rule is an important step forward in ensuring that systemically important nonbank financial firms will be subject to strong consolidated supervision and regulation. with respect to the second prong, the enhanced prudential standards, sections 165 and 166 of the dodd-frank act require the federal reserve to establish enhanced prudential standards both for the largest bank holding companies and for nonbank financial companies designates by the council. these enhanced prudential standards include requirements for enhanced risk-based capital and leverage requirements, liquidity, risk management, stress testing, and resolution planning. as well as single counter party credit limits go r and an early remediation regime. in december, the federal reserve issued proposed rules which would apply the same set of enhanced prudential standards to covered companies that are bank holding companies and covered

companies that are designated nonbank financial companies. the federal reserve may tailor the application of the enhanced standards to different companies on an individual basis or bill category. working out the exact details of how enhanced prudential standards will an apply will certainly require a thoughtful and itsrative analysis of each designated company over time. the federal reserve is committed to thorough little assessing the business model, capital structure, and risk profile of each designated company and tailoring the application of the enhanced standards to each company. with respect to the third prong, resolution, the dodd-frank act provides two important new regulatory tools. both of which extends to systemically important nonbank financial companies. first, each of the largest bank holding companies and each nonbank financial company designated by the council is required to prepare and provide to the fdic and federal reserve

a resolution plan or living will for its rapid and orderly resolution under the u.s. bankruptcy code. second, title 2 of the dodd-frank act provides for an orderly resolution process to be administered by the fdic. thank you very much for your attention. i'd be pleased to answer any questions you might have. >> thank you. thank you both. i will begin with the question. as you're probably well aware, many different companies from various industries and both of you emphasized the tailoring of the designation procedure and the regulation procedure. they have mentioned, some that have been mentioned as candidates for systemic designationing are concerned about a sort of one size fits all where let's say you're assessing a large insurance company on the same sort of criteria that you would judge a bank institution, a nonbank institution the same. you've kind of mentioned this in

your topic, but how will you deal with the differences in the industry business models? i'll start with the treasury. >> thank you, chairman. the process that the council developed in putting out its proposed rule for comment in three different occasions was to devise a three-stage framework. the first is taken provides clarity and consistency by using uniform quantitative thresholds that are based on publicly available data so that they could screen out the large number of firms that the council is unlikely to consider for further evaluation. it's very explicit in the stages two and three that the council plans to take an individualized look at each particular nonbank financial company under consideration to look at all of its activities all of its businesses, the types of

business it is in, the types of activities it engages in, so that it can take into account the specific factors of that will firm and of that industrial in coming up with a final proposal for the council. ing. >> thank you. mr. gibson? >> so we have made it clear in our proposal for enhanced prudential standards that we do intend to tailor the standards to the characteristics of the companies that are designated by the council. what we've proposed is a single set of standards that are applying to both the bank holding companies and the nonbank companies. but we have said that once the firms are designated, we will consider tailoring the standards and the dodd-frank act explicitly gives us the authority to do that. now, we understand that there are some nonbank companies for wilthe bank-like standards that

we proposed would likely be a bad fit. and we have committed to looking at that when those companies are designated and doing what we can to tailor the standards. however, there are other companies that could be designated that are not that different from a bank and for those companies, we would expect that the bank-like standards we have would require less tailoring. >> would the federal reserve be doing that particular exercise in terms of trying to tailor, let's say if you're looking at enhanced capital or such, would that be done within the federal reserve or within the fsoc? >> that would be done by the federal reserve. >> do you have the expertise to overlook all the different types of business pod dels that you're probably looking at here, or am i making it more complicated than it is? >> well, we have a lot of expertise across a range of activities. >> well, i mean financial activities, yeah.

>> because bank holding companies engage in a lot of the activities that the nonbank companies are engaging in, as well. so in a lot of cases we feel like we do -- we would have sfirnt expertise but if there's cases where we need to bring in more expertise for nonbank companies that are des nagnated we would certainly do that. >> i would assume the dollars ig nation simply by the name obviously means that if one institution were to fail, that there wouldable systemic problems to other institutions bank or nonbank. we will obviously found that in 2008. is that one of the main criterion to having the designation? >> yes, the statutory standards that are the council should designate firms that could pose a threat to the financial stability of the united states. the council in its rule and guidance has stated that threat to the financial stability is where an impairment of financial mediation or financial activity

could have a real effect on the real economy. so that is a standard on which a designation would ultimately be based. >> okay. one of the concerns i have is with the orderly liquidation authority you're probably aware, we tried to go with an enhanced bankruptcy look on this and failed so the liquidation authority rests with the fdic. again i'll go back to my original question. when you're looking at a nonbank entity, the fdic vice president more accustomed to working with banking entities. i want some confidence and i know you probably can't make a judgment statement, but is the competence there that the fdic has the expertise again to make judgments when trying to unwind nonbank institutions? is that a concern? >> well, chairman, we have the treasure ril department and other fsoc members that would be

involved in any orderly liquidation authority have been working with the fdic to understand what their approach will be to putting a firm in or liquidation authority and how they would handle that. they've devoted significant resources to that process. but ultimately, that's you know what resources and the details of their approach is a question you would have to pose to them. >> my time is up. i'm going to go to miss maloney. thank you. >> thank you, and i'd like to ask mr. auer, i understand the criteria the council has established by regulation sxwl statute, but i'd like more clarity on the exact metrics that will be used in designating nonbank financial companies as sifis. for example, how much interconnectedness makes a firm a sifi? could you elaborate in this

area? >> certainly. again, in the multiple rounds of public comment that we received, there was a desire to led to a development of a three-stage process. the first stage is based on publicly available data and easily calculatable metrics in order to provide greater clarity to the public about the types of entities that the council is likely to want to examine further in stages two and three. however, the council is very clear that it wants to look in stages two and three on a firm by firm basis and the rule and guidance layout a specific framework for it to do so. interconnectedness is one of the elements that the council will be looking at in stages two and in stages three, but it is one of six broad categories of frameworks. the others are size, interconnected -- size,

substitutability, leverage. >> how did you find interconnectedness? >> so the council does not believe after much analysis work that there is a single metric or formula that can measure interconnectedness. the council believes that rather than try and have a one size measure fit all interconnectedness is simply one of the measures it must look at and different firms might be interconnected in different ways which is why you can't have a formula for calculating that factor. again, the final determination of a firm for enhanced prudential standards and federal reserve supervision is if that firm could pose a threat to the financial stability of the united states whether through interconnectedness, lack of substitutes or other factors. >> thank you, and mr. gibson, will the federal reserve's prudential standards proposal for sifis be modified to adopt

to the unique and distinct profile of nonbank sifis different businesses with different business models will require different regulatory standards. do you agree, and specifically, insurance companies are very different from banks. you know, private businesses are very different and mr. gibson, could you elaborate on that? >> so we understand that different types of nonbank financial companies will have different characteristics and different business models that may make it necessary or desirable for us to tailor the enhanced prudential standards and we have committed that we will do that when the companies are designated. in terms of the proposed rule that we put out for comment in december, the rule was out for comment. we received many, many comments, including from many nonbank financial companies that were worried about the possibility of being designated and we're

currently in the process of weighing the comments. so i can't predict where the final rule will come out on that, but we have committed after the companies are designated to take a look at the need for tailoring the standards. >> okay. mr. auer, you said in your testimony you're going to be very transparent. so what are the plan tosses make the designation decisions transparent? >> so first i should note that the council was not required to issue any sort of rule around its nonbank designations process. however, in a desire to provide greater transparency and gain greater input from the public it went actually -- >> and what is the timing? when do you expect to make this public? >> so the rule and guidance were finalized in april and have been went into effect this month. the council is now beginning its process for looking at

calculating the is taken one, which firms pass the stage one thresholds. it's collecting that data and making sure that it's accurate. and the council will then move through stages two and three as the secretary has said, publicly, the council at least he hopes that the council will begin the first of its designations sometime this year. >> and my time is almost over, but mr. gibson, what is the timing for the development of prudential standards for nonbanks? and do you need to know p nope who they are before you develop these standards? >> so the timing for finishing our are rule making on section 165 and 166 is that we've put out the proposed rule for comment. we've received a lot of comments. we're in the process of reviewing those comments and we're working towards a final rule. but we will still have the possibility even after the final rule is done once a specific

nonbank company is designated to tailor our standards to that particular company. >> my time has expired, thank you. >> thank you. mr. bacchus for five minutes. >> thank you. mr. gibson, i'm reading 113. eventual to read 113 i guess in connection with 165. is that correct? in determining what is a sifi and what is not? >> so section 113 lays out the rules for designating firms and section 165 describes the standards that will be applied to these firms. >> right. you know, it appears the prudential standards that are in 165 once you designate are banks -- are they not? >> yes, so the prudential standards in section 165 and 166

are bank centric and they are some of the traditional standards that we've had such as capital, liquidity and the requirement is to enhance those standards, make them higher standards for systematically important firms. >> you know, i noticed when you read 113, which is really the section that determines whether something's designated, it says nonfinancial activities of companies shall not be subject to the supervision of the board of governors and prudential standards of the board. would insurance activities be nonfinancial? >> insurance activities are considered financial. >> they are? okay. but the standards don't appear to apply to insurance -- there's no discussion of reserves or policies or -- you know, in fact, you look at what you discuss in 113 and you talk

about extent and nature of -- you talk about underserved low income communities, their outreach there. their -- is there -- does there need to be a different set of standards developed for insurance companies? >> well, we the federal reserve currently in its role as bank holding company supervisor and savings and loan holding company supervise already supervises some companies that have insurance operations so we're will already doing supervision and regulation of holding companies with insurance activities. >> but i mean, the standards are bank centric and these are not banks. you would agree? >> that's right. what we've done is for, in, the existing cases of insurance companies that are supervised by the federal reserve because they have chosen to be bank holding

companies or achings and loan holding companies, we have taken the approach that has applied some capital that the capital and leverage requirements to the holding company but we do rely on the state functional regulators of the insurance companies which have traditionally focused on the risks in the individual legal entities that are insurance companies. >> you'll consult with those state insurance regulators? >> yes, we already do work closely with them. >> you will before designation is made? for instance, you know, you're trying to determine leverage or whether there's capital, enough capital or reserves and that would obviously if you're talking about insurance companies, an important part of that would be their insurance policies. >> so the fsoc includes members that he have insurance expertise. maybe i should let you respond. >> the fsoc contains at least three members primarily focused on expertise. as the council gets into stages

two and three of looking at any particular firm it, we do expect to be working with state insurance commissioners to ensure that we have a good understanding of the unique nature of those firms. >> all right. is there any recognition by either two of you gentlemen that these standards don't appear to -- they don't really appear to fit say an asset managers or money markets or you know captive finance companies or insurance companies? they you know, you can look at them as a bank and tell what you're going to do, but they need a lot of work in nonbank financial company. >> so some of the nonbank financial companies that you mentioned such as set management companies or captive finance companies, we would certainly have to look at the need to tailor the standards that are in the proposed rule to the

specific characteristics of those companies and as you point out, asset management company is very different from a bank because the assets it's managing are not on its own balance sheet but they're held in custody for customers. that's an important difference. we have experience was asset management companies because there are large bank holding companies that are significant participants in asset management. but we don't have the experience of writing capital and other prudential standards for a company that only engages in asset management, and that was what we would need to tailor if and when those companies were designated we would tailor the standards. >> but your original threshold is $50 billion. so that would capture what, i know you've said 50 or 60. wouldn't it be closer to 100 companies that could possibly be designated? >> the is taken one thresholds ininclude a $50 billion consolidated assets test. as we say in the final rule and

guidance, we expect that that would capture less than 50 companies in total. >> okay. >> gentleman's time has expired. >> thank you. >> for five minutes. >> thank you, madame chairwoman. >> mr. hanahosa and then i'll come to you. >> thank you. most people agree that the lack of the regulation of the nonbank segments of the financial industry, such as the nonbank mortgage lenders and the derivatives market was a very large contributor to the recent financial crisis. one of the cornerstones of the wall street reform act was to ensure that, going forward, the

regulators can reach any financial company whose failure or activities could threaten our whole system. my question to mr. auer is do you agree that the wall street reforms act mechanism for designated nonbank financial companies for failed supervision as implemented by the fcoc's final rule will help prevent future crisis by ensuring that there is no place to hide from appropriate regulation? >> thank you, congressman. yes, we view the authority to designate nonbank financial companies that could pose a threat to the financial stability of the united states as a key part of the performs, essential element to ensure that those type of firms that encounter distress and were at the heart of the last financial crisis can be better identifyie

going forward and subject to heightened standards, subject and management, liquidity rules so that they're less likely to get into distress in the future as well as subject to liquidation authority and requirement to provide living wills. they will describe how they can be wound down without government support in a bankruptcy without causing disruption to the rest of the financial system. we think that this nonbank designation process is key to those goals. >> there's been, of course, a lot of effort made to go back to the old regulations. do you think that this new regime for regulating significant nonbank financial companies will level the playing field between the banks and their nonbank competitors that provide comparable services? >> i think the key goal and objective of designating nonbank financial companies is if they pose a threat to the financial

stability in the united states regardless of their legal structure or business line. if a firm does pose such a threat regardless of its activities, it ought to be designated and subject to heightened standards so that all firms that could pose such a threat are treated equally. >> mr. gibson, we've heard repeated criticism from community banks that i represent that wall street reform increased regulatory burden on th them, the community banks. does anything in this regulation affect community banks directly? do you think that the increased prudential standards on these larger, riskier companies could actually lead to an improved competitive atmosphere for our community banks? >> so, no, nothing in the section 165 or -- the majority

or almost all of section 165 and 166 do not apply to community banks. what we're doing is raising standards for bank-holding companies that have 50 billion and above, far above the level of traditional community bank. any bank holding company that is above 50 billion in size would be subject to these higher standards. and you ask the question of whether that could give a competitive advantage to community banks and the potential is there for that to happen, because community banks will not be subject to the higher capital, liquidity and other standards that the bank holding companies, 50 billion and above or the nonbank companies will be subject to. >> i have seen that we have a small group of banks, then the medium sized banks and then the very large banks, too large to fail. and it seems to me that the medium sized, those that are in the 12, 13 billion in assets or

larger, are coming together with community banks to come visit me in my office and together point out that these regulations are overreaching and that we should just throw them all out. from listening to your answer, it seems to me that in most cases, the consumer financial protection act exempts those community bankers, but that's not the perception that is out there. what can we do? what can we do to clarify that? >> so, i've encountered the same perception when i've talked to community bankers and i think it's a fear, based in part on what's happened in the past that requirements imposed on the large banks eventually roll down and affect community banks as well. what we're trying to do as we implement the dodge frank provisions is to make it clear in both our rules and when we put out guidance which parts

apply to community banks and which parts do not apply to community banks and we've started to put statements upfront, at the beginning, to say this -- either this does not apply to community banks at all or only these particular sections apply to community banks to try to counteract that perception. >> thank you for that explanation. i yield back. >> thank you. mr. renacy for five minutes. >> thank you, madame chairwoman. thank you for being here today. one of the biggest challenges was not the regulation but certainty and predictability and timing of the regulation. what i'm hearing so far, when ranking member maloney asked about timing, i never thought i heard a good answer from either of you about timing, which is a problem for the business owner. but also the certainty and predictability. those are things that concern me as we move down this path. not so much the regulation, but understanding where you're going. mr. gibson, title i of donl

frank, a company engaged in financial activities. however there's been some confusion over what it means to be engaged in financial activity. doesn't this confusion need to be resolved before fsoc can start did he say did he say ig designating -- >> nonbank financial companies that are possible to be designated. we issued a proposed rule in february 2011. we received a lot of comment on that proposed rule. in response to the comments, we issued a supplemental proposed rule in april this year that clarifies certain aspects of

that definition, but fsoc has noted they don't believe they have to wait until the rule is time to designate the companies. >> how do the feds determine which activities are financial? >> so, what we've defined as financial in nature is activities that are reveference in a certain section of the law, permissible by a bank company. and we're incorporating the existing definitions of what is a financial activity into this definition of nonbank financial company. >> is there any -- are there really any limits to what the fed can determine as to financial activities? i mean, financial activities are widespread. you can almost go into any company and say they have financial activities. >> right. well, it has to be above a certain percentage of your

business has to be financial. so, commercial companies that do a small amount of trade finance or the like would typically not be defined as financial, if that's the only financial activity they're doing, but the definition is designed to capture any company whose financial activity rises to the level that would put it into the category of posing a systemic risk. >> so the answer really is any company that has that particular -- >> well, there's a well defined set of activities that are familiar to the legal community that deals with a bank holding company, regulation and what's permissible for a bank holding company and they understand what these activities are. we're just trying to use the existing body of knowledge to say what is in this case. we're not trying to define