>> the last issue i would like to address is information sharing. our past work has identified significant streamlining opportunities in this area. for example, our september 2010 report identified potential overlap among three key federal

mechanisms used to share security information with public transit agencies. and to help improve information sharing, tsa and key industry groups have developed so-called transit and rail intelligence unawareness daily. or triad report. we think this is a positive development to streamline the exchange intelligence and security information. however, our ongoing work also indicates that freight rail agencies still have concerns about federal information sharing efforts. a concern center around two issues, the analytical content of reports and the action ability of the information provided. for example, security officials at three class one railroads we interviewed recently raise significant concern about the action ability of the information. improvements are needed in this area and are taking steps to address them.

we will report, issued a report on this issue later this year. mr. chairman, this concludes my testimony. i look forward to answering any question you are other members of the committee may have. thank you. >> thank you very much, mr. lord. and now we will hear from the chief pleased. >> thank you, mr. chairman, ranking member hutchison, my testimony today is in response to the emergency -- emerging threat to rail in this country. that was recently highlighted by information obtained from the osama bin laden compound. during a prior period before this committee, i testified that the threat against rail was very real and i described the manner in which amtrak had responded by focusing on threats related to improvised explosive devices in stations, on board a train, or by an active shooter scenario.

the recent events serve as a stark reminder that these threats continue to be viable and then a new twist was added, that terrorists are considering derailing trains. this is of particular concern to amtrak operates high-speed rail trains were catastrophic losses could occur. this begs a question, are we doing enough to detect and deter terrorist acts on surface transportation? and can we do more to prevent a terrorist rail tragedy from happening? upon receipt of intelligence information from the ubl compound, in the hell with tsa officials to discuss what was uncovered and to evaluate how to proceed regarding the threats to the right-of-way and the. >> host: of trained. amtrak also collaborated with other federal with other federal, state and local agencies and initiated a response that addressed right of way threats.

the steps included increasing right-of-way patrols focusing on bridge and tunnel infrastructure. shifting operation rail safety, a program called reach out alliance of putting local state efforts, right-of-way patrols. requesting law-enforcement air and marine support for critical infrastructure. ensuring current capital security planning including right-of-way risk assessments. deploying special operations personnel for the right-of-way. and coordinating with other amtrak departments. lastly, learning employees in reinforcing security programs and vigilance messages. while amtrak was undertaking these countermeasures is to remain committed to existing programs such as explosive k-9 detection program. recover 46 impose of the teams that lasher did more than 11,000

train rides and 25 weekly searches across the nation. our security inspector program, we conducted more than 3000 random passenger baggage screening operations. active shooter training, all abd personnel have been trained and active shooter training and we also trained more than 45 agencies in swat tactics and responding to the rail environment. corporate security, amtrak has leverage grant money to improve protection for passengers and critical infrastructure including cctv, fencing and other security improvements. mostly with grant funding from tsa. and collaboration with the tsa, amtrak continues to work closely with the tsa and some highlights are we conducted more than 800 viper programs, a visual

protection response deployment. we've also conducted joint screening operations. continued improvement of security efforts through suspicious activity reporting program and the baseline assessment security enhancement program. and the northeast corridor we continue to work with major lawrence and dhs officials of the northeast corridor, in a collaborative way to enhance public safety on surface transportation. i mentioned rail safety before. this effort is a grassroots effort that is now included hundreds of agencies across the country helping to protect rail. our last major operation on may 19, more than one and 55 u.s. agencies as well as several canadians across 34 states and more than 1000 law enforcement personnel deployed to over 200 stations.

a key to our security is front-line employee training your amtrak has been active in providing security trained for front-line employees, and 20118300 front-line transportation employees are receiving classroom training by way of interactive simulated course including an active shooter situation. technology is also a big part of our efforts. in conclusion, we're very concerned about the recent events and we will continue to work with the federal government to do all that we can to protect america's rails. we will work with dhs, tsa, and the committee to identify funding sources for front-line employee training and advanced technology to address these threats. the security of our system is our top priority, and i look forward to working with the committee in the coming months to make sure that we have the people, the training, technology and the intelligence we need to

keep our system safe and secure. thank you. >> i would note we are joined now by senator wicker. senator wicker is not new to the surface transportation subcommittee, but he is now the ranking member of the subcommittee. i welcome him and i look forward to working with him on the subcommittee. what we will do, senator wicker, if you have something very short, you can do it now. otherwise, you should at the time of the questions. i would prefer the latter, thank you very much, mr. chairman. i'm glad to be joining you in that position. >> we look forward to working with you. we know you have a serious interest in rail safety. and we want to pursue that interest with you.

just got a news report that came out today, and it talks about tampering on the rail system in idaho -- iowa, i'm sorry. and so, it says that on a recent sunday morning, iowa interstate radio -- spotted something that didn't look right at the switch, just west of a town called menlo. and it immediately stopped traffic their, and were able to deal with the problem as they saw was designed to be an attack. and it was interrupted by a heightened interest of a rail

employee, and was turned over to federal authorities to pursue what was intended there. and help us in registering more interest in these kinds of things, even as we talk on this very day. so, i start by asking administered pistol, -- administratoadministrator pisto, designated 90% of the funds to aviation, and we want i care to continue. but it leaves relatively small percentage of the funds for service, transportation security. and as i mentioned in my

commentary, 700 million passengers fly on airlines each year, and compared to the 10 billion to use public transportation. and news reports indicate that al qaeda has been plotting an attack on a u.s. rail line. so, how does the tsa budget request reflects our concern and our actions against rail system attack, mr. pistole? >> thank you, mr. chairman. obviously, we be very much interested and apply more resources to surface transition rail transportation, in particular security aspects. we tried to be risk-based an intelligence driven in our process of recognizing both al qaeda, al qaeda peninsulas interest in particular as aviation, and the catastrophic effects as we saw from both the attempted bombing on christmas

day 2009, and then the cargo plot that we saw only cost al qaeda $4200 to do the toner cartridge printers devices and the shaping of those two packages. and we saw bin laden's statement about that, and al qaeda's peninsula statement, the impact about recognizing at least two of the concerned economic impact. that's not to say there's not economic impact if a train is derailed or anything along those lines, but what we try to do is recognize the exceptional efforts of both the amtrak police and those in state and local law enforcement initiative taken measures and efforts on their own and simply in terms of risk mitigation. to do those things that they know are prudent in terms of whether it is the additional police officers and canine, as

chief o'connor testified to, whether it is augmenting with transportation security grant funds, which i mentioned that we try to do in terms of operational deterrence, training, and then other things such as the viper programs that we mentioned. we tried to do all those things recognizing we can be all places, all people, all places, all times. with federal -- regulate federal money and provide the best posture possible. >> the question is, you know, that is raised further, in the past year law enforcement has uncovered plots against both the newark city subway and the d.c. metro. and yet the house sent over, recommends funding that is carelessly established to

support the public transportation security grants by 55% recommended below this year's levels. now, what would an impact like that do the transportation security grants that we have to have for the safety and security of the traveling public? >> mr. chairman, it as a serious and significant impact if that were to go forward. in terms of several areas. one would be the training which we would be unable to do. for example, we recently had a conference call with the chiefs of police from many of the metro police department. we call them the policy adviser group, including chief o'connor. one of the things requested as result of the bin laden raid was some video training, basically a videotape that could be provided -- we could produce and provide

two, for example, the engineers, those who work on the lines that deals with sabotage. and particularly what can be done in terms of trying to take preventive steps to prevent sabotage. and in the event there is, what steps can be taken to avoid the impact of that. so that would be one day. the operational deterrence, another area of critical infrastructure would be another area. as you know, some of the paths between new jersey and new york have some issue that we've talked about previously. some of that funding may adversely affect some of the continued risk mitigation efforts being done in those areas. and then there may be reduced funding for, for example, the operational efforts that amtrak and others would have with additional canine teams or uniformed officers that can do random, unpredictable patrols. >> i am extending the time that

i have for asking questions. i'm going to come back to mr. pistole, because what i hear you saying is there are many things that we could do. and the question is, what is missing from the application of these ideas that leaves us with more risk than i think we caught to be? with that i asked senator hutchison to take over. >> well, thank you. you know, we understand the stretch that you have across all the transportation modes. so, i'm not going to rail on you about how much of your budget you are allocating to rail, but am going to rail on you to this event. and that is, what, for instance, are you doing about hiring the

inspectors that you do have in this area with some mass transit or rail experience? which have not been done as of april 2010 when we had a hearing like this. secondly, what about the 400 f. r. a. inspectors? could you give them training as you just mentioned that you might be giving to the employees which i think is very good step, but what about the fra inspectors, could they also, they're doing safety, but what about adding security to their portfolio and coordinating with the federal rail administration? and last i would just ask this of you, mr. pistole. what is the association and cooperation between tsa and d.o.t.?

how would you rate debt, and can you do more with what you have that would help the situation? and i'm glad you all mentioned about osama bin laden's information on his computers that we found, because clearly they saw that there was a void of interest in this area, so we now are forewarned your. >> thank you, senator. in terms of your first question on the inspectors, we are looking for the best qualified. and i think there are things we can do and are doing to always recruit and retain those with exceptional background and experience. so there's more we can do in terms of specialize, and i think to your point that will address some of those issues that perhaps have been raised in the past. i wasn't present in the april 29 but i understand some issues that were raised. >> but you think we are doing that? >> i think we are but we can do more, yes. on your second point in terms of

the fra 400 inspectors i will take that back. i don't see why we can't provide that weathers for amtrak or other rail, passenger and freight rail providers to add to the good aspect to their safety issues. i will take that back and look at that. and then on the last issue, i didn't write that one down. i apologize. with the d.o.t., right. i think it's good, secretary napolitano and chief o'connor and i had a meeting with secretary lahood last month i guess it was to talk about some of the issues involving, particularly passenger rail i think there's a lot of things we're doing well, well. i think we could probably streamline and leverage some of those relationships into a more effective way so that's something i'm interested in looking at. basically to get the best return on our u.s. taxpayers investment in freight and passenger rail

security. >> thank you. thank you, mr. chairman. >> thanks. senator wicker. >> thank you, mr. chairman. gentlemen, thank you for your service and for your testimony. let me ask you about the incident that happened yesterday. here in the washington area. and i would reference a story in the "washington post," been on the television and radio also in the last 24 hours, a 51 year-old woman is being held at an undisclosed mental health facility after she allegedly made bomb threats on the red line train monday morning the passengers fled the train to some evacuated on the track bed according to eyewitnesses. the rockville station was closed for about two hours while canine units searched. no explosives were found

apparently. this woman was more of an emotional case that a terrorist threat, but she reportedly got down on her knees and said you killed my family and now i'm going to kill you all. and melee ensued. passengers press the call button. one writer called the transit police, and a number of people just jumped off, ran. at a place that was not the station, panic passengers use emergency release levers to open train doors manage. jumped on the track and then began walking towards the nearest station. have any of you look at this? do you have an opinion about what worked well and what didn't work well?

can the committee learned lessons from the incident that occurred yesterday? >> senator, i intimate with the incident. i haven't seen the official reports, but what is described there does not not surprise me. any previous career, we dealt with an incident with a gunman on board a train, colin firth is an, on the long island railroad back in 1993, who actually killed the husband of a member of congress. and the response by the passengers on board the train was certainly very similar to what you are describing now. it appears that the woman was very credible, very believable and those people truly believe that their lives were eminently in danger. they took what action they thought was literally going to save their lives.

one of the things we do in amtrak is actually try to teach passengers evacuation plans, both in stations and on board the trains. i think probably all agencies should take a look at their programs and see whether or not we need to reinforce that and put additional training out there for the passengers. in today's world we have active shooter situations. we have situations in rapidly required responses on the part of the public, and they need to be part of the solution and we need to provide the training for them. >> mr. lord? >> i would agree with mr. o'connor. i think the entire incident underscores the importance of providing additional training on emergency response and the evacuation procedure. a lot of time and attention is focused on deterring an attack and preventing an attack.

once an attack happens or it appears imminent, i think there needs to be increased focus in the area. and my statement today that was one of the issues we highlighted. the tsa's efforts to introduce new regulations that would set up programs for the training of front-line rail employees. we think that's important because the program requirements stipulate various requirements, one of which is training and evacuation procedures. >> to either of you have an opinion as to what would have been the best response of all armed passengers -- of all armed passengers? did they endanger themselves? do they risk electrocution by jumping off at that particular spot? >> it would've been preferable if they could escape to the platform if that were possible.

but when there's a mad dash to the door, sometimes that's not possible. clearly in a panic situation like that, you want to try to do whatever you can do well to panic and direct people to a safe evacuation. >> thank you. i think i will take another round later on, mr. chairman. appreciate it. >> senator boozman, welcome. and your opportunity to ask any questions you have. >> thank you, mr. chairman. mr. pistole, i'd like to follow up just a little bit on what senator hutchison asks, in terms of the responsibilities of tsa, you know, versus others. i know there's been some studies

psa, you know, they are not the lead, all are saying that. are we clear on those lines of who does what? any other thing is, you mentioned a few minutes ago in response to your question utah some areas we could do a better job. could you elaborate on that perhaps tell us more? >> so, i think there's clear understanding of those in the government and industry in terms of tsa's responsibility as related to security, and then, for example, transportation duties responsibilities in areas of safety, similar to what f. aa has on the aviation side and tsa has for security. i think there's clear understanding in most respects. part of what i was referring to on some of the streamlining is for example, the training facility that dod has. for example, there's an outstanding training facility

for rail safety security and response to for example, a freight rail with toxic hazards, derailment which was located in pueblo, colorado. or other locations. there's one the national guard runs in harpers ferry, west virginia, that they may be some efficiency achieved by doing the things. with omb on friday to look at that. so that's one thing on the training site. >> can ask about tha that in? if you establish if that were the case, is that something that you all could work out a would you need our help in fixing that? or is that and administrating? >> no, i think that would be worked out with the administration just to say okay, the question is are we providing services to different audiences. so it's one more focus. and i -- i visit to west virginia website, i just don't have all the information right now. >> okay. very good. thank you, mr. chairman.

>> thanks, senator boozman. i want to ask a question about, mr. o'connor as well as mr. lord. one of the primary benefits of rail travel is the ability to move easily, efficiently, get on the train, get moving to your destination. how is it going to be as efficient, as rapid, or us to be able to balance the needs, the security needs, with a mode detailed review of whose boarding the trains? mr. lord, -- or mr. o'connor, let me ask you first because you've got the force out their. >> sure, center. it's critical that our systems remain open and free.

it's part of who we are as americans. that being said, there are ways of secure data can be applied in the transit environment that reduce the vulnerability. and we are doing that by training our police officers in behavioral assessment, by training our employees in how to spot suspicious behavior and activity. and also, layering in random screening of bags, canines, both in the stations and on board the trains, as well as the use of technology. and technology is improving all the time and we're working with the tsa on new technology. so, i think it's important we keep this is an open and free, but later in these random, unpredictable security to

disrupt anybody who might be planning something untoward. >> mr. lord, i may be stretching your responsibility here, but do we know enough about systems -- if you're not somewhere with this, please feel free to say so. with the systems that are available, the technology that is around, how do you apply that to the millions of people who, daisy, get on the trains -- who, daily, get on the trains in a very short period of time, as the day moves across the country, the load stays about the same. you're talking about millions of people moving each day. so, i would love to have an answer that mr. o'connor suggested, that can be

applicable, but you do have the time factor on the other side. >> given the multiple access points and open architecture system, it would be extremely difficult to screen all passengers against, i believe you're referring to a terrorism watch list, something analogous that is being done on the aviation side. >> but now we find like this the right person who has challenged the system -- erratic person. how do you prevent people who would bring harm from being able to get in the train, get on the train, and cause mayhem? i don't know -- mr. pistole, is there anything that you see that wouldn't violate the security that we all have here, that so

rapidly discerns problems when you have millions of people moving that would enable you to provide the kind of risk aversion that we would like to see? >> the short answer is, as you know, is very difficult but it's problematic. but we do try to focus on are those areas, those points of vulnerability. and has chief o'connor mentioned, using canines, random, unpredictable patrols, the undercover officers who may be looking for such vicious activity and in recognizing at least on the tsa perspective part of our job is to promote the free movement of goods and people with the best possible security. so it's a balance between that commerce, moving, people moving with security. so, the idea, we talked about this last year in office, about trying to do individual screening just does not make sense from our perspective on the rails. >> you have to walk away with

one conclusion that i think is fairly obvious. and that is, the presence of security apparatus, including people, has to be obvious. they have to know that there are people who are watching, whether it's the canine. i love seeing -- so, i found out is the dogs get more tired than officers handling the. i see a dog stretched out their, and poor dog, i want to pick him up and give him a little hug, some water, get them going again. but the fact of the matter is i think it has to be obvious that it is an emergency that tsa has a program, see something, say something. but there has to be reminders that there are people who are looking out for our interests. and the fact that is randomized i think has the valley of its

own. so, thanks. senator wicker. >> i would you do ms. klobuchar for questions, if she has question. >> that's very kind of you. i would have if i'd had the time. >> very good. thank you. i do appreciate that. thank you, all of you, for being here for this important hearing, and thank you, chair, for having this thing. i think it's incredibly important. we are very focus obviously on air safety, but i think as the chairman knows, we have to always, always be very diligent with our rail system. it's so critical with goods in the flow of people across our nation, and an attack could cause not only high casualties but also severe disruption to interstate commerce. i appreciate hearing from you on this today. i have a question, first of all, i used to be a prosecutor, director pistol, so i'm very

direct with local law enforcement. i know you discusses several of initiatives tsa has undertaken to streamline coordination with local enforcement. and could you expand on that and discuss some more in detail and to what extent is tsa not just direct local law-enforcement but also integrate their expertise into its own oversight and assistance program? >> thank you, senator klobuchar. i would describe it in three ways. one is on information sharing. what could we provide on a timely basis to state and local law enforcement, and, obviously, rail security police. such as we did on monday, the day literally within 12 hours of president obama's announcement about the killing of bin laden. so we convened a conference call with all the major stakeholders in local law-enforcement in the metro police, transit police to say here's what's happened, be aware of possible retaliatory actions that may take place.

no specific intelligence about that. then on wednesday of that week when we see the information about the plot on the 10th anniversary of 9/11, to derail a train, we provide that information. so that's one area. information sharing. the second is the training, recognizing that state and locals just as myspace and fbi agents, state and locals usually have the best resources locally and address information, intelligence connection with the community, that they can do the best possible job if we, the federal government, can't enable them whether to grant such as transportation security grant program, or with specific training they can augment, or it might be through the viper teams where we can engage with state and local law enforcement and say okay, here's some things that we can do. the last is in the third areas in the critical infrastructure improvement. it for our critical infrastructures within a particular locale, how can we be informed by state and local

police and transit authorities and say, here's what they say are the vulnerable point, how can we were collectively to shore up those vulnerabilities. >> and also i know that tsa works with the rail stakeholders in the private sector. and according to the gao, many stakeholders don't have the computer acts as they need to receive tsa security updates, and they don't quite know what to do with them. can you discuss your understanding on the current state with a stakeholders? i just remember from the aviation issues, when things came up that at the beginning, at least in the change of the aviation security standards that there were some issues there. so if you could comment with rail. >> we have taken a number of steps, and gao identified some of those areas that we could improve upon over the last several years, and i think we made some good improvement, recognizing that we can do better but they are in the

entered in the dependency agenda was stakeholders on the ability to receive information, especially if it's classified information which we want to provide. it really comes down to several things. i ask abroad a folder of intelligence bulletins that we share with both stakeholders in state and local and transit police. different bulletins, whether it's about for example, the mumbai at that, the active shooter center, or moscow attack, both subway attack and the airport. we have a bulletin which stephen lord mention, triad, is a daily intel report that we're developing. but what we're really looking for is input from industry and the stakeholders as to the actual intelligence, what they are really looking for, recognizing that there's very little actionable intelligence. most of its strategic intelligence. al qaeda wants to hurt us,

here's things are done in the past, here's what they may do, but other than his 10th anniversary of 9/11, that's the really only actual intelligence at a specific plot. other than those as the chairman mentioned earlier about zazi in your city or individuals here in d.c. about the metro which is an aspirational plot as opposed to something that was operational. >> just one last question. i know during her nomination hearing you and i talked about in my office as well as appearing about worker morale with tsa. and i have to tell you talked about this before, i've seen some improvement in just talking to people. and it's just anecdotal network at the airport and some of it has to do with when you stood and defended the honor during the whole patdown controversy when they were just doing their job. but i wonder about morale and tsa workers and to get any thoughts on that. >> well, i have the perspective on from the transportation security inspectors, those tsa

workers who work with industry. i would defer to chief o'connor in stephen lord in terms of what they have received. i believe over all that morale is improving within tsa. there were a number of issues that we have gone. i think we have a lot of good things that people are proud of him. i'm glad to hear you're anecdotal information. even with your particular situation -- >> you mean the fact that my hip is checked all the time? >> yes. >> it's hanging out there. spent i'm glad to know there have been positive encounters. thank you. >> every day to tsa sends as screeners to work with our officers, and multiple cities across the nation. and the screen is that, our well-trained, and actually enjoy the break from the airport, working with us so they get a little bit closer than doubled the more interactive. they don't have to go through

the whole patdown routine, but they do help us with explosive detection, as well as behavioral detection. they were very good in the rail environment. >> thank you. >> thank you very much, senator klobuchar. senator wicker. >> thank you. mr. pistole, did i understand you to say that the zazi plot in your city was more aspirational than real? >> no, i'm sorry. that was a very real plot. the one that was disrupted here, locally, washington, d.c., the metro last fall -- >> that was the route ahmed? >> yes. i say a aspirational from that standpoint, he was interesting than some but he was doing it with an undercover fbi agent. and so he didn't have the means of doing, what has zazi could have the means, motive, the opportunity. but because of good information intelligence sharing, that plot was disrupted. yes, sir.

zazi had homemade bombs mature, with an attempt to detonate them right there in manhattan. what can you tell us any public hearing about how we detected these two plots? speaking in general terms. >> i can say that was because of very good intelligence area, and the zazi case, i was with the fbi during the time and help oversee the investigation. and it was a very collaborative work between the joint terrorism task force in denver. zazi was in aurora, colorado. he and relatives had been buying ammonium peroxide from several dod supply stores, and so there was actually some tripwires in place to have that identified as someone who's buying suspicious amounts of peroxide, for

example. that did not work as effectively as it should have, but then because of information sharing with state police and actually tracking him as he drove through the night from colorado to new york city, and then working with nypd and there were some issues that could have been improved in that regard. in terms of how that was all action. the bottom line was he and his two co-conspirators were tracked and were disrupted before they were able to carry out their plots with backpacks. there were nine backpacks down in the apartment they were staying in the they believe they're going to put those devices, they peroxide-based bombs in those backpacks and go to the new york city subway. >> do you view that as an attack that actually could have been brought to fruition? >> absolutely. >> if authorities had not intervened? >> absolutely. he was intent on doing that. he had built a device at a hotel

in the denver suburbs, and he was prepared to go about doing that. he had been trained back in afghanistan, so yes, he was ready to go. pakistan, i'm sorry. >> let me just shift in the remaining moments to requirements in the implementing recommendations of the 9/11 commission act of 2007. and i informed correctly that mandated security training requirements are still not final? and that background and immigration checks, frontline public transportation rail employees are still not finalized? am i correct in that information? >> you are. >> why is it taking so long? 2007, and here he is 2011 and

the training requirements are not in place, and the background immigration checks are not in place. >> so for context, senator, after the 118 provision of the 9/11, 74 have been complete, 14 are overdue, and you mentioned two of those. the train actually has taken place but the notice of proposed rulemaking which was mentioned earlier has taken much longer come in my mind, than it should have. and that is in process, the substance has actually taken place but the process for the mtr and has not been finalized so that is still in progress. and as you know that is a severe process. the other one we should have that out by december, by the end of the issue is what i understand. but again, i agree, that is taking too long. we did focus on the top tier priorities. those have been addressed and successfully complete. training is a top priority but

it just was not done on as a timely basis as it should. >> do i understand the role miking process, for something of a national security issues such as this, is really the same as the process for the implementation of the rule involving a labor law, or in a private law? >> yes. it's generally the same process, yes. >> would you advocate in cases of national security legislation, would you advocate a streamlined will making process? >> absolutely. and i would appreciate support on that. >> are you aware of any proposal coming from the administration in that regard? >> not off the top of my head. i could look at that and get back to you, senator. >> mr. chairman, it seems to me when we have our allies

suffering from attacks in london and madrid, and when we see 400 plus -- 40 plus hotels in moscow, 200 plus fatalities in india, and there's a national security issue, it seems the rulemaking should be different than the rulemaking with regard to the construction of toys or a new way of looking at labor laws. but in conclusion, let me just observe, mr. chairman, that somebody must be doing something right, in the fact that we've not had these incidents as i mentioned in the other four locations, as something to be proud of. it's not to say that something won't happen this afternoon or

tomorrow, because the threat is ongoing. but we, i think we are very fortunate in that we have escaped this type of attack for as long as we have. thank you, mr. chairman. >> thanks very much. i think it's fair to say that we have been diligent, that we have intercepted many plans for people who want to bring destruction to the system. and i congratulate all branches of the area that are concerned, whether it is gao or the amtrak police. mr. pistole, the tsa, your people are hard at work. i generally believe, and we urge you to keep on the diligence. something happened the last couple of -- things happened the last couple of weeks which are

distrustful. and i addressed this to mr. o'connor about the walk through, new york to new jersey, the path train tunnel, without being detected by security. others came walking through secure passageways. and i don't know what measures amtrak has in place to prevent something similar from happening, but obviously it's got to be there. we need to know that these access ways are secured and that we are not going to have people just wandering through there, doing whatever they want, as well as bringing terrible risk to the passengers, the system itself. that we are not missing the

evidence that we see in front of us. and not curbing it before it takes place. >> i agree, senator. and funding that has been provided by tsa to new jersey transit as well as to amtrak has been used to put some systems, surveillance systems in that have been helpful to us in protecting those entrances to those tunnels. but given the reason information coming out of the bin laden compound, we are looking to do even more, and we have been in discussion with the tsa in terms of operationalizing some of the grand funding to put additional security personnel out at critical infrastructure. until we can target some more

riches and tunnels that we are concerned about. so, in short order, there will be beside additional patrols we're doing, there will be some additional fixed security areas that will help further protect critical infrastructure. >> i think it's obvious, fairly simple technology that's available to provide cameras, the views of these access points, somebody sitting in a facility, an office can maintain a watch on lots of these places without a lot of trouble. so, i would urge that. before he came to the senate i was a commissioner of the port authority of new york new jersey. and i'm not sure what prompted me as i look back because this was some years ago, 1978 specifically.

i decided i would walk through the tunnel. not unescorted, and i did through the path train, new york/new jersey as you mentioned. and i found some distressing things. emergency doors were locked, fire exits locked. electric light systems that were antiquated, and resulted in lots of lights going out as one of them went out, the whole system is not in use anymore, but at that point in time it was. so surveillance of those facilities has to be there, and as inviting as they might be for the curious, they are even more inviting for those who would bring terror or mayhem to our public. i thank you all for your participation today.

and we will make an announcement that we will keep the record open for a couple of weeks for outstanding questions you get. please respond to as probably as you can. with that, this hearing is adjourned. thank you. [inaudible conversations] [inaudible conversations] [inaudible conversations]

>> the house financial services committee held a hearing yesterday on banking regulations overseas, and how they compare to rules in the u.s. testament from head to the federal deposit insurance corporation, the securities and exchange commission and other financial industry regulars. this hearing chaired by alabama

congressman spencer bachus is three hours. >> the hearing will come to order. without objection all members written statements will be made a part of the record. the chair will recognize himself for an opening statement. when president obama sign the dodd-frank act into law last summer, he set in motion the most ambitious changes in financial institution regulation since the great depression. while american regulators and financial institutions sort through its 2300 pages to find out what the new legislation means for them, and to raise to meet its deadlines, the international implications of the ball have garnered relatively little attention. receiving even less attention has been the work of the basel committee on banking supervisi

supervision. last november ag 20 formally adopted its recommendation for basel iii. a new global framework for determining the minimum amount of capital that banks must hold a cushion against losses for insolvency. these complex matters are too significant to ignore. during today's hearing we will examine the implementation of these new bank regulations and the implications for the competitiveness of our financial markets. we need to know if we lead, will others follow. does it matter? it has been said that if banks impose cost and risk on a country's economy, the country is better off with rules that limit the risk and cost even if others are not doing the same. that might be true if only the risk and cost to the country with the risk and cost of bank failure. but there are other threats and dangers. if we overregulate and ignore

the plans of the rest of the world, then i fear we will push capital industry and jobs out of the country. at a time when each new release of government data seems to underscore the sensitivity of our economic recovery, it is fair to ask trade and other agencies representing -- represented on the first panel, whether they have carefully considered ditching the tip of fact of the tsunami of predatory band-aids unleashed by dodd-frank is having on the real economy. we will be discussing for critical issues during this hearing and raising important questions. i hope our panelists will address. versed is capital and liquidity. willful basel iii rules make the financial sector more stable? and if so, at what cost? is the banking system worth the potential trade off of slower economic growth malaise

innovation and diminished credit availability? regulation of si fi is congressman -- governor carrillo's proposal impose additional capture requirements on the sifi, reflected not of harm a sifi very well reflect on the rest of the financial system the right approach? or will it just make u.s. financial institution significant important, financial institutions less efficient and less competitive without making the system safer? as we doubt of the capital and liquidity constraints on the red lake financial sector, do we run the risk that more activity will migrate to the shadow banking system and the jurisdictions offering a lighter regulatory structure? three, to raises regulation.

should we expect the participants entering this market will shift their business to non-us firms if other countries refuse to follow our lead on margin and capital requirements? how should we expect u.s. firms to compete if they face higher costs than their foreign competitors? number four, regulation of proprietary trading. not even paul volcker claims that proprietary trading caused the financial crisis in 2008. but dodd-frank's rule prohibits banks and non-bank financial congress from engaging in trade for their own gain. now that the rest of the world has rejected a call to impose similar proprietary trading bands on their institutions, what effect will unilateral u.s. application of the volcker rule have on the liquidity and vibrancy of our capital markets? these are important questions am and i'm pleased with two distinguished panels of witnesses with us today to answer them. i look forward to the discussion and will now recognize the ranking member.

>> before us are, how much side on each side? >> we have 12 minutes on each side step and i will give myself five. i appreciate, was looking at the testimony, which we'll hear later, and i was pleased to see him say in his first page certainly the financial crisis exposed serious flaws in the u.s. regulatory system, particularly the dangers of unchecked leverage and regulatory arbitrage. most other forms impose in the wake of the recent financial crisis by market participants and accounting of greece, supervise, regulars and the congress will improve the soundness of our system while allowing u.s. firms to remain competitive. i appreciate that because that's a framework in which we operate. within that framework, there are several things we want to do. first of all to make sure that capital is adequate. sadly cannot put american institutions at a competitive

disadvantage. there are a couple of points i want to make about this. i say to my friends in the financial industry, you do understand that we have to separate to the extent that we can to important desire is that you have. one is not to be regulated in a way that puts you at a disadvantage, vis-à-vis, your foreign competitors. number two, there's a desire not to be regulated. ..

tea is not to be regulated and the desire of european institutions not to be regulated to reinforce each other and it is important to single those out. a second point i want to make to my friends in the financial community. another important distinction we have to keep in mind that i must say to be honest they don't always -- and i can understand that -- they are the means to a sound financial system, not the end. their operability is not important to anyone other than themselves. but that doesn't make it an important. they have that role. but their role in the financial system is to be the intermediary. to help us gather enough capital in the system from a variety of sources and make it available to

people to think productively. of fact that a particular financial institution may or may not be making a good profit is not a matter of public policy. that does not mean it as some have said that we should set out to reduce the role of the financial sector of the economy although there was an interesting paper from the financial service of 40 raising these questions. that says to me as a consequence of regulation that we think preserve's safety and soundness in the system the simple fact of profitability from these institutions with well based executives is not a problem. it interferes with the ability for capital formation. we also have a question of what comes first, the chicken or the egg?

there is a danger, financial institutions in each country to the point where there's an overall reduction. we are told by regulators that when they talk to their european counterparts in particular, the same thing that they here. if you don't stop we are moving elsewhere. and the area of compensation, there's a strong argument from europe that i heard myself from the european union that the extreme lax schools in america on compensation for chief executives puts europeans at a disadvantage. europe has much tougher rules on compensation. that doesn't drive me to do any differently but i have to note that. people talk about the level playing field. we won't have a level playing field here if we are -- i have

noticed something extraordinary about the level playing field which would defy logic. in all the years i've heard people complain about the unlevel playing field by never heard of an instance in which anyone was at the top of the unlevel playing field. it is a constantly declining playing field. i yield in another minute. we have constantly declining playing field in which everybody is at the bottom and no one has ever been at the top and i worry we get into that same situation in which all financial institutions of the world will prove to their regulators there added disadvantage compared to every other financial institution. there are some reasonable points to be made. i did not think margin requirements on sovereign entities are a good idea. my new york colleagues point out a particular case. i do believe, i will be interested if regulators had a

different view, the law gives them the flexibility to take that into account. i do not think the cftc would be mandated to put people at a disadvantage if that could be clearly it sad list but the general framework is we have a problem with leverage and we got into a terrible financial crisis because we hadn't done appropriate regulation and as we do the regulation it is important to keep in mind the role of financial institutions is not to make money for themselves but to be the intermediary between various sources of capital and people who put it to good use and the need not to allow competition to be used to denigrate regulation but to try to get cooperation so that we get a good regulatory scheme that puts no one at a competitive disadvantage. >> mr. royce for one minute. >> given were a financial crisis are originated it is unfortunate

how far off the radar this reform effort has gone. this all started when congress decided to embark on a social justice course to get everyone that wanted one into a home regardless of whether they could afford it. then came the crisis followed by dodd-frank. let's be clear. an avalanche of regulation doesn't mean better regulation. the new regulations were piled on to the old ones. will that make the financial system safer? unlikely. it fundamentally weaken the global financial system by encouraging capital flight out of the most stable and liquid markets in the world. in the pile of new regulations, a few good ideas. this effort is getting trumped by 2300 pages of government attempting to micromanage every player in the financial system. the most competitive banking system is one with high capital requirements and few rules on

the extension of credit, with it to a consumer or corporate sponsor. is up to us to correct the mistakes and ensure the end result is a financial system built on higher capital, market discipline and common-sense regulation. i yield back. >> miss waters for two minutes. >> thank you. i would like to thank our witnesses for coming today. chairman bair's tenure will come to an end on july 8th. i would imagine this may be your last time testifying before this committee so i would like to thank you for your service during this turbulent time. it has been almost a year since democrats in congress passed the most street in reform of our financial markets since the great depression. the cause of that reform, regulation has been closely

monitored, systemically significant institutions, regulate the shadow banking industry and bring transparency to the degree of this market. the statutory authority we provided will only be suspected as the rules adopted to implement that authority and the ability to prevent another crisis will only be realized if regulators are willing to testify the enforcement and resolution powers. hour hearing is about implementation of dodd-frank and i am interested to hear from our regulators about how they are cooperating with international partners. i am interested to hear from industry witnesses, those concerned about competitive positions relative to the international counterparts. it is extremely important to caution against engaging in a global basis to the bottom, if you watered-down financial reform to entice firms to the

united states we may find the only thing we accomplished is insuring the next bailout recipient is headquartered in the united states. strong, transparent and fairly regulated markets are a way to prevent another crisis and create jobs. i yield back. >> thank you. >> this week is the 1-year anniversary of the administration's summer of recovery. we now have one in seven americans on food stamps, new business starts are at a 17 year low. it now takes ten months according to the bureau of labor and statistics to find a job, this is the longest period in recorded history, and we now have 28 months where unemployment has been north of

8%. the longest period of sustained high unemployment since the great depression. on top of this we have dodd-frank signed into law which is fraught with intended and unintended consequences that i believe has the impeded and will harm job creation in america. dodd-frank was not passed in the e you or by the g 20 and power regulators must proceed with great care. we do not know what the total impact is. we cannot afford greater job loss. i yield back. >> thank you. mr. maloney? >> thank you for calling this. i welcome all the witnesses and thank you for your service and i join my colleagues in thanking sheila bair for her extraordinary leadership during a difficult time in history. you did an incredible outstanding job. i am interested in seeing what

your next goal will be and i am sure you will continue to have an outstanding career of service to our country. i join the chairman and ranking members in expressing my concern for any competitive disadvantage for american institutions in the world economy. i am particularly concerned about a requirement in the dodd-frank wall street reform act which responded to the work of a financial crisis in our country's history since the great depression and sternly move forward with improved regulatory infrastructure and financial services sector and it was clear our infrastructure had not kept pace with the development of financial products and services and was a long needed reform. i am concerned about one of the features that would impose heightened capital requirements on the most complex u.s. banking

entities and financial institutions. i wonder if this surcharge adopted under basil free satisfied that requirement or is this an additional burden that would be on our financial institutions and what would that impact be? also with the implementation of dodd-frank, how the implementation schedule, how you are working with our european counterparties and other counterparties across the world to make sure we are moving in the same direction and hopefully enacting similar regulations. i raised these concerns with ben bernanke during our annual testimony before his annual testimony before our committee and he indicated that he thought we could be at a competitive

disadvantage. i look forward to hearing what your comments are on the capital requirements, specifically for entities and complex u.s. entities. >> thank you, mr. chairman. one of the most important dynamics of implementing regulatory reform is to keep our financial industry's competitive. without a strong financial sector that commission loans and surprise capital to help businesses grow our economy will continue to falter. more jobs will be lost. if we unnecessarily constrain financial institutions to a level standards to their international competitors businesses will migrate to the international competitors and if we restrict our financial institutions from providing innovative and competitive products consumers will look elsewhere. it is counterproductive that the most stringent regulation of our

financial institutions drives businesses overseas and shifts risky behavior to unregulated sectors of the economy. we must find the right balance, u.s. jobs in our economy depend on it and i would like to talk about sheila bair. you have done a wonderful in the financial crisis and whatever you do next is going to be very important and i know that it will help all of us. thank you for all you have done. >> mr scott for two minutes? >> thank you, mr. chairman. i would like to convey my deep appreciation to miss bair for her excellent work. i want to talk about international aspects of this. there's no more important deal

for us in our financial system than to take care of our present issue at home. i want to start off by putting on the table, hopefully your comments will reflect, our failure, the failure of our financial system to deal with this extraordinary problem of home foreclosure and the downward turn of home values. our standing in the world is going to go down. failure to address this. we have a problem with our loan services and banking establishment. they are good people but we have to figure out a way to get our financial system to be more responsive to the issue of home foreclosures. it is the core that will drag our economy down and i hope that as we move on we can get that but i want to mention that the dodd-frank measure in terms of international aspects included requirements for increased transparency of derivatives mandating that they be traded on

transparency by pursuing legal resource against banks that violate this condition. a lot of provisions of dodd-frank is neither reform to the derivatives markets, parts of the financial industry expressed concern regarding application of these regulations in foreign countries particularly their effect on competitiveness. the rules require international branches to collect margin for uncleared swaps potentially jeopardize in their ability to compete with foreign entities. in addition it is unlikely that foreign jurisdictions will adopt similar laws as that within the dodd-frank was since the issue was not addressed as part of the g 20 accord. so as we move forward in the question and answer period to address that and reflect what is happening at home with foreclosures and particularly as i am putting together a major event to address that so your

comments would be much appreciated on those two issues like home foreclosures. >> thank you. >> there are many lessons we learned from your recent financial crisis. you are clearer than we are in a global interconnected system more than ever before. the communication advances that allow them to interact with in the last few financial crises, it is slow throughout the entire financial system. whether we support dodd-frank or not, setting new regulatory benchmarks across the services industry. the regulators before the committee today will bear a considerable burden of hundreds of rules and regulations. i encourage you to move forward with caution and work with your counterparts to ensure america remains a financial leader. we have an opportunity to bring

a financial discussion to the committee about the effects of dodd-frank on financial institutions. failing to examine the cost of compliance could lead to job losses and a downgrade of the financial center. i look forward to hearing from our witnesses today and look forward to hearing from the chairman. >> as far as international coordination, we are long way from the solidarity we had in pittsburgh with the dirksen senate office building 0. that is because there is substantial differences beginning to emerge between dodd-frank financial reform and we're seeing in the rest of the world. you bleed and we will follow for the rest of the world. if you lead in the u.s. we will pick and choose where we're going to follow with. dodd-frank has the volcker

rules, and exchanging swaps. it is collateral for trades. just a few examples. because of that, risk capital and jobs going overseas impairing our economy and competitiveness, the overreaching policies cut of 5 in dodd-frank incentivize other countries to do what we think they do. increase tactical revenue through strategic regulatory arbitrage. deregulations may be hard to measure but that is what they do. what is the cost of this regulation in the form of jobs and economic growth? with these address real problems and which ones had costs and this cost benefit analysis must be done now because the stakes are too high to get wrong. with that i yield back.

>> putting a chart up i apologize it is a small chart but this is the 50 top financial firms, over on the right side in 2003 the u.s. was -- had 51% of the total capitalization. you move into 2006 it dropped to 35% of market capitalization and u.s. companies in 2010 moved to 24% market capital with china going from 1% in 2003 to 22% in 2010. you see a little bit of shrinking in the e.u. and the u.k.. when we talk about how important it is, regulatory harmonization, it is extremely important to accomplish that goal because already we are seeing a migration of capital to these

other countries. for those who don't understand job creation, capital is a driving force and we try to create jobs to make sure that capital is in the united states of america and what i am concerned about and i appreciate the chairman holding this hearing that if we do not make sure we get this right we will see deterioration of capital formation in the united states which will mean more unemployment and less jobs for american families. yield back my time. >> mr. mchenry for 30 seconds. >> i am deeply concerned accumulative effect of these regulations will be a vacuum. there will be a huge sucking sound of capital out of our market into other markets across the globe and this is that very time we have companies that are starved for capital to create jobs. the head of japan's

second-largest bank predicted our stringent regulations will fund western banks, will help double their lending. this is a great example of the loss of competitiveness and i hope regulators will understand our folks are starved for capital and we need to get more capital on the streets to create jobs. look forward to that hearing. >> thank you for calling -- it is ironic we talk about the international context but 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 part of the examiners. this has got to stop. 4 years i have been complaining these people were in the process of creating jobs and never had a

problem and had their loans classified and complained bitterly to the fdic and the fed. it falls on deaf ears. we will talk to our examiners. there will be a change in policy on the u.s. side before we worry about the international side. >> thank you for holding the hearing and thank you to our witnesses. obviously we are concerned that the implementation of frank will hurt market competitiveness but we need to emphasize u.s. competitiveness as a whole. these provide capitalization and growing an entrepreneurs everywhere you go, you hear about job creation and we won't be able to do this if we are at a competitive disadvantage if we move capital and jobs overseas. i am interested in hearing the

panel today, how the implementation process will go real -- with our competitiveness around the world. >> 30 seconds. >> to our witnesses to date, this is a fascinating discussion. on occasion we hear the comment on regulatory arbitrage. how much of that is for work? how much is ruled to robbery asian, ability of the rule and another fundamental, actual enforcement. we have equal rules but this birdie killer sovereign entity has a habit of never looking at the capital reserve and that puts us -- creates a great facility.

thanks, mr. chairman. >> i would like to welcome our esteemed analyst, several of the members of the challenges you face, we commend you for your hard work. our first witness from left to right is the hon. lael brainard of international affairs. second witness is daniel tarullo of the federal reserve system. the third is the hon. sheila bair of the insurance corp. and you will be leaving, so we wish you well in your new endeavor. our next witness is the hon. mary schapiro of the securities and exchange commission.

our fifth witness is gary gensler of the futures trading commission and the last witness is john walsh, acting comptroller of currency. we welcome our panelists and we will start with undersecretary brainard. >> thank you, chairman bachus and ranking member frank. i appreciate the opportunity. some would argue the united states is moving too fast on financial reform, that we should slow down and see what other countries implement. i don't agree. by moving first and leading from a position of strength we are elevating the world standard. with financial markets that are more globally integrated than ever we need financial reforms that are more globally convergent than ever. we don't need to synchronize across all issues there are a few key reforms that must be global in scope if they are to proceed. the risk of regulatory arbitrage

carries real impact. it means a race to the bottom for standards and protections. it means potential loss of jobs in the american financial sector if firms move overseas and may increase the possibility of future financial instability if riskier activities migrate to areas with less transparency, loose regulation and lax supervision. acting in concert is the best way to address the potential for regulatory arbitrage and concerns of american firms about proceeding fairly. the sooner we level the playing field the better. let me briefly touched on the priority areas that are most relevant. the first priority is strained and capital liquidity and leverage. these standards can make the difference between the success or failure of firms and jobs and livelihood they are lending support. confidence in the markets and protection of taxpayer dollars. new capital framework known as

basel iii will ensure that banks have more capital and that capital will observe losses of a magnitude associated with the crisis without relying on taxpayers and the definition of capital will be uniform across borders. full international convergence will be achieved only if supervisors in all jurisdictions ensure that banks across the world measure assets similarly. that is why the united states has called on the basel iii committee for greater visibility and supervises 3 of how we measure liquidated assets and we're pleased that is on the committee's agenda. in addition basel iii include a mandatory leverage ratio to protect against possibility of weak international implementation. a second final issue is reducing the systemic risk from large interconnected financial firms, global cities. many of these put the global

financial system at risk and necessitating significant government intervention. to make sure that does not happen again dodd-frank requires the fed to heighten financial standards. g 20 leaders at a parallel commitment to develop additional capital requirements for firms across borders. in those negotiations the united states has been clear about our priorities. additional capital must consist of high quality and common equity. the surge arch must be well calibrated to balance financial sector stability and macroeconomic stability and must apply to wide range of the large interconnected banks across the globe and the mandatory and comparable across jurisdiction to promote a level playing field. the third area is resolution. dodd-frank established a robust regime that provides federal authorities with strong authority to resolve the largest

institutions but the best national regime in the world is not going to be adequate if other countries do not adopt robust resolution toolkit and complementary authority. the united states is working actively to implement an international framework. the uk and germany have passed resolution legislation and we will continue working to encourage other financial jurisdictions to do the same. finally international convergence is critical across derivative markets in the run-up to the crisis. few understood the magnitude of aggregate exposure is because derivatives such as credit default swaps were traded over-the-counter on a bilateral basis without transparency. as we learned from the crisis we require greater transparency, trading on to exchanges or platform and require the cities and we cleared. if we do not have alignment across borders firms will move activities to jurisdictions with lower standards which will include risks to the system.

for this reason g 20 leaders set forward principles that are in full alignment with dodd-frank. both the u.s. and european commission a developing margin requirements for otc derivatives pet not central cleared. it is important for those requirements to be developed internationally and our regulators have agreed to work with international regulators to do so. if we don't have a consistent margin standard for unclear trade we run the risk that activities will migrate jurisdictions that do not provide incentives for central clearing. in some we are making great strides to assure 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? >> i will make five points in

three minutes. it is important to remember what the strength to minimum capital standard increased liquidity standards in three regulatory banking agencies in front of you and regulators around world. the financial crisis revealed the amount of capital held by many banking institutions under prevailing cap or requirements proved quite inadequate in quantity and quality. firms with substantial reliance on wholesale funding markets found that those sources of funding dried up quickly, at times almost overnight as market concerns rose. back in 2008 prospect of the failure of the most systemically important institutions raised in turn the prospect of a collapse of the financial system to which none of the large complex financial institutions would have been immune. that is what led to t.a.r.p..

no one wants another part. not those who supported it and not those of you who opposed. if we are to avoid another choice between a park like mechanism on the one hand or collapse of the financial system on the other we have to ensure financial firms have adequate loss absorption capacity and sustain stress in funding markets. second point, in a global financial market serious problems in any financial center can spread sometimes very quickly. that is why it is important to negotiate good liquidity requirements from all internationally active banks. that is what basel iii was about. that is why it is important to ensure the most systemically significant institutions around the world have an additional capital buffered in light of the impact their failure would have on the financial system. third point, in number of additional areas where there is need for more international

cooperation. several of the mentioned derivatives and i agree. fourth point, this is where i want to spend most of my time. the financial stability benefits of basel iii and other international reforms would be realized only if they are implemented rigorously and consistently across jurisdictions. i want to distinguish between implementation in incorporating the agreement into domestic legislation and regulation on the one hand and on the other hand ensuring those standards are in practice observed by firms in all the basel committee countries. getting into laws and regulations is obviously necessary but not sufficient. historically that is all that the implementation efforts have been able to achieve. as external monitoring of international capital and

liquidity agreements become hard, it is more important to take a second step. there has been considerable external analysis in recent months. apparent divergence and risk in countries, in number of reports by financial analysts in the united states and in europe suggesting generally speaking it appears assets and similar portfolios are more persuaded here than in some european countries. these analyses raised significant questions but there authors don't have access to models and processes of financial institutions so they cannot provide definitive answers to those. that is where an effective international monitoring mechanism comes from. we raised this issue in basel committee. as we move through the implementation phase of basel iii we will put forth a detailed

proposals for how international agreements can be effectively monitored at the firm level. i have provided some ideas in my testimony this morning and would be happy to discuss them further with you. the key point is much more needs to be done for at least three reasons. first as i said earlier to ensure the financial stability benefits of the agreements are realized. and firms from some countries including the united states have competitively disadvantaged. and feared because the effectiveness, will benefit from the concrete sharing of perspectives and problem solving among supervisors from the basel committee countries that will be entailed when a monitoring mechanism is in place. when i am done i will lead to answer questions. >> chairman bair? >> good morning, chairman bachus

and remember frank. i'm curious how this will affect the international competitiveness of the united states. i want to focus in particular on the importance of strengthening capital regulation. a strong stable financial system is a precondition for a competitive u.s. economy. unfortunately in the years leading up to the crisis some large financial institutions provide credit intermediation to support the real economy. they exploited regulatory gaps and weaknesses for complex securitization structures and derivative instruments but little support for productivity by the market perception of too big to fail. they ss low-cost debt financing which they funneled into investment strategy. and economic resources into unstable financial activity instead of more productive uses like manufacturing, energy, technology and infrastructure.

the full cost of the financial crisis are not known. we lost payroll jobs and homeowners suffered a 1-third decline in 2006 and nine million foreclosures started over the past four years. lending by insured banks and loans contracted by $750 billion and loan commitments have declined by $2.7 trillion. trillion's more in credit availability lead to the collapse of shadow banking sector. a healthy and competitive u.s. economy requires a system that is stable and supports the credit needs of the real economy. this is not the system we had prior to the crisis. as we debate needed improvements there is much discussion of how financial reform will affect the competitiveness of the u.s. economy. u.s. economic competitiveness is a broad concept in which industry competitiveness is only one part. short-term profitability of financial institutions should not be confused with

international competitiveness. many regulatory gaps and lapses which occurred 3 crisis as a way to strengthen our international competitive position. we discovered sacrificing safety and soundness in the name of global competition made both financial institutions and the broader economy. a prime example is capital regulation in the pre crisis years which gave undue weight to the desire of financial institutions to boost return on equity with leverage, capital requirements repeatedly and materially weakened in the pre crisis years. as a direct result large financial institutions steadily increase to the point where capital was inadequate and during the crisis. insufficient capital, shareholders beat the upside and investors paying off and the cost was born by the broader economy. we were paying the price of the country for accommodating the pre crisis advertised for leverage and some of the largest

institutions. with basel iii and important provision of the dodd-frank act, we have a historic opportunity to strengthen the capital of our banking system. the basel iii agreement strengthens capital in a variety of ways and is an improvement. the numerical basel iii ratios are on the low end of what is needed to weather a severe crisis. this is especially true for the largest banks. we saw in 2008 the cost associated with a large interconnected financial institution. i strongly support the need for additional common equity for such institutions. it seems self evident the capital requirements of the largest financial institutions should be higher, lower than the general standards. prior to the crisis a number of large european banks were allowed to implement the approaches under basel ii which use their internal model to set capital requirements. large u.s. insured banks and holding companies were on course

to a take additional leverage to drive risk-based capital requirements. tuesday this week we corrected the institution. the fdic board approved final rules for the federal reserve to implement section 171 of the dodd-frank act. it is simply that the capital requirements of the largest banks cannot be less than capital requirements of community-based for the same exposures. this model under basel ii cannot reduce kapor requirements. large banks are still allowed to affect their own capital requirements. this concerns the reasons indicated and discussing that more with the committee. as we strengthen capital standards we need to make sure we follow suit and i will be glad to work this committee as long as i can which is not much water and our hope my fellow colleagues will maintain strong capital standards in the united

states. >> chairman schapiro? >> thank you, members of the committee. i appreciate the opportunity to testify on the house-senate series of the security exchange committee for the financial implications of the wall street reform and consumer protection act. it establishes new reforms that have implications for u.s. companies. the written testimony discusses a number of these reforms as well as the fcc's efforts to effort reform regulators and limit regulatory arbitrage. i would like to focus on over-the-counter derivatives market claim. the derivatives market play has a global notional value of $600 trillion yet otc derivatives were excluded from financial regulatory framework by the modernization act of 2000. title vii would bring the market under the regulatory umbrella requiring the sec and cftc write

rules relating to among other priorities mandatory clearing operation of execution facilities and data repositories, capital and margin requirements, and these will greatly improve transparency, facilitate central clearing, enhance regulatory oversight and reduce counterparty risks. by promoting efficiency and stability this framework should foster a more nimble and competitive market. because the marketplace already exists as a functioning global market with limited generation, international coordination is critical to limit opportunities for regulatory arbitrage, eliminate competitive disadvantage and conflicting regulation. domestically the sec is working with the cftc and the federal reserve and other federal regulators to coordinate implementation title vii will recognize the differences in

progress, entities and markets. working domestically also bolsters our efforts internationally. it requires the sec and prudential regulators to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards and we are working with international regulators in this regard. the u.s. is leader in this area but a significant international consensus exists around core components of otc derivatives reform. progress is being made internationally but other nations lag behind u.s. efforts. to address differences in scope and timing the sec has been active in bilateral and multilateral discussions with regulators abroad. we have been engaged with international market regulators bilaterally and through participation in and leadership of various international task forces and working groups to discuss full range of issues surrounding regulation of otc

derivatives. rather than addressing international implications in title vii of dodd-frank piecemeal we are considering addressing relevant international issues holistically in a single proposal. this approach generates powerful and constructive comments to consider regarding application of title vii to cross border transaction is. in addition after proposing all of the key rules under title vii we consider seeking public comment on the implementation plan that will permit a rollout of the new security based swap requirements in an efficient manner to minimize cost to the market. i also would note that last friday the sec announced it would take a series of actions in coming weeks to clarify the requirements that would apply to security based transactions as of july 16th. the effective date of title vii and provide temporary release. yesterday in the first such action the sec provided guidance

that many of title vii's requirements applicable to security based law would not go into effect on july 16th and grant temporary relief of compliance from any new requirements that would otherwise apply. we took this action to avoid market disruptions as we work expeditiously to finish rule writing and adopt our rules. derivatives are the key focus of the international effort of the sec and other policy areas demand our attention. for example accounting and financial reporting standards are essential to the efficient allocation of capital by investors everywhere in the world. the sec is continuing its work on the important issue whether to incorporate international accounting standards into the u.s. financial reporting machine. our primary consideration of these activities is the best interest of the u.s. investor. in conclusion the sec continues to work closely with regulators in the u.s. and abroad and members of the financial community and investing public to conduct rulemaking of

international implication in a manner that supports the interests of the u.s. market investors and firms. thank you for the opportunity to share my thoughts with you and i will respond to questions. >> chairman gensler? >> i thank you for inviting me today to today's hearing, the conference on regulatory reform. i thank miss bair. this might be the last five or six times we testify together. it has been two years since the financial crisis and win 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 exotic financial contracts had their lives hurt by the risks taken by financial actors all over the world. we still have high unemployment, homes worth less than their mortgages and pension funds that did not have the value they had before the crisis and we still

have very real and '70s in our economy. though the crisis had many causes and i agree with many statements on that it is clear the swaps market played a central role in the crisis. they added leverage to the financial system where more risk could be back with less capital. they contributed particularly through credit default swaps to an asset bubble in the housing market and also 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 too interconnected to fail. so swaps which help manage and lower risk for many users actually concentrated heightened risk in the economy by concentrating it among the large financial agencies. important firms. as capital and risk have no geographical boundaries we really need to have

international oversight that ensures these markets, these swaps and derivatives markets function with integrity, transparency, openness and competition. that has been found since reforms of the 1930s that benefit the securities market and futures market and the economy and job growth and creation. to address the real weakness in the swap market the president and the g 20 leaders in pittsburgh in 2009 laid out a framework for regulation in the swaps market. the u.s. and japan passed reform through legislatures and are working on implementation. european council and european parliament are considering their swaps proposal and asian nations as well as canada are working on their reforms. as we work to implement dodd-frank we are actively coordinating with international regulators to promote robust and consistent standards and the commission participate in numerous international work groups but we are also sharing our work product.

we started last july and august sharing memos and work products with international regulators in europe and in asia. we found this to be a great benefit because we got, ands before we put proposals out and consistent with administrative procedures we put proposals out and got more comment. we are coordinating with regard to the scope of the derivatives regulation, central clearing and capital martin raised by many members here, data reporting and business conduct standards and transparency initiative including trading on electronic trading platforms. very important feature of the act was a section called 722 d. it states specifically that the act relating to swaps shall not apply to activities outside the u.s. unless those activities have a direct and significant connection with the activities of the commerce here.

we are developing a plan for the application of the 722 b and expect to receive public input on that plan and we are working closely with the sec on similar work they will be doing. before i close i will address the issue related to what occurs on july 16th. the commission two days ago had a public meeting on this matter. the substantial portion of title vii only goes effective once we finalize the rule. majority of title vii is not effective july 16th but for the provisions that are not dependent on a final rule but self executing, we propose exempted relief until december 31st of this year. this will provide relief for most of title vii. we look forward to hearing public comment on it to the extent we need to tailor additional relief for the end of the year and look for additional relief at that time as we move

forward. effective reform requires comprehensive international response and consistency. i look forward to your questions. >> thank you. controller walsh? >> thank you, mr. bachus and members of the committee. i appreciate this opportunity to discuss the work of the otc and other banking agencies which reviving capital and liquidity requirements consistent with the dodd-frank act and basel iii. this is a complex undertaking and it is important to determine not only how individual requirements of basel and dodd-frank will impact firms and international competitiveness but the cumulative impact of the provisions as well. the invitation letter raised the issue of an international race to the bottom. i don't think this was a serious concern when regulatory requirements are becoming more stringent around the world. the concern instead is standards are being raised significantly and comprehensively and so much

so we could unnecessarily restrict financial remediation and economic performance. at the same time it is certainly true that if the same high standards on 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 undermining the ability of banking institutions to support a strong national economy or placing u.s. institutions at an unfair competitive disadvantage internationally. the dodd-frank act and gensler to promote more resilient banking sector by proposing stronger capital and liquidity standards. they raise the amount of regulatory capital and just as important the quality of that capital is improved. improved significantly by placing greater reliance on common equity and raising capital charges are riskier asset classes. thanks will be required to hold more liquidity in the form of

short-term low risk assets and increase reliance on more stable long-term deposits. basel iii standards were designed around a crisis experience of the largest active u.s. banks to allow the otc to support capital surcharge of common equity for a small number of the largest banks. that ad on should be modest given where capital requirements have moved. this is not to argue that surge charges should not be higher in countries where large institutions represent greater risk to the national economy particularly where the asset to the largest banks exceed national gdp like switzerland or the u.k.. the u. s has imposed statutory caps on the size of our largest firms and even the largest firms are only a fraction of gdp. 27 countries reached general agreement on the policies and standards outlined in basel iii but the details of its implementation will vary from

country to country. you as implementation is likely to be more complex and impose additional constraints than in other countries owing to its interaction with dodd-frank. set a floor on capitol based on current basel and i standards and 9 u.s. banks are not based -- and with the simpler basel 1 framework still use to determine capital u.s. banks will have less incentive to rigorously pursued the complex and costly task of a implementing the basel ii framework. there is provision against the use of credit ratings to impede our efforts to achieve international consistency and implementation of basel iii since basel iii, the basel ii framework and basel i make use of external ratings in several areas including securitization assessment of counterparty credit risk and trading propositions. given capital already raised by large banks a return to

profitability, largest extended phasing period for the higher capital standards of basel iii u.s. banks should transition to the 7% standard rooftop causing undue stress on economic recovery. i am concerned how much further we can turn up the data without negative effect on lending capacity. a very real risk is lending will fall and move from the regulated bank for less regulated shadow banking sector. less than the financial crisis is risk can migrate and accumulate in the unregulated shadows sector with undesirable consequences. defect that so many dodd-frank and basel iii reforms combined effect we cannot measure caused for caution. before contemplating substantial further increases to capital finalizing liquidity requirements we need to take account of all the reforms being introduced to increase the ability of the financial system

to absorber losses and reduce the probability and potential impact of the failure of large institutions. the goal of these changes is to improve the system's resilience but taken too far we may limit the availability of credit that is needed to support economic growth. i welcome your questions. >> thank you. i think we all agree that banks should be sufficiently capitalized, particularly all the banks but our global cities because we want to avoid bailout. we want to avoid taxpayer funding and the shock that it does the economy. the same is true about overleveraging and bar wing overnight with some of our investment banks. having said that, i think

controller walsh has an important point. if we raise capital, and i know that governor tarullo talked about 700 basis points on some of our sipis. how does that affect our lending? do you think that will have many negative effect on our economy? >> mr. chairman, let's say a couple things here first. you have got to understand the rationale for a surcharge is systemically important. >> that is what we are talking about. >> it complements the rationale for basel iii which is a micro prudential so for the basel iii capital standards, we look at each firm on the basis of its balance sheet and its balance sheet alone. what is the riskiness of various

assets on the balance sheet? it doesn't take into account the correlation of risk among firms that hold similar assets. in the financial crisis, what happens is those assets, particularly traded assets are under the most stress for which the market is most impeded. that is why the systemic effects we saw in 2008 are such a concern. the motivation for the surcharge is one that takes into account the interconnectedness' and associated systemic consequences of failure of such an institution. that is the first one. the second point, a fair amount of attention to the numbers i cited in that speech i gave a week and half ago, what i said in that speech is that