about the ongoing structure of the firm, that is just, we will not just be able to say, if something bad happens on thursday, will they be able to resolve by monday morning? i think we are going to need to ask ourselves whether the drafting and review of the resolution plans shows us that there are structural elements or features of the organization that could be an impediment to achieving that end. and a matter of current supervisory policy. we need to adjust. and that kind of exercise should >> want to indicate that i strongly agree with the tenor of the question that we heard from senator corker and senator warner with regard to law volcker rule and those aspects. i will not go into that further

but i wanted to indicate that that was the direction i would have gone in. i encourage you to take your comments to heart. i want to shift the focus for a minute. the housing credit market continues to be very tight. i am hearing a lot of concern about how dodd-frank will increase liability.

there are variables such as the consumer ratio. >> thank you, senator gore for the question -- spriggs -- thank you senator. we have recently been able to obtain a significant amount of data from fha and gives us a better window into the mortgage market. i think we are all quite concerned and you are all as well about the direction and trajectory of that market. this is an important role in helping shape the future of that market. we want to be clear that we want to craft a rule that is based on sound and data and does not unduly restrict access to credit which i think is something we have been hearing consistently from small banks, large banks, community and consumer groups

across the country. even after the fed comment period closed on this proposed rule, we continue to get immense amount of comment from different groups and we thought we would comment period and dan burtagain. his role was originally proposed by the fed -- this rule was originally proposed by the fed and if we were trying to convene we fully intend to comply with january 13. that is our approach at the moment. we encourage any small provider that wants to take advantage of the renewed theperiod. those outside the beltway often do not understand the ways they

can access the agency want them to have full access in full voice care and our role making to make sure we reflect the entire market. >> thank you. it would seem to me because the qualified residential mortgages supposed to be more broadly defined and a qualified mortgage, would be correct to say the banking regulators should wait for the cfpb to finish their roles before they move ahead? >> i don't know that a judgment has been made on that. as a general matter, we thought there was a logic in having qrm follow qm. there is a logic to that theme mr. curry? >> i think that is a necessary component. >> if people want to wait, we

will wait, to. >> i encourage you to do that. mr. terullo, different models model rest for the federal reserve is utilizing the current exposure method and there has been quite a bit of concern about whether that is an accurate method of risk modeling. are you considering other models or are you focused on simply staying with the current exposure method? >> in what context, in the stress test? >> that's my understanding, yes. >> with respect to the stress testing, what we are trying to do is make our best judgment as to what kinds of losses would be entailed across the industry. >> let me interrupt, i was more

focused on a single counterparties -- >> that is a different issue. that is a calibration issue with respect to the determination of the exposure of a large institution to another institution for purposes of the limits that would be promulgated. that is one of the topics that is being commented on in the consideration of changes before potential modifications to proposed rule 165-166. without trying to signal where we would go because we have not seen all the comments yet and i have not had a briefing but the challenge will be on the one hand wanting to have a methodology that tries generally to track risk

exposure while on the other, not becoming dependent on modeling within firms. as was seen in a number of that can lead you astray particular because firms in our observation tend to be much better at associated risk assessment for more or less normal times as opposed to the tail events we are trying to guard against. in thinking about the comments on the proposed rule, let's keep both of those issues in mind. try not to skew toward the risks associated with the positions on the one hand and on the other hand, wanting to make sure we are not totally dependent on some internal model. >> that is another example if we model to aggressively we will get a wrong and create unintended consequences. i encourage you to get it right and focus on these concerns

about the current accuracy of the current method. >> thank you very much. does anyone on this panel think that bruno iksil who ran the j.p. morgan investment unit woke up every day trying to mitigate the risk from excess deposits invested between loans in bonds? >> that is a related area of inquiry at the occ. >> you are inquiring but you would not argue that case? >> not necessarily. >> i wouldn't think anyone would because you look up each day trying to make money for the bank. it is kind of a basic observation.

small businesses across america and i will ask you to keep your smalls crescrisp - businesses are trying to get access to credit and they are frustrated. it is essential to the recovery of our economy. does it do damage to our economy to have banks diverting deposits into hedge fund investments instead of making loans to families and small businesses? >> we are very supportive of small business lending by the entire spectrum of national banks and federal thrifts that will supervise. >> that's not the question. is this damaging to our economy? >> i would hope not. i hope that was not the case. >> but it would be of deposit

were diverted into hedge fund investing rather than making loans to small businesses? you are saying it would be if that's what happened? >> we expect national banks and fiscal thrifts to meet the needs of their communities including small business lending. we do not direct exactly how they do that. we assess that from the cra. >> does it increase systemic risk to have banks diverting funds into hedge fund investments? >> i believe that is the intent of the volcker provision of the dodd-frank act. >> it is the intent but in your opinion, does it increase systemic risks? >> unrestrained financial risk

taking outside a legitimate risk for a market something we would be concerned about. >> from the common citizen point of view, when they look at long- term capital management and institutions that survive because we bail them out, i think the case is fairly clear that if you are in the hedge fund business, you increase systemic risk and if you're in the bank world, you increase the stomach rest. and my way off base? >> again, senator, we would look toward the banks engaging in safe and sound landing within the context of banking to the extent there was undue risk taking. >> to banks hedge fund

investment units have an advantage? do they have a competitive advantage over non-banquette's funds? >> i would have to look at the available research to come to a conclusion. >> of course they have an advantage. they have deposits and access to the discount window. is that an observation that is way off? >> i would like to be able to research and that further. >> in terms of proprietary trading as risk mitigation, there are eight basic things that create red flags. the company says it is mitigating risk on a long position, investments in in corporate bonds, by essentially taking a long position by selling insurance, is that a red flag that maybe this is not risk mitigation after all? >> that is something that would raise red flags and we would have to look at them up how

. >> that would be another area under risk management that we would look at. >> so a potential red flag -- with a risk mitigation operation is making massive trades that are not identified with specific risks from specific assets, would that be a red flag? >> we would look at that and the other examples you have given very close the. closely. >> are you going to support closing the loopholes that wall street banks are calling for? >> that is one of the issues that all the banking agencies and the other agencies are looking at, the proposed npr on

the volcker rule. our experience here as it unfolds with j.p. morgan chase would help inform our views in the final rule making them and thank you very much. >> senator twomey. >> thank you, mr. chairman. i would like to start by acknowledging mr. terullo's comments about the importance of capital. i know you have given a great deal of thought to this. for a long this for a long time. there may be many things we may not agree on but i think the emphasis on capital as a general matter is exactly the right direction we should be heading in. i fear that dodd-frank is a profoundly misguided effort to

do many other things. i respectfully disagree with our chairman who tended to disagree with the characterization of dodd-frank as a very explicit attempt to require that regulators micromanage banks. i believe very much it is exactly that and it is guaranteed to fail in that respect. i want to touch on another topic. mr. gruenberg, you stated and i think this is within context that the typical path toward the failure of an insured banks starts with bad loans. my understanding according to the fdic website that over the course of 2009 and 2010, there

were almost 300 banks that failed. that is a high rate of failure, the highest since the early 1990's. 95% of these failures were banks with assets less than $1 billion. i would ask you, to your knowledge, how many of them failed because of -- because of their proper trading activities? >> to my knowledge, none of them. >> not one? did they fail because they made loans that went bad? >> as a general characterization, i would say yes. >> virtually 100% of the cases? would it be fair to say historical late, including to the present day, the biggest risk of banking is the lending activity inherent to the bangla process? >> yes. >> do you regulate that at all? >> yes, that is a considerable

focus of our supervision. >> lots of regulation. concentration, requirements, supervision of the activities and yet, despite that, what a% of the failures of banks in america in the last two years are attributed to bad loans. i am not criticizing the regulatory process. it seems to me that if we have a banking activity, the very nature of which is to take risk and extend credit, some of those bags during tough economic times will fail. that is unfortunate but it is acceptable. it is unavoidable. the real goal of the regulatory regime, it seems to me, should be to insure that you do not have systemic risk. that you don't have the failure of one or more institutions taking down the rest. it seems to me that capital is the greatest insurance that you have less leverage if you have

more capital and less -- and more ability to absorb a greater losses. instead, we're going down the direction -- you are forced to implement the bill law that has been passed -- my understanding is there are 398 rule-making requirements and 110 of them have been met with finalized rules and 144 of them have been proposed yet another 144 have yet to be proposed and as we all know, but maybe our constituents may not be fully aware, we are talking about rules. we're not talking about an admonition not to play in traffic. we are talking about many pages of complex matters that are associated with each individual role. the volcker rule alone is staggering in its length and complexity. i think it is impossible. take one little aspect of the ball roll, the exception

applied to market-making activities just in formulating that exception. we have all kinds of metrics we will impose that regulators will decide and they will invent limits on how much money can be earned from the spread versus the subsequent market role and how much business a market maker must do with end-users verses interbank dealers. what kind of asset class as are permitted to trade and under what circumstances we decide whether this applies to an individual trader. it is staggering. i am concerned it will limit the ability for banks to manage rest and will have a huge cost that will reduce liquidity in the markets and we are doing this while no banks have failed because of proprietary trading. we create these arbitrary exceptions. you can do all the risk taking as long as it is in treasurys.

you can lose your shirt trading treasurys. i guess i don't have a specific question about this. i am concerned that we have created a monster. at my last count, it is between the comptroller of the currency and the fed, we have over 100 examiners on the ground pretty much full time at j.p. morgan alone. that is before we implement all of these rules. mr. chairman, i have to say we have very much taken the wrong direction here and i hope we will reconsider when we are in a political environment when it is possible and will consider capital as the essential tool to reduce systemic risk than center menendez -- >> thank you, mr. chairman. i want to ask you about j.p. morgan losing $2 billion and

possibly more sins occ was the primary regulatory they have a well cap deserved reputation of being too cozy with the banks they regulate. i know you just got to your new position so you have an opportunity to decide what occ does in the future. i find it interesting -- i don't want to see a repeat of 2008. i know a free market is essential to our economic vitality but there's a difference between a free market and a free-for-all market. in 2008, we came to the conclusion of the consequences of a free-for-all market where the decisions of large financial institutions became a collective risk and the entire country even though they were not part of making those investments and

other decisions and all this had to pay. i wish we had capitalization van and i wish we had insisted on a whole host of things that would have avoided 20008 because i will never forget that meeting with chairman bernanke and secretary ballston reddit describes large slate financial institutions on the verge of collapse. they said failure to act would lead to a new depression. i do not want to revisit have that. i don't know whether people can forget such recent history but i don't. i know you just got to this position and i'm certainly not blaming you personally for this but i have a yes or no question -- did the occ screw up and allowing these j.p. morgan trades to happen? >> senator, we will critical

look at that question as part of my goal in reviewing what happened at j.p. morgan chase. it is not just to see what the bank itself did or did wrong also how we can improve our supervisory processes and at theocc. it will be a critical self review as part of this process >> how long will that take you to come to a conclusion? >> i hope to have it done as quickly as possible. >> what does that mean? >> i hope within the next several weeks, no more than a few months. i want to reiterate that my goal as comptroller is to have a strong and effective supervision at the comptroller's office. it is imperative and the lessons learned from the 2008 crisis are clear to me and my colleagues at kate occ. we need stronger capital which we are getting through basel 3

and other rule making. corporate governance is critical. shouldn't the sheer size of these trades have been a huge red flag for occ? >> that is an issue the concentrated nature of the trading and illiquidity of that are red flags that are clearly apparent now. >> i just think that for those of us who supported wall street reform and don't want to relive 2008, i think every regulator here responsible for if hugeting blothe law,

trading losses happen at a bank after we institute the volcker role and capital rules have been written in implemented, i think the blood will be on your hands of the law whale goes belly up -- -- will be on your hands lndon whale goes bellye up next time. what if a less-well-capitalized bank is brought down? i just don't see were the circuit breakers are. i don't see where the ability to ensure that that type of decision making doesn't become the collective risk of all of us in this country. i don't think the american people and certainly this

center, are willing to go down that road again. i don't know what it takes to get everybody to understand that we are serious of purpose to insure that the law is fully implemented. there are those that disagree but as been set in the past, americans are free to disagree with below but not free to disobey it. they are not free to disobey it. this senator, for one, will continuously pursued to make sure we do not relive 2008. i hope all the regulators and certainly occ understands that. thank you, sir. >> thank you very much. this is one of many hearings that i participated in and this committee has held a in connection with the implementation of dodd-frank for it when i ask for a committee assignments a year-and-a-half ago, i ask for the banking committee. i was told by some that if you

want to be on the banking committee, the work is done and they have already passed dodd- frank. oversight, implementation, alteration of dodd-frank is a very important task for this congress. it is one i wanted to fully engage in because the consequences of dodd-frank are tremendous source of lead directly to financial institutions but more importantly, to the customers, borrowers and depositors, that we care a lot about. it is concerning to me that while we continue to have these hearings, my concern is that there is no legislation that follows the serious of ideas presented and certainly i would guess almost every member of this committee has expressed be there in a committee hearing or in a letter to regulators, a

desire for a different outcome: what has occurred with dodd- frank. i think there is a general belief among almost a run on the committee that the knees to be some alterations in dodd-frank. my hope is that we will take the opportunity to modify through the legislative process provisions of dodd-frank we think are objectionable or improperly worded or need an alteration based upon the hearings over a long period of time we have had on this topic. i have always been concerned that any time legislation is proposed that alters the provisions of a dodd-frank, the allegation is that the senator or legislature that wants to make changes is defending big banks and does not care about the consumer. i cannot imagine a circumstance in which there is not legitimate needs that need to be addressed

that our concerns for everyone on this committee in different areas and different issues. we need to make certain that the oversight hearings become something more than an oversight hearing and that there actually is a legislative response in which we treat other with great respect and not with political allegations that we are carrying water for some particular institution or segment of the financial industry. i would encourage us to mark up the menendez legislation. let's go to work and pursue some of things we need to be done in regard to improving the financial regulation even though we have passed dodd-frank. proving a right that the glory days of the banking committee are not over and we have lots of work to do. i want to ask a series of you have indicated that as a result of bill lawson announced at j.p.

morgan that your position in regard to the volcker role has been well informed. loss hasring how informed your view in regard to the volcker role and in particular, what do you think that ouroccur in regards to byn experience the level of risk management that was present at the cio office that was engaged in activity that arguably may fall under dodd-frank's volcker rule provision on proprietary trading and risk mitigation hedging exception -- i think it really illustrates in terms of the types and kinds of oversight

structures and mechanisms that would be needed under that particular provision. >> has anyone else become informed? >> i did not use the term but i will answer anyway. we need people run through this. you have a situation in which the firm has publicly said they did not think this was a well managed risk. it was supposed to be a hedge. somebody should align the role with the practice and say of the rule had been in effect, would have precipitated the kinds of risk management, identification of strategy, and documentation that would have been adequate to bring the attention to the firm and the supervisors to a potentially risky strategy? i think that is the case as i sit here today but i would want someone to go through it more carefully. >> mr. chairman, thank you.

i would like to compliment my colleague from pennsylvania in his very logical presentation. thank you, mr. chairman. >> senator bennett. >> thank you for holding this hearing. i appreciate the comments of senator moran. i'm sure we all want a secure capital market in this country. i sat here three years ago and heard the testimony on the credit defaults swaps that brought down these large financial institutions and put our families through enormous economic turmoil. it was very clear to me that the testimony we were hearing was that no one was watching and no

one had a view of the systemic risk that was produced by those transactions and to think of those as merely bad loans rather than securitized instruments that nobody was watching, i think, is not an accurate reflection of the history of what we heard. i'm not for any more regulation than is needed and i share some of the skepticism on the other side about the ability of the regulators to keep up with what is going on in the capital markets. i want people to remember why we are here to begin with. we saw gaps in the regulation that had a profound effect on this economy and the people i represent. having said that, i want to go back to the ranking member's first question which was -- what

was the nature of this transaction? was it proprietary or a hedge? we don't have any answer to that. this is how i would ask the question. to explain to us what that examination will look like. what will you consider as you think about defining that? i think we can learn something from that. those of us that are cautious about those definitions would like to know what you are actually going to be looking at. >> at the occ, we have a two- pronged approach to this particular issue. we want to fully understand the nature of the hedge or trading activity at issue. we also want to get an

assessment and full understanding of how the bank intends to reduce its exposure from that position. part of that process and part of our secondary prong -- >> sorry to interrupt but the first step is to determine the nature and the second step is to determine the risk, the attention to risk. it is that seconded termination dependent on the trade activity? n >>o, the first prong is to assess the financial risk to the institution. that is a priority immediately after this issue surfaced. we're also looking at from a post mortem standpoint of what happens and where were the deficiencies and what needs to be corrected. is there additional risk

management gaps elsewhere in the organization? is there an opportunity to learn from this experience in terms of the risk-management practices that the other large institutions we supervise. that is the general scope of our review them i'd do you have anything you like to add? >> you made an observation earlier that i thought i heard you say? low likelihood of a tale experience with europe? - >> i was referring that in my observation, the modeling that to try tofirms tdio understand what their risk of losses are tanned not to be as

oriented towards detail risks. that means events that while appearing at that moment to the low probability would come if they transpired, have enormous loss. >> how do you view that rests? - risk. i understand the balance sheets are better here than in europe but the risk of collapse -- >> i think european leaders appear to be moving with high heightened sense of urgency. i think the g20 meetings will be an important opportunity for them to make further progress with respect to their banks and capitalization and the restructuring of the banks. as you have seen, they are considering those things now on

a european-wide basis. the europeans have the will and the capacity to keep this thing together. the president, the secretary of the treasury and others in the a ministration are engaged. as developments move forward, i think it is not useful for me to hazard a guess. what is clear is they have the will and the capacity and i think they understand the urgency to start taking the actions that are consistent with avoiding some of the most on pleasanton things. >> thank you, mr. chairman. >> senator brown -- >> thank you all for joining us. i am glad to hear you talk about the importance of capital requirements.

they seemed less concerned about that during the drawing up of the dodd-frank. i have sent you a number of written questions and i look forward to your prompt response and i would appreciate those answers prior to jamie dimon appearing in front of this committee next week. i hope -- i hope you can do that. year-ago, the subcommittee held a hearing on bank supervision. you were not here and i appreciate you taking the responsibility in this job. , especially with the reputation of your agency. i want to share that testimony briefhigh would insist on answers because i have many questions.

david wilson, the head of credit and risk testify "given the importance the role these institutions play in the overall financial stability of the united states, we have instructed our examiners that these organizations should not operate with anything less than strong risk-management and audit functions for anything less will be no longer sufficient. jamie dimon himself said j.p. morgan traits were flawed and complex and poorly reviewed and poorly executed and poorly monitored. i would like a yes and no on this question. did occ meet the standard set for itself before you were there? >> i want to acknowledge that we are working on your written responses to your original letter and we will get it to you prior to the testimony. in this answer, the and no is, not in the particular case c of

theio's office. it does not look like a meat -- met the higher expectation. >> also the hearing is reviewed by the response a ball offadc before it is finalized. both units have formal quality assurance that assess the effectiveness of our supervision and complies with occ policies. i know you were not there by did the deputy comptroller and assist in deputy comptroller is simply not know about them? >> this is part of the inquiry we are conducting to determine how we can improve our process seas. es.pe >> the supervisors were unaware of the activity occurring at j.p. morgan chief investment, office until april of this year. this office was making $360

billion in trades. this is larger than the assets of 7299 banks in the united states. if it were a stand-alone bank, it would be the eighth largest bank in the united states agreed it was making a trade that you say is the biggest and most complex trade in the banking system. should the eighth largest bank in the nation be allowed to make the biggest, most complicated trade in the entire bay gang system with out the occ's knowledge? >> we would expect to be aware of significant risks to have a bank identify them and four of -- and for us to have adequate records on those risks. office and this was an area that was a discreet portion of it. that may be a reason why was not identified as quickly as we would like.

>> is still show that unidentified. i hear about the $2 billion or $4 billion loss that the chief investment office which is serious but is more than that. j.p. morgan took a $25 billion hit to their stock which is for a'won as and pension funds and i loss of wealth to a large number of people. that is a signal that the market believes this event indicates bigger problems in the management and oversight that j.p. morgan -- at j.p. morgan this begs the question that these trillion dollar megadeaths banks are too big to fail. they are too big to manage them to big to regulate the of the occ's position is they don't

subscribe to the view that big is bad. as long as occ continues to insist that large banks are essential to our economy, they are responsible for their inability to properly examine and supervise these mega bags. i appreciate you working to improve your oversight but i heard the same promise last year from different management. could the occ have done differently. you need to identify what mistakes were made, by whom those mistakes were made and of j.p. morgan can hold its senior executives accountable which bay appear in part to be doing, which expect nothing less from the people that work for you. thank you. >> senator schumer. >> thank you, mr. chairman and

the witnesses. one of the obvious issues raised by j.p. morgan trading losses is the role of risk management at banks, especially large bank. i thought to have included in dodd-frank, a provision, section 165h requiring all banks with over $10 billion in assets and all non-banking financial firms supervised by the fed to have a risk committee that includes at least one risk management expert having experience in identifying, assessing, and identifying risk exposures of large firms. in your testimony, you say you will require the bank to read here to the highest risk management standards? in your assessment, the j.p. morgan has sufficient expertise in risk management to carry out its duties? it has been reported that j.p. morgan is changing the competition -- the composition

of its risk committee. can you provide the committee with an update on those changes and discuss whether you think the new members of the committee has sufficient expertise? >> the introduction of the risk committee to dodd-frank is a welcome improvement to the overall corporate governance of financial institutions and the sikelia large institutions. we view the role of the board in terms of corporate governance as they met again to excessive risk as being a critical feature of sound risk management. and this is a killer case, there appears to have been a breakdown and at thecio level. that is a matter of significance. we have endeavored to make sure

it is not endemic throughout the entire organization. we hope the reconstituted or members to the board will be experts. >> you reviewed the risk committees of other banks with a red $10 billion to determine whether they have the necessary expertise? >> one of the virtues of the provision that you refer to is that, as one of the enhanced prudential standards, it will now precipitate what we call a horizontal comparison in review meeting for those largest institutions, our large institutions supervision committee should look at -- will look at each and compare them. it is that process which will give the individual supervisory teams on the ground war guidance and more insight as to what they should expect. >> i suppose there is some difference. some banks are over $10 billion

that a plain vanilla. and others were doing these fancy and unfathomable things that that is exactly right. >> are you reviewing other banks as well? >> that is a credible component of our assessment of corporate governance and the overall risk management policy. >> so you are. the second question, j.p. morgan's credit derivative trade was made by a group that is part of the u.s. bank apparently, all booked in london. do you have full access to the information you need about trading activity conducted in london if it is carried out by a u.s. bank and what more needs to be done to improve coordination with international regulators to prevent these kinds of cross border losses? the london operation at j.p. morgan are conducted through a branch of united states national bank. >> in terms of jurisdiction, we

have clear jurisdiction over that branch. in the case of j.p. morgan chase, those activities are managed on a global basis through the new york office where we have the majority of our core staffing >> good - this is about early-warning systems. traders said several hedge funds have been able to spot the j.c. glamorgan -- the j.p. morgan trade. the regulators know? regulators cannot micromanage every trade position at every bank. that would be impossible for you to do. is it possible to build an early-warning system to warn us of a single company accumulates unusually large positions in any single product as it appears. i ask sec chairman of there

would be possible. they said with a new information under dodd-frank, we could set up early warning systems. my question goes to both of you -- what can and should regulators do to improve their ability to identify potentially risky trading activity at a time? i realize foresight is a gift and it is not easy but, when you are getting above a certain level of money, a little bell could go off and maybe it is playing these vegetables as they say trade would not ask you to get involved with everything the bank is doing. i will first go to t mr.erullo , mr. curry and anybody else. >> this includes things like position limits and that should

be a first early-warning. secondly, we already, within our supervisory process, look at market indicators including aggregate market formation to identify trends that might be relevant to a particular institution. our ability to do that depends on the relative granular to or specificity of the inflammation. in this case, for example, i think there are products that although they could be a big part of the market, for the overall financial markets, we are relatively small. if there is reported on mars is of a products like that, our normal look at market information would not have revealed this. >> what about after dodd-frank is fully implemented? >> i think what is most

important there is when a firm is taking a hedging position, it will be required to specify what its strategy is and what to risk-management will be. they will have before and access to that information rather than have to ally and us going in afterwards. >> you think it will improve? >> i think it will improve. >> this was a highly complex gillibrand em concentrated investment. it would have been very helpful had there been market or other data available that would highlight this concentration to was. to the extent that dodd-frank provided that or there is other market information that could utilize that. >> and the fact that they have reported justified this. is this prophylactic or do they have to do that within the bank anyway?

>> the reporting would be very helpful. one of the issues is whether there was adequacy of reporting and whether that report was available to the occc and the examiners. anyone else care to comment? thank you, mr. chairman, my time is up. quite senator shelby has additional questions. >> thank you, governorterullo,. you said thatony recent events served to remind us about the presence of substantial amounts of high- quality capital is the best way to ensure the future of financial firms and are borne by their shareholders and not depository for taxpayers.

what percentage of capital of b underasel3 will large banks likely hold under the new and has capital standards? will this amount be sufficient to? i think it is a given that there is no substitute for capital. you can regulate everything in the world but if they have inadequate capital, you know what will happen sooner or later. >> i believe on the centrality of capital but is not the only way. >> but it is number one? >> in my judgment, yes. requirement is for 7% equity. >> what do you mean by common equity? >> traditionally, measures of capital, so-called tier one

capital could include common equity which people generally think of as shareholder earnings, retained earnings and what they have put into the company but also included some other kinds of hybrid instruments. there's loss absorption capacity which ford ongoing firm is not as strong as for common equity. basically pre crisis, if you dug down into the requirement, it was only really a 2% common equity ratio requirement. it had to have a common equity west -- which was at least two% and basel 3upped that for banks generally. there would be a surcharge. is that enough?

my preference would have been to have this hire but these were negotiate internationally. we set them with an eye to the other regulatory tools you talked about. there are some restraints on activities and market discipline. but their supervisory capacity. it will always be a balance as to how much capital and what other tools you have. >> do you believe our banks are overall in much better shape than they were three years ago? >> yes, senator. >> do you agree with that, mr. secretary? >> absolutely. >> stefan with respect to national banks. -- definitely with respect to national banks. >> do you can't this is the cause of required capital -- you

think this is because of required capital? >> i blew -- i believe it essential but i also think there has been a good bill re- risking. >> is there some risk to the economy if people try to take most risk out of the banking system? you make a long, that is a risk. if you have something, that is a rest. risk. you can't take real risk out of the banking system? >> no, you can then you wouldn't want to. >> that's correct. it is a question of one properly understood and managed risk and a capital buffer when things happen that you don't anticipate. >> i would agree with the governor. >> i agree also, senator. >> thank you.

>> thank you all for your testimony and for being here with us today. with continued threats for europe and the reason reminder that risks in the financial system must be appropriately manage to, we must remain vigilant and complete the implementation of wall street reform to enhance and reduce systemic risk. this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

the house returned at 10:00 a.m. eastern and will work on the homeland security spending bill. live coverage on c-span. c-span2's coverage of the senate session begins at 9:30 a.m. they will work on the farm bill. c-span3 has ben bernanke as he testifies before the joint economic committee. live coverage begins at 10 eastern -- 10:00 a.m. eastern. on "washington journal," we will hear from loretta sanchez. also, tom