of regulation. you have a proposals proprietary trading, hedge funds, equity funds and derivatives and better capital standards. to minimize the chance that those biggest institutions are really going to get in trouble to the point that they need to be rescued. but if they are on the brink of fail ier, actually failing, the law provides authority. i understand in this case, fdic has experience this this area. will act as conservative or liquidator of that institution. a sufficient authority to keep the institution running in essential ways and in short run. so that there is a continuity in the marketplace. and inside of spreading contagious kind of panic or connections because the fdic will have the authority, sufficient authority, to keep it operating in the short run in

areas that are essential. i think that is possible. it is not now smaller institutions. but as i said before, to make that effective, i think for some of these biggest institutions, that have very substantial operations overseas, those operations tend to be centered in the uk. so i think you do want to get consistency between the uk and u.s. authorities. and they also have the provision in the law for so-called living wills. where the banks should organize themselves in a way that they -- makes it easier to break them up. than is the case now. and that will be a continuing supervisory challenge to make sure the banks are properly creating these so-called living wills. >> bloomberg, thank you. bloomberg has released a study recently that the banking sector

is becoming marger, more concentrated. they said having grown seven times faster than gdp since the beginning of the financial crisis. growth has been concentrated in the largest banks, top ten banks in the u.s. grew from 68% of all bank assets in 2006 to 77% of all u.s. bank as nets 2010. are there, based upon these numbers and no sort 6 end in sight to this, that i can see, do you -- are the regulators doing enough? should -- how concerned should we be about this continuing, if in fact it is a continuing level of -- this continuing increase in concentration? >> well, i think it has obviously been a great increase in concentration. most of it took place before 2006, whenever the figure you have -- >> right. >> took place in 90s, early part of the century, aided and

abetted by the end of glass eagle. but before that, it seems like yesterday i was in the federal reserve. not yesterday, a good many yesterdays ago. but at that time, banks could not branch outside their home states, by and large. the united states had one of the most decentralized banking system. it has suddenly gone from a very decentralized system into a rather concentrated system. which i think is unfortunate. in the midst of the crisis it got worse. because big joined with big. now how to deal with that, you may have people on this panel that are much more aggressive than i. i don't know how to break up these banks very easily. but some of things we are talking about, reduce trading for instance, will reduce the overall size of the bank, easily. some derivatives will reduce their off balance liabilities. significantly. so they are, these modest steps, there is a provision in the law

that conduct beyond certain limits by merger or acquisition. so there are some limits here. but as you say, ask me whether i prefer banking system that has less concentration, i would. but i think we can live more or less with what we have. >> thank you mr. chairman. >> thank you mr. chairman, and dr. volcker, thank you for being here. i've read comments that you made specifically about the volcker rule. and i know we add clans to talk in advance of this. >> i'm glad somebody read those comments. >> yes, sir, i read them all the time. there's been -- what's happened, i think there's consensus around the fact that prop trade sougt the door. i think that's one of the major contributions that you have made to this debate. what is happening as regulators wres well this and some of the regulators have differing agendas than others, there

really are attempts by some to really did away with market making itself. and i think you've had some comments about that. i wonder if in front of this committee you might differentiate between the two and, it's my sense that you had no intentions to do away with the legitimate market making, but prop trading was really the focus of what you were trying to do. >> that is correct. i'm not involved, obviously, in writing the rules. i'm sure it got very complex and maybe an effort to try to identify particular transactions in a way that is difficult be unless you're sitting on the trading desk. but i think can be identifiable. my view all along has about two things. one, i think it is important that the management of the banks, that includes not only chief executive officer but the director of these banks, do understand what law says.

and the law says no proprietary trading. now auld bank, unless they are totally irresponsible, and i don't they think are all irresponsible, will have trading desks and their own interest. they don't want rogue tray d traders sitting around jeopardizing, and then we will have -- i'm sure rather detailed controls on their traders and what's important is those controls take account of the fact that no longer should there be proprietary trading and a special desk which i think they understand, and no longer should traders on the market making desk be taking proprietary risk under the disguise of market making. i think that can be identify as a problem by adequate so-called metrics afterwards. you look at the size of the trading, relative to the side of their position and look at

volatility, and you look at measures like value at risk and whether there is suitably narrow for trading operation or very broad, which suggests a proprietary trading operation. if you see the tell-tale signs, there is no question the regulator ought to get in there, supervisor ought to get in there and raise questions. raise questions with the board of directors. whether the bank is sufficiently charged with what the law says. >> some of the -- we have looked at some of the rules and by the way, i've always understood that what you intended was to keep banks from being involved in prop trading. but that legitimate market making was something you thought they should continue to do. some of the rules created though, there is one rule we just read yesterday where the regulator is saying, if you engage in market making, and you make any profit on it, then it is really prop trading. now i don't know many institutions that are involved

in businesses where they can only lose money. you would consider that, i assume, to be an everreach or not what was intended. >> nonsense. >> nonsense, i'm glad. >> on market making, you certainly make money and responding to customer requests. until recently, no, prop trading in banks is a recent phenomenon. banks didn't did that historically. somehow they didn't go out of existence. >> so -- >> the trading is not necessarily in bank profits. i read, i think it's -- appropriate yit that all of the money in was made on trading in this century by banks, up until 2007, disappeared in 2008. which gives you a sense that this is not a risk-free business. >> so an institution that would hold a very small amount of inventory, very small amount,

that was legitimately held for customers use, you think that is a legitimate thing for banks to be involved in? and i appreciate you saying that. i wish could you sit down with the federal reserve and some of these other institutions and cause them to very simply lay out what it was that you init tended when you began this process. because i think they are making it overly complicated and i think a lot of institutions are in a place right now where they have no idea as the ticker's going, where they will end up. >> well, i don't want to get involved in detailed regulatory process. i had enough of that in my lifetime. but you know, the general principle that you describe, i believe is consistent with my position. you emphasize a small position. i always wonder when they tell me, just like on the corner dress shop, for christmas sales,

whether the mark set so predi predictable is christmas sales and do you really need a big inventory. you said small inventory. i sometimes wonder if they want to be prepared for market making and customer trading. why don't they have a short position? because the customer may want to sell. so they want to have a balance position it seems to me and the position is very unbalanced to raise the question. >> yeah. >> listen, thank you so much. i wish i had more time to talk with you and hopefully we will do that in person in either my office or your office soon. thanks a lot. >> thank you. >> thank you, senator corker. senator merckly. >> thank with you be mr. chair and thank you mr. volcker. i thought i would ask about a couple issues raised in the contempt of the volcker rule. one argument that has been made is that it will result in decreased liquidity in the trading world and that will be a very bad thing. is that an issue? is that a problem? >> well i do not think it is a problem.

i put it the other way around. i was going to say a little extreme. but i don't think it is really extreme. the markets seem become very liquid before the crisis. there were complaints that markets were too liquid. it was hard it make money in liquid markets. i'm not worried about being lard it make money. but it led to some behavior that i think it not very constructive. you would not have all of the sub prime mortgages tied up in cmos and can cdos if they weren't so easily traded. these are long-term obligations. if you are buying one of those obligations you should be prepared it keep it for a while thp that would be the normal investor reaction. normal banking reaction. if you think you can trade it tomorrow at no loss, then it becomes a trading proposition and speculative proposition. and the markets are too liquid, it can give rise to behavior

that is not very useful in terms of the basic of banking or finance markets generally. now i'm not alone in this thinking at all, obviously. there is a big movement in europe to tax transactiones it make the market less liquid. the fullest analcyysis i know o this is the chief examiner who examined this very carefully and came to conclusion, yes. beyond a certain point, liquid markets highly liquid markets, are not in the public interest. i can give you other analyses. obviously you want to be able to buy and sale. reasonably. that does not mean you have to be able to buy and sell a long-term security ten minutes after you bought it. at no risk. >> thank you. another issue that's been raised

is that the volcker rule creates handicap for american institutions vis-a-vis european institutions. any ininsight on that? >> when i sat here many times when i was chairman of the federal reserve, the complaint i would lear is american banks are at disadvantage to foreign banks because we are too small. we want to be bank big big. like japanese banks. that's the example. we want to be big like japanese bank went we have to carry more capital than japanese banks. i would rather have smaller banks and stronger banks. we see what happened in gentleman japan with their big banks. it wasn't a great treat. so my answer is simple. if we want it make rules that

are consistent with banks go doing their bakes job, i would not worry about what some think contribute it a suound safe banking system. the english authorities, uk authorities, are always told by their banks, you can't do this, you can't do that, because we will be at a disadvantage to american banks. if you are told all the time, you can't do this or that because you will be at a disadvantage with the english banks. the capital requirement should not be that different. there is a lot of effort to make to make sure the capital requirements are not that different. now trade n this trading operation, the british looked at what we're doing and at what point they expressed sympathy. now they are at the same point with a different rule. they say no investment banking. no trading. no proprietary trading. no hedge funds. no equity funds. in a bank.

in a commercial bank. you can have it in the same holding company. but it's going to be in a separate part of the holding company and we are going to make a great wall between one side of the holding company and the other side of the holding company. i don't know whether that's any easier, the banks obviously don't like that. i don't know what they like least. but they are after the same problem and they have a somewhat different approach. you could argue their approach is much more rigorous than what we have. so the banks can choose whether they like that poison or our poison. but there is not, i don't think, either of them are poison frankly. but we found it difficult, the federal reserve, and it became more difficult in the midst of the crisis to main an distinction between parts of the holding company. because when you're in crisis, everybody leaps over those

boundaries and authorities say okay, we have a crisis, good ahead and leap. i like to think of the fencing necessary with a british term. have you a ring fenced, the commercial bank or ring fence both of them, my experience is the gulf is going underneath and the deer jump over and have you a lot of lawyers to help them. but the point i'm making is that they are somewhat different approaches to the same problem. and you got all could argue all day as to which is better or worse. a more restrict standpoint of the banks. >> both are focused on the same issue of insured deposits and access to discount windows separated from hedge fund style investing. i'm out of time, thank you very much for your commentary and leadership. >> thank you. >> the british proposal fiercely

contested by the bank is to separate it by putting hedge funds away from the banks. never should there be in contact between them. now we say, you could have limited can be turned out to have limited, ability to put hedge funds and equity funds. the proposal is not to have any sponsorship. so it is limited. but it is pretty much under control. and i think the banks, my impression, is during the process, pretty much giving up their hedge funds and equity funds. >> thank you. >> thank you senator. >> mr. chairman, good to see you again. >> thank you. >> one of the last times you appeared before the banking committee, the full committee was prior to the passage of dodd-frank. and it was at a point in time where the volcker rule was just

kind of unveiled, if you will, the concept at least. and i remember during hearing and i don't have the exact language in front of me, but we were kind of debating back and forth all of us, what's this going to involve? what's going to be covered by the volcker rule? what is proprietary treading, et cetera. and i remember you maybe somewhat skas skexcess patriote with me, which is fine, and the second thing you said, that even though it is hard to define, we'll know it when we see it. and again, those aren't your exact words. but very clearly, that was the impression i had. >> i recall both of those. >> now we have, now we have the 300-page rule. go ahead.

dimislead -- >> have you 35-page rule accomplished in 300 pages of explanation, questions, comments. >> yeah. i was getting to the fact that i think there are 1300 questions and it just kind of goes on and on and on. really on both sides of aisle there's been concern about its complexity. you have expressed concern about complexity. as i have talked to those kind of at the ground floor level who've got to administer this thing, they're kind of saying, geez, how do we administer this? how do we take whatever is here and put this in a real live situation and administer it and here is what i'm concerned about. my concern is, number one, it is going to be very difficult for the people on the field to say you have violated the rule or

you have not violated the rule. number two, it seems to me that the very goal here was to try to deal with these very large institutions that were doing irresponsible things. but at the end of the day, we are making this so complicated that i think we are forcing more consolidation, not less. and i would like your opinion on those two points. are we making this so complicated that the big are going to get bigger and the small are just going to sell out? >> there is a matter that with some exceptions, but broadly, these validations apply to six, seven, eight institutions. the typical regional banks, typical community bank, is not doing proprietary trading. it is a very rare kind of transaction. so you are talking about a very concentrated number of banks.

very sophisticated. they have trading desks. they do have, as i said before, their own interests, i'm sure. strict controls over their trading desk. maybe not as strict as they should be sometimes, but they have them. because once in a while, even with those controls, they found out some rogue trader fell into a ditch and cost the bank $9 million, billion dollars, or something, which happened on a number of occasions here or i ai broad. i don't think you have to trace every transaction in realtime. i don't think that's the purpose of the regulation. at least not the way i would write it. the regulation should describe the characteristics of proprietary trading. then have some very sophisticated, but not all this complex, measures with the bank activity. now all these banks will have daily reports on their trading

activity anyway. if they don't, they aught to be put in jail for having insafe and unsound banking practice. these trading desks are all controlled, daily. you know in general what the characteristics are of proprietary trading. you can look at those reports weekly, monthly, whatever you want it look at them. as set down by the federal reserve, or whoever is doing it. if you see characteristic ever those trading patterns, that suggest proprietary trading, then you go look at it. you can, last extreme, go to the trading desk and see what they are doing. if they say it is customer trade, who is the customer. or why were you buying all these he is chiropract securities? you weren't in the market buying the same security all morning. you're not in the market and there's no customer on the other

side. or you're not market making for a customer. you don't have to look at it in that detail unless you were very suspicious. and i assume that in good faith, with the management understanding what's at stake, and that their reputation is at stake with the regulator, they will take due care. >> okay. i'm out of time, thank you mr. chairman. >> thank you, sir. >> i've had traders, people who ran trading desks in the past tell me, a matter of fact, they said don't believe all this stuff. i ran a trading desk, it was the policy of the institution not to do proprietary trading. we were an active trader but we didn't do proprietary trading but our daily reports showed it. >> thank you. with fact there are two other panels, after you in mind, i have one question i want to ask. certainly the other members of the sub committee can ask a

question or two in addition if you want. maybe an whole second round. but i wanted to -- he is notty merckly asked a question that you answered in terms of british banks -- we know that swiss and uk financial sector was significantly larger. their concentration both banks in both nations were bailed w0u9 billions of dollars from their governments and from others including us too. both have taken dramatic actions and i would just like your brief comment o or your comment generally on what you think of that switzerland's considering, 129% capital requirements. uk is established fire walls as you said between banks risking activities and traditional banking.