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. i suspect we are going to find in this case that there was an absence of documentation both within the firm and in reporting. >> you would have more guidance on aggregate hedging. i think there is a value in aggregate hedging. instead of hedging each individual trade, you would have had at least a little clearer guidance. >> i think that's the intention of these additional provisions in the regulation. the ongoing supervisory challenge is to make sure that the information that is received is scan and reviewed properly.

>> moving to a different subject, one of the new tools we tried to put in place and worked on is these living wills. as we move down that path, i would like both of your comments in terms of have you had the tools you need to evaluate these back and forth on the creation of living wills and to what standard are you going to hold the institutions? the living will will demonstrate on how they would unwind themselves? are you looking at that in a blue skies environment and the potential real environment we may have? with a break up of the seweuro? let's get comments on that. >> the statute itself establishes the standard that is

the bankruptcy code. the environment that you have to make adjustments as to whether the plan could credibly result in an unwinding of the institutions under the standards of the bankruptcy code, the operating premises 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 have been working with the institutions on the development and under the rule, the first round of plans will be and those will be for the largest institutions. that's with the assets of over $250 billion. that will be due in july. we have been engaged in a process with the companies. in the initial development of the plans, we will get the submissions in july. then there is going to be an extensive process of review of

the plans following the submissions. >> the only thing i would add to that is obviously it's not possible to tailor a lot of resolution plans to a lot of potential adverse scenarios. 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. we are not just going to say if something bad happens on thursday, will they be able to resolve by monday morning? i think we are going to need to ask ourselves whether the drafting and review of the resolution plans shows us that there structural elements or features of the organization that could be an impediment and thus as a matter of current supervisory policy, we need to adjust. that kind of exercise should

help provide more suppleness in response to whatever the risk is that could lead to the firm's problems. >> thank you. >> thank you, mr. chairman. i want to indicate that i agree with the tenor of the questions we heard from. senators with regard to the rule and those aspects. i think we covered that thoroughly. i will not go into that, but i wanted to indicate that that's a direction i would go into. i encourage you to take their comments to heart as we move forward. i am very concerned about how we were moving forward in the regulatory climate with regard to the response to the jpmorgan issues and others. i want to just shift the focus for a minute and i want to talk to you first.

the housing credit market continues to be tight and i am hearing a lot of concern about how dodd frank will reduce credit availability for qualified mortgage that increases liability and residential and a 20% down payment. i know that they reopened the comment period for the qualified proposals and seeking comments about data that can be used to model the relationship between the borrower's ability and varyiable from debt to income. is it your intention to convene a panel to discuss the impact of this proposed rule? >> thank you, senator, for the question about the qualified mortgage or ability to repay rule. one of the reasons we reopened the comment period is we have been able to obtain significant data from fhfa that gives us a

window into the mortgage market. we are all quite concern and you know you are as well about the direction and trajectory of that market. 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 does not undually restrict access to credit. something we have been hearing from small banks and large banks and community and consumer groups across the country. even after the fed's comment period closed, we continue to get immense comments from different groups and thought that we would open up a comment period again to make sure everybody had an even chance at commenting on the issues including data issues that we have identified in the recomment proposal. because this rule was originally proposed by the fed, the small

business panel does not implicate and if we were to try to convene a process, we would miss the statutory deadline congress set for us in january of 2013 which we fully intend to comply with. that is our approach at the moment. we encourage any small provider that wants to take advantage of the renewed comment president 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 a rule making to make sure we reflect the market. >> it would seem to me because of the qualified residential mortgage is supposed to be more broadly defined than the qualified mortgage, would it be correct to say the banking regulators should wait to finish their rules before we move ahead with the risk retention rules?

>> i don't know that the judgment has been made on that. as a general matter, we found that there was a logic and we will have to see. there is a logic to that. >> mr. curry, do you agree? >> that's a necessary component to the entire package of rule-making. the qrm and the qm. >> it's an interagency process. if people want to wait, we will wait too. >> i encourage to you do that. the recent highlighting and mottling risk, the federal reserve is following or route lizing the exposure method and there has been quite a bit of concern about whether that is an accurate method of risk modelling. are you considering other models

or are you focused on simply stating what the current exposure method? >> in what context in the stress test or in the -- >> that's my understanding, yes. >> with respect to the stress testing and what we are 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 more focused on the single county. >> yeah. okay. that is a different issue. 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 would be promulgati promulgating. that's one of the topics that is being commented on in the consideration of changes to or

potential modifications and the rule on 165, 166. there have been a number of alternatives suggested. i think the challenge without trying to signal where we would go because we haven't seen the comments yet and i haven't had a briefing, but the challenge will be on the one hand, wanting to have a methodology that tries genuinely to track risk exposure while on the other, not becoming dependent on modelling within firms. as we have seen in a number of other contexts, dependence solely on the modelling and firms can lead you astray, particularly because firms in our observation tend to be much better at modelling and associated kinds of risk assessments for more or less normal times as opposed to the tail events that we are trying

to guard against. in thinking about the comments on the rule, we will have to keep both of those in mind. trying to go towards what really are the risks associated with the positions on the one hand and on the other hand, wanting to make sure we are not totally dependent on internal models. >> another x. of creating unintended consequences. 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? >> thank you very much, mr. chair. does anyone on the panel think that the london quail who ran the investment unit woke up each day trying to mitigate the risk from excess deposits invested between loans in bonds?

>> that is a related area at the occ. >> you are inquiring, but you wouldn't argue that case? >> not necessarily. >> i wouldn't think anyone would. we woke up trying to make money for the bank. so it's kind of a basic observation. the comptroller addressed this to you and i will ask to you keep your responses crisp to get through a series of questions. across america, small businesses are trying to get access to credit, they are highly frustrated and the ability to access credit is essential to the recovery of our economy. does it do damage to have the banks diverting deposits into hedge funds rather than making

loans to families in small businesses? >> we are very supportive of small business lending by the entire spectrum of national banks that we europe vise from the largest -- >> that was not the question. is diverting into hedge fund rather than making loans damaging to our economy? >> i would hope not. i hope that was not the case. >> but it would be if deposits were diverted into hedge funds rather than making loans to small business. you are hoping it wasn't the case, but saying it would be if that's what happened? >> we expect national banks and federal thists to meet the credit needs of the communes including small business lending. we don't direct exactly how they

do that. we assess it from the cra. >> i will continue then. thank you. does it increase the rink to have banks divert deposits into hedge fund investments? >> i believe that's the intent of the provisions of the dot frank act. >> it is the intent, but has it increased systemic risk? >> unrestrained financial risk taking outside a legitimate risk framework is something that would be very concerned about as a supervisor at the occ. >> from a common citizen's point of view when they look at the capital management and lehman brothers and a host of institutions that survived because we bailed them out, i think the case is fairly clear that if you are in the hedge fund business, you increase risk. in the banking world, you increase systemic risk.

is that a fair -- am i off base here? >> again, senator, we would look to the banks engaging in safe and sound lending within the context of banking to the extent that it was undue risk taking that occurred. we would hope to have a statutory and reg well tori extent. >> do bank-hosted units have a competitive advantage over nonbank hedge funds because they have access to the discount window and ensured deposits. do they have an advantage over non--bank hedge funds? >> i would have to look at the available research to come to a conclusion. >> of course they an advantage. they is have deposits and is that an observation that is way off mainstream common sense? >> i would like to be able to research that subject further. >> okay. in terms of proprietary trading

being disguised as risk mitigation, it seems like there basic things that create red flags. if a company said they are 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 is not risk mitigation after all? >> that is something that we would raise red flags and have to look at. >> how about if risk mitigation is investing in hedge funds? would that be a red flag and this is an investment operation and a proprietary trading operation? >> that would be another area under general risk management that we would be looking at. >> a potential red flag? if a risk mitigation operation is making massive trades that are not identified with specific risks from aspects whether individual or aggregated, would

that be a red flag? >> we would look at that and the other examples you have given very closely. >> if they are not tightly correlated, something red flag. will you support the loophole that is the banks have been arguing for so they can continue hedge fund-style operations? are you going to support that or keep the loopholes? >> i think that's one of the issues that all the agencies and the others are looking at. the proposed rule and i would add that our experience here as it unfolds with the jpmorgan chase would inform our rules in the making. >> thank you very much. >> senator toomey. >> thank you, mr. chairman. i would like to start by also

acknowledging the comments about the importance of capital. i know you have given a great deal of thought to this for a great period of time and considered this in a sophisticated way and there may be many things we may or may not agree on, but the emphasis as a general matter is exactly the right direction that we ought to be heading in. i fear that dodd frank is a profoundly misguided effort to do many, many other things. i have to disagree with the chairman who in his opening comments i think tends to disagree with the characterization as an explicit attempt to require that regulators micromanage banks and i believe that it is exactly that and it is guaranteed to fail in that respect.

i want to touch on another topic if i could. 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 towards the failure of an ensured 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. it'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 a billion dollars. to your knowledge, how many failed because of the trading activities? >> to my knowledge, senator, none of them. >> not one? did they fail because they made loans that went bad? >> as a general

characterization, i would say yes. >> virtually 100% of the cases because they had bad loans. would it be fair to say that historically including to the present day, the biggest risk of banking is the lending activity that is inherent to the banking process. >> yes. >> does the fdic and occ have overtight over the process? >> yes. that's a considerable focus of our examination. >> lots of regulation and concentration requirements and supervision of the activities. yet despite that, 100% of the failures of banks in america and the last two years are attributed to bad loans. i am not criticizing the regulatory process. it seems that we have a banking activity, the very nature of which is to take risk in

extending credit, some of those banks in tough economic time are going to fail. that is unfortunate, but it is acceptable. it's unavoidable and the real goal of the regulatory regime it seems to me ought to be to ensure that you don't have systemic risk and you don't have the failure of one or more institutions taking down the risk. this is why i go back to the observation. it seems that capital is the greatest assurance that you have less leverage if you have more capital and less systemic and greater ability to absorb whatever losses might occur. instead we are going down the direction and you are forced to implement the law that has been passed, but dodd frank to the chairman's point about micromanagement, there 398 rule-making requirements and 110 have been met with finalized rules and 144 rules have been

proposed and another 144 have yet to be proposed. all of them may not be fully aware, we are talking about rules and not to play in traffic. we are talking about many, many pages and very dense and complex matters that are associated with each rule. this rule alone is staggering in length and complexity. i think it's impossibility. take one aspect of the rule, the exception that is applied to market-making activities just in formulating that exception. we have all kinds of metrics we will impose and regulators will decide. they will have limits on how much can be earned versus a subsequent market rule. how much business a market maker must do within users versus inner bank dealers and what asset classes are permitted to trade under what risk and circumstances we have to decide whether these limits apply to an

individual trade or whether we aggregate. it's staggering. i am concerned that it's going to limit the ability of banks to manage risk. it's going to have a huge cost and reduce liquidity in the markets. we are doing this while no banks have failed because of proprietary trading. we create these exceptions. it's perfectly okay if you do all of these as long as it's in treasuries. as someone who once traded, i can assure you, you can lose the treasuries as readily as you can lose your shirt. i guess i don't have a specific question about this. i am very, very concerned that we have created a monster that my last count is between the controller of the currency and the fed. we have over 100 examiners on the ground pretty much full time at jpmorgan alone.

that's before we implement the rules. i have to say i think we have very much taken the wrong direction and hope we will reconsider and consider capital as the essential tool to reduce systemic risk. >> senator me mendez? >> thank you, mr. chairman. i want to ask you about jpmorgan losing $2 billion and possibly more since the occ was a primary regulator and they have a well-deserved reputation for being too cozy with the banks. i know you got to your new position. i find it interesting, what i don't want to see is a repeat of

20 2008. i know that a free market is essential to a very economic vitality, but there is a difference in a free market and a free-for-all market. in 2008 what we 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 investments and other decisions and all of us had to pay. so i wish we had insisted on capitalization then and insisted on a host of things that would have avoided 2008 because i will never forget that meeting where they described largely a series of financial institutions on the verge of collapse and suggested that if they collapse not only would they create a risk to the

country, but failure to act to a new depression. i don't want to revisit that. i don't know why they can forget such recent history, but i don't. you got to this position. i am certainly not blaming you personally, but i have a yes or no question. did they screw up in allowing these jpmorgan trades to happen? >> we are going to critically look at that question as part of my goal in reviewing what happened at jpmorgan chase. it's not just to see what the bank itself did or did wrong, but also how to improve the processes at the acc. that will be a critical self review as part of this process. >> how long is that self review going to tyke come to a conclusion in. >> i hope to have it done as

quickly as possible. >> what does that mean? >> within the next several weeks and no more than a few months. i top the reiterate that my goal size comptroller is to have a strong effective and fair supervision at the comptroller's office and it is imperative and the lessons learned from the 2008 crisis are clear to me and my colleagues at the occ. we need stronger capital which we are getting through the other rule makings. we need heightened expectations and we are requiring that of the largest institutions to be supervised in terms of the bank's management and awareness of risk and raising expectations with what we require for minimum reserves and liquidity and risk management and corporate governance. >> shouldn't the -- i know you are going to review it, but shouldn't the sheer size of these trades have been a huge

red flag? >> that are is an issue. the concentrated nature of the trading and the liquidity of it are red flags that are apparent now. >> i just think that for those of us who supported wall street reform and don't want to relive 2008, i think every regulator are responsible for implementing the law should know if huge trading losses like this happened at banks after we established the rule. capital rules have been written and implemented. the blood will be on all of your hands if they go belly up next time. in this case i know the comment as well, they can absorb the 2 or $4 billion, whatever it ends up being. what's to stop them from losing

multiples of that. billions more the next time or even more significantly, a less well-capitalized bank from losses that could bring it down. i just don't see where the circuit breakers are here and where the ability to ensure that type of decision making doesn't become the collective risk of all of us again in this country. i don't think the american people and certainly this senator are willing to go down that road again. i don't know what it takes to get everybody to understand that we are serious to ensure that the law is fully implemented. those disagree with law, but as is said in the past, americans are free to disagree, but not free to disa bay the law. this senator for is going to pursue to make sure that we don've