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 standard don't appear to -- they don't really appear to fit say an asset managers or money markets or captive finance companies are on insurance companies? you can look at them as a bank and tell what you're going to do, but they need a lot of work in non-bank financial company. >> so some of the non-bank financial companies that you mention such as asset 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 companies is very different from a bank because the assets it is managing are not on its own balance sheet, they're held in custody for customers so that's an important difference. we have experience with 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 is what we would need to tailor if and when those companies are designated and we would tailor the standards. >> your original threshold is 50 billion. that would capture, what, i know you said 50 or 60. wouldn't it be closer to 100 companies that could possibly be designated. >> the stage 1 thresholds include a $50 billion consolidated assets test. as we say in the final rule and guidance, we expect that would capture less than 50 companies

in total. >> okay. >> time expired. >> thank you. >> five minutes. >> thank you, madam chair woman. >> mr. hosa and then i will come to you. >> thank you. most family auto degree the regulation of non-bank segments are the financial industries such as the derivative was so 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 designating non-bank financial companies for supervision as implemented by the fsoc's recent final rule will help prevent future crisises by ensuring there is no place to hide from appropriate regulation? >> thank you, congressman. yes, we view the authority to designate non-bank financial companies that could pose a threat to the financial stability of the united states as a key part of the dodd-frank reforms and a central element to ensure that those types of firms that encounter distress and were at the heart of the last financial crisis can be better identified going forward and subject to heightened standards, better risk management, capital and liquidity rules, so that

they're less likely to get into distress in the future as well as being subject to an order liquidation authority and requirement to provide living wills and 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 and we think this non-bank designation process is a key element to achieving those goals. >> there has been of course a lot of effort made to go back to the hold regulations. do you think that this new regime for regulating significant non-bank financial companies will level the playing field between the banks and their non-bank competitors that provide comparable services? >> i think the key goal and objective of designating non-bank financial companies is if they pose a threat to the financial stability of 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 all firms that could pose a threat are treated equally. >> mr. gibson, we heard repeated criticism from community banks that i represent that wall street reform increased regulatory burden on 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? >> no, so, 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 which is far above the level of traditional community bank so 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 non-bank companies will be subject to. >> i have seen that we have the small group of banks and the medium-sized banks and the very large banks, too large to fail. it seems to me that the medium size, 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 over reaching 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 is not the perception that is out there. what can we do? what can we do to clarify that? >> so i have encountered the same perception when i have talked to community bankers, and i think it is a fear based in part on what's happened in the past that requirements that are imposed on the large banks eventually roll down and affect community banks as well, so what we're trying to do as we implement the dodd-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.

we have started to put statements up front 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. >> thank you, madam chairman woman. thank you both for being here today. as a business owner for the last 28 years before coming to congress wucht biggest challenges was not the regulation but the certainty and predictability and the timing of the regulation and what i am hearing so far i know when ranking member maloney asked about timing, i really 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 as much regulation but understanding where you're going. mr. gibson, title i of dodd-frank defines a non-bank financial company as a company

that is predominantly engaged in financial activities. however, there has 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 designating non-bank financial companies for supervision by the federal reserve. >> the federal reserve has a proposed rule out for comment that would define the phrase in the dodd-frank act activities that are financial in nature which defines the set of non-bank financial companies that are possible to be designated. we issued a proposed rule in february of 2011. we received a lot of comment on that proposed rule. in response to the comments we issued a supplemental proposed rule in april of this year that clarifies certain aspects of that definition, but the fsoc has noted that they don't believe that they have to wait

until the federal reserve's rule is final to designate the companies. >> so how do the federal -- how did the fed determine which activities are financial? >> so what we have defined as financial in nature is activities that are referenced in certain section of the law that defines what activities are permissible for a bank holding company and by referring to that section of the law, we're incorporating the existing definitions of what is a financial activity into this definition of non-bank financial company. >> is there any -- are there really any limits then to what the fed can determine as financial activities? i mean, financial activities are widespread. you can almost go into any company and say they have financial activities. >> it has to be above a certain percentage of your business has to be financial. 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. the definition is designed to capture any company whose financial activity rises to a level that would put it into the category of posing a systemic risk. >> so the answer really is any company that that says that that particular -- >> there is a well defined set of activities that is familiar to the legal community that deals with bank holding company regulation and what's permissible for a bank holding company and they understand what these activities are, so we're trying to use the existing body of knowledge so say what's financial in this case. er would not trying to invent a new definition of what is a financial activity. >> all right. are companies subject to -- companies that are subject to a

determination not entitled to an evidentiary hearing as part of the appeals process and what recourse do they have if designated? >> so in the final rule and guidance that the council published, the council went above the statutory requirements in providing opportunities for firms to challenge or present information about why they should or should not be designated. specifically, starting in stage 3 a firm will be sent a notification that it is under consideration and the firm would have the option to provide any material or arguments or information it wishes to the council, either in support or opposition to its designation and the council will take those into account. if the council after completing stage 3 decides to vote for a proposed determination, the firm has the right to request a

hearing in front of the council, to contest its proposed designation. if after that hearing the council decides to vote in the affirmative for a final determination, the firm then has recourse to an appeal to the federal court system. >> thank you. mr. scott for five minutes. >> thank you very much, mr. gibson, mr. auer. let me ask this first question. is the fsoc the only way to further regulate systemically important non-banks or have alternative methods been contemplated? >> so some non-bank companies are already subject to some degree of regulation, many insurance legal entities are subject to state insurance

supervision, even if their holding companies are not. hedge funds have certain reporting requirements as do asset managers, so there are bits and pieces elements in which non-bank financial companies may in some cases already be subject to supervision, but the rule in the dodd-frank act that provides for the council to identify those firms that could pose a threat to the financial stability of the united states is designed to ensure that those firms that can pose such a threat are subject to consolidated supervision and enhanced prudential standards. >> did it seem prudent to impose bank like regulations on non-banks? >> what we have proposed in our proposed rule to implement section 165 and 166 is focused on the banks.

that section applies to both bank holding companies that are 50 billion and above and any non-bank companies that are designated by the council, so the standards that we have proposed are focused on the banks and we have been given the authority in dodd-frank to tailor the standards to the characteristics of a particular company, a non-bank company that is designated, and we have said that we will use those -- that authorization to tailor the standards as appropriate. >> as the fsoc conducted a thorough cost benefit analysis on the designation of non-banks as systemically important, specifically in regards to asset managers? >> so the fsoc agencies are obviously very concerned about the costs and benefits of their

actions. they want to bear in mind that this rule was not required in statute. the rule was designed to provide greater clarity about the purpose of the process by which the council would engage in designations. >> and let me just ask you also, have you all taken a look at or considered any adverse effects of the designation? >> so the effects of a designation -- >> adverse effects. >> right. well, there are certain effects that, for instance, requirements for greater supervision, heightened capital standards, liquidity requirements, i don't think those are adverse effects. i think those are effects that are appropriate to a firm that could pose a threat to the financial stability of the united states.

>> okay. and involved in this in an intricate way are indeed the asset managers. now, asset managers do not invest with their own balance sheets. they invest on behalf of their clients, so when a client changes asset managers, it does not result in an immediate portfolio liquidation, so the point that i am getting at is where will this process end if non-bank financials are designated systemic, will there be other non-bank industries that are systemic as well? >> so the council's determination about whether a firm can pose a threat to financial stability and should be designated is going to be done not on an industry by industry basis but on a firm by

firm basis, so to the degree that an asset management firm is largely has its activities in custody and on behalf of customers, and as a result does not pose a threat to financial stability, it is unlikely to be designated. to the degree that it engages in activities that could pose a threat to financial stability, then the council would likely make such a designation but that assessment would be done on a firm by firm basis. >> finally, will the fsoc evaluate business models, capital structures and risk profiles as intended by congress before further pursuing designations? >> so as part of its designat n designations the council will look at all factors you mentioned for each individual firm to see whether or not in total that firm could pose a threat to the financial stability of the united states. >> thank you very much, mr. chairman. >> thank you.

mr. royce for five minutes. >> thank you. madam chair, i would like to ask a question of mr. auer to get his feedback on a problem that i see here that i don't think it going to go away, and that is that the market is going to make a determination once that these firms are deemed systemically significant by you and it is reflected in the credit rating agencies deciding already that the cost of borrowing based upon their decision, they have shared with us, that they believe that implicitly there is a likelihood of government support, so the cost of borrowing is lower for these firms than their competitors, and the consequences of that are that when you're in a situation like that you often can gobble up

your competitors, your smaller competitors especially. you can out perform them, frankly you can over leverage, but you acquire your competition and the competition shrinks in the market as a as a consequenc this reality. orderly liquidation authority was supposed to imply, i think at some point, lick with which dags. but these firms will never fail. i want to quote back to you the new head of the fdic and mr. gruenberg's recent comments and get your reflection on this. he said three of the goals are to ensure financial stability, accountability and viability, which means converting the failed firm into a new, well-capitalized and viable private sector entity. now, when the market hears that, they don't think that that's a firm that is going to fail. the implication here -- and it may not be for the stockholders, but certainly for the creditors

-- is that if you loan to that firm, there's a very good chance -- that's not to talk about, you know, death panels for what's going to happen to the firm. that sounds like the goal was the same as it was in 2008, unfortunately. although part of that goal is to stop the crisis from spreading, the other part is then nursing that insolvent firm back to health, eventually through either public dollars or new debt, which although we can argue that it won't be, i think it likely will be guaranteed by the government. so, the assumption here again is that these firms will be punished by the market by being designated. that's what we would like to believe is going to happen. but that does not seem to hold water, given the reaction by the market, given the reaction when we talk to the credit rating agencies about this, because the presumption is they're going to

receive very favorable treatment by the agency task by unwinding it by the fsoc. and mr. gruenberg's comments certainly would imply that. i just wanted to get your take on that. >> so, i can't speak for mr. gruenberg's comments. i can say my understanding of the application of -- or liquidation authority is that when a firm is put into liquidation, all its equity holders would be wiped out. >> as i cited. >> yeah. and its debt holders would be given haircuts or only paid back in part. the result in that would allow the new company that survives to be well capitalized. >> i understand that. but understand that the market, arguably, looks at that and says that haircut is not equivalent to what the haircut would be if they go through bankruptcy. and now because they have this potential path, we're going to evaluate that as a -- you know,

as an advantage to creditors and as implied through the decisions by the credit rating agencies. last question. capital, capital and more capital. secretary geithner said that. it bears repeating. this is the only way to ensure that banks are going to be able to observe unforeseen losses and luckily banks have been increasing the amount of cash on their books, largely because of all three. and there were some that have been critical of the fed and the international work being done, having the potential to harm economic growth. i hope that recent incidents put that argument at rest. i think that these requirements for more capital have been born out here and i would like your view on that. >> so one of the requirements of any firm that is designated that would pose a threat to financial

stability is enhanced prudential standards, including increased capital tailored to the risk that firm poses. >> and i would certainly agree that the reforms we are putting in place to raise capital standards for the largest bank holding companies are an appropriate response to the cries sis crisis and are necessary. >> thank you. i will yield back. >> thank you. five minutes. >> thank you for having the hearing today and thank you to the panelists for coming. mr. auer, your written testimony provides, i think, a pretty clear walk-through of the process for determination. i would kind of like to run through it and see if you could put a timetable for it and make sure that i understand. so as you said in your remarks, the first to cut is stage one. and just these quantitative measures that are listed on page three of your written testimony, theed $50 billion, then $30 billion and gross swap,

derivative, so on and so forth, so you'll look at all these firms. when will that test -- when will the process start? >> the process has started. >> has started? >> the final rule was published in april. it went into effect this month. so, the council member agencies and office of financial research are collecting data to assess which firms pass the stage one threshold. >> so you're in the stage one assessment process, determining which firms meet these criteria, right? >> that's correct. >> so when you do that, will there be any notification of those firms? it's not clear here, will you then go to stage two? >> then we go to stage two. >> explain that a little bit better. you mention additional quantitative measures and qualitative measures. what would they look like? >> stage two is designed around a six-fake tore framework for

analysis. there are several factors that relate to sort of probability that a firm might get into distress, things like leverage, liquidity, existing regulatory scrutiny. there are also factors that indicate whether a firm might transmit that distress, including lack of substitutes, interconnectedness and size. the stage two process will look at all of those factors. it will take all publicly available data and any data available from already existing -- >> could you pull your mike up just a little bit? i think some members are having difficulty hearing. thank you. >> my apologies. in stage two, it will look at all publicly available data as well as any data already available to regulators and try to provide in-depth analysis to how that firm might or might not pose a threat to financial stability. >> leading up to the stage three

question, which you have here on page five, which says whether the company's material financial distress or nature, scope, size, scale, so on and so forth, could pose a threat to the u.s. financial stability, that's a judgment that is both subjective and objective? how would you characterize that judgment? >> the council used, in stage three the firm will be notified that it is under consideration by the council. the firm will have an opportunity to provide any arguments, information or data that it feels will be useful to the council in making its determination. the council may also ask the firm -- >> let me stop you there. that's after a two-thirds vote? of the council? >> no. >> there's this process first? >> right. >> then a two-thirds vote, then an additional hearing and process? >> yes. >> and an additional vote if there's a hearing, correct? >> that's correct.

>> so it's a pretty involved kind of back and forth and certainly enough or adequate opportunity for the firm to question, you know, some of the conclusions that are made, certainly a lot of opportunity for feedback. >> there are multiple points at which a firm can engage with the council and its member agencies about its diagnosis. >> you get through this whole process and you determine here is a big firm that has a lot of this interconnectedness. meets all this quantitative and qualitative criteria in it. by a two-thirds vote is determined to pose a threat to the financial -- do you expect that many of these nonbank firms will meet the criteria at the end of the day? >> as we say in the final rule and guidance, we expect less than 50 firms will pass the stage one thresholds. stage one thresholds, however, are not meant to be definitive in any way.

they are more of a screening device to identify those firms where the council will spend more of its time and effort. i think it would be premature and inappropriate to speculate how many firms would be designated before we analyze them. >> fair enough. thank you. i yield back. >> thank you. mr. henterling for five minutes. >> thank you madame chair. mr. gibson, in your testimony you stated that the dodd/frank act addresses the market perception that such firms are too big to fail. it seems to be fairly well documented that the larger investment banks still enjoy funding advantages over their smaller competitors. and since the passage of dodd/frank, we know that the big have gotten bigger and the small have gotten fewer. so i'm curious