capital than japanese banks. i would rather have smaller banks and stronger banks. we see what happened in japan with their big banks. it wasn't all a great treat. so my answer is very simple. make sure the capital requirements are not that

different. now in this trading operation, the british looked at what we're doing and at one point they expressed sympathy and now they're at the sam point. now they say no investment banking, no hedge funds, no equity funds in a bank. in a commercial bank. you can have it in the same holding company. it's got to be in the separate part to have holding company. we're 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 if that's any easier. the banks obviously don't like that. i don't know what they like least. they are after the same problem. they have a somewhat different approach. you could argue their approach is much more rigorous than what we have. the banks can choose if they

like that poison or our poison. i don't think either of them are poison. we found it difficult in the federal reserve and it became even more difficult in the midst of the crisis to maintain a dings between parts of the holding company. everybody leaps over the boundaries. authorities say we have a crisis. you're going to ring fence -- i don't know the commercial banks are going to ring fence both of them. my experience is ring fences is gophers go underneath and the deer jump over. you have a lot of lawyers to help them. they are somewhat different approaches to the same problem. you can argue all day which is

better and which is worse. >> i'm out of town. thank you very much for your commentary and leadership. >> thank you. the british proposal fiercely contested by the banks is so separate it by putting the hedge funds, equity funds away from the banks. we say you can have limited -- turned out to have limbed ability to spot the hedge funds and equity

the volker rule was just unveiled the concept at least in i remember during that 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 voerk rule, what is proprietary trading, et cetera. you maybe exasperated with me at the time, if you don't do something this will haunt you. then the second thing you said -- [ laughter ] . >> which is fine. the second thing you said was

that even though it's hard to define, we'll know it when we see it. again, those aren't your exact words. that was the impression i had. >> i remember both of those. >> now we have a 300 page rule. go ahead. >> we have a 35 page rule accomplished in 300 pages of explanation, questions, comments. >> i was getting to the fact that i think there are 1300 questions and it just goes on and on and on. really on both sides of the aisle there's been concern about its complexity. you have expressed concern about complexity. as i talked to those kind of at the ground floor level who got to administer this thing, they're saying, how do we administer this?

how do we take whatever is here and put this in a real life situation and administer it. here's what i'm concerned about, my concern is number one, it's going to be very difficult for the people in 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're making this so complicated that i think we're forcing more consolidation not less and i would like your opinion on those two points. is this just -- are we making this so complicated that the big are going to get bigger and the shawl are just going to sell out? >> this is a matter that with some exceptions but broadly

these prohibitions apply to six, seven, eight institutions. the typical regional bank, certainly the particular community bank ask not doing proprietary trading. it's a very rare kind of transaction. so you're talking about a very cob sen traited number of banks. very sophisticated. they have trading desks. they do have their own interest, i'm sure. strict controls over the 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 the ditch and cost the bank $89 billion or something which has happened on a number of occasions either here or abroad. i think you don't have to trace every transaction in realtime. i don't think that's the purpose of regulation. at least not the way i would write it.

the regular lagts should describe generally a characteristic of proprietary trading. it should have some very sophisticated, but i don't think has to be all that complex measures of the bank activity. all these banks will have daily reports on their trading activity anyway. if they don't, they ought to be put in jail for having unsafe and unsound banking practices. these trading desks are all controlled daily. you know? general which the targetistics are of proprietary trading. if you see characteristics of those trading patterns that suggest proprietary triding then you go look at it.

last extreme go to the trading desk and see what they're doing. it's a dust her trade, what was the customer? why were you buying all these securities. you weren't making the market when you're in the market sbie buying is same security all morning. you're in the in the market, there's no customer on the other side. you're not market making for yourher. you don't have to look at that in this detail unless you were very suspicious. i assume with management and their reputation at stake with the regulator, they will take due care. >> i'm out of time, thank you, mr. chairman. >> thank you. >> i have had traders, people who ran trading desks in the past tell me, don't believe all this talk. i ran the trading desk. it was the policy of the institution not to do propie

trar trading. we were an active trader, but we didn't do proprietary trading and our daily reports showed it. >> thank you. with the fact there are two other panels, i have stobz after you in mind, i have one question i want to ask the other members of the eskimo can ask a question or two. might be not a whole second round. i wanted -- senator murkily asked a question about you answered in terms of british banks tell their regulators that the more thanes will have the advantage and the american banks tell their regulators that british banks will have an advantage. in light of that, what we know that the swiss and the uk financial sector was significantly larger their concentration both -- banks in both nations were bailed out with billions of dollars for their governments and from others including us, too. both have taken dramatic action.

i would like your brief comment, your comments generally on what you think of that switzerland's considering 19% capital requirements. uk established firewalls as ushs between banks' risky activities and traditional banking. give me your thoughts on those two approaches? >> if i can make one point, those countries their banks are no bigger than our bans. but their countries are smaller. they're much more concentrated than we are. so they have even more vulnerable than we feel, i think to those problems. switzerland was obviously very concerned because they have two big banks. both were in trouble. one was in severe trouble. they took strong measures including exceptionally high capital standards and other measures. my understanding is, the biggest of those banks has practically

given up proprietary trading. i'm sure they were under pressure from the central bank. and they have moved away from some of these activities to nonrisky activities. to investment toward investment banking. traditional banking on the one side. investment management on the other side. and they have been derisked substantially. there's been some reaction along the same lines at some of the british banks. british are still open as to how they apply the proposed regulation. it may be that ining is cant. i was -- insignificant. i was invited to have a session with the european parliament with the british regulators and the commission. mr. vickers who made the

proposal about the british banking system. i'll have a better feel for how coordinated we are next month. i think the average purpose of the invitation was to try to get a maximum amount of coordination. >> thank you. senator corker, any comment? >> in your written testimony you eluded to the government sponsored enterprises in particular fannie and freddie. it's been four years and you know, 95% of the mortgages originated today are dependent upon them. how important is it in your opinion that we move away from that reliance. and should they exist if their current forms? >> it's important if you think the free market financial system is is important. they were sitting here with half the capital market under control of two institutions both of which at this point are government owned. it's kind of ridiculous when you look at it.

>> i assume you think having a free market system is a good thing. >> got only you, but i think some other people are, too. right now the residential mortgage market is dependent on two defacto government institutions, fannie mae and freddie mac. how do we wean away from that? it's going to take years. let's not make the same mistake of having the quasi government institutions half public, half private. they're private when they're making money, and public when they're in trouble. that's a recipe for not very disciplined, effective mortgages. that's a big issue. >> thank you very much. >> thank you mr. volcker, the group of agencies working on the volcker regulations the 30 pages

have indicated they might not be prepared to implement then in july. the two-year time period after the passage of dodd frank. should they hold their deadlines solid and get those rules inch ymted in july? -- implemented in july. >> i'm not clear what their attitude is. i've seen a couple of statements that confused me a little bit. my basic understanding is they're aiming to get the rule out by jewel, whatever the date is. they recognize it will take some time to adapt. they recognize over a two-year period there may be some thingings you want to change. the law also says after july no proprietary trading. so i don't know, somebody tole me some law firm said they can two proprietary trading. it's a very training reading of

the law. i won't get into the legal profession at this point. it does seem to be a rather strange, contrived reading. >> thank you. >> it just occurs to me with passage of dodd frank that incorporates the volcker rule and a whole host of other things a complex piece of legislation that at the end of the day, we still have a very small number of financial institutions that control an enormous amount of the capital in the united states and we just haven't inpacted that very much. do you disagree with my assessment of that? >> no. no. we do have much more concentrated financial system than we used to have. i do think that stent simple

about dealing with institutions outside of the baning organization itself the protected sector of the market i think the idea that they can and will fail is totally credible to me. the biggest banking institutions get a lot of government support in the ordinary course of business. i think they should be regulated to the point including what we're talking about in derivatives and proprietary trading that the risk of those institutions failing will be very remote. but they -- you know, you say they've gotten quite concentrated. i agree with you. >> thank you. >> thank you very much for your testimony. >> thank you. >> for your service for so many years. >> i do appreciate you took this initiative. thank you. >> thank you.

chair will call up tom -- >> there's perhaps no stronger advocate that dr. hone ig. he served as president and chief executive officer of the federal reserve bank of kansas city. he spent 18 years as a bank supervisor at thecity fed. randall crossner is the bobbins professor of exhibition at the school of business at the university of chicago. he served as grn of the federal reserve system from 2006 until early 2009. during his time, he chaired this committee in the regulation of banking institutions and the

committee when con soumer and committee affairs. >> thank you for the opportunity to testify on issues relating to improving the safety and soundness of the nation's banking system. having joined the board of the fdic less than a month ago, it was a privilege to be on the board. this subcommittee has asked me to discuss a paper titled "restructuring the banking system to improve safety and soundness" that i prepared with my colleague in may of 2011 when i was president of the federal reserve bank of kansas city. i welcome this opportunity to explain the recommendations in that paper. one note while i am a board member of the fdic, on this i speak for myself today.

first, banking organizations should be allowed to conduct the following activities, commercial baking, underwriting asset and services. most of these latter services are primarily fee-based and does not disproportionately place a firm's capital at risk. they're similar to the trust services that have long been part of banking itself. but in contrast, dealing and market making, brokerage and proprietary trading extend the safety net's coverage and yet do not have much in common with core banking services. under the safety net, the incentives that follow from it, with those incentives, risks are created that are difficult for management and the markets to assess, to monitor and to control. thus, under the proposal, banking organizations would not be allowed to do trading, either proprietary or for customers, or make markets which requires the

ability to do trading. allowing customer trading makes it easy to game the system. concealing proprietary trading as part of the customer trading. also prime brokerage services require the ability to trade and essentially allow companies to finance their activities with highly unstable, uninsured deposits. this combination of factors, as we have recently witnessed, leads to unstable markets, financial crisis and government bailouts. furthermore, these actions alone would provide limited benefits if the newly restricted activities migrate to the shadow banks without that sector also bowing reformed. we need to change the incentives within the shadow banking system through reforms of money market funds and the repo market. the first change addresses potential disruptions coming from money market funding of shadow banks that fund long-term assets. money market mutual funds and

other investments that are allowed to maintain a fixed net asset value of $1 should be required to have a floating net asset value. shadow banks' reliance on this source of short-term funding would be greatly reduced by requiring share values to float with their market values. the second recommendation is to change the bankruptcy law to eliminate the automatic stay exemption for mortgage-related repurchase agreement as collateral. this exemption allowed all of the complicated and often risky mortgage securities to be used as repo collateral just when the securities were growing rapidly and just prior to the busting of the housing price bubble. one of the sources of instability during the crisis was repo runs, particularly on repo borrowers using subprime mortgage-related assets as collateral. essentially these borrowers funded long-term assets of relatively low quality with very short-term liabilities. the proposal would not eliminate

risk in the financial system. it would shift it away from the incentives of the safety net. this plan would return u.s. banks to a position of financial clarity and strength from which the country enjoyed decades of its greatest global economic advantage. it would improve the stability of the financial system by clarifying where risks reside for management and for regulators, improving the pricing of risks and thus enhancing the allocation of resources within our economic system. it would promote a more competitive financial system as it levels the playing field for all financial institutions in the united states. finally, it will raise the bar of accountability for actions taken and to an important degree give further credibility to the supervisory authority's commitment to place these firms into bankruptcy or fdic receivership when they fail. thus reducing the likelihood of future bailouts.

i'm pleased to provide you these comments and i'm happy to take your questions. thank you. >> i thank you, dr. hoenig. dr. kroszner, thank you for joining us. >> i'm delighted to be here. my general approach to these very important issues that you've convened this hearing on is to try to clearly state objectives, what regulation and regulatory reform are about and try to weigh the costs and benefits of alternatives in order to decide which regulations and which reforms are most effective in trying to address those objectives. my priorities and objectives are very much shared by the committee and in the discussion that we heard earlier enhance had stability of the financial system and its resilience to shocks, since shocks are going to be inevitable. in other words, we can talk about it as trying to make the markets more robust to those shocks. i go into much more detail in the contribution to the book

that i have with bob schiller under reforming u.s. financial markets and trying to make markets more robust. second obviously we have to mitigate taxpayer exposure as was discussed in the previous panel. i certainly applaud and share the objectives, the recent regulatory reforms, but i perhaps want to raise some questions about whether the proposed means are the most effective means possible to try to achieve those ends. would they be the ones that would be the highest in a cost benefit test? i think it's extremely important to identify the fragilities in the system and address those directly as possible rather than rely too much on one regulatory instrument or one regulatory intervention because i think that opens up the greatest possibilities for unintended consequences. i think some of the greatest fragilities in the system are leverage, liquid tee and interconnectedness. our focus seems to be on interconnectedness issues, too big or too interconnected to

fail. chairman volcker also characterized things that way. so what we need to do is think about exactly where are those fra gui fragilities in the markets and address them directly. one of the fragilities is trying to identify contracts and contract enforcement, something that's very important thinking about the large complex institutions. new authority is given to the treasury and the fdic but that authority has not really been clarified yet by the regulators. i think that's of the utmost importance. one of the challenges that we saw during the crisis was the uncertainty about contract enforcement, uncertainty about what's mine and what's in customers' accounts and that's a recipe for an implosion of a business model and uncertainty where people in general pull back so i urge greater clarity on that. second has already been discussed on the counter derivatives markets, providing

more information to market participants, more information to supervisors and better incentives to avoid risk concentrations as we saw in aig. third, to think about activity restrictions. interestingly, chairman volcker in his testimony says that his first principle is that risk of failure of large interconnected firms must be reduced whether my reducing their size, curtailing their interconnectedness or limiting their activities. so it's interesting that he sees those as alternatives. in thinking about it that's the appropriate way to think about it. what is the best way to try to limit those kinds of risks to both the taxpayer and to the system overall. i'm not 100% convinced that trying to draw the lines on what is and isn't different types of trading activities will be the most effective way of getting there. as was discussed in earlier questioning, there's a lot of uncertainty about where the lines should be drawn and i think the great are clarity, the better. i was very heartened that former

chairman volcker said that he did not want to exclude market making. i think it's very important not to exclude that very important function that provides liquidity and robustness to the markets in general. we wouldn't want the unintended consequence of producing rules that make markets less robust rather than more robust. but i think it's very difficult to draw those lines clearly and crisply and ensure that we don't have unintended consequences of pushing activities off balance sheet or into the shadows and so i think it's incumbent upon the supervisors and regulators to have much greater clarity when it comes to those issues. also, something that has been mentioned is the culture of institutions and the culture of risk taking if these activities are there. i think it's important to remember that there were many institutions that were much more narrowly focused primarily on mortgage lending. like washington mutual,

countrywide, that were not engaged in other activities that may involve risks. but we're reminded that even their core activity of mortgage lending was extremely risky and brought these institutions down. so it's not clear to me that simply removing these activities will be things to change the culture or make institutions more stable. in some cases, as we've seen very focused institutions actually could be quite unstable. thank you very much. >> thank you, dr. kroszner. dr. hoenig, let me begin with you. i want to follow up on the concentration question that we discussed with chairman volcker. you and i have talked in the past about the importance of manufacturing. your region was obviously a major manufacturing centering and other things. the last 35 years, the share of gdp of manufacturing and financial services basically flipped. 30 years ago, manufacturing was 25% plus of gdp, financial services about 10. those numbers have more or less reversed since