public event. >> one of the things that i quite frankly like about the dodd/frank bill is that each one of these agencies -- or entities will have to put together a living will. would you describe to me what would be in a living will that would be important for you to see that were there and how it would operate? >> the living will requires that the company describe how it could be resolved under the bankruptcy code. so for companies that are very complicated, the living will needs to have a description of how different legal entities within the company interact with one another so that if different legal entities are subject to different procedures or different regulatory procedures, how exposures of one entity aren't so tied in with another that it creates an intractable situation.

by having that information in advance or especially by requiring the companies to produce that information and understand what those impediments to resolution could be, we could then use our supervisory process to push the companies to reduce them. >> living will basically lays out the connectivity of all the things going on within that company? >> that's one of the important aspects of it, yes. >> what happens -- i see my time is up. thank you, madame chair. >> thank you. mr. miller, for five minutes. >> thank you, madame chair. significant credit portfolio and i don't claim to understand that

entirely, but the details are sketchy. it also appears -- credits of the banks are taking too much pleasure in the hard to see this as something to gloat over. it's not like a $200 factory burned down. it just sort of shifted $2 billion. it was chase's $2 billion around to probably some hedge funds. so it really appears that the only thing to worry about in all of that is the effect it might have on the soundness of any given bank engaged in these

kinds of transactions or especially to the system as a whole, whether it creates a systemic risk. and i'm wondering how on earth we got a chance, even got a fighting chance to figure that out ina drew, chief financial officer at chase who has now resigned was making $14 million last year. and she apparently did not understand these transactions and we're supposed to send in some examiners on government salaries and they're supposed to figure out what risks are involved in these transactions. it would be easy for an examiner to say, well -- or think this kind of looks like a risk but it's a $2.3 trillion bank. even if they lose money on this, they're making it up somewhere else, they'll be okay. which is exactly the kind of attitude that can -- or the kind of thinking that can lead to a

great risk for an institution that size if every division is taking risk like that. what sense does it make to create banks this big? they're actually bigger now than they were before the crisis. why do we need to combine what appear to be entirely discreet businesses all within one huge $2.3 trillion bank that will be impossible to regulate, to examine? it will be impossible for the market to discipline. why not have smaller banks so that if they can't figure out what risk they've got and the risk pulls them down, it won't create quite the same effect on the entire economy and even if it's -- should be possible to figure out more what their business really is if they're smaller. why not have smaller banks? >> so, under the dodd frank act, in particular section 165 enhanced prudential standards we've been talking about today, the dodd/frank act asks the federal reserve to imply -- >> part of my question is does dodd/frank go far enough or should we have done more to take apart big banks? allows for breaking up banks based on very high standard of risk. should they just be smaller?

>> so, what we'll be doing as we implement dodd/frank is to impose higher capital and other standards on the largest banks. we will be doing that in a graduated way that imposed the highest capital standards, for example, on the largest banks and less stringent capital standards on the smaller banks. so we'll have the effect of tilting the incentives away from becoming large simply for the sake of becoming large because the largest banks will be subject to even the capital is your charge eventually once the is your charge is implemented in the u.s. so whether it will work or not, i think, remains to be seen. we have a lot of work to implement that. it is going in the direction of putting in the requirements and less stiff requirements for smaller companies. that is what we're implementing now. >> why have, apparently, entirely discreet lines of business consolidated into one firm?

there appears to be no particular reason to do it and it creates conflict of interest. why not have servicing units be -- why do they have to be an affiliate of a bank that holds second mortgages on the same homes that they're servicing? >> the approach we're taking by having higher capital standards on the largest banks will naturally create an incentive for if an activity can be done outside a bank, it can be done presumably more cost effectively. we are providing incentive for where there's not a synergy that creates a benefit that would not be passed along to the customers, then those activities logically -- there would be an incentive to move them out of the largest banks.

>> mr. mchenry? >> thank you, madame chair. mr. auer, so designated nonbank sifis, how much weight will the fsoc put on -- how much weight will the fsoc give to companies that have miss existing regulators? perhaps you have an international nonbank financial institution and in their home country they have supervisory authority that's very clear. would the fed be likely that the fed would be designated or less likely? >> in the framework that the council lays out in its rules and guidance for stages two and three, the council does plan to take into account existing regulatory scrutiny. whether that scrutiny is domestic or foreign, whether

it's at the consolidated level or at a legal entity level, the quality and extent of that regulation will all be factors that would lead into the council's ultimate determination about whether or not that firm poses a threat to financial stability. >> mr. gibson, you said earlier that you have the authority, the fed has the authority to tailor standards as appropriate to nonfinancial companies. now, isn't this unchartered territory for the fed? >> we have the authority to tailor the standards for nonbank financial companies. commercial companies would not be subject to the nonbank. so there are bank holding companies and financial holding companies that own insurance companies that own asset management companies and a

variety of other nonbank companies. so, we will use that experience that we have. and, if necessary, bring in more experience so that we're able to do a good job of supervising nonbank companies that are designated. >> will you be consulting with a federal insurance office? >> we already have -- we already are consulting with federal insurance office on our existing supervision of bank holding companies and financial holding companies that have insurance operations, so yes. >> moving on to another issue, it's my understanding that the counter party limits proposals or proposal, the fed currently has put forward. it's a pretty significant shift in how financial institutions manage their risk. and i appreciate the challenge of managing interconnectedness in the financial system but what

i'm concerned about is whether the feds putting the cart before the horse in that there's not sufficient analysis that we've seen in the public sphere on the impact that this proposal would have to banks, to clearing houses, to foreign sovereigns and the rest of the financial system. has there been -- is there significant data within the federal reserve on measuring that? >> so, we put out our proposal for section 165 in december in the comment period recently closed. one thing we asked for comment for was exactly the question of what would the impact of the single counter party credit limit proposal be, in terms of how constraining would that be for the banking agencies $50 billion and above. we have received a lot of comment and those comments do

include some information about the impact, and we have done our own analysis through the supervisory process as well. so we will be using all that data as we move forward towards a final rule. >> so you did a cost benefit analysis on the proposal? >> we look at the cost and benefits of every rule that we put out on this particular proposal. we're still gathering information on the particular counter party credit limits that were proposed and the alternatives that were suggested by the commenters as well. >> have you done any analysis on the current level of exposurexp? >> yes. >> would you be willing to share that data with us? >> in the proper way that doesn't require me to talk about confidential supervisory information, i would be happy to provide more information, including the information we've gathered and information companies have submitted to us.

companies have submitted information to us, both through their public comment letters, already available to you and companies have also submitted confidential information to us through the supervisory process, which they intend for us to use as we move forward to a final rule and have the best information available. we have all that information. >> so what will be public? that's sort of my question. i can't predict how we're going to move forward toward a final rule. when we do the final rule, we'll certainly come out with a discussion of how we weighed the comments we received and what judgments we made based on the comments to move from the proposed rule to the final rule. >> thank you. mr. canseco. >> thank you, madame chair. i noticed at the february 1st fsoc meeting you updated the council on comments that it had

received regarding the second notice of proposed rule making. the meeting was gaveled in at 1:00 pm and concluded at 3:13 pm. your presentation was one of five or six items on that day. and i'm not certain how long the council discussed your presentation or what questions were asked. i assume it couldn't have been more than 20 or 30 minutes of discussion on one of the most important provisions of dodd frank. could you shed some light for us on what was discussed that day and some concerns that were raised by the council members? >> the discussions at that particular council meeting were not the first time that the nonbank designation rule had been discussed by the council. the council actually put out an advanced notice of rule making, first notice of proposed rule

making and a second notice of proposed rule making. all three cases, we received comments and all three cases the council discussed those comments, how the next iteration of the rule would incorporate and respond to those comments so that there was a thorough conversation at each point in the process about how the final rule responded to the comments. >> did you discuss the comments that you received? >> yes. >> and were those comments and comment letters, were they discussed at that time? >> yes. >> and what were some of the dissensions? >> i don't know that there was any dissension. there was discussion among the principals about how they were addressed and what questions about how the rule addressed the comments and what changes were

necessary at various points to address the comments and how those were reflected in the final rule. >> so, everybody was on the same page? >> the -- all council members asked a lot of questions, but the ultimate vote, i believe, if i recall correctly, was unanimous in supporting the publication of the rule and guidance. >> so, the final rule was approved two months later. can you shed some light on specifically how comments were incorporated into the final rule? or were they not incorporated into the final rule? >> many comments were incorporated into the final rule throughout the process. the entire three-stage process enshrined in the rule are as a result of comments received over the course of the rule-making process. the very structure of the rule, in fact, is built around comments from industry. the comments drove other changes to the rule and amendments to the rule since the desire that

many firms had that it be given for advanced notice. that led to the stage three notification. that's an excellent example. there were other questions about ensuring the confidentiality of informing that's provided to firms, information that was provided to the council. we elaborated on that. every serious comment that came in was addressed one way or another. >> was it incorporated? were they incorporated or thrown out? >> depending on the comment, i think the rules addressed every comment, certainly the preamble to the final rule described all significant comments and described whether that comment was adopted wholesale, adopted in a way that was adjusted or deemed not relevant. >> thank you.

mr. gibson, the final rule that mr. gibson, the final rule that was issued in april, it was noted that the fed has authority to issue regulations for determining if a company is predominantly engaged in financial activities and has issued a proposed rule under this authority. so if i'm interpreting it correctly if i say the fsoc has moved forward with a final rule on sifi designations before the fed has determined the definition of financial activities and who's engaging in them? i mean, has it done that? >> so we have a proposed rule which has not been made final yet on the definition of financial as it applies to the nonbank designation. >> right. if that is the case then when does the fed expect to finalize this rule? and shouldn't it have been done

before the final fsoc rule. >> i'm not asking you about legal requirement. it seems to me it is putting the cart before the horse and that is a pretty common occurrence these days. >> so i think the rule that defines what it means to be activities that are financial in nature will be relevant for companies where there is some uncertainty about whether they are financial enough. i think as we mentioned it's the cutoff is 85% financial. there are some companies out there that are kind of on the boundary and are not sure. i think for the companies that are -- there are a lot of companies that are clearly financial and where the boundary is drawn is not going to affect whether their determined to be financial or not.

thank you madam chair for calling this hearing. i have problems in the fact that the proposed regulations sweep insurance companies into the same area as bank holding companies. and what's unfortunate about the inability to have all the witnesses on one panel is the fact that if you take a look at the testimony of met life which will occur shortly when william wheeler testify, it's the fact that the asset and liability structures of banks are much different than from insurance companies. insurance companies are in for the long haul, very solid, fixed

income, stable investments. banks borrow money on the short term and then put it into long term and could put them in a position where they could have a risk taking place. would you agree upon that? if met life failed, the role of the question to ask is this. if met life failed, would the failure of the company threaten the financial stability of the united states? we believe the answer is no. we cannot think of a single firm that would be brought down by its exposure to metlife. would you agree with that statement? >> metlife has been supervised by the federal reserve because it's a bank holding company. >> they're getting rid of the bank holding company.

zwl so once they get rid of the company, they will no longer be supervised by the federal reserve. >> so would they come under the new regulations? >> metlife is a eligible to be designated by the counsel. that does not mean the counsel would choose to do so. >> it's the largest insurance company. they're eligible. then no insurance company would be regulated. is that correct? >> i know the council has not done analysis. >> come on. it's a pretty easy question. >> so i don't know. if the council plans to designate metlife or not. >> because it's not your decision. >> it's not our decision. it's a bank holding company right now.

the reason i bring that out is if you take a large company like metlife, and you treat them like a bank holding company, are you gaining anything? is anybody safer? >> so the difference in the regulation that the federal reserve or regulation and supervision that the federal reserve has been engaged in with metlife and other large insurance companies that chose to become bank holding companies is we are a consolidated -- >> remember, they're shedding the bank holding company. they will be just an insurance company. >> >> if you're talking about after they shed the bank holding company, then it will be up to the fsoc to decide if they should be regulated. >> but what do you think? they propose no systemic risk. >> i'll say it's up to the fsoc to make the judgment. >> i understand that. but that's the reason for this hearing. the dragnet that see we taking

place here. you're imposing standards -- no, you're creating standards, and yet you don't know to whom they will apply. and when we show you -- and i'm not being critical. but when it's shown that a company like metlife after it sheds the bank holding company would produce no systemic risk, then it should now be regulated under the new regulation? >> if the council decides to with met life and does not pose a threat to financial stability then -- >> no, nurks. three insurance companies got tarp funds. aig was maybe -- didn't need it. even with the insurance, it was walled off. those asseted were walled off because of illinois liquidity

requirements. so i don't seed the need to drag the insurance companies sba this particular rule when they did not present a systemic risk in the event -- in the terms of metlife. we cannot bring a single term down to metlife. you don't have to answer that question. >> thank you. mr. grim for five minutes. >> thank you, madame chair. and thank the panel for being here today. it is interesting, i'll tell you that, the last of his questions, i think hit to the heart of why everyone is so confused. the amount of uncertainty has risen to an all-time high. and it's getting worse. the gentleman from north

carolina asked before why we don't have more smaller banks. that should be obvious. they can't compete. they can't keep up with the administrative costs of all the rugs and regulations. as we continue to add on in the hopes of getting rid of systemic risk, you're going to be left with only a few large institutions that can afford to keep up. therefore, making them systemically risky. but maybe i have it backwards. maybe i'm missing something. let's talk a little bit about asset managers for a second. has the council considered the possible adverse effects of asset managers? >> the council is in its

proposed rule and guidance describes how it's going to go about assessing whether or not a firm poses a threat to the financial stability of the united states. the consequences of being designated are it will be served to enhance capital requirements. the con kwenss would be to enhance procedures, liquidity, and requirement from livings will among others. >> is that a yes? >> the council is aware of what the consequences are being designated in a firm, yes. >> so you have considered the adverse effects? >> well, i'm not sure what you mean by adverse effects? >> well, have asset managers been involved in the study? >> the ofr is engaging in analysis to the extent that

there are threats to financial stability from asset management firms. they have begun the process of talking with people in the asset management industry and will continue to do so. the ofr, the council and a number of agencies are welcome to any comments. >> is there a formal process for conducting the due diligence for asset managers? any -- >> any asset management firm or other sbi think that wants to meet with the council staff is welcome to contact any agency. and we will try to set up meetings for that firm. zbr i'm concerned with, is if the fsoc evaluated the substitutability. they're investing on behalf of

clients. that doesn't mean that the portfolio is immediately liquida liquidated. i hope they're looking at that and there would certainly be adverse effects and i wish they would consider that. i'm hearing it's not been a tra transparent process. i'm hearing they're working in a black box, so to speak. when a nonbank entity is put into designated stage three, it seems there's no explanation why. can you elaborate on that? >> if any firm makes it to stage

three, that firm will be provided a notification that it is in stage three. that begins the process of having discussion with the firm. the firm has the opportunity to provide comments, arguments, and data to the fsoc and the member agencies about why it should or should not be designated. >> the company may have to disclose the information that they've been put in stage three. all they have the ♪ification with no explanation. do you see how that could be for these companies? >> i think that the desire was put in the request. whether or not they would be under consideration while the exact composition of what will be in the notice is yet to be rm