chairman. i think we need to make sure that as we look at the situation we're in today, the results of our financial crisis from a few years ago and even the. j.p. morgan chase situation, we have to do everything we can to make sure it doesn't happen again, that all of that takes into consideration, but i caution on this point. i think we need what i refer to as a delicate balance here. we need to make sure we have the regulations to make sure this is not dodd-frank is in place to do that. it is an excellent frame work. it put the fsoc in there so he should marshal our efforts for stability. there is no assign yaigs for sfis in the dodd-frank bill. we're leaving those kind of threats and identification up to the fcoc, and i agree that the crisis that we had a few years

ago, the j.p. morgan situation, certainly got to be avoided but we got to make sure that any additional regulation for our financial institutions, including both banks and non-banks will not stifle the growth of our economy and the creation of american jobs. that is the most important thing before us today. we have got to create jobs. we have to get this economy better. we got to also make sure that the forces that generate the capital that, disburse the capital, that lend and keep this economy going is not put in a straight jacket. i say that as a proud sponsor of dodd-frank and also as one who understands we got to make sure that the abuses don't happen, but all i am simply saying is it has got to pass that delicate

balance test foremost economic growth, not be stifled. now, we're making great progress here. jobless rate is coming down, all of this, so all i am saying is that as we move forward, let's move forward with an eye on this and do it correctly. >> thank you. mr. royce, one minimum zit thank you, madam chairman. more than any other section 165 of dodd-frank is emblematic of washington taking its eye off of the ball because instead of focusing on those institutions everyone knows are too big to fail, instead of getting back to less leverage and higher capital requirements for those few firms, the government instead will publicly stamp institutions, potentially dozens of institutions as systemic, and the explicit statement to the market is washington believes these firms are special and the

implicit statement to the market is also going to be that washington will never allow these firms to fail. given the precedent that has been set, given the propensity of government to err on the side of intervention, err on the side of bailouts to save systemically important firms, it is my hope we can cast the smallest possible net in this and designate only the firms that everyone agrees are too big to fail and frankly the approach was the wrong approach. i yield back. >> gentlemen fields back. mr. green, two minutes. >> thank you, madam chair. i thank the ranking member as well. of one thing i am totally absolutely and completely convinced, it is this. regardless as to how we feel, the public is of the opinion that too big to fail is the right size to regulate, it is

the right size to deal with such that it does not bring down the econo economy. aig is a prime example of what we did not have the authority and ability to properly deal with when it was going out of business as it were. we cannot allow ourselves on our watch to simply say we need to get back to business as usual. i hear a lot of that in other words, let's get back to business as usual. we cannot afford business as usual because it brings down the economy with these institutions when they become so large that they have an impact across not only the american economy but the economy of the world.

so today i think it is appropriate for us to examine the rules, but it is also appropriate to note that we cannot allow business as usual to become the order of the day. i yield back the balance of my time. >> gentleman yields back. i believe that concludes our opening statements. i would like to ask the witnesses -- i would like to recognize the witnesses for the purposes of a five minute summation of your submitted statement and our first panelist is mr. lance hour, deputy assistant secretary for u.s. department of treasury. welcome. >> thank you, chairman, ranking member maloney and members of the subcommittee. >> do you have the microphone on or pull it closer. >> how is this? members of the subquestion, thank you for the opportunity to discuss the financial stability oversight counsel rule and guidance for identifying

companies for enhanced standards and supervision by the federal reserve. in the 2008 financial crisis financial distress as certain non-bank financial companies contributed to a broad seizing up of the financial markets. to address potential risks posed to u.s. financial stability by these types of companies, the dodd-frank wall street reform and consumer protection act authorizes the council to determine that certain non-bank financial companies could pose a threat to u.s. financial stability and will be subject to the supervision of the federal reserve and enhanced credential standards. although the dodd-frank act specifically outlines the substantive considerations and procedural requirements for designating non-bank companies, the council elected to engage in a rule making process in order to obtain input from all interested parties and provide increased transparency to the public. to these ends the council provided the approximate you be with three separate opportunities to comment on its

proposal. after receiving significant input from market participants, non-profits, academics and other members of the public, the council approved its final rule in april of this year. the rienl fuel provides a robust process for evaluating whether a financial company should be subject to federal reserve supervision and enhanced standards. the council will approach each derns using a consistent framework but ultimately each designation must be made on a company specific basis considering the unique risks to the u.s. financial stability that each non-bank company may pose. the council's rule and guidance explain the three-stage process that the council intends to use in assessing non-bank financial companies. in stage 1 the council will apply uniform, quantitative thresholds to identify those non-bank financial companies that will be subject to

evaluation. the use of clear thresholds in stage one enables the public to assess whether a particular company is likely to be subject to further evaluation by the council. in stage 2 the council will analyze the non-bank financial companies identified in stage 1 using a proud range of information to the council primarily through existing public and regulatory sources. this review will include both quantitative and qualitative information. in stage 3 the council will contact each non-bank financial company that the council believes merits further review to collect information directly from the company that was not available in prior stages for an in-depth review. each non-bank financial company reviewed in stage 3 will be notified it is under consideration and be provided an opportunity to submit written materials to the council for the council's consideration. if the council votes to approve a proposed determination, the

non-bank financial company will receive a written explanation of the basis of the proposed determination. the company may also request a hearing to contest the proposed determination. after the hearing a final determination requires a second vote of the council. the authority under the dodd-frank act for the council to designate non-bank financial companies for enhanced prudential supervision standards and federal reserve supervision is an important part of the council's ability to carry out its statutory duties to identify risk to u.s. financial stability or respond to such threats in order to better protect the u.s. financial system. thank you, and i would be happy to answer any of your questions. >> thank you. our second witness is mr. michael gibson, director, division of banking supervision and regulation board of governors of the federal reserve system. welcome. >> chairman, ranking member

maloney and other members of the subcommittee,thank you for the opportunity to testify today on implementation of the dodd-frank act as it relates to the designation, supervision, and regulation of systemically important non-bank financial companies. the recent financial crisis showed that some financial companies including non-bank financial companies not historically subject to consolidated prudential supervision had grown so large, so leveraged, and so interconnected that their failure could pose a threat to overall financial stability. the sudden collapses or near collapses of major financial companies were among the most destabilizing events of the crisis. the dodd-frank act addresses key gaps in the framework for supervising and regulating systemically important non-bank financial institutions through a multi-pronged approach that includes, first, the establishment of the financial stability oversight council which has the authority to

designate non-bank financial company that is could pose a threat to financial stability, second, a new framework for consolidated supervision and regulation of non-bank financial companies designated by the council, and, third, improved tools for the resolution of failed non-bank financial companies. with respect to the first prong, the financial stability oversight council was created to coordinate efforts to identify and mitigate threats to u.s. financial stability across a range of institutions and markets including by establishing a framework for designating non-bank financial companies whose failure could pose a threat to financial stability. on april 3rd the council issued a final rule and international active guidance setting forth the criteria and process it will use to designate non-bank financial firms as systemically important. the council's issuance of this rule is an important step forward in ensuring that

systemically important non-bank 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 non-bank financial companies designated 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 and an early remediation regime. in december the federal reserve issued proposed rules which would apply to the same set of enhanced prudential standards to cover companies that are bank holding companies and cover companies that are designated non-bank financial companies. the federal reserve may tailor

the application of the enhanced standards to different companies on an individual basis or by category. working out the exact details of how enhanced prudential standards will apply will certainly require a thoughtful and iterative analysis of each designated company over time. the federal reserve is committed to thoroughly 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 extend to systemically important non-bank financial companies. first, each of the largest bank holding companies and each non-bank 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 ii of the dodd-frank act provides for on orderly resolution process to be administered by the fdic. thank you very much for your attention. i would 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 emphasize the tailoring of this designation procedure and the resolution procedure, and they have mentioned some that have been mentioned as candidates for systemic designation are concerned about 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 non-bank institution the same, and you have kind of mentioned this in your top i can, but how will you deal with the

differences in the industry business models? i will 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 advise a three stage framework. the first stage 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 is very explicit in stages 2 and 3 that the council plans to look at all to take an individualized look at each particular non-bank 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 firm and of that industry and coming up with a final proposal for the council. >> 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 have proposed is a single set of standards that are applying to both the bank holding companies and the non-bank 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 non-bank companies for which the 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 company that is could be designated that are not that different from a bank and for those companies we would expect 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 models 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. >> i mean financial activities, yeah. >> because bank holding companies engage in a lot of the activities that the non-bank companies are engaging in as

well, so in a lot of cases we feel like we do, we would have sufficient expertise, but if there is cases where we need to bring in more expertise for non-bank companies that are designated, we would certainly do that. >> i would assume the designation just simply by the name obviously means that if one institution were to fail, that there would be systemic problems to other institutions, bank or non-bank. we obviously found that in 2008. is that one of the main criteria to having the designation? >> yes. the statutory standard is that the council should designate firm that is could pose a threat to the financial stability of the united states. the council in its guidance has stated that threat to the financial stability is where impairment of financial remediation or financial activity could have a real effect on the real economy, so that is a standard on which a

designation ultimately will be based. >> 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 orderly liquidation authority rests with the f dic. again, i will go back to my original question. when you're looking at a non-bank entity, the fdic is more accustomed to working with banking entities, i mean, i want some confidence and i know you probably can't make a judgment statement, but is the confidence there that the fdic has the expertise again to make judgments when trying to unwind non-bank institutions? is that a concern? >> well, chairman, we have the treasury department and our fsoc members involved in any orderly liquidation authority have been

working with the fdic to understand what their approach will be to designating -- i am sorry, to putting a firm in order liquidation and how they would ajds that and devoted significant resources to that process but ultimately what resources and the details of their approach is a question you would have to pose to them. >> right. my time is up. i am going to go to ms. maloney. thank you. >> thank you. i would like to ask mr. auer, i understand the criteria the council has established by regulation and statute, but i would like more clarity on the exact metrics that will be used in designating non-bank financial companies as sfis. for example, how much interconnectedness makes a firm a sfi. could you elaborate in this area? >> certainly.

again, the multiple rounds of a comment that we received, there was a desire led to a development of a three-stage process. the first stage is based on publicly available data and easily call can you labl metrics in order to provide greater clarity to the public about the types of entities the council is likely to want to examine further in stages 2 and 3. however, the council is very clear that it wants to look in stages 2 and 3 on a firm by firm basis and the rule and guidance lay out a specific framework for it to do so. interconnectedness is one of the elements that the council will be looking at in stages 2 and in stages 3, but it is one of six broad categories of frameworks. the others are size, interconnectedness -- substitutability, leverage. >> how do you find interconnectedness?

>> so interconnected -- 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 trying to have a one-size-fits-all measure of interconnectedness, it is simply one of the measure it is must look at when it looks at any particular firm 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 credential standards and federal 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 sfis be modified to adopt to the unique and distinct profile

of non-bank sfis, different businesses with different business models will require different regulatory standards, do you agree and specifically insurance companies are very different from banks, private businesses are very different, and, mr. gibson, could you elaborate on that? >> so we understand that different types of non-bank 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 and we received many, many comments including for many non-bank 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. what are the plans to make the designation decisions transparent? >> first i should note the council was not required to issue any sort of rule around its non-bank designations process. however n a desire to provide greater transparency and gain greater impact from the public -- >> what is the timing ? when do you expect to make this public? >> 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 stage 1, which firms pass the stage 1

thresholds. it is collecting that data and making sure it is accurate and they would move through stages 2 and 3 and as the secretary has said publicly he hopes the council will begin the first of its designation sometime this year. >> and my time is almost over. mr. gibson, what is the timing for the development of prudential standards for non-banks and do you need to know who they are before you develop these standards? >> so the timing for finishing our rule making on section 165 and 166 is that we have put out the proposed rule for comment. we received a lot of comments. we're in the process of reviewing those comments and we're working towards a final rule, but that -- we will still have the possibility even after the final rule is done once a specific non-bank company is designated to tailor our standards to that particular company.

>> my time has expired. thank you. >> thank you. mr. bachus for five minutes. >> thank you. mr. gibson, i am reading 113. you have to read 113, i guess, in connection with 165, correct in determining what is a sfi and what is not? >> section 113 lays out the rules for designating firms and section 165 describes the standards applied to firms. >> you know, it appears the prudential standards that are in 165 once you designate are bank centric, 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

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

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

some capital, that the capital e 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 consult with those state insurance regulators. >> yes, we already do work closely with them. >> you will before designation is made? for instance, you're trying to determine leverage or whether there is enough capital or reserves and that would obviously be you're talking about an insurance company, an important part of that would be their insurance policies. >> the fsoc includes member that is have insurance expertise. maybe i should let you respond. >> the fsoc contains at least three members who are primarily focused on insurance expertise and as the council gets into the stages 2 and 3 of looking at any particular firm, we