countries, including the united states are competitively disadvantaged. third, because the effectiveness of these rather complex standards will benefit from the very concrete sharing of perspectives and problem solving among supervisors from all the

basel committee companies that will be entailed when such a monitoring mechanism is in place. thank you. i'll be happy to answer questions. >> thank you. chairman bair. >> thank you. i am pleased to testify about how current regulatory initiatives effect the economic health and international competitiveness of the united states. this morning, i want to focus in particular on the importance of strength and capital regulation. a strong and stable financial system is a precondition for a vibrant and competitive u.s. economy. unfortunately, in the years leading up to the crisis, some financial institutions strayed from their core missions at providing credit intermediation to support the real economy and supported gaps and weaknesses to reap huge fees from complex structures and with instruments that did little to support growth and productivity. dealed by the market perception of too big to fail, many had low

cost debt financing rolled into high risk debts and up stable financial activities up stead of manufacturing, energy, technology, and infrastructure. the full cost of the financial crisis are not yet known. we know that we've lost almost 9 million payroll jobs in 25 minutes, homeowners are in a one-third decline, and over 9 million foreclosures over the last four years. lending by ensured banks contracted $750 billion and loan commitments declined by $2.7 trillion. availability is lost at the collapse of the so-called shadow banking sector. a healthy and competitiveness economy requires a financial system that's stable and supports the credit needs of the real economy. this is not the system we had prior to the crisis. as we debate the needed improvements, there's much discretion as there should be about how financial reforms impact the overall effectiveness

of the u.s. economy. competitiveness is a broad concept of which financial industry competitiveness is one part. the short term profitability of financial institutions should not be confused. many of the lapses that occurred as a way to strengthen our position, but what we discovered was sacrificing safety and soundness for global competition made both the financial institutions themselves and the broader economy worse off. a prime example is capital regulation during the precrisis years gave undue weight to the desire of financial institutions to reduce and capital requirements were weakened in the precrisis years. as a direct result, institutions increased to the point with capital was inadequate entering the crisis. insufficient capital skews incentives. shareholders reap the upside,

but the costs are born by the broader economy. we are still paying as a country for the leverage of some of our largest institutions. with basel iii and dodd-frank act, we have an historic opportunity to stlenten the capital. the agreement strengthens capitals in a variety of ways, 5 marked improvement over the current regulation. the basel iii ratios are on the low end needed for banks to weather a crisis. this is especially true for the largest banks. we saw the cost associated with the failure of a large interconnected institution. i strongly support the need for buffers. it seems self-evident that capital requirements for the largest financial institutions should be higher and not lower than the general standard that applies to smaller banks, yet prior to the crisis, a number of large european banks implemented

the so-called advanced approaches under basel ii allowing them to increase leverage by using internal models to set capital requirements. large u.s. ensured banks and their holding companies were also on a course to take on additional leverage by using the risk models to drive risk-based capital requirements. on tuesday of this week, we corrected the situation. the fdic board approved final rule joint with the occ and federal reserve to implement section 171 of the dodd-frank act. this provision of the act, the collins amendment says the capital requirements of the largest banks cannot be less than the capital requirements community bank face for the same exposures. this model under basel ii can be used to increase, but not reduce requirements. unfortunately, large banks in europe and elsewhere are allowed to effect their own capital requirements. 24 concerns me greatly for the reasons indicated, and i look forward to discussing that more with the committee. i think we need to, as we strengthen capital standards here, we need to make sure that

you follow suit, and i will be glad to talk to the committee as long as i can which is not much longer, and i hope my colleagues will continue this course to maintain very strong capital standards in the united states. thank you. >> chairman schapiro. >> thank you. i appreciate the opportunity to testify today on behalf of the securities exchange commission regarding the international implications of the dad-frank wall street reform consumer protection act. the act establishes a host of new reforms with implications to compete internationally. i testimony discusses a number of the reforms and other efforts to coordinate with foreign regulators and eliminate arbitrage. i want to focus on the over-the-counter derivatives marketplace. it's a global value of just over $600 trillion, yet otc derivatives were excluded from the framework by the commodity

futures modernization act of 2000. title vii of the dad-frank act brings this under the financial umbrella requiring the ftc writes rules relating to among other priorities, the operation of execution facilities and data repositories, capital and large requirements, business conduct standards for dealers, and greater transparency of transaction information. these rules are designed to greatly improve transparency, improve centralized clearing, enhance oversight, and reduce counterparty risk. by promoting transparency, sufficiency, and stability, this fosters a competitive market. because this market place exists as a functioning global market with limited regulation, international coordination is critical as we seek to limit opportunities for arbitrage, eliminate disadvantages, and address conflicting

regulations. domestically, the fcc is working closely with the ftc, federal reserve board african-american others to -- others to implement differences in products, entities, and markets. working closely domestically bolsters our acts immediately. this enails to consult, coordinate with foreign regulatory authorities on the establishment of consistent international standards. we are working closely with international regulators in this regard. while the u.s. is the leader in this area, a significant international con accept sus exists around core components of otc derivatives reform. while progress is made internationally, other nations lag behind u.s. efforts. to address differences in scope and timing, the fcc has been extremely active and bilateral discussions with regulators abroad. we've been engaged with market

regulators bilaterally and participation in and leadership of various international task forces and working groups to discuss the full range of issues surrounding the regulation of otc derivatives. rather than addressing the international implications of title vii of dodd-frank peace meal, we're considering addressing the relevant international issues holistically in a single proposal. this generates thoughtful comments for us to consider the application of title vii to cross border transactions. in addition after proposing all the key rulings under title vii, we intend to consider seeking public comment on a detailed implementation plan with a roleout of the swap requirements in an efficient manner while min mizeing disruption and costs to the markets. i also would note last friday the fcc announced they are taking a series of actions in the coming weeks to clarify the requirements to apply to

security based swap transactions as of july 16 and provide appropriate temporary relief. yesterday in the first such action, the fcc provided guidance making clear that many of title seven requirements applicable to security-based law will not go into effect on july 16 and grant temporary relief with many of the new requirements that would otherwise apply. we took this action to avoid market disruption as we work expeditiously to finish rule writing and adopt our rules. while derivatives are a key focus of the fcc, other policy areas demand attention. for example, accounting and national reporting standards are essential to allocation of capital by investors ever where in the world. we are continuing work on the important issue of whether to incorporate international accounting standards into the u.s. financial reporting regime. our primary consideration on these activities is the best interest of u.s. investors.

in conclusion, the fcc continues to work closely with regulators in the u.s. and abroad, members of the community, and investing public to conduct rule makes with implications in a manner to support the interests of the u.s. markets, investors, and firms. thank you for the opportunity to share my thoughts with you, and, of course, i'm happy to respond to questions. >> thank you. chairman gensler. >> thank you. i thank you for inviting me to the hearing of regulatory reform. i thank ms. bair as this might be the last time we testify together, and best of everything you do. it's now been more than two years since the financial crisis, and when both the financial system and i would say the financial regulatory system failed america. so many people throughout the world who never had connection to derivatives or exotic financial contracts had their lives hurt by the risk taken by

financial actors. all over the world, there's high unemployment, homes worth more than their mortgages, and gains not regaining value they had before the crisis. we have real uncertainties in our economy. though the crisis had many klauss, and i agree with the members' statements on that, it's clear that the swaps market did play a central role in the crisis. they added leverage to the financial system where more risk could be backed with less capital. they contributed particularly through credit default swaps to an asset bubble in the housing market and i believe accelerated the financial crisis as we got nearer to it. it contributed to a system where large financial institutions were not only thought too big to fail, but we had a new phrase called too interconnected to fail. swap, which do help manage and lower risk for many end users, actually con sen straited and heighten risk in the economy by

concentrating it amongst the large financially important firms. as capital and risk knows no boundaries, we have to have international oversight that ensures that these markets, these swaps and derivatives markets function with integrity, transparency, openness, and competition. this has been found since the great reforms of the 1930s to benefit the securities market and the futures market and benefit the economy and job growth in creation. to address the real weaknesses in the swap market, the president, the g20 leaders in pittsburgh in 2009 laid out a framework for regulation of the swaps market. the u.s. and japan both passed reforms of legislatures working on the implementation. the european parliament are considering swaps proposal, and asian nations as well as canada are working on their reforms. as we work to implement dodd-frank, we're actively

coordinating with international regulators to promote redust and -- reboast and consistent standards and the commission participates in numerous international work groups, but we're also sharing our work product. we have started last july and august sharing memos, term sheets, and draft work products with international regulators in europe and asia. we've found this to be a great benefit because we get comments before we put the proposals out, and then consistent with the administrative procedures act putting proposals out, and we have more comment. specifically, accorduating with regard to the scheme of the regulation, central clearing, capital, margin, raised my be members here, business reporting, business conduct standards, and the transparency initiatives including trading on electronic trading platforms. furthermore, a very important feature of the act is a section called 727d. i learned so much now.

it states specifically the act relating to swaps shall not apply to activities outside the u.s. unless the activities have a direct and significant connection with the activities of the commerce here. we are developing a plan for the application of the said 727d and expect public up put on that plan, and we're working with the ftc on similar work they're doing there. before i close, i'll address the issue realitied to what occurs on july 16. the commission two days ago had a public meeting on this matter. first, the substantial portion of title vii actually only goes effective once we finalize rules. a majority of title vii is not effective july 16, but for the provisions that are not dependent on a final role, sort of self-executing, we propose exemtive relief until december 31st of this year providing

relief for most of title vii. we look forward to hearing public comment on it to the extent we need additional relief at that time as we move forward. effective reform requires comprehensive international response, and, yes, consistency, but i thank you, and i look forward to your questions. >> thank you. chairman walsh? >> thank you, and the banking agencies have ways underway to have requirements consistent with dodd-frank and basel iii. we believe it's important to see not how only individual requirements impact u.s. firms and their international competitiveness, but the accumulative impacts as well. the invitation letter raised the question of the race to the

bottom. it's not a serious concern when regulatory requirements are becoming more stringent around the world. the concern, instead, is that standards are being raised both significantly and comprehensively, and so much so that we could unnecessary restrict financial intermediation and economic performance. at the same time, it is certainly true that if the same high standards are not adopted by all countries and enforced with the same vigor, u.s. institutions could be left at a competitive disadvantage. our challenge then is to address the problems that led to the financial crisis without underminding the ability of banking institutions to support a strong gnarl economy or placing u.s. institutions at an unfair competitive advantage internationally. both the dodd-frank act and basel iii aim to promote a banking sector by imposing stronger capital. they raise the amount of regulatory capital and just as important, the quality of that capital is improved.

improved significantly by placing much greater reliance on common equity and raising capital charges on risky asset classes. banks will also be required to hold substantially more liquidity in the form of short term low risk assets, and to increase their reliance on more stable long term debt and core deposits. the basel iii standards were designed around the crisis experience of the largest u.s. banks and the occ supported a capital sur challenge of common equity for a small number of very largest banks. that add-on should be modest given where requirements already moved. this is not to argue that surcharges should not be higher where great institutions represent a greaterring risk to the economy. where the largest banks succeed gdp like in the u.k.. the u.s., on the other hand, imposed statutory caps on the size of our largest firms, and even the largest firms are only

a fraction of gdp. while 27 countries reach general agreement on the policies and standards outlined in base iii, the details of the implementation vary country to country. u.s. implementation is likely to be more complex and impose additional restraints than in other countries with dodd-frank. for example, the coal lips amendment -- collins amendment on the floor has base basel i standards that capital u.s. banks do not face, and still used to determine capital, large u.s. banks will have far less incentives to rigorously pursue the costly tax of implementing the framework. the dodd-frank agents prohibition against the use of credit ratings impedes our efforts to achieve international consistency in the implementation of basel iii. since basel iii, the basel ii

frame work and i for that matter make use of ratings in several areas including securitizations, counterparty risk, and trading positions. given capital already raised by large banks, a return to profitability and the extended phase-in period for the higher standards, u.s. banks should be ail to transition to the 7% standard without causing undue stress on the economic recovery. however, i'm concerned with how much further we can turn up the dial without negative effects on lending capacity. a very real risk is lending will fall, become exceptive, and move from the regulated banking sector into the shadow banking sector. certainly a lesson is that risk may grates too and accumulate in the unregulated shadow sector with undesirable consequences. the fact that so many reforms are occurring at once with combined effects we cannot measure is cause for caution.

before contemplating further increases to capital and timizing liquidity requirements, we have to taking the of all reforms introduced to increase the stability of the financial system to absorb losses and reduce the probability and potential impact of the failure of large institutions. the goal of all these changes is to improve the system's resilience, but taken too far, we may limit the credit needed to support economic growth. thank you, and i welcome your questions. >> thank you. i think we all agree banks should be sufficiently capitalized or particularly or globals because we want to avoid bailouts, avoid taxpayer funding, and the shock it does the economy, and i think the

same is true of overleverageing, and having said that, i think i'm -- there's an important points and as we raise capital, and you talked about 700 basis points on some of our sifis. how does that effect our lending, and do you think that has effect on our economy? >> well, mr. chairman, let's say a couple things here first. it's important to understand that the rational for a sur charming and systemically important institution -- >> that's what we're talking about, a surcharge. >> right. it complements the rationale for basel iii, a firm-by-firm

analysis. for the basel iii standards, they look at each firm and basically on the basis of its balance sheet and balance sheet alone say what's the riskness of the various aspects on your balance sheet and off balance sheet assets? it doesn't take into account that correlation of risk among firms that own similar assets. in a financial crisis, what happens, of course, is that those assets, particularly traded assets, are the ones that come under the most stress, the ones for which the market is most impeded, and that's why the systemic effects in 2008 are such concern to us. the motivation for the surcharge is one that takes into account the size, interconnectedness, and sorted systemic consequences of a failure of such an institution. that's the first point. second point doesn't get a fair

amount of attention to the numbers i cited in that speech i gave about a week and a half ago. i mean, when i said in that speech is that when analysts here and abroad have applied some analysis or mode of analysis to how much the surcharge should be in order to try to sustain that systemic risk, there's a range is what everybody comes up with. you have to have assumptions, and that range which i indicated was some variant on certain per sen taming points up to maybe seven percentage appointments above basel iii is just what some studies produced. that's not to say that's the one that gets good adopted. there's reasons to collaborate, and that's what's going on with the international process right

now and domestically is what will go on when the federal reserve does its rule making on the enhanced prudential standards. i agree, mr. chairman, you have to take into account costs for the firm and benefits of the firm, and we've done a cost analysis with the analytic tools available to us, but what's important is not to lose sight of the cost of not acting here. >> i understand there's a cost of not acting, but, you know, for instance, comptroller walsh is concernedded as i am, and i know that chairman bair takes a different approach, but under basel iii, the -- i hate to call it advanced approach to risk management -- other countries will be using this approach to sort of refine their approach and the coal lips amendment takes that off the table for us. i would ask under secretary

brainard, are you concerned about that? >> well, sir, as you probably know, mr. chairman, my concerns about the implementation of basel ii predated my arrival at the federal rereceiver, and that's a lot of the academic work i did before i got to the fed, and, sure, i'm particularly concerned about the way it's implemented. i mean, one would think if you put a procyclical regime into place since the biggest recession of the -- since the 30s, capital should go up, and it didn't. that's why it's important to look at the proposals i made on the compliance in my testimony. >> undersecretary? >> well, i think it's important as we look at the surcharge. because the institutions are competing internationally, that's critical whatever is agreed is comparable across countries and mandatory in every jurisdiction, and that's why

there's an emphasis on having common equity, of course, the strongest most loss absorbing kind of capital we'd like to see in international agreements that have common equity and gives little discretion to supervisors. the other thing i think it's important is weight assets. our institutions are concerned, and we share those concerns, and that's why, as i said earlier, as governor said, we are trying to put in place monitoring mechanisms for the first time to have visibility and help supervise to see if they assess risked weights. basel iii will be helpful. it is another way of trying to create a floor. >> thank you. i think we're concerned about rules on the books not een forced by some of the other countries. >> i want to say the advance

approaches did not work. they allowed european banks to reduce their capital levels. as the recession hit when you expect the levels to go up because the property of to faculty on -- default on loans was likely. the report we're happy to share with you, investors have no confidence. it's a large issue, but all the effort in the basel committee is to try to put more constraints on the aim of the individual banks to set their own capital standards so i think and the u.s. is pushing that, and i think that is the direction to go. i must say in terms of easing large institutions, given the flaws in the advanced approaches, it's expensive to implement. i would get rid of it. it's harmful, and not helpful, and ce with i'll prove the basel i standard. one way to decrease cost is get

rid of those all together. >> thank you. >> i want to begin by saying good-bye to sheila bair. my working relationship was a ben formal one for me, and i want to make a prediction now that she will be missed even by people who don't know that now, but i think that her tenure will stand out as an extraordinary public service. i'd like to give credit where it is due. mr. subrow, i want to read what he just said. we understand the commonality we come from. he has recent initiatives designed to reduce risk, and it's federal reserve

supervision, offbalance activity reduced, margin reporting and derivatives, centrally clearing derivatives derivatives, risk retention, prohibition. here's what he says. as a result of these post financial crisis changes, lehman brothers would have been subject to the same prudential superfission as jp morgan. aig would have been required to register as a major swap participant reporting positions and subject itself to federal supervision. countrywide and washington mutual would have been subject in the same write standards as national bank and would have been significantly limited in making subprime lopes or required to retain risks of the mortgages, and the charming would have been gathering data. these are important changes. i appreciate the acknowledgement of things in the bill, and as he

notes, would have substantially lessened the likelihood of those institutions that were major failures, and he notes apply some of the restrictions, all the restrictions in the bank system to the unregulators where the shadow bank system comes in. he also on page five talks about what we did in terms of resolution of large institutions which i continue to believe should be calls dissolutions, a euphemism too far. what he says in summary of listing these is the united states is ahead of the rest of the world. the fdic's new authorities are already in place. most countries have no plans for orderly resolution and acknowledged their banks should be bailed out at taxpayer expense should a crisis occur. we're doing the hard work of making large institutions a viable option and banks are devolting resources to this project. it's clear from the context this is not a case where he is complaining that america is different than the rest of the

world, but a case where he is boasting together with the financial institutions, the congress, regulatory agencies, we're ahead of the rest of the world. on page six, he has a heading, further i understandlation for tax -- insulation for taxpayers. beside increasing the risk, dodd-frank reduces the risk of a large institution failure would cost taxpayers. i thank you for that, and we have differences, but i think we are where they are. one point because it goes on too big to fail. on the imposition of a capital charge, i noticed that one of the contributory factors to be considered # would be an increase in the capital charge to justify set the -- offset the perceived advantage of too big to fail. i disagree with that. i don't think we should be reup forcing it rather than charge people what is an increasingly

differing position. what we have now, i think, is an increasing recognition that that is not the case, and i think that's one area where, and i understand that, you know, we don't want to charming banks excessively. i hope you reconsider that. rather than charge the banks perception, let's make sure we absorb the connection and drop out. there's concerns about margin requirements on solve run wealth funds. when the nine u.s. subsidiaries of the u.s. bank is dealing with a nonu.s. entity that there's a requirement, my view isst that's a legitimate view of advantage. do you have the authority to take that intoing the, and can you and your fellow commissioners adjust with regard to margins so in the very particular cases where there's an international setting, a

competitive disadvantage make it go away? >> we're working a long with the prudential regulators because they actually have authority under dodd-frank to set the mar gyps for the banks. we just have the non-banks, but we are, along with the fcc, nicheuating dialogues with colleagues. >> do you have the authority collectively to adjust if there's a problem? >> i think that we have a existing authority based upon rational reasons along how the administration act has us do it. >> i understand, assuming rationality, but you do have sufficient statutory authority to deal with those specific situations we talk about? >> along with other regulators who have the authority. >> i have 30 seconds. do any -- do the other regulators with that authority concur in the very specific situations that the authority would be there to take that under account? >> generally, i think that's

true, mr. chairman. >> ms. bair ?rks >> yes, we have the authority. mr. walsh, you agree also? waves doesn't make it into the record. >> i didn't know you wanted to hear, but yes, absolutely. >> i don't always want to hear, but that i did want to hear. there was no box and candy to report it to the ethics commission. [laughter] >> thank you, mr. chairman. certainly there's wide agreement that capital and liquidity standards were most up adequate going into the financial panic of 2008, and clearly there's a convergence of opinion. they must be raised. i think the question particularly in this hearing that has to be addressed is what is the accumulative impact of

raising the capital standards under basel iii? what will be the impact of the extra capital standards to be assessed against the institutions juxtapose the 200-plus pages of dodd-frank? i am uncertain that we know the answer to that question. i've heard many tough that we must have stability in our capital markets. i agree state is a good thing, but we've had stability in our employment markets for two and a half years. employment stabilized at -- unemployment stabilized at roughly 9%. stability as a macroeconomic virtue may be somewhat overrated, and clearly, i think we have to look at the balance again of what ultimately will be the impact of this extra stability on our job creation?

secretary brainar drk, you confused me with one part of your testimony. what i thought i heard you say is that it was critical that the united states essentially be the first mover in regulatory reform, but at the same time i believe i heard you and almost every other panelist talk about the -- their fears of a essentially a race to the bottom and what we know as regulatory arbitrage. i'm having a little trouble understanding why does mission critical to move first, and why should we not move concurrently. did i misinterpret parts of your testimony? >> first of all on the capital starnth, there was a great deal of consideration on the basel iii capital standards to the macroeconomic impact of those capital standards, and our

regulators did a lot of impact here on the u.s., and it was also done internationally, and there was broad agreement, and i've seen the analysis that the transition timelines that are generous in the basel iii framework gives the institutions plenty of time to earn their way in meeting the standards without adverse impact. i don't think we are choosing between stability and growth. in fact, i think the real point here is that we will have much healthier growth, if, in fact, we put in place a safe and sound financial system. with regard to the -- >> let me interrupt you here if i could. chairman bernanke ten days ago spoke before the international monetary policy conference in atlanta. when asked about the accumulative impact of basel iii, dodd-frank charges, said,

"has anyone done an analysis of the impact of credit? i can't pretend anybody really has. you know it's just too complicated." i think what i'm hearing from you, secretaryings is that you may know something that the chairman doesn't? >> with regard to the capital standards in particular -- >> you're speaking solely of capital standards? >> yeah, there's been analysis of that. secondly, with regard to moving first, really, i think, we have a choice, and we have chosen as a nation to put in place very strong standards, and then to work internationally to get other countries to -- >> what does is your -- >> in terms of -- >> what assures the con con convergence of the standards? many said basel ii had disparity of interpretations and come plieps, and that was with basel ii. what assurance is there there's a uniformity of compliance and

timing? what's the mechanism? >> what we've done is first of all gotten agreement in the g20 and the basel commitments in the basel committee around the same standards, the same set of reforms, same set of principles in all three areas that were under discussion today. secondly, there's implementation deadlines for the areas, and third, there's processes in place that permit supervisors to have peer review and to hold other jurisdictions toking the for the implementation deadlines. >> i would say in the remaining time that i do not have that michael said "europe is not going to be under american supervision, and they seem to be on a different timeline." i'm out of time now. >> thank you. ms. waters in >> thank you very much, mr. chairman. i'd like to engage the honorable

sheila bair. so many practices and considerable amount are flawed, surfaced in the industry of the financial crisis, and regulators could have been quicker and stronger. i was dissatisfied with the foreclosure review reliced by regulators in april, and since you led the charge for sustainable loan modifications, i think the fdic was likewise disappointed. let me read their press release. "the inner agency review was limited to the management of foreclosure practices and procedures and was not by its nature a full-scope review of the loan modification or other loss mitigation of these services. a thorough regulatory review of

loss mitigation efforts is needed to ensure processes are sufficiently robust to prevent wrongful foreclosure actions and to ensure services identified to the extent of which individual homeowners have been harmed." first, you believe that another regulatory review is needed? is that what we need to do with this? >> well, i just wanted to make sure it was clear what the scope of the review was, and i don't think there was disagreement among the regular regulators with the scope. right now, pursuant to consent orders discussed, there needs to be a look back so the major servicers need to be a third review of servicing errors retroactively and identify harmed borrowers and provide appropriate redress for that and a client process. we're in discussions with the fellow regulators on that, and i defer to mr. walsh, the lead regulator for most of the

servicers and has been playing a key role in this, but i think it's important for the public to explain what was and what was not covered and also being coordinated with the justice department, the state ag's on the law enforcement end. i think there's hope this can be packaged together so there's one set of standards for both the prospect reforms to make sure we don't have errors going forward as well as the look back that borrowers who were harmed receive appropriate redress. >> so this recommendation of letting the services have outside consultants to up vest gait -- investigate them is of concern to, i suppose, many of us. do you believe that outside consultants can do the job that's needed to be done instead of regulatory review? >> well, i do think there's needs to be a robust validation

process so, yes, we want an examination team reviewing sizable samples of the reviews that the consul at that particular times do to -- consultants do, and i think the extra set of eyes would be helpful. >> mr. walsh, you testified to the banking committee in martha only a small number of wrongful foreclosures took place. do you still think that? if the federal inner agency review was limited, how would we know that? >> well, i think the key there will be the look back that chairman bair was referring to. the sampling done in those examines was to -- exams was to establish whether there was sufficient grounds to determine that the servicers had failed in significant ways and that remedial actions, cease and desist orders, remediation plans were needed, and result of that

sampling was to determine that that was, indeed, the case. now having done that, we have enforcement orders in place to require significant follow up, both implementation plans, and also, again, this lookback process that chairman bair referred to and that we are working on an inner agency basis, and that will establish the wider scope of problems if there are more substantial problems. ..

to look at those things in the context of this look back and review where he will drove down. >> thank you. >> thank you, mr. chairman. i wanted to ask chairman there and a point here that goes to the president of the kansas city fed's commentary on this very thing you're struggling with and that is he sells the funding advantage is too big to fail organizations have over others amounted to $250 billion for the 28 largest banks in 09. at the federal reserve bank of kansas city, he says we estimate their ratings and funding advantage for the five largest u.s. banking organizations during the crisis. in a nine these organizations

had long-term bank debt rated four notches higher on average than it would have been based on just the actual condition of the banks. with one bank given an eight notch upgrade for being too big to fail, looking at the curve of the advantage translates into 160 basis points savings% two years to maturity and for 360 basis points for seven years to maturity. this is huge, and it has a highly distorting influence on the market. now, i also notice you are deutsch in ancillary rationale is additional capital requirements could help offset any funding advantage from the perceived status of such institutions as too big to fail. we had a hearing yesterday, regarding to big to fail, and i think some very well-meaning people believe the problem is

solved by this new orderly liquidation of 40. in the course according to their logic because of the new authority, the institutions will not be perceived as the old and the rating agencies downgraded the institutions, which is going to lead to hiring borrowing cost thus eliminating the status. but i don't believe many of the fed governors believe this and i don't believe many in the market believe it, and i would start with you, chairman barry and ask for your perception on this. and how you believe orderly liquidation of for the impact the size and scope of this global surcharge in the future, and this global systemically important financial institution surcharge? >> welcome as you say, too big to fail is a problem before the crisis and there are bumps up and these are made the problem

is the bailouts reinforce the perception and even widening disparity in the institution. i think we are making progress of already and so a downgrade and consider moving -- >> you said they may. >> i think again as we have discussed before, the fdic and the fed through implementation will require liquidation and has the keys to make and wi can work and won't be a thing of the past. two big to fail is ingrained into the crisis and it's going to take a while to get rid of it. but title tooby and i give the authority to take the steps to get rid of it over time. it's going to take time, but i do believe that, and i'd also see any alternative either. i think -- >> let me go to mr. tarullo for his thoughts. >> chairman, for the next 22

days every time i address her as chairman there, i think she's already made the point that it's not an off and on a switch. that is we've got the orderly resolution of for the in place which the fdic is implementing. i think as i have suggested the capitol standards are a complement to the orderly resolution of 40 and to get to the market discipline i think actually both of these things are going to change. if you think about it, if you end up in a situation in which counterparties truly believe that there's not going to be a bailout forthcoming, those who advance credit to very large organizations are going to demand higher level of capital than existed in the past. and so i regarded the resolution of 40 and the capitol surcharge as complementary self reenforcing mechanisms which can move us along the road to what i think everybody up there on the

panel and everybody in this panel agrees should be the end, which is eliminating any too big to fail reality or perceptions. >> that should be our end goal, and the one concern i have is the way in which the legislation was written. i'm afraid in some ways we may have reinforced it. and i say that because counterparties -- you can see it right now in the market. clearly at the moment things have not changed in terms of the way to big to fail, but my time is expired, and thank you. >> we will take one more on each side and then when we come back we will start with other members. >> we both agreed that for our members -- >> launch off the hill. >> thank you. i would like to ask all the

panelists of about the capitol requirements and whether or not they will have a disadvantage specifically i would like to start with chairwoman bear, section 165 of the wall street reform act requires the fed to impose heightened capital requirements on the most complex u.s. banking entity. in your opinion, should any sifi charge adopted under basel iii satisfy the requirement or should american banks be subject to a surcharge in addition to what's required under basel iii? >> well, i would first to governor tarullo i believe he said the fed is going to be making this up with basel iii. and at least for capital we all made a very conscientious effort to make sure that the standards are harmonized internationally.

>> governor? >> welcome okay, i'm sorry, the sifi surcharge would be on top of basel iii. life of your question is what the fed have something in addition -- >> i think whatever the sifi charge is is the basel agrees to will be with the fed implements' year; is that correct rex yes. >> so in other words, well, maybe the fed should answer. the fed should answer, in other words, are you going to put an additional charge -- was in the data set feige for the banks? >> it would be an additional charge on top of the basel iii standards, but as chairman they're just noted, it is one that we are working in the basel committee to get agreement on internationally so that comparable institutions in all the major financial markets would have a comparable surcharge. estimate that is definitely a good goal.

otherwise i feel the we would be disadvantaged. may i ask you and the of the panelists whether you believe that there is a risk of regulatory arbitrage with the requirements we have in our country, and whether there is any risk that u.s. markets could be placed in our financial institutions at a competitive disadvantage? >> you to start with me? >> sure. >> yes, there's always a risk of that, and i did you heard from several of us and a number of your colleagues on both sides of the all that in the derivatives and market areas, in particular i think a number of us are concerned about that, which is why there's a need to accelerate work to get basic convergence on that proposition. >> would anyone else -- mr. danziger, since derivatives is your area could to comment on the competitiveness? whether or not we will be at a

disadvantage. 66 regulator or even treasury here, but i did that there is always that challenge. it was one of the reasons why i think this nation didn't regulate this market. it was one of the five or six key assumption welcome the market will just go overseas. i do think there's international coordination on and good consensus on central clearing, on capitol because that's part of basel iii. i think we are going to work together on the margin in approach. i think there's good consensus on a risk mitigation techniques. there is frankly a greater challenge on some of the transparency initiatives. we have swap execution facilities looking at the cody yes, but those might be a little different in what we are doing here on the execution facilities >> honorable shapiro? >> i agree there's always of course the risk of regulatory arbitrage but there's also significant consensus among the veggie 20 and financial stability board members who is

put forth recommendations to implement the g20 commitment about what needs to be done. in particular the derivative stays and oral we have a lot of consensus issues there are a few restaurants were notes treating problems and regimes i would speak to in particular where we are not only doing the same place but that's why it's important to continue to push to the task forces and working groups of international regulators and to persuade others to come to the consistent requirements. >> mr. wash? >> i guess i would just add to what others have said that commitments have been made to maintain consistency. and if we succeed in achieving consistency in the derivatives area and the capital area, and, as governor tarullo pointed out, if people actually deliver on those commitments in the comparable ways, then there should not be an arbitrage or race to the bottom problem but

it's trauma edging to do that in an international context and we have to work at that. we also have to be careful here at home that as we integrate some of the dodd-frank requirements specific to us and the international commitment that works well also. >> well my time is expired. thank you very much. >> thank you, mr. chairman. you know, i would note that there's not a representative of the insurance industry on this panel. so, i will ask mr. brainard. do you know when the president plans to finally nominate an independent insurance expert who will have a vote on fsoc? >> we have our new director in place i think three days i want to say. >> you have him but you don't have the insurance experts voting on fsoc that you all do. >> i don't have the answer on the timing of that, but i will get that for you.

>> then critical to the u.s. competitiveness is the fio person. i happen to be from illinois, so i am very happy that he is there. so, she will proceed right away, three days that he's been there now? that's right. i can get you the information on the expert as well. >> certainly with what is happening in mecca ustr it's important that he be there. so, and then to all of you, since all of you represent federal agencies that are part of fsoc, can someone explain their understanding how fsoc proposed rules could impact insurance businesses which are regulated by the state and since we have no insurance person than to really let us know. ms. brainard? >> i think, first of all, the

insurance commissioners from the states will be represented on the fsoc and as they go through the designations process will be part of that process. the other thing we are working hard on just because this hearing is very focused on achieving international consistency is that we already have representatives on the international body iais, and we are looking for to having the fio representative there as well. >> so, your resources and staffs are devoted to ensuring that fsoc rules when they are finalized and that they are taken into consideration and the uniqueness of the insurance? >> absolutely. i think given the importance of the state insurance commissioners that fsoc takes into account the nature of the market and the way that it's regulated in the u.s..

so, looking at the volcker who will which many of you have addressed should businesses be allowed to continue to invest in the private equity? >> i cannot speak to how the volcker rule will be applied. that process is yet to come, and in particular which will be applied but that's something that is still under consideration. >> the key issue that is the volcker rule is whether or not of a depository institution is engaged in the activity and then whether any ensured institution is affiliated with it engaged in the activity. if an insurance company is itself not to the owner of a depository institution than it is not going to become. >> chairman shapiro, would you agree with that?

>> his i would, the volcker rule is to banking entities and would depend upon the structure of the particular insurance company. >> and i would note that before the august recess the subcommittee on insurance and community opportunity will hold an insurance oversight hearing to further examine these rated insurance issues and i hope buy then we have a representative on fsoc and with that i would yield back. >> thank you. undersecretary brainard, that is something that i think many of our members are concerned about that position, still coming and i know that the administration has put some ethical considerations out, but one of them as they had not been involved in insurance operations which sort of rules held a lot of people within insurance. if there's time the first panel

was discharged. we appreciate your testimony and the fact that the hearing was not a long hearing doesn't mean we don't have your testimony which will be a great value to us, and we look forward to working with you in the coming months as we try to implement dodd-frank. thank you. >> of the committee stands in recess until votes are over. [inaudible conversations] [inaudible conversations]

[inaudible conversations] >> we are going to welcome our panelists. the hearing will come to order. our second panel is made up of mr. stevan o'connor, managing director of morgan stanley and the chairman of the international swaps and derivatives association. he's testifying on behalf of the international swaps and derivatives association.

mr. tim ryan's prez and ceo of securities industry and financial markets association and we welcome you. mr. ryan. professor space, president and director of the program on international financial systems at harvard law school. mr. barry zubrow chief riss officer of jpmorgan chase. excuse me. and mr. donovan silvers, the council of the american federation of labor to the afl-cio. let's just put it that way. so, mr. o'connor, we will start with you. >> thank you, chairman baucus, a ranking member french and members of the committee. for the opportunity to testify today. i would like to begin by making five key points.

first is to represent more than 800 members from 56 countries. ever brought membership includes corporations, asset managers, governments, supranational entity some exchanges, clearing houses as well as global and regional banks. our members support the goals of dodd-frank and global financial regulatory reform. we have worked with policy makers in the u.s. and around the world. second, we have made and continue to make substantial progress in implementing the most important aspect of reform, those relating to the systemic risk mitigation such as the central clearing and triet repositories. ferre, further improvements can and will be made and i would like to note that there is a high degree of consistency between u.s. regulators and regulators in other major jurisdictions of a systemic risk pools related to recording. is very helpful for the market participants.

on the other hand, there's far less consensus between the u.s. and overseas jurisdictions regarding masses outside the systemic risk area. these issues are premier ottilie to the otc market structure and critical to the viability of the u.s. markets. finally, in addition to the substance of policy difference between the u.s. and other regulatory regimes, they are equally significant timing differences between the jurisdictions, differences that will go a long way into determining the competitiveness of the country's markets. turning to some of the key policy differences, we believe that the application and effective u.s. law and regulation should be as even-handed as possible with respect to both u.s. and non-u.s. institutions and regrettably at this point it seems there will not be equal treatment of the firms at the institutional level. in addition, the members are concerned about the potential divergent approaches of the jurisdictional level. it appears that other regulatory

jurisdictions are likely to adopt regimes but different from our own in a meaningful and material ways. as i have mentioned the policy differences are not generally in the area of systemic risk mitigation, but the primary driver of the regulatory reform and instead they are on the area of market structure. here are some examples of the differences. banks operating in the u.s. will be forced to comply with section 716 of the dodd-frank act, the so-called pushout provision which has no counterpart in the proposed european or asian regulations. these report the removal of section 16 countries of the efficiencies competitive challenges and increased systemic risks the will surely result from such a requirement. another area of difference is with regard to electronic trading venues. at this point, critical components of the cftc has no

regulatory paralleled in europe or other major jurisdictions. as noted in greater detail in my written testimony, these rules could adversely impact u.s. competitiveness and the depth and liquidity of u.s. markets. and ironically, they will likely harm the beneficiaries of the new rules, the commercial and the users of derivatives. another important point of the divergence relates to the proposed business conduct rules the cftc's proposals to be ignored the institutional nature of the otc derivatives market. moreover the standard sees the protections required by the statute and go well beyond the regulatory framework concentrated in other jurisdictions. these rules will further impair the viability of u.s. markets. another key issue is the issue of the extraterritoriality. today there are serious concerns about the reach of the dodd-frank act and the activities that take place

overseas, extraterritorial reach exacerbates the problems created by the asymmetric rules. furthermore, it is inconsistent congressional intent in limiting the territorial scope of the new regulatory framework. as i mentioned, there are also many meaningful differences in the timing between the various jurisdictions. it appears that the u.s. markets will be subjected to a new regulatory framework will be on average restrictions this will create an uneven playing field that could cost capital of shores and will be harmful to u.s. markets. to summarize, there are large differences and recovery reform in the u.s. and abroad. these differences have less to do with systemic issues and more to do with the structure of markets. policy differences that impose significant costs but offered few if any offsetting benefits mainly to decrease the

liquidity, reduction in the growth capital and the erosion of u.s. competitiveness. the losses will be measured in jobs and tax revenues. the best way to avoid the issues that i have discussed to protect the competitiveness of u.s. markets is to work with europeans and other overseas policy makers to ensure strong yet harmonize rules that are implemented along the same time line. this will reduce the impact of any temporary or permanent regulated differences between the markets and mitigating the damages of the differences will cause to the united states. thank you. i would be happy to answer your questions. >> thank you. mr. ryan? >> thank you mr. chairman and members of the committee. in my state that you responded to the questions you all must ask in your implementation so in my statement i want to focus on three issues and special attention.

it's our hope congress will agree with me and press for answers i will raise through a combination of hearings by this committee and additional study by policy makers here and globally. first, who are the globally systemically important financial institutions? the so-called sifi that frames the subsequent debate including the capitol surcharge debate you had this morning and in practice what action should be taken with respect to such. most of us think we know the firm's preordained connect the list, but at this moment, no such public list exists. we do know there's a long list of firms to do what we want to be in the call. there are related questions that need to be asked on this topic. one, who decides whether a firm should be on the list?

number two, is this a domestic decision or a global decision? number three, should countries without a sifi has a say in the process? number four, what will be secretary of factors used to make these determinations? five, will this process be transparent, fair and subject to review and appeal? none of the questions have been answered. a second major question we would like to pose to me and you talked about this all morning. regulators into the time focusing on the need in this special additional capital surcharge. the systemic risk like the first question this one has several related questions associated with it such as how large should the surcharge be, what types of capital should qualified to meet

the surcharge, and will there be any mitigating factors which might lessen the need for a surcharge? since the financial crisis occurred, policy makers, regulators, the financial-services industry and consumers have all changed their behavior. we have been very busy making the system changes, but the industry and governments have failed to understand or ss the total aggregate impact of all of these actions. it's important for you to understand the enormous amount of change taking place in the financial markets today. other witnesses will provide you with a definitive figures, but it's really important to note that in the u.s. we have raised more than 300 billion of common equity repaying t.a.r.p. with a

12 billion-dollar profit. the largest banks have significantly reduced their leverage and reserves have been increased by over 200%. i can go through a long list but you all know the list of dodd-frank actions which we are now trying to implement. sifi alone funneled over 100 comments during this regulatory process. while we are working through the dodd-frank changes which significantly modify the banking activities in the united states, we are also faced with comparable changes in basel which we are trying to work through. 1. i would like to make that is imported deutsch is to echo a comment made yesterday by mr. kronman church which was also discussed this morning about the question of resolution of large systemically important institutions certainly in the united states.

we worked very hard with this committee to make sure that legislation was done in the inappropriate fashion and we are hopeful that both in the united states and outside the united states that resolution schemas recognized as something that's viable. so, my as to number two, the question is we would like congress and regulators to postpone any position on the capitol surcharge until the industry has had time to implement all of the regulatory changes making their way through the system and the effective parties which include the private sector and government conduct a study received what impact this surcharge has on the financial institutions and on the economy. now mr. chairman, one last comment in the letter you asked us to specifically comment on

accounting convergence. i can say that from a standpoint we are supportive of the convergence of the u.s. gatt international accounting standards. we are concerned with the application of iasb standards of offsetting and welcome the recent pronouncements by the standard setting the fasb that allows netting. and again, think you for holding the hearing and asking me to testify. >> thank you. professor space? >> thank you, chairman and members of the committee. i am testifying in my own capacity and not to represent the view of any organization with which i affiliated although much of my testimony is based on work of the committee on capital markets regulation. indeed, the last six years the committee has been tracking recommendations to strengthen the committed competitiveness of

our capital markets. let me address the issues he will call us to comment on. we will begin with dhaka volcker rule. it passed with a hope other nations would follow us but none have. the rule is to start because proprietary trading is not responsible for the financial crisis indeed it was a source of profitability. now it could have the effect of making u.s. firms less competitive internationally. there is still time to dampen its potential effect, however because defining the precise boundaries of the provision regulators and they can and should take a narrow approach to defining proprietary trading to preserve our competitiveness. for the derivatives rules there are major areas in which the u.s. proposal from the proposals of the e.u. are the major competitors in this area. the differences include

standards for membership in its commercial and control of clearinghouses, the scope of the user exception and possibly accounting standards. we should put aside for now the initiatives we are taking that are in conflict with the e.u.. these areas can be defined in concert with the e.u. and should be the subject of efforts to harmonize the approaches. in the meantime, we can implement them on conflicting initiatives on the inappropriate time table, i don't know if you know the cftc called for comments on the sequencing. we may have to make some compromises as well the e.u.. but it's not a tenable for us to say to become our way or the highway. for capital requirements, we are now on the third version of the capitol court, the basel capital corporation. it's very difficult to precisely quantify the impact the economic impact of basel iii we know it will affect gdp and only one

direction down. perhaps up to 950, 1 billion in the u.s. alone between 2011 and 2015 to one estimate. although it's an international initiative it his differential impact in different countries. the testimony earlier today adapting the control of the currency lock and government tarullo knott acknowledges the problem. but beyond the uniform of the problem, we should have learned a big lesson from our experience basel i of ii. the devotee of basel to determine the amount of capital for the given risk is highly questionable. basel iii isn't a silver bullet far from it. in my view we should use both fees' and her time provided by the basel st rules to examine how rules can be more effective and implemented in a fashion to minimize differential when pact.

next, i want to discuss this madd to desiccate sifi or systemically important financial and institutions. dodd-frank requires fsoc to designate non-bank firms as systemically important and thus subject to the fed supervision along with the 50 billion-dollar plus banking organizations which are already subject to the fed supervision under dodd-frank. other countries are going through a similar designation process. different approaches to designation and different surcharges could have a major impact. thus we should have a global approach. our national process should be tightly coordinated with the work of the financial stability board, the operational arm. finally, resolution of failed financial firms remains an important and difficult issue with competitive implications. chief among these is the

divergent positions on bailouts for all to the cost of capital. countries more willing to bail out banks lower the cost of capital. we've known this from our competition with japan before the last decade. furthermore, many large banks have significant cross border operations and their failure can affect all the countries in which they operate. some countries bring the assets of the local banks to protect local creditors and those things can get a competitive edge as well. we should continue to work with the speed to achieve as internationally coordinated approach to these resolutions as possible. thank you. i look forward to your questions. >> thank you. mr. zubrow? >> my name is barry zubrow and i am the jeeves risk officers jpmorgan chase. in the wake of the financial crisis, numerous steps have been taken to reduce systemic risk in

u.s. banking. since some of my testimony was quoted so extensive earlier today, i won't repeat of those portions now. however, the important lesson to draw from all the actions taken in the last few years is the capitol is one tool, but certainly not the only tool nor a cure all for ensuring that there's not a recurrence of a financial crisis. jpmorgan chase is not trying to avoid regulation, but we do have some serious concerns the regulatory pendulum has swung to a point that risks hobbling the competitiveness of our financial system and of our economy. it's a dramatic increase in capital standards focused exclusively on the largest banks. it focuses particularly on the trading and other assets likely

to produce systemic risk. at this point, the best course for the system is not adding a surcharge on top of the basel free standards, but rather, to ensure that liquidity, derivatives and other rules are written right and applied globally. one year after dodd-frank, other countries are still debating whether to follow suit, and there are indications they will not in many areas. lack of international coordination on derivatives and the potential for extraterritorial application of the u.s. rules could prevent u.s. firms from serving our clients overseas. there is already evidence that basel free will not be enforced the stringently abroad as it is your. nowhere has change been more profound than in the area of capital where u.s. banks face a dramatic increase under u.s.

basel iii. and i should emphasize that these increases effectively apply only to the largest banks. to illustrate, jpmorgan chase entered a financial crisis with capital sufficient not only to whether the crisis, but also to make acquisitions and to continue our lending activities. revenue basel free would require us to hold as much as 45% more capital than we did during the crisis. let me be clear, jpmorgan chase supports basel free capital standards. however, we believe that a sifi surcharge would be excessive and could impede economic growth. draconian capital requirements, at a cost for u.s. competitiveness and economic growth. requiring a capital at a level above basel iii will force large

banks to either reduce their balance sheets, increase prices or abandon more capital intensive activities. for example, we estimate a hospital requesting a standby letter of credit could see its costs go up by as much as 30%, or a small mid-market client could see increases in as much as 20% on a revolving line of credit. in conclusion, our holistic approach to the risk management was one of the key reasons jpmorgan a letter of the financial crisis as well as we did. mauney responsibility as the chief risk officer is to look at all of the bank's activities across all markets. we believe the fsoc was intended to serve as the chief risk officer for the financial system, analyzing and coordinating the impact of

regulations on safety and soundness, but also on economic growth and competitiveness. we believe that before any capital surcharges imposed of the fsoc should review and report on the global regulatory reform the have already been enacted and their impact on the competitiveness. whether existing capital standards are being evenly applied, and the cumulative impact of existing regulation on the safety and soundness as well as economic growth. we would expect that such an analysis would demonstrate that a sifi surcharges on warranted. thank you very much. i look forward to answering questions. >> let me say that ranking member frank acknowledged he only read small concerts which for most favorable to him and we

pointed out some of of of things that were not so in line. >> we appreciate that, and i'm sure that he and others on the committee will take my testimony in its entirety. >> actually since you like your testimony so much i don't think we will any problem getting him to go along with the basic -- >> we certainly hope he will be as enthusiastic about the conclusions as about the premise. >> thank you. >> mr. silver? >> thank you, mr. chairman, and good afternoon. i appreciate on behalf of americans for financial reform the opportunity to testify. the americans for financial reform is a coalition of over two entered 50 organizations which represent over 50 million americans. in the age of global markets, many serious effort to ensure we do not repeat the experience of

2008 must include the establishment of an international regulatory floor. otherwise every country's financial institutions are vulnerable to contingent from radical the unregulated markets. as iceland, ireland, united kingdom and the united states proved in 2008. however, minimum standards are inevitably weaker than more effective international efforts, that's why they are called minimum standards. the united states works and was moved more rapidly on the derivatives in europe but has been less aggressive with private pools of capital light hedge funds and private equity and we've been faulted by european regulators for the weakness of the approach to regulating executive pay and financial firms. so why all we hear this afternoon about the possibility the business would leave the united states because the strength of our regulatory efforts over in europe parallel threads are being made about the financial activity moving to the united states. as a result of the strength of the european regulatory efforts.

nonetheless, to be the big banks have come seeking help from congress yet again. they say that dodd-frank is too tough compared to the fore in regulation. now it seems odd that a group of firms that the american public recently rescued from imminent bankruptcy now amid line% unemployment and after 7 million forclosures, after record bonuses and the rising ceo pay think that they are the people whom congress needs most help right now. nonetheless, here we are so i will now address the bank's specific arguments. on derivatives, we have heard that by requiring the capitol be posted and their disclosure on pricing we will drive the derivatives away from the u.s. institutions. this type of argument has been used to oppose virtually every effort to regulate finance and of least the last century and perhaps longer. it sounds plausible but it's historically wrong. as a general matter of debate the matter of a well regulated markets. while market participants have confidence in their counterparties and can benefit from transparent pricing.

radically be regulated markets attract briefed bubbles of before they are inevitable. in addition, there are some kind of derivatives businesses we do not want, we do not want the next aig, the next seller of bond insurance without capital to be a u.s.-based firm. we should not want the united states to retain a dominant position in derivatives by guaranteeing to the derivative dealers monopolistic profits at the expense of the economy. we have heard today that the volcker will in section 716 of dodd-frank will impair the competitiveness of u.s. financial institutions apparently by lowering the rate of return. this argument ignores the basic principal of investing that seeking higher returns exposes a greater risk. moving up the risk return curve is not a good idea for too big to fail institutions. though it is in the interest of the executives with stock based compensation who benefit from the heads i win, tails you lose nature of allowing the system ackley important fdic insured

firms to place bets in the markets. on capital requirements, the basel free process envisions a one-size-fits-all risk-based capital system back stopped by an absolute leverage limit of 33-1 to be an extraordinarily high level. here congress should ask dewey what the united states to have a robust size based system of requirement for the banks? or do we want to be no better than the global minimum standard that does not impose higher capital requirements of larger institutions, thereby, not addressing the problem of too big to fail? finally, we cannot implement the resolution of for the process envisioned until we have a comprehensive international resolution of 40. this argument is a red herring and will be used to promote new bailouts. it is a red herring because the process in dodd-frank is fundamentally focused on the parent company of its foreign subsidiaries. the break up and wind down of their u.s. parent occurs entirely within u.s. law.

progress has been made toward a global financial regulatory floor. great credit goes to the witnesses in the first panel particularly governor tarullo and at the fed there were, basel st the minimum standard is just that, a minimum. the u.s. financial regulatory policy should not be whether we manage to meet the global minimum. the measure should be whether we have entered the financial system as a contributor to sustained balance to growth in our economy. the regulatory whipsaw and infinite delay of the kind recommended today by my fellow witnesses may temporarily increase bank profits but the price will be another cycle of economic crisis and job loss. thank you. >> thank you for being so patient as we left this morning to go vote and finally came back the chairman and the ranking member had agreed we would not

stop at the top again but would go to those that are here that did not have the opportunity to ask a question this morning. so we will go for five minutes. >> thank you, madame chair. mr. ryan, with regards to the foreign account tax compliance act, i was going to talk this morning about it and since it's affecting you and your industry, i would like to pose a question to you with regards to the firm's required to report to the irs on the client for face heavy withholding tax on u.s. assets and treasury bonds. as the response indicated they will either sell all of their assets from subsidiaries that will touch the assets or stop buying bonds and the companies might stay across the nation and

we are curious as to what steps you would see the treasury department needs to do to defend it from having a negative impact on the capitol markets. >> i will be able to move quickly on this issue for you because we have multiple committees working on this issue and we haven't come to a conclusion so what i would like to be able to do is to submit our views for the record after the hearing. >> okay. it's kind of a major impact on the ability of investments being made by foreign entities and americans who are purchasing through their foreign entities into this country, and that can have a dramatic impact on the amount of capital available in the marketplace it suddenly the entities stop purchasing. i feel that it's a important question to the title of the

hearing today. so, i appreciate that. with regards to the first four holes coming out of the dol and the ability of some securities folks to be able to sell different securities, what kind of -- >> you probably look at my resume because many times during the reagan administration was the solicitor so high had a lot of experience with erisa and the dol. we have spent quite a bit of time with the department of labor and other bureaus of the government basically trying to get the department of labor to withdraw their proposals and repose. we would like to see it better coordinated with other similar work that's taking place now with the securities exchange

commission as a result of dodd-frank, and we are especially concerned about their efforts to for the first time ever to regulate at the department of labor. >> professor scott, you feel a lot with the director of the program for systems at harvard. just kind of curious, what is your thought process on with dodd-frank it seems as though we have a lot more connectivity between all the different merger institutions that have gotten better and by putting the institutions they deserve they've gotten better and in discussing this with a number of panels with regards to the connectivity to in the banks here and those countries especially some that are in trouble and this morning we saw that the headlines in the paper of greece indicate one article had a 50/50 chance to be fooled and they made a comment that the

50/53 sold would do you see the impact of that i know we were talking about regulations here in one direction but the impact of them coming this direction and a devotee with of the dodd-frank bill which caused the collectivity of the banks to be even greater it now connected over there how was that going to impact everything, can you kind of shed some light on it? >> you are focused on the issue is going on in europe. >> so issues here that have impacted that by a greater extent. >> i think american banks hold a lot of debt in the country we are talking about directly or indirectly or the derivatives. i have not stated this in depth but i believe that there would be if we are talking about any kind of restructuring of the fault of that debt which of

course we would expect it would have summoned back on the banking system. that being said, it would have a lot more impact on the european banks holding, so overall, whether it would rise to a level of concern i don't know because i haven't looked at the statistics and i would think that we would have some concern with the intent on our banking system with their excess of fear or not, i don't know. >> i think it would have a pretty significant impact. it was investments to the bank in those countries. that is significant, and if the domino effect keeps going we are going to be at the end so think you madame chair. >> mr. miller? >> i joined the committee in 2003, and remember that by the

end of 2006 search in the early 2007 it was apparent there was an enormous problem in the subprime mortgages there be a number of defaults and foreclosures that because house prices stopped the preceding that wouldn't be possible to solve their homes or refinance their homes and we were assured throughout 2007 really through september, 2008, that there was nothing to worry about. everything was under control. and because of that experience, i have not always know who to believe since then. i may have believed things people told me that were true as a result of that experience. but it's very hard to tell what the liability of the banks or from what has gone on in the mortgage securitization. mr. silvers, if you may change hats for a second, the congressional oversight panel

said in november of last year that the potential liability for the chain of title issues for mortgages that ended up in securitized homes was sufficiently serious and i'm certain it could threaten the solvency of the banks. sheila bair said that just a month ago and within just the last few days, it appears the new york attorney general is investigating bank of america for those violations. mr. silvers, what is your estimation of potential liability of the securitizations which are the biggest banks for the issues? >> as you said, the congressional oversight panel report on this, the panel which is the vice chair of. there were certain key issues. it wasn't possible.

we couldn't answer partly because we didn't have the investigative authority and partly somewhat complex legal issues. however, the statement that you were quoting which i believe is still the case is that if it turned out to be true, that systematically the title wasn't properly conveyed to the liens on the properties that have been securitized, and if it was also true as a matter of law that the leni did not follow an equitable fashion the notes come and that would implicate a series of significant issues associated with the doctrine in our tax code, and it would also implicate questions in the new york trust law. if all of those things went wrong, meaning a wrong from the perspective of causing lawyer devotee come and it turned out that effectively the properties

in the securitizations trust did not have leaned come that the trust didn't have liens. stomachs of the mortgage-backed securities -- >> it turned out the mortgage-backed securities were not mortgage-backed. and it turned out but could not be cured. as a result of the developing cause of vast tax liabilities breaching of the structure. then potentially between the tax liabilities involved and the possibility that those holders of the mortgage-backed securities would be able to call upon the right to repurchase the loans at face value that you would be talking about liabilities backed to the securitized, the institutions that put the trust together in the multiple hundreds of billions of dollars, well in excess of the numbers by my fellow panelists in the cattle raised by the banks. >> how has jpmorgan chase result from that liability, that

potential liability? >> i think as mr. silvers responded to your question, there is a long chain of different things that might have to happen in order for that liability to actually have come about, so we certainly do not think that long series of events actually did occur. >> we have reserved it if at all as a long shot. >> the would be correct. >> there were a couple of insurers of the bonds and another that has taken jpmorgan chase for the conduct of bear stearns at bear stearns mortgage-backed securities then

pursue claims against originators of the mortgages to buy the mortgages back, and instead of making them not back to a monetary damage. even though they no longer have equitable or beneficial titles ownership of the mortgages they kept the money and said not a word to the investors. the lawsuit appears to be attending this fall. how has jpmorgan chase went through that litigation? >> i am generally familiar with some of the litigation in that area. i don't know off the top of my head the exact way that we have assessed the potential liability as you noted originated with activities that bear stearns pursued but would certainly be happy to give back to you and give you a specific answer.

>> the gentleman's time is expired. the gentleman from minnesota. five minutes. -- before, madam chair. this morning, and i don't know if any of you were able to hear the testimony this morning but the current pop culture is regulatory arbitrage. and buyers don't start with mr. scott and go from the epidemic from the examples. >> we have on our history when the united states imposed requirements on banks in this country in the 70's will spur the creation of international banking centers. when the united states, in my view, overregulated its equity

capital markets and the committee's documented this extensively, a lot of the business of those capital markets, the equity capital markets abroad particularly to london. .. >> that has a six month right of

redemption, should there not be a different in the pricing of those loans? those 30-year home loan between those two jurisdictions if both of those actually have a regulatory arbitrage, just in the cost of foreclosure and cost of liabilities? >> i think that you're certainly correct that, you know, given the application of, you know, individual state laws, and in some instances, individualing individualing thing laws, and this would expect the risk to be reflected in the market place. i think in addition, it's worth noting your examples of regulatory arbitrage, there was a significant amount of regulatory ash tramming in the united states -- arbitrage in the united states

through the disportioned oversight through the different financial institutions, and certainly would be of the things we now have is the fact that the federal reserve board has overall, you know, responsibility for oversight and supervision of the large financial institutions in order to void that sort of arbitrage. i would cite on the international side, you know, one of the things we're very concerned about is a form of regulatory arbitrage between different countries where different supervisors and regulators will apply different standards for measures weight assets under accord such that the application of models and analysis of risk weighted assets may result in a lower rating or lower ranking of risk in some jurisdictions than what we would

anticipate will be applied here in the united states. >> madam chairman, you beat me where i was going to go. okay, if i have that different risk ranking, how much is in the quality of, we'll call it enforcement? if we have a derivative or home loan, and if there's different loans in greece compared to what i do in iowa, how much will you look into risk analysis? not only says we linedded up on basel iii, but there's a failure of enforcement. >> i think that's a good question, congressman, and certainly that needs to be a factor in our seasonal sis of, -- analysis of, you know, how we assess risks that we take in different just -- jurisdictions and certainly in

the potential for enforceability for contracts around the world. >> okay. madam chairman, if anyone else has something to educate us -- >> i don't want to take anyone's time, but may i -- >> go ahead, mr. chairman. >> for us this is not necessarily regulatory arbitrage, but we're in the middle now of trying to implement dodd-frank which is a massive assignment for the government and for the industry, and disparity app -- applications is a real issue. we sent a letter to secretary geithner showing 20 dead-bang conflicts in regulations that are now being offered by various u.s. agencies, and to mr. z ubrow's comment, we thought

that's why fsoc was created within dodd-frank. you don't have to leave the borders to find con knicks of the same law. >> the time expired. you are recognized for five minutes. >> thank you very much, madam chairman, just joined the hearing, just walked in, so i missed all the lead up to this, but i was present here this morning when we had the panel of regulators, and the discussion, most of the discussion this morning was on the cumulative effect of dodd-frank, regulations, and so on, capital liquidity requirements, and sheila bair in particular said she thought the capital requirements were on the low end, and the governor from the

fed, mr. tarullo, and he suggested we agree, and we had back and forth on that. this question may not be germane to the question that preceded my approving, but there's expertise at the panel, and i want your view on that question if i could. please. >> the question is not simple in part because of the exchange that just occurredded. if you're capital requirement -- if you are looking at risk weighted capital requirements, and you get into the interest of that, and it turns out that risk weights is used essentially to pretend that you don't have risk that you do have. as we saw under basel ii under mortgage-backed securities, for example, then you may look like there's strong capital

requirements, but you don't. with dodd-frank, there are, you know, some of this is still being put in place. there are some very important principles in dodd-frank that are very good. one of them, for example, is dodd-frank embodies the principle of size based principles. we just learned we tend to like to bail out large institutions, so we charge them a higher capital rate. that counterbalances for the fact their cost of capital is subsidized by the market perceptions they get bailed out so it's a good thing. >> if i can stop yo u there, one of the questions i had of mr. tarullo, those on the borderline and being subject to the same capital requirement of the big, big sifis if you will, and the answer was no, and it seems to me you're addressing that. >> i think sliding scale capital

requirements is a really, really good idea. i think a cliff structure or a binary structure, you get into this argument of i'm on the line -- >> right, right. >> the sad thing about people on the line is that when they are setting the rules, they are likely to be exempted, and then when the crisis comes, they are likely to be bailed out. if you have more of a continuous approach, then the kind governor tarullo spoke to you about, you'll have a more consistent approach. >> others? please. >> so i think that the -- >> by the way, your name in your paper was quoted profusely by the ranking member, i might say, and somebody asked whether it was valentine's day with a box of chocolates, and he said the candy didn't come with it. i say that in a complementary

way. >> we had discussion about that with the chairman when the panel started, and it was acknowledged that the ranking member selectively quoted from the paper, and we hope that he will, you know, also endorse the conclusions of the testimony, you know, as well as the premise of it. i do think that the question of capital is a very important one, and as we've tried to say in the written testimony, and as i said, you know, here earlier this afternoon, capital is one tool until overall framework of how large systemically important financial institutions have to be regulated and managed, but it's not the only tool, and the basel iii capital levels that have been -- that are in being enacted at 7% level of tier one

common equity, you know, are much larger than what any of the financial institutions operated under, you know, going into the financial crisis for jp morgan chase, that's roughly an increase of 65% to meet the basel iii standards above what the prior minimum standards were, and, in fact, you know, we think that the basel iii -- the basel committee and the implementation of basel iii, you know, has done an enormous amount to both increase the amount of capital in the financial institutions, but also the quality of that capital which is equally important, and, you know, our view is that at this point in time to add an additional sifi surtax on top of that. it's both necessary, but also has the opportunity to threaten growth in the economy which we

think would be very dangerous to the financial systems. >> the time expired. the gentleman from illinois is recognizedded for five minutes. >> thank you, madam chair. by a showing of hands, could you tell me how many of you there agree with this statement? proprior tear trading and private hedge fund investing were not responsible for the financial crisis and were indeed the source of profitability to banks during the crisis. the losses to banks resulted from bad housing loans and investments in pools of those loans, traditional banking activities. how many would agree with that statement? >> i'm glad they're endorsing my position. >> you got it. i was going to say those are your words on page four.

>> that was my prior testimony. >> did you notice how deliberately he raised his hand? >> it's a payoff. >> is that what it is? [laughter] >> you know, that's a very simple answer to a very complex issue, and i agree with that 100%. if the fed had exercised appropriately its jurisdiction over instruments and underwriting standards and not waited until october 1 of 2009 to set forth the rule that requires run proof of a person's earnings, would we be in this mess now? >> i'm not really prepared to answer that specific question,

but i think the thrust of it is that the standards for making loans were low. people got caught up in the bubble. this has happened over and over in the history of banking. people get enthusiastic, lower the standards, they think things are going to keep going on as they are and bloom, and then people are caught short. it's almost always in lending which is the core function of banks, okay? the point i was making is this is still another crisis about lending really. it's not a crisis about private equity, hedge funds, or pro proprietary trade. >> you state that so correctly -- i'm sorry? >> no, go ahead. >> we had before this committee and before the house in 2000, goc reform bill, and it didn't go anywhere.

2005, we had goc reform bill with the amendment that really would have tightened thingses up with regard to -- things up with regard to lending. that did not go anywhere. it passed the house, but did not go into the senate. we had numerous hearings here with the president of fannie mae showing how they cooked the books in order to make themselves eligible for the pensions down to two or three mills to come within that particular window, and it just appears to me that the evidence was out there, both presidents bush and clinton encouraged the goc's to buy up subprime and all day loans into these packages, and the reason i quoted your statement, i'm glad you recognized that you are, indeed, the author of that sentence on

page four, is the fact that that really is the core reason for why we're in this financial crisis today. dodd-frank addresses a lot of issues, and i mean, that's fine. they are interesting, but do you believe that the power existed within the federal agencies, that they could have stopped these bad loans from taking place in the first place without any further legislation? >> oh, definitely think they have the power to maybe not stop them, but certainly raise a standard for making loans, and i mean, that's the essence of bank supervision so the a bank supervisor feels the bank is taking too much risk, not controlling the risk, its job is to go to the bank and say so, and the bank works with the regulator to try to address it. they can do that. on the other hand, congress

mapp, we were all on a housing crisis ewe forya. looking back, it's obvious, okay, but at the time if you really believed housing prices were going to keep going up, which almost everybody did, the pressure to raise those standards was not very high, and there would be political pushback in any of them if you tried to lower the standards in a way that deprives people from getting loans so i think that was the reality of it. >> appreciate that. wasn't that a great answer? >> gentleman's time expired. [laughter] the gentleman from texas is recognized for five minutes. >> thank you very much, madam chairman. mr. o'connor, you mentioned in your testimony the divergence in rules between the european union

and the united states in regards to interaffiliate derivatives transactions. if i understand it correctly as it currently stands in the united states, a financial institution helping one of its affiliates heads the risk through derivatives essentially would have to post margin to itself; is that correct? >> that is currently the case, so with the proposed rules, so in the e.u. currently, the commissioner is considering exemptions for certain types of interaffiliate transactions. it's potentially two subsidiaries within the same company. in the u.s., such an exemption has not yet been given which could result in two parts of the same firm having to clear trades between the post margins between themselves, yes. >> so what we could end up with is derivative trades instead of being conducted between a company and its affiliates, they

are conducted between non-related companies if the case is where an affiliate has to post margin with its parent company, thus increasing systemic risk and a flying in the face of what dodd-frank was intended to do; is that correct? >> it certainly would increase costs and not directly affect systemic risk, but if such a margin had to be segregated, for instance, then that would be taking money off the institution's balance sheets that could ordinarily have been put to other uses such as lending or other things that are beneficial to the economy. >> in your opinion, is this worthwhile? >> no, no. >> okay. and does this rule make sense? >> this rule needs -- no, the

rule does not make sense to me. >> thank you. mr. ryan, do you feel the same way, or do you have another opinion? >> no, i agree totally with mr. o'connor. >> okay. mr. zubrow, is that your answer also? >> congress mapp, that is correct -- congressman, that is correct. i think that rule does not make sense. i would also point out, you know, i think that you're example of how it could lead to an increase in systemic risk, you know, was really predicated on the assumption that instead of having a firm engage with transactions with the affiliates, instead a firm might have to in effect do a three-legged transaction where it goes outside of its affiliates in order to layoff certain risks as a way of transferring risks within, you

know, amongst its different entities that obviously increase, you know, the overall exposure to, you know, risk and credit risk, you know, across the system. in addition, i think, you know, as you're aware, you know, there's also proposals, you know, that are competing between what the u.s. has proposed and what it appears europe is likely to propose as to the types of collateral margin that could be posted for different transactions, and the u.s. proposals, you know, limit the amount of margin that could be posted to, you know, instruments that are basically nominated in u.s. dollars, and so therefore, you know, if there is extraterritorial application of the u.s. rules to, you know, foreign entities, be they affiliates or customers, we would be asking european clients to be posting, you know, u.s.

dollar securities as opposed to, you know, european bond collateral or government collateral or a currency which would obviously be the natural currency in which they would have their assets. >> let me just clarify what you just said. so even if these rules were harmonized across borders, is the restriction and cost increase on affiliates, on affiliate trades worthwhile in your opinion? >> if they are harmonized in a way that requires posting of margin in between affiliates, you know, then we would not think that is worthwhile. >> all right. thank you very much, and i yield back my last nine seconds. >> thank you. i recognize myself for five minutes. this question is for mr. o'connor, and i think mr. ryan had some part of this

in his statement. does the swap pushout decision increase market liquidity and impair safety and soundness, increase systemic risk making it harder for the large bank to resolve, and are you aware of any country beside the united states with the sophisticated derivative market? there's plenty to adopt such a pushout requirement. >> thank you for the question, congresswoman biggert. answering the second question first, i'm not aware of any adoption similar to the pushout rule, and yes, i agree with the points that you make. namely, that requiring banks to move half of their businesses outside of the banks into differently regulated entities adds to systemic risk in the sense that that -- those two

entities now to be managed by the bank from a liquidity and capital point of view, and also customers of the bank that typically would engage in directive transactions under one agreement with credit exposures now have to trade across two agreements, and therefore an increase in counterparty credit risk within the market adding to systemic risk. >> wouldn't this put us then at a real disadvantage? in the global economy? >> in my testimony i included that as one of the examples that is putting the u.s. at a competitive disadvantage, yes. >> thank you. mr. ripe, would you like to -- mr. ryan, would you like to comment on that? >> i agree totally with mr. o'connor. it's funny your end result from not only dodd-frank, but some of the things going on in basel that in effect, we are pushing

risk out of the highly regulated, highly capitalized environment, and into shadows, and it's predictable that in the future that will be an issue so as to your question, could it or will it increase systemic risk, it's entirely possible. >> so should it be repealed? >> we're not pushing of repeal of dodd-frank right now. >> i mean, a section -- >> 716? you know, we were against it totally during the enactment of the statute, so if it disappeared, we'd probably be very happy. >> okay. then, mr.zubrow, your testimony made a lot this morning. on page two of the testimony, you talk about the regulatory pendulum swung to a point that the risk are hurting our

financial system and economic growth. you sate that u.s. policymakers should focus on how much the regulations they propose collectively reduce risk by taking financial firms and how this collective impact is likely to result in reduced u.s. economy and job growth and how many of these regulations are referred by other countries. what's putting u.s. firms at a competitive disadvantage? is it -- does fsoc have anything to do with this? is the fact that fsoc members are not coordinating in the global market place? is that the problem? >> madam chairwoman, i think that you are exactly correct that the fsoc has a very important role to play here, and

it is really within their purview to be able to analyze and assess what is the cumulative impact of all the regulations that are being proposed under both, you know, dodd-frank, but also the additional regulatory activities that the different supervisory agencies as well as the basel committee, you know, are imposing upon, you know, the financial system, and so, you know, i think that it is very important that the fsoc do a study in order to really be able to assess what that cumulative impact is and have we accomplished enough already in order to feel comfortable that we have a much safer and sounder banking system. there's obviously -- it's all going to be in how the rules are ultimately prom mull gaited and implemented, and it's very

important to step back and look at what that cumulative impact is and how it's impacting, you know, the economy. >> thank you, and with that, i would ask unanimous consent to enter into the record a statement by international bankers, without objection, so on the other handed, and -- ordered, and i think that we will give you a rest here. i think you've been here for a very long time. unfortunately, we haven't had probably as much time as we would have liked pledget i think we'll remember that sometimes having such an important hearing on what we call get-away day is not the best idea, but we are thankful that you stayed, and you gave such great testimony. we really appreciate all that you've had to say so i would note that some members may have additional questions for this panel for which they wish to

submit in writing. without objection, the record remains open for 30 # days to ask questions and place responses within the record. with that, this hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations]

>> the senate banking committee held this hearing today to consider a bill that would allow credit yiewn yons to lend -- unions to lend more to small businesses. representatives of credit unions

and small banks testified. this is an hour and 20 minutes. [inaudible conversations] >> good morning. i want to welcome and thank our witness for being here today to testify on the issue of credit union member business lending. while we wait for ranking member to make his appearance, i'll go ahead and start. under the federal credit union act, credit unions are limited in the amount of business lending they are permitted to engage in. they have a good amount of business loans made by create

unions as restricted to the 1.75 times credit union's net worth or 2.25% of the credit union's total assets. the cap was put in place in 1998 by passage of congress by the union membership access act. since that time, the credit union industry has aggregated for removal or increase in the business lending cap. senator mark udall introduced legislation that would raise the cap to 27.5% of total assets. there is a wide range of views op this matter especially as congress considers proposals to speed the economic recovery. i think that it is important that we take the time to examine

this issue here in committee and provide the opportunity for all sides to fully express their views on this subject. i look forward to your testimony, chairman, to our other witness' testimony, and to the question and answer period. i see there are any other members present. has been chairman of the national credit union administration since august of 2009. she was the executive vice president and chief operating officer of andrews federal credit union of maryland. chairman mass served as a board

member from january 2002 to object 2005. chairman mass, welcome, and please proceed. >> thank you. [inaudible] sorry. thank you, chairman johnson. i appreciate this opportunity to discuss regulation and supervision and the significance of such lending for small businesses. credit unions have always offered member business loans. in the industry's early days, business loans primarily supported agriculture, but overtime, business lending has evolved, changing with the needs of entrepreneurs who deserve greater, not fewer affordable credit options. today, credit yiewn yons have more than -- unions have more than 167,000 outstanding loans to business. as a starting point, there's

three credits. it allows small businesses to obtain reasonably priced loans. simply put, more competition benefits the marketplace with a positive effect on the cost and availability of credit. second, prudent member business lending strengthens a credit union's balance street and improves the ability to with stand economic cycles. third, member business lending supports community, spurs job growth, and expands consumer access to goods and services. as the pro den reel regulator, we recognize that member business lending poses a unique set of risks requiring specialized rules and oversight. our experience has shown that to succeed, credit unions making loans to small businesses need to be aware of cash flow, portfolio management, and liability issues just to name a few. in response, we have tailored rules to emphasize sound

underwriting, solid collateral, and tested management. this forms the foundation of prudent lending. they have taken great care to ensure our rules keep pace with the evolving market place. like other loans, business loan performance is cyclical. recent member business lending trends reflect the stress of the economic downturn. member business loan dewing sifis stood and peaked in 2010, and since improved to 3.76%. while chargeoffs increased during the economic downturn, those increasing primarily resulted in the severe decline, arizona, florida, nevada, and utah, and 40% of all late and 49% of charge ups are isolated in these five states.

nationwide, 21 credit unions make business member loans, and this figure rose 10% since 2006 despite the economic downturn. while nearly 30% of credit unions underwrite loans, it compromises of 30% of commercial lending. they don't capture the fact that business lending serves an important segment of the market place. small businesses and ensure neuros. the average loan is only 223,000. this represents a wide range of loans for a variety of business purposes. they tend to be smaller than other business lenders. for example, credit union loans for commercial and industrial purposes such as building and commitment afternooned us $127. by comparison, bank loans for industrial purposes averaged $143,000, five times larger than

the credit union's average. to extend service, senator mark udall, tended legislation to increase the permissible level of lending from 1 2.25% of assets. the bill's approach allows healthy, well-capitalized credit unions to increase business loans in small, manageable increments. these credit union, however, have to meet standards placing a premium on experience and a proven track record of successful management. if legislative changes increase the current cap, we would revise the regulations to ensure that additional capacity and the credit union system would not result in unintended safety and soundness concerns. we remain vigilant in carrying out the responsibilities. the regulatory approach provides

credit unions to grow their business loan portfolios. in so doing, credit unions increase the diversity in loan portfolios reducing concentration risks. regulations require any credit union that is less than adequately capitalized to suspend business lending and i'm pleased that s509 adopts a safeguard. it's a well received balanced approach to make capital available to small businesses while ensuring the loans are made in a prudent matter consistent with each credit union's capabilities. entrepreneurs work hard, take risks, and put people to work. to tule fit their -- fulfill their dreams, they need capital. credit unions are frequently the only lenders making small loans to expand a store or start a day care center. the capital provided to hard working americans provides

employment and reenforces the base of communities. s509 permits credit unions to empower more individuals and meet the needs of more small businesses that are expanding creating jobs and opportunities for their communities. thank you, and i look forward to your questions. >> thank you, chairman matz. members will have five minutes for questions. chairman matz, when you testified before the committee in december, your written testimony indicated that the levels late member business loans and chargeoffs have increased. you also noted an increasing number of large credit unions about which the ncu, you weigh as supervisory concerns or nbls are the primary or secondary contributing factor where the

supervisor is concerned. given these concerns, why do you believe that it is prudent to increase the member business lending done by credit unions? >> thank you. well, member business lending does have higher chargeoffs than other consumer loans, but, in fact, in the last quart, the dee link went sifiss started to decline. we're looking to a decline in chargeoffs as well. i point out if a credit union has late loans, that doesn't necessarily result in a loss. even the charmingoffs don't result in a -- chargeoffs don't rule in a loss. if the loans are well-clat rised, and that's part of the supervision to be sure that they are, but in terms of actual

losses, there are about 2200 credit unions making business loans right now, and in 2008 and 2009, we only had one credit union failure that was primarily attributable to member business lending, so member business lending is being done prudently by and large, and we are supervising member business lending within the credit yiewn yons that engage in business lending carefully to be sure they have experienced staff and underwriting properly. >> chairman, matz, senator udall's legislation would require that the ncua develop an approval process by which a credit union gradually increasing their amount of murmur business lending it engages in. have you given any thought as to

what that process might look like and how you might implement it? >> yes, the tiered process will be very helpful in terms of increasing our supervisory ability and ensuring safety and fairness because credit unions will still be able to make loans up to 12.25% of assets, but to get above that, there's guidelines. have business loans for five years, be well-capitalized, and well-managed, and they'll have to be at or above 80% of the cap, but we'll come behind that with regulations to ensure that even above and beyond that, that the credit unions that go above the cap do so in a moderate way that they crawl before they washing so we -- walk, so we won't necessarily

let them go up to 30% increase in one year, but probably have regulations that modify that, and let them increase more gradually than that. >> the second panel suggests that credit unions are making loans that banks have previously turned down. is that the case? if so, are you as a regulator concerned about the safety and soundness of such loans? >> well, from what i hear, credit unions sometimes do make loans that banks have turned down, but my understanding is that it's based on the size of the loan and the use of the loan because what i'm told is that very small businesses that need small loans don't have access -- frequently don't have access to

banks and come to credit unions. the loan is averaged at $223,000. the median is closer to $127,000. these are very small loans, so i'm not concerned about the risky nature, and as long as the credit unions are underwriting the loans prudently, you know, i'm not concerned that they are approving loans that banks have turned down because i believe by and large it's based on the size of the loan and not the risky nature of the loan. >> i have an additional question. member business loans often have higher late rates than other types of loans. therefore it's counterintuitive for the potential regulator to support legislation to increase

the member business lending cap. would you provide more details about why you support the udall bill, and why you believe that the committee should not view this legislation as a risk? >> thank you. that's a good question because it does seem counterintuitive that a regulator who is extremely concerned about safety and soundness, in effect, that really is my sole, almost exclusively my focus, would support a regulation to raise the cap, but raising the cap will enhance safety and soundness because the low cap, the cap at 12.25% is art officially -- artificially low, and there's a number of credit unions who would like to be in business lending, but they don't. business lending would diversify their portfolio, and now credit unions are probably

overconcentrated in mortgage loans, and they also have a lot of car loans, and so i view business lending as an opportunity to diversify their portfolio and reduce the concentration of risk in their port portfolio and reduce the interest rates they have from long-term mortgages. i view it as a safety and soundness benefit, not as increasing the risk. >> chairman matz, what percentage of credit unions are currently at the limit, and therefore con constrained by the cap? >> there's a very small number at or near the limit. it's under 300 credit unions at our near the limit. >> out of how many credit unions? >> about 7300 credit yiewns. it's a very small number, but the cap is misleading because the cap constrains all credit unions. there's so many credit unions not making business loans

because of the cap even though they are not near it, and they don't want to make the investment. some that are making loans don't market it. they make business loans to people who walk in the door and ask for them, but they don't market it because they don't want to be in a position to turn away customers once they get close to the cap. >> senator brennan. >> thank you, mr. chairman, and thank you chairman matz for being here. i have something a little off topic. will you talk about how our credit unions faired during this economic crisis that we just went through and are slowly climbing out of? can you give us a sense of their experience in this period of time? >> certainly. i'll dwied that answer into two parts, the corporate credit unions and the consumer credit unions.

the corporate credit yiewn yons had mortgage-backed securities, and when the bond market collapsed, we had to place five of the corporate yiewn yons into conservativeship, and it has been a significant crisis that we -- that we are leading the credit unions out of. the five credit unions in conservativeship we have put into place much stronger rules governing corporate credit unions, and at this point, we are beginning to -- the corporate system is stabilized, and we are beginning to feel like we've seen the worst of the corporate situation. right now, credit unions are deciding whether or not to recapitalize the corporate credit unions, and we'll know that by september, and at that point credit unions will either

get their liquidity and their payment processing through corporate or elsewhere, but september is the deadline, but we are on track, and it's been very effective, no interruption of service, payment systems have been effective, and so we are coming out of that, but we learned a lot of lessons, and as a result have significantly changed the rules governing corporate credit unions. the retail or consumer credit unions are also beginning to show signs of recovery. the first quarter dated for the credit unions were actually very positive indicators that net worth is up and their assets continue to rise. they lates are dwindling down,

and it's been a tough time, but through it all they continued to lend through 2007 to 2010 with lending increased by 10%. it's modest, down from where it was, but they are still continuing to lend so i'm optimistic that they have -- that the problems have bottomed out and that they are starting to recover. >> thank you for that. if congress did increase the cap on member loans, you just testified that only about 300 yiewn yons are closes -- unions are close to cap. how many would take advantage of that? you talked about the distinction between corporate and consumer. are there certain kinds to be in the business before others? i mean, how do you -- how do you see this going if we did this? >> well, i would think that larger credit unions that are

well capitalized would be -- and by that i mean, credit unions from 50 million and up or 100 million and up would be more likely to start making business loans. there are those that are making business loans that would be inclined to expand it. as i've said previously, credit unions tend not to market the business loans because of the cap so if the cap were raised, they would be more likely to market it and make more loans, but there are probably about -- i'm guessing about 2,000 credit unions that are over -- that are over 50 million in assets that would be more likely to take advantage of this if the cap were raised. >> thank you, mr. chairman. thank you. >> senator mew then does.

good to see you. you know i've been a supporter of the credit unions, but there's serious questions here. how is it that we'll hear from the next panel. i just want to look at a couple of the arguments presented to get your sense of it. one is that they'll say that this, the legislation, would allow a new breed of credit union institutions to more progressively pursue business customers through large loans and serve as an invitation to credit unions not near the cap to focus on business lending to the exclusion or greater limitation of consumer lending in order to be eligible for an increase in the business lending cap. are you concerned about that? >> well, i think that it would be an opportunity for credit unions to expand their business

portfolio, but the loan-to-share ratio of credit unions in the high 60s, maybe 68%. there's a great deal of capacity for credit unions to expand business lending and still meet the needs of consumers. >> what about the fact that credit unions by their nature are tax exempt and obviously don't live within all of the regulatory requirements that banking institutions live under? if we expand the nature of their portfolio, the arguments that you have a uncompetitive process and they are not subject to the regulatory requirements that a banking institution doing similar transactions would be subject to, is that not a fair criticism? >> credit yiewn yons are more stringently regulated than banks. in 2001, the treasury department did a study of credit lending

and found no evidence that credit union business lending adversely impacts banks, and, in fact, that they would increase the competition with small banks and the benefit would go to the consumer, so it's, you know, whether or not credit unions are tax exempt is not something i deal with. you know, i deal with safety and soundness issues, but credit unions are very tightly regulated in terms of making business loans or any loans. >> they don't have the community reup -- reinvestment responsibility that banks have. >> no, they don't. credit unions have membership so they serve people in their field of membership. >> right. the question is well, what would you do if we were to pass this

law? how would you go about deciding whether it's okay for a credit union to increase member business lending, and if you had to approve applications for that, what's the criteria you use? >> well, we base and do examines based on safety and soundness so if a credit union has experienced commercial lending staff in place, and it's a well-managed credit union and well-capitalized, those are the types of issues we would look at. >> uh-huh, but right now they have, what? very little commercial other than, you know, auto loans and maybe real estate? >> no, there are 2200 credit unions that make business lopes. >> that make business loans, okay. that's the universe that would be up for the possibility? >> well, i think it would be more than that. i think there are credit unions that are not making business lending because of the cap that would -- that likely would start

making those loans because right now credit unions i'm told are reluctant to get into the business lending in some cases because they feel they won't get a return on their investment because of the cap because it is a sizable investment because of the staff and infrastructure to be put in place. >> so then of the two questions you're saying that if we were to do this, you're not concerned about serum lending being squeezed out as a result of the credit unions seeking more of the business lending and you're not concerned about overall risk as it relates to taking on an expanded portfolio in regard to the credit union? >> no, i'm not. >> thank you, mr. chairman. >> senator shelby. >> thank you, mr. chairman. mr. chairman, i was saying earlier for unanimous consent my

opening statement will be -- >> it will be in the record. >> thank you, mr. chairman. chairman matz, sorry i was not here earlier. >> that's okay. >> congress, as i understand it, imposed business limitations in order to limit excessive risk taking. you may have gotten into this. i'm not sure. i was not here. do you believe that a higher cap on business lending would adversely impact the safety and soundness of credit unions, and how would increasing the lending limit impact the national credit union share insurance fund? >> i don't believe that increasing the cap would adversely impact safety and soundness, and as counterintuitive as it may seem -- >> if not, why not? >> i think it has a positive impact on safety and soundness because right now, credit unions have a