however, the greek economy remains in deep recession. third positive step has been the approval of a new fiscal compact treaty among the members of the eu. this treaty is an important step towards resolving the fundamental tension inherent in having a monetary union without a fiscal union and that should help bolster the area of the euro area economy in the longer run. although progress has been made more needs to be done. secretary geithner discussed some of these issues. further strengthening of the european banking system, an expansion of national back stops to guard against contagion in sovereign debt markets and we need continued efforts to increase economic growth and competitiveness and to reduce external balances in the troubled european countries. federal reserve has been following these developments closely and have been in frequent contact with key european policymakers. our focus, of course, is to protect u.s. financial institutions, businesses and consumers from any adverse developments occurring in europe. to help calm dollar funding

markets and to support the flow of credit to u.s. households and businesses, the federal reserve acted in concert with major foreign central banks to enhance the u.s. dollar swap facilities as has been testified before this committee. use of our re-established lines was limited till late last year. however, in late november, we agreed with the ecb and the central banks of canada, japan, switzerland and uk to extend the swap lines through february 2013 and to reduce their pricing. the lower cost of the ecb and other foreign central banks in turn allowed them to reduce the cost of short-term dollar loans they provide to financial institutions in their jurisdictions. as was noted the swap line increased considerably and peaked at $109 billion in mid-february. this has had a very official effect on easing dollar funding pressures and european and other foreign banks which in turn lowered tension in u.s. money markets, alleviated pressures on foreign banks to reduce their lending in the united states and has boosted confidence at a time

of considerable strain in international financial markets. as market conditions have improved notably usage of the swap lines has fallen back, currently about $65 billion. i would add that the swaps are very safe from the perspective of the federal reserve and the u.s. taxpayer. they present no exchange rate or interest rate risk. each drawing has a short maturity and must be approved individually by the federal reserve. they are collateralized by the foreign currencies for which the dollars are swapped and our counter parties are the foreign central banks, not the commercial banks receiving the dollar loans. fed has also worked with the fsoc and other agencies who ploernt our financial institutions. notably u.s. financial institutions have very limited direct credit exposures to the most vulnerable euro area countries and u.s. money market funds have almost no exposure to those countries. there are some exposures arisings from the sale of credit default swaps on sovereign debt, but our assessment is that those are broadly hedged with ces and

the other direction. and that the counter parties to those cds are broadly disburses and are strong banks in europe. >> although u.s. banks have limited exposurable to peripheral yarpian countrieser that exposure to the larger core countries is much more material, mo those funds remain structural little vulnerable despite steps taken since the recent financial crisis. so the risk does remain a concern for those supervisors and regulators. in particular where the situation in europe to take a severe turn for the worse, the u.s. financial sector would likely have to contend not only with problems stemming from direct european exposures but declines in global equity prices, increased credit costs and reduced availability of funding. the fed released on march 13th the results of our comprehensive

capital analysis and review or ccar, essentially a stress test of the largest banks or holding companies. we imposes a hypothetical stress scenario on these banks that involved a deep recession in the united states with unemployment reaching 13%, a decline in activity abroad combined with sharp decreases in both domestic and global asset prices. this exercise was designed to capture both direct and indirect exposures of u.s. financial institutions to economic and financial stresses that might arise from a severe crisis in europe. the results show that a significant majority of the largest u.s. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical scenario. so in conclusion, the recent reduction in financial stress in europe is welcome given our important trade linkages, the situation however remains difficult and it's critical that european leaders follow through on their policy commitments to ensure a lasting stabilization.

i believe that our european counterparts understand the challenges they face and are committed to take the necessary steps to address those issues. for our part, the fed will continue to monitor the situation, work with our financial institutions and foreign counterparts to strengthen our financial system and be ready to use the tools at our disposal to help stabilize u.s. markets should the situation require such action. thank you. >> thank you. i'll now recognize myself for five minutes. chairman bernanke, in that stress test, i presume you assumed that the fed systems, including the credit default swaps that are backed nation to nation, would work. is that correct? you weren't assuming a collapse of all of the, lets say, $1.4 trillion of exposure? >> we didn't assume they would work. we checked to make sure we were comfortable with the counter parties. >> but that means you graded yours as that part working, correct? >> i'm not quite sure what

you're asking. we looked at the cds positions of the banks and we verified first that they are largely hedged against sovereign default in europe first. and then secondly, we looked at the counter parties of those credit default swaps and assure ourselves they are widely disbursed and represent the strongest financial institutions in europe. >> like aig did a couple years ago. >> aiging is an example of what we don't see now. aig was not appropriately regulated. it was not appropriately hedged. it didn't have the sufficient capital behind those cds. we know there's nothing like that kind of -- >> so you're comfortable today there are no aigs hiding in the woods, no fps sitting in some small company in london that essentially has bet the bank without us knowing it? >> well, our stress tests have covered all the largest bank holding companies in the u.s. we've looked also at other large banksing with a somewhat less stressful and somewhat different approach but within than whole

range of u.s. financial institutions we don't see any similar problem. >> thank you. that's one of the most important parts of today is to ask the questions that weren't asked in earlier times before what couldn't happen occurred. europe has a -- the euro zone has as economy, we'll call nominally our size. it has a debt, if i'm roughly right of euro conversion of about $14 trillion of sovereign debt. some countries actually have positives but we'll just look at their sovereign debt across the board. so it's fair for the american people, not the talented economists but the american people to say same size entity, similar debt to ours, not exact but similar. if that's the case, why is it that they're not being treated and this is a question for the american taxpayer, if you will, being treated much more like we treat our states, california doesn't look to greece or germany for a bailout.

they look to -- they look to the united states federal government. in other words, we're internal. what is the justification for the american people to understand of a zone similar sized to ours, similar wealth to ours, similar debt to ours looking around at the rest of the world and saying what part will the united states put in to a european union member such as greece's problem? >> well, your question highlights the difference between europe and the united states which is we have a fiscal union as well as a monetary union. as you point out correctly, the reason that we don't see the same kind of stresses at the state level is because implicitly, there's support from the federal government for the rest of the country. >> right, but for the taxpayer and i want to get to the secretary geithner too, for the taxpayer, they are very similar to us in the positive side. human beings move freely within the euro zone. money moves freely. most of the eurozone is a single currency and in fact, they

basically act from a winning standpoint as a protective trade partner. they treat each other in a way they do not treat us, period. we simply do not enjoy the advantages of selling into the eurozone that the eurozone enjoys throughout the european union. so the question is, for the american people, and by the way, this is not a question of why are we doing it in our own self-interests. i understand we're doing it in our own self-interests, too. the question is, why is it that the euro zone isn't beak asked by our government to step up much more and take more responsibility? why is it comes to the american people at all, not why is it in our best interests. why does it come to the american people when they have the same wherewithal and when they're trading with each other, they trade like states but when they have a problem with a rogue nation or two or three or four, they turn to the imf and other external forces for which we participate? >> it's a good question.

our position and perhaps the secretary can speak toing this from the administration's point of view, the position of the united states has generally been that europe needs to really step up and do a lot more. we've been encouraging them to strengthen their fire walls, their fiscal compact and essentially to move in the same direction as the united states is currently structured. >> mr. secretary, as i go to you, i want to say this because as you said in your statement, we have never lost a penny to the imf. we have been fully repaid. some might say is the interest has not always been what we would hope it to be but it has been a good bet overall for the world economy. but the american people are wondering what i asked. i hope you can give it to us in a way and the follow-up question i'll give new advance which is doesn't it strengthen your hands when we making it clear that the american people are essentially saying no and you're going to have to convince us if you need large amounts of money, you're going to have to convince us to go against what is in fact the

populist feeling within mr. cummings' communities and mine as well? >> well, we have a very similar view to the view you express. europe's a very rich couldn't nept, absolutely has the means to solve this on their own. and you're right to point out that because they're monitor union, we had a fiscal union, they don't have the mechanisms we have the in united states not just to discipline the borrowing behavior of our states but we have a set of fiscal transfers which are very powerful in the united states to soften downturns that individual states might face. the imf is an sfugs where members have a right to request assistance and if they're prepared to meet the conditions the imf establishes they have the right to request that assistance. and our judgment has been that it's been in the interests of the united states and fully consistent with the institution and certainly better for us as a country for the imf to play a modest supplemental role alongside the much more dominant financial role of the european

authorities going forward. and where they've asked us for the imf to take more of the burden, we've said, we don't think that's appropriate. so we're taking -- most americans would say which is they're a rich country. nations around the world have taken a similar view. let's make sure people understand for their strategy to work, the world needs to see europe, that very rich continent of europe demonstrate they're prepared to do what it takes to make this work. and we can help with advice and some support in the margin. we're not going to do that in a way that puts it the american taxpayer at risk and not in a way that shifts the burden of solving their crisis to the american taxpayer. noorz. >> thank you. mr. cummings. >> thank you very much, mr. chairman. secretary geithner, you know, europe has a housing crisis, does it not? >> parts of europe do.

>> and so to restore our economy, you would agree that housing has to be addressed. is that -- do you believe that? >> well -- >> the foreclosure situation that we're going through right now? >> i do think that obviously our economy as i said is still suffering from a lot of collateral damage fallout from our crisis. you see that in housing, not just in high unemployment. and our judgment is that we should do everything we can to help repair that damage and that would make the economy stronger over time. that's what we're trying to do. >> now, house republicans released a budget proposal this week that would make a cost of what cuts of more than $5 trillion in medicare as we know it shift the cost of health care to seniors. /education research and infra structure funding and chairman bernanke you and i have talked about this a number of times. you know, you gave a speech back income 2008 in which you said

principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. is that right? >> sometimes it can be effective, yes. >> secretary geithner, you also agree that principal reduction can be a critical tool if it's well designed, is that right? >> yes, in some cases. that's why you seep private investors and private banks on their own in many cases offering principal reduction to their borrowers. >> how did europe deal with this, the foreclosure situation? >> well, you know, there's actually very limited number of countries in europe with quite that same mix. and they are taking somewhat different approaches. but where they're different it's different because the nature of the problem is different in those cases. you can't see a common approach across the continent on the housing front yet. and i think it's fair to say

they have not been as aggressive as we were in trying to move early to try to repair the >> now, mortgage banks across the country already are doing principal reductions because they help their bottom line. they want to keep people in their homes paying lower mortgages instead of foreclosing and getting nothing at all. this helps the homeowners and sharehold shareholders. the only official who does not share this view appears to be ed dimarco, the acting director of fhfa. chairman bernanke, his opposition is strange because his own data which he provided to us earlier this year shows that principal reductions would save the united states taxpayers billions of dollars compared to foreclosures. his data also shows that principal reductions would help the homeowners. so based on his own data and based on the law our congress

passed to create fhfa, mr. dimarco should be doing principal reductions now but has refused. secretary geithner, i know you are in negotiations with mr. dimarco and the treasury has now offered triple incentives for principal reductions. can you tell us why treasury is doing that and why are these inseptemberatives important? >> well, as you point out that under the law, the treasury and the administration do not have any authority to compel account fhfa to undertake specific activities and under the conservatorship mandate they have to make sure they meet a very tough test appropriately so to make sure the things they're doing are in the interests of reducing losses to the taxpayer, maximizing overall returns to the taxpayer. but there are certain cases where we think there's a pretty strong economic case for principal reduction as part of a strategy to limit the future losses to the gses.

so we've been having some discussions with him about how to narrow the differences between us. but he'll have to make these choices. i think maybe on this question, it would be better for me to come back and talk to you in more detail about it will spatially, maybe in a couple weeks we could give you a better sense where he's going to come outs. >> very well. in his letser to us, so that you'll have this when you talk to him, he said administrative costs could be too high to adjust his i.t. systems. he went on to say, and he has made that argument to you i assume, has he not? >> he has. but again, i think he's in the process of looking again at those questions as are we. >> uh-huh. and so your response was look further? >> yes, again, we both have the same basic interest which is we want to make sure that those institutions are doing things to not just help repair the daniel in the housing market but doing so consistent with their

obligation established by congress to make sure they're doing things that would limit the risk of future losses to the taxpayer. >> finally secretary geithner, let me ask about the stakes here. mr. dimarco controls all of the loans guaranteed by fannie mae and freddie mac. how many families could be affected by his decisions, hundreds of thousands i would think or millions potentially. >> no, not millions. it's an hard to tell. they -- i know it's not part of the popular wisdom but the gses were actually more conservative, more careful in their underwriting standards than the loans they took. so the broader quality of their loans is actually better than the broader market in this context. again, our job is to try to make sure we're doing everything we canning to reach as many people as we can whether we think there's a good strong case for the country on the merits, not just for the taxpayer. >> the gentleman's time has expired. mr. secretary is, we'll also send you a copy of the field hearing information from brooklyn which actually has fed and other representatives' testimony to that point so that

you're briefed before you come back to the ranking member. with that, we go to the chairman of the full committee emeritus, mr. burton for five minutes. >> what did you call me. >> emreitus is a forever term as is chairman around here. >> i got it. >> please, mr. chairman. >> according to crs, the exposure that the united states has in portugal as of september of last year was $54 billion. ireland was $111 billion, italy $310 billion, greece $48 billion, spain $244 billion, germany $635 billion. and france $685 billion for a total of $2.08 trillion. of i'm concerned about what happens if the euro starts to devalue and how it's going to affect the united states'

ability to collect on these indebtedness that we're having with europe. my first question is, and i'll combine some of these questions so you'll have more time to answer. we're printing money, have been printing money with qe 1 and qe-2 and i presume this may be continuing. is there a mid or long-term cost to loaning money that we've printed to yaerp and how much will that be? the federal reserve has created this foreign currency swap mechanism and it has outstanding loans, as i said earlier, as high as $1.2 trillion. i understand you say now it's only $65 billion but nevertheless, that's a considerable amount of money. and i still like to ask what happens if you do have some defaulting over there and they can't repay those loans? i know the european central bank

is printing money right now. that will cause some kind of inflationary pressures, as well. quhal that do to the indebtedness that we have? the foreign currency swaps takes our money and exchanges it for euros. i presume we're getting the money from the money we're printing. and i'd like to have the answer to that. it appears as though we're providing dollars that are loaned to or swapped with europe and it is used to buy commercial bank loans that are lent to commercial banks. i believe that's correct. if that's the process, it sounds like we're cooking the books to make this all look legitimate. finally, i've been to a number of these countries and the unrest is very apparent. some of our european neighbors have not passed austerity measures and even when they have passed some of these reforms, you still have an awful lot of

dissension in the countries. and they've had changes in those governments. and i think there's still a big quell whether or not greece can survive and maybe italy, spain, portugal and so for the. so to what extent are we exposed if this so-called european recovery does not take place, and can you give us the figures or at least roughly the figures both directly and indirectly as far as the exposure is concerned? and do your numbers include foreign currency swaps or other assistance from the federal reserve or the treasury? i know that's a lot. but if you could run through that, i'd appreciate it. >> may i respond? >> sure. >> on swaps as you said, the maximum was $109 billion. it's down to 65 because it's been very constructive and it's been beneficial to the united

states as well as to europe. if the euro devalues or depreciates it has no effect whatsoever on our value of our liability because we get paid back in dollars. so they take any -- the european condition central bank makes any foreign exchange risk. if the banks they lend the money to don't repay, we still get paid back in full because the ecb takes the credit risk. we're not taking any credit rick. the chances of losing money on this are very, very low and the benefits are quite significant. on exposure, you mentioned some numbers. i wasn't clear whose exposure you were talking about. let me say briefly that will obviously our banking system is exposed to europe. they are a major trading partner. we have many investments there. but it was exactly what we tried to do in our stress test scenario that we just released the results last week. we considered a very severe scenario that included a sharp new recession in the united states, a sharp decline in activity in europe, a major financial stress including 50% drop in stock prices. so all of this is sort of an

attempt at least in part to measure the impact on our banking system of a new crisis in europe and, of course, there would be significant losses. but what we found was that all the banks essentially were able to meet a reasonable level of credit, sorry, reasonable level of capital even following the losses associated with such an event. the losses would be large, of course. >> thank you, mr. chairman. >> thank the gentleman. the gentleman from illinois, mr. quigley. >> thank you, mr. chairman. gentlemen, i guess the academic question is, that balance that i talked about in my opening statement about austerity measures and how they impact recovery, your view in general on that issue and how the european plan seems to strike that balance or if how effectively it might do that?

either or both of you, please. >> well, i think the answer to your question depends on which country you're talking about. i mean, there are countries like greece, ireland and portugal which are currently under european union eurozone and imf support which have essentially no alternative but no do whatever they can to reduce their fiscal deficits. they've been trying to do that although the slowing and growth has made it more difficult. more broadly, there are some countries that have some fiscal space as it's called and there, they might consider a balanced approach which leaves some flexibility in the short-term to deal with the fact that europe is slowing. their economy is slowing. at the same time, addressing longer term fiscal issues in a comprehensive long-term plan, which is for example, they're trying to do through their fiscal compact. so that's analogous to an aapproach the united states might take which is a

comprehensive plan that has both a short-term and long-term component to it. >> i think the chairman said it exactly right. you have to distinguish the countries that lost the ability to borrow on their own without support. from those that still have that capacity. in general, for the countries not still in an acute stage of crisis, you want there to be a medium term plan to gradually phase in the reductions and deficits that have to come. and you want that to be balanced by and complimented by reforms focused on trying to improve the growth performance of the economy, make it easier to start a business. very important to get that balance right. and as i said, it's going to take a bunch of financial support to make sure those reforms have time to work. and you want to make sure they're phased in gradually over time and avoid the risk that again, every time growth disappoints, and therefore, the short-term effects and the deficit increase the deficit,

you want to avoid the risk that has to be matched by immediate cuts in spending or tax cuts or increases because if you do that, the risk is you add to the rick on growth and harder to dig out of this problem. >> how did they do? >> how are they doing? >> if you want to talk about the countries more acute like greece and italy and others, how did they do striking this balance? how optimistic are you that -- the concern is for those -- if we are so dependent on their recovery and perhaps we can learn some lessons there, did they go too far with these countries that are really hurting and stymie the opportunity for recovery? >> i don't believe you can say that in greece and ireland and portugal. once you get to that point, there's really no choice, no alternative available to them except to do this mix of very tough reforms across the board. the other countries in europe have a bit more time and space to bring a bit more care and balance to the path.

of course, greece and ireland and portugal are very small economies aggregate in that context. what hurts the united states is the risk of a longer period of weak economic growth in the major economies in europe. that's why it's so important that as they've calmed the financial tensions across europe, that they're able to shift some of the attention, some of the focus in europe to broader strategies that would make growth stronger across the continent. >> and your overall assessment, their chances for recovery, why are they perhaps less optimistic or you're less optimistic or more optimisticing abouting what europe faces versus the u.s. >> the fundamental reality of europe is this is going to take a very long time for them to work through. and the i think just realistically looking at the prospects ahead, even if europe is able to be successful in avoiding a catastrophic. financial crisis and they have the means to do that, even if

they're successful in avoiding that, then it the risks are that europe is still growing on average at very weak levels and that will mean that growth in the united states is weaker than it otherwise would be. and again, this process is a lot of risk in it, very fragile. a lot of political challenges as your colleagues have said. that's why it's so important that they are doing everything they can not just to restore some financial stability but help lay a foundation for stronger growth. that's why we have such a compelling economic from in trying to work with them to make that happen. >> thank you, my time has expired. >> thank you, a very good line of questioning. with that we go to the chairman of the of subcommittee, mr. mchenry for five minutes. >> you thank you both, secretary geithner, chairman bernanke, for your service to our government. you certainly both served in some challenging times. not just in the last three years