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 stage provides clarity and consistency by using uniform quantitative threshholds, based on publicly-available data. to screen out other firms. it's very explicit in stages two and three that the council plans to look at all, to take an individualized look at each particular naub 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, 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 that we do intend to tailor the standards to the characteristics of the companies designated by the council. what we've proposed is a single set of standards that's 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 there's some nonbank companies for which the bank-like standards that we

proposed would likely be a bad fit. we have committed to looking at that when the companies are designated and doing what we can to taylor. >> other families, not that different from what we expect. we would expect the bank-like standards you have would require less tailing. >> would the dpefrl be involved in that particular exercise, trying to tailor, 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 the 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. >> financial activities, yeah. >> because bank holding companies engage in a lot of

activities that the nonbank companies are engaging in as well. in a lot of cases we feel like we do, we would have sufficient expertise, if there's cases where we need to bring in more expertise for nonbank companies that are designated, we would certainly do that. >> i simply assume by the designation, obviously means if one institution were to fail, that there would be systemic problems to other bank, bank or nun bank. we found that in 2008. is that one of the main criteria to having the designation? >> yes, the statutory standards is that the council should identify firms that could pose a financial threat to the stability of the united states. the council has stated that the threat to the financial stability is impairment of financial mediation or financial activity could have a real effect on the real economy.

that is the standard on which a designation ultimately will be based. >> one of the concerns i have is with the orderly liquidation of authority. we tried to go with an enhanced bankruptcy look on this and failed. so the early liquidation rests on fdic. when you're looking at a nonback entity. the fdic is more accustomed to working with banking entities. i want some conference and i'm sure you can mant make a judgment statement that the fdic has the expertise again to make judgments when trying to unwind nonbank institutions? is that a concern? >> well, we have the treasury department and other fsoc members involved in any orderly

liquidation authority, have been working with the fdic to understand what their approach will be to designate, i'm sorry, putting in a film in a normal significant but ultimately, that's a, what resources and the details of their approach is a question you would have to pose to them. >> all right. my time is up. so i'm going to go to ms. maloney. thank you. >> thank you, and i'd like to ask mr. auer, i understand the criteria the council has established by regulation and statute. but i'd like more clarity on the exact metrics that will be used in designating nonbank foreign ministers is saifis. how much interconnectedness makes a firm a sifi? could you elaborate in this area.

>> again, in the multiple rounds of public comment that we received, there's a desire to led to development of a three-stage process. the first stage is based on publicly-val indicated data and easily cal kulable metrics, in order to provide greater clarity that the public, about the types of endits that the council is going to want to examine further. the council is very clear that it wants to look in stages two to three, on a first by firm basis. a specific framework for it to do so. interconnecteds in is will of the things that the council will be looking at. >> one of six broad categories of frameworks, the others are size, substitutability, leverage. >> how did you find

interconnectedness? >> there's the council does not believe after much analysis. that there's a single metric or formula that can measure interconnectedness. the council believes rather than have a one size fits all interconnected in. it's one of the issues that when it looks at any particular firm. which you is why you can't have a formula for calculating that factor. the final of a firm for enhanced credician standards for supervision, if that firm could pose a threat to the financial stability of the united states, whether through or other factors. >> mr. gibson, will the federal reserve's prudential standards proposal for sifis, be modified

to adopt 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? >> we understand that different types of nonbank financial companies will have different characters and different business models. that may make it necessary or desirable for us to tailor the enhanced 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 is out for comment, we received many, many comments, including from many nonbank financial companies that were worried about the possibility of being designated and were currently in the process of

weighing the comments. 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. >> mr. auer, you said on your testimony, you'll be very transparent. what are the plans to 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 designation's process. however, in a desire to provide greater transparency and get and gain greater input from the public, it went actually -- >> what is the timing? when do you expect to make this public? >> the rule and guidance were finalized in april. have been, went into effect this month. the council is now beginning its process for looking at calculating the stage one. which firms pass the stage one

thresholds. it's collecting that data, making sure it's accurate. 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 who they are before you develop these standards? >> the timing for finishing 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 that 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. >> mr. bachus for five minutes? >> thank you. mr. gibson, i'm reading 113, you have to read 113, i guess in connection with 165. is that correct? in determining what is a sievi and what is not? >> section 165 describes the standards of the firms. >> standards. right. you know, it appears the prudential standards that are in 165, once you designate are banks, are they not? >> the prudential standards in 165 and 166 are bank-sent ricend

they are some of the traditional standards we've had such as capital and liquidity and the requirement is to enhance the standards, make them higher for systemically important firms. >> you, i noticed when you read 113, is really the section that determines whether something is designated it says nonfinancial activities of a company shall nod 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 -- there's 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

know, you talk about underserved, low-income communities are outreached there. >> is there, 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. >> 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 companies or savings and loan holding

companies. we have taken a approach that has applied capital and leverage requirements to the holding company. but we do rely on the state functional regulators of the insurance companies that have traditionally focused on the risks in the individual legal entities that are insurance companies. >> you will consult with the 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, important part of that would be their insurance policies. >> the fsoc includes members that have insurance expertise. maybe i should let you respond. >> the fsoc contains at least three members primarily focused on insurance expertise. as the council gets into stages two and three of looking at any

particular firm, we do expect to be working with state insurance commissioners to insure that we have a good understanding of the unique nature of those firms. >> is there any recognition by either of you two gentlemen that these standards don't appear, they don't have, they don't really appear to fit say an asset managers or money markets? or captive finance companies or insurance companies? you could 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 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 its 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 or other prudential standards for a company that only engages in asset management. that's what we would need to tailor if and when those companies are designated, he would tailor the standards. >> but again your original threshold is $50 billion, so that would capture what, i know you said 50 or 60. wouldn't it have been closer to 100 companies that could possibly be designated? >> the stage one 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. >> the gentleman's time is expired. >> thank you. >> mr. hinajosa, for five minutes. >> thank you, madam chairwoman. >> mr. hinajosa. >> and then i'll come to you. >> thank you. most people, 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 insure 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 nonbank financial companies for federal supervision as implemented by the fsoc's recent final rule, will help prevent future crisis by insuring that there is no place to hide from appropriate regulation? >> thank you, congressman. yes, we've 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 dodd-frank reforms and an essential element to insure 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 are less likely to get into distress in the future. as well as being subject to an order of 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 it will rest of the financial system and we think that the nonbank designation process is a key element of achieving those goals. >> there's been of course a lot of effort made to go back to the old regulations. do you think that the 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 a key goal and objective of designating nonbank 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 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. 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 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. renacci 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 dodd 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 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 referenced 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 a new definition of what is financial

in a company. >> companies that are subject to 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, they went above and beyond for providing firms to challenge why they should or should not be designated. specifically, starting in stage three, 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 it wishes to the council, either in support or in opposition to its destination. and the council will take those into account. if the council, after completing stage three, 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 the recourse to appeal to the federal system. >> i'm out of time so i'll yield back. >> mr. scott for five minutes? >> thank you very much. mr. gibson and mr. auer, let me ask you this first question. is the fsoc the only way to further regulate systemically important nonbanks? or have alternative methods been contemplated? >> so, some nonbank companies are already subject to some degree of regulation subject to state insurance and 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 on which nonbank financial companies may, in some cases, already be subject to supervision. but the rule in the dodd frank act for those firms that could affect the stability of the united states, those firms that could pose such a threat are subject to consolidated supervision and enhanced prudential standards. >> does it seem prudent to impose bank-like regulations on nonbanks? >> what we have proposed in section 165 and 166 is focused on the banks. that section applies to both bank-holding companies that are