before continuing the analysis, they can provide a firm with all the reasons that the firm may or may not be designated. prejudge the outcome. >> thank you so much. i yield back. >> five minutes. >> and i thank the chair and the gentleman on the panel. to define the financial activity for the purposes of dodd-frank. but it would appear a few additional list of activities different from what dodd-frank had intended are now included. in other words, dodd-frank clearly says that the fed has the authority to define the criteria for falling into this category. but doesn't give the fed the

option to redefine terms already set forth in dodd-frank. why do you think they have the authority to go beyond what dodd-frank is explicitly setting forth as far as defining terms. >> i'm not aware of any ways that the rule is going beyond or trying to redefine terms. i think the proposed rule, which has been reproposed is responding to the comments we received in response to the first proposal that there were suggested changes and in order to incorporate those, we put out a second proposal. normally i think the fed would be responsive to what that legislation is.

i know there was concern by the industry, various industries when there was talk about the fed being able to designate nonbank financial institutions that it might be overly broad going forward. so a specific amendment was adopted into law. to define the area was engaged in financial activities. defined under existing law, section 4k of the bank holding act. but now the fed has gone beyond that. because here it describes specifically both predominantly engaged in financial acttivities means a company that derives 85% or more revenue or asset from activities, in section 102b, further provides that the board of governor will establish by regulation the requirements predetermining if a company is predominantly engaged in those sections. again, and end quotes.

as defined in section a-6. it seems though it's laying out there pretty clearly in the statute so it would make sense that a list of activities for financial and that's not what is occurring here. that's why i make the position to try to make sure it would be limited to the area. part of the reproposal in april was a list of the activities considered to be financial activities as of april to

provide clarity on activities in nation for the purpose of determining if it's clarified or not. and we're open to the comments that we receive. and we'll use the comment as we go. >> would that list then potentially or actually beyond what would be those list of financial activities under the bank holding act, as defined in the statute. >> i'm not aware that it is. the comments will determine that. >> i think it was mr. rice who raise ran down the list in the possibility that once a bank or financial institution becomes designated, there may be certain benefits to the institution, as far as lending and the like. and so there is an anti-competitive nature, if you will. with regard to the bank financial institutions,

vis-a-vis other nondesignated institutions. but now, he didn't go this far, but i'll go this far. now you carry that potentially one step further. now if you designate nonbank firms, such as insurance company, that same aspect of benefit. . now we have just spread it over to nonbanging institutions as wel well. >> the intent of what we are trying to do on the company thasz are designated so to impose tougher regulation. and we meet with a lot of

nonbank companies. >> i see my time is up. i yield back. thank you. >> i recognize mr. duffy for five minutes. okay. i want to thank the gentleman for the testimony this morning. and i want to bring up the second panel. university of pennsylvania for five minutes for his tm.

>> good afternoon, acting chairman, ranking member and members of the sub committee. i'm a professor at the university of pennsylvania's warden school. i've been studying insurance marks for the better part of 30 years. i've done quite a bit of work on solvency prediction, capital standards, systemic risk and insurance markets. i'm pleased to be here today to testify in the hearing as an independent expert. with spill overs on the economy. and/or executiveness among firms. there's a disting between loss from common shocks to fm financial firms and losses that arise from con ttagin. a primary driver of the crisis

in general and the collapse of aig was the bursting of the housing crisis bubble. it's also important to keep in mind aig's failure was consistent with the favorable performance. the consensus is, and there's a lot of research being done on this. it's systematic risk is minimal. and, isn't that correct? markets compared with banking. they have much greater potential to produce rapid and widespread harm to economic activity and employment. significant system risk strengthens the case for broad guarantees of bank obligations and stringent financial regulation to help deal with the

moral hazard that flows through government guarantees. because insurance company poses little or no systemic risk, there's no need for policyholders. there's less moral hazard and less need for capital requirements. they've been narrow with scope in banking, insurance company market discipline for safety and soundness is reasonably strong. and if not, face strong incentives. the final rule this accompany guidance for determining systemically importance nondetermined banning companies under section 213 are the same as the second notice of proposed rule making issued in october of 2011. much of the detail remains in the interpretive guidance. as we've heard this morning. it retains the six category frame work. first set forth in the january of 2011 notice.

the first stage would employ publicly available information from regulatory agencies to identify nonbank financial companies for more details evaluation in stage two with further evaluation in stage three prior to any designation. the inclusion of the quantitative thresholds provides some guidance to companies, presumably reflecting the council's desire to provide them with some career guidance and certainty. but the metrics are inherently in part subjective, a enthe thresholds are not binding.

any further financial company, irrespective if they meet the thresholds since stage one. the final rule must provide the council with broad discretion for designating systemically important nonbank financial companies and companies who face considerable uncertainty about such designation. there's a benefit and cost associate twd the overall procedure. there's short run. increased cost for companies so designated. this can be very problematic. it would give them in an advantage of the companies that can be very destabilizing to

safety and soundness of the business. the enhanced standards proposed are bank centric. they would need to be tailored significantly to any insurance company that would be designated systemically significant if that, in fact, occurs. thank you. >> >> thank you, ranking chairmen. and members of the sub committee. i appreciate the opportunity to testify today. reasonable risk taking is at the core of the free enterprise system. systemic risk is the possibility

of the goebl financial system is much different. it was very apparent that the government did not have the ability to identify, understand, and manage systemic risk. and november of 2008 the chamber is part of a larger regulatory reform package called for the regulation of systemic risk and that it be used sparingly to prevent harm while not constraining reasonable risk taking, which if limited will hurt economic growth and job creation. in creating title 1 of the dod-frank act, we think congress for the most part got it right in striking the balance. if you take a look at title one, right off the bat. congress immediately separated d system risks. they also created specific

delineated tests to determine if a nonbank should be determined to be systemically important. so if you take a look at the system. you take insurance companies and the like. they go through the very defined test to see if they're predominantly engaged in financial activities. if they're determined to be nonbank financial companies then we look through a broader criteria to determine if they should be designated. and then the federal reserve and the prudential regulator of the company work together in order to create enhanced regulations to deal with systemic risks. so, if you take a look at what congress did, congress said sometimes when you travel, you have to travel through dense forests. and you have to travel through dense forests, you clear a path,

you brightly mark it so that the travelers can know with safety how to get to where they're going. what the regulators are doing, however, is that they're taking the markings off the path, so the path is not illuminated and forcing more into than the congress had envisioned. so we have problems with the way the regulators are implementing hit l one. title one. number one, i think we heard a discussion this morning. the regulators are using discretion to go around the very specific tests that congress put in place to determine if nonfinancial -- if nonbanks should be designated or considered to be engaged. we're seeing a one size fits all approach in order to regulate the institutions at the nonbanks, but do not take into account the different business models. we're seeing that there's not in consideration of regular -- of

conflicts between systemic risks and existing regulations. if you have a public company that goes into this process, at what point in time does it become a material issue that that public company is going to have to disclose this to investors? if you do it too late, the company can put itself in legal jeopardy. the process issued, so that's when they're acting eaz a regulator that they aren't following the same transparency and accountability processes that other regulators engage in when they're rying rule makings. if they are engaged in discussions about systemically important problem, or a title two issue, that should be done in private. when they're acting as a regulator writing rules, that's much different. i think we've heard testimony this morning which goes to the point of a lack of a cost benefit analysis. during the april discussion finalization of rules on

designation it was determined that to designate the important institutions was not significant. meaning it would not have a cost to the economy of $100 million or more. finally, rules are being considered out of order. we're going into designations. we're talking about predominantly financially engaged rules now, which is really the start of the process. we started backwards and started to work forward so people cannot understand how the process is going to work or how it meshes. so finally, if these issues are resolved, the balance system that congress put in place can move forward. if these issues are not resolved, systemic risk regulation will be impaired and normal every day business practices constrained economic growth and job creation. i'm happy to take any questions you have. thank you. next, mr. jay willer, president

of america's metlife. >> acting chairman, members of the committee, my name is bill whealer. i'm the president of the america's division at met. thank you for the opportunity to testify on behalf of metlife. met life recognizes the importance of managing systemic risks and the need for sensible regulations to protect taxpayers for costly bailouts. coming up with the appropriate regulatory formula will not be either. for the financial stability oversight council and designated nonbank firms, or for the federal reserve in determining the standards that be applied to the firms. nevertheless, we nus get the prescription right. they are the largest in the united states. we are the only one that is also a bank holding company. our experience as an insurance company regulated by the federal reserve has provided us with unique insights into the pitfalls of applying the rules to noncompanies.

it's because we do believe our insurance business should be regulated that we have decided to sell our depository business join the peers in being regulated as an insurance company. i plan to discuss three topics in my testimony today. first, wide regulated insurance activities do not pose systemic risks. in the event that we are named a nonbanks, why the prudential regulations must be tailored to the unique asset and liability characteristics. life insurance companies protect policyholders and beneficiaries from the loss of income that occurs as a result of debt, disability or retirement. in order to make good on the promises, we invest in primarily investment rate fixed income securities.

unlike banks, insurers generally have a stable portfolio of enforced insurance policies that prohibit insurance company financial distress occurs far less frequently than bank distress. in 2009, only three had received taxpayer assistance through the troubled relief program. compared with 592 banks. i do not believe tarp money needed to be provided to at least two of these to prevent any systemic event. rather than design a whole new set of standards for them, the more sensible approach would be to identify and regulate the activities that fueled the financial crisis in the first place. certain firms that expanded significantly to nontraditional and noninsurance activities suffered significant distress. the main reason insurance companies are part of the

discussion about systemic risk is because of aig. as dodd-frank recognized. they did not appropriately regulate the activities of aig financial products. insurance law and insurance regulators would not have permitted the activities to occur in the same manner within a regulated insurance company. if fsoc names only certain insurance companies it will be picking winners and losers in the insurance industry. some believe naming metlife and other insurance companies would give us a competitive advantage over the smaller rivals. we are indeed, too big to fail. and if we got in financial trouble, the federal funds would be used to rescue the firm. at the other end are those who believe they would be placed in a competitive disadvantage.

they would reduce returns on equity for shareholders and impose higher prices on customers. they would have to deal with two levels of regulation compared with one for the rest of the industry. i've been forced to stand on the sideline including all the regulators returned the capitol to shareholders while bank rules prevented us from doing so. whether it's a help or hindrance. it seems certain name lg a handful of insurance companies as too big to fail will needlessly distort the competitive landscape and misallocate capitol in the this. it would be essential to tailor the new prudential rules for insurance companies. bank centric regulations are inappropriate for an insurance company. if a nation's largest are named and subject to unmodified bank style capitol and liquidity

rules. our ability to issue guarantees would be constrained at the time when governments are facing their own fiscal challenges. insurers would have to raise the price of products the they offer, reduce the amount of capitol or risk or stop offering certain products all together. i do not believe metlife is or should be designated too big to fail. if fsoc names the largest as it will be imperative to get the prudential rules right. >> thank you. >> thank you, mr. willard. our financial witness, mr. douglas eliot. fellow of the brookings institute is recognized for five minutes. >> thank you for the opportunity to testify before you again today. these are institutions most

capable of triggering financial crises and merit closer regulation than most other firms and should be held to a higher standard of financial conservatism. the need for closer regulation is not erased by the steps taken to reduce the potential for government bailouts. a serious financial crisis would still lead to a cub strax of credit, sending the economy into a deep recession. as you know, the recent recession cost taxpayers far more than did the bailouts. let me emphasize a few points made in my wherein testimony and in a paper we wrote last year. first, no part of the financial industry should receive an automatic discollusion. there's too much danger of regulatory arbitrage if we go by legal category.

second, there are no absolutes in determining systemic importance. there are multiple ways of measuring it will level of significance and no clear consensus on the exact methods. sch is why the proposed rules alo for considerable judgment. even within a single measurement approach, there are degrees of importance, with no bright line where an constitution flips from unimportant to important. we must strive for the right balance between the dangers of over designation and underdesignation. there will be an economic cost to designated firms. therefore, we should do so whenever the safety benefitsout weigh the costs but only when they do. this has been around to question whether firms may benefit from being named. i would emphasize a point, which

is that which is if it's true that funding costs will be lower after designation, the primary beneficiaries of that will be the managements and the sha shareholders of these companies. i've been heavily lobbied by the companies to take the positions they shouldn't be. i'm sure you as members of congress have been levied much more heavily. someone will make an argument that you shouldn't do something to their advantage. i do not believe for that and other reasons that there would be a significant funding cost advantage. fourth. the additional oversight we need to avoid overlap, conflicting requirements and gaps where no one regulates. similar activities should be regulated in similar ways.

with similar safety margins, to the extent possible. regardless of the legal form of the institution doing the activity. otherwise it will be easy to fall prone to regulatory arbitrage, as well as the inefficiencies that are produced by arbitrary differences and competitive advantage. so evaluating these key points, the regulators appear to been o the right track. although there's a great deal that cannot be judged yet. they focus on the the right source of systemic risk. and they recognize the need to carefully review the specific facts and to apply considered judgment to questions that are inherently subjective. it makes sense that the regulators are casting a a net in the initial phase. in order to determine which institutions they will need more information about. there are no straight forward quantitative methods to find the

answers here. so there's a need to gather information on a wide array of candidates in order to assess each in a deeper way. the regulators have also said the important things. although there remains cause for concern as to whether this will be reflected in actual practice, i do share that concern. from my point of view, i don't think there's many. but i would stress that this has been ab area of much discussion today, it is possible that life insurers will fall within that. i would dispute the point of a clear consensus. that they do not represent exclusive risk. there are argumenting from both sides. it's premature to form a conclusion on that. so on my point, designating a nonbank is a complex endeavor

that requires a careful balancing act and substantial human judgment. the rules generally reflect the considerations and i believe the resulting uncertainty about the ultimate outcomes is unavoidable. unless we abandoned the effort or use cruder measurements to almost certainly produce worth results. my larger concern is whether the rules may be too bank centric. thank you. >> thank you, mr. eliot. i will now recognize members for five minutes. recognize myself first. mr. quaadman, although they've finalized the roles and the federal reserve has yet to finalize the roles on enhanced prudential standards, as a result no one can know what the effect of this designation will have. should they wait to