views of the road. the refusal of the bureau a lot of us believe to issue clear rules means that banks will have higher costs, more exposure to lawsuits and less effective operations, something i don't think congress did. in the end it will be consumers that will pay the price in the form of higher costs, less access to credit, fewer choices and more paperwork from less efficient banks. but this should come as no surprise to the regulators here. after all, it was not our regulators or the banks that paid for the poor regulation and practices that lead or led to the financial crisis. it was the taxpayers and the consumers. >> thank you senator shelby. this morning opening statements

will be limited to the chairman and ranking member to allow more time for questions from the committee members. i want to remind my colleagues that the record will be open for the next seven days for opening statements and any other materials you would like to submit. now i will briefly introduce our witnesses. deputy secretary of the u.s. department of the treasury. currently serving as a member of the board of governors of the federal reserve system. thomas curry is comptroller of the currency. welcome mr. curry to your first hearing before the banking committee since your confirmation as comptroller. marty is the acting chair of the federal department insurance corporation. i thank all of you again for being here today. i would like to ask the witnesses to please keep your remarks to five minutes. your full written statements will be included in the hearing record. secretary wallen, you may begin your testimony. >> members of the committee, thank you for the opportunity to appear today to discuss implementation of the dodd-frank

act. the act's full implementation will help protect americans from the excessive risk and poor consumer protections that played leading roles in bringing about the financial crisis. that crisis and the recession that accompanied it cost nearly 9 million jobs and brought gdp growth to nearly negative 9%. today our economy has improved substantially. although more work remains ahead. more than 4.3 million private sector jobs have been created over the past 27 months. and since mid 2009 our economy has grown at an annual rate of 2.4%. as part of our broader effort to strengthen the economy, treasury is focused on implementing the dodd-frank act. core elements include tougher constraints on risk taking and leverage. a new liquidation authority to resolve large interconnected firms facing failure,

comprehensive oversight of drif tough is, stronger financial consumer protection, and new measures to promote transparency and market integrity. substantial progress has been made since the dodd-frank act was enacted. regulators have finalized all rules related to the core elements of reform. treasury's implementation responsibilities include the secretary's role as chair of the financial stability oversight council. excellent progress has been made setting up each of these entities. treasury is also charged with coordinating the rule making. we are working with the regulatory agencies towards a final rule that effectively prohibits proprietary trading and limits sponsorship of hedge funds and private equity funds.

the lessons learned from recent failures in risk management at jpmorgan chase important input into efforts to design the dodd-frank act reforms including a strong vocal rule. the rule exempts the ability of firms to engage in risk mitigating hedging activities in connection with and related to individual or aggregated positions designed to reduce the specific risks to the banking entity. to that end the final rule should clearly prohibit activity that even if describes as hedging does not reduce the risk related to specific individual

or aggregate positions held by a firm. losses at jp morgan raise questions that go beyond the vocal rule, as well. among other things, regulators should require that banks senior management and directors put in place effective models. strengthen reporting structures and establish clear accountability for failures and risk management. regulators should make sure they have a clear understanding of exposure and that banks are held accountable for the systems. ultimately, the true test of reform is not whether it prevents firms from taking risks or making mistakes. it is whether our financial regulatory system is tough enough and designed well enough

to prevent those mistakes from harming the economy or costing taxpayers money. we all have an interest in that outcome. our ability to achieve it depends on authority and resources to enforce tougher capital, leverage and liquidity requirements on banks and the largest most complex bank companies. it depends on implementing the framework of protections ondrif -- derivatives, for marginal requirements for standardized derivatives to greater transparency and risks to exposures. it depends on providing other enforcement authorities with the resources to police manipulation, fraud and abuse. it depends on unwinding the broad firm without risk to the taxpayer we experienced in 2008. it depends on making sure no exception built into the law is allowed to undermine the impact of the tough safe guards we need. the challenges our economy has continued to experience since the financial crisis in 2008 only increase our commitment to implementing lasting financial reform. recent failures and risk management provide an additional reminder that comprehensive reform must continue to move forward. the administration will continue to resist all efforts to roll back reforms already in place or block progress for those that

remain to be implemented. the lessons should not be left unlearned or unforgotten nor should american workers or taxpayers, be left unprotected from consequences of future financial instability. >> thank you. >> thank you mr. chairman, senator shelby and members of the committee. you are all probably familiar with the concept of the law and the instrument but you may know it as the law of the hammer. if you are holding a hammer everything looks like a nail. that concept is supposed to be a warning not to use reflexively a familiar tool in response to every problem but i must confess that the longer i taught and wrote in the area of financial regulation the more convinced i became in the centrality of strong capital standards to a sound financial system. my time at the federal reserve has not changed my mind. on the contrary, a series of events most recently the jp morgan loss has only reinforced my conclusion.

a bank with a strong capital position can absorb losses from unexpected sources whether those be external shocks to the economy, the insolvency of important counter parties or failures of risk management within the firm. strong buffers ensure that losses are borne by shareholders of the bank and not by taxpayers either directly through bailout or indirectly through a major effect on an economy resulting from a bank's failure. so i'm especially pleased that tomorrow afternoon the federal reserve board will be considering a final regulation implementing more rigorous capital requirements as well as proposed rules to increase the quantity and quality of capital held to satisfy regulatory requirements. these regulations are the product of cooperative efforts by the fed, the occ and fdic over the last few years to achieve strong international capital arrangements and over the last several months to draft joint domestic regulations. along with our stress tests and annual capital reviews, anticipated systemic risk

surcharges these regulations will form a complimentary set of requirements for the largest institutions. while capital is central to good financial regulation there is more than a hammer in the regulatory tool box which includes noncapital roles, market discipline and supervised re-oversight. we continue work on rules notably enhanced standards for larger institutions required bisections 165 and 166 of the dodd-frank act, and the voca rule. the latter includes multiple agencies which have finished reviewing the 19,000 comment letters and are considering phone shall -- potential modifications of the proposed rule. the enhanced prudential standards present a number of important issues for consideration before final regulations can be implemented including how to tailor the application of these standards to firms of different sizes and complexity. as to market discipline one development of note is that the federal reserve and fdic will in the coming months be reviewing the plans to be submitted by large firms in a core dance with

the joint rule adopted by the two agencies last year. finally with respect to supervision the federal reserve continues to build a more centralized horizontal and data driven approach to supervision of our largest institutions. the process has run the stress test and other horizontal supervisory exercises since its establishment in 2010 and is extending activities to coordinate other supervisory processes more effectively. thank you for your attention and i will be pleased to answer any questions you might have. >> thank you. comptroller curry, please proceed. >> thank you chairman johnson and ranking member shelby and committee members.

thank you for the opportunity to update you on our implementation of the dodd-frank act, impact of supervision of national banks and federal savings associations and our response to jp morgan chase's losses reported in may. among the many dodd-frank related rule makings underway our rules remove references to credit ratings from occ regulations and a final market risk rule. in addition i will soon approve publication of a set of proposals to implement basil-3. the occ is also reviewing comments received in response to proposals regarding the rule and stress tests required by the dodd-frank act. these rules when final will make important contributions to the regulation of financial institutions in this country. the dodd-frank act and other reforms have already done much to strengthen our financial framework translating these reforms into improved soundness of our banking system and fair treatment of bank customers requires strong effective supervision which is a theme that flows throughout my testimony and will mark my

tenure as comptroller. the occ has begun efforts to heighten expectations for the largest institutions we oversee. this process includes increasing our awareness of risks, facing banks and the banking system insuring the risks are understood and well managed and raising our expectations for management, capital, reserves, liquidity, risk management and governance. it will take time to achieve these objectives and we must remain vigilant in maintaining. my testimony provides considerable detail about these efforts. i want to use the remainder of my time to provide an overview of what the occ is doing in response to the jpmc losses reported in may. we are the primary regulator of the national bank where the activity leading to its losses

occurred. and we are responsible for the prudential supervision of the bank. since early april the occ has been meeting with bank management to discuss the chief investment office positions, risk management and controls. as the positions deteriorated discussions turned to corrective actions and steps necessary to mitigate and reduce the risks of the banks' positions. we in the federal reserve are conducting reviews in the bank and are sharing information with the fdic and other regulators. we are also undertaking a two pronged review. of our supervisory activities. the first component focuses on evaluating the adequacy of risk. risk controls at the bank informed by their application to

the positions at issue. the second component evaluates the lessons learned from this episode that could enhance the risk management processes at this and other banks. consistent with our supervisory policy of heightened expectations we are demanding that the bank adhere to the highest risk management standards. we are not limiting to particular transactions at issue. we are assessing throughout the bank. we are using these events to broadly evaluate the effectiveness of the bank's risk management of cio function and identify ways to improve our supervision. if corrective action is warranted we will pursue appropriate informal or formal remedial measures.

jpmc's national bank has approximately $1.8 trillion in assets and $101 billion in tier one common capital. given that scale the loss by jpmc effects its earnings but does not present a solvency issue. those levels are sufficient to absorb this loss. it is also worth noting that the events do not threaten the broader financial system and the banks' efforts to manage its positions is not creating an unusual risk of contagion. there has been much discussion about whether these activities would be permissible under the proposed rule. while it is premature to reach any conclusion before review is complete this episode will help our thinking on the issues. i appreciate the opportunity to appear before the committee. before closing i want to stress my commitment to insuring that the occ continues to enhance supervision. i look forward to updating you throughout my tenure on how we are achieving strong, effective, fair and balanced supervision of national banks and federal thrifts. thank you. thank you.

>> thank you chairman johnson, ranking member shelby and members of the committee for the opportunity to testify today on the fdic's efforts to enhance bank supervision and reduce systemic risk. the most important new fdic authorities under the dodd-frank act are those that provide for the orderly resolution of systemically important financial institutions. since passage of the dodd-frank act the fdic has taken a number of steps to carry out its new responsibilities. first the fdic established a new office of complexed financial institutions to carry out three core functions, to monitor risk within and across these large complex firms from the standpoint of resolutions and risk to the deposit insurance fund, to conduct resolution planning and respond to crisis and coordinate with regulators overseas regarding significant

challenges associated with cross border resolution. for the past year and a half this office has been developing internal resolution plans in order to be ready to resolve a failing financial company. the fdic has also completed the basic rule making necessary to carry out its systemic resolution responsibilities. in july of last year approved a final rule implementing the orderly liquidation authority. last september the fdic authority adopted a rule requiring bank companies with total consolidated assets of $50 billion or more as well as certain nonbank financial companies that may designate as systemic to submit plans to regulators. these are the so-called living wills. with the joint rule final the fdic and federal reserve has started the process of engaging with individual companies on the preparation of their resolution plans. the first plans for companies

with nonbank assets over $250 billion are due in july. section 210 of the dodd-frank act also requires the fdic to coordinate to the maximum extent possible with appropriate foreign regulatory authorities in the event of a resolution of a covered financial company with cross border operations. also u.s. has foreign operations in dozens of countries around the world those are concentrated in a small number of key foreign jurisdictions particularly in united kingdom. our initial work with foreign authorities has been encouraging. in particular the u.s. financial regulatory agencies that made

substantial progress with authorities in the u.k. in addition to provisions relevant to systemic risk the dodd-frank has other provisions with direct effect on community banks. for example, the dodd-frank act, it made changes to the fdic's deposit insurance program which was implemented soon after enactment. which generally works to the benefit of community institutions. the first of these was the rule to implement the provision to increase the insurance coverage limit to $250,000. the fdic also implemented the dodd-frank act requirement to redefine the base use for assessments from deposits to assets. when this was implemented aggregate premiums paid by

institutions with less than $10 billion in assets declined by approximately 33%. many community bankers have expressed concern about the dodd-frank act rules and other regulatory actions that would impact their ability to compete in financial markets. in response the fdic's undertaking a series of initiatives related to the future of community banks. we are holding a series of round tables with groups of community bankers in each of the fdic's six regions around the country. the division of research is undertaking a comprehensive review of the evolution of community banking in the united states over the past 25 years. additionally i have asked the fdic's division of risk management supervision and division of depositor and consumer protection to review

the examination process for risk management and compliance supervision as well as to review how to promulgate and see if we can improve our processes and communications in ways that benefit community banks. mr. chairman, that concludes my oral statement. i would be glad to respond to questions. thank you. director, please proceed. >> thank you for the opportunity to testify today as part of this panel of my colleagues. as the director of the consumer financial protection bureau i am committed to being accountable to you for how we carry out the laws congress enacted and we are always happy to have a chance to discuss our work with you. this is the 18th time that the bureau has testified before the house or the senate. i am pleased to be here again today. my testimony will focus on the areas in the letter you specified you wanted me to testify in this hearing.

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 regulaors 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 community banks. as you know, the consumer bureau does not generally enforce the 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 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 from small providers 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 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 withstand 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