you asked about the bank supervision program. we have been focused on recruiting and hiring the best team we could find with our focus on consumer protection. we are blessed with great talent. the former commissioner of banks in massachusetts leads our bank supervision team. the former associate director of financial practices at fdic leads our nonbank supervision team. our examiners are working to ensure compliance with federal consumer financial law and may seek corrective actions to redress and remediate harm to consumers. we have met with many supervised institutions to see how they operate and how they approach compliance. we are engaged with state banking regulators to establish communication and share information to reduce compliance burden. to promote transparency, we published our examination manual along with other procedures covering particular products and services. on monday the federal prudential regulators released a memorandum of understanding that clarifies how we will coordinate our

supervisory activities to minimize unnecessary regulatory burden and decrease the risk of conflicting supervisory directives. our responsibility under the law unique among the federal regulators is to achieve even-handed and reasonable oversight of both banks and nonbank firms that compete in the same consumer finance markets. we take a consistent approach to examining both using the same procedures for the same products and services. in addition to mortgage lenders, services and student lenders we will finalize a rule to examine the larger participants in the debt collection and credit reporting industries as we develop our nonbank supervision program further. the second topic you identified for this hearing is my statutory role on the financial stability oversight council. as you know, congress designated the director to serve as one of ten voting members. the u.s. consumer finance market

represents over $20 trillion in loans and deposits and hence it is central to stability of domestic and global capital markets. because we share the responsibility of regulating with some of our colleagues our mutual participation furthers our efforts to maintain a collaborative approach. participation also provides a broader vantage points on the kinds of triggers and vulnerabilities that pose larger risk to the financial system. i have found this to be valuable as we work towards a sound and vibrant financial system that protects consumers, supports responsible providers, and helps safe guard the broader economy against systemic risk. third, you asked how our statutory obligations affect our regulation xhuvcommunity banks. as you know, the consumer bureau does not generally enforce the law in such banks. we have the authority to adopt rules that can affect community banks as well as larger banks.

we will help community banks by our new oversight of nonbank firms. i have heard from community bankers who refuse to make a ill-considered mortgage loan only to see customers go down the street and get a loan from somebody else who did not require the same standards. the other lender often required no documentation of income and engaged in no recognizable form of underwriting but still managed to sell bad lens into the secondary market. once bundled into securities those loans crashed the financial system and the economy. consistent application of consumer financial laws will promote safety and soundness. of the financial system. over the next year, the bureau is required to adopt new mortgage rules that protect consumers. many of these rules are intended to return to sound underwriting standards, and sound customer service, practices that are traditional at our good community banks. as we dichl these -- as we develop these regulatory initiatives, we know that one size does not fit all. when it makes sense to treat smaller institutions differently

we are implementing small business review panels on several mortgage rules and find input to be helpful in calibrating our proposals. when i became director at the consumer bureau at the beginning of the year i barely knew my colleagues on this panel. now five months later from our work together in various roles and on various committees, i have come to know and respect them all. our team is glad to be working with their teams and with the members of this committee to strengthen and support a vibrant financial system. i'm happy to answer any questions you may have. >> thank you. i would like to thank all of our witnesses for their testimony as we begin questions. i will ask the clerk to put five minutes in the clock for each member. mr. curry, it is clear from your testimony that jpmorgan lacked the proper control to mitigate such a large loss. was this a failure in risk management?

if so what should the bank have done differently? >> in essence we believe that the issue is one of inadequate risk management within the office of the chief investment office. we have been focusing on potential gaps or deviations from accepted standards of risk management within that particular office and looking to see whether similar gaps exist in any other area of jp morgan's risk management architecture. >> mr. curry, the occ has dozens and dozens of examiners at jp morgan. did your agency check the risk management and internal controls of all aspects of the bank

including the chief investment office before this event? or did you miss this? and second while regulators are not in the position to review every single trade, what assurances can you give us that the bank regulators will be able to monitor situations where large trades done for hedging or other purposes can bring down a firm or have a systemic impact on the broader economy. >> one of the major focuses of our examination and supervision activities is risk management. we look at risk management in the entire organization and within key areas where there is a substantial risk facing the institution. that process is intended to go across the entire organization in those key areas. in this particular case we are looking at whether there were

gaps within our assessment of the risks and the risk controls in place. we are in the process of evaluating that on our on going examination. the point i would make in terms of our focus on risk management is that it is one part of the overall approach to identifying risks within the organization. as governor mentioned a key component of how we assess and mitigate risks in the institutions is the institution's capital levels and level of reserves and liquidity. in the case of jp morgan chase their capital levels and liquidity are substantially higher than they were at the beginning of the financial crisis. as i mentioned in both my oral and written comments they're

more than sufficient to with stand the reported losses in this particular area. we are continuing to review as part of one of the two prongs of our on going review is what exactly transpired with the trading operation within the cio's office. and we are looking to make sure that there were appropriate limits and controls on those activities in that area and how they compared to other similar areas within the organization. >> it is important that wall street reform implementation is completed to enhance financial stability and reduce systemic risk. just to be clear doesn't that seem to be that the jp morgan trading loss was systemic?

do you agree? and what do you believe are the implications on the wall street reform rule makings that have yet to be completed? >> thank you, mr. chairman for the question. obviously, the loss at jpmorgan chase was a big loss and one that will effect share holders. we concur in his judgment that it is not about the solvency of the firm or the stability of the broader financial system. i think what is clear is that the lessons that we all learn from what happened at jp morgan chase will serve as important lessons into the range of dodd-frank implementation work to come whether questions about risk management or capital. risk management, enhanced standard, or capital. this incident under scores the need for us to pay attention to examples like this in order to learn those lessons both with.

with respect to dodd-frank in limitation. and the broader limitation of supervision that are ongoing. >> are regulators better coordinated and prepared after wall street reform to deal with external threats to our financial stability and economic growth like a eurozone crisis, what steps are you taking in response to this crisis? >> i think there is no question, mr. chairman, that the existence of the financitie n financial s oversight council has given regulators an opportunity to constantly monitor financial markets and the exposures of our banks and broader financial system to what is going on in europe. the financial stability oversight council has spent a lot of time on europe and thinking through what its

implications are and might be to our financial system. that work, of course, is on going. for the first time, the range of ent tea u.s. government to work together in engaging counterparts in europe to make sure that we are as well prepared and have thought through the various contingencies that might be necessary. >> do you have anything to add to this? >> with respect to european preparation, i just say that one thing about the euro zone problems they have been with us for some time as a result of which we have been able to regularize a system of oversight of u.s. sfinancial institution exposures and activities in europe. so right after the first greek problem as ros arose, 2010, on

hoc basis we have been looking at these, we have been able to put in a system that allows us to check the positions and exposures of individual firms against -- aggregated data whether from market sources or from supervisory sources to make sure both we and the firms have a handle on what is going on. other than that, i concur with what the secretary said. >> senator shelby. >> thank you. i think it's kind of a given here from what i read and what i know, the stress test, jpmorgan went through, and so forth, that they have more than adequate capital. i have been told that they would have to sustain losses 40 times, in other words, $70, $80 billion to even, they would still be standing, is that about right? >> senator, in the, in the stress test where we, what we did with the trading book was to

assume an instantaneous shock based on our very adverse scenario which entailed trading losses of $28 billion. we also assumed over the -- over the period of the stress test, credit losses of $56 billion, the sum of those gives the approximately the number you indicated. >> comptroller curry, tell us, just walk us through from what you know -- what was going on at -- at jp morgan. you know? were they managing risk? were they making money? were they doing a combination of what? everybody has got a measure risk. in other words, what was really going on? you had people on -- on site, right? >> that's correct. >> so they took a position. was that a position to manage something they had already done? or could you explain it to us?

i know it's complicated. >> that is actually the key question we are trying to address, senator. is really, what actually happened to this particular -- in this particular investment strategy. and it's a very complicated investment strategy, both in terms of its, its size as well as complexity. we are looking to determine what the actual strategy behind that -- that investment scheme was and also what, if there were any other factors that were -- driving that strategy other than attempting to mitigate known risks in the bank's portfolio. >> whether it is a banking areaso areaso arena, derivatives, you talk a

position somebody else has another position. >> yes. >> so if you win you are looking great, you are looking smart i you lose, you are maybe -- having a bad day. you are not trying to take risk out of the market are you? >> not necessarily. >> but what are you really trying to do -- from my perspective, i think banks ought to be able to take risk. they ought to manage those risks. the regulators ought to make sure that they know what is going on from your perspective and the fed's perspective. of any huge risk they take. that it might, what, endanger the taxpayer. a lot of us maybe not everybody but a lot of us are worried about the taxpayer and bailouts and future bailouts. jpmorgan, as strong as they are, seems from your testimony and others, and what we know, was never in any danger if they lost

$2 billion or $4 billion or what. that as it lot of money to me and i guess a lot of money to them. but what did the comptroller's office know and -- were you on top of things? how many people did you have at jpmorgan, kind of supervising or watching this? >> let me address the issue of -- of the strategy with regard to risk management, first, senator. number one we are looking for the institution to identify and address -- the potential for a serious risk within the organization. we are really not looking to eliminate all risk. if you did so you wouldn't have a bank the nature of a bank is to -- to manage risk. and to be profitable. the role of capital is really to absorb those areas where -- where -- risk is either unavoidable or, occurs just

because the nature of the business. and in the case of -- of jp morgan national bank which we supervise there is ample capital, there is over $101 billion worth of capital backing the, just the national bank, not the holding company. with respect to the actual supervision of of jpmorgan chase. we have 65 individuals who are our core team of examiner whose are resident at the institution. on top of that, we are able to draw upon a considerable reservoir of -- of skilled individuals with expertise in the, in a variety of credit market, capital markets and other areas that are brought in as a -- as a targeted examiners on an as-needed base. we work in connection and cooperation with the federal reserve system which also

supervises the holding company. in terms of this particular investment -- situation at the cio's office, we did -- begin to examine this early in april. we are -- we are -- interest and concern intensified during the month as, losses increased. within the portfolio up to the point that -- that the institution itself announced the significance of the, the losses that were incurred. since that point in time, we have, our focus has been on -- managing and monitoring the bank's efforts to mitigate, or derisk that particular portfolio. with the idea -- with the objective of ensuring that there is a -- a, a soft landing and of

that particular position. and that to minimize both risk to the -- institution and ultimately to the deposit unsure ans fu -- insurance fund. >> when do you think you will finish your analysis of what really happened and -- and awful th and all this? >> we hope to do that as quickly as possible and we hope to use our findings to inform us as to what potential implications there are for the other institutions that we supervise and our large bank cadry of institutions. >> thank you, mr. chairman. >> thank you very much. mr. curry, you have 65 personnel devoted to supervision. how many are in london? >> we have five individuals who reside or are housed in our london office.

>> and they're responsible for how many institutions in london? >> they're responsible for any national bank that has a global operation especially with the >> so how many would that be, roughly? >> that would be -- i'd give you the exact number, but it would be roughly a half dozen institutions. >> half dozen. how common is it to have a risk office of a national bank located outside of the united states? >> in this particular case, the risk office is actually housed in new york where the global operations of the cio office are housed, so from a supervisory standpoint, our focus in supervising that and other global issues is really directed from our resident team in new york. >> one of the impressions you get from reading the press is the cio office in london

actually was -- had significant responsibilities with respect to the overall risk of the bank. in fact, the justification that's been publicly made is they were making -- taking these hedge positions, taking these investment positions to protect the bank from the overall portfolio of the bank, which is essential risk operation. can you explain? >> the individuals that are responsible for the managing the risk and establishing the parameters for the activities that may occur in the london office are housed in new york, and that is where the physical focus of our activity's been. >> and they reported directly to the chief management, or -- >> the chief executive officer, yes. >> and you're confident from your review that they had complete authority to countermand or contradict or direct the operations in london? >> that is part -- the focus -- one of the focuses of our review

is to determine the accountability, the involvement of management in supervising the design of the risk management controls and their monitoring of it. >> when the model for risk was changed, were you aware of that change, did you evaluate the new model? it took place prior to your assuming these duties, i understand that, you came onboard april 9th and april 6th was the first indication of difficulties, but is that model evaluated by occ? >> there are hundreds, if not thousands, of models that are employed by large financial institutions to measure and monitor a variety of risks or other functions in the institution. but under the authority of the applicable capital regulations,

basel regulations, we are required to approve their capital-related models. there are other models that may be at issue here, management-related models or other models that would have been involved in this particular situation. we would not have had an express approval requirement of those models, but we would likely have been aware of them, and we're looking at our procedures for evaluating other types of models that are used by an institution such as jpmorgan chase. i would point out that a year ago, last april, the occ did publish written, formal guidance on the use of models by occ-supervised institutions, and that guidance does outline the pitfalls and areas in which

banks and bank management must assess in the use of models in measuring risks throughout their organization. >> thank you. >> mr. wolin, right now we face a serious challenge in europe with european banks who seem to be in a much more adverse condition than the united states banking industry based on capital and many other measures, as governor tarullo's testimony. to what extent did dodd-frank improve our banking situation, vis-a-vis the european? and put us in a stronger situati situation? >> i think both dodd-frank and the ability of the oversight council to come together and discuss and understand these things, but also the work of the fed and other regulators sitting at this table to undergo the stress tests that have been at the core of making sure our banking system is well capitalized and well cushioned from other kinds of exposure

that might have otherwise been important aspects of our being in a much better position than we were before dodd-frank and frankly in a much better position than our counterparts in europe. >> is that your view, governor tarullo? >> yes, senator. i think that beginning in 2008 and with the hearings that were conducted by this committee and your counterparts in the house in 2009 on reform, there was just a sea change in attitudes and orientation both respect to existing authorities and with the use of new authorities, and as secretary wolin indicated, particularly with respect to stress testing capital requirements, which, of course, are embedded now in section 165 of dodd-frank. i think we just all have a much better handle on the positions that our banks will be in in the

case of a tale event, which is to say the very bad, if low probability, outcome. >> thank you. thank you, mr. chairman. >> senator corker. >> mr. chairman, thank you, and thanks for the hearing. i do hope we're successful in having a markup on the menendez-boxer bill and it's a real mark yum hopefully it will happen soon. and i know that in any big piece of legislation, 2,400 pages, there's going to be some good attributes. i know from my perspective as we get further and further in the rearview mirror, it's more and more evident to me that in many ways dodd-frank was a political response to a -- instead of real reform in so many ways, and i do hope that when this season is over of everybody talking about it being the best thing since sliced bread, will move on to exploring real reforms down the road. mr. tarullo, i do thank you for talking about capital. i think that's our best buffer against financial institutions having trouble, and i think that

has been a contribution, and mr. gruenberg, i appreciate you coming in and talking today about orderly liquidation. i do think, mr. chairman, i don't know how many people have gone through the fdic-proposed rules on resolution, but the words liquidation are throughout title two. i know senator warner knows that well, and i think we found that it's anything but liquidation and institutions will continue, and, again, i just think it would be great for us to understand that and think about whether there should be a chapter two title too, but let me move on to the issue at hand. i think it's a fool's errand to think regulators are going to be ahead of bankers, especially in these highly complexed organizations, and the notion of having a regulator beside every

banker is, again, a fool's errand, and i think we charged y'all with a lot of things we shouldn't have charged you with in the first place, but the real question, to me, i know that, look, jpmorgan lost $2 billion, i think, over a two-year period. they could lose like $80 billion and still be okay, yet we still haven't dealt with the $200 billion that taxpayers really loss with the gses, and i know people may be looking at this hearing and wondering why we're having it. the reason i think it's important is this is a real-life example of what volcker may or may not be, and i know determinations are being made about volcker and since we have all the regulators here, and i'll start with you, mr. wolin, and ask each of you, what does this mean, risk, mitigating hedging activities in connection with and related to individual or aggregated possession

by the way, we all understand s or contracts. volcker's not in place today, so has no relevance whatsoever as it relates to what happened to jpmorgan, but what does that mean if an institution has tremendous exposure, does it or does it not have the opportunity once volcker's put in place to hedge against a downturn in economic activities or activities there that might be adverse to the bank. i would like for you all to tell me what this means and is portfolio hedging something you envision to be something that can happen or cannot happen after volcker is fully implementing. starting with you, neal. >> the right question to ask, is it related to individual positions, if you're hedging something related to that, then it's permi,