carefully. we certainly heard the market concerns on this topic. at this point i can give you a list of factors that may be causing this phenomenon. i should say you see this -- you see this decline in liquidity in some measures, but not in others. . is there a number of things that might be involved? first, there is a change in the structure of the market. a larger share of bonds are held by investors such as insurers and pension funds that may do less trading than leveraged firms that used to be more dominant in this market. we have had higher capital requirements and other

regulatory changes, but firms are also changing their own risk management practices in some sense -- in some cases in a more conservative direction. we have seen an increase in algogh rhythmic and high--- algorithmic and high trading practices. in addition, in the corporate bond market, there have been increased reporting requirements that may be reducing the desired sizes of trades. and i think all of these factors could potentially account for what's going on but we have not really yet been able to figure out what the contribution of each is. we just have serious -- i think a concern is while day-to-day and normal times -- most measures of liquidity seem to be roughly unchanged, there is

a concern that in stressed situations it may be -- and we have seen some cases where it's less available. senator shelby: in any market, you need risk and you need liquidity, do you not? chair yellen: yes. senator shelby: you don't have a market without it, do you? chair yellen: we do need liquidity in markets. there may be changes, however, that precrisis it was leveraged even highly leveraged banks that were exposed to providing liquidity and vulnerable if liquidity were to be reduced. and now it seems like more of that risk has moved to unleveraged -- low-leveraged investors and that may be a safer situation. so there are two sides, i think, to this. senator shelby: in the area of

reducing systemic risk which we're all interested in, do you believe that having fewer systemically risky financial institutions would be a good thing? chair yellen: well, we -- arguably yes. senator shelby: ok. should banks through regulation -- like the fed -- be encouraged to reduce systemic risk anywhere they can? chair yellen: well we're certainly trying to put in place a set of incentives that will reduce the systemic footprint and risk of firms. i think higher capital requirements we plan to impose, surcharges, capital surcharges on the most systemic firms and other regulations that will diminish the risks create incentives for their footprints to be reduced in ways that will

reduce their systemic risk to the financial system. senator shelby: senator brown. senator brown: thank you, mr. chairman. madam chair, i continue to be concerned, as i know you are, that the economic recovery has not taken hold for all americans. notably, large numbers of women and in communities of color. i know that confirmation bias can be a problem in investing and some might think it's a bit of -- it might exist on capitol hill, too, but i see lots of evidence of underemployment, unemployment, virtually no evidence of inflation and lots of sources of head winds for our economy. what are the risks of tightening monetary policy too soon and once rates are increased, what would be the impact of the gradual rate increase on working americans? chair yellen: so, of course, there are risks to the recovery of tightening too soon and we

have been ohio valley focused on those risks that's an important reason why we have left rates as low as they are for as long as they have been over six years, they have been at -- they have been at effectively zero. we have had a recovery that has been slow to take hold. growth has been slower than in most u.s. recoveries following a severe financial crisis. we have clearly made progress. i agree with you that there remain groups that are struggling in the labor market and as we try to show in the monetary policy report arguably the standard unemployment rate that we look at 5.3% may somewhat understate the real degree of slack that exists in the labor market.

so we clearly want to see continued improvement in the labor market, and we want to do nothing that would threaten that. on the other hand, the labor market is getting demonstrably closer in my view, in my metric, to a more normal state. and the degree of monetary accommodation has been sufficient over a long period of time to generate pretty significant improvement in the labor market. and as the head winds that are holding the economy diminish -- and i believe they are diminishing -- i think it does become appropriate to begin -- we're not talking about tightening monetary policy. i think we're talking about slightly diminishing the very high degree of accommodation that we have in place. and of course, we won't want to do so in a way or at a pace that would threaten continued

progress in the labor market. at the same time, inflation is very low, and while we've indicated that a good share of that is for reasons we believe will be transtory and we expect inflation, headline inflation to rise to much closer to core levels, that's another reason why we can be patient in removing accommodation. but i think it's also important -- there are risks on both sides. just as we don't want to tighten too soon to threaten the recovery or to jeopardize the return of inflation back to our 2% target, we also want to be careful not to tighten too late because if we do that arguably we could overshoot both of our goals and be faced with a situation where we would then need to tighten monetary policy in a very sharp way that

could be disruptive. my own preference would be to be able to proceed in a -- to tighten in a prudent and gradual manner, and there are many, you know reasons why we would like to be able to do that. i agree there are risks to the labor market to tightening too soon but there are risks on the other side as well. we are trying to balance those. senator brown: thank you. some have recently -- some people have suggested recently that american workers need to be willing to work longer hours. i don't think many americans work fewer hours by choice. obviously -- unless, of course, there are health issues or childcare limitations or other responsibilities. i think most or at least many americans working part time would like to work full time. this slack in the labor market seems to indicate we have a ways to go. discuss with us your concern

about the number of workers who are only working part time but would like to be more in the labor force, if you would. chair yellen: yes. well we have an unusually large share of the labor force -- i believe it's around 4.5%, that report themselves working part time for economic reasons. that means they would like to be working more hours than they are able to work. and broader measures -- the measure of the unemployment rate that we normally look at, it's referred to as the youth three measure. that's 5.3%, but broader measures that capture that part time for economic reasons a measure like u-6, we have a picture in the monetary policy report and we show how high that is. and we show that although of course it's always higher than the narrower concept of

unemployment it is very much higher than you would expect historically given the narrower measure of unemployment. so to my mind, this really suggests that our standard unemployment rate does understate the degree of slack we still have in the labor market. senator shelby: senator corker. senator corker: thank you, mr. chairman. ranking member, i appreciate it. madam chairman, thank you for being here. i spent a lot of time with you when you were getting ready to be affirmed and enjoyed that and appreciated talking about views on monetary policy. this is not a per jor tiff statement but i know when you were coming in you were claimed to be the, quote, defense, head of the federal reserve. i know we had a number of conversations about that. i know you supported all of the rate hikes on the other hand that took place as we were leading up so i want to make

sure that everybody understands that. chair yellen: thank you. senator corker: but we did talk a lot about this moment in time we're in and it seems many are getting -- let me put it this way -- the impression many who are spending their daily lives dealing with the stock market and is that the fed has become very affected by the market swings and that much of that may actually be driving monetary policy, not just the stats. we got -- we had -- i guess we had two other times in modern history where we had negative interest rates or at least times that i'm aware of from 1974 to 1976 and 2002 to 2004 and we had this long period of time where in essence we had negative interest rates and yet it seems the fed continues to watch, not just the stats, but is very affected by the markets and worried about disruptions

in the stock market. wondering if you might address that. chair yellen: so i would push back against the notion that we're unduly affected by the ups and downs of the stock market. we're certainly very focused on the fundamentals and the economics statistics that describe where the economy is. and in terms of the labor market and inflation, which are the two goals assigned to us by congress and a lot of different kinds of economic information go into the forecast that drives our decisionmaking, our forecasts about where the labor market and inflation will be moving. but financial conditions broadly -- and i'm not talking about the stock market here uniquely but a wide range of

financial variables that i would say go into assessing financial conditions, the ease for households and businesses of borrowing that affect their spending patterns. whether it's consumer spending or investment or our ability, our competitive position in the global economy that affects our ability to export and the competitiveness of import competing goods. the state of financial conditions, broadly speaking, is one variable that does affect our forecast of the economy. so we can't completely ignore what's happening in the markets to housing prices, to equity prices to longer term interest rates, to credit spreads that influence borrowing costs, to the exchange rate that affects the competitiveness of u.s.

goods and services. all those factors feed into financial conditions and they're relevant to forecasting the economy. so it is one element of our evaluation but i don't think we pay undue attention to it and i don't think we should. thank you. the living will process, i know the ranking member alluded to dodd-frank, and senator warner and myself were working on title 1 and title 2 and i think senator shelby offered an amendment on the floor that passed 95 votes to make it even stronger if i remember correctly. or at least altered to some degree but certainly make it sure it became law. we've had some questions about the living wills, as they've come up. the last round, there was a little bit of concern, at least on my part and a few others, regulatory capture taking place that really these living wills

were lay lacking in substance and yet maybe the fed really wasn't, you know putting the pressure on these organizations to deliver as they should. aid good meeting this week with mr. tarullo, and my understanding is the substance of these living wills -- i know y'all sent out some statements regarding what's happened. i think they're much better than they have been, but it's pretty clear these living wills have to be able to resolve an institution under bankruptcy. i just wonder if you might speak to that for a moment. chair yellen: i agree with you. we worked closely with the fdic in this last round a year ago to set out a clear set of expectations for what we want to see in the current round of submissions. we've worked closely with the fdic and the banking organizations to make sure that they have been very clear about

what we expect in this round of submissions. we've instructed them to enhance their disclosure in the public part of the documents that they produce, and it looks like preliminary reads suggests they have made progress there. and we're going to be evaluating them in the coming months, and we indicated that if we continue to see shortcomings in the living wills that we'll use our authority to determine that these resolution plans don't meet dodd-frank requirements and that's where we stand and that's what we're going to do. senator corker: thank you very much for your service. i appreciate it. senator shelby: senator menendez. senator menendez: madam chair, thank you for your service to our country. i appreciate the work you've been doing. as you know and have stated many times the fed's dual

mandate, now how the fed chooses to balance these goals has significant consequences for the quality of life of millions of americans. and on the first element our labor markets are improving but most americans feel like they have a lot of catching up to do from the deep hole of the financial crisis put us in. they don't feel that their personal circumstances has certainly risen at all and they feel enormous challenges. meanwhile, inflation continues to run well below target, as it has for an extended period of time. so it would be a mistake, from my view, for the fed to shift its focus away from jobs at this critical time. with interest rates near zero, the fed has essentially no

room. if it tightents too late, the fed has pretty ammunition to keep it anchored. to follow up for senator brown's question. i'd like to know, in order to avoid choking off economic growth prematurely will the fed wait to raise interest rates until after it has seen signs of actual inflation rather than based on intangible fear of inflation which may or may not ever materialize? chair yellen: so, senator, i agree with your characterization of the risks that if there is a naked of shock to the economy with interest rates penned at zero, we don't have great scope to respond by loosening policy further. whereas with a positive shock, of course, we can tighten monetary policy. we have the tools and we know how to do that. that's a consideration that has

been weighing on our decisionmaking for quite sometime and has led us in part to hold interest rates at these very low levels for as long as we have. so that has been a factor we have been taking into account and it partly explains the policy that we have been following. but there are lags in the effect of monetary policy. we need to be forward looking and on the other side, that's -- there are risks from waiting too long to act as well. we have to balance those risks. you asked me if we would likely raise rates before inflation has risen substantially, and there i would point you to section 3 of the report that we gave to you where we show each

participants' forecast for -- we show a summary of their forecasts for the economy, and for policy -- and as i mentioned in my testimony, most participants -- as of our june meeting -- envisioned that economic developments would proceed in a way for the rest of this year that would in their view for almost all of them make it appropriate to begin the process of normalizing policy sometime this year. and if you look at their inflation forecast, at the end of the year on a year-over-year basis, most participants envisioned that total inflation would be running a little bit under 1%. so that's well below our 2% objective. and they envisioned core

inflation that is for the year as a whole at the end of 2015 as running in the neighborhood of 1.3% to 1.4%. you can see in their projections that it's appropriate to begin tightening policy with inflation to lower our objective. but what we've said is we want to have reasonable confidence before we tighten that inflation over the medium term will move back to 2%. what's going on here is that we think that there are transtory influences namely, the marked decline in oil prices and the strengthening of the dollar that are holding inflation down. and that underlying inflation, even with core inflation, that low import prices and declining import prices are a transtory factor holding that down that

as we see the labor market improve and these transtory influences wash out that we believe that inflation will move back to 2%. and so if we have that confidence, the committee would be likely to begin forcing inflation go back to target. senator menendez: i would have interrupted you a long time ago because my time expired. because your response was so interesting and i'm trying to grasp where your policy view is from it that i let it go. let me just make one, if i may very briefly, chairman, a comment and that is that from my -- i listen to you intently. from my perspective, i think it is much less of is a problem that inflation may run high a little bit. i didn't say it was significant inflation would you reference, to run high for a little bit for a short period of time

until the fed's response to it fakes effect. then the alternative which is cutting off much-needed job growth and income growth too, which would have been my second question. i'll submit that for the question. chair yellen: cut off job growth and income growth and we do want to see inflation move up to 2%, we would not be pleased to let it linger below 2%. senator shelby: senator rounds. senator rounds: thank you, mr. chairman. madam chair, recently the senate banking committee held a hearing that examined the role of the financial stability board and the u.s. regulatory framework. a lot of concern was expressed about international decisionmaking on regulation overtaking u.s. decisionmaking. i'm just curious would you agree if it's important for the united states to set its own insurance capital and other regulatory standards before agreeing to any such standards

internationally. chair yellen: well, we are working on u.s. standards. nothing applies to u.s. firms until we have gone through a formal rulemaking process or process with orders in the united states. so no international discussion or agreement applies to u.s. firms unless they're consistent with u.s. law and we've gone through a full-blown rulemaking process. but discussions are taking place internationally about appropriate standards. i think it's very important that we weigh in on those discussions so that the standards that other countries adopt work for our markets and for our firms and we end up

with a playing field that is competitive for our own firms to compete in, so we participate in those international discussions but with an understanding that nothing applies to u.s. firms or is -- until we have gone through a full rulemaking process here. senator rounds: thank you. i'd like to follow up on what the chairman was visiting with earlier and that's with regard to sifi designations. do you support giving designated firms a specific road map for dedesignation, like an offramp or an approach that would allow them to basically dessertify? chair yellen: so i think firms should have the ability to dessertify and the fsoc every year has to review designations

to make sure that they remain appropriate. that's an annual procedure. now, firms are given very detailed information and interact a great deal with fsoc during the process of designation and they understand very clearly what it is about their business model and strategy that's caused them to be designated. so it's not a mystery to their firms what about their business activities is responsible for designation. i guess i want -- i don't think it's appropriate for fsoc or for the regulators to try to run these businesses, to try to micromanage what these firms do. i don't think there is any single appropriate offramp. we shouldn't be telling them

exactly do the following list of things. they understand what they need to do to change their profile in a way that would change fsoc's evaluation. and if they were seriously contemplating making those kind of substantial changes i'm sure there would be many opportunities to interact with fsoc and staff to gain some perspective on whether or not the kinds of changes they were thinking of would significantly change their systemic footprint. senator rounds: thank you. one last question. as you know, madam chair when you talk the markets clearly listen. as you work with the federal reserve's open markets committee, you look at a balanced approach and you're looking at several goals. you've clearly defined that

your goal is a 2% inflation rate. what about when we talk about maximum employment? where do we go and what do you lay out as the firms look at it in terms of what to expect from the committee, what's your goal in terms of the maximum employment? chair yellen: so, as we say in our statement of longer run goals and monetary policy strategies there is something different about the two goals. we have a goal for inflation 2%, and maximum employment. a central bank can choose or determine what its inflation targets should be. we chose 2%. we're in good company. that's what most advanced central banks have chosen. maximum employment is different. we can't just decide what do we want that to be in the long run. we think there is some normal longer run rate of unemployment or level of maximum employment

that is consistent with stable inflation, and for us it's not something we can say we'd like it to be this or we'd like it to be that. it's something we're trying to determine. it can change over time. it's not easy to know exactly what's possible, given technology and dem on graphics and the institutions of the labor market function. so we're trying to estimate it, not determine it. but participants in the committee are asked every three months when they submit their forecast to write down their own current views on the unemployment rate that corresponds to what they regard as normal in the longer run or consistent with maximum employment. and most members of our committee or participants currently regard that as an unemployment rate of 5.2% to

5.3% and that's something that can change over time. it has changed over time and we report that publicly. senator rounds: thank you. thank you, mr. chairman. senator shelby: thank you, senator rounds. senator donnelly. senator donnelly: thank you, mr. chairman and thank you, madam chair. madam chair, i know you share my concerns about income inequality and the trend of middle class wage stagnation. you said although there are tentative signs that wage growth has picked up but it continued to be relatively subdued. so as the economy improves, how do you expect middle-class wages to show substantial improvement? what are you looking at? chair yellen: well we look at many several different measures of wage growth. three aggregate measures that we look at are the employment cost index hourly compensation and average hourly earnings. they don't always tell exactly the same story.

i think we have seen a meaningful pickup over the last year in the growth in the employment cost index. but less movement in the other two measures. so their early indications are conflicting. indications there. the levels of increase are still relatively low and in real or inflation adjusted terms. compensation or wages are increasing less rapidly than productivity. senator donnelly: what do you expect to see in the next year? chair yellen: i expect to see a pick up in -- i'm not going to say middle class wages but aggregate wages in the economy. i would expect to see some further upward movement. where they can go depends in part by productivity growth. for example, if productivity growth -- and there's a lot of uncertainty about what it is -- but if it were at a trend rate

running, say around 1.5% with a 2% inflation, we would expect to see growth. senator donnelly: and i guess the key is there is some correlation between productivity growth and the growth in wages as well? chair yellen: there tends to be over long periods of time, but it's not always true over shorter periods, so there is some uncertainty about this. and we have been through a period in which wages have been -- growing less rapidly than productivity. i would expect to see a pick up. it's not a certainty here, but it is, and to my mind it is evidence of some remaining slack in the labor market. so that's my forecast is that we will see some pick up in wage growth. but it is important to remember that there has been increasing

wage inequality in the united states over a long period of time. certainly going back to the mid to late 1970's. and that reflects a deeper set of structural factors that the federal reserve doesn't have tools to combat. what we're looking for is an overall job market that's functioning in some sense well but we see big gaps between increasing gaps between the wages or compensation of more skilled and less skilled workers and that's been holding down middle-class wage growth for a long time for other reasons. senator donnelly: let me ask you a little different subject. i voted for dodd-frank because i wanted to see safety and stability in the system. it wasn't a desire to load it up with regulations but it was

a desire to make sure we had safety and stability. but now what we've seen is a growing shadow banking system, which brings other concerns. and so as you look at this, since shadow banking entities are not subject to the same regulatory oversight, how concerned should we be with the potential risk involved here? because that is what we are trying to drive at in the first place with dodd-frank was to eliminate some of the systemic risk. chair yellen: well i think you have put your finger on a very important phenomenon, and we were well aware when we put these regulations in place in dodd-frank that wherever you draw the regulatory parameter that there will be a tendency for activity to migrate beyond it to what we call the shadow banking system. so we clearly need to be very vigilant about monitoring risks

that are migrating to that system. and certainly in the federal reserve, we have hugely ramped up our attention to shadow banking system. the fsoc is focused on risks developing broadly through the financial system in shadow banking and the financial stability board has a large work program devoted to shadow banking. we are thinking about regulations that might address like minimum margin requirements that would apply not only to banking organizations but more broadly that might address some potential risks in the shadow banking system. of course, we have seen some heightened attention to risks by the s.e.c. in money market funds, which was an important

piece of the shadow banking system where risks leading up to the crisis. but you're absolutely right to focus on that and we are attempting to address those risks as best we can. senator donnelly: thank you madam chair. thank you, mr. chairman. senator shelby: senator scott. senator scott: as i travel across south carolina and people express concerns about people leading from behind, whether my conversations with folks have been about the administration's failure to enforce their own red lines in syria or more recently about the ill-advised deal with iran south carolinians have a sense that our nation is timid that it is comfortable sitting back and taking keys from foreign actors rather than occupying our traditional role as leader of the world. i'm certainly not suggesting that you somehow are in charge of military policy or middle east diplomacy, but you are in

charge of our regulatory policy for some of our country's most successful businesses. and sometimes it seems to me like our u.s. regulators are leading from behind especially when it comes to our involvement in international regulatory bodies, like the financial stability board or the international association of insurance supervisors. for example, the fsoc designated sifi shortly that the f.e.b. did. we saw something what happened with money market mutual funds the fsoc seem to take their cues from the f.s.b. madam chair, now they're writing a capital rule for insurance companies, i'd encourage you of breaking the tradition of leading from behind by developing a capital standard that first works for our domestic insurance companies rather than letting

international standard setting bodies like the ones i mentioned before write rules and export them back to our country. i'd also encourage you in your capacity as a member of the iais to take the lead in that body in promoting activity-based regulations of insurers as the group reconsiders the designation methodology later this year. it appears that governor tarullo has committed the fed for asset managers, but i haven't yet heard him say he would do the same for insurers. can you commit today that the fed will take the lead and follow these two courses of action both on insurance company capital standards and on promoting the replacement of entity-based regulation of insurance with activity doifed regulation? i think senator rounds really was starting down this road when he was asking his questions. it appears to me that the european regulators are

concerned about the creditor protection we at home are far more concerned about protecting the policyholders. the difference yields different capital philosophies. i'd like a commitment to use our domestic approach and export it as opposed to importing their philosophical disposition on capital standards based on creditor protections. chair yellen: so i guess all i can really say is that we are playing an active role internationally in insurance, which is why we joined the iais. we are participating jointly with the federal insurance office and to make the state insurance commissioners, we're collaborating to think through what is an appropriate system of capital and liquidity standards for global low active

firms. we have a strong interest in doing that, and it's important for us to have our voices heard in that process. so i don't think it's accurate to say we are sitting back and not trying to play a leadership role. i think we are. domestically, we have been given increased flexibility through the collins fix to design and tailor a set of insurance regulations, capital standards that we think are appropriate for our institutions. we want to carefully tailor them to the unique characteristics of the firms that we supervise, and we're taking the time and interacting with those firms to make sure we understand what an appropriate insurance centric

will tailor -- well tailored. senator scott: thank you. i think what it ultimately boils down to is a price that americans will pay for their retirement. one of the things we're trying to do is make sure that that price goes down and not up as we find ourselves from my perspective, adopting international standards as opposed to taking ours. thank you. senator warren: i want to follow up on senator corker's question. dodd-frank requires big financial institutions submitting living wills, a plan how they can be liquidated in a rapid and orderly fashion in bankruptcy without bringing down the economy or needing a taxpayer bailout. now, by law the fed and the fdic is supposed to determine whether these plans are

credible or not. and then if they're not credible, the agencies can order the institutions either to simplify their structures or eventually to sell off assets. so last august, the fed and the fdic identified significant problems with the living wills submitted by 11 of the biggest banks in the country. the fdic determined that these living wills were not credible. but the fed didn't. instead, the fed said that if the banks did not quote, take immediate action to improve their resolveability and reflect those improvements, closed quote, in their new living wills, the fed, quote, expected, closed quote, to find new living wills, the new living wills were not credible. the 11 banks submitted their new living wills at the end of this month. i know you haven't completed reviewing them yet. i want to make sure we're really clear on this point. will the fed find living wills

not credible if the bank has not fixed each of the problems that the agencies identified last august? chair yellen: we are certainly prepared to make those determinations. we will work jointly with the fdic as we have been doing to analyze the living wills and see whether or not we feel that the responses to the directions that we gave to these firms are satisfactory or not. and if we find they are not we are certainly prepared to say they are not credible. senator warren: ok, good. i'm glad to hear that. two of the issues the agencies directed the banks to address were, quote, establishing a rational and less complex legal structure and developing a holding company structure that supports resofblet. now, jpmorgan chase, just to

pick one example has over 3,000 subsidiaries. it will take a lot of work to establish a rational structure that permits jpmorgan to be resolved quickly as required by law. but to be clear again, the fed will find jpmorgan's living will not credible, and the living wills of the 10 other banks not credible if they have not taken concrete steps to significantly simplify their structures and are not sleek enough to be resolved quickly. chair yellen: well, we have given them those directions, and we will evaluate that. i would simply say that the regulatory reports that we receive indicate that these firms, since 2009, have reduced the number of legal entities in their structures by

approximately a fifth. i guess -- senator warren: it's not from 2009. it's over 3,000 subsidiaries the latest count that i've seen. i just want to be clear that you're willing to say not credible if they don't meet the legal standards that they could quickly be resolved and that includes how complex their structure is. chair yellen: well agree that they need to be less complex and we have given them that direction. but i'm not sure we can determine exactly how complex they are by just counting the number of legal -- senator warren: fair enough. chair yellen: they are not the a all equal. some are set up for very narrower purposes. some are not really material parts of the, you know, wouldn't represent serious impediments to resolving the firms. so i don't want to determine

this by count of legal entities. senator warren: count by itself i understand that. but we do remember that the statute says rapid and orderly liquidation and that goes to the question of complexity. i raise this because the living wills are one of the primary tools the fed has to make sure that taxpayers won't be on the hook if one of these giant banks fails. it is critical that the fed uses this authority and, like the fdic has been willing to do to make sure -- make our financial system safer. i want to ask you one other question quickly. in dodd-frank, congress directed the fed to impose some tougher rules on banks with more than $50 billion in assets. that covers roughly 40 of the biggest banks in the country. about one half of 1% of the 6,500 banks that we have in the u.s. together this .5% holds more than $14 trillion in assets.

about 95% of all the banking assets in this country. 40 banks, 95% of all the assets. the tougher scrutiny is designed to direct regulator attention where serious risk is. in other words concentrate regulatory scrutiny on these 40 banks rather than on community banks and credit unions. now, there have been proposals recently by exempting them by raising the $50 billion tresh hold to $100 billion, $500 billion. the argument i hear is that $50 billion banks don't pose systemic risk. i want to pose a question on this one. we learned or should have learned in 2008 that in a crisis several banks can find themselves on the verge of failure at the same time. do you think it could pose a systemic threat if two tore three banks with about -- two or three banks with about $50

billion in assets were on the verge of failure? chair yellen: well, when a significant number of firms is that the risk of failure is often is because they have highly correlated positions. we always have to worry about that resulting in a deprige up of credit to the -- drying up of credit to the economy. during the great depression, most of the banks that failed were small. they were a lot smaller than $50 billion or adjusted for that time. when many banks fail, of course we have to be concerned as well, and that's one reason why for all institutions, even for community banks basel 3 regulatory capital requirements are higher. we want to see safety and soundness throughout the entire financial system throughout the banking system, although the most systemic firms, as you pointed out, of course needs the greatest scrutiny. senator warren: it's the top 40.

there are two approaches to this issue. the first, which ever republican on this committee supported, is to raise the threshold to $500 billion. that is cut loose about 30 or so of the biggest banks in this country. and just hope for the best. and if it doesn't work out, the taxpayers can pick up the tab again. the other approach is to play it safe. keep the threshold where it is and rely on the fed to tailor the rules to fit the risk posed by these different banks. that's the approach i support, and since the american taxpayers are on the hook when the economy starts to implode, i suspect most of them would prefer that congress be careful, too. thank you, madam chair. mr. chairman. senator shelby: madam chair, some people have pose posed we don't have -- proposed we don't have any threshold. you've seen that. the regulator has the power to do their job properly. you've seen some of that, i'm sure. senator crapo. senator crapo: thank you very much, mr. chairman. i want to follow up on exactly the same question that senator

warren just finished on. last september i asked the federal reserve governor to raise the trigger when a bank is systemically important from the $50 billion level. in hearings we've heard that the asset threshold should be raised or changed because it's arbitrary, includes institutions that are not systemically important focuses only on size and produces undesirable incentives. the governor said several years of testing and assessment have given regulators a better understanding of the designation threshold. given the intensity and complexity of work around stress testing, he said that regulators haven't felt that the additional safety and soundness benefits of sifi regulation are really substantial enough to warrant the kinds of compliance and resource expenditures required of banks that are above $50 billion in assets but well below the largest systemically important institutions. and so i guess my question to you, which is sort of another way of asking the same question

that senator warren just asked is, do you agree that -- with the governor's analysis that there would be a benefit if congress changed the current threshold and focused more on substantive evaluations of true risk rather than an arbitrary number? chair yellen: so like governor tarullo, i would be open to a increase in the threshold but the reason i would be open to it, as he indicated and as you just stated, we do have some smaller institutions that under section 165 are required to do, for example, supervisory stress testing and resolution planning and for some of those institutions it does look from our experience like the costs exceeds the benefit but if

there were to be a modest increase in the threshold, i think what is essential is that the federal reserve retain the discretion to subject an institution that might fall below the new threshold to higher supervisory requirements. for example, that we would be able to insist that it performs supervisory stress testing if, in our view, the risk profile of that firm, in spite of its size, led us to believe that it had systemic import that made us think it was appropriate. that is appropriate that we might feel we need that discretion but at present, every firm over $50 billion has to do things like supervisory stress testing. and i think what we found is that in some cases the burden

associated with that for many of those firms really exceeds the benefit to systemic stability. but retaining the discretion to supervisors require them if we thought it is appropriate that would be important for me to support that. -- that change. >> thank you. senator crapo: it seems to me that a principle we should follow is that banks with similar risk profiles should not be subject to different regulatory standards. and that applies on both sides of any arbitrary number which we might pick. the question that i -- what i think i heard you say was that the real issue is the risk profile and that the regulators should evaluate the risk profile of our financial institutions and regulate them appropriately.

did i hear you correctly? chair yellen: i think that's a fair summary. senator crapo: thank you. and last question i have is the office of financial research recently published a study this past february that uses a multifactored approach to grading the systemic risk of each of the institutions subjected to section 165 of dodd-frank. are you familiar with that study? chair yellen: sorry. not really. i haven't had a chance to review it. senator crapo: i get asked about a lot of things and if i don't know i tell them. the question -- the point is this study showed that different banks who are subject to the $50 billion -- who are on the upside of the $50 billion trigger have vastly different risk profiles. and i guess the question i was going to ask you is whether the validity -- whether this study has validity in showing there are vastly different risk profiles among the different banks who are above the $50

billion trigger. so let me ask that question without referencing the study. isn't it correct there are very, very different risk profiles in this pool of banks that are above the $50 billion trigger? chair yellen: yes, they have very different risk profiles. some are essentially large community banks that are not especially risky but on the other hand we have a couple of u.s. firms that are designated as gsibs now. they are above $50 billion. they have business models that make nair activities systemically important. and so firms of the same size can have very different risk profiles and the appropriate supervision of those firms can be quite different. senator crapo: thank you. this is not a question. i'll just conclude with this comment. i think we would be much better served if our regulatory system

allowed our regulators to focus on risk and regulate to that rather than forcing them to utilize arbitrary numbers. senator shelby: thank you. senator crapo. senator reed. senator reed: i had the opportunity to listen to these questions. your position would be that a threshold is appropriate but then discretion to look at different banks over that threshold differently is what really you think is the ideal? chair yellen: well, within limits we can -- we can tailor our supervision to the profiles of the firms. i guess i would be concerned if the threshold is raised we're now seeing that banks that used to be above the threshold now fall below the new threshold they're no longer automatically subject to a number of

requirements. senator reed: and might be engaged in risky behaviors? chair yellen: as supervisors say, no, no, no. these two firms really need to continue doing that. we know they are now below the threshold, but we want to subject them to it anyhow because it's right for them. now, there may be many other firms that have now been relieved from what was a burden that isn't appropriate for them. senator reed: so just to be clear, this issue of threshold is not to essentially if you get below a threshold you don't have any responsibility. what you want to be able is to follow risk even if it's below the threshold? chair yellen: that's right. but we have observed that, for example, quite a number of firms that are, you know, just above the $50 billion threshold we're really imposing some burdens on them that it's not clear that the benefits exist. senator reed: there is a functional value of having a threshold, however you want to

characterize it because if you don't then you have to have sort of a contest with each institution about whether they fit within your criteria whether they truly have risk and you don't have the need to basically -- way to basically fight your way to the door? chair yellen: that's right. i used the word modest increase in the threshold. senator reed: my question is with the now ubiquitous issue of cybersecurity. two-prong question. first, the cybersecurity of the federal reserve and as more importantly how effective you are in ensuring that you are regulate -- that your regulated institutions have cybersecurity protections because this is the issue of the moment and of the next decade or more, millennium maybe. chair yellen: absolutely

agreed. we internally are highly focused on cybersecurity. i believe we have a robust and comprehensive cybersecurity system in place. we realize that the nature of the threats we face are constantly evolving. we're routinely doing self-evaluations of our vulnerabilities and engaging third parties to review what we're doing. we have a national incident response team that is constantly 24/7 responsible for looking at intrusion detection, incidence response, vulnerability assessments, trying to do their own penetration tests to see how secure we are. we have business continuity plans for all of our business

lines, including our most systemically important payment systems like fed wire and for our open market operations. if the primary operators of these systems were to suffer an attack, we have backup facilities that could take over the operations. . senator reed: switching to your regulator in industry, are you testing them as hard? are you going in with teams to assess -- are you trying to sort of break in in terms as a regulator to see if they are conducting operations appropriately. chair yellen: we aren't doing our own detection tests but it is and important aspect of our supervision to ensure financial institutions have appropriate

measures in place. we have a specialized teams of superviseors that are trained in i.t. security, who examine the institutions to make sure there are -- they are appropriately taking the appropriate steps. and we work jointly with other regulators through the ffiec through the financial sector more broadly under the leadership of treasury. and we support efforts throughout the government to make sure that we're addressing these threats. senator reed: thank you very much. the nature of the threats, we will be having this conversation for a long time. >> senator warner. senator warner: thank you, mr. chairman. i'll go ahead and start.

senator shelby: senator schumer came back. senator schumer: i will let senator warner go ahead. senator warner: senator schumer was hoping to learn from some of my comments. [laughter] senator warner: i want to start by complimenting the chairman on one of his first questions to chair yellen about the notion of this taking some of these funds that are used to shore the financial system and using them for purposes not related to the financial system. this is what happens when you skip line in the hierarchy on the democratic side. [laughter] >> those are the big banks. senator warner: i would

acknowledge that while i have great sympathy for the fact that our community-based banks are buying into this getting the 6% return you know, some of the money market funds that can access the 80 basis points, if they have to then get this ability to invest at 6%. that's a pretty good trade for the banks -- the community banks don't have. >> i'm going to forgo my line. senator warner: the one thing that i know that senator warren and senator brown offered, i actually do believe on a resolution plan that we have made progress and that we are seeing plans with greater rigor and candidly, even some of the

plans in terms of the capital standards that are being put in place, might even get close to meeting senator brown's and senator vitter's requirements. one thing we don't have the regs out on is regs on the long-term debt and make sure that long-term debt is clear and could be convertible in the event of a challenge so we can use bankruptcy, so we can meet the goals that senator brown has articulated. i think what i would like to hear is some assurance that we are going to see those final regs by the end of the year so we can have full guidance about this resolution plans. chair yellen: so, i can't give you a specific date, but i want to assure you it is a high priority for us.

senator warner: i'm saying end of the year. that gives you half the year. chair yellen: i'm loathe to promise a date. this is really important to us. this is not something that we are just letting slip. it is right at the top of our -- senator warner: when we look at the capital structures and the kind of increased ability for these large banks to withstand trauma, having those rules out on the long-term debt and that conversion component -- chair yellen: agree. i totally agree. senator warner: i want to respond to senator brown in an artful and complete way and maybe it has been solved. chair yellen: so, we completely agree. it's very important for there to be a long-term debt requirement.

most of these firms in their living wills propose a resolution strategy that's similar to the fdic's single point of entry strategy that they would use under title 2. in either case, it requires adequate long-term debt. we are working jointly with the fdic to figure out better parameters and working through the ffsc. we want to see this globally. promise to get it done just as soon as we can. senator warner: end of the year sounds like a great time. chair yellen: i make every effort to do so. >> he has spoken. [laughter] senator warner: let's switch to world monetary policy for a moment.

as we see the bank of japan the e.c.b. continue to deal with their currencies, which indirectly makes their products cheaper, our products more expensive, do you worry at all that the actions of these other central banks are putting even more undue pressure on america to be the engine that drives the whole world's economy because of their monetary policy? chair yellen: monetary policy for domestic purposes often has impact on the country's exchange rate. likely to raise rates sooner and continuing to ease monetary policy those factors have tended to push up the dollar,

has tended to create a drag for net exports and to diminish our growth prospects. and that is something that affects the future stance of monetary policy. even taking that into account the very significant appreciation we have seen of the dollar what we need to put that in the context of the overall domestic spending in the u.s. economy, our committee concluded that even taking that into account, the continuing drag there, we still think that the u.s. economy is going to grow. senator warner: this will be a factor that they will look at and continuing to put all these burdens on our country's economy to carry the whole world forward. chair yellen: it is a factor and constantly looking at it and

essentially what is happening. senator shelby: before i recognize senator schumer. the bill that was reported out of here, our banking legislation back in may, does not raise the threshold in section 165 of dodd-frank to $500 billion. in fact, the language, the legislation keeps the $50 billion threshold in place for all institutions to be considered by enhanced regulations and gives the regulators, the fed generally, the discretion to determine what institutions above $50 billion should be subject to that. banks above $500 billion would receive no such discretion. i wanted to clear the record. >> could i speak for a moment?

senator brown: while the chairman is correct the difficulty was made much greater. and i believe what senator warren said is correct. it doesn't protect the safety and soundness. that can threaten the safety and soundness. we could debate this for a long time. senator shelby: we will. senator schumer: thank you, chairman. as you stated in your testimony the fomc would likely look to raise the rate before the end of the year and you and others must make this decision weighing all the information at your disposal. i understand that. but as we have discussed previously, i'm troubled by sluggish wage growth in america. along with tepid wage growth, we continue to see inflation

continuing to run well below the 2% target. whether there is still significant slack in the labor market. views may differ here. i heard from experts on both sides. but i refuse to let the loud voices of those screaming for the fed to act to drown out the voices of middle-class families for more to show up in their take-home pay. the question of when the fed will raise rates has received a lot of attention. i believe the single biggest problem is the decline of middle-class income. and middle-class incomes have decreased by 5.6%. $3,600 lower. my question is a simple one. how can we create better incentives to increase productivity? what do you see is a stronger

catalyst? it seems we are pushing on a wet noodle? chair yellen: we have seen structural forces over a longer period of time push down on middle class wages and the economic research that's been done suggests a continuing high demand for skilled labor and declining demand for less skilled labor. we seen an increasing wage gap between those who are more skilled and less skilled partly reflecting the nature of technological change and globalization and productivity growth as you mentioned has certainly slowed down since 2007. we point this out in the monetary policy report. it's been decidely slower than

before that. i think it's important to focus on policies that would improve productivity growth. they have to do with making sure that every american child is able to get a really world class education and is really able to succeed in this economy and that we take actions to promote innovation and entrepreneurship and capital investment, both public and private that are necessary to drive innovation. i think those are the kinds of policies that congress and the public need to consider to address these -- these are deeper structural trends that are just not related to the sick lick call state of the economy.

cylical state of the economy. senator schumer: we are facing sequestration in the congress. this would slash funding for key resources, supplemental opportunity grants pell grants 300 million from job training programs, cuts in education. these are the kind of programs you mentioned in part as catalyst for stronger wage growth. i don't want you to weigh in specific programs, obviously, that's not your job. as we look towards the end of the year, can you talk about the broader impact of our economic recovery that drastic automatic budget cuts may have as well as the potential for a government shutdown and the uncertainty surrounding the debt ceiling? do you think this could create fiscal headwinds for our recovery? chair yellen: fiscal policy has gone from creating a significant

drag on the economy to being roughly neutral and that shift in the favorable direction has had to promote economic recovery. so i would be concerned about something that was a large fiscal shift. i don't know whether or not this would be but policies that or governmental actions that create uncertainty, whether it's a government shutdown or running up against the debt ceiling that reduced the confidence of households and businesses on the ability of their government to function in an effective way and create fear and loss of confidence obviously you're not hopeful to recover. senator schumer: just getting to the wage growth cun nun drum, wouldn't cutting education cutting training workers to be

more productive be counter to that? chair yellen: i don't want to weigh in on specific programs, but i do think that education programs programs to promote training and skill acquisition are critical in addressing wage inequality. senator schumer: thank you. senator shelby: we thank you again for your appearance and your willingness to come and we hope we can work with you on some of the proposed legislation because i think there is some misperceptions of what we are trying to do. we are trying to give you a line of power. you already have a line of power and some discretion, but none of us want to weaken the bank system. chair yellen: i look forward to working with you and the committee.

[captions copyright national cable satellite corp. 2015] [captioning performed by national captioning institute]

the speaker: we've got a lot of people in prison that really in my view that don't need to be there. it's expensive to house prisoners. some of these people are in there under what i'll call preliminariesy reasons. i think it's time we review this process. they have and i'm looking forward to putting those

recommendations on the floor. >> just some of today's briefing. watch the entire briefing any time on-line. tomorrow morning on "washington journal," the "national journal" looks at the highway trust fund. this weekend on the c-span networks politics, books and american history.

>> the senate finance committee held a hearing earlier today on healthcare.org the web site where americans can purchase health insurance. recently, the government accountability office exposed potential fraud on the website when it signed up 11 fake identities, six of which were offered coverage for a second year. the hearing is about an hour.

>> the committee will come to order. good morning everybody. health care.gov. we will hear from the government accountability office -- if i'm saying that right -- led to undercover secret shopper investigation to test the internet controls of healthcare.gov and the handling of this program. this investigation was designed and determined to the federal health insurance exchange can

protect against fraudulent applications. what happens when advocates provide false information and documentation and whether the controls are successful in dealing with irregularities. perhaps i should say spoiler alert before this next part. today, the director will explain how the federal exchange failed spectacularly virtually on all relevant accounts tested by gamplet a.o. g.a.o. created fictitious identities to apply for federal subsidies. we learned last year 11-12 fake applications were approved. and accepted documentations without attempting to verify its awe thensity and handing out thousands of dollars tax subsidies. a year later g.a.o. has

reported that nothing has changed and that, if anything, there are more problems. worst of all, the administration has known about these problems for over a year now and hasn't taken the necessary steps. while c.m.s. says it is balancing access with integrity concerns, i think it's pretty clear what's going on here. since the federal exchange was first implemented success has been measured by a number of applicants that have signed up for insurance. indeed, last year, when the administration reached its initial enrollment goal, critics were told we had been wrong all along and that the law was despite all the evidence to the contrary working just fine. however, with these findings from g.a.o., it seems obvious, at least to me that the administration has been pre-occupied signing up as many applicants as possible ignoring fraud.

now supporters of obamacare says it's the law of the land and congress should work to improve rather than repeal it. on the first point, these proponents are unfortunately correct. for the foreseeable future, the affordable care act is the law of the land. on the second point republicans in congress continue to work toward the misguided law and mandates, regulations, penalties and taxes and replace it with patient-centered reforms that puts patients in charge of their health care decisions. that day will not come until a president who shares our goal. obamacare will remain in place. congress has to maintain rigorous oversight and protect beneficiaries and taxpayers from its negative consequences. that's what today's hearing is about.

we are going to get an account on how things are working and what we have thus far is not reassuring and doesn't speak well of c.m.s.'s management, the protection of taxpayer dollars. the g.a.o.'s investigation exposes not only huge gaps, but also flaws in how the exchange and c m.s. contractors america who are trying to correct legitimate applications. the g.a.o. team sent questions only to have it ignored or have the exchange respond. the fact that g.a.o. encountered inefficiency at every turn does not bode well for the experience of your average honest enrollee. i look forward to today's hearing and what i hope will be a good discussion of program

integrity. before i conclude, even though this investigation was requested by this committee c.m.s. was less than cooperative. indeed throughout the entire endeavor officials appear to be blowing past deadlines and good faith attempts to to put forward this work. no federal agency could stand in the way of that work. by delaying the g.a.o. and hampering their efforts, c.m.s. has delayed this committee's work and hampered our efforts. this is unacceptable and despite promises of increased transparency and cooperation from agencies throughout this administration, this type of stonewalling is far, far too common. acting c.m.s. administrator who is now the president's nominee to run the agency was personally involved in this process. as the committee considers his nomination i look forward to

asking about this investigation and why c.m.s. has been interfering with our oversight efforts. that will wait for another day or time. today we have our hands full as we hear testimony. so with that, i will turn it over to senator wyden. senator wyden: we do not take a back seat to anybody in fighting fraud and protecting taxpayer dollars. one dollar ripped off is one dollar too many, but let's be very clear this morning. the report up for discussion today is not about any real world fraud. the study looks at a dozen fictitious cases and not one of them was a real person who filed taxes or got medical services. no fast-buck fraud steer got a

government check sent to their bank account. moreover, the government auditors acknowledge today, and i want to quote here, their work cannot be generalized to the full population of applicants or any enrollees. none of the fictitious characters in this study never stepped foot in a doctor's office. and when you actually show up for medical services, it's a lot harder to fake your way into taxpayer subsidized care before services are delivered providers ask for a photo i.d. and if you have stolen an identity there is probably a medical history belonging to someone else that ought to set off alarm bells. if you are a real person signing up in the insurance marketplace

you have to attest under penalty of perjury that the information you provide is correct. and if you false si file the application, you face the prospect of a fine of $250,000. another major anti-fraud check went untested in this study. that is scaring up tax returns with the information from your insurance application. the general accounting office today and i quote calls it a key element of back-end controls. if your tax return and personal information don't match but the study before us today ignores that anti-fraud check. it only looks at a part of the picture when it comes to stopping fraud. as i noted at the beginning, there are always methods of strengthening any program and

rooting out the fraudsters and rip-off artists. any strategy against fraud is drawing a distinction by going after the rip-off artists and not hurting a law-abiding american who has made an technical mistake. a retiree nearing medicare age shouldn't be kicked to the curb because he or she submitted a mistaken document. i can't imagine that anyone in the congress or on this committee wants a system that knickses the health insurance coverage of americans because of those kinds of issues. i wrap up by saying a recent gallup report stated that the rate of americans without health insurance is not the lowest that

they have ever measured. this is the first finance committee hearing since the supreme court's landmark decision that upheld the law that made that possible. the fact is the affordable care act has extended health care coverage to more than 16 million real people who use their insurance coverage to see real doctors. now at some point down the road, the g.a.o. is expected to complete their report. at that time, let's work on a bipartisan basis how this committee can work together. thank you, mr. chairman. hatch hatch as assistant

director for homeland security and justice, he has served on congressional details with the senate finance committee and the committee on homeland security. in his private sector career he has held a number of senior positions and focusing on political risk and homeland security. he earned a b.a. agree in international relations in economics and an m.b.a. in strategy. we welcome you to the committee and we are interested in your statement here today. >> thank you mr. chairman. chairman hatch ranking member wyden and members of the committee. i'm pleased to be here today to discuss the final results of g.a.o.'s undercover test addressing the controls set up

under the affordable care act of 2010. as you mentioned, we reported our preliminary results during testimony in july of 2014. we performed 18 undercover tests, 12 of which involved online applications. our tests were designed specifically to identify indicators of potential control weaknesses in the marketplaces and enrollment processes specifically for plan year 2014 and inform our ongoing forensic audit of these controls. i would note that our tests while illustratetive and as ranking member wyden mentioned, cannot be generalized. further, we shared details of our observations with c.m.s. during the course of our tests to seek its responses to the issues we raised. in this regard, c.m.s. officials stated they had limited spacity

to respond to attempts of fraud and must balance consumers' ability to access coverage with program integrity concerns. without providing details on how and when, these officials stated that they intend to assess the marketplace's eligibility determination process. in terms of context, health coverage was a significant expenditure. several million enrollees about 85% of whom are estimated to be receiving subsidies. c.b.o. pegged costs for f.y. 2015 at $28 billion and $850 billion for fiscal years from 2016 to 2025. a program of this scope and scale is inherently at risk for errors including improper payments and fraudulent activity. accordingly, it is essential that there are effective

enrollment controls in place to narrow the window of opportunity for s.u.v. risks, hence the importance of our undercover tests. i will discuss some of our test results. the marketplace approved subsidized coverage for 11 of our 12 fictitious applicants. they obtained about $30,000 in total advanced annual tax credits and eligibility for lower costs at term of service. for 7-eleven, we didn't submit all required documentation and didn't cancel coverage or reduce or eliminate subsidies for these applicants. while subsidies including those granted to our applicants are not direct to enrollees, they represent the financial benefit to consumers and a cost to the government. as part of its verification process, the marketplace didn't

accurately record all inconsistenties which occur when applicant information does not match information from marketplace verification sources. the marketplace resolved inconsistencies from our fictitious politicses. the marketplace didn't term nays any coverage for several types of inconsistencies including social security data. we found errors in information reported by the marketplace for tax filing purposes for three of our 11, such as incorrect coverage periods or subsidy amounts. under the a.c.a. filing of federal tax return is a key control element designed to ensure that subsidies granted at time of application are appropriate based on reported applicant earnings during the coverage year. the marketplace re-enrolled

coverage for all 11 applicants for plan year 2015. later based on what it said were new applications our enrollees had filed but which we hadn't actually made. the marketplace terminated coverage for six of the 11 enrollees saying they hadn't provided necessary documentation. however for five of the six terminations, we subsequently obtained re-instatements. in closing, our test results highlight the need for c.m.s. to have controls to reduce the risk for reducing improper payment and fraud, however there are such risks to be embedded early in a major new benefits program. we plan to include recommendations for controls in a forth coming report. this concludes my statement and i look forward to the committee's questions.

senator hatch: it's come to my attention that the g.a.o. had difficulty getting enrollment and related data from c.m.s. to conduct a full analysis of what really happened to enrollees from 2005. now this would have been helpful to g.a.o. in providing explanation for things like those who were supposed to get dropped for failing to provide documents to clear inconsistencies among other things. can you provide us with more detail about the difficulties g.a.o. had in obtaining that information from c.m.s. and i expect g.a.o. has the data and expect c.m.s. works with you and the committee tore make that happen. any information you can provide as to the problems experienced and what the committee can do to help address them would be helpful to us and the committee

now. >> thank you for your question, mr. chairman. i will lay out in a general sense our experience in obtaining data. i would like to establish a context as i mentioned earlier why we did our uncover testing was to flag weaknesses and at the same time, we had designed our forensic audit which relied on the data base in order for us to map out what we were finding in the controlled environment against the actual enrollees that ranking member wyden mentioned earlier. that said, we began our informal meetings in consultations with c.m.s. in april of 2014. we requested various data tests. we had some success in obtaining information. and when we focused on the

enrollee data base, we submitted a written letter requesting that data base in august of 2014 and subsequently engaged in additional conversations as they expressed some concerns about what we were asking and what we planned to do with the data as well as how the data would be safeguarded. upon subsequent discussions through early part of 2015, we submitted another letter to then or current acting administrator in april of 2015 as of a couple of days ago we were in contact with c.m.s. that we should expect the data some time next week for our ability to continue the work. we look forward to and conducted

additional tests to determine whether the data. >> apologize that for the story. senator hatch: i understand that the marketplace invoked the so-called good faith exemption for plan year 2014 and not pursuing the documentation to reconcile differences. could you describe what the good faith exemption is all about, whether it has any basis in the a.c.a. affordable care act or its implementing regulations and the impact if any of its invocation on present controls and integrity. >> sure, the good faith

provision is basically an interpretation by c.m.s. of certain provisions in the statute itself and in its implementing regular laces. essentially under this implementation c.m.s. deemed that as long as an enrollee or applicant submits at least one document to support their application, they would have engaged in a good faith effort to meet the documentary request and accordingly remain a participant in their coverage. in terms of whether has an impact on the controls, it is essentially one of back and controls. the document verification process, that is. and depending on your point of view whether that's adequate, whether one is asked to submit seven documents and only submits

one document, that can create a control gap and raise questions about their ellgibblet for participation. senator hatch: my time is up. widewide -- senator wyden: my time is short and i would like you to give us yes or no answers. as of this morning, can you generalize from the 11 fictitious cases what the fraud rate would be for for the more than 10 million real americans who actually receive health care coverage under the law yes or no? >> not as of this morning. senator wyden: you said in your testimony that tax returns, and i quote here, quee element ksh key element of back end controls. it's a major check that would shut down the fraud steers. as of this morning, can you file tax returns for any of these

individuals, yes or no? >> we did not. senator wyden: as of this morning, have you uncovered any real individuals who fraudulently obtained health coverage using g.a.o.'s techniques yes or no? >> no. senator wyden: as of this morning, have you provided h.h.s. with the nick tissueous identities -- fictitious identities to g.a.o. so they can address the problems that you address? >> we have not. senator wyden: i reviewed this very carefully and given the answer that we have just heard, it is clear to me that the auditors have much more work to do before the committee to draw useful conclusions on this matter. and on this point with respect to the claims that the agency

has not been responsive to the request for enrollment data, i very much respect the fact that federal agencies need to be responsive to requests from congress and the g.a.o. for information. however, i also want to take note of the fact that these enrollment records contain personal identifiable information on more than 10 million americans. loss of their personal identifiable information is becoming a nightmare for millions of americans. it's my understanding that the agency and the auditors have worked out an agreement of how this information one, can be turned over to g.a.o. and protected, and i think that's good. and second it's my understanding that the agency has turned over some 30,000 pages of documents to my colleague, senator portman, for

his committee. so this notion that the government, the agency in particular c.m.s. is spending its day, morning noonan night in an attempt to stonewall on releasing this information, i think is not accurate given the facts i just cited. thank you, mr. chairman. senator grassley: in deference to my colleagues and a lot want to ask you questions and that's because we have a pending six votes this morning, i'm going to ask one of three questions and i'm going to put the lead-in up to my questions in the record. you presented c.m.s. with potential flaws. the flaws as i understand what you said, didn't get fixed. so my question is very simple. in your work with c.m.s., do you

believe that c.m.s.'s attitude is enroll people first and worry about eligibility later if at all? >> from where we stand currently, c.m.s. explanation has been that they have to balance the ease of access to coverage with program utility controls. based on our undercover work, i would say that there are gaps in these controls that have yet to be addressed and we continue to look at it through our forensic work but as of now i think the balance would favor access over program integrity. as we stand today. as we stand today. senator grassley: i yield back my time. >> thanks for holding the hearing, i think it's important talking about taxpayer dollars

and making sure we are doing everything to see they are spent wisely and well. in your testimony you highlight marketplaces are required by law to verify application information, yet it appears from your investigation and subsequent interactions with c.m.s. that the buck stops with no one especially since the investigators are not required to detect fraud. it begs the question of whether you are currently aware of any effective, front or back end fraud detection program in use by the administration. >> again i would couch my response to you in terms of our ongoing work, the forensic part of our work should be able to give us a good idea of what the controls are. we will take what we have learned from the undercover

tieses map those out against the fornsic audit and apply appropriate criteria of the federal government as well as forth coming g.a.o. framework to measure fraud risk and we will be able to have a comprehensive view of what the control is like. >> the contractor confirmed with us they are not required to

detect fraud. that would be a greater transaction. >> you said your work is ongoing. does g.a.o. have any recommendations to improve the process to sort out fraud as opposed to just accepting documents? >> as i mentioned in my opening statement, we are working on a forth coming report sometime in the fall time frame where we hope to have some initial recommendations and those recommendations might cover the matter you mentioned. >> you don't have any hard fast -- >> we don't. we had discussions about their view on that and continue to have those discussions and await some explanations in that

regard. >> without ever submitting documentation to the marketplace. how can this be? how can the marketplace continue disbursing taxpayer dollars without receiving any documentation in response to its request? >> we were automatically re-enrolled without any action on our part for all 11 applicants and then subsequently we found out that six of them, as i mentioned in my statement had been dropped from coverage because they had not submitted any documents in response to that and to carry that one step further, we did acting again as typical consumers, sought to restore our coverage and we were successful five out of six times. >> mr. chairman, i would simply say in these i think are really troubling results.

11 out of 12. and senator from oregon, we need to drill down and get to the bottom of this. i don't think you can discount this or right this research and report off and couple that within in june, the h.h.s. -o.i.g. report couldn't verify whether $3 billion in subsidies was disbursed to insurance companies in the first couple of months in 2014. these are significant failures in this system and need to be addressed and i appreciate the hearing here mr. chairman and hope we can continue this dialogue with you, as you continue your work to determine how to stop this waste of taxpayer dollars in the future. senator hatch: we are going to turn to senator wyden for a question.

senator wyden: i'm always willing to work in a bipartisan way. let's review what just happened. i asked whether he uncovered any real individuals who fraudulently obtained health coverage using these techniques. he answered no. and during the previous two enrollment periods, the agency rescinded a quarter of a million individuals' health insurance because they weren't able to validate their documents. we have to work together. there's no question here. i'm willing to look at the ramifications of the 11 applicants but let's do it in a bipartisan way and do it when we actually have some recommendation because once again, the witness said he doesn't have any recommendations to give us. senator hatch: we are doing it in a bipartisan way. i don't think we can ignore some of this testimony.

senator portman. >> my friend talked about h.h.s. has been responsive. you have indicated they have not been responsive in providing information. since you mentioned i got 30,000 pages of documents 2,000 of those pages are responsive and still getting delay delay, delay and we are asking for a schedule to submit documents. i would like to hear your response. i know from talking to your folks you have the same frustration. with regard to this issue, there is clearly a policy problem here not just the fact that 11 of 12 of these fictitious people got through and automatically re-uped and when they were kicked out, so clearly we have a problem here. but i think the statistical example of 12 might not be as significant in terms of what you found in policy.

your statement mentioned that g.a.o. failed in the application process, in other words, people are fictitious and couldn't get through but the g.a.o. was calling h.h.s. what did g.a.o. to produce applications and why that is significant? >> as i mentioned earlier, we were able to obtain coverage by essentially following the systems on instructions. we failed the initial online tests. we contacted the contractor who does the identity proofing. they couldn't clear it. and then they instructed us to call the marketplace, which we did, and then pleased on self-attestation of information we obtained coverage. >> it was a phone call after being denied twice, people got back in. this is a policy issue this

isn't a statistical quirk that somehow your people snuck in. >> we would view that at least as an indicator of a control gap. i know it is a technical, nerdy thing. >> and self-attesttation is a policy by a phone call. you can get in by self-attestation with no proof. another example. you noted to show and some cases, g.a.o. required some of the documents and nonetheless was able to receive coverage because the so-called good fate exemption and why g.a.o. received it and the legal basis that h.h.s. used in implementing it? >> in terms of the legal basis we are awaiting a response and our attorneys are in touch so we are trying to get some clarity on that.

so under the good faith exemption or provision, whatever the term of art is, essentially the applicant is compliant with their obligation to submit documents as long as they submit one out of the however many they have been asked to submit. >> your result is not a result of a statistical quirk or a result of h.h.s. policy being implemented as planned and i think anybody who cares about the affordable care act should be concerned about this policy because it allows people to continue receiving subsidies without h.h.s. making an attempt to verify eligibility. but these policy issues that are being applied today as we talk. finally, your statement notes this investigation was conducted with limited backstopping. what is backstopping and why it is important. >> it involves the extent to which we employ investigative

techniques. this was pretty much -- i don't want to speak to my colleague to runs the investigative side of things, but basically was a pretty simple thing to do using commonly available software materials and other approaches. . >> you didn't use any inside information, you just came as it as any consumer would, which makes your results, again more troubling than they might otherwise be. i think these are really important aspects to your report and i think from a legislative perspective, an oversight perspective, it makes this much more serious. mr. portman: the final thing i'll say is the amount of confusion this is causing people who legitimately are trying to get a subsidy is unbelievable. h&r block say 2/3 of people are getting their tax returns cut or getting a tax bill. the i.r.s. has told me half of the people this year are in that situation.