risk-management issue regardless of the volcker rule. >> whether this is a proprietary trade and i think he's saying he doesn't have information right now that would allow him to say whether if in effect it would have been a proprietary trade. my point is, though, regardless of what we conclude about the actual nature of this particular set of transactions, if this proposed rule had been in place, if the hedging exception were to be invoked by a firm, they would have had to ensure that the kinds of risk management that tom speaks of would have been in place and they would have been required to document it, and i suspect we're going to find, in this case, that there was an absence of documentation both within the firm and in reporting to supervisors. >> perhaps more guidance on aggregate hedging. clearly, i think, there's a

value on aggregate hedging. instead of hedging each individual trade, but you would have had a little clearer guidance? >> i think that's the intention of these additional provisions in the regulation, and then, of course, the ongoing supervisory challenge is to make sure the information that is received is scanned and reviewed properly. >> let me move to a different subject, because my time's running out. both again, governor tarullo, one thing we worked on is these living wills, and as we move down that path, i'd like both your comments in terms of have you had the tools you need to kind of evaluate these back and forth on creation living wills and to what standard are you going to hold the institution in a sense this living will will

demonstrate how they would unwind themselves, are you looking at it in a blue skies environment, the potential environment we may have with a break up of the euro, love to just get some comments on that. >> senator, the statute itself establishes the standard for evaluating the plans, and that standard is the bankruptcy code, and the requirement is that you have to make adjustment as to whether the plan could credibly result in an unwinding of the institutions under the standards of the bankruptcy code and that's sort of the operating premise for the development of the resolution plans. as i indicated previously, the fed and the fdic issued a joint rule last year establishing the criteria for the plans. we've been working with the institutions on their development. under the rule, the first round

of plans will be for the largest institutions, those with assets of over $250 billion will be in july. so we've been engaged in a process with those companies and the initial development of those plans, we're going to get the initial submissions in july, then there's going to be a process of review of those plans following the submissions. >> only thing i'd add to that, senator, is that, obviously, it's not possible to tailor a lot of different resolution plans to a lot of potential adverse scenarios, and i think that's why our review of the plans that are submitted is going to need to include basic questions about the ongoing structure of the firm, that is we're not just going to be able to say, gee, if something bad happens on thursday, will they be able to resolve by monday

morning? i think we're going to need to ask ourselves whether the drafting and review of the resolution plans shows us that there are structural elements or features of the organization that could be an impediment to achieving that end and thus as a matter of current supervisory policy, we need to adjust, and that kind of exercise should help provide some more suppleness in response to whatever the risk is that could eventually lead to the firm's problems. >> thank you. senator? >> thank you, mr. chairman. i want to first indicate that i strongly agree with the tenor of the questions that we heard from senator corker and senator warner with regard to the volcker rule and those aspects. i think we covered that thoro h thoroughly, but i want to

indicate i would have had we not had a full discussion on that, and i encourage you to take their comments to heart as we move forward. i'm very concerned about how we're moving forward with the response to things like the jpmorgan issues and others. i want to just shift the focus for a minute and mr. cordray, i want to talk to you first. the housing credit market continues to be very tight, and i'm hearing a lot of concern about how dodd-frank will reduce credit availability through the proposed rules through qualified mortgage that increases liability and qualified residential mortgage that requires a 20% down payment. i know that last week the cfpb reopened the comment period for the qualified mortgage proposal until july 9th. seeking comments about data that can be used to model the relationship between the borrower's ability to repay and

the consumer's ratio to debt income. >> so thank you, senator, for the question about the qualified mortgage ability to repay rule. one of the reasons we did reopen the comment period is that we have recently been able to obtain significant amount of data from fhfa that gives us a better window into the mortgage market. we're all, i think, quite concerned and i think you are as well about the direction and trajectory of that market, and this is an important rule in helping shape the future of that market. we want to be clear that we craft a rule that is based on sound data and that does not unduly restrict access to credit, which i think is something we have been hearing consistently from small banks, large banks, community, and consumer groups across the country. even after the feds comment

period had closed on this proposed rule, we continued to get immense amounts of comment from different groups, and we thought that we would open up a comment period again to make sure everybody had an even chance on commenting on those issues, including data issues that we have identified in the re-comment proposal, because this rule was originally proposed by the fed, the small business panel does not -- is not implicated, and if we were try to convene a whole process, we'd miss the deadline congress has set for us, which is january 2013, which we fully intend to comply with, so that is our approach at the moment. we encourage any small provider that wants to take advantage of the renewed comment weird, and this is part of the reason why we did it, those outside the beltway often do not understand ways that they can access the agency, and we want them to have full access and full voice in our rule making to make sure

we're reflecting the entire market. >> thank you, and to mr. gruenberg, curry, and tarullo, seems to me because the mortgage is supposed to be more broadly defined than the qualify mortgage, would it be correct to say that the banking regulators should wait for the cfpb to finish its rules before they move ahead with their risk retention rules? >> i don't know that a formal -- senator, i don't know that a judgment's been made on that. i think as a general matter, we thought there was a logic in having the qrm follow the qm, so we'll have to see, but there is a logic to that. >> mr. curry, do you agree? >> i think that's a necessary component to the entire package of rule making, the qrm and the qm. >> mr. tarullo? >> it's an interagency process, senator, if people want to wait, we will wait too. >> all right, i encourage you to do that.

mr. tarullo, recent events have highlighted the difficulty in modeling risk. my understanding is that federal reserve is following or utilizing the current exposure method and that there has been quite a bit of concern about whether that is an accurate method of risk modeling. are you -- are you considering other models or are you focussed on simply staying with the current exposure method? >> senator, in what context, in the stress test context? >> that's my understanding, yes. >> so with respect to -- with respect to stress testing, and what we're trying to do in stress tests is make our best judgment as to what kinds of losses would be entailed across the industry. >> let me interrupt -- >> i was mistaken. i was more focussed on the sipg

l counterpa -- single counterpart -- >> that's a calibration issue with respect to the determination of the exposure of a large institution to another institution for purposes of the limits that we'll be promulgating, so that will be -- that's one of the topics that's being commented on in the consideration of changes to or potential modifications to the proposed rule on 165, 166. there have been -- there have been a number of alternatives suggested. i think the challenge, without trying to signal where we'd go, because we haven't seen all the comments yet, and i certainly haven't had a briefing on it, but i think the challenge is going to be on the one hand wanting to have a methodology that tries genuinely to track actual risk exposure while on the other not becoming dependent on modeling within firms,

because as we've seen in a number of other contexts, dependents solely upon the modeling firms can lead you astray particularly because firms in our observation tend to be much more at modeling associated kinds of risk assessments for more or less normal times as opposed to the tale events we're trying to guard against, so in thinking about the comments on the proposed rule, we'll have to keep both those issues in mind, trying to hue towards what really are the risks associated with the positions on the one hand, and on the other hand, wanting to make sure we're not totally dependent on some internal model. >> it's another example if we model too aggressively one way or another, we'll get it wrong and create unintended consequences, so i encourage you to get it right and focus on the concerns about the current accuracy of the current exposure method. thank you, mr. chairman.

>> senator merkley. >> thank you very much, mr. chair. does anyone on this panel think that bruno exo, the whale, woke up each day trying to mitigate the risk from excess deposits between loans in bonds? >> that is a related area of inquiry at the occ. >> so you're inquiring, but you wouldn't argue that case? >> not necessarily. >> no, i wouldn't think anyone would, because he woke up each day as head of the strategic investment unit trying to make money for the bank, and so it's kind of a basic observation. small business across america and comptroller curry, i'll

address this to you and try to ask you to keep your responses crisp so i can try to get through a series of questions, but across america, small businesses are trying to get access to credit, they are highly frustrated. the ability for them to access credit is essential to the recovery of our economy. does it do damage to have our banks diverting taxpayer deposits into hedge fund investments rather than making loans to families and small businesses? >> we at the occ, senator, are very supportive of small business lending by the entire spectrum of national banks that we supervise -- >> that wasn't the question, the question is diverting deposits into hedge fund investing rather than making loans damaging to our economy? >> i would hope not. i hope 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?

you're hoping it wasn't the case, but you're saying it would be if that's what happened? >> i -- 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 cra -- >> i'll continue then, thank you, does it increase systemic risk to have banks diverting taxpayer deposits into hedge fund investments? >> i believe that's the intent of the volcker provisions of the dodd-frank act. >> certainly, it is the intent, but in your opinion, does it increase systemic risk? >> unrestrained financial risk taking outside of legitimate

risk framework is something that we'd be very concerned about as a supervisor at the occ. >> from a common citizen's point of view, when they look at a host of institutions that survived only because we bailed them out, i think the case is fairly clear that if you are in the hedge fund business, you increase systemic risk, and if you're in the banking world doing hedge funds, you'd increase systemic risk. is that fair, am i way off base here? >> again, senator, we would look to the banks engaging in safe and sound lending within the context of the banking to the extent that it was undue risk taking that was occurred. we would hope to either have a statutory or regulatory restraint. >> do bank-hosted hedge fund investment units have a competitive advantage because the bank-hosted funds have access to the discount window and ensured deposits. do they have a competitive

advantage over non-bank hedge funds? >> i would have to look at the available research to come to a conclusion. >> of course, they have an advantage. they have taxpayer-ensured deposits and access to a discounted window. is that way off mainstream common sense? >> i would like to be able to research that subject further. >> okay, okay. in terms of proprietary trading being disguised as risk mitigation, 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 would have to look at. >> how about if they are

investing in hedge funds, private equity funds. would that be a red flag? >> that would be another area under general risk management at a minimum that we'd be looking at. >> so a potential red flag that would draw attention. if a risk mitigation investigation was making massive trades not identified from specific risks from specific assets, would that be a red flag? >> we would look at that and the other examples you've given very closely. >> okay, if they are not tight liquy correlated, a red flag. >> continue a hedge-fund style operation or you going to support closing those loopholes or keeping those loopholes? >> that's one of the issues the banking agencies and other agencies are looking at. i would add i think our

experience here, as it unfolds with jpmorgan chase would help inform our views in the final rule making. >> thank you very much. thanks. >> thank you. >> senator toomey. >> thank you, mr. chairman. i'd 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 to this for a very long period of time and have considered this in a very sophisticated way, and i just maybe many things you and i may or may not agree on, but i think the emphasis on capital in a general matter is the direction we ought to be heading in, and i fear that dodd-frank is a 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 the regulators micromanage banks. i do believe very much it is exactly that and it is guaranteed to fail in that respect, but i want to touch on another topic, if i could, and mr. gruenberg, i observed in a recent speech that you stated, among other things, that the quote, and i think this is within context, that the typical path toward the failure of an insure ed bank starts with bad loans. my understanding is according to the fdic's website over the course of 2009 and 2010, there were almost 300 banks that failed, about 297. that's actually quite a high rate of failure, the highest

since the early 1990s. 95% of these failures were banks with assets of less than $1 billion. and i would i would just ask you, to your knowledge, how many of them failed because of the prop tradings? >> well to, , to my knowledge, senator, none of them. >> not one. did they fail because they had loans that went bad? >> as a general characterization, yes. >> virtually 100% of the cases it was because of bad loans. >> would it be fair to say that historically, and including to the present day that the biggest risk of banking is the listeneding activity that is inherent to the banking process. >> yes. >> do you regulate that at all, and does the occ or anybody have any regulatory authority over the lending process? >> yes. >> it is a considerable focus of the examination of supervision.

>> lots of regulation, right? documentation. >> and on site -- >> and concentration requirements and supervision of the activity, 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, and i'm not criticizing the regulatory proce process, and it seems to me that if we have a banking activity, the very nature of which is to take risks in extending credit, some of the banks in the tough economic times are going to fail. and that is unfortunate, but it is acceptable, and it is unavailab unavailable, and the real goal of the regulatory regime it seems to me ought to be to just insure that you don't have systemic risks or the failure of one omore institutions taking down the rest. and this is why i go back to mr. tarullo's point that if you have less capital, you have less

ability to absorb what losses may occur, but instead, we are going down the direction, and this isn't -- you are forced to implement a law that has been passed, but dodd/frank to the chairman's point about micromanaging, there are 398 rule-making requirements and 110 of them have been met with finalized rules and 144 rules have been propose and yet another 144 have yet to be proposed and as we all know and yet all of the constituents may not be fully aware, whaen we are talking about the rules and not admonition not the play in traffic, but talking about many, many pages of very dense and complex matters that are associated with each individual rule. the volcker rule, alone, it is staggering in the length and the complexity and i think it is an impossibility. take one little aspect of the volcker rule that is applied to the market-making activities jus

in formulating that exception, and we have all metrics to impose that regulator are going to develop and implement limits of how much can be made from the offered bid from a subsequent rule, and how much business they mus dot with the inner bank dealers and what asset classes are permitted to trade, and what circumstances that we have to decide whether these limits have to apply to a specific trade or aggregate trades, and it is staggering and i'm concerned that it is going to limit the ability of the banks to limit the risks, and it is going to the reduce costs and reduce liquidity in the markets, and we are going to do this while no banks have failed because of proprietary trading, and also, we have exceptions, because it is okay if you do all of the risk-taking that you like, as long as it is in treasurers and as someone who traded fixed insurance, you can use your shirt with traded treasuries

just as you can lose your shirt trading corporates for example, so i don't have a specific question about this, but i am very, very concerned that we have createded a monster that m last count between the controller of the currency and the fed, we have over 100 examiners on the ground full time at jpmorgan alone, and that is before we implement all of these rules. mr. chairman, i have to say that we have very much taken the wrong direction here, and i hope that we will reconsider when we are in a p t plitcal environment whpli plit -- political capital, and it is an essential tool to limit the risk. >> senator menendez? >> thank you, mr. chairman. mr. curry, i want to ask you about jpmorgan losing $2 billion and possibly more since the oco is a primary regulator of

jpmorgan and the oco has a well deserved reputation for being cozy with the banks that it regulates, and i know you got to the new position, so you have an opportunity here to decide what the occ does in the future. and i find it interesting, you know, what i don't want to see is a repeat of 2008. i know that, you know, a free market is essential to our very economic vitality, but there is a difference of a free market and a free for all market. and in 2008, what we obviously came to the conclusion of is the 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 investment and other decisions and then all of us had to pay.

and so, you know, i wish we had insisted on capitalization then, and i e wish we had insist odd an whole host of things that had avoided in 2008 because i won't forget that meeting with chairman bernanke and paulson where they described the financial institutions on the verge of collapse and if they collapsed not only cause systemic collapse for an entire industry, but for the rest of the country. i don't want to revisit it. i don't know if the people can forget such recent history, but i don't. i know that you just got this position, and i'm certainly not blaming you personally for this, but i have a yes or no question. did the occ screw up in allowing these jpmorgan trades to happen? >> senator, we are going to critically look at that question as part of my goal in reviewing what happened at jpmorgan 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, you know a critical self-review as part of the process, and -- >> how long is that self-review going to come? if you come to the conclusion? >> i hope to have it done as quickly as possible, senator. >> what does that mean? >> i hope within the next several weeks, and no more than a few months. >> i do want to reiterate that my goal was as comptroller to have a effective and fair supervision at the comptroller's office, and it is imperative from the 2008 crisis that are clear to me and my colleagues at the occ that we need stronger capital, which we are getting through the possible three and other rule makings, and we also need heightened expectations,

and we are requiring that of the largest institutions that we supervised in terms of the banks, management, and its aware ness of the risks, and raising the expectations with what we require for the minimum reserves and the liquidity and the risk management, and also corporate governance which is critical. >> shouldn't that -- i know you are going to say that you will review it, but shouldn't the sheer size of the trades have been a huge red flag for the occ? >> that is an issue that the concentrated issue of the trading and the 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 that every regulator here responsible for implementing the law should know if huge trading losses like this have been to banks like this after we have established

the volcker rule and capital rules have been written and implemented then the blood is on all of your hands if the london whale ultimately goes belly up next time, because in this case, the comment is, well, they can absorb the $2 billion or $4 bill yon or whatever it ends up to be and what is to stop them from being billions more nex time? and even more significantly is a less well capitalized bank from losses that could bring it down. i just don't see where the circuit breakers here are, and 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. i don't think that the american people, and certain ly this senator are willing to go down that road again. i dot