get everybody to understand that we are serious of purpose here to ensure that the law is fully implemented. there are those who agree with the law, but as said, the americans are free to disingagr with the law, but not free to disobey it. not free to disobey it, and this senator for one is going to continually pursue that we don't relive 2008, and i hope that all of the reg yu ulators and certa the occ understands that. thank you, mr. chair. >> senator moramoran. >> senator, thank you very much. this is one of the hearings that i have participated in and this committee has held in regards to the implementation of dodd/frank and when i asked for the committee assignments a year and a half ago, i asked for the b banking committee, was told by some, you don't want to be on the banking committee, because the bank is done, and they have

passed dodd/frank and the heyday has come and gone, and in my view, oversight, implementation, and modification and alteration of dodd/frank is a very important task for this congress. one that i wanted to fully engage in, because the consequences of dodd/frank are tremendous, and certainly to directly to financial institutions, but more importantly to the customers and the borrowers and the depositors that we care a lot about. it is concerning to me that while we continue to have these hearings, i am -- my concern is that there is no legislation that then follows the series of ideas that are presented and certainly i would guess that every member of the 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.

so i think that there is a general belief among most everyone on the committee that there needs to be some alterations in the 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 that are objectionable or impr improperly worded or need an alteration based upon the hear hings that the of over a long period of time that we have had on this topic. i have always been concerned that any time legislation is propose 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 bank, doesn't care about the consumer, but i cannot imagine a circumstance in which the, 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 that just, we need to make certain that the oversight hearings become more than oversight hearing, and that there is a legislative response in which we treat each other with great respect and not with the political allegations that were carrying water over some financial institution or some s segment is of the financial industry. i would encourage for example us to mark up the menendez legislation, and 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 have passed dodd/frank, and to prove me right that the glory days of the banking committee are not over, but 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 at jpmorgan that your position in regard to the volcker rule has been, quote,

informed. i'm interested in knowing how that the loss is reported how it has, quote, 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? >> since i believe i used that term, i will be the first to go. i think that by "informed" i mean that our experience with the level of risk management that was 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 kinds of oversight stru 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 will answer you anyway. it seems to me that what someone will do or that we need people to run through this, and to say, hey, you have a situation in which the firm has publicly said that they didn't think it was a well managed risk and it was is supposed to be a hedge, and 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 the firm and the supervisors to a potentially risky strategy. i think that as i sit here today, that is the case. but i would certainly want someone to go through it more carefully.

>> mr. chairman, thank you. i would like to associate at least compliment my colleague from pennsylvania, mr. toomey in what is a logical presentation and enlightening in my view. thank you, mr. chairman. >> senator bennett. >> thank you, mr. chairman, and for holding this hearing. this is not something i wanted to talk about, but i appreciate senator moran's comments, and all of us want to have as efficient capital market as possible, and profitable capital market and 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 and your families through enormous economic turmoil and very clear to me that the testimony we were hearing is that no one was watch

watching that. no one had a view of the systemic risk that was produced by the transactions, and to think of those as merely bad loans rather than security ized instruments that nobody was watching is not, is not an accurate -- it is not anything that you said, senator, but it is not an accurate reflection of the history of what we heard. i'm not for any more regulation than is needed and i share the skepticism on the other side of the ability of the regulators to keep up with what is going on in the capital markets which raises the importance of capital as you described earlier, but i want people to remember why we were here to begin with, and the gaps that we saw in the regulation that had a profound effect on the economy and the people that i rep. so having said that for the record, i want to go back to the ranking member's very first

question or one of them and that is what was the nature of the transaction was a proprietary or was it a hedge? we know through the testimony today, we don't have any answer to that yet, but here is how i would like to ask that question. to mr. curry and 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 you are quite right that you can learn something from that. these of us who are cautious about those definitions would like to know what you're actually going to be looking at. >> at the occ, basically, we have a two-pronged approach to this particular issue. number one, we want to fully understand the nature of the hedge or the trading activity at issue. we also want to get an

assessment and the full understanding of how the bank reduces the exposure or the de-risk from that position. part of that process, and part of the secondary prong which is to -- >> can i be -- sorry to interrupt, but the -- the first step is to determine the nature of it, and 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. they are really, and one is the first prong is to assess what is the financial risk to the institution, and that is really a pry tear, and particularly immediately after this issue surfaced, but we are looking at it from the almost postmortem standpoint of what happened? where were the deficiencies? what needs to be corrected? is there additional risk

management gaps elsewhere in the organizati organization? ? and is there an opportunity to learn from the experience in terms of the risk management practices at the other large institutions that we supervise. that is the general scopef our -- scope of our review. >> governor, anything to add? then i have another question for you. >> senator, if you will give me the question. >> well, i wanted to shift to your -- you made an observation earlier that i thought you heard you say that the low light ll l likelihood of a tail experience of europe? >> well, no, senator, i was referring to the fact that at least in my observation the modeling that the financial firms do via modeling and trying to understand what the risk of losses are from a number of

contingencies tend to be not as oriented towards the tail risks which mean events that while appearing at that moment to be low probability would if they transpired have enormous losses. >> so in that spirit, since we are about, and i don't know if secretary wolin, how do you view that risk right now, as you are sitting here? i understand that the balance sheets here are in better shape than the balance sheets in europe, but the risk of collapse -- >> well, senator a couple off thing, and first of all, european leaders tend to be moving with a sense of heightened urgency, and the run-up to the los cabos meetings will allow them to make further progress with respect to the banks and the restruck shun of the banks and and as you have

seen, they are considering those things really on a now european-wide basis, and you know, the europeans have the will, and the certainly the capacity to keep this thing together. the president and the secretary and the treasury and others throughout the administration engaged and you know, i think that we will see as developments move forward it is no as useful for me to hazard a guess, but think they what is clear is that they have the will and the capacity, and i think that they understand more than ever the urgency to take the actions that are consistent with avoiding some of the most unpleasant outcomes. >> thank you, mr. chairman. >> senator brown. >> thank you, mr. chairman. thank you all for joining us. i am glad to hear my colleagues on both sides of the aisle talk about the importance of capital requirements and they seem less

convinced of that in the drawing up of dodd/frank, but if there are changes to dodd/frank maybe that is where we would want to look and especially the disfrugs mr. toomey and mr. moran on the importance of the high her capital requirements. mr. curry, my questions are to you if i could. i have sent you a number of w t written questions and i look forward to the substantive responses and i look forward to those answers prior to mr. dimon appearing before the committee next week. i hope you can do that. about a year ago last june my committee held a hearing before the occ in which he testified. i know you were not there, and i appreciate your coming to testify, especially with the history of your agency, and i want to share some of the testimony and i appreciate and i would insist on brief answer, because i have several questions and limited time, as you know how it works and i would particularly appreciate a yes/no

response, and the head of the occ has testified, quote, that given the importance of the role of the institutions play and the overall financial stability of the states that we have instructed them that they should not operate with anything less than strong risk management, and audit functions and anything less will no longer but sufficient. unquote. jamie dimon himself said that jpmorgan's trades were complex and flaw and poorly executed and poorly monitored. i would like a yes or no answer to this question. did the occ meet the standard prior to your being there, meet the standard that it set for itself in this case? >> before i answer that, doi want -- i do want to acknowledge that we are working on the written answer s answers to the questions you sent, and we will get them to you before mr. dimon's testimony. and the answer to the question

is no, not in the case of the cio's office, it does not appear they met the heightened expectations of the demand. >> mr. wilson also said at that hearing that every report of examination is reviewed and approved by the responsible adc or the deputy comptroller before it is finalized and both units have for mall qualification processes that assess the effectiveness of the supervision and the compliance with the occ policies. again, i know you were not there, and did they just not -- and did the deputy controller and the assistant deputy controller simply not know about them? >> well, this is part of the inquiry that we are conducting in terms of improving the processes. >> you are -- thank you for that. your written testimony suggests that the examiners and the supervisors were unaware of the activities, okccurring at jpmorgan's chief investment office until april of this year, and what is intriguing about that is this, this office was

making 3$360 billion in trades and this is larger than the assets of 7,299 banks in the united states. if this were a stand alone bank, it would be the eighth largest bank in the united states. it was making a trade that you say is the biggest and most complex trade in the entire banking system, and the question is this, should the eighth largest bank in the nation be allowed to make the biggest, most complex trade, your words, in the entire banking system without the occ's knowledge? >> we would expect to be aware of significant risks to have the bank identify them and for us to have adequate reporting about the risks. i would want to clarify that the cio's office invests that a pool of approximately $350 billion, and that this particular area was a discrete portion of it, and that may be part of the reason why it was not identified as quickly as we would like.

>> okay. still should have been identified, and that is an issue of the structure of the occ and again, under different management and when you were there and than you are there now of course. this is not about -- i hear and this is going to be a discussion for next week, but i hear about the $2 billion or the $4 billion lost at the chief investment office, and that is serious, but obviously more than that. jpmorgan took a $25 billion hit to the stock, and that is 401(k)s and the pension funds, and that is a loss of wealth to a large number of people. we went through that in multiples higher than that of course two and three years ago, but there is a signal that the market demonstrates bigger problems in the management and the oversight at jpmorgan. this begs the issue that these trillion dollar, $2 trillion in that case mega banks are not just too big to fail, but too big to manage, and too big to regulate, but the occ's position has been that, quote, they do

not subscribe to the view that big in and of itself is bad, unquote. as long as occ continues to insist that big complex banks are actually essential to our economy, they are responsible for their inability to properly examine and supervise these mega, mega banks. i ap appreciate your working to the oversight, but i heard the same promise last year, again, under different management, for the occ to determine in your words in what respect the occ could do differently, and i know you want to look forward, and that is your job, but you have to identify who made mistakes, and how they were made, and if jpmorgan can hold the senior executives accountable which they are in part doing, then we should expect nothing less from you, mr. curry, and the people who work for you and whether they are the people there now or the people whom you replace them with. thank you.

>> senator schumer. >> thank you, mr. chairman, and thank you, witnesses. one of the issues raised by the jpmorgan risk management losses is the role of the risk management in the small banks and the large banks. as you know, i have fought to have in dodd/frank, a provision to require all banks with over $10 billion in assets and all non-bank financial firms supervised by the fed to have a separate risk committee that includes at least one quote risk management expert having experience in identifying, assessing and exposing risk management. and you say in your testimony, quote, that you will adhere to the highest risk management, end quote, and in your assessment did the jpmorgan supervision have the sufficient risk management personnel to carry tout duties, and in addition, is

jpmorgan changing the risk management policy committee, and can you provide the committee with update of the changes and tell us whether the new members of the committee have sufficient expertise. >> the introduction of the risk committee through dodd/frank is a welcomed improvement to overall corporate governance of the financial institutions and particul particularly large institutions, and we view the role of the board in terms of corporate governance as a mitt gant to excessive risk as being a critical feature of sound risk management. in this particular case, there appears to have been a breakdown at the cio level's risk management architecture and system and controls. that is a matter of significant concern to us that the occ, and

it is also one in which, you know, we have endeavored to make sure it does not, and that it is not endemic throughout the entire organization. we hope that the reconstituted risk committee members of the board will be experts in that area. >> and have you review ed the risk areas of other banks worth over $10 billion to have the necessary expertise, and that is for mr. tarullo as well. >> mr. senator, one of the provisions that you referred to is that as the enhanced provincial standards it will precipitate a horizontal review, and meaning that the larger supervision institution committee will compare them and it is that process that will actually give the individual supervisory teams on the ground more guidance and more insight as to what they should expect. >> right. i suppose some difference and some bank s ths that are over $

billion that are plain vanilla banks and others that are doing all of the fancy, sometimes unfathomable things. >> that is correct. >> yeah, and you didn't correct the word unfathomable. mr. curry, are you reviewing the banks as well? >> it is a critical component of the assessment of the corporate governance. >> so you are. and this is for you, mr. curry, jpmorgan's deriptive trades were made by a group that is part of the u.s. bank, but apparently all booked in london. do you as the u.s. regulator have full access to the information that you need about trading activity conducted in london if it is carried out by a u.s. bank and what more needs to be done to improve coordination with international regulators to prevent these kind of cross border losses. >> the london operations at jpmorgan are conducted through a branch of the united states

national bank and so in terms of the jurisdiction, we have clear jurisdiction of activity over that branch. in the case of the jpmorgan chase, those activities are managed on a global basis through the new york office where we have the majority of our core staffing at the occ. >> okay. good. all right. third question about early warningrs at several hedge fund have been able to spot the jpmorgan trade through the irregular effect on the market through the derivatives and begs the obvious question, why didn't regulators know? they can't obviously micromanage every trading position at every bank and that would be impossible for you the do, but it is possible, but is it possible, rather, to build an early warning system to warn us if a single company accumulates unusually large positions in any single product as it appears with the jpmorgan case?

last month i asked the s.e.c. chairman if it was possible and they said with the new information to be reported under dodd/frank we can set up early warning systems to identify the risky positions before they blow up. so my question goes to both you mr. tarullo and any others who care to add their opinions what can and should regulators do to improve their ability to identify potentially risky trading ahead of time. i understand foresight is a gift, but at least at a certain level of money that a bell could go off and maybe it is a perfectly plain vanilla safe trade and maybe it is not, and not ask you to get involved in every single thing that the bank is doing. so first to mr. tarullo and mr. curry and anybody else. >> well, first off, the risk management of the firm overseen by the supervisors and should include things like position

limits. that should be a first early warning. secondly, senator, we do already within our supervisory process look at market indicators including aggregated market information to try to identify trends that are relevant to the particular institution, but that is our ability to do that obviously depends on the relative granularity or the specificity of the information, and i think that in this case for example, i believe there are products which although they could be a big part of the market, and jpmorgan could be a big part of the market, and for the overall financial markets, still relatively small, so unless there is reporting on the more specific products like that, our normal look at market information wouldn't have revealed this. so it has to come internally. >> yeah. and what about after dodd/frank is fully implemented where you get more significant

informatio information. >> there i think that, i think that what is most important is when a firm is taking a hedging position, it will be required to specify what the strategy is and what the risk management, and what the monitoring of the strategy will be and what the supervisors will have beforehand access to the information rather than have to rely on us going in afterwards. >> okay. so you think it will improve with time? >> i think it will improve with dodd/frank being implemented. >> yes. >> and mr. curry? >> as he mentioned, this is a highly complex and liquid and complicated investment. it would have helped with other market data available to highlight the concentration to us as a regulator so that the extent to the dodd/frank act does provide that or other readily available market information that we could utilize it would be helpful. >> and the fact that it has to be adjusted, is that prophylactic or does it have to

be done within the bank so it does not matter if it is sent to you? >> well, the reporting is helpful and that one of the issues here of whether there was adequacy of the reporting and whether the reporting was available to the occ and the federal reserve examiners. >> my time has expired. anyone else care to comment? thank you, mr. chairman. >> thank you. senator shelby has an additional question. >> mr. tarullo, i want to be like senator toomey and agree with you in that you said recent events serve to remind us that the presence of substantial amounts of high quality capital is the best way to insure that significant losses at individual firms meaning the financial institutions are borne by the shareholders and not depositors or taxpayers.

what percentage of capital under basal three likely hold under the new capital standards and will this amount in your judgment be sufficient? it is a given here that there is no substitute for capital. you can regulate everything in the world, but if they have inadequate capital and you know what is going to happen sooner or later. >> so, senator, as you know, because you have quoted from me, but i do believe in the central ti of capital and it is not the only way -- >> oh, no. >> it is a central way. >> but it is number one, isn't it? >> in my judgment, yes. the basal requirements are for 7% common equity ratio, which is a substantial increase over the pre -- >> tell the public what you mean by common equity 7%. >> so, so, what traditional ly

measures of capital of the so-called tier one capital which could include common equity which people generally think of shareholder earnings and retained earnings and what they have put into the company, but also included some other kinds of hybrid instruments, the loss absorption capacity of which for an ongoing firm is not as strong as for common exwhich quity. so basically for precrisis if you dig down into the requirements, it is only really a 2% common equity rati meaning have to have common equity of 2% of the liquid assets, and basal three takes that up to 7% for the banks generally, and then as you referenced with respect to very large institutions, there will be once with implemented our additional authority, a surcharge which at present we think is between another one percentage