small businesses across america -- comptrollor, i'll address these to you. they're trying to get action toes credit, highly frustrated. the ability for them to access credit is essential to the recovery of our economy. does it do damage to our economy to have banks diverting taxpayer-insured deposits into hedge funds rather than making loans to families and small businesses? >> reporter: >> we at the occ are very supportive to small business loaning at the entire spectrum of business loans that we supervise through the largest -- >> that wasn't the question. is diverting deposits into hedge funds rather than making loans damaging to our economy? >> i would hope not. i would hope that that was not the case, would not be the case. >> but it would be if deposits were diverted into hedge fund investing rather than making

loans to small businesses? >> is that what -- >> you're hoping it wasn't the case but you're saying it would be if that's what happened? >> we expect national banks and federal thrifts to meet the credit needs of their communities, including small business lending. we don't direct exactly how they do that. we assess it from the c -- >> i'll continue then. direct deposits into hedge fund investments? >> i believe that's the intent of the volker provisions of the dodd-frank act. >> certainly it is the intent. in your opinion, does it increase systemic risk? >> on unrestrained financial risk taking outside a legitimate

risk framework is something that we would be very concerned about as supervisor at the occ. >> from a common citizen's point of view, when they look at the fate of long-term capital management, aig, lehman brothers, that exist only because we bailed them out, i think it's clear that if you're the hedge fund, you increase systemic risk. is that fair -- am i way off base here? >> again, senator, we look to the banks engaging in safe and sound lending within the context of banking to the extent that it was undo risk taking occurred, we would hope to have a statutory, regulatory -- >> do they have a competitive advantage over nonbank hedge funds? they have access to the discount

window and insured deposits. do they have competitive advantage over nonbank hedge funds? >> i would have to look at the available research to come to a conclusion. >> i would say of course they have an advantage. they have taxpayer-insured deposits and a discount window. is that an observation that's way off mainstream common sense? >> i would laike to be able to research that subject further. >> okay. in terms of proprietary trading being disguised as risk mitigation, it seems there are basic things that kind of create red flags. if a company says it's mitigating risk on a long position that is investments in credit and corporate bonds, by essentially taking a long position by selling insurance, is that a red flag that maybe this isn't risk mitigation after all? >> that is something that we -- would raise red flags and we

would have to look at. >> hedge funds, private equity funds, would that be a red flag that this is isn't risk management but a proprietary trading operation? >> that would be another area under general risk management at a minimum that we would be looking at. >> so, potential red flag? it would draw attention. if a risk mitigation operation is making massive trades that are not identified with specific risks from specific aspects, whether individual or aggregated, would that be a red flag? >> we would look at that and the other examples you've given very closely. >> it they're not tightly correlated, something red flag. are you going to support closing the loopholes that the wall street banks have been arguing for so that they can continue hedge fund style operations, or are you going to support closing those loopholes or keeping those loopholes? >> that's the -- i think one of the issues that all the agencies, banking agencies and the other agencies that are looking at the proposed npr on

the volker rule. i would add that i think our experience here, as it unfolds with jp morgan chase, would help inform our views in the final rule making. >> thank you very much. thanks. >> thank you. >> senator tumi? >> thank you, mr. chairman. i would like to start by also acknowledging mr. tarullo's comment about the importance of capital. and i know you've given a great deal of thought for this for a very long period of time. and have considered this in a very sophisticated way. and i just -- may be many things you and i disagree on, but management of capital ought to be the right direction we're heading in and i fear that dodd-frank say profoundly misguided effort to do many,

many other things. i have to respectfully disagree with our chairman, who in his opening comments, i think, tends to disagree with the characterization of dodd-frank as i have characterized it, as a very explicit attempt to require that regulators micromanage banks. i do believe very much that it is exactly that and that it is guaranteed to fail in that respect. i wanted to touch on another topic, if i could. mr. greuenberg, i observed that you stated -- this is within context, i think, that the typical path toward the failure of an insured bank starts with bad loans. my understanding is that, according to the fdic's website over the course of 2009 and 2010, there were almost 300 banks that failed. about 297.

it's actually a high rate of failure. i would just ask you, to your knowledge, how many of them failed because of their trading activities? >> to my knowledge, senator, none. >> none, not one. did they fail because they made loans that went bad? >> as a general characterization, i would say yes. >> like virtually 100% of the cases it was because they had bad loans? so, would it be fair to say that historically, including to this -- to the present day, the biggest risk of banking is the lending activity that's inherent to the banking process? >> yes. >> do you regulate that at all? does the fdic and the occ have any regulatory oversight at all over to the lending process? >> yes. >> yeah. >> it's a considerable focus of

our supervision. >> that's what i thought. lots of supervision of the activities. and yet, despite that, 100% of the failures of banks in america in the last two years are attributed to bad loans. this is not my -- i'm not criticizing the regulatory process. it seems to me that if we have a banking activity, the very nature of which is to take risk and extending credit, some of those banks, especially during tough economic times, are going to fail. and that is unfortunate, but it is acceptable. it's unavoidable. and the real goal of the regulatory regime, it seems to me, ought to be to just ensure that you don't have systemic risk. you don't have the failure of one or more institutions taking down the rest. and this is why i go back to mr. tarullo's observation. it seems to me that capital is the greatest assurance that you have less leverage if you have more capital and less

systemic -- greater ability, of course, to absorb whatever losses might occur. instead, we're going down a direction -- and, again, you're forced to implement a law that's been passed but dodd-frank, to the chairman's point about micromanaging, my point is that i understand there are 398 requirements, 110 with finalized rules another 140 rules have been proposed, yet another 144 have yet to be proposed. as we all know -- but maybe all of our constituents may not be fully aware. we're talking about rules, not an admonition not to play in traffic. we're talking about many, many pages of very dense and complex matters that are associated with each individual rule. the volker rule alone is staggering in its length and complexity. i think its impossibility. one exception, market-making activities just in formulating

that exception, we have all kinds of metrics that we're going to impose, that regulators are going to decide. they're going to invent limits, for instance, on how much money can be earned from the bid spread, how much business a market maker must then do with users as opposed to interbank dealers. what kind of classes are permitted to trade what kind of risk and under what kind of circumstances. we have to decide whether these limits apply to an individual trade or whether we aggregate trades. it's staggering. i'm concerned that it's going to limit the ability of banks to manage risk. it's going to have a huge cost. it's going to reduce liquidity in the market. and we're doing this while no banks have failed because of proprietary trading. by the way, we create these arbitrary exceptions. it's perfectly okay if you do all the risk taking you like, as long as it's intreacherous. as someone who once traded fixed income instruments, you can lose

your shirt trade iing -- i gues don't have a specific question about this. i'm just very, very concerned that we have created a monster that -- my last count is between the controller of the currency and the fed, we have over 100 examiners on the ground. i guess pretty much full time, at jp morgan alone. and that's before we implement all of these rules. mr. chairman, i have to say, we've very much taken the wrong direction here and i hope we'll reconsider when we're in a political environment where it's possible and we'll consider capital as the essential tool to reduce systemic risk. >> senator hernandez? >> thank you, mr. chairman.

>> mr. curry, i want to ask you about jp morgan losing $2 billion or more and being too cozy with the banks it regulates. i know you just got to your new position here. you have an opportunity to decide what the occ does in the future i find it interesting. i don't want to see a repeat of 2008. i know that a free market is essential to our very economic vitality. in 2008 we obviously came to the conclusion of a consequences of a free for all market, where the decisions of large financial institutions became the collective risk of an entire country, even though they were in part of making those investments and other decisions.

and then all of us had to pay. and so, you know, i wish we had insisted on capitalization then, had insisted on a whole host of things that had avoided 2008. i'm never forget that meeting with chairman bernanke and secretary paulson where they described largely a series of financial institutions on the verge of collapse and suggested that if they collapsed they would create systemic liability and would lead to another great depression. i don't know whether people can forget such history, because it's recent history, but i don't. i know you just got to this position. i'm certainly not blaming you personally for this i have a yes or no question. did the occ screw up in allowing these jp morgan trades to happen? >> senator, we're going to critically look at that question

as part of my goal in reviewing what happened at jp morgan chase is not just to see what the bank itself did or did wrong, but also how we can improve our supervisory processes at the occ. so, it will be a critical self review as part of this process. >> how long is that self review going to take you to come to a conclusion? >> i hope to have it done as quickly as possible, senator. >> what does that mean? >> i would hope within the next several weeks and no more than a few months. but i do want to reiterate that my goal as comptroller is to have strong, effective position at the comptroller. and it is the lessons learned from 2008 are clear to me and my colleagues at the occ, we need stronger capital, which we're getting through other rule

makings. we need heightened expectations and requiring that of the largest institutions that we supervise in terms of the bank's management, awareness of risks, raising their expectations with what we require for minimum reserves, liquidity and risk management and also corporate governance. >> i know you're going to say you're going to review it. but shouldn't the sheer size of these trades have been a red flag for the occ? >> that is an issue, the concentrated nature of the trading and liquidity of it are red flags that are clearly apparent now. >> well, i just think that for those of us who supported wall street reform and don't want to relive 2008 that -- i think every regulator here responsible for implementing the law should know if huge trading losses like this happen at banks after we

establish the volker rule and capital rules have been written and implemented, then i think the blood will be on all of your hands inf t s if the london wha belly up next time. the comment is that they can absorb the $2, $4 billion, whatever it ends up being. what if you had through these trades -- what's to stop them from losing multiples of that, billions more the next time? or even more significantly a less well-capitalized bank from losses that could bring it down. i just don't see where the circuit breakers are here. i don't see where the ability to ensure that, in fact, that type of decision making doesn't become the collective risk of all of us again in this country. and i don't think the american people and certainly this senator are willing to go down that road again.

i don't know what it takes to get everybody to understand that we are serious in purpose here to ensure that the law is fully implemented. i know there are those that disagree with law. americans are free to disagree with the law. they are not free to disobey it. they are not free to disobey it. and this senator, for one, is going to continuously pursue to make sure that we don't live, relive 2008. and i hope that all the regulators, but certainly the occ, understands that. thank you, mr. chairman. >> senator moran? >> mr. chairman, thank you very much. this is one of many hearings that i participated in, that this committee has held in regard to oversight of the implementation of dodd-frank. when i asked for committee assignments a year and a half ago, i asked for the banking committee, was told by some, you don't want to be on the banking

committee. its work is done. they've already passed dodd-frank. its heyday has come and gone. implementation, modification of dodd-frank, to me is a very important task for this congress. and one that i wanted to fully engage in, because the consequences of dodd-frank are tremendous, certainly directly to financial institutions, but more importantly to the customers, borrowers and depositors that we care a lot about. it's concerning to me that while we continue to have these hearings, i am -- my concern is that there's no legislation that then follows the series of ideas that are presented. and certainly, i would guess, almost every member of this committee has expressed either here in a committee hearing or in a letter to the regulators a desire for a different outcome

than what has occurred with dodd-frank. and so i think there's a general belief among most everyone on the committee that there needs to be some alterations in dodd-frank. and my hope, mr. chairman, is that we will take the opportunity to modify, through the legislative process, provisions of dodd frank that we think are objectionable or improperly worded or need an alteration based upon the hearings that over a long period of time that we've had on this topic. i've always been concerned that any time legislation is proposed that alters the provisions of dodd-frank, the allegation is that the person, the senator, the legislator who wants to make changes is defending big banks, doesn't care about the consumer. but i can't imagine a circumstance in which there is not legitimate needs that need to be addressed that are concerns for everyone on this

committee in different areas, different issues. but i think just -- we need to make certain that the oversight hearings become more than an mae yiver sight hearings there is actually a legislative response in which we treat each other with great respect and not with political allegations that we're carrying water for some particular financial institution or segment of the financial industry. i would encourage, for example, us to markup the menendez legislation. let's go to work and pursue some of the things that we think need to be done in regard to improving the financial regulation, even though we've passed dodd-frank and to prove me right that the glory days of the banking committee are not over, that they're ahead of us and we have lots of work to do. i wanted to ask, i guess, a series of you have indicated that as a result of the loss announced of jpmorgan that your position in regard to the

volcker rule has been "informed." and i'm interested in knowing how that, the loss is reported, how it has "informed" your view in regard to the volcker rule and in particular what do you think needs to occur in regard to dodd-frank and now that you have become informed? >> i believe i'll use that term, i'll be the first to go. i think by informed, i mean that our experience with the level of risk management that is present at the cio's office that was engaged in activity that arguably may fall under dodd-frank's volcker rule provision in the proprietary trading and possibly the risk mitigation hedging exception. it really is, i think,

illustrating in terms of the types and kind of oversight structures and mechanisms that would be needed under that particular provision. >> anyone else become informed? >> so i didn't use the term senator, but i'll answer you anyway. it seems to me what -- what someone will do -- we need people to run through this to say, we have a situation in which the firm has publicly said they didn't think this was a well-managed risk. it was supposed to be a hedge. so somebody should align the rule with the practice and say, if the rule had been in effect, would it have precipitated the kinds of risk management, identification of strategy and documentation that would have been adequate to bring the attention to both the firm and the supervisors to a, a potentially risky strategy. i think as i sit here today, i think that is the case, but i

would certainly want someone ton go through it more carefully. >> mr. chairman, thank you. i would like to associate at least complement my colleague from pennsylvania mr. toomey in his what i thought was a very logical presentation and in my view enlightening. >> thank you mr. chairman for holding this hearing. this not what i was going to talk about but i appreciate senator moran's comments and say that i think all of us believe and want to have as efficient a capital market at possible, profitable capital market a secure capital market in this country, but i just want to be clear, because i sat here three years ago and heard the testimony on the credit default swaps that brought down these large financial institutions, and put my family's and your families through enormous economic turmoil. it was very clear to me the

testimony we was hearing was that no one was watching that, that no one had a view of the systemic risk produced by those transactions and to think of those as merely bad loans rather than securitized instruments that nobody was watching, i think is not -- is not an accurate -- this is not anything you said, senator, but this is not an accurate reflection of the history of what we heard. i'm not for anymore regulation than is need and i share some of the skepticism on the other side about the ability of the regulators to keep up with what's going on in the capital markets. i think -- which raises the importance of capital as you described earlier but i do want people to remember wipe we were he -- why we were here to begin with and the gaps that we saw in the regulation that had a profound effect on this economy and on the people that i represent. so having said that for the record, i want to go back to

actually the ranking member's very first question, one of them, which was -- what was the nature of this transaction? was it proprietary or was it a hedge? and we know through the testimony today that we don't have the an answer to that yet, but here's how i would like to ask the question to -- to mr. curry and to mr. tarullo, which is this -- explain to us what that examination is going to look like. what will you consider as you think about defining that, because i think you're quite right. we can learn something from that, and those of us that are cautious about those definitions would like to know what you're actually going to be looking at. >> the -- at the occ, basically we have a, a two-pronged approach to this particular issue. number one, we want to fully understand the nature of the -- of the hedge or trading activity at issue.

we also want to -- get an assessment and a full understanding of how the bank intends to reduce its exposure or derisk from that position. part of that process and as part of our secondary prong, which is to -- >> can i just -- sorry to interrupt, but the -- the first step is to determine the nature. the second step is to determine the risk. the attention to risk in the institution. will that -- is that second determination dependent on the nature of the transaction? >> no, no. >> okay. >> really, i mean what is the first prong is really to assess what's the financial risk to the institution, that's really a priority. >> okay. >> particularly immediately after this issue surfed, but we're also looking at it from, almost from a post-mortem standpoint of what happened? where's were the deficiencies?

what needles to the corrected, is there additional gaps elsewhere in the organization and is there an opportunity to learn from this experience in terms of the risk management practices that the other large institutions that we supervise? that's the general scope of our review. >> governor, do you have anything you'd like to add? i have one question for you. >> okay. i think, senator, you should -- go ahead and ask your kwenktsqu >> i was going to shift. you made an observation i thought i heard you say that the low likelihood of the tail experience with europe, and i just wanted -- i wanted to know why you think that's a low likelihood or if i misunderstood? >> no. i was referring more generally, senator, to the fact that at least in my observation, the models that financial firms do, var models and associate the kinds of modeling to determine

losses from any number of contingencies tend not, i think, to be as oriented towards tail risks, which mean events that, while appearing at that moment to be low probability, would, if they transpired, have enormous loss. >> so in that spirit, since we're about -- i don't know. secretary wolin, if you'd like to talk about this at all. how do you view -- how do you view that risk right now? as you're sitting here? i understand that the balance sheets here, are in better shape here than in europe, but the risk of collapse there. >> well i think, senator a couple things. first i think european leaders appear to be moving with a little heightened sense of urgency. i think the run-up to the g-20 meetings in los kaup bowes will be an opportunity opportunity for them to make further progress with trop their bank, capital of banks, restructuring of their banks and as you've seen, they are considering those

things really on a, now on a european-wide basis. you know, the europeans have the will and they certainly have the capacity to keep this thing together. the president, the secretary, the treasury, other of the administration are very much engaged and i think that we'll see as developments move forward. i think it's not useful for me to hazard a guess, but i think what's clear is they have the will, they have the capacity and i think they understand more than ever before the urgency to start taking the actions that it were consistent with avoiding some of the most unpleasant outcomes. >> thank you, mr. chairman. >> senator -- senator brown? >> thank you, mr. chairman. thank you all for joining us. i'm glad to hear me colleagues on both sides of the aisle talk