i hope that all the regulators and certainly the occ understands that. thank you. >> senator? >> thank you very much. this is one of many hearings that i participated in that this committee held with regard to the oversight of dodd frank. when i asked for assignments a year and a half ago, i asked for the banking committee and was told by some, you don't want to be on the banking committee. the work is done and they passed dodd frank and the hay day 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 engage in because the consequences are tremendous to directly to financial institutions, but more importantly to the customers and

borrowers and depositors that we care a lot about. it is concerning to me while we continue to have these hearings, my concern is that there is no legislation that follows the series of ideas presented and certainly i would guess almost every member of the committee expressed here in a hearing or in a letter to the regulators, a desire for a different out come that has occurred with dodd frank. there is a general belief among everyone on the committee that there needs to be alterations in dodd frank and my hope is that we will take the opportunity to modify through the process, provisions of dodd frank that we think are objectionable or improperly worded or need an

alteration based on the hearings that over a long period of time we had on this topic. i have been concerned that any time legislation is proposed that alters the provisions of dodd frank, the allegation is that the senator and the legislator who wants to make changes is defending big banks and doesn't care about the consumer. i can't imagine a circumstance in which there is note legitimate needs that need to be addressed that are concerns for everyone on this committee in different areas, different issues, but i think that we need to make certain that the oversight hearings need to be something more and there is a legislative response in which we treat each other with great respect and not with political allegations that were carrying water for some particular financial institution or segment of the financial industry. i would encourage, for example,

us to mark up the menendez legislation and let's go to work and pursue the things that need to be done with regard to improving the regulation even though we passed dodd frank and to prove me right that the glory days of the committee are not over and they're ahead of us and we have lots of work to do. i wanted to ask a series of you have indicated that as a result of the loss announced at jpmorgan that your position in regard to the rule has been informed. i am interested in knowing how that loss is reported and how it has informed your view in regard to the rule and in particular what do you think needs to occur in regard to dodd frank and now that you have been informed. >> i will use that term. the first to go.

i think 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 rule provision and the trading and possibly the risk mitigation and hedging exception. it really is i think illustrating in terms of the types and kinds of oversight structures and mechanisms that would be needed under that provision. >> anyone else become informed? >> didn't use the term, but i will answer anyway. it seems what someone will do and we need people to run through this. you have a situation in which the firm has publicly said they

didn't think this was a well-managed risk and it was supposed to be a hedge. 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 intention to both the firm and the supervisors to a potentially risky strategy? i think as i sit here today, that is the case, but i would want someone to go through it more carefully. >> mr. chairman, thank you. i would like to associate or compliment my colleague in what i thought was a logical presentation and in my view enlightening. thank you, mr. chairman. >> senator bennett. >> thank you for holding this hearing. this was not something i was going to talk about, but i

appreciate the comments to say that i think all of us believe we want to have as efficient of a market as possible and a secure market. in this country. i wanted to be clear because i sat here three years ago and heart the testimony on the credit default swaps that brought down the large financial institutions and put my families and your families through enormous economic turmoil. it was clear to me that the testimony we were hearing was that no one was 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 securitized instruments that nobody was watching is not an accurate reflection. this is nothing you said, but it's not a reflection of the history of what we heard.

i'm not for any more regulation than is need and i share the skepticism about the ability of regulators to keep up with what's going on in the capital markets. that raises the experience of capital as you described earlier. i want people to remember why we were here and the gaps that we saw and in the regulation that had a profound effect on this economy and the people i represent. having said that for the record, i want to go back to the ranking members's first question. what was the nature of this transaction? was it pro pridary or a hedge. we know through the testimony that we don't have an answer. we would like to ask the question to mr. curry and to -- explain to us, what that examination is going to look

like. what will you consider as you think about defining that? i think you are right. we can learn something from that. those of us that are cautious about those definitions would like to know what you are actually going to be looking at. >> at the occ, we have a two-pronged approach to this particular issue. number one, we want to fully understand the nature of the hedge or trading activity. we also want to get an assessment and understanding of how the bank intends to reduce the exposure or derisk from that position. part of the process and part of the secondary prong. >> sorry to interrupt, but the first step is to determine the nature and the second step is to

determine the risk. the attention to risk. is that second determination dependent on the determination? >> the first is to assess the financial risk and that's a priority particularly immediately after this issue surfaced. we are also looking at it from almost a postmortem standpoint of what happened. where were the deficiencies and what needs to be corrected? is there additional risk management gaps elsewhere in the organization and is there an opportunity to learn from this experience in terms of the practices at the other large institutions. that's the scope of our review.

>> i was going to shift to your -- you made an observation earlier that i thought i heard you say. the low likelihood of a tail experience with europe and i just wanted to -- i wanted to know why you think it's a low likelihood or if i misunderstood. >> i was rivering generally to the fact that at least in my observation, the modelling that financial firms do fear and the associated kind of modelling to understand what their risk of losses are from any number of contingencies tend not to be as oriented towards tail risks that mean events that while appearing at that moment to be low probability would if they transpire have enormous losses. >> in that spirit, since we are about -- i don't know if the tech tear would like to talk about this. how do you view that risk right

now? as you are sitting here. i understand that the balance sheets are in better shape than they are in europe, but the risk of collapse there. >> i think, senator, a couple of things. european leaders appear to be moving with a heightened sense of urgency. the opposite of the g20 meetings will be an important opportunity for them to make further progress with respect to the banks. the restructuring of the banks and as you have seen, they are considering those things now on a european basis. the europeans have the will and they have the capacity to keep this thing together. the president and the secretary of the treasury and they very much engaged and think that we will see as developments move for the, it's not useful for me

to hazard a guess. what's clear is they have the will and the capacity and i think they want to take the actions 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 talking about the importance of capital requirements. they seem less convinced during the drawing up of dodd frank. if there changes that, may be somewhere where we want to look and especially the discussion for mr. too manyy and mr. moran on the experience. my questions will be with you you if i could. i sent you a number of questions and i look forward to your prompt and substantive response

and i appreciate them prior to mr. diamond coming next week. i hope you are able to do that. about a year ago my subcommittee held a hearing on banking and supervision on which the appreciate you taking the responsibility of this job. it is difficult in these circumstances with the reputation of the history of your agency. i want to share some of that testimony and i appreciate and i would insist on brief zero because i have limited time. i would appreciate a yes or no response. david wilson's head of credit and risk, given the experience and the role that these institutions play and the stability of the united states, we instructed our examiners that these organizations should note operate with anything less than strong risk management and anything less will not be

sufficient. jpmorgan was splau and poorly execute and poorly monitoring. i would like a yes or no. did they meet the standard prior to your being there and meet the standard that it set for itself in this case? >> before i answer, i want to acknowledge that we are working on your written responses. >> thank you for that. >> in this answer, the answer is no, not in the particular case of the cio's office. it does not appear that they met the heightened expectations. >> thank you for that answer. they said every report of examination is reviewed and approved by the responsible a d.c. or deputy controller before it is finalized. both units have formal quality assurance processes that assess the effectiveness of our supervision and compliance with

occ policies. again, i know you were not there, but did they just not -- did the deputy controller and the assistant deputy controller not know about them? >> this is part of the inquiry that we are conducting to determine how to improve our processes. >> thank you for that. your written testimony suggest that is the examiners and the supervisors were unaware of the activities. what's intriguing about that is this. this office was making $360 billion in trades. this is larger than the assets of 7299 banks in the united states. if this were a stand alone bank it would be the eighth largest in the united states. it was making a trade that you say is the biggest and most complex trade in the system. the question is this. should the eighth largest bank in the nation be allowed to make the biggest and most complex

trade 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 respecting about those risks. i want to clarify that the cio's office have a pool of $350 billion and this area was a chris crete portion of it and that may be part of the reason why it was not identified as quickly as we would like. >> still should have been identified and that's an issue of the structure of occ under different management than you were there. you are there now of course. this is not about -- i hear and this will be a discussion for next week, but i hear about the $2 billion or $4 billion lost.

jpmorgan took a hit to their stock and that's 401(k)s and pension funds and a loss of wealth to a large number of people. we went through that in multiples higher than that. they are a signal that the market demonstrates bigger problems in the management and oversight at jpmorgan. this begs the issue that these trillion mega banks are not just too big to fail, but too big to manage and regulate, but the occ's position has been that they do not subscribe to the view that big in and of itself is bad. as long as occ continues to insist that big banks are essential to our economy. they are responsible for their inkpablt to properly examine and supervise these mega banks. i appreciate you working to improve the overside, but i heard the same promise last

year. to determine what in retrospect they could have been done differently and i know you want to look forward, but you need to identify what mistakes were made and by whom the mistakes were made and as jpmorgan can hold the executives accountable which they appear to be doing, we expect nothing less and the people who work for you whether they are the people there now or the people whom you replaced them with. thank you. >> senator? >> thank you, mr. shareman and thank the witnesses. one of the obvious role is the role of risk management at the banks. as some of you know, i fought to have included in dodd frank a provision of section 165 h requiring all banks with over $10 billion in assets and all nonbank financial firms

supervised to have a separate committee that includesa the least one quote, risk management expert in identifying, assessing risk exposures. in your testimony, you said you will require the bank to adhere to the highest management standards. in your assessment, do the policy committees have sufficient expertise in risk management to carry out the duties and also it has been reported they are changing the competition. can you provide the committee with an update and whether or not you think they have sufficient expertise. >> the risk or the introduction of a risk committee is i think a welcome improvement to the overall corporate governance of financial institutions,

particularly large institutions. we view the role of the board in terms of corporate governance as a mittegant to excessive risk as being a critical feature of sound risk management. 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 at 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 reviewed the risk committees of other banks worth over $10 billion to make sure if they 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, 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 banks that are over $10 billion that are plain vanilla banks and others that are doing all of the fancy, sometimes unfathomable things. >> that is correct. >> you didn't correct the word. >> that's a critical component of our assessment in the overall risk management policy.

>> you are? >> yes. >> all booked in london. do you, as the u.s. regulator have full access to the information you need about trading activity conducted in london if it's carried out by 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 united states national banks. in terms of jurisdiction we have clear jurisdiction over that branch. in the case of jpmorgan case, they are managed through the new york office where we have the majority of our court staffing after docc. >> all right. third question. it's about early warning

systems. traders at several hedge funds have been able to spot the trade. it begs the obvious question. why didn't the regulators know? obviously they can't micromanage every position. that would be impossible for you to do. is it possible to build an early warning system that could warn us if a single company accumulates unusually large positions in any single product as it appears with the jpmorgan case. we will be able to set up early warning systems that could identify risky positions before they blow up. my question is to you mr. tarullo and any others that care to add their opinions what can

regulator do to identify potentially risky trading activity ahead of time. i realize foresight is a gift, and it's not easy. at least when you're getting above a certain level of money, a little bell could go off. it couldn't ask you to get involved in every single thing the banks are doing. >> we do within our supervisory process look at market i understand caters the try to identify trends that might be relevant to the particular institution. that, our ability to do that depends on the relative

specificity of the information. i think in this case, for example, i believe there were products which although they could be a big part of the market, justice of the peace mar began could be a big parkt of the market, for the overall financial markets were still relatively small. >> what about after dodd/frarng is fully implemented. >> what's most important is when a firm is taking a hedging position, it will be required to specify what its strategy is and what is risk management and the monitoring of that strategy will be. >> you think it will improve? >> i think it will improve.

>> this one a highly complex and concentrated investment. it could have been very helpful if there were market data available that would highlight this concentration to us as regulators. the extent that dodd/frank does provide that or there's other readily available market information, it would be helpful. >> the fact they have to report and justify this does that the end to be prophylactic? >> the reporting would be very helpful and that's one of the issues here is whether there was adequate si of reporting and whether it was available to the occ and the federal reserve examiners. >> my time has expired. anyone else care to comment. thank you.

>> you side recent events serve to remind us that the presence of substantial amounts of high quality capital is the best way to ensure that significant losses in individual firm, meaning financial institutions are born by their share holers and not depositors or taxpayers. what percentage of capital will large banks likely hold and under the new enhanced capital standards. will this amount be sufficient. i think it's given here there's no substitute for capital. you can regulate everything in

the world, you know what's going to happen. >> as you know, i do believe in the centrality of capital. i don't think it's the only way, but it is a central way. >> it's number one, isn't it? >> in my judgment, yes. sgll tell the public by what you mean by common equity. >> traditionally measures of capital, the measure of capital tier one capital could include common equity which people think of shareholders. it also included some other kinds of hybrid instruments. the loss absorption of foreign capacity is not as strong as for

common connect. pre-crisis, if you went down, dig down into the requirements, it was only really a 2% common equity ratio requirement. you had to have common equity, which was two percent of your risk weighted assets. with respect to large institution, it will be once implemented additional authority as surcharge, which we think will be between another one percentage points and two and a half percentage points. is that enough? i've said it would be to be somewhat higher.