back second chair, lew. we received the report of the financial oversight council as required by law, as we all know, this year marks the fifth anniversary of enactment of the dodd frank wall street reform and consumer protection act. it's hard to believe it was just five years ago that we were coming to grips with the magnitude of the financial crisis which caused the greatest loss of wealth in a generation. all told the financial crisis cost our nation more than $13 trillion in economic growth and $16 trillion in household wealth. not to mention the devastation of an unemployment rate topping 10% in many states. the leadup to the crisis, nobody in the private sector or in government was looking at the financial stability as a whole.

nobody had the responsibility to deal with emerging threats before they caused damage to our economy. that is why we created the financial stability oversight council as part of dodd frank. fsoc filled that void. it serves as an advanced warn ing system to identify and address posed by large complex companies, products and activities before they threaten the economy. the counsel has ensured that for the first time that our financial regulators are working collaboratively to identify and respond to emerging threats to financial stability, and with their february announcement outlining enhanced engagement and opportunities for public input, they've doubled their efforts to engage with the

industry and congress in a transparent matter. we have taken important steps to prevent another economic disaster from happening including making our large banks resilient. leveraged and liquidity standards. covering oversight gaps in our financial system. designating complex interconnected nonbanks for consolidated supervision and reforming key markets like asset backed securities and money market mutual funds. however, five years after dodd frank became law, my republic colleagues remain fighting the battles of the past, they continue to believe that if only we roll back all of the rules of the road the financial system would magically unlock. growth in the market would

suddenly police itself. they continue to ignore the lessons of the last crisis by doing all they can to undermine fsoc under the guys of oversight. by focusing merely on dismantling dodd frank, my colleagues on the other side of the aisle impede congress's ability to focus on the new emerging threats to financial stability, identified in fsoc's 2015 annual report. like the consumer financial protection, destroying fsoc has become a leading component of the agenda. while they waste countless hours working to undermine it engines of job growth and american competitiveness like the import export bank face a possible shutdown in just five legislative days. rather than renew a proven job creator, like the xm bank, republicans are spending their

time getting fsoc down and countless document requests and inquiries. and obvious effort to undercut its ability to protect homeowners consumers and the american economy. so welcome secretary lew and thank you for your resilience in the face of efforts to stop the council from its important work i look forward to your insight on areas of systemic risk, the council has identified and hope to learn more about what fsoc is currently doing to monitor for such risks and promote financial stability. as we hear additional details from you, i will be interested to here if fsoc should take any action to address systemic risks or wait for another crisis. thank you and i yield back the balance of my time today we

welcome the testimony of the honorable jack lew. i feel he needs no further introduction. welcome mr. secretary. we are happy to have you back. we will be made a part of the record. you're now recognized for five minutes to give an oral presentation of your testimony. >> thank you for having me today, and for this opportunity to testify on the financial stability oversite council's 2015 annual report. i'd like to begin by recognizing that we're a few short weeks away from the five-year anniversary enactment of wall street reform and the creation of council. wall street reform has put important consumer protections

in place small businesses that need access for credit to grow. and working men and women trying to save for their children's education. wall street reform has worked. >> five years ago the council was created to be a forum for the entire community to come together to look across the financial system to identify and respond to threats of financial stability. today the council is doing what congress designed it to do from asking the tough questions that will make our financial system safer to shining a light on emerging threats before they can evolve into the next financial crisis. the council's member agencies work collaboratively too leverage the expertise that each regulatory agency brings to the table. the counsel has also established a track record of conducting its work in an open minded and

manner. the council asks hard questions and only makes judgments based on facts and detailed analysis. i want to emphasize why each annual report is important. the annual report provides transparency about the council's work. each report covers a range of issues based on extensive data driven analysis. and it contains in one place the collective views of the financial regulatory community about current risks and emerging threats to stability along with recommendations for specific actions to mitigate those risks. the findings and recommendations set down a marker for action providing clarity regarding the council's priorities and a road map for the year ahead. this provides congress and the public a way to hold the council accountable for making progress. the report highlights the council's recent work and demonstrates its continued commitment to openness and good governance. this year's report highlights a

series of initiatives over the last year. stronger internal governance supplemental guidance to our nonbank process, and ongoing engagement regarding potential risks for asset products and activities. the council released its fifth annual report. this year's report focuses on 11 key areas many of which have been discussed by the council as well as its meetings over the past year. these include the potential incentives for greater risk taking. the need for continued progression to reform benchmark rates, and the continued reliance on short term wholesale funding. for each of these areas the report highlights where progression has been made and where more still needs to be done. cyber security remains a key area of focus for the council. the financial sector has been a leader of other industries adopting cyber security

measures. we have seen cyber affect the community banks afford the bedrock of the financial system. that's why this add men and council are focusing on how to information share and response. we look forward to working with congress on this critical issue. this year's report also identified several new potential risks coming into focus, which the council and its member agencies will monitor over the year. the council highlighted the ongoing evolution of market structure across asset classes and the need for constant monitoring to ensure that market functions -- markets function efficiently. the council recommends continued vigilance to the confluence of factors driving changes in market structure, and the extent

of their impact on market functioning and the provision of liquidity. promoting financial stability and protecting the public for the next financial crisis should be a common objective we all support. opponents of reform continue to advocate rolling back these provisions. as the council's annual report demonstrates. threats are real and will evolve with the marketplace. we simply cannot let our guard down. i want to thank the other members of the council and all the staff involved with the 2015 annual report for their hard work and commitment. as we approach the 5-year anniversary of wall street reform, we continue to address these threats and promote -- to promoting the strength and stability of the u.s. financial system. thank you very much, and i look forward to answering any questions that you have. >> the chair now yields himself

five minutes for questions. >> i alluded to it in my opening statement. are you familiar with this report? >> i understand it from the past. >> i've seen it in the past i'm not familiar with what you're holding. >> you have reviewed the document? >>. >> i'm familiar with it. >> you're familiar with the fact that there's been a 61% increase in our financial system since the crisis? is that correct? >> i understand that that's the analysis that's in that piece of paper, i haven't read the piece of paper. >> do you have any reason to challenge that analysis? >> i think if you look at the experience we've had since the financial crisis many since the financial reform, we've seen -- >> i'm just asking, mr. secretary has the council. >> i haven't looked at that piece of analysis. >> okay that's.

>> i can give you my response to the idea, but that's what i was -- >> let me quote from the report. there's $26 billion according to the richmond fed in explicit and implicit federal back stock today. the report, one of the final conclusions of the report is that it is certainly to restoring market discipline and achieving financial stability to shrink this federal safety net. do you agree or disagree with their conclusion? >> i don't want to comment on a report i haven't read. >> how about their conclusion. do you believe independent of their report that it is important to achieving financial stability to shrink the size of the government to the federal safety net. our financial markets? is it important or not? >> i think if you look at the financial stability situation today versus before the dodd

frank act. we have -- >> mr. secretary, i'd be happy to have you -- let you have some context, i would like for the question to be answered. it's a fairly simple question you believe that for the sake of financial stability the extent of the federal safety net in our financial markets should be shrunk? >> i think if you look at an issue we have talked about before, i very much believe that it would enact reform in the area of gse's. it's something that didn't proceed proceed. >> i'll be happy to look at that report, i'm happy to offer my views. >> you don't have to look at the report, i'm asking you about a conclusion. i don't sense i'm going to get an answer. let me move on. >> under dodd frank fsoc is

compromised of agency heads as opposed to the agencies themselves correct? we can both agree on that? >> the 10 voting members was appointed by president obama correct? >> yes, i believe that's correct. >> i alluded to it again in my opening statement, i have read experts of this report. have you read the entire report? >> i have. >> my staff read the entirety of the report. i've read many excerpts. in identify inging a current federal policy or rule as a contributing factor because we can't find it? >> we identify the threats we see as real, many of those have

a connection to federal policy. >> you have the mandate to make recommendations so how do you make a recommendation if it is not my source. >> it's not my view that federal regulation -- >> the last time you were here mr. secretary. there was increasing evidence we're suffering great liquidity in our corporate bond market. you admitted that. this report cited, we know when market companies hoard cash they can't promote jobs and economic growth. many economists believe this will be the source of the next financial crisis. somehow it can connect the bond illiquidity rule. similar testimony from cftc

commissioner john carlo even former secretary of the treasury says there's regulatory authorities will lose sight of keeping markets open and liquid. in your last testimony you found no evidence. we have incredible evidence that it is do you still stand by your previous testimony there's no connection to bond illiquidity. >> i said a contributing factor is it a contributing factor? >> this is a complicated issue. it's an issue i spend a lot of time thinking about. >> is it a contributing factor? is it not a contributing factor.

i think it is not possible to say, what is the single cause. i do not believe the federal regulation regulation. i -- >> may i ask to address this issue, i think it's an important issue. >> please asking r answer the question. >> there are a lot of people trying to reach a simple explanation to a complicated question. we are at a point in the business cycle where we are seeing a lot of volatility as we move out of the deepest recession since the great depression. we're seeing expectation of some movement in interest rates. that's a significant factor. we're seeing market structure changing rapidly. we're seeing the introduction of a high level of electronic trading including high frequency trading. that's changing the structure of markets.

>> i understand that. >> i think anyone who tries to point to a single thing. >> i did not say it was a single thing. i asked you the question, was the volker rule a contributing factor? you have refused to answer the question. i can only take -- my only takeaway is that you don't see it as a contributing factor. >> i don't think it's a bad thing, it doesn't mean there's a good thing. i do not see a major impact of broad liquidity. we are constantly looking at this question of liquidity. we are looking to ask the question what the federal policy is, i think it's a mistake to start there. >> you could have fooled me. i now recognize the ranking member for five minutes. >> thank you very much. i'd like to offer you the

courtesy of continuing your explanation if you would like to have it. >> thank you very much. i guess -- the thing i would add is that there's been a lot of focus on this issue since october 15th. and there's been a lot of telling of the story of what happened on october 15th that has just not based on the analysis or the facts. there was no breakdown in treasury markets on october 15th. that's not something that's supported, there was no liquidity crisis. there was a moment a blip, there were a lot of things going on. we don't see any evidence of regulation contributed to that event. there was a moment in time where there was a lot of sentiment because of the risks going on in the world. there was a huge amount of electronic trading going on and there was a blip in the market

that is worthy of our attention. people took from that i think incorrectly the notion that somehow that was an event that was caused by a rule. it wasn't. we're looking forward to that about one of the criticisms by my republican colleagues is what they deem to be a lack of transparency with respect to banks systemically or second designations. many of their criticisms are merely attempts to have string, the council under the guys of oversight i do appreciate that you and your staff have redoubled your efforts to engage with congress and with nonbank constitution s constitutions. mr. secretary would you describe

precisely what changes to both the annual and the five-year designation processes that fsoc made in its supplemental procedures announcement and please also describe how fsoc balances the need for transparency against the need. >> congressman, thank you. we made a number of changes that were designed to respond to this question, members of the committee, and by stakeholders which give a great zeal of earlier notice and transparency to the process to parties that are under review. i want to just underscore that there was a lot of back and forth even before. so this is not as radical a change as it may sound like, but it is more formal and it is something that has led to a good deal of recognition that the

system is more transparent which is our goal. the fsoc, the review process by necessity involves reviewing highly confidential business documents that are commercially sensitive, under law we're -- we have to protect the documents and the information that is constrained by supervisors as well. to be trans parent with the public and the committee at the same time. i think that the changes that we have made have helped. fsoc is a young organization and we remain open to suggestions on how to always improve the process. >> last month the chairman of the subcommittee sent a request for documents regarding the fsoc designation process, which contained at least 13 different

subparts. it is my understanding that more than a week ago you responded to that document request with an offer for in camera review of 1,400 pages of confidential business and bank supervisory information. since you responded my staff has begun to review of those materials to your knowledge has the majority availed themselves of that opportunity and would you consider the production of such sensitive and voluminous documents to be consistent with the council's desire to be trans parent with the congress? >> congresswoman, we did make that offer. we appreciate that your staff has begun reviewing it unless it's happened in the last day, i'm not aware the majority has reviewed it, that could have happened in the last 24 hours. that's the right way for us to make clear the commitment to transparency while protecting very sensitive confidential information.

>> thank you very much. members on this side of the aisle, would you please allow the secretary to answer questions and give him the courtesy of not badgering him, this is complicated subject matter that we're dealing with and he deserves the right to be able to respond in the time that it takes i yield back the balance of my time. >> the time of the gentle lady has expired. >> you said at the outset i would be delighted to answer your questions, if you just give me the time. well we gave you time to answer the questions, and it took your appearance here today before we got the answers of them. at 11:58 last night we got the answers. we gave you a lot of time. it's a pattern of ducking the

questions and evading the answers. you have such disdain for the american public that we have to bring you before this committee before you would answer the american public's question. is it a factor the volcker rule and the secretary couldn't answer it, and yet you were able to come up with a litany of other factors. it was a factor with regard to the time you ran off all those. did you say that regulation and volcker is not a factor? is that the final answer? >> it's quite complicated. >> we understand it. >> you did say that in the blip there was no evidence of regulation being a factor in that blip, correct? >> that's my understanding.

>> is it your understanding that volcker is not a factor in any of this? >> i think the volcker rule is important. >> is it a factor. >> it's four other factors is this one of the factors? >> i listed the factors that i know are very much real. >> do you know if this one is a fact summer. >> i'm not able to say. >> that's the end of those questions. >> i'm trying to demonstrate an open mindedness, you're not giving me a chance. with regard to the fsoc and the fsb, i appreciate that fsoc has announced it has a process with regard to the listing of the potential risks associated in going-forward with the designations. is there such a process with fsb as far as a due process in place

there? >> fsb is a different process than fsoc. >> i understand that. >> there's no consequence to the designation. it doesn't have the powers only fsoc has the power -- >> i understand that. >> there's an open process where stakeholders share their views. it's a different kind of a process, soy don't think the same kinds of due process -- >> it's not a due process, it's a different process, is what you're saying? >> >>. >> you're comparing apples and oranges. >> within that process right now, the fsoc is asserting its authority with regard to new

roles. i'm sure you're familiar with that. >> yes. >> i know fsoc had previously been looking at that issue. until they finalize that, would you make sure -- >> i think there's a more basic issue. >> i'm not asking the basic issue, i'm asking the question. >> what i'm asking you is as a member of fsb you told us repeatedly it's done on a consensus basis. you go back and try to get a consensus, what you say is your position, until your regulator, the sec, which is working on this, would you ask fsb to stand down for now, until this decision is made over here. >> what we're doing is try to make sure it's a thorough complete review. >> i understand. until sec finishes their process, will you use your

capacity to say fsb should stand down in this area? >> that's a simple yes or no question. >> i don't know the precise schedule at the fsb. >> i didn't think did you. >> i don't think the fsb can tie all of its actions. >> i doubt they can, can you assert your authority in that regard to try to do so. >> this process let's understand what it's about. >> i'm trying to ask if you will use your authority to represent the american companies on their behalf. >> i would have to look at where we were and where they were to make a judgment at the time. >> the chair recognizes the gentle lady from new york. >> we have held cyber security hearings this year. both in this committee and the small business committee to examine the toll of cyber attacks on consumers and businesses. many of the witnesses stated a

clear uniformed set of rules was needed to address this problem. can you elaborate on fsoc's proposal for a national plan, to respond to cyber threats that you mentioned in your testimony? >> thank you, this is a hugely important issue in our economy. there are exposures to cyber risk everywhere. the financial sector has been a leader in taking it seriously, and the largest firms are putting enormous resources into trying to put systems in place that are effective. one of the things that we've done as a government that i think is very important is our national institute of standards has put out best practices, we have encouraged the private sector to use best practices, i've encouraged other financial regulators to have the same view. i think that we're at a -- kind

of a moment where it's not just a question of what does a firm do itself, you have to ask, what are the policies a firm has with regard to who it will do business with. a lot of the exposures come not directly with the firm but when a third party connects with the firm do they have good standards as to who they will do business with? our goal ought to be able to bring all of those parties to a high standard. it's premature to talk about having a single national standard that's mandatory, we put it out as a voluntary standard. many are going and using that standard, and i think it's something we have to continue to look at. >> cost is an issue especially for small businesses. do you have any working relationship on this matter like sba, small business administration?

>> we do work across agencies in many areas in particular there's communities between the financial sector. you're going to face a risk. i'm not -- we focussed on the need for smaller financial institutions to be able to work together or through organizations, so that they can pursue best practices together because the burden for any individual firm would be too high. that's why it's so important to have collaboration easier and less risky for them. we have been very much supporting the enactment of cyber legislation. we put out executive orders to pave a way for firms to work together. >> as you mentioned lending standards have decreased

financial institutions, trying to find perfectly ability in the current law interest rates environment. while the credit markets since the recession has been beneficial for small businesses, could lead to problems. >> if interest rates were to rise. what impact will this have on the markets overall. >> i think that there's at some point a tradeoff between access to credit and risk taking. we have raised concerns over the last couple years that in some cases there may be an over adjustment where you look at the fico scores for home mortgages the averages have gotten very high. there are a lot of not very risky potential borrowers who are having access to credit issues. some of that requires a clarification of some of the policies put in place, it's why

we have some of the agencies addressing the issue like put back risk, why am i answering a question about small business lending with housing issues. i think we all know for a lot of small businesses, the pathway to credit in part is through their personal home equity, and home mortgages, the two aren't related. we have done a lot through our programs to reach out, both through the sba, to make credit available to small businesses. we work with the community banks and local lenders to encourage that lending i think it's an important question i think as we come out of the -- through the financial crisis, into a period of calmer macro economic circumstances, that's an important time for more lending activity to be appropriate. the question isn't do financial insti tigss have no risk do they take reasonable risks and

are they not overly leveraged. >> the time of the gentle lady has expired. >> thank you, mr. chairman, good morning, mr. lew. i was kind of taken aback by your report. this morning in the washington time s times there's a report that cbo put out. >> they make comment hear that headlines, cbo warns of financial death spiral from debt first alliances forensic economic growth death spiral. one of the things that in your testimony here the council demonstrates vulnerabilities in

the u.s. financial system. we take collective responsibility for threats to financial stability. and yet in your report, i don't see anything about that. am i missing something? >> i think if you look at the risks to our economy. we are at a much better position now than we were six and a half years ago, we reduced the deficit as a percentage of gdp and dollars at an historically quick rate, that report makes clear that over the next ten years, we're in a stable place i think the thing in that report that people are concerned about is the long term. and obviously there are still. >> that's not what it says mr. secretary. it says, the long term federal budget has worsened dramatically. >> i said over if the next 10 years, that report goes out far honor than 10 years i think the issue of -- >> we're going to -- a little blip in the screen here let me

go back a little lower part of the curve, if you go back up again? >> where we were, where we were in 2008 and 2009 we were careening toward a treacherous place, we stabilized it and it's improving. we still have long term challenges and -- >> mr. secretary, if you just quote the president and use his analogy of a car in a ditch -- two%, 1% the point i'm trying to make is, cbo points out, our report says nothing about it. why did you not point out that debt is a problem for our economy. >> our report appropriately looks at the threats to financial stability i think if

you look at where we are today versus six years ago, the federal deficit has been brought under control for the next decade, we're at a period where we need to get the economy growing. our conversation should be what can we do to grow the economy. we could have an infrastructure program in place. there's lots of things we can do to grow our economy. i don't think the debt 20 30 years from now is the thing holding our economy back. >> you missed the boat, quite frankly. >> the cbo points it out. nothing in here i think we're missing the boat. we dropped the ball on this next question. one of the concerns i have as a chairman of the housing insurance committee. we have the situation where we designated some insurance companies. one of the things that's fine if you feel there's that much risk there, we asked before quite frankly to give us the criteria

in which you base your analysis and we've never gotten it we have this undersecretary not too long ago i think part of your job is how to derisk things. you point out there's a problem i think that's also what is in your report, in your first line here talks about progressing potential threats and -- to find ways to get you back to financial stability. how do we derisk your -- do we have criteria in place to derisk sifi? >> the analysis that led to firms being designated is laid out clearly in the record that's quite public, and i think each of the firms understands why they were designated. the question of how they -- you're really asking, how could they exit, because derisking would mean they would no longer be. >> we are going to review

regularly, annually with the status of the firms we've done that, with the firms that have been designated and -- >> if the firm changes its business model and has less risk, it would no longer be designated. >> my time is up, i'll yield back. >> the time of the gentleman has expired. the chair now recognizes the gentleman from new york, mr. meeks. >> thank you, mr. chairman. mr. secretary i want to go somewhere else, i think i have to say, from what you were talking about, you know, how we're better off than we were six years ago, i wish my colleagues had talked about the person, when they had the opportunity to stop the person that drove the car into the ditch in the first place, that caused us to have this debt and all this problem. so we're going to get you out of this ditch i didn't drive you in. and you start pushing them to get them out of the ditch you might not be going 100 miles an hour yet, you're going maybe at 50, now you're no longer in that

ditch, you're out of the ditch, and you're moving in the right direction. but yet you want to blame the person that is getting you out of the ditch instead of the one that put you in the ditch in the first place that's where we are today, we're in a ditch in 2008 and now we're driving ourselves out of the ditch, that is where we are today. let me go to where i really want to go to, mr. secretary. dealing with asset management, that's what i've been looking at dealing with fsoc in the work around asset management in that industry i know they don't assume all of the risk as banks look at them differently. but i did see in one of the reports, however, and i'm concerned about hurting -- i think that was in the fsoc report, we have a lot of investments there, should we be concerned about this process? >> congressman, i think that obviously asset management has grown as a sector, and there are

a lot of individual and institutional assets there. we've been looking at this question for some time and -- the risks are not necessarily just firm specific that's one of the reasons we're looking across the industry. at activities to ask are there activities that are particularly risky? we have not reached a conclusion i'm reluctant to give a view until we've reached a conclusion, frankly, we've entered the process as have regulators around the world trying to understand and learn about a growing and somewhat new industry. we've identified that as a question. i can't prejudge what the answer is, what i can tell you is, it is important that we complete the process, and that it be driven by facts and analysis and if there's action that needs to be taken, the appropriate regulatory body should do so. the notion that you cut these questions off, you think you might not like the answer, or

because you think you know the answer is exactly what got us into trouble in 2007 and 2008 we have to be willing to ask the questions and even if the answers end up being hard follow them to a logical analytic conclusion that's what fsoc is doing, and i look forward to that procession being completed. >> i know on some municipal levels and state levels where we have multibillion dollar pension plans that have tried to benefit from a greater diversification of asset managers by using more emergeing and diverse asset managers, which are generally smaller asset managers in minority and women who have selective investment strategies. i'm finding these small managers prevent them from gaining more market shares. has the tragedy looked into how we can get more diversification of managers in this industry? >> fsoc is looked at it treasury secretary looked at it and i think that if you look at the performance of the smaller

minority owned manager ss there's not a huge difference. the same is true with the large managers. i think one of the problems is that there's a tendency to bulk things up because it's easier to deal with a few rather than a lot of managers. and we need to push back on that. >> we need to make it clear that the door has to be open to new participants in this space. and we've tried through a number of things we've done to have that be the approach. both in terms of how we've managed some things within treasury and through other intergovernmental efforts we've had, i think we're making progress, but there's more progress that needs to be made. >> as these asset managers get bigger and bigger, they play more and more of an important role in the sourcing capitol, the business that creates jobs in various communities. and so that's one of the reasons

why with banks we had to go to the community reinvestment act in the '70s, don't you think we should be looking into some parts that we should have more inclusion so that we can also make sure they're investing or reinvesting in some of our other communities. >> i think it's important for there to be broad participation for the process to be open i don't know that i would think you should have mandatory targets, but i'd be happy to follow up with you. >> the time of the gentleman has expired, the chair recognizes the gentleman from high-- >> everyone's moved around. i have five minutes, 15 minutes i'm going to try to move through a number of things. i too received the e-mail at 11:18 last night, in answer to my questions on a few things from three months ago,

congratulations, you were clear on one of my questions i asked to explain -- for you to explain why treasury continues to impose regulatory matters this is the most clearance that i think i'm aware of, and i think the committee has seen, you say it's not however an appropriate or necessary vehicle for addressing financial regulatory cooperation. you claim that it's already happening in financial stability board. and other -- a number of others. i disagree with the answer, i think it should be included in it does lead me to another question, which is having to do with local storage data requirements that many in europe are starting to push. and you -- it's my understanding that the administration has highlighted the free flow of information across as a centerpiece of the negotiations for both tpp and ttip which is

again a provision i fully support. i'm confused as to what that difference without a distinction might be as to why you are going to be doing that since it makes tremendous amount of sense to have us negotiate with our partners in this way if it's bad for american business. you exclude financial services and i'm curious, is it the add men strait station's permission that we're seeking local storage requirements for everything except for financial services? >> no we've been very firm on the issue of putting nontariff barriers in place where you have a local storage requirement for electronic data. the distinction is easy to make. and i tried to be clear in this committee before, we view regulations as something to not be brought under trade negotiation or trade process that's the difference.

it's not for regulation to say it shouldn't be -- >> you're willing to have the financial services sector treated differently than any other sector of the u.s. economy? >> well in general, trade agreements do not bring prudential matters or -- >> well, we have the europeans. >> we've said no to the europeans on this. >> the europeans would like to do it, it seems very odd and i think a huge mistake. >> i want to quickly move on to imf in greece. would you agree or acknowledge that the decision to bend the rules, if not ignore the rules regarding greece on the exceptional access framework which was done with treasuries concurrence was a mistake? >> well, i think that the actions taken in 2010, 2012 to avoid an economic crisis in greece was the right thing for the imf. >> it was not a mistake? >> for the united states.

>> so i'm clear, it wasn't a mistake? >> at the time. >> looking back, do you think it was a mistake? >> no and if i could just take -- >> i'll take no. i'll take no as your answer, that's fine. because there is a discussion of putting those rules back in place at the imf had a is something that the imf board is interested in and i'm curious why the administration from my understanding is opposed to that why. >> i think there's occasions when it would be important for the imf to have flexibility. the rest of the board excluding us wants to put those rules back in place, because they believe that it was a mistake of what happened with greece. >> i think that's not exactly where the conversation in the imf is. there is a serious conversation. >> i've had a number of conversations with folks from the imf, and involved in the imf. i'm not sure that's an accurate

portrayal. >> there's a range of issues, i think it's important to distinguish them. there's a question of how to proceed into a new world of debt reprofiling. >> i know that the administration's been trying to use that as a reason to not necessarily go into imf quota reform. but it seems to me if we're not going to address this exceptional access framework -- >> so, congressman, if i could just take -- i know you're running out of time. if i could take half a minute to respond. >> i'm happy to take a private meeting on it too, but we can only get you up here twice a year. >> this is a hugely important issue. obviously quota reform is critical to the u.s. place in the world. and we're working very hard to get quota reform enacted. i think exceptional access has serious questions. i have never pushed back on the kinds of questions you're asking. and i'm open to a serious conversation about it. i think looking forward finding

a way for the imf to avoid having to use tools like that is in all of our interests. and i'd be happy to have that conversation. >> time of the gentleman has expired. chair now recognizes gentleman from massachusetts. mr. cep capuano. >> thank you, mr. chairman. >> hello, mr. secretary, how are you doing? >> just fine. >> you familiar with major league baseball? >> i've heard of it. >> you familiar with the team called the boston red sox? >> i have. >> so you purport to be an expert in baseball. can you tell me what's wrong with the red sox right now? >> that's a long -- >> no, you refuse to answer that question. i need to know. is it the pitching, the fielding, the hitting? come on, mr. secretary, answer the question? i can't believe -- if you won't answer that question, can you answer me why the republican baseball team can't seem to beat the democrats? come on, mr. secretary, answer the question. you got plenty of time. oh, well, okay, if you refuse to answer the question i guess i'll have to move onto some other areas because i just wanted to show that i guess badgering is not the exclusive realm of some of my colleagues.

we can badger too, but it doesn't produce much. >> as a mets fan i'm showing great self-control though. >> mr. secretary, for everybody's sake in your next fsoc report can you put a chapter in there on debt? you've got a great story to tell. i think my colleagues actually raise a good point. i mean, debt in theory could be a risk to the economy. and you have a good story to tell it would satisfy everyone including me. >> i understand. and, look, we could discuss it and say why we don't think it's a risk. the report focuses on the things that we think are risks. it's a fair point. >> yeah. if you do it the next time, at least you take one of their arguing points away. and you make some good points. and i think it's a fair thing to discuss. with that i am going to move onto a couple of things that not directly related to fsoc but indirectly related to it.

first of all, talking about fannie and freddie. has fannie and freddie paid back every money they've borrowed from the american taxpayer? >> they have -- they have, i believe -- >> the answer is yes. >> i believe the answer is yes. >> i know it is. i'm asking the question i know the answer to. and by the way, haven't they also paid back billions upon billions of dollars above what they borrowed? >> i think i understand where you're going, congressman. >> hope so. >> and i think what they have not done is they've not removed from the federal government, the federal taxpayer the risk that goes with those institutions having the backing of a federal backstop. >> that i understand. but the money that they're paying now above and beyond the money they borrow, where does that money go? >> it goes to the treasury. >> goes to the general treasury. so basically homeowners that have -- >> and so does the risk -- the support that goes behind the risk. >> i supported all that. i'm not -- i totally agree with everything that was done up

until they paid back their loans. my problem is they paid it back. they're stable. they're heading in the right direction. and it's time to get back to more business as usual. because like everybody else i want to keep homeowners keeping their own money to the best of our ability. yes, there are interest rates and yes there are some risks, but right now dollar for dollar risk is contributing to the general treasury account, and that doesn't seem fair to me. it strikes me if we're going to have a general treasury account, either we should tell people we are charging you extra because you have a service or increasing taxes, neither one of which are sins to me. but in this case you're charging them through their mortgage for something that is unnecessary at this point in time. >> that's not the way i look at it. i see it the gses are still in conservatorship, which means the federal taxpayer is directly standing behind them if they fail in the future. >> well, they've done that from day one. >> well, no. from day one there was actual

denial that there was a backstop. >> who denied that? >> it was in law. >> well, i would respectfully and strongly disagree. and i think pacts pointed out i was right. >> i think that we've seen over the last several years the estimates of the potential risk of a problem in the gses is still quite large. >> i understand. but if the money were going to a separate account to sit there and build up some kind of capital reserve, i think you'd have a fair argument. >> well, the -- >> doesn't bear up in my estimation. >> liability is born -- >> number one, they deserve their money back now that they're stable. number two, homeowners deserve lower interest rates unless they're being told what the money is being used for. right now some of their money is being used to support something other than fannie and freddie. i guess we'll have to disagree on that. with the last few seconds i wanted to follow up with something brought up. however, it strikes me trial and possibly fsoc is pursuing a back

door way to take over regulation of u.s. insurance companies via international agreement. that may be a little overstatement and i'm not a black helicopter guy. i kind of overstated it to make the point, but it certainly strikes me that some of the agreements we're about to make with some of our international friends may be pushing a little too far. with that i'll have to yield. >> time of the gentleman has expired. the chair now recognizes the gentleman from wisconsin, mr. duffy, chairman of oversight and investigation subcommittee. >> thank you, mr. chairman. welcome, mr. lew. obviously you are the treasury secretary, not the coach of the red sox, and therefore we're not going to ask you questions about their feelings. we would note they're doing better than the brewers which says a lot about the brewers. but if you were the coach, we'd expect you to answer the questions that we have about baseball. and when we ask questions we hope that you wouldn't give us answers about the history of baseball and how it came to be and you could talk about the history of fenway. you would actually answer the questions of what's wrong with the red sox. you've had a lot of questions

today about liquidity in the bond market and i think the chairman brought out is this related to vulker or other rules and regulations that are caused banks and other market makers to leave the space. i want to give you a chance to answer that question. is this something that you're looking at, do you think the rules and regulations that have come since the crisis have had any part in the lack of liquidity in the bond market? >> congressman, i think to answer the question fully would take quite a long time because it's a very complicated issue. i had tried to indicate that we are open to looking at any of the possible -- >> this is not a got you game at all. you identify risk in the markets, right? that's your job. and you do come in and you've talked about cyber and other things that are very complicated.

that we can't wrap our heads around, but you tell us where you see those risks. and it's a very simple question because a lot of the commentators will say, listen, it is complicated. there's a lot of reasons why there's a lack of liquidity in the bond market. but they will unanimously point to one of the causes could be the new regulatory regime and its impact. so can you -- the commentators can talk about this, but you're not willing to answer that question today? >> in fairness, congressman, i'm offering a much more detailed answer than the commentators. most of the commentators that i've heard with some self-interest have jumped to one explanation. i'm deliberately -- >> you do this really well. so i ask you about liquidity in the bond market and i mention commentators and you'll talk to me about commentators and the history of commentating. and the articles that are written. are you unwilling to answer this question because the do-gooders

who are looking for risk are actually the ones that are potentially creating the risk in the market? and so if you tell us yes this could be a cause of the lack of liquidity in the bond market, you have to look at yourself, you have to look at the regulatory regime that's taking place since the financial crisis and you don't want to admit that today. that's not badgering. i think that's a fair question. and to say that it's too complicated to answer, i don't understand that, mr. lew. just give us a straight up shot what is it? yes or no? >> i think if you look at the many factors at work right now haveing an impact on liquidity, it's not my view that financial regulation is the principle thing that requires our attention. i have not said we shouldn't look at it. and i think these other factors are -- >> mr. lew, i don't know if you were a tap dancer when you were young. i didn't ask if it was the principle. this goes back to what the chairman was saying. you're playing with words. is it a contributing factor, which goes back to the point the

chairman made, is it a contributing factor that rules and regulations, are you looking at that? not the main factor, not the only factor, but a contributing factor, yes or no? >> so if you look at liquidity you have to look at different parts of the market. >> i know. >> and if you're looking at treasuries it's different than if you're looking at high risk bonds. >> i'm going to ask you a yes or no question. are you looking at fsoc, yes or no? at whether the rules and regulations are having some impact on the lack of liquidity in the market? >> we're looking at all factors. >> so you are looking at that? >> we're looking at all factors that can contribute. i'm saying that as secretary of the treasury. something many of the members of fsoc and other agencies are looking at too. >> this isn't complicated stuff. we ask you simple questions, and i think we're entitled to get straight answers from you. and i think if you think, listen, the rules and regulations come have no impact, the commentators are wrong, banks and market makers have left the space but that has no

direct correlation with the lack of liquidity, tell us that. >> congressman, i think that the financial reforms made our system safer and sounder than it was. we have a stronger economy because of it. liquidity is still deep. >> is it creating a risk too? >> i think that when we look at the issues related to liquidity we should look at all potential factors. i identify the things that i'm aware of. >> one quick question, do you support tpa like the president? >> i do. very strongly. >> dually noted. >> time of the man has expired. the chair now recognizes the gentlelady from new york city, ms. maloney. >> thank you so much, mr. chairman. i am very pleased to welcome one of the favorite sons of the great city of new york. very good to see you. and i regret i had to chair another meeting. and i just got here. but i want to follow up with something that was raised by ranking member waters earlier. and while my good friends on the other side of the aisle have

criticized fsoc for not being responsive to their document request, i'd like to point out that fsoc did make 1,400 pages of confidential documents available to this committee. and my staff and i believe the staffs of many others on this side of the aisle have been over there to treasury and reviewed these documents. and these were confidential documents laying out the detailed reasoning behind the fsoc decision to designate individual companies as systemically important which is exactly what the majority asked for. so i think supplying 1,400 pages of documents review is being responsive. i want to make that clear. i would like to ask you mr. treasury you said earlier the issue of bond market liquidity is a legitimate one. but we should be very careful about assessing the causes of the lack of liquidity. and i agree with you, i don't think we have any definitive

answers yet. but i think it's incredibly important issue. i think it's also important to focus on potential problems in the treasury market rather than other markets. because the treasury market is a $12 trillion dollar market that determines the borrowing costs and so many other key markets as well. you mentioned the huge swing in the treasury market on october 15th of last year and said that there was no evidence of a breakdown market that day. and i agree. i agree with you on october 15 trading was continuous. and trading volume was heavy. so was it really a lack of liquidity driving the wild price swings, or was it something else? can you give us some more context for what the fsoc has found so far as it looked into this issue? >> thank you, congresswoman. we have worked treasury together with other agencies that look at

the market carefully and try to follow the transactions that day to understand what actually happened. and there was a huge amount of volume. and there was this 15-minute period when there was a price spike. but there was not a breakdown in the market. it's something we have to ask what happened then and what do we learn from it going forward. there was a huge amount of electronic trading going on. market structure has evolved. and, you know, one of the things with technology is you never go back. so we have to deal with the reality and there's many positive things about electronic trading. so i don't say that critical of the development of electronic trading. that changes the structure of a market. we're looking at that. i can't sit here today and say i have a clear answer. we're hoping over the course of the next few weeks to complete our analysis so we can offer a more definitive view. but, you know, what i was trying

to say before is there was a desire to jump to a conclusion that somehow financial reform caused october 15th. we see no link between financial reform and what happened on october 15th. maybe others will find it. but it's why we have to be so careful when we ask these questions about liquidity to treat a very complicated issue the way it should be treated. i have not ruled out looking at any of the contributory possibilities from any policy area or market condition. but we also ought not to jump to a conclusion which many did very quickly in a way that i can understand why they did, but it doesn't mean it's right. and, you know, the treasury market remains the deepest and most liquid in the world. there are other areas of the market where there are some questions about liquidity that are quite legitimate where they're not electronically traded. so that is different. where the huge volume of

corporate bond issuances raises some questions about would there be a good liquid market if there were a very stressed day? we're looking at all those questions. we take them very seriously. one of the things -- you got to separate the different kinds of liquidity because if it's a question of institutions keeping high risk proprietary investments on their balance sheet or not, that is not something we should go back to. we have a system that's safer and sounder because we've moved away from that. >> well, thank you. and i look forward to your report. and i hope you'll personally brief members of congress. >> i look forward to. >> i think it's critically important. and my time has expired. >> time of the lady has expired. the chair now recognized the gentleman from pennsylvania, mr. fits patrick chair of our terrorism task force. >> thank you the chairman and thank you, secretary, for your time here. we've had a couple of hearings to investigate terrorism financing.

series of questions i would like to make part of the record rather than go through them and ask the secretary to give us a timely response. i'll submit them to the chair. actually i want to follow up on some questions and your quick responses from my friend of massachusetts with respect to the national debt. it was being referred to as the national debt, which is not in the fsoc reports, not even identified that number one the national debt is a good story, it's a good story to tell about the national debt. and number two, it's not a threat to our economy. and i think that you answered both in the affirmative, you agree with that? >> again, it's a complicated question. i think the national debt i was omb director with a surplus, i believe in having a fiscal policy that lasts for the long, long term. i think if you look at what we inherited, the stability we now have is a world of improvement and there's still work to do -- >> mr. secretary, the question is the debt itself. which in 2008 then president

obama referred to as a $10 trillion national debt is unpatriotic and immoral. today there's a debt clock, it's right above us at the hearing. $18 trillion, 159 billion -- >> but -- >> it's going up a million dollars a minute. >> it has come down. >> is it a good story? >> it is a good story. the deficit has come down as a percentage of gdp faster. >> the deficit started coming down, new administration, new speaker that took office in january of 2011. and because of fiscal restraint in federal spending and growth of the economy that annual operating deficit is coming down. but it's not zero yet and the national debt continues to rise. is that a good story? >> i don't think it would be good for our economy if we were to have a balanced budget today. right now we have an economy which many of you have said isn't growing fast enough. we need to continue to look at keeping the economy growing and keeping an eye on the long-term. having a stable fiscal posture for ten years is huge progress. >> mr. secretary, couple years

ago then-chairman of the joint chiefs of staff described the national debt as the greatest dlet to our national security. is an $18 trillion debt a threat to our economy? >> at the time our deficit was in double digits. it's now coming below 3% of gdp. >> i'm not asking about the annual operating deficit. i'm asking about the national debt. >> the debt as a percentage of gdp has stabilized for this period of time. we have made enormous progress. it was climbing. and it has stabilized. >> mr. secretary, last month you referred to a proposed amendment to combat currency manipulation in the transpacific partnership as a poison pill. but also last month, the president said he was opening new efforts to combat currency manipulation abroad. can you describe what efforts or ideas the administration might have, what the role of treasury would be and whether you think they could be effective? >> the president and i personally take this extremely seriously. we put enormous effort through our multilateral and bilateral engagements to use the tools we've had. and we've had considerable success.

we've helped push china and japan into a different policy. so i think we're using the tools and using the tools well. in the trade legislation that is moving through congress there are additional tools. one is that there's a negotiating instruction that says in tpp currency issues are a high priority. and we're working with our tpp negotiating partners to arrive at agreements that will give us more visibility and more ability to use the consultation process and public disclosure to get them to do the right thing. >> can you identify the ideas the administration was referring to last month? >> and then i was going to say there's an amendment that we support that senator hatch and senator bennett put in in the senate which puts new tools in place which requires we do an evaluation based on objective criteria as to whether or not countries are violating what we would consider fair currency practices. if they are in violation it puts us in a position where there are

several new tools including not being able to be in trade negotiations with countries that are violating. so i think we have important new tools in the trade market. >> i want to get to an important question on the treasury's budget which the president identifies the budget as a compilation of our nation's priorities. fin sin and otfi have been relatively flat funded. congress has met and probably exceeded the president's request specifically on fin sin. i want to say the organizations within the department of treasury do an outstanding job with the resources that they have. >> thank you. >> but we see terror growing, you know, the challenges globally every single day. new organizations coming to light every single month. what can you tell us about -- >> congressman, i couldn't be prouder of our offices that work on threat financing. >> do they have sufficient resources? >> they do have sufficient resources. and they punch way above their weight. but if we thought we needed more resources to do the job, we would ask for them. >> time of the gentleman has

expired. the chair now recognizes the gentleman from massachusetts, mr. lynch. >> thank you, mr. chairman. first of all, i think you're doing a great job, mr. secretary. and i know we had a disagreement last week on tpa, but i have never in my time knowing you have ever heard you address congress or the american people with disdain. that is something not in your makeup or character. >> reverence would be more like it. >> that's right. that's right. and a desire to serve. so i appreciate that. you're a good man. we don't always agree, but i honestly believe you have the best interest of the american people at heart. and the administration's lucky to have you. i want to focus on a situation here. when a bank is convicted of a felony or a bank pleads guilty to a felony, we have laws in place, congress has put forth some laws that says when they're

guilty of these crimes we remove some privileges that they have. one of those privileges that they have is that of a well known issuer, well known issuer and so well known seasoned issuer. we had a recent bout of guilty pleas by big banks. both in connection with libor and also the fx manipulation of dollar-euro exchange rates. so normally those banks should be penalized by removing that designation which allows them off the shelf registration and other privileges. but what's happened is that i believe the secretary of labor is the one that grants these waivers, i'll give you a for instance.

in the latest rounds of s.e.c. waivers, barclays just received their third wksi waiver since 2007. citi group has triggered a disqualification five times in the last nine years. and every single time we give them a waiver. we don't penalize them. so there's no difference in how they operate because we give them a waiver after they plead guilty. ubs just received a second waiver since 2008. so they broke the law, criminal conviction or pled guilty. jpmorgan chase received sixth waiver since 2008. and the royal bank of scotland received its third since 2013. and ubs going back to ubs, their last wksi waiver occurred while they were still under a nonprosecution agreement from libor. so they immediately failed.

so the penalties congress has put in place don't happen. because s.e.c.'s giving them waivers. and i'm just wondering if giving these waivers continually and not punishing these banks is, you know, a moral hazard. is it causing them to behave just as they always have been? because it seems that way for me. >> congressman, let me start by saying i think we have made clear as an administration that no individual and no firm is above the law. and we will prosecute and we will enforce regardless of who has broken the law. secondly, the violations of law that are behind these actions are very serious. they get to the heart of the integrity of our system. things like tax fraud, things like terrorist financing, facilitation. i think if you look at the prosecution, if you look at the settlements, the numbers have been very large.

and there's no question they have been held accountable. >> but falls on the shareholders. the penalty doesn't go to any individuals involved here. and the banks continue to operate. there were $2.5 billion in fines, but they just keep on doing what they've been doing. and i have people in my district that are convicted of far smaller crimes. and they do serious time. and so, you know, at least the way -- is there another set of penalties that we could put in you would actually agree to enforce? >> if i answer your first question and come back and answer your last question. i think if you look at the approach the prosecutors have taken, they have wanted to make sure they could hold accountable financial institutions and the individuals in them. and not have unintended consequences that they can't control. >> but these are intended consequences. that's my point. they intended them to be penalized and they're not. >> i would leave to the regulators to decide the right way to respond, but prosecutors

need to know that they're not going to create, you know, an unintended consequence -- >> that's not the point here. >> i think on your last question there are a lot of things we could look at in terms of what the practices within the industry are and how you hold individuals accountable that are worthy of consideration. >> time of the gentleman has expired. the chair now recognizes the the gentleman from texas, mr. mr. neugebauer, chairman of financial institution subcommittee. >> thank you, mr. chairman, secretary lew, good to have you back. i want to refresh your memory a little bit. back in march you and i had a conversation a little bit about u.s. regional banks and whether they were systemic risk or not. you also referenced and you and i discussed a little bit the ofr report in february where they used i think five of the basel standards to analyze a number of banks. and if you recall that analysis showed that $50 billion banks

were not a systemic risk, in fact, it went pretty far up the asset chain before it reached a point where they felt like the financial institutions were a systemic risk. yet dodd-frank says that the trigger is $50 billion. so i guess my question to you is the chairman of the financial -- of fsoc, is the framework of basel in conflict with dodd frank? >> i don't think it's a question of conflict. i think the question is do banks of all size pose the same risk and require the same exact treatment, the answer is no. and we have been very careful in designing rules to try and distinguish different levels of treatment for different firms of different size. that doesn't mean we have it perfect. there certainly is an openness to looking at issues there. but i have to say that the debate recently has taken on a kind of odd character. there's been discussion of exempting banks of $500 billion

or less. do you know how many banks there are between $500 billion and the biggest banks? there's six banks. the largest financial institutions in the country in the world. so we have to be careful not to ask questions as if a $2 billion bank is like a $50 billion bank or a $50 billion bank is like a $500 billion bank. i would be happy to have this conversation. we are open to ideas of how to tier treatment appropriately. >> i guess that leads me into the other discussion you and i had and that was about section 115. and i think one of the things dodd-frank was passed, it was passed in a pretty hurried manner, and not in a very transparent manner, but somebody just picked $50 billion out, but then in section 115, they said, you know what, you all can establish gives you the latitude to establish you know, a different trigger or trigger mechanism if you choose to. and i think if i go back and look at your and my conversation

you said that y'all had not formerly looked into it. you mentioned that you had informally looked into it. but there is in fact a process where there can be a formal process if the fsoc could go through -- treasury could go through that process and recommend to fsoc to change that. and i'm a little confused. >> there could be a formal process. but i think if you look there are a number of regulators taking a look at this issue to see what they can do with their regulatory flexibility. and i think it's a question of when you raise it to level of formal review. i'll give you an example of the kind of issue we've looked at. the frequency of the examination cycle. there's a reasonable case that the frequency should be different for a small institution and a very large institution. so there are ideas here that could be pursued. the fact that it's not a formal section 115 review doesn't mean that people aren't asking these questions. if you look within the regulatory bodies they are looking at them.

and we're obviously looking across the landscape. >> mr. secretary, i think it's important to get their input, but the truth of the matter is under section 115 those other regulators do not have that authority. section 115 authority resides in the secretary of the treasury. and last i checked that's you. so i just think it's kind of a little confusing here is that we've got one entity ofr using these basel standards saying this is what the world looks look from a systemic risk standpoint, and then we've got dodd-frank. and i think from a banking perspective it's a little confusing as to what standards should be in place. and i think it's really kind of time for you to take on that leadership role and exercise 115 and bring some certainty to the marketplace. >> i'd be happy to continue this conversation with you, congressman. to be clear ofr expresses

independent views, it doesn't express the views of treasury or of fsoc. i'm expressing my own views. and they won't always be identical. you wouldn't want them to be identical with ofr because ofr was put in place to be an independent institution expressing its own analytic views. >> i see my time has expired, mr. chairman. >> gentleman yields back. the chair now recognizes gentleman from georgia, mr. scott. >> thank you, mr. chairman. secretary lew, good to have you. doing a great job. >> thank you. >> i want to keep the conversation for a moment on liquidity. it is a very serious issue. i'm very concerned about it. a number of experts are registering great warnings about it. liquidity to me is the key to protecting our financial system. it's also the key to being able to ascertain potential risk to our system. so it like provides us with a way of to be able not just look down the road for problems but

see them before they turn that corner. so i also realize and i think you would agree you too are concerned about liquidity, correct? >> i've said so, yeah. >> yes. so the issue becomes will this liquidity worsen as the economy worsens? and specifically tell me what if there were another crisis? we don't want another crisis. after they finished the depression they said they didn't want another crisis. but surely as we have a free enterprise system it's free to go up, sideways, down, whatever. so if we have another crisis, would the financial system in your opinion have the liquidity to be able to come to the assistance of other financial --

of our financial system the way it did in 2008? when healthier institutions, it helped us a lot. they had the liquidity. they were able to buy up institutions like indy mac, washington mutual, lehman brothers, rather than the government having to wind them down. >> congressman, i think when we talk about liquidity in the markets, we're not talking about institutions that merge or don't buy other institutions or not. i think what we're talking about is is there a market for buying and selling bonds in a quick way with stable prices. so obviously the capital and the depth of the balance sheet of institutions will affect potentially both questions. but i think they are severable. let me make a couple of comments. one, i think that as we come out

of the financial crisis there is undoubtedly going to be more volatility. i started testifying as treasury secretary concerned there was no volatility in the market, now there's concern there is volatility in the market. it shouldn't be a surprise as we see a return to the more normal economy there's more volatility. i think that the institution themselves are stronger than they were going into the crisis. they have more of a capacity to come through a period of economic stress in a healthy way. and that's a good thing. i think in our fsoc report we look at the risk we see to the broad financial system. and we do include liquidity on the risk, but it's not the single factor that we're looking at. and i think it is also important to separate the different parts of the market because treasuries are very different from high risk bonds. >> yeah. let me ask you this other question. i don't have much time. but do you believe that there is any link between our anemic

financial growth rate and the fact our institutions have to hold so much capital in reserve rather than putting that capital back into the economic system to good use? >> congressman, i think that there is a lot of money that is on the balance sheet of businesses. they don't even need to borrow to get access to. and yet there's a more fundamental question is why are they not investing more? i think it has to do with a sense of confidence that they're looking for. that the continued economic growth will be strong. >> but do you see a link? is there a causal -- >> i don't think there's a lack of access right now to capital that is the problem. i mean, i focused earlier on things like housing and small business because i think that's where the questions are real as to whether individuals or small businesses are having trouble accessing capital. large firms right now are not having trouble accessing

capital. >> do you feel that these companies should have to hold as much capital in reserve as they are? and is that helping or damaging the economy? >> i think that the fact that our banks now have the ability to see themselves through a difficult period makes our system safer and sounder. they did not have the capital, they had too much leverage. and we saw in the financial crisis what the result was. we can't go back there. >> all right. thank you, sir. >> time of the gentleman has expired. chair now recognizes the gentle lady from missouri, ms. wagner. >> thank you, mr. chairman. there seems to be so much interest in this issue of liquidity. so i just can't help myself. and perhaps i'll ask a question that will help put this to rest for all of us. in going back to your march 2015

testimony, secretary lew, on the issue of liquidity you said, and i quote, so i think that this is something that requires a lot of analysis. we're doing it. and i'd be happy to share with you a more complete analysis when we complete it. now, this was march of 2015. i didn't get anything at 11:18 last night. what's the plan here? >> well, as i've indicated earlier, our hope is in the next few weeks that analysis of october 15th will be completed. and we look forward to sharing it with the committee. it's been a complicated analysis. it's required a number of agencies working with very different bodies of data. and i'm very anxious -- >> so within the next three weeks we will receive -- >> i can't say three weeks. over the summer is the schedule we're working on. i hope -- i've been pressing people very hard to finish it as soon as possible. and as soon as it's finished we'll share it. >> and you believe that that will come this summer then?

>> that's the schedule we're working on, yeah. >> and that should answer all of our questions about the importance of liquidity -- >> no. >> -- lack thereof? >> i wouldn't say any single analysis will answer all the questions. it will help us understand october 15th much better. and in the fsoc report we noted that there's a broad range of factors. and, you know, i must say i've taken a lot of questions today that want me to comment on regulation. in the fsoc report we added regulation in the list of things we need to look at. we're open to looking at all the causes. i identified the things i'm confident are things we need to be -- >> i've got several more questions here. we look forward to your report this summer. to date fsoc has designated four non-bank financial companies as systemically important financial institutions essentially signaling to market participants that the government considers them too big to fail. as a result richmond fed

president lacquer stated that shareholders and creditors of that firm can expect the government to shield them from losses during periods of distress. ultimately, putting the taxpayer on the hook for a future bailout. for that reason i'm interested and i think others on this committee are also have mentioned this today, i'm interested in how these companies can ultimately de-risk and shed their designation status from fsoc and remove the implicit government support that such a designation carries with it knowing that the primary goal for fsoc is to reduce risk in the financial system. i think that you also would share that sentiment. i know that senator mark warner has told you before that there was never any intention of creating a hotel california, i believe were his words, with the designation process where you were able to check in any time you like -- or pardon me check out any time you'd like but

never leave. secretary lew, in the absence of any practical guidance from fsoc on how to exit sifi designation, is it possible for designated firms to know what they are supposed to do to reduce systemic risk? >> yes, congresswoman. i think that the process is clear that we review the designations annually. if the business of the designated company has changed and it no longer presents risk they know what the risks are. we've identified the risks very clearly. and right now it's been in the news that ge capital has changed business plans for reasons that have nothing, i believe, to do with the sifi designation but will cause there to be a review. and we'll have to see whether that changes their character. so we're open to when firms change their structure. >> they specifically though know how they can reduce risk. you've given them guidance on

this? how to change their business model, their structure? >> they know what it is about their business that created the designation in the first place. they know what the transmission -- >> do they know from you specifically? >> there's a very long analysis that goes to the companies when they're designated that identifies for them the basis of determining the risk. if the basis then changes -- >> so you have a list? because i've got limited time here. a list of specific information on what firms can do to remove this designation? >> it's not a question of take steps a, b and c. it's a question of what are the risk factors -- >> so you don't have a list. >> the risk factors are quite clear. >> the risk factors are quite clear to whom? >> to the firms designated. >> have you provided them with the risk? >> yeah, it's available in the list that's available to the public. >> the chair now recognizes the gentleman from california, mr. sherman. >> thank you for holding these hearings, i hope we get the

other members to also testify, it's simply, chairman is a lofty position, but if you were to interview as chairman of this committee, i'm not sure you would get the views that reflect every member. i'm glad secretary lew is here but i look forward to hearing from the others. you've got litigation on whether met life prudential is a sifi, you have filed your reasons to dismiss their lawsuit. you're the client. this is a document filed on your behalf. you just put it on your website, because it's a public policy interest. of course, redacting any proprietary information about the individual company. why would the reasons for -- arguing the dismissal of the lawsuit be under seal? >> congressman, obviously, it's a matter under litigation.

i'm not going to comment on the substance of pending legislation. we have tried in all of the designations to be as transparent as we can be while protecting legitimate commercial information that we need to protect. >> i would hope that you would make that document available for members of this committee since it's a public policy document as much as anything. lehman brothers didn't go under because it had too many assets, it had too many liabilities. particularly contingent liabilities. and i'm confused as to how there's discussion of mutual funds being listed as sifis. if the market dropped by thousands of points, that's terrible for the economy. it's terrible for me because i have my individual account. it would be just as terrible if that same money was in a fuchmutual

fund. why would an unleveraged mutual fund be classified with a sifi knowing it has no liabilities? >> in the review of that debt managers, we have made the judgment that the area that we need to spend considerable time on is looking at activities that asset managers engage in and whether or not there's risk associated with those activities. we haven't completed the review yet. >> are you looking at whether the asset management company would go bankrupt, whether the mutual fund would go bankrupt or whether the economy would suffer not because the sifi wasn't able to pay its liabilities but rather because a big company was doing this or that in the stock market? >> ultimately, the questions of looking at financial stability involved looking at what the

losses would be to creditors and associated businesses, not so much an issue here, what the run risk would mean in terms of the potential spread to the economy and the market, whether or not it locks up access to some one or another kind of essential services. we're looking not just at firms. we're looking at activities -- >> so they could be designated a sifi not because their inability to pay their liabilities would cause a problem but just because their activities cause a problem? >> no, the question is, are there activities within asset managers that if there were under a stress situation, a series of bad events -- these things don't happen in good situations. they usually happen when there's a lot of bad things going on. are there activities that present the risk we need to be concerned about?

i don't know the answer to it. we asked this question. >> i need to move on to another issue. >> we ask the question knowing the answer could be yes or no. i don't sit here today with a firm view. >> we're, of course, faced with this trade deal. we're told there are enforceable standards but they're usually enforceable only if the executive branch of our government is willing to take action. with regard to china currency manipulation, we pass a law requiring the executive branch to do things. you explained to this committee last time i asked you about is that, well, the law is bad policy. so it will not be followed. if the executive branch won't enforce u.s. laws because our trading partners would find that

offensive, it's difficult to see how any provision of any trade agreement would be enforceable if that enforcement required -- >> the time of the gentleman has expired. the chair now recognizes the gentleman from oklahoma, mr. lucas. >> great to see you again. we work through the subcommittee chairman, the underclass man, didn't have a chance to ask you questions last time, that's appropriate, now you're back to the old guys on the back row. i share some of the concerns of my colleagues on both sides of the aisle. but there's a real problem with this liquidity issue in the financial services committee, and i find it seems very hard to argue this reduction has nothing to do with the cumulative impact of new rules and regulations of the capital requirements. while we continue to work to improve the safety and soundness, it's important we be don't lose soithd of the big

picture, the aggregate impact of all these factors and be ever mindful of unintendedly creating risk and harming the ability of users to drive the economy and create growth. i have a particular issue i'd like to focus on, and that's on the leverage ratio rule as it applies to the treatment of segregated margin. this is an issue that increases costs for end users and impacts their ability to hedge risks. congress required margin received from customers for clear derivatives belongs to the customers and should remain segregated from the banks affiliated on member's accounts. however, under the leverage ratio rule this margin is treated as something the bank can leverage and treat it punitively by requiring higher capital requirements for clearing. if end users don't have the ability to hedge their risk, more risk is introduced into the system, customers pay more, it cannot growth is harm.

it's an example of leverage ratio rule when applied inappropriately in my opinion. what actually harms liquidity and creates risk. can you tell me why does the rule treat customer margin as something the bank can hedge? >> the leverage rules apply to all assets, it even applies to treasuries and cash, it's a very inclusive rule. i think it is reasonable to ask questions as to whether or not there are intended consequences. and certainly you distinguish it safe from the volker rule. the volker rule exempted treasuries, a lot of the questions i got earlier referred to the volker rule. it obviously doesn't affect treasury holding. i would have to look at the specific issues related to -- >> i hope we agree it would seem

to have the effect by requiring extra capital to cover these margin accounts that are segregated, it would have the net effect of increasing the cost. i hope you see where i'm coming from on that. >> yeah, look, i haven't focused on the margin issue, i have focused on the treasury and cash issue. i think that you go back to the purpose of the leverage rule, it's a very solid objective which is to make sure that institutions don't get overextended. i think that where the -- what the percentage is makes a big difference in terms of whether or not it's a binding constraint or not. >> segregating the money makes sense. i think we did a good job there. let me ask you this, then. if regulators have been focused on removing risk from the banking system, through the capital requirements, risk is going to exist somewhere within the system, if we remove it from the banking system, where does it pop up next?

if the banks can't play this role of playing the market, somebody will. will somebody who played that role be more of a danger to the overall economy than the banks? >> i think it is an overstatement that the banks aren't playing that role. the banks are still doing their core business. even under the volker rule, they're not prohibited from market making and holding inventory for market making. you're asking a question that i'm asking as well. with the new -- the evolution of the markets, are there questions of financial stability that we need to ask that are different. you look at some of the newer players on the market, where the volume of trading is. i think it does raise questions, both about the plumbing of the system, but also, you know, about implications on liquidity. >> historically the banks in making these markets. it would seem to be a better perspective of evening things

out. consistency, stability, being boring. the entities who are winding up taking their place, have made their money off volatility, if we take it away from the people who like to take the wave out, yet give it to people who have made and make more, the more intense the waves, it doesn't seem logical to me. >> i don't think one can overstate the tradition of the banks doing things in their economic interest to maintain markets. clearly having inventory had been real. i also think if you look at what the definition of liquidity is it may not be reasonable to think that there should be no price fluctuation even if there are dramatic things going on. >> the time of the gentleman has expired. the chair now recognizes the gentleman from missouri, mr. cleaver. >> thank you, mr. chairman secretary thank you for being here.

we're moving toward the fifth anniversary of the pass around of dodd-frank. many of us were here during those turbulent and troublesome days. we know that great care was taken in dealing with the creation of this act. and we think that we made significant progress. and i think you apparently agree with us as well, that we have made tremendous progress. and regulators have moved to -- toward implementation. some of the rule making i agree with, some of it i, along with my colleagues, have challenged. overall, we made great progress. but when you think about daud fraung as a whole what do you think is the most significant thing left undone?

what would you want to see right now completed so that we would have the full strength of dodd-frank at work preventing another collapse? >> that's a very good question. there's pieces that need to be completed, and that's not really what you're asking. you're asking, what is the area that we haven't addressed. i'd have to say gse reform is the area we haven't addressed. it would be a good thing if we would. i'm not sitting here today optimistic that that's going to happen legislatively, but it's why we engage so much in the senate, in the bipartisan discussion to work through and approach the gse reform. >> mel watt, who was a member of the committee, you mention the gse reform, and mel watt is now over at fha, and doing a great

job. some of the work he's doing is going to help in some of the housing needs we have with money put into the housing trust fund. one of the things you may be able to help me with what do we do to enable private money to move back into the market? >> look, i think that there have been some small steps taken, but there needs to be an active effort to look at what can we do to have a more active private secureatization industry. the notion that most mortgages are backed by either fha or gse that's backed by the federal government is not a great place for the industry and the part of

the market to be. which is why i said gse reform, which is path toward a private active private marketplace. >> but you -- >> all right, sir. the experiments that have been useful are putting first loss protection in place, apart from the gse. it's been small. we have seen that there are ideas there, that you can insulate the public from the first risk and start to bring private money back into the place, back through mortgage insurance, through capital market products. more thought has to be put into that area to develop it further. >> you do believe there's an need for a secondary market? >> i'm sorry? >> you do believe that we do need a secondary -- >> yes, i think it would be good if there were more private nongovernmentally backed --

>> so gses would be a hybrid? >> yes or they would have competitors. >> i think there's a -- in this committee, there's some suggestion from time to time that the gses are not even needed. one of the things i'm wondering about, when some prefer it be completely private whether or not the private market whether you believe that the private market has an appetite to fully either take over or in what i would refer to re-enter the market. >> i think right now, the structure of our mortgage industry makes the continued operation of fannie and freddie necessary. the idea behind gse reform was to be able to chart a path where there would be a different kind of marketplace in the

future. we live in the present. we live in a world with fha and fannie and freddy. we have to try to make that world better. >> the time of the gentleman has expired. the chair now recognizes mr. royce chairman of our foreign affairs committee. >> thank you, mr. chairman, very much. and for the record, mr. secretary, one of my colleagues earlier asked if the gses have repaid the money that they have borrowed from the american taxpayer. the simple answer that my colleague tried to elicit was that payments they have made to the government now exceed the rescue funds they received. mr. secretary, i think you agree here, this is not the real answer, nor the real question. the real question is, have they repaid their debt to the american taxpayer? for that answer, i think we can go to the federal reserve bank of new york, that was asked that question. and they put it this way.

they said should these figures be interpreted to mean that the treasury and therefore the taxpayers have been repaid by two firms should pay div dividends to their shareholders again? no. taxpayers are entitled to a substantial risk premium, government support has lowered funding costs and boosted profits, the government has never collected the commitment fee that the government has owed from fanny and freddie. >> the false narrative that is perpetuated is that taxpayers have been repaid. it's time to end conserveship and return control to the shareholders. from your comment earlier, i assume you disagree with this narrative, and agree with the conclusion of the fed, that failing to work to wind down the gse's and give space for private

capital to come in would be a colossal missed opportunity to put u.s. residential mortgage finance on a more stable long term footing? >> congressman, i totally agree. and i was trying to indicate in my response earlier, the risk is being borne by taxpayers on an ongoing basis. and the conservatorship is not over. i would only add one additional thing to what i said earlier, the damage done to our economy by the housing crisis, was far more than simple amount of money that was put into the gse's, and i think americans are still healing from the pain of that financial crisis. so i think that the right thing is to do gse reform and get on to a new restructured system, but it is not the right time to be talking about ending the conservatorship or paying

dividends. >> i think on that gse reform concept. i've publicly endorsed reforms that would increase private sector participation in the secondary housing market that would decrease taxpayer exposure to future losses and limit disruption to the housing market. if you look at the particulars, more risk sharing is something that can be done to create a lot of space here. a common securitization platform is something that works for the gse's and brings in private capital to use that platform. common mortgage backed security, would be a good start for congress to pass this year. if i could have your thought on that. >> i think the items you just mentioned are the kinds of things we've been talking about and thinking about. obviously there is a common security platform being built. it's something that could be expanded beyond the gse's and be available more broadly. the more we are able to lay a foundation that a private

securitization market can be built on the better off we'll be. >> if i have a minute here, i'm going to push -- last week the treasury department announces deliverables for the upcoming strategic and economic dialogue with china. one of the issues a few years back, ownership caps were raised from 33% to 49%. this is largely symbolic, it doesn't provide further benefit to firms operating in china. when chinese institutions invest in the u.s. they face no ownership cap, or activity restrictions. and this is just one of many impediments that our financial services firms face, when operating there. i did want to raise with you that issue and also i raised with you earlier that on this technology restriction, we've got china agreeing to delay implementing a certain restriction on its draft anti-terror laws that would require foreign companies to

hand over their encryption keys. clearly our banks and financial services firms, technology firms cannot operate under those conditions in china. recently we were in shanghai and they were pushing that. it is still on third reading, the people's congress is adjourned until next year, but that still hangs out there, and so we need to have greater push back -- >> i have -- i agree with you totally, i have push back with china's most senior leaders on this issue, and have made it clear to them that it is a significant issue here, and it's something that in the context of both the leaders meeting, we need to see movement on. >> thank you, chairman. >> the time of the gentleman has expired. >> the chair recognizes chair woman from wisconsin. >> thank you so much for joining us today secretary lew. i can't resist asking questions about liquidity as well since that's come up several times.

i want to take a different approach. as opposed to the required capital standards. i was wondering, in your testimony, you mentioned that it's been a year now since we have floated institutional investors, and i was -- at least your executive summary was not very descriptive of how that's been working. i'm wondering if we have seen less use or about the same of assets which are typically a little more liquid than other investments in the money market mutual fund. >> congressman, first, the rules i don't believe are effective yet, they were put in final form, but with the future effective date. i think we've seen a continued

reduction on the reliance on short sale funding which is a good thing. we have large amounts of investment in money market funds. and we saw in the financial crisis that there was run risk there, and the reason that the rules were put in place by the sec was to create a safer path forward. i certainly will keep an eye on that as it's implemented to make sure it works as designed. but we've made clear we have to keep taentive to whether or not they are sufficient on whether there's a need for additional policy. >> but it would not be a good thing if we were to close down -- or essentially shut down the money market? prevent those institutional investors from having the liquidity? that would be something you would be watching out for? >> right, the problem is, is

that the connection between the money market funds and the rest of the financial system, what we saw during the financial crisis was that the risk of money market investors institutional investors leaving -- selling their position was creating the risk that the overnight funding that the largest financial institutions relied on would evaporate. and that could have caused the entire implosion of major financial institutions. we're in a much better place, because there's less reliance on wholesale funding and we have rules in place to make it safer. >> you mentioned also that the threat of migration of servicing from banks to nonbanks, recently announced algorhythmic lending that goldman sachs wants to do. really demonstrate there's a change in the market structure, there's more risk taking incentives.

i'm wondering in that context, whether or not -- how nonbank sifi's, do you think it's more important to focus on a few industries, fewer institution? or what do you see? do you see an expanded role in the fsoc given the change in the market structure? >> i think we have tried to be very careful and analytic in the approach, and not to overreach and go into spaces that we don't need to be or belong in. the institutions that have been identified are market utilities that have cross cutting exposures. and the largest kinds of firms that are not bank firms, where the determination was made that the risk is there. it's not that we're looking to regulate more firms for the sake of regulating more firms. we're going to continue to go through the criteria and we're

obviously getting to smaller firms as we get down the list. >> thank you secretary lew. i was stunned at some of your comments to mr. cleever about gse reform and also that negative equity has declined. that hasn't been my experience at all. i think homeowners are in a lurch after this recession. a lot of housing in my district deteriorating because you can't lend for needed improvements in the home basic things like roofs, plumbing and so on. i guess i just want to get your insight about the health of the homeowner in this environment. >> i would be happy to follow up, i don't have time. i have tried in a few instances to express the concern that creditworthy borrowers should have access to the market.

and there are a number of things we're looking at in that regard. >> the chair now recognizes the gentleman from florida, mr. pozzi. >> thank you, mr. chairman. mr. secretary, in october of 2013 the online publication repealfactor.com, submitted a freedom of information request for documents concerning the intergovernmental agreements with the united kingdom, switzerland and canada. the department promptly acknowledged a request on october 24th, 2013 stated that expedited treatment has been approved. this is a letter fro