incentive compensation that could lead to excessive risk taking. it's not focused on the total overall level of pay, but the adverse incentives that could be embodied in that pay. >> but that's not the regulation that is called for by law. >> it's been very challenging. there are many agencies involved in trying to come up with this compensation rule. >> what's the holdup? how do we help? who do i have to kick to get this done? >> i can't -- i mean, i can't give you a good answer. >> have you done your job? >> well, as i say, we have been working with the institutions now for many years to -- >> yes, i know. the law says 90 days. at some point, regulators have to regulate. i'm not complaining it's 91 days i'm not complaining it's 365 days. but, if it's not you, tell me who it is.

if it's my friends at the fcc, first of all, i wouldn't be shocked. and second of all, maybe that's a pretty fair thing. have you done what you need to do to get this regulation, required by law, simply to allow us to know the incentive that is are involved and to prohibit inappropriate incentives that did help lead to the 2008 debacle. have you done your job? >> we have tried to work constructively with the other agencies. >> i love when chairs never give answers. >> we have done -- >> i think the fed has done a pretty good job. i'm not complain:00 the fed. but this is long overdue. each regulator that comes before me, i'm going to ask. i don't say do a specific item, i don't care how much they make. do it so the american person doesn't get on the hook again. on an item that we have already identified as a problem that everybody agrees was a problem

and that should be relatively easy to fix. >> i agree with your assessment, that it was an important problem, that it is essential to address it. and as i said, in our supervision, we have addressed it, and we do feel we have seen very meaningful changes. >> i want the regulation that was required by law. >> i understand that. >> that's what i want. i want the regulation done so that the american people will feel comfortable. two other items since my time is running out. one, i want to talk basically, i'm not pushing yet, but looking forward to the results of the current -- the next iteration of living wills. back a few years ago when we had them, all of them were called not credible in the living will provision in dodd/frank as you know was pretty important to many of us. with think it's a way to avoid too big to fail. it allows the institutions to say don't worry, we can take care of ourselves, we don't need help. when they are all called not

credible, that's a problem. i know you're in the process now. do you have any idea what the time frame might be when you are into the second chance? >> so last year the board working jointly with the fdic sent very detailed evaluations of the living wills -- to the firms and directed the firms to take action to improve their resolvability that were quite specific and quite detailed. >> time frame? >> we have received those plans. we are evaluating them jointly with the fdic. >> thank you. >> and we will be making decisions in the coming months. >> time. time of the gentleman has expired. the chair recognizes the gentleman from michigan. mr. huizenga. >> thank you, mr. chairman.

i'm happy, chair yellen to rescue you from the hostile questioning of my democrat friend over there. don't take it personally, he's like that with everybody. but i do actually want to kind of follow on on something that he had point of interest and frustration for a number of us. is having to do with the speed or lack thereof where there has been some very specific things that were laid out for the fed to do, and specifically, i want to talk about section 13.3, the fed, dodd/frank required the fed to adoption regulations, quote, as soon as practicable. and that was five years ago. there have not been a final rules implemented to what fed reserve restrictions you yourself were going to put as far as and guidelines as far as

utilizing 13.3. so i'm very concerned that that is taken that long. when is that that the fed is going to issue those final rules? >> we expect to issue the final rule by the end of this month. >> by the end of this month. i will point out to my friend from massachusetts, just talk nicely and she'll give you a great answer. so my next follow-up question on that is will the rules address the concerns that senator warren, chairman hensarling and others have put forward regarding whether your earlier proposal leaves the door open to future wall street bailouts? >> so let me just say we regard our emergency lending powers as very crucial powers. it's very important that god forbid there should be a future

financial crisis. we hope that won't occur. but if there is, that's why the federal reserve was created to provide liquidity when there is a financial panic and lenders are worried about the state of financial institutions and markets generally. those powers we use during the crisis to keep credit flowing to the economy. >> sure. >> we want to be very careful about what we do. >> sure. and the words used for that are unusual and exigent circumstances? >> correct. >> in my format, we take that and we say, we add upon it, raise the bar, marginally, i would argue and we use language, quote, unusual and exigent circumstances exist that pose a threat to the financial stability of the united states. you have come out and some of the other fed governors have come out opposed to that

language. why? >> well, that's when we would use -- i'm not sure that we have been opposed. that's when we would use those powers when there are unusual -- >> i understand. >> it's understood to mean pose a risk to the financial system. >> we kind of added two things as a belt and suspenders, a phrase you used earlier. one was to include the language that pose a threat to the financial stability of the united states. and certainly informally, that is the pushback we have gotten. i met with some of the other fed governors and they have pushed back saying we should not address 13.3. the other one we have is in my bill, section 11. we also mandate in addition to the current requirement of five of the seven fed board governors to approve a 13.3 usage, that 9 of the 12 district federal bank presidents must also approve. any concern with the belt and suspenders approach that way? >> i think the approach that we have currently that's in

dodd/frank is quite adequate. >> so you do have a concern with adding the district fed bank presidents? >> i might have some concern with that. >> what concern? >> this is always been a board power to decide when to authorize particular reserve banks to engage in programs through the discount window, emergency lending programs through the discount window. >> but you understand there's a bipartisan concern, and bicameral concern about how that has been used in the past, and that there is too big of a door open yet for these massive wall street bailouts to happen, and that what we are trying to address is, in addition to adequate collateral and insolvent borrower definitions, we're trying to make sure that's

not just a check and there is just not a rush to find a solution here, but that we also have the fed bank presidents in there. >> well, dodd/frank clearly restricts the way in which this power can be used and the rule we finalize will address concerns about the definition of broad-based eligibility insolvent borrowers and pent rates. >> the time of gentleman has expired. the chair recognizes the gentleman from texas, mr. huizenga. >> thank you, chairman and ranking member waters. welcome madam chair yellen. thank you for your appearance here today. please accept my gratitude for your steadfast leadership at the federal reserve. the dodd/frank act reforms paved the way for solid and steady economic growth by restoring

confidence in our markets. it's one of the pillars of reform, supporting the creating of 13 million private sector jobs for 67 consecutive months, extending the longest running growth streak in our history and reducing the unemployment rate to 5.1%, the lowest since 2008. my first question is as follows. you indicated in your testimony that the fed has tailored its regulatory and supervisory requirements for regional and community banks. however, i continue to hear from banks of all sizes in texas and in my congressional district that they're burdened by the regulation and the costly stress tests required. in fact, one regional bank of texas, one of their facilities is in houston spent $20 million

in its stress tests alone. in your opinion, do our financial regulators currently have the discretion they need to correctly tailor regulatory and supervisory standards or should we in congress take action? >> congressman, my understanding is that stress tests are required of banks that are $5 billion and above. and the requirements for the smaller banking organizations are very different than those for the larger, above $50 billion organizations that they are only required to do a company run stress tests for the smallest organizations there's no such requirement. now, i did say earlier that we

don't have as much ability with respect to stress test to tailor as i think would be ideal. there are smaller banking organizations where we do see costs of having to participate in the stress tests and benefits that are probably not commensurate so that is an area that we are focused on where we're tailoring as best we can, but some legislative change to reduce the burden on the smaller institutions subject to it could be useful. >> my next question, last week, the fed finalized the total loss absorbing capacity rule for the largest eight banks. yesterday, i read in bloomburg where they reported the standard & poor's as well as the other credit rating agencies make up the rating of these banks, based on the prospect the united

states government is less likely to provide aid. in case of a financial crisis. can you elaborate for us how tlac works and how it makes it less likely that a government bailout will be needed in case of a future failure of one of these very large banks. >> well, thank you for that question. its's an important regulation that is intended precisely as you say, to mitigate too big to fail and to the extent that the ratings agencies recognize that a firm is more likely to be able to be allowed to fail, and they reduce the so-called uplift, that's good. >> it's my understanding here in congress that there is no willingness to repeat what we did back in 2008 to save the banking system. let me go to the next question. yesterday, we debated replacing the $50 billion threshold for

mandated enhanced prudential standards with a financial oversight council designation process. what is your opinion on what the threshold should be? >> so we would not like to see an fsoc process that tells us exactly how to tailor our supervision to firms of different sizes. we already have an elaborate program in which we do tailor the requirements within the confines of law to match the footprint and complexity of the firms. and there are only a few areas where we have concerns that we may be limited in our ability to do that. stress tests and resolution planning are two areas where i would say the smaller of the

firms above that $50 billion threshold, we would like to be able to reduce the burden on them. generally, we have been able to tailor it. >> thank you for answering my question. time. time of the gentleman has expired. the chair now recognizes the gentleman from wisconsin, mr. duffy, chairman of the oversight investigation subcommittee. thank you, mr. chairman. good morning, ms. yellin. when you were here in october, we had an change about the lauft subpoena we made to the fed. you were unwilling to comply with the subpoena. however, two weeks ago you did comply with that lawful house subpoena and we are grateful for your cooperation with the house oversight committee. in your cover letter, when you provided those documents, you stated as chair, i implemented the practice all suspects material, security breaches in

involving fomc information. why is that your personal practice and why isn't that the policy of the fed? >> well, the policy of the fed, it was adopted back in 2011, i believe, stated that if the chair was alerted to a breach, that the procedure would involve asking the fomc's general counsel and secretary to review the matter and to decide whether or not should it be referred to the inspector general. >> i'm aware of that. every january don't you need to go to the lead policy on the program for fomc information and you set the policy every year. since you have been chair, you haven't made that the new policy, you only made that the personal practice. you could, this january, change that rule and make it policy, not practice, right? >> well, if it seems appropriate

to look at it, it's something we could do. my understanding of that -- of the existing policy, i'm simply trying to say my understanding of the existing policy is that if there is a material breach, should it be referred to the inspector general, and i have done that. that's been my practice. and i think that out to be the understanding. >> you can change the policy this coming january. i think with all that's happened, i think you should change it from personal practice to policy. but it brings me to a question about the policy. the way it currently is written, if there is a leak, you will have the fomc secretary and the general counsel make a review and then make a request to the inspector general. but it's fair the say that the general counsel, who would make the recommendation for referral also is privy to sensitive

information, which would mean that there could be a conflict of interest, that the general counsel could actually be the leaker, and he's also or she's also the one that is responsible for referring the matter to the ig. do you see the conflict there? thing is ripe for some internal policy review at the fed. and i would encourage you to take that under consideration. >> let me simply say that i think maintaining the confidentiality of sensitive information is, to me, a very high priority. >> i know, but that's not my point. i think that you can see that there's an issue here on how the policy works internally, and i think you could work on changing it. i only have a couple of minutes left. "the wall street journal" recently reported that the white house and treasury were made aware of the 2012 leak. is that true before congress was made aware in december of 2014? >> not to the best of my knowledge.

>> but you were aware that they were doing a background check on mr. carpenter for a potential nomination from the fed to treasury, correct? you are aware of that process? you are not aware of that? >> i know that he was -- has been nominated to be assistant secretary. >> and as part of a background review, you telling me they did not reach out to the fed and ask about his access to this information that was involved in the leak, and you did not provide that to the white house? >> i -- i don't have direct knowledge of that. >> do you have indirect knowledge of that? >> i -- that's a particular matter pertaining to an employee. it has -- >> no, no, no, come on. madam chair, here is my concern. that we find out in congress, who have the oversight over the fed. and we find out in december of 2014. however, before the nomination, the white house has this information about the leak.

the white house and treasury that don't have any oversight over the fed are made privy to not just the internal investigation at the fed, but also they received the ig investigation. and so it brings a -- >> i'm not aware that's correct. i think it would be maybe standard practice for an agency that's considering a nomination to do a background check and that might involve asking the previous employer is part of the government. >> i would agree with that. also, it's common practice for the oversight committee to send subpoenas that are lawful to the agencies in which they oversee, and that agency actually comply with the subpoenas in a timely manner. >> i have done my best to do that. >> thank you. >> and i believe we have now fully complied. >> you have, thank you. >> time of the gentleman has now

expired. the chair recognizes the gentleman from missouri, chairman clay. ranking member of the substitutions committee. >> thank you, mr. chairman and thank you chairwoman yellen for your return visit. hr-1309 would remove the fed's ability to make safety and soundness decisions and place them with the fsoc. what impact would this dilution of your authority have on your ability to work with international regulators? >> well, it is important to the fed to be able to put in place the supervision program that we regard as appropriate for a particular institution and we would not like to see fsoc involved in determining exactly what that appropriate program would be once a firm is under our supervision.

there's no real relationship, i'm not sure when you say international negotiations, i'm not sure what's involved there. >> let me elaborate for you. under hr-1309, designation of banks for enhanced prudential standards can only be undertaken if the fsoc follows standards developed by the international basel committee made up of banking regulators from over two dozen countries. >> i see. >> do you know of any major nation that defers their domestic bank safety around soundness regulations to a board of international regulators? >> no, i do not. that's a very useful committee. we participate actively. we want to make sure that other countries put in place tough

safety and soundness regulation that is will be good for our firms and for financial stability. but nothing is law in the united states or is adopted as a regulation unless we deem it to be appropriate for our firms and i believe all countries behave in this same manner. this is international bodies or coordinating bodies where consultation takes place, but that doesn't substitute for domestic rule writing efforts here in the united states. >> sure. that would be a highly unusual. arrangement. >> extremely unusual. >> let's shift chair yellen to insurance capital standards. now that the insurance capital standards clarification act which gives the federal reserve flexibility in implementing

capital standards for insurance companies subject to enhanced supervision has been signed into law, can you please provide an update on the federal reserve's implementation? >> well, we appreciated the flexibility that that law provides to us to design an appropriate capital regime for insurance centric companies that we supervise. we are taking our time to really understand the business models of these firms so that we can tailor the regulations in a way that's genuinely appropriate to their business models. we are working on that in the process, we are closely consulting with the national association of insurance commissioners with the federal insurance office, with

representatives of the industry and the firms. again, to be clear, we understand their business models. we want to get it right and take the time we need to understand what will be appropriate. >> right. it sounds to me as though you are on the path to getting it correct. >> we are definitely on the path to implementing that. >> this week, the federal reserve bank of new york is for the second year in a row, hosting a conference to promote the importance of a strong culture of compliance within the banking industry. in light of the seemingly endless series of bank violations on everything from sanctions and mortgage fraud to manipulation, the focus on improving bank culture certainly seems appropriate. can you discuss what the board's role has been in the effort to improve bank culture? >> we have been extremely disturbed by the pattern we have

seen of violations in a whole variety of areas, foreign exchange, we have imposed exceptionally large finds and in a number of cases barred individuals from continuing to work at this supervised institutions or the industry and we do fully expect, as part of our supervision that the boards of directors of these firms will put in place rules and tend to the culture so we do not see a continued pattern of flagrant violations. >> time. time of the gentleman has expired. the chair now recognizes the gentleman from new mexico, mr. pearce. >> thank you, mr. chairman. thanks, madam chair for being here.

kind of as a continuation of the question that mr. capuano had, do you all ever sit around as a team and assess the things that were within your control leading up to 2008 that you all were doing sort of a bad job of regulating and say hey, we had internal failures here. we were sitting in the room. we were allowing this. we saw long-term capital collapse. we saw the instability. i think greenspan actually forced the banks to come in and buy the bad assets just because he could and he was trying to save a system. have you all sat around and had that discussion internally as a team that we need to do better? >> that's a set of discussions we have had over many years. lessons learned, exercises about how did this happen and what do we need to do differently so that it doesn't happen again.

i have tried to describe in some detail in the testimony how we have changed the process of supervision as well as more broadly our monitoring of financial stability risks in the system outside just the portion that we regulate in order to avoid the problems. >> right. if i could then follow that with you are saying the things in the system that provide a risk. so, i understand that, i mean i'm getting mixed signals whether or not you release the standard on the evaluate firms. so i'm not quite sure. my question is, do you really look at the systems themselves? your comments say that we aim to regulate and supervise financial firms in a manner that promotes stability of the financial system as a whole. and it's that financial system as a whole that i think provides

maybe the greatest risk to the largest firms, or all of us. so are you really discussing that? are you discussing the fact that the brick nations are forming the ndb or whatever they are forming that other nations are trying to figure out how to avoid the u.s. currency because of our actions internally. are you having that discussion? >> well, we are bringing together a diverse group of people to consider what the significant threats are that could affect not only individual firms, but a set of firm that is are large and interconnected. >> with respect -- >> it could involve foreign threats. it could, for example, when there were stresses pertaining to the euro area, focus would have been how could they -- >> could your share with me the parts of the discussion that deal with china selling down its debt? with them selling treasuries,

they have decreased the percentage from 74% to 54%. that, to me, indicates a strong reaction against our policies and against our dollar. and it is maybe the biggest threat. forget the internal stresses of corporations. think about the fact that the ground we are standing on, literally is going to get unsolid and very quickly. can you share with me the concernses that have been expressed about china internally selling its treasuries? >> china has been selling treasuries because it's currency has been under downward pressure. and in the market, there is a demand -- >> well, then i understand that. i only have a little bit of time. i don't mean to interrupt. so let's step aside from that, if that's -- says there is no concern there. look at the fact we are putting out $1.1 trillion of debt and you have $300 billion being purchased. that leaves a gap of 800 billion.

forget the chinese and everybody else. you, the feds are going to have to fill the gap with printed money for the 800 billion. 800 out of 1.1 trillion. you all should be saying, this is really outside the scope of what the stress tests are showing us on the banks. so tell me a little bit about that conversation. >> congressman, we have no intention given the economic outlook of expanding. we are maintaining our holdings of securities that we acquired during the period that we -- >> let me wrap up. i only have 17 seconds. >> we have no intention of adding to the holdings. >> so this morning in barons, they say -- they compare the situation to zimbabwe. this morning in barons they say that the federal reserve is making itself the lender of last resort. i mean, these are huge warning signs to us, and we are sitting here talking about relatively

small stress tests inside different banks. i appreciate the work you are doing. i really think we ought to be looking at it deeper. thank you. yield back. >> time has expired. the chair now recognizes the gentleman from georgia, mr. scott. >> thank you, mr. chairman. ms. yellen, let me first ask you about basel capital. who is it that the basel capital requirement do not recognize the exposure offsetting nature of segregated customer margins that are posted from a derivatives client? and then that goes to a bank. at the bank, they then guarantee the client's transaction with the clearinghouse. this is particularly when five years ago we, here in congress with the dodd/frank act actually encouraged more derivatives clearing as a means of reducing clients' counter-party risk.

so my question is what sort of message are we sending these clients who post margin to offset this guarantee by not recognizing it as such? >> so congressman, i'm not sure that i can respond properly to your question. i may need to get back to you on that. i mean, we certainly have required higher margin requirements both initial and variation on nonclear derivatives. is your question about the capital requirements on the assets that are being held? is that -- >> yeah. i think it's sending a conflicting message to the public, particularly when we, on one hand, are encouraging more derivatives action for risk management. yet, the basil capital

requirements do not recognize the exposure offsetting nature of the segregated customer's margins. so my point is, we need to send a clearer message to the public as to how basel capital is interreacting with this margin requirement of posting. >> so the important message we want to send is we've taken key steps to make the derivatives markets and transactions safer and less a source of risk. and i promise to get back to you on details about how that interacts with basel. >> yeah, this is very important chairman. as you well know, derivatives and swaps now as far as risk management is now an $822 trillion piece of the world's economy. we need to take a little bit

better care of making sure we send out nonconflicting information. i want to go back to another question about the designated company. and as a member you are responsible for determining when a designated company no longer presents a risk to our financial system. so it would be important if you could tell us in a little nutshell exactly when does a designated company no longer present a risk to the financial system and therefore should be dedesignated? and in your opinion, it is not important for fsoc to communicate clearly and publicly what are those specific risks that they present so we can have transparency in the process so the designated companies and the public will know exactly what a

designated company is and what those issues are. >> so fsoc can explain very clearly to the company and to the public what the basis was for designation. so it is no mystery at all to the companies what aspects of their business model caused them to be designated. the firms have that information. every year, fsoc reconsiders whether or not designation is appropriate and looks at the changes that have occurred in the business of those designated firms since it last reviewed them. if there are significant changes, then a firm can be dedesignated. now -- >> i want to get this last bit of a question because i want to

know what if we here in congress made a move to improve the transparency and due process designated companies received in the dedesignation process, what would you recommend we do? >> i don't really think it's necessary to do anything, because these companies have every opportunity to provide information to fsoc, to tell us that their business model has changed, to ask the counsel to consider dedesignation. i think, you know, you probably know the ge capital has significantly changed its business model. it's decided that it's in their interest to do that. they have not come to fsoc, yet, to the best of my knowledge to ask to be dedesignated. a company like ge capital could present information to fsoc and when asked, there would be an active discussion of whether it's appropriate.

>> time of the chairman expired. the chair recognizes the gentleman from virginia, mr. hurt. >> thank you, mr. chairman. i want to thank the chair for appearing before us today. i want to thank the chairman for holding this important hearing. madam chair, we have discussed before sort of the dynamic. in my rural congressional district in my rural fifth district of virginia where access to capital is absolutely critical for job growth across all those main streets, across all that farmland that i represent, it's important to our small businesses. it's important to our farm. >> and it's important to families. i think those of us that live in rural areas depend disproportionately on rural banks. and i appreciate your testimony up-front talking about the efforts that you have made to try to tailor the rule making,

tailor the regulations supervision to try to accommodate the difference in size and complexity of these institutions. but, i think, i hope you agree despite these efforts community banks have been disproportionately affected. dean mahoney who testified before our committee previously, he testified that dodd/frank is in significant part is designed to enhance the regulatory reach of regulators. inevitably that will mean increasing the size, market share and political clout of the largest banks. if you look at the trend over the last few decades, it's been brutal for community banks in the five years dodd-frank has been enacted and seen a drop in the number of community banks from 7700 to 6300. a whopping 20% loss. the rate of consolidation has doubled. this regulatory regime and

supervision has clearly impacted our smallest institutions. i hear from institutions across our district who say all i have time to do is paperwork. i don't have any time to serve my customers, to go out and look for new business. in one instance, i recently talked to a bank president who said i realized i had a problem when we were up for an examination and we had more examiners, bank examiners in our boardroom than we had bank employees. those are the kind of stories that we hear as we travel across the district. i guess my first question really deals with why you are here. we know that the dodd/frank act included one provision that would create a vice chair for supervision. and i guess my question is, or let me just tell you what paul volcker said. you know what he said after it was included. he said this new post might turn

out to be one of the most important things in there. it focuses the responsibility on one person. and we know this is a senate-confirmed position. so i guess my first question is if -- you would agree that effective and balanced supervision is an important part of the role of the federal reserve? >> absolutely. it is one of our most important responsibilities and i spend a great deal of time on it, take it very seriously. >> i guess my next question would be then if there was a senate confirmed person in that place, or in that spot, how would that affect your ability to focus on what your other responsibilities are in the larger picture? wouldn't it be good as in fact former fed chair volcker said, wouldn't bit good to have that position filled? >> congress created that position. i would welcome having it filled. i have to say we now have a

division of labor among the governors on the board. we operate through a committee system. we do have a committee. >> the position remains after five years unfilled. >> yes. the governor heads our banking committee. >> he has not been confirmed for that position by the senate? >> that's correct. but i would say he's done an outstanding job leading our work in this area and all of us, including me, need to be involved. >> do you believe the fact this important role in congress' important role in the appointment of that, does that reflect, do you think, the president's view of whether having a balanced and effective supervision, having somebody, as volcker said, who is dedicated to this, striking this balance, does that reflect the president's priorities? >> you would really have to ask the white house why there's not

yet -- >> considering that this is the law, dodd/frank is the law of the land at this point, at this time, is it appropriate for you as chair of the fed to press the president to fill this position? is it appropriate for you to do that? >> i think that we -- as i said, i think we are carrying out our supervisory work in a very thorough and thoughtful fashion but would welcome nomination of the position. >> time of the gentleman has expired. the chair recognizes the gentleman from texas, mr. green ranking member of our oversight investigation committee. >> thank you, mr. chairman, and thank you, madam chair for your appearance today. madam chair, dr. king, mlk, reminded us that life is an inescapable network of mutuality tied to a single garment of destiny. whatever impacts one directly impacts all indirectly.

we found this to be imminently true with lehman and bear stearns. the failure of these mega institutions had a direct impact on us but indirectly they impacted the global economy, which is integrated to an extent that many of us can't even imagine. i mention this to you, madam chair, because it's not just a failure of a bank in the united states we have to concern ourselves with but the failure of these mega banks in a foreign country. because of the indirect impact that it can have on the united states and other banking institutions around the world. i see some value in this living will for these mega institutions and the lesser institutions as well, simply because when we had the failure in '08, we had a crisis such that banks were reluctant to lend to each other.

when banks won't lend to each other, you don't have a lot of options left. i mention all of this to you because i'm getting to the $50 billion threshold. you've indicated a willingness to see that threshold lifted but i believe you've also indicated you would still prefer to have the opportunity, if necessary, to revisit those that are below the $50 billion threshold as to ascertain whether or not they may become sifis by virtue of their activities. so you have mentioned lifting it. i'm not going to ask you at what point you would go to, in terms of lifting. but are you saying to us that you still prefer a trigger of some dollar amount? currently we have the $50 billion trigger. if you lift it, do you still want a trigger there in of a dollar amount or are you amenable to going to a means by

which only the activities will determine the sifi destination? >> i certainly remain amenable to having a dollar threshold. to the extent i've discussed the possibility of raising the threshold, i would really only support a very modest increase in the threshold. once we get to a slightly higher threshold, we're dealing with institutions even when we're looking at the large regional banking organizations that are very important suppliers of credit to the country collectively, even the, you know, the regional organizations have probably a trillion dollars

of more lending throughout the country. and while conceivably the failure of one of these organizations would not bring about the downfall of the financial system, it could impact a significant portion of the country in the borrowers who depend on these institutions for access to credit. so i think a threshold is appropriate, especially in which banks over that threshold are designated for more intense supervision, especially if we have the ability to tailor our supervision. the only reason that i have said i'd be supportive of some modest increase in the threshold is because dodd/frank does impose some requirements on this smaller institutions in the area of stress testing and resolution

plans, where we have limited insufficient flexibility to remove those requirements, and we really think the costs exceed the benefits. >> thank you. moving quickly to the interest rates, you have a global economy weak and by some standards, continuing to weaken. how much emphasis do you have to place on the global economy when setting the interest rates within our economy, given what i said about the inescapable network of mutuality? >> we are mutual and interconnected. we take global performance into account. at the moment, what we see is a domestic economy that is pretty strong and growing at a solid pace offset by some weakening spilling over to us from the global economy.

on balance, as we said, we still see the risks to economic growth and the labor market is balanced, but the global economy's been a drag. >> time. time for the gentleman has expired. the chair now recognizes the gentleman from ohio, mr. stivers. >> thank you, mr. chairman and chair yellen, thank you for being here today. the gentleman to my left, mr. hurt already talked about the reason for this hearing is statutorily mandated around your supervisory rules. and normally the vice-chairman presidentially appointed and still filled by acting. when he was appointed by you to that acting position? >> i guess i wouldn't call it an acting position. we have a committee system in which up to three governors

oversee particular functions that we carry out. supervision is one of those functions. there are other areas of oversight of reserve banks and so forth. so forth. this is a longstanding practice and the chair of the committee on banking supervision, governor turilo, that individual has long been -- >> how long has he been doing that? >> he's been doing that -- >> two years? >> he did that under chairman bernanke, since he joined the fed, i think that was 2009 if i'm not mistaken. >> okay, so five years. not having him here even though he's acting in that role reduces the accountability, it reduces the interaction that the person in that supervisory role should have. so my question for you is, will you commit to allowing him to accompany you to these

hearings in the future, these semi-annual hearings? >> governor tarullo has testified on many occasions to our oversight committees and usually stands ready to do so. i certainly have no concerns about having him come up and answer questions. >> i hope you'll bring him with you next time. he's the one making a lot of the decisions. i know you're his boss and you're engaged but we really need him here because these are important. the next area i'd like to quickly talk about is the impact of regulation. so as you know, we don't live in a static world, we live in a dynamic world. every time we take an action there are responses to that reaction -- aor to that action. regulation has increased the compliance costs for many financial institutions, created barriers to entry, and the result has been a consolidation of assets in the too big to fail

banks. it's almost been the opposite of what we as policymakers would have liked to have seen. on the volcker rule, the result has been a reduction in the number of market-makers, which is a market utility function that provides important liquidity during a crisis. i guess i would ask you, are you trying to look at these unintended consequences because in both these cases, we are actually making -- creating problems through unintended consequences. >> we certainly are looking at consequences. in particular, in the case of market liquidity that you mentioned, that is something we're looking into very carefully -- >> i've asked ofr to do a report, i've asked others to do a report on it. and hope you guys will do a report.

there are basic drivers to it. simplification, the volcker rule and coming dll standard, a lot of things driving it. i would like you to do an analysis to it because liquidity is so important to anybody that whether they're a small 401(k) person or a large corporate entity, because we all enter and exit through the capital markets. if there's no liquidity, the marketplace doesn't work. >> completely agree. that is why we're looking at it. as we issued a report on the october 15th episode -- >> i have one more thing. >> and regular reports on corporate bond market. >> keep looking at it and i hope that you will look at the volcker rule as potentially another way to look at it, separately capitalize those activities, it takes away the whole argument and doesn't make it as complicated. yesterday, your ig issued a report that shows with regard to stress tests, there were six problems found in the fed's own stress test. if it had been a member bank, they would have required

immediate attention. i've only see media reports on this. i look forward to reading the report on it. in light of these highly critical things in the report, do you plan to undertake any changes that would create more transparency and accountability in the stress testing and ccar process with regard to the fed? >> as i understand it, the ig's findings had to do with our model -- mainly with our model validation procedures. and those are matters that we certainly will look into and attempt to strengthen. >> i think we should probably request a more complete review by the ig on all of that. thank you, mr. chairman. >> time of the gentleman has expired. chair now recognizes gentleman from missouri, mr. cleaver, ranking member of our housing and insurance subcommittee. >> thank you, mr. chairman. thank you, ranking member. chairman yellen, i think it's been a little over a year ago

since congress gave you the authority to tailor standards for insurance companies, those who would qualify for enhanced supervision. there is, as you know, a great deal of angst, there's maybe even panic on the part of the insurance companies over the fact they don't know what's going on, and fear when they come. to the degree you can speak about this publicly, i would present you with that opportunity because it would also help us -- or help me, as i'm asked questions over and over and over again from that industry. >> we know this is a very important matter. we understand that insurance companies are different than banks in important ways, in

particular the nature of their liabilities is in many cases quite different from that of banking organizations. we appreciate the flexibility that we were given to tailor appropriate rules and we're working very hard to get it right. to understand the nature of the business, to consult with the firms, with the insurance, state insurance commissioners, with our colleagues and federal insurance office. we're consulting widely and thinking very carefully about what the appropriate regime is. when we have made a set of initial decisions, we will go out with a notice of proposed rulemaking, likely, and ask for comments. so we will go through and open an transparent process in deciding what the appropriate

supervision is and allow for comments that we will carefully respond to. >> i don't want to ask you to give me a date certain, but is the process moving along and -- >> yes. people are working very hard. i'm sorry, i can't give you a date certain. but this is something that our staff is working on very hard. this is something that our staff is working on very hard. it's a high priority. >> similarly, the fed isn't under the international association of prevention supervisor, the iais. these acronyms, we've got to do something about that with the federal government. especially this committee, mr. chairman. we need to do something. your mission is to promote

effective global consistent supervision of the insurance industry. we are i think at a point now where -- maybe it's because of the 2008 collapse, everybody is nervous about everything and everybody is afraid that there's a new regulation that's going to come in to cause the world to collapse and allow the mets to win the world series. [ laughter ] >> i'm sorry. but, you know, there is no need for this hysteria, is there? >> there's no need for hysteria at all. we are, as i said, looking very carefully at our own firms to design an appropriate regime. and by participating in the iaies, we're trying to make sure that we weigh in on how other countries set up their own

regimes, in a manner that will be good for u.s. firms and the u.s. market. it's an attempt to influence what other countries do and thereby ensure a level playing field that works in our best interest. >> their angst is based on the fact that they believe we might end up accepting standards from the international community that might create problems for them here at home. >> nothing that's adopted internationally has any binding force in the united states. we go through our own rulemaking process and decisionmaking. it's our internal decisions now. of course, given our thoughts on what's appropriate, we're using that and collaborating, doing this collaboratively with other u.s. insurance regulators. we're presenting positions in basel, attempted to influence

the international decisions. but we decide here what's the appropriate regime. >> thank you, madam chair. >> time of the gentleman has expired. the chair recognizes the gentleman from illinois, mr. holmgren. >> thank you, mr. chairman. chairman yellen, thank you so much for being here. i've been closely following the work of the fed and other regulators during the agrip pa process. i sent a letter a couple of weeks ago when a public outreach meeting was held at the chicago fed. i'm very supportive of the agrippa process and i imagine you're hearingful of the concerns i'm hearing from the banks in my district. in addition to the report that is mandated to be provided to congress what tangible regulatory relief can we expect as a result from this process? >> we are listening very carefully to the concerns that are raised in the hearings and in the course of taking comment in this process. and i'm very hopeful that there

will be things that we can address and look to change that will reduce regulatory burden. an example of the kind of thing we're hearing, for example, has to do with appraisal requirements. that many community banks think the cutoffs are too low and make lending difficult, particularly in rural areas. i'm sure that's something we'll take a look at reporting and so forth. >> can i jump in on that. your written testimony notes the banking regulators have taken steps to reform the call report. as you're probably aware it's grown from 18 pages in 1986 to 29 pages in 2003 to nearly 80 pages today. would you support legislation requiring the banking agencies to issue regulations allowing for reduced reporting requirement for the first and third quarter, assuming they are highly rated, specifically if they have camel's composite rating of 1 or 2?

>> so i believe this is a matter the ffiec is studying carefully. i think there is a mutual desire among the supervisors to reduce burden on smaller institutions. i would suggest you let that process play out and we're all trying to do what we can to reduce burden. >> god good. we appreciate that. we continue to hear from our smaller and medium-sized institutions of feeling the weight of this and growing burden. as you know, the supplementary leverage ratio requires a banking organization to hold a minimum amount of capital against unbalanced sheet assets and off balance exposures regardless of the riskiest of the individual exposures. these capital requirements yield an economic cost to financial institutions and are a major driver of what assets they're able to hold. why is the supplementary leverage ratio applicable to

funds banks deposit at the federal reserve despite the low risk of these funds? >> the supplementary ratio is meant as a backup ratio that works as a backup to risk-based capital standards to make sure that the minimum amounts of capital held by banks are sufficient. and it's a requirement that is based on the size of the entire balance sheet of the organization including low-risk assets, such as accounts held at the federal reserve. it's reflective of the overall size and scale of a firm's balance sheet. for many organizations the supplementary leverage ratio is unlikely to be the binding ratio, particularly for the larger organizations that face

sifi surcharges, the risk-based capital requirements are likely to be what's binding going forward. >> chairman yellen, do you chair the concern that the minimum interest rate paid by the fed on these deposits is far below the yield some banks would need to generate in order to offset the economic costs of the capital requirements in the supplementary leverage ratio? and along with that, with just a few -- less than a minute left, i wonder what advice you'd give to banks which as a core function of their business model hold large cash deposits for their institutional customer base and what advice would you give to their customers? >> i'm not positive i really understood the question. you were asking about the level of interest we pay on reserve balance? >> right, that was the first part of it. then i was trying to sneak in the last question of advice -- again, where banks have a core function of holding large cash deposits for their institutional customer base. yet because there's a cost with that and it impacts, again, the

ratios that they need to hold, we're hearing concern from some important institutions, northern trust, others, that are feeling pressure from this. >> i would say with respect to interest we pay on reserves, that is our key monetary policy tool and we set that not to cover particular costs of banks but to establish a level of interest rates that's appropriate for the economy. >> my time is expired. i yield back. thank you. >> time of the gentleman has expired. the chair now recognizes the gentlelady from wisconsin. miss moor, ranking member of monetary policy and trade subcommittee. >> madam chair, thank you so much for appearing. it's always good to see you. i was wondering and hope you haven't been asked this question over and over again, i am curious about how going through another round of living wills has informed you and other

regulators implementing the orderly lick wa days facility and the cross-border liquidation of large systemic banks and of course nonbanks, sifis? >> we have learned a lot from looking and evaluating the living wills of the firms we have reviewed. we recognized cross-border issues are among the most challenging. we have made progress in working with those firms to encourage them or even require them to adopt changes in a set of financial contracts that would, under the existing rules, trigger, make it difficult to resolve a firm by triggering early termination rights to derivatives contracts.

so one of the things that we asked the firms to do in the most recent submissions is to work on that and to change the nature of those contracts. more generally, over several years of reviewing living wills, we have been able to give very detailed guidance to the firms about what the shortcomings of those living wills are and what we wanted to see in the submissions this year. we're working closely with the fdic to evaluate this latest round of submissions, and we are prepared to ask the firms for significant changes or if need be to determine that a living will is not credible. >> thank you, madam chair. just kind of as a follow-up, there have been a lot of critics of the stress tests. and i was wondering, how has

this criticism informed your regulation and has it contributed to a better focus in your oversight? >> we are currently, i think it's been five years now we have conducted the stress tests. we have learned things in every round and work with the institutions. to try to improve what we do in their understanding and the public understanding of these stress tests. i really want to say that this is one of the most significant innovations in how we conduct supervision. it is a truly forward-looking and comprehensive evaluation of how firms would fare under the very stressful conditions of the type that we experienced in 2008 and 2009.

the firms themselves, i think, if you were to talk to their executives, they would tell you they have learned a lot about the risks in their organizations and how to manage those risks, because they have been required to engage in such rigorous analysis. we see some marked improvement in the capital planning processes that are going on in these firms. they're asking themselves hard questions about what capital do they need to make sure they are sufficiently resilient. so this is a very important exercise. it is a core key part of our supervision of the largest firms. and i -- we will -- we're reviewing our experience to see if there are some changes we can make to make this more effective and where possible to reduce burden.

this is a major innovation i believe has culted in much sounder supervision, especially of systemic firms. >> thank you so much. mr. chairman, i would yield back the balance of my time. >> gentlelady yields back. the chair now recognizes a gentleman from minnesota, mr. imer. >> thank you, mr. chair and thauction thank you, madam chair, for being here this morning. madam chair, i will go a different route. i don't think anybody has asked this this morning. will the federal open market committee ever rule out going to negative interest rates? >> rule out is something we tend not to do. i don't at the moment see a need for negative interest rates. the committee is seeing a

domestic economy that's been proceeding on a steady path of improvement. our focus has been another possibility that it will be appropriate to begin to raise interest rates. this is something we're actively considering although no decisions have been made. if circumstances were to change, suppose the economic outlook, which i don't expect, but if it were to deteriorate in a significant way, so that we thought we needed to provide more support to the economy, then, po -- potently including negative interest rates would be on the table. but we'd have to study carefully how they'd work here in the u.s. context -- >> let me ask you, because we've seen it in other countries. >> that's what's new, yes. >> yes. when they've had economic difficulties, we've seen other countries use negative interest

rates or go to negative interest rates. >> right. >> what impact, madam chair, would negative interest rates have on lending? and economic activity? what impact do you believe it would have? >> most loans would not have negative interest rates even if a central bank pays negative interest rates. >> i understand. but what impact would it have? on lending? >> it would be intended to spur lending and i believe would have some at least modest favorable effect on banks' incentives to lend. and it would be undertaken as a measure to support the economy and to encourage additional lending and to move down the yields on interest-bearing assets to stimulate risk-taking, investment spending. >> i want to change just a little bit. i'd like to talk about this proposal and if you could clarify it for me.

the tlag proposal that was discussed last week, was that finalized last week? >> no. it's a notice of proposed rulemaking, it's out for comment. >> because it's been around for a while, you've been discussing it for a while. >> members of the fed, the governor and others have given speeches on this. it's something that's being discussed internationally in the ffb. the united states is contemplating this. we're working jointly with the fdic. it's an important step to ensuring that the fdic's single point of entry strategy would be workable in a title ii resolution or in a bankruptcy resolution. we see it as very important. it's been under discussion quite a long time -- >> picked interrupt you.

in the short time i have left i'd like to ask you specific things about the tlag proposal. some of the analysis i've been provided suggests it penalizes firms for what is broadly understood to be a desirable business model, gathering deposits and making loans. in fact, some have even suggested the effect of the new rule could be interpreted as a tax on deposit funding. would the federal reserve benefit and have you done, because i know this question has been asked before, from a quantitative impact study being conducted by the fsb prior to implementing the new tlac proposal? >> so i think that's frankly a mischaracterization of this proposal. the purpose of this proposal is to ensure that if a firm becomes insolvent that there is -- >> would you benefit -- forgive me, i've got 20 seconds left. would you benefit from a quantitative impact study being

done prior to implementation? >> we have carefully analyzed this proposal, the costs and benefits -- >> have you done a quantitative impact study? >> we've done a quantitative analysis and -- >> would you share that with us? >> there is information contained in the proposal that we published. >> all right. well, the analysis -- is there any -- well, it looks like my time is expired. >> the point is that the deposits are not a liability that is capable of absorbing losses when a firm is in trouble. we've seen that in financial crises. and the point of this is to make sure -- >> thank you, my time is expired. >> -- there is enough assets at risk. >> time of the gentleman has expired. the chair now recognizes the gentleman from delaware, mr. carney. >> thank you, mr. chairman. thank you for coming in for a hearing you wouldn't normally do and thank you for filling in for that vacant position and for listening and responding to

all our questions. there's been a lot of debate on both sides of the aisle and the committee the last several days about regulatory relief, mainly for mid-sized banks and smaller community banks. and you addressed it a little bit in the answer to some of your questions of my colleagues. i'd like to ask questions about that. mr. hurt talked about these banks, particularly community banks being the lifeblood of our communities and rural communities. contradicts across the country, particularly rural districts. not so much my state, state of delaware have fairly sophisticated financial services, institutions, some of the biggest. we're not talking about regulatory relief for those firms. but there's been a lot of debate about what's the best way to do it? one side of the argument is, well, the fsoc and regulators have the next bit flexibility under dodd frank to tailor these

enhanced regulations for the size of the bank. i have a list of banks, bank holding companies, $10 billion hence subject to the ccar process, comprehensive and capital analysis review process we've been talking about. this is what we hear from our banks as to expense involved in that. that.overnor turillo said the $50 million bull cutoff -- this is $10 billion and above and you have casual regulations if you're $50 billion and above. and mr. tarullo said that is way too low. i talked to him directly in my office and he said something very far north of $100 billion. we considered a bill today in committee, i did not vote for it, that would have used a different approach. wouldn't have a size cutoff but would apply an activities-based

approach. what's your view of that? i mean, are we -- is this a better way to do it? and part of that question is, do you have the authority -- i heard you say earlier you do not have the authority to appropriately tailor these ccar processes for some of these smaller and community banks. >> by and large we have considerable ability to tailor what we do to fit the complexity and systemic footprint of an institution. >> what did you mean when you say we don't have the ability to day who are for smaller banks as necessary? i don't know if that's a direct quote but i tried to write down the words that you said. >> so banks $50 billion and above are under dodd frank subject to stress testing

requirements and resolution plan requirements. that while we can tailor to some extent we can't completely remove. what we have found for some of the smaller institutions, the costs exceed the benefits. >> time is running out. i'd certainly be interested in having a conversation what is a better way to do that and give authority, flexibility and authority to enable you to provide the appropriate tailoring that's necessary. you look at this list of banks, jp her began base, $2.5 trillion bank, it's a lot different than the bank of hawaii and some of these other, motor strom, nordstrom, ink, which i didn't know was a bank. i suspect some of those that are

much smaller than the top five or six wouldn't -- don't have any systemic risk associated with them and shouldn't be then subject to some of these more expensive -- they could do what they do, right, length money so people can build businesses and buy homes and the like. >> we have eight banks that have been designated as u.s. gsibs and those banks are subject to a heightened set of requirements with risk-based capital surcharges and enhanced leverage ratio and tlac requirements that the banks below that, those eight, are not subject to. so even among the largest banks we have been able to tailor our rules. >> i'd be interested in hearing more about how we would day lower for some of the smaller banks. my time has run.

thank you for being here. i yield back. >> the chair now recognizes the gentleman from indiana, mr. stutsman. >> thank you, mr. chairman. thank you, chair yellen, for joining us today. i'd like to talk a little bit about the comment you make in your written testimony regarding the lessons of the financial crisis that we have learned. you state, to supervise financial firms in a manner that promotes the stability of the financial system as a whole and limit the systematic -- systemic damage that would result in a large financial institution does fail -- obviously we always want to learn lessons from different situations that we have experienced. prior to the collapse in 2008 the fed was created to -- was focused on financial stability.

but we still see about one -- once per generation some sort of collapse. how do you believe that what the fed is doing now prevents us from another experience like we did in 2008? >> as i try to describe in my testimony, i think the focus of supervision has changed and is now far more focused on financial stability than it ever was prior to the crisis. we are trying to diminish the risks of another financial crisis in a number of ways, most important i would say is improve the resilience of all those systemically important firms so that they have much greater

ability to survive adverse conditions and to continue to meet the credit needs of the economy. we have much more and higher quality capital, higher liquidity requirements, stress testing procedures which i've discussed earlier this morning are providing a much more robust way of attempting to detect weaknesses in these organizations. >> okay. >> so we're doing that. and also we are working very hard to address too big to fail by making sure that if one of these firms was faced with insolvency, that we could resolve that firm in a manner that would not create systemic risk, would guard the remainder of the financial system from systemic risk. >> thank you. so what -- can i ask you, what portion of your time each week

is typically spent on regulatory matters relative to monetary policy? >> a good share of my time is spent on regulatory matters. i'm not sure i can tell you exactly and it certainly varies from week to week. but a substantial share of my time is devoted to regulatory matters. >> do you have any concern that if the focus is on regulatory matters that it becomes a politicized regulatory -- the focus becomes more political at some point when you're focused on the regulatory side rather than the monetary side? >> i have never seen the focus in regulation to be politicized at all. >> as far as the frequency of financial crises, and you would say that -- would you say that any of them were successful as far as the regulations that were in place that kept us from some

on or abo other greater collapse? >> you're talking about earlier crises? >> correct. prior to 2008 the fed was focused on -- go ahead. >> we were -- i think the united states was very fortunate from the great depression until 2008 we never suffered a major financial crisis. and i think conditions developed prior to the crisis, this was a variety of things that came together that provoked a very, very serious crisis. >> let me ask you this, why do you expect basel 3 to be more successful than basel 1 or basel 2? >> i think that we have improved capital standards by raising the quantity and quality of capital we demand particularly of the most systemic organizations and we've designed kind of backup

leverage requirements that also serve to enhance safety and soundness. >> thank you. >> time of the gentleman has expired. the chair now recognizes the gentleman from illinois, mr. foster. >> thank you, mr. chairman. as you may be aware, there is a shared enthusiasm on the part of both the chairman and myself of contingent capital instruments as a way of stabilizing the banking system. and i have got a copy of a staff memo describing the actions taken last week, the preliminary rule. and it seems to me, i haven't completely digested this, but it seems to me that you are implementing contingent capital requirements for the u.s. subsidiaries of foreign-owned ihcs. is that correct? >> what we've put in place or what we are proposing is a long-term debt requirement. i don't think i would use -- i'm

not sure precisely how you'd define contingent capital -- >> it's explained in this memo as eligible internal ltd of foreign gsibs. >> this is for foreign? >> right, but it's my reesing -- >> u.s. -- >> right, that the federal reserve board will be operating the trigger for the conversion of these, is that correct? so that -- >> you're talking about the foreign banking organizations? >> foreign, yeah yeah. >> so we're making sure that the u.s. subsidiaries of foreign banking organizations will be required to set up an intermediate holding company have enough essentially debt that has been issued to them by their parents, that if we -- it will make it easier for that to be resolved -- >> i understand. they accomplish very similar things. >> they do. >> the difference i see between

cocos and just unsecured debt is one triggers an insol vaens, so there has to be determination by the regulation uryou're a growing concern and not going into debt. >> correct. >> that appears to have been chosen by u.s. companies whereas you allowed or chosen the coco mechanism on the federal reserve would say you're in violation of capital requirements, you're not insolvent, you're in violation of capital requirements, therefore converting it to equity. my question is do you have it in place and will the feds be operating that trigger mechanism in the case of foreign-owned subsidiaries? >> clearly in the case of u.s. subsidiaries what we want is in the title ii resolution and the loss absorbency, the fdic, to be able to recapitalize -- >> what i'm searching for is -- right. you know, i view this, the european solution, the coco

mechanism, as superior because it warns the banks when they're in danger of being -- there's a market-based signal that warns the banks when they are in -- likely to be in violation of their capital requirements, not that they are likely to become insolvent. right? do you understand? and that i view as a major difference. i think that the political nature of that decision will be much easier and less fraught if you're talking about triggering the conversion to equity rather than to sending the firm into recess las vegas. for that reason i think it's likely to be less politicized and moreover it is much more likely to yield a going firm at the end of this. so i was wondering why you had decided then to allow for foreign subsidiaries, you know, the mechanism of cocos, and yet not included in the capital stack of u.s. firms and what the thinking was behind that. >> so i'm not sure i'm going to

be able to explain this to your satisfaction. we think in the case of a foreign firm, many foreign regulators, if a firm got in trouble, would want to essentially engage in a single point of entry type of recapitalization. and the structure that we have proposed i think would make that possible. we would end up cooperating with a foreign supervisor who was trying to resolve her firm. if there were problems -- >> and the coco triggers when a firm needs resolution, right if as i understand it the coco triggers when the firm violates its capital amount but is not yet insolvent. is that right? >> if the firm were united states our supervision in the united states, to violate that requirement, we would demand i guess that it would be refilled so that if the firm were to be in trouble and we needed to resolve it, it wouldn't operate in the manner you suggested.

>> all right. so i guess -- it sounds like you have in place the trigger. the reason i brought this up before the response i've gotten is, well, the trigger is too complicated for us, really, to set up. whereas it seem like you plan to set up suffa trigger. anyway. would it be possible to get me a briefing on this whole thing? >> yes, certainly would be glad to do it. >> appreciate it. >> time of the gentleman has expired. we recognize mr. mulvaney from south carolina. >> thank you, mr. chairman. madam chair, i know it's a relatively minor issue in the greater scheme of things but since this is an oversight hearing more than it is a monetary policy hearing i want to go back to congressman duffy from wisconsin's line of questioning regarding the 2012 leak, generally your policies on those sorts of things when we're dealing with what we call information security rules. mr. duffy asked you a question, i don't know did we're able to get to the bottom of it. you said in your cover letter to him about two weeks ago, reducing the documents, you

wrote the following. "as chair i have implemented the practice of immediately referring to the inspector general all suspected material security breaches involving fomc information." i believe that's from your letter. if it's not please let me know but i think that's a fairly accurate representation. and his question was, why -- and my question still is -- you say you have implemented the practice. why hasn't that become part of the formal policy of the fed since you've been the chair? because the policy's different. the formal policy's very different from that, as a matter of fact. so help me reconcile your practice and the formal fed policy. >> the formal fed policy says that in the case of purported information, security breach, there should be a review by the fomc secretary. >> correct. >> and general counsel to

determine what the next step should be including whether it should be referred to the inspector general. of that policy, the way i understand that, is that if there is a material breach, it is appropriate to refer it to the inspector general, and i've done so. if these rules need clarification, that's how the fomc chair is tasked with handling these investigations and that is my understanding of the rules and how i intend to proceed. >> so let me see if i can cut to the chase on this. i think what you're saying is that you believe that your practice is entirely consistent with the policy and that what your letter really said was, without saying this after the general counsel did their investigation, i would immediately refer it to the inspector general? >> i've taken the view of as

as soon as we have determined that there is a material breach, i have asked the inspector general to look at it right away. >> right, and you wouldn't determine there was a material breach until after the general counsel and the secretary have done their -- >> they need to do a review. >> correct. i know this is stunning since i actually agree with you, if you want to take yes for an answer and quick move on. >> the kind of thing that happens sometimes somebody has a usb with a draft of something on it and it drops out of their pocket in a taxi, or they lose their blackberry. now, there are security procedures both in usbs in and in blackberries that should disable them and protect the information. but the fomc secretary receives reports of such things. in general, i wouldn't refer such things to the inspector general, but something that is a

material breach, i would do so and have done so routinely. >> fair enough. >> there have not been a lot of things but i have -- >> before we go back to the 2012 leak, let me simply ask you the question, have you ever actually activated this practice since you have been the chair at the fed? >> the practice of referring to the -- yes, i have. >> have you disclosed all those referrals to congress? >> i'm not -- i'm not certain. for example, i think we have -- we did disclose publicly that a portion of the fed staff's forecast was accidentally disclosed on a website, where it was included on a website. >> fine. and again -- >> and that was referred. >> i'm familiar with that example. i'm asking you if there's ones we don't know about? have there been referrals to the

inspector general that you've not notified congress of, publicly or privately, since you've been the chair? >> that have not referred -- have not told congress about it? >> yes, ma'am. >> i need to check on that. >> fair enough. let's go back. by the way, one final change. i know this is splitting hairs. i used to be a lawyer in the real world a long time ago and this is the type of stuff that catches my eye every now and then. y'all switched the policy on the security breaches somewhere about 2014, 2015. you're shaking your head no but you did, right? >> we made a small change. i know it has been alleged that was a weakening of the requirements. it absolutely was not in any way a weakening of our requirements. >> very briefly, it's your testimony, ma'am, that the small changes in language, changing an investigation from a full investigation, was not intended to change the scope of the rule at all? >> absolutely not. there was nothing, as far as i know, about full investigation. >> thank you. >> time of the gentleman has

expired. the chair wishes to inform members that chair yellen will be departing at 1:00. presently, i think we can clear the queue in the room. members who may be monitoring from their offices, you are out of luck. the chair recognizes the gentleman from washington, mr. heck. >> thank you, mr. chairman. madam chair, thank you for being here. indeed, thank you for your outstanding public service. >> thank you. i appreciate that. >> i think you probably heard something closely resembling consensus here today from both sides of the aisle about concerns regarding regulatory relief. many of us share your commitment providing for both prudential protections as well as consumer protections as well as enabling the free flow of credit but with a belief on our part that that could be done with a bit of a lighter touch. i'm hearing that somewhat from you today.

indeed, my perception is that the regulatory structure is in fact moving from what i would characterize as actively resistance to receptive. >> very receptive. we are actively looking for ways we can safely diminish burden, particularly on community banks, but also smaller institutions that are, for example, subject to the 165 rules in dodd-frank, those over $50 billion. so we are very receptive and actively engaged. >> so my encouragement would be that you would move it from reseptemberive to being proactive, and in the spirit of that recommendation, i want to -- and if this has been asked, i apologize -- follow up with your testimony where on page 11 you indicate that the reserve is giving all of these suggestions careful consideration and will be

working closely with other banking agencies in developing a report to congress at the conclusion of egrpr-a review, which is a deregulation exercise. >> yes. >> approximately when can we expect the report? >> i'm not -- do you know when that's over? egrpr? by the end of next year for sure. >> by the end of? >> by the end of next year for sure. >> by the end of 2016. then i would encourage you to see if there's any distance between the pedal and the metal on velocity of that effort. because i think it would may a very constructive part to move from receptive to proactive. i think it's important that you all be a part of this. because frankly, otherwise what i observe here is you have those who legitimately believe that we can do a whole lot less, but that which many of us believe

would compromise prudential considerations and consumer safety considerations and so we react accordingly. >> yes. >> and the positive, constructive advancement on your part i think would be very helpful to -- >> i think that's -- i think that's completely fair and i pledge that we will try to be proactive in looking for -- actively looking for ways that we can reduce burden. >> i have another question. we tend to think about the fed's monetary policy as its big lever to deal with the issue of price stability and the fed fund rate that you set. fy understand this thing correctly, and i may not, you also have the ability to set the interest rate that you pay on excess reserves that member institutions have with you. which seems to me to have potentially the same benefit as hiking the fed funds rate because if they are incentivized

to leave more money with you, it's less money that they lend out, which is tapping the brakes on inflationary pressures. why would you do one over the other? what are the comparative benefits of doing just fed funds rates versus looking at excess reserve rates? >> so the interest we pay on excess reserves will be the key tool that we use in order to raise the federal funds rate. the federal funds rate is not something we can decree. it is a market-determined rate. and when we decide it's appropriate to raise that rate, we will accomplish it by raising what we pay on excess reserves. they're intimately connected, not two separate tools. interest on excess reserves is critical. and we expect by raising it the short-term interest rates

generally on money market instruments will all rise across the board. and -- >> can i see if i can get one more in in 14 seconds? >> sure, yes. >> one of the rating agencies recently indicated that the exercise of living wills is actually working and they put it in writing. we're about to go through another roundthink this winter. what is your forecast for what the impact will be? >> we have very -- we have very detailed living wills. they are much more details than previous versions. they've responded to instructions that we carefully gave out. we are carefully evaluating them and will be making decisions in the coming months. >> time of the gentleman has expired. the chair recognizes the gentleman from north carolina, mr. pitten jer. >> thank you, mr. chairman. afternoon, chair yell len. let's see if we can answer five questions in five minutes. i'm following up on the chairman's questions regarding the role of the fed in the board

room. i'm going to read a quote from the "financial times" august 2014. that said, fed officials are also involving themselves in the kinds of decisions the company management or board of directors usually make. including whether employees should be fired or disciplined. which has been surprising. miss yellen, do you support this type of activity, notwithstanding that you said it's not the policy, but do you support this type of invasive participation by the fed? would you approve of it? >> well, when there is wrongdoing as we have seen, for example, in the liber fx scandals, it is appropriate for us in addition to leveling fines to try to identify individuals who are guilty of wrongdoing -- >> as an ongoing process, do you think it should be a matter that the fed, for example, should be opining on human resource decisions and so forth inside the board room as was quoted

here in "the financial times"? >> so -- i'm sorry, what exactly did they quote? >> well, they just said that they were including whether employees should be fired or disciplined. that was one of the comments that was made. >> i'm not aware that we -- >> but would you approve of that, owe pipping whether this should be done or not? >> we should be not be managing firms, we should be making sure firms that appropriate systems -- >> should the fed then be micromanaging these board rooms and trying to dictate policy inside of a board room? >> we're not managing the firm, we shouldn't be managing the firm, but we need to make sure that the firm is managing itself properly. >> chair yellen, following up on mr. hurt regarding community banks, what reforms, if you can give some clarity on this further, would you say that the fed could do to reduce regulatory purchaseds on community banks? and also what would you

recommend that we as a committee would recommend to do to provide some type of regulatory relief or community banks to ensure that they can provide the best services and products for the consumers? >> well, there's a lot that we can do on our own and we have been doing it. we're trying to do more work off-site so that we have fewer examiners spending less time in full banks doing exams. we're trying to tailor our exams to the areas that are really high risk, either in terms of consumer compliance or safety and soundness. >> chair yellen, have you had occasion to go out and visit some small community banks? >> shull. >> how many have you seen? >> many over the years that i've been involved with the federal reserve. >> in the last two years, have you been out to see any community banks? >> since i've been at the board,

i haven't made trips to see community banks. but i meet with many community bankers. you know, we have the so-called cdac, which is -- in fact, we're meeting with the cdac on friday -- >> i think, if i could interrupt, a more in-depth awareness and understanding. i was on the board ten years. just to go visit the banks yourself it would make a major statement of your own and importance for community banks. i think you would get a sense from the staffing what they're addressing. you can hear from the ceo and the bank chairman. but i would really encourage you to do that. as you look at the imposition of the regulations on the financial industry, it's had really indirectly a major impact on industry that's left our country and moved offshore. we've seen that occur too many times. what do you think can be done to make sure that we can provide

the financial resources available and not have the regulatory impediments on the financial institutions, and frankly an impact on business froetss and their environment? they're leaving here and that's part of the problem. >> well, this is partly why we participate in international groups like the iaias or the basel committee, the europe financial stability board, to work -- >> how much success in this approach -- do you think what you're doing is working now? because we haven't seen the measured success we would like to see in terms of being able to attract companies that want to stay onshore -- >> i think we have seen success that we have a much safer and sounder financial system and other countries are also raising the standards that they apply to their large banking -- >> thank you, my time's expired. >> time of the gentleman has expired. chair now recognizes the

gentleman from minnesota, mr. ellison. >> i thank the ranking member and the chairman. thank you for being here, chairman yellen. really appreciate it. you know, we've had this big debate yesterday and the votes today on whether or not the $50 billion designation is the right metric for sifi designation. i tell you, i'm sympathetic to changing it but i didn't vote for either one of those proposals because i feel that after there's a big crash, then we regulate, and then before the ink is dry we're all trying to change it suddenly. and is it good or is it bad? and so what i want to see when a proposal comes back to change it -- so people, there may be a growing consensus that $50 billion could be different but we don't have a consensus on what it should be. and i guess my point to you is, knowing that our constituents happy on us to do things that they want, our constituents aren't thinking about the

system, they're thinking about their business and that's a generalization but i think it's generally true. i'm looking for good guidance from people like you as to if it's not $50 billion, what should it be and why? and so i'm sure that this issue's not going away. and so i just want to make that point cheer because i definitely believe that, you know, the $50 billion designation, the truth is that it is an imprecise metric. i'll agree to that. but there were some regional banks that caused some major damage in the last go-round so i'm not willing to just walk away without a real clear plan what's going forward. do you have any reaction to that? >> i agree with that and we have said modest increase. not a large increase. a modest increase. and while i think there would be some benefits to the smaller banking organizations that are over that $50 billion threshold

and would save us some supervisory resources, this isn't a must have. >> okay. well, so living wills, the very country are even larger today than they were in the financial crisis. living wills provision of dodd frank was created to make sure these banks never threaten the economy again by giving regulators additional power it is banks, living wills, are found to be not credible. the last time the fed and fdic evaluated the banks and living will, only the fdic took the official position that wills wither not credible. the fed's decision not to join the fdic has slowed both regulators' ability to take additional action. why would the fed voluntarily give up authorities to give up changes at problem banks? >> so we took the position that this was a depletely new process. and we stated this when we put out guidance on the living will

process that we expected to have to work with firms for a few und rounds in order to understand what we needed to see in a plan and to give firms reasonable guidance on our expectations. last summer that is why we declined to join the fdic last summer and did not vote to find the plans noncredible. but if we're closely and jointly with the fdic over the last year to give very clear, very detailed, and we're asking for very substantial changes on the part of these firms. they have submitted a new round of living wills. we're evaluating them with the fdic. and in the coming months we will make important decisions. >> thank you. with my last minute i just want to know if you would be willing

to offer your perspective on one of the observations of ben bernanke, as you know he came out with a memoir recently. in there he said something like this, it would have been his preference to have more investigations of individuals' actions as obviously a everything that went wrong were was illegal was done by some individual, not by an abstract firm. in that respect there should have been more accountability at the individual level. of course loretta lynch under the doj just said a month ago they're going to look into white collar prosecution a little bit more. do you have any observation on mr. bernanke's observation? what about prosecuting some of these folks who engage in fraud? >> i completely agree with his assessment. now, we can't engage in criminal prosecutions, but i would say to the extent that we can identify individuals who have been responsible for wrong doing and

significant breaches where we have leveled big civil money, money fines, we are trying to take action against individuals as well. that means barring them from working for those organizations or potentially for the banking industry. >> time for this gentleman has expired. the chair recognizes gentleman from kentucky. mr. bart. >> thank you, mr. chairman. chair yellen, welcome back to the committee. we routinely hear from president obama and senator warren that action was the principle cause of the financial. the threat to financial stability posed by too much regulation. let me take as an example the clo market collateralized loan obligations. this market provides more than $400 billion in financing for hundreds of american companies that employ more than 5 million people. they are a crucial source of

funds for many companies that cannot issue bonds. clos also performed extraordinarily well during the last 20 years with a nenlg i believe default rate. they performed better than high grade corporate bonds over that same period of time. unfortunately we are hearing from market participants that the risk retention rules promulgated by the fed will cause a contraction in the clo market and credit crunch for american companies. alternative sources of funds are available through hedge funds and the like. but they are not a stable source of funds and they will certainly demand a much higher interest rate. do you believe that american businesses are better served with expensive short-term financing from hedge funds as opposed to stable long-term financing options? >> well, we want to make sure that businesses have stable long-term financing sources. but we also want to make sure that when securitizations take place that the originators do

have skin in the game so that we avoid the kinds of problems that happen previously, and that's with those qrm rules designed to accomplish. >> i appreciate it. i would make a distinction between securitized mortgages at the epicenter of the financial crisis as opposed to, you know, highly rated commercial -- senior secured commercial loans that never defaulted in 20 years. i do appreciate the point about skin in the game. i wanted to just is ask you about a letter that we sent to regulators. i joined a bipartisan group of members of congress who wrote to you recommending you support the concept of a qualified clo, much like a qualified mortgage, a structure that would ensure the safety of these vehicles but also ensure a continuation of financing to hundreds of companies that rely upon them. is that something that you would be open to? >> i think it's something we could have a look at.

i would have to get back to you on it. >> i appreciate that. i would love to have that discussion with you. let me move on to the issue of illiquidity president market. secretary lew denied there was a liquidity issue or post crisis regulations are contributing to illiquidity in the market. in your previous testimony you you would not rule out the possibility of it playing a role. certainly your colleague acknowledged regulations may be a factor in diminished fixed income liquidity and there's been a lot of research on this. i'm quoting from one often cited piece of research. almost every institutional investor in almost every market seems worried about liquidity even if it's here today, they fear it will be gone tomorrow. they say that e trading is contributing to volume but little depth for those who need to trade in size. the growing frequency of flash

crashes and air pockets, add weight to the fears and most frequently cited explanation is increased regulation has driven up the cost of balance sheet and hence their ability to act as a warehouser between buyers and sellers. what would lead you to doubt that increased regulation is actually creating a destabilizing impact in terms of liquidity? >> well, it's just there are a bunch of different things going on in these markets and we are trying to carefully study. the treasury market and the corporate bond market aren't the same, the conditions are quite different and the rule of the broker/dealers is different. high frequency trading has become very pref levalent in th treasury market. >> i hear that explanation. let me just yump jump to one ot potential theory here. the more liquidity central banks add the less there is in markets.

in addition to regulation central banks distortion of markets has reduced the heterogenety. are they forcing investors to fix viewed income expensive making markets more prone to sudden corrections? >> we hold significantly more assets, the federal reserve and other central banks, than we did prior to the crisis. but we have very deep and liquid markets in the treasury securities and mortgage-backed securities that we hold. so i'm not aware that our behavior is significantly influencing market functioning. i'm not aware of any evidence suggest that. >> thank you for your testimony. >> time of the gentleman has expired to accommodate the chair's schedule. the gentleman from maine will be the last member recognized. gentleman from maine, recognized for five minutes. >> thank you, mr. chair. and thank you, chair yellen, for being here.

you notice they always save the best for last, chair. that's what they say in maine anyway. i'm thrilled to have a discussion with you in the lobby before we came into the hearing chair where i asked you specifically what your thought process is now going forward about fsok and your involvement in fsok is designated asset manager, mutual funds as systematically important financial institutions and if that happens, of course, they have to succumb to other regulations with respect to dodd frank and that stifle rate of return for small savers. you mentioned something very interesting group said right now the fed is not focused on designating asset managers -- >> if,sok. what i said was that the fsok is focusing on activities. >> i stand corrected. >> -- and studying a set of activities involved in asset

management liquidity risks, redemption risks, potential risks that have to do -- >> thank you. i stand corrected. you sit on fsok. >> that is right. that is fsok's focus at the moment. it's studying these areas. the sec is actively involved in rule making in these areas and that has been the focus recently in fsok. >> thank you. you know what would be really helpful, chair yellen, if i could suggest, if we have a written set of criteria that the industry, those folks that are in this space can look at something on paper to say, you know, if i have these various business practices that revolve around my business model or i manage these sort of assets then i know the probability of me being designated to siffy is very high or low. does that make sense? instead of our focus at