systemically significant, sufficiently capitalized. where did the lapses in the internal risk controls within the firm occur. were federal financial regulators aware of the positions that jpmorgan were taking? transparency a question, i think. did they do an adequate job of supervising the firm's risk. are they able to supervise the complexity of the firm's positions? the losses at jpmorgan emanated from their london office, which begs the question, how well are our federal financial regulators coordinating with their counterparts across the globe. and how did the provisions in dodd-frank help or exacerbate the problem? i think there are plenty of questions that we'll be answering in the next several weeks. but this morning's hearing focuses on the effect of designating nonbank financial firms as systemically important. the dodd-frank act grants the financial services, or the

financial stability oversight council, better known as f-soc, the authority to designate films as systemically important. while the statute is clear which financial institutions will be designated, it is less clear about designating nonbank financial institutions. the f-soc was tasked with promulgating rules to determine the criteria for nonbank institutions to be designated as financially important and the in the process to finalizing roles to supervise the entities to be designated. there's are many questions about the effect a significant designation will have on these nonbank firms. we've seen with the largest banks systemic significance equates to market participants viewing these institutions as being too big to fail and expect the government to intervene in times of severe distress. the implied government guarantee results in lower borrowing costs. it is less clear what the effect

of the designation will have on nonbank entities. i know that many of our witnesses on the second panel have serious concerns about the panels used not only for designating the firm, but also for the supervision of nonbank firms once it is designated there are legitimate questions about how the standards will work with the various business models of nonbank firms. does the federal reserve have the expertise to supervise nonbank firms from different industries? how well would the f-soc and the federal reserve coordinate to insure the standards for designation supervision are in harmony and are they working with their counterparts across the globe to harmonize the standards for systemic significance in the united states with global systems significance. there's still questions that deserve a robust discussion and i'm hoping we get do that in this morning's hearing. i'd like to thank our witnesses for appearing before the subcommittee and would like to recognize the gentlelady from new york, ms. maloney, for the purpose of making an opening statement.

>> first of all, i want to thank you, madam chair, for calling this hearing and i welcome our witnesses. this hearing today is about a very important set of issues designation of nonbank companies as systemically significant. and there's a lot of per spektives and issues that have been raised. if there was one area we learned from the financial crisis in 2008, was that the regulators did not have the tools to regulate complex interconnected nonbank companies like aig. and did not have the ability to wind down these companies in the event of a failure without disrupting the system and without taxpayer funding. as a result, these highly interconnected over-leveraged

firms nearly brought this entire country and its financial system to its knees, and it was quickly recognized that key supervision for these nonbank areas was missing. we did two important things in dodd-frank to address this. by eliminating the hiding places from regulation and ending too big to fail. first we gave the fsoc, the financial stability oversite council the authority to require federal supervision of nonbank financial companies that pose systemic risk and required the fed to impose heightened regulatory requirements on these companies, as well as any bank holding company. with at least $50 billion in assets. these changes also leveled the playing field between nonbanks and banks. secondly, if a company does fail, in spite of the heightened

requirements in supervision, we also provided an orderly liquidation authority entitle inn title ii of dodd-frank, so that regulators would not be faced with the horrible choice between either bailing a company out, at taxpayers' expense, which we did with aig, or letting it fail to the great detriment of the broader financial system. designation of nonbank companies is a two-step process. the entities must first be identified as nonbank entities and must be subjected to heightened supervision. fsoc rule was not required by dodd-frank and was done to provide clarity to the public and companies about how fsoc will designate nonbanks as siffise. i understand that about 50 entities will be considered for heightened regulations, waysed

on their size and scope of their financial activities. these companies will be subject to stricter standards under the rules that the fed is developing and it has asked for detailed input. i look forward to hearing from the panels and i also look forward to hearing from the firms. i welcome our panelists today. and yield back and i also would like to ask, unanimous consent for mr. green to have privileges as subcommittee member today so he may question also. >> without question. it is so ordered. i would like to recognize the chairman of the full committee, mr. baucus, for three minutes for an opening statement. >> thank you, ms. chairman. today's hearing we'll have an opportunity to examine one of dodd-frank's most vague and potentially problematic mandates, we're here to better understand what it means to be systemically important, a

euphemism for too big to fail. what are the advantages of, and what are the disadvantages? how will these institutions be regulated? and how will counterparties and other market participants interact with them? we've been told by the fdic that part of the interaction will be to indemnify certain creditors and counterparties and that seems very similar to aig. which dodd-frank and members on both sides pledged that we would not get into another bailout situation. many companies are asking themselves the same questions and whether the regulators think they are systemically important. the financial stability oversight council's final rule is not at all clear. it is therefore, my hope that the regulators testifying here today, can help provide the

committee and all affected parties with some much-needed clarity on these important issues. i look forward to this discussion and thank the witnesses for being here. and i do want to say in conclusio conclusion. >> because of the jpmorgan chase situation, we are again hearing from some of our colleagues, that we need a law which will essentially prevent a business from losing money or taking risk. and no law can do that. nor should a law attempt to prohibit a company from taking risk. in fact, that's just an impossibility. now, when taxpayer funds are at risk, and a bailout situation would certainly be one of those, or deposits, then that's another

question. just to put in perspective, jpmorgan chase, if you're concerned about deposits in that institution, let me put that trading loss in perspective. they're pretax profit last year was $25 billion. so a $2 billion loss would represent one month of earnings. it would reduce, if it had been last year it would reduce their earnings to $23 billion. the loss is about 1/100th of the firm's $189 billion net worth and roughly 1,1,000 of the firm's $2.3 trillion in assets. even with this loss, i believe they're one of the most profitable financial institutions in the country. and unless the facts are diametrically different from what we've heard, there is no

risk from this loss to depositors or to taxpayers. they remain a very profitable viable institution. thank you madam chairman. >> thank you, mr. bachus. for two minutes. >> madam chair, i want to thank you for hosting this hearing along with the ranking member. also want to thank both of the panelists for being here with us today to offer their insight into this important topic. as we know in the financial service committee, greenspan came to us many times and said, trust them, they know what they're doing. i dpes we're still trying to figure out if we should trust them and apparently we shouldn't have not have trusted them, but we did. one of the biggest developments during the economic crisis in 2008 was the realization how much of the impact could be femt from the collapse of the firms. until the problem arose, it seemed that no one quite

understood the level of interconnectedness that some of these firms had. and everyone knows that our government took drastic action to limit the stress the collapse of these institutions caused. and no one wants to see the events of 2008 repeated. in writing and passing the dodd-frank two years ago, i believe we created a sound framework. i state i believe we created a sound framework that will allow us to stay ahead of the curve with these important systematic institutions. to make sure that we regulate them and we do a lot of the enforce. that needs to be done. it's not just regulating them. but how are we going to enforce them? and what action should be taken to make sure we don't develop additional crisis and that we solve the problems? this framework will alloy the regulators to work with the market to participate in creating efficient and secure regulatory structures. at the same time, it will will

allow the market to continue to operate in a free manner that will not be dictated by the needs of the demands of the regulators. finally, a firm does not run into trouble, the market has the confidence that the mistakes of a few will not impact the actions of many others and that's only if the action is taken, and its brought before us, to make sure that it doesn't affect a lot of the consumers or individuals involved. at the end of the day, what everyone is looking for is certainly industries want to be certain they can run their business in a manner where they don't fear becoming too unsuccessful. but at the same time, doing what is right. regulators want to be certain that they can step in and act in a timely manner to correct the bad behaviors. and that is going to be the key right there. in the american public wants to know that all parts involved are doing their best to insure that the abusive behavior is not something that will be allowed to be repeated in itself. i want to thank the ranking

member and the chair for having this hearing. >> mr. garrett, one minute for opening statement. minute and a half. >> well thank the chair also for this important hearing with regard to the designation of firms that are systemically important financial institutions but instead of calling these firms systemically important financial institutions. we should call them too big to fail institutions. if you're honest about it, dodd-frank codified too big to fail in a law and simply changed the name over to sifis, or systemically important financial institutions. when you change the name, you haven't changed anything about the characterization of them. or you changed the substance. you haven't solved the too big to fail problem. so the firms now that are on the list of firms that are chosen by this administration in fsoc that are formerly designated as too big to fail, they have funding advantages in the marketplace.

and because of that designation, they are subject to a resolution process that still allows the government to use taxpayers' money at the end of the day to decide which creditors are going to win and which creditors are going to lose. if you really ended too big to fail, the members on the other side of the aisle would not state as one of their goals for the next congress, let's end too big to fail. and if you had ended too big to fail, enter would be no reason whatsoever, for in the media or anyone here for people to be concerned about jpmorgan's $2 billion loss, because taxpayers would not be on the hook. the entire debate about sifi designation is nothing more than a charade. a debate about which financial institutions are too big to fail and we should not be debating which companies to call too big fail. we should be debating how do we end a taxpayer being on the hook for these institutions. i yield back. >> thank you, mr. scott for two

minutes? >> thank you very much. 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, even a jpmorgue be chase situation. that we've got 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 would 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 framework. it put the fcoc in there so it could marshall our efforts for stability. there is no assignation for sifis within the dodd-frank bill. we leave those kind of threats in identification to the fcoc.

and i believe the crisis we had a few years ago, the jpmorgan situation got to be avoided. but we got to make sure that any additional regulation for our financial institutions including both banks and nonbanks, will not stifle the growth of our economy. and the creation of american jobs. that the most important thing before us today. we've got to create jobs. we've got to get this economy better. we've got to also make sure that the forces that generate the capital, that test purse the capital. that lend and keep this economy going, disburse -- is not put in a straigtjacket. we've got to make sure that the abuses don't happen. all i'm simply saying is it's got to pass that delicate

balance test, foremost, as economic growth, that not be five stifled. >> we're making great progress, jobless rate is coming down. let's move forward with jaundiced eye on this and do it correctly. >> thank you. mr. royce for one minute? >> more than any other, section 165 of dodd-frank is emblematic of washington taking its eye off the ball. instead of focusing on their institutions are too big to fail, instead of getting back to less leverage and higher capital requirements for those few fints, the company instead will publicly stamp institutions, potentially dozens of institutions as systemic.

the explicit statement to the market is that washington believes these states are special. and washington will never allow these firms to fail. given the propensity of government to heir on the side of intervention, heir on the side of bailouts, to save systemically important firms, it's my hope that we can cast the smallest possible net and designate only the firms that everyone agrees are too big to fail. but frankly, the approach was the wrong approach. >> mr. green for two minutes? >> thank you, madam chair, i thank the ranking member as well. of run 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.

is the right size to deal with such that it does not bring down the economy. aig is the prime examine of what we did not have the authority and the 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. and 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 inpact across not only the american economy,

pu the economy of the world. i think it's appropriate for us to examine the rules and it's 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. >> i'd like to ask the witnesses, recognize the witnesses for the five-minute of your summation of your submitted statement. our first panelist is mr. lance allor ev, deputy financial secretary for financial institutions, u.s. department of treasury, welcome. >> thank you. >> do you have your microphone on? >> maybe pull it closer. >> how is this? >> chairman caputo, ranking members maloney, members of the subcommittee, thank you for the opportunity to discuss the financial stability oversight council's rule and guidance for

identifying nonbank financial companies that will be enhanced subject credentials stand ds and supervision by the federal reserve. in the 2008 financial crisis, financial distress at certain nonbank financial companies, contributed to a broad season up of the financial markets, to address potential risks posed to u.s. by these companies. dodd-frank act authorizes the council to determine that certain companies could pose a threat to the stability and will be subject to enhanced credential standard. although the dodd-frank act specifically outlines the substantive considerations and procedural requirements for designating nonbank companies, the council elected to engage in a rule-making process. to provide increased transparency to the public. to these ends, the council provided the public with three

separate opportunities to comment on its proposal. after receiving significant input from our market participants, nonprofits, academics and other members of the public, the council approved a final rule in april of this year. it's a robust rule. the council will approach each determination using a consistent framework. but ultimately each designation must be made on a company-specific basis. considering the unique risk to the u.s. financial stability. that each nonbank company may pose. the council's rule and guidance explain the three-stage process that the council intends to use in assessing nonbank financial companies. in stage one, the council will apply uniform quantitative threshholds to identify those nonbank company companies that will be subject to further

evaluation. the use of clear threshholds in stage one allows the public to assess whether a particular company is subject to further evaluation by the council. in stage two, the council will analyze the nonbank financial companies available in stage one. using a broad range of information available to the council. it includes both qualitative and quantity taetive information. in stage three, the council beliefs bes merits further view to that was not available in prior stages. for an in-depth review. each nonbank financial company is reviewed in stage three will be notified it's under consideration and be provided an opportunity to submit written materials to the council for the counsel's consideration. if the county votes to approve a

proposed determination, the nonbank fp conditional will receive a written station on the basis of the proposed termination, the council may also request a hearing to address the proposed termination. the final termination require as second vote of the coin. the authority under the dodd-frank act, for the companies to enhance and federal reserve supervision is an important part of the council's ability to carry out its statutory duties to identify risks to u.s. financial stability and respond to such threats in order to prevent or protect the u.s. financial system. i'd be haynppy to answer any of your questions. >> our second witness is mr. michael gibson, board of governors of the federal system.

>> 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 nonbank financial companies. the recent financial crisis. showed that some financial companies. including nonbank financial companies, not historically subject to consolidated. had grown so large, so leveraged and so interconnected that their failure to could pose a threat to the financial stability. the major collapses of major companies were the most destabilizing events of the crisis. the dodd-frank act addresses key gaps in the framework for supervising and regulating systemically important nonbank institutions. the establishment of the financial stability oversight

council which has the authority to designate nonbank financial companies that could pose a threat to financial stability. second, a new framework for consolidated supervision and regulation of nonbank financial companies designated by the council. and third, improved tools for the resolution of failed nonbank financial companies. with respect to the first prong, the financial stability oversight council was created to coordinate efforts to i'dfy and mitigate threats to financial stability. across a framework for designating nonbank's financial companies whose failure to pose a threat to financial instability. >> on april 3rd, setting for the the criteria and processes that it will use to designate nonbank firmses systemically important.

it's an important step in insuring that nonbank financial firms will be subject to strong consolidated supervision. with respect to the second prong, the enhanced prudential standards, sections 165 and 166 of the dodd-frank act require the federal reserve to require financial standards for large bank companies and for nonbank 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 determine, the federal issued proposed rules, which would apply the same set of enhanced financial standards, to 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 by category. working out the exact details of how enhanced prudential standards apply, will require a thoughtful analysis by each company over time. the federal is committed to assessing the business model, capital structure and risk profile of each designated company and tailor the application of the enhanced standards of each company. with respect to the third prong, the dodd-frank act provides two important new regulatory tools. both of which extend to systemically important nonbank financial companies. first, each of the largest bank holding companies and each nonbank financial company designated by the counsel to prepare or provide to the fdic

and federal plan or living will under the u.s. bankruptcy cold. second, title ii 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, both of you emphasize the tailoring of the designation procedure and the resolution procedure. >> they have mentioned, some that have been mentioned as candidates for systemic designation, are concerned about a 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.