problem and it should be relatively easy to fix. chair yellen: i agree with your assessment that it was an important problem. that it is a central to address it. supervision weur have addressed it and we do feel we have seen a meaningful change. >> one, i want to talk just base ically to the results of the current next it race of living wills. back a few years ago when we had them they were all called not credible. in the living will provision, in dodd frank as you know was pretty important to many of us. we think it is a way to avoid too big to fail. they're all called

not credible, that's a problem. i know you're in the process now. do you have any idea what the time frame might be when you're nto the second chance? >> so last year working jointly sent very detailed evaluations the living wills to the firms. and directed the firms to take action to improve their resoveability that were quite specific. >> and quite detailed. we've received those plans. we're evaluating them jointly with the fdic. and we will be making decisions in the coming months. >> the time of the gentleman has expired. the chair now recognizes the gentleman from michigan,. >> thank you, mr. chairman. i am happy to rescue you from

the hostile questioning my democrat friend over there. don't take it personally. he is that way with everybody. but i do actually want to kind of follow on on something that he had point of interest and frustration for a number of us speed g to do with the or lack thereof where there has been some very specific things that were laid out for the fed to do and specifically i want to talk about section 133. the fed dodd frank required the fed to adopt regulations "as soon as practcabble. " and that was five years ago. there have not been final rules plemented to what federal, fed reserve restrictions you yourself were going to put and

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

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

opposed to that language. why? >> that's when we would use -- i'm not sure that we have been opposed. that's when we would use those powers when there are unusual and exjent. it's understood to mean pose a risk to the financial system. >> we've kind of added two things as a belt and suspnders. one was to include the language that pose a threat to the financial starblete to the united states. and that is the pushback that we've gotten. i've met with some of the other fed governors saying we should not address 13.3. the other one that we have in my bill we also mandate five of the seven fed board governors to approve a 13.3 usage. that nine of the 12 district federal bank presidents must also approve. any concern with the belt and suspenders approach that way? >> i think the approach that we

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

we're trying to make sure that there is not just a check and there is not just a rush to find a solution here, but that we also have the fed bank presidents this there. so. >> well, dodd frank clearly estrict it is way in which this power can be used and the rules that we finalize will address concerns about the definition of broad-based eligibility, insolvent borrowers and penalty rates. >> the time of the gentleman has expired. the chair recognizes the gentleman from texas. thank you, chairman and ranking member. and be used and the rules that we finalize will address concerns about the welc yellen. thank you for your appearance here today. please accept my sincere gratitude for your steadfast leadership at the federal reserve. e dodd frank act reforms

paved the way for solid and steady economic growth by restoring confidence in our markets. it's one of the pillars of reform supporting the creating of 13 million private sector jobs for 67 consecutive months, extending the longest running growth streak in our history and reducing the unemployment te of 5.1%, the lowest since 2008. my first question is as follows. you indicated in your testimony that the fed has tailored its regulatory and supervisery requirements for regional and community banks. however, i continue to hear from banks of all sizes in texas and in my congressional district that they're burdened by the regulation and the costly stretch edde required. n fact, one regional bank, one

of the facilities in houston, spent $20 million in its stress tests alone. in your opinion, do our financial regulators currently have the discretion they need to correctly tailor regulatory and supervisery standards or should we in congress take action? >> congressman, my understanding is that stress tests are required of banks that are $5 billion and above. and the requirements for the smaler banking organizations are very different than those for the larger, above $50 billion organizations that they're only required to do a company-run stress test for the smalest organizations there is no such requirement. we i did say earlier that

with have as much ability respect to stress tests to tailor as i think would be ideal. there are smaller banking organizations where we do see costs of having to participate the stress test and fixes that are probably not commence rat. so that is an area that we are focused on, where we are tailoring as best we can. but some legislative change to reduce the burden on the smaler institutions subject to it. >> my next question. last week the fed finalized its total loss-absorbing capacity rule for the largest eight banks. yesterday i read in bloomberg where they reported that standard and poors as well as the other credit rating agencies may cut the rating of

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

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

areas where i would save the smaller of the firms above that $50 billion threshhold we would like to be able to reduce the burden on them. but generally we have been able to tailor. >> thank you for answering my question. >> the time of the gentleman has expired. the chair recognizes the entleman from wisconsin. >> in your cover letter when you provided those documents you stated that as chair i have implemented the practice of immediately referring to the inspector general all suspected

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

not prack at this time. right? -- practice. right? >> if it seems appropriate to look at it it's something we could do. my understanding of the existing policy, i'm simply trying to say my understanding of the existing policy is that if there is a material breach it should be referred to the inspector general. and i have -- i have done that. that's been my practice. and i think that were to be the understanding. >> and you can change the policy this coming jan rifment with all that's happened you should change it from personal practice to policy. but it brings me to a question about the policy. he way it currently is written if there is a leak you will have fomc secretary and general counsel perform a review and then make a request potentially to the inspector general. but it's fair to say that general counsel, wholed make the recommendation for referral

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

>> not to the best of my knowledge. >> but you were aware that they were doing a background check obmr. carpenter for potential nomination from the fed to treasure rifment correct? ou're aware of that process. you're not aware of that? >> i know that he has been nominated to be assistant secretary. >> and as part of a back zpwround review are you telling me they did not reach out to the fed and ask about his access to this information that was involved in the leak and you did not provide that to the white house? >> i don't have direct knowledge of that. >> do you have any indirect knowledge of that? >> that is a particular matter pertaining to an employee. it has to do with the treasury. and i would -- >> here is my concern. that we find out in congress who have the oversight over the fed. and we find out in december of 2014. however, before the nomination

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

gentleman from missouri mr. klay. >> thank you -- clay. >> thank you for your return. hr 1309 would remove the fed's ability to make safety and soundness decisions and place them with the fsoc. what impact would this delusion of your authority have on your ability to work with nternational regulators? >> well, it is important to the fed to be able to put in place the supervision program that we egard as appropriate for a particular institution. and we would not like to see oc involved in determining exactly what that appropriate firm is ould be once a

under our supervision. there's no real relationship. i'm not sure, when you say international negotiations. i'm not sure what's involved there. >> let me elaborate for you. under hr 1309, designation of banks for enhanced credential standards can only be undertaken if the fsoc follows standards developed by the international basl committee made up of banking regulators from over two dozen countries. do you know of any major nation that devers their domestic bank safety and soundness regulations to aboard of international regulate snrs >> no, i do not. that is a very useful committee we participate actively. we want to make sure that other

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

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

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

disturbed by the pattern we have seen of violations in a , like riety of areas foreign exchange. we have imposed exceptionally large fines and in a number of ases barred individuals from continuing to work at this supervised institutions or in the industry. and we do fully expect, as part of our supervision, that the boards of directors of these firms will put in place rules and attend to the cultures so that we do not see a continued pattern of flagrant violations. >> the time of the gentleman has expired. the chair now recognizes the gentleman from new mexico. >> thank you, mr. chairman. i thank madam chair for being

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

happen again. and i've tried to describe in some detail in the testimony how we have changed the process of supervision. as well as more broadly our mont >>ing of financial financial stability riskses in the system just the portion that we regulates in order to avoid the problems. >> if i can follow that with you're saying the things in the ystem that provide a risk. i'm kind of getting mixed signals whether or not you release the standard on which you evaluate firms. i'm not quite sure. but my question is, do you really look at the systems themselves? your comments say that we aim to regulate and supervise financial firms in a manner that promotes the stability of the financial system as a whole. is that financial system as a whole that i think provides

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

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

so that leaves a gap of $800 billion. for example the chinese, forget everybody else. you, the feds, are going to have to fill the gap with printed money for the 800 billion. 8200 out of 1.is 1 trillion you should be saying this is outside the scope of what the stress tests are showing on the bank. >> we have no intention of economic outlook of expanding. we're maintaining our holdings of securities that we acquired. but we have no intention of adding to those holdings. vor this morning in brarnes they say they compare the situation to zimbabwe. this morning in barrens they say that the federal reserve is making itself the lender of last resort. these are huge warning signs to us and we're sitting here

talking about relatively small stress tests inside the different banks. i appreciate the work you are doing. i really think we ought to be looking deeper. thank you. i yield back. >> the time of the gentleman has expired. the chair now recognizes the gentleman from georgia, mr. scott. >> thank you mr. chairman. let me first ask you about basl capital. how is it that the requirements offsetting nize the nature of segregated customer margins that are posted from a derivative client? and then that goes to a bank. and at the bank they then guarantee the client's transaction with the clearinghouse. and this is particularly when just five years ago we here in congress through the dodd frank act actually encouraged more derivative clearing as a means of reducing clients' counter party risk.

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

recognize the exposure offsetting nature of the segregated customers' margins. we need to s that send a clearer message to the public as to how basl capital is interreacting with this margin requirement of posting. >> so the important message we want to send is we have taken key steps to make the derivatives markets and transactions safer and less a source of risk. and i promise to get back to you on details about how that interacts with basl. >> this is very important. because as you well know, derivatives and swaps now, as far as using for risk management, is now an $822 trillion piece of the world's

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

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

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

discussion of whether that is appropriate. >> the time of the gentleman has expired. the chair now recognizes the gentleman from virginia. >> i want to thank the chair for appearing before us today. thank the chairman for appearing for this important hearing. we have discussed before the dynamic in my rural congressional district in rural fifth district of virginia where access to capital is absolutely critical for job growth across all of those main streets, across all that farmland that i represent. it is important to our small businesses. it is important to our farmers. and it is important to to families. and think that those of us who live in virginia depend disproportionately on community banks. i appreciate your testimony up front talking about the efforts you have made to try to tailor

the rule making, taylor the regulations supervision to try to accommodate the difference in size and complexity of these institutions. but i think -- i hope you would agree that despite these efforts community banks have been disproportionately affected. uva law school professor testified before our committee previously that dodd frank is in significant part designed to enhance the regulatory reach bank regulators inevitably that will mean increasing the size market share and political clout of the largest banks. i think if you look at the trend over the last three decades you see that it's been brutal for community banks just in the five years since dodd frank has been enacted we have seen a drop in the number of community banks from 7700 to 6300. a whopping 20% loss. the rate of consolidation has

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

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

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

the white house why -- >> considering that dodd frank is the law of the land at this point, at this time, is it appropriate for you as chair of the fed to press the president to fill this position? is it appropriate for you to do that? >> i think that, as i said, i think that we are carrying out our supervisery work in a very thorough and thoughtful fashion. but would welcome nominations to the position. >> the time of the gentleman has expired. the chair recognizes the entleman from texas. >> thank you for your ppearance today. dr. king reminded us that life is an inescapeable network of a one lt tied to

directly affects all direct lifment we found this to be true with lehman and bear stearns. had a a institutions direct impact on us. indirectly they impacted the globble economy which is integrated to an extent many of can't imagine. i mention this to you because it's not just a failure of a bank in the united states that we have to concern ourselves with but the failure of one of these mega banks in a foreign country. but the impact it can have on the united states and other institutions around the world. i see some value in this living will for these mega institutions and the lesser institutions as well simply because when we had the failure in e we had a crisis such that

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

dollar amount or are you amenable to going to a means by which only the activities will determine the designation? >> well, i certainly remain amenable to having a dollar threshhold. and to the extent that i've discussed the possibility of raising the threshhold, i would really only support a very modest increase in the threshhold. once we get to a slightly higher threshhold we're dealing with institutions even when we're looking at the large regional banking organizations that are very important suppliers of credit to the ountry collectively even the regional organizations have probably $1 trillion of more of

lending throughout the country. and while conceive combli the failure of one of these organizations would not bring about the downfall of the financial system, it could impact a significant portion of the country in the borrowers who depend on these institutions for access to credit. so i think a threshhold is appropriate, especially in which hangs over that threshhold are designated for more intense supervision, especially if we have the ability to tailor our supervision. and the only reason that i have said i would be supportive of some moddist increase in the threshhold is because dodd frank does impose so many requirements on the smaler institutions in the area of

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

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

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

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

consolidation of assets in the too big to fail barningse. it's almost been the opposite of what we as policy makers would have liked to have seen. and on the volker rule the result has been a reduction in the number of market makers which is a market utility function that provides important liquidity during a crisis. and i guess i would just ask you are you trying to look at these unintended consequences because in both these cases we are actually making -- creating problems through unintended consequences. >> well, we are certainly are looking through consequences. and in particular the case of market liquidity that you mentioned, that is something we are looking into very carefully. >> i've asked them to do a eport.

i hope you will do a report. i think there is basic business simplification there is the vokeler rule the coming standards. there are a lot of things driving it. but i would i hope you will do like you to important analysis of it. because liquidity is so important to anybody that whether they are a small person or a large corporate entity because we all enter and exit through the capital markets. f there's no liquidity the marketplace doesn't work. >> completely agree. and that is why we are looking at it. the -- >> quick -- >> we issued a report on the october 15 episode. >> i have one more thing i want to get to. >> reports on -- >> keep looking at it. i hope you will look at the volecler rule. another way to look at is eparately capitalize those acts. it takes away the whole argument. yesterday your ig issued a report that showed with regard to stress tests acts. six problems

found in the fed's own stress test. and if it had been a member bank they would have required immediate attention. i have only seen made yo reports on this. i look forward reading the report on it. but in light of these highly critical things in the report, you plan to six undertake any changes that would create more transparency and accountability in the stress testing and seek our process with regard to the fed. >> as i understand it, the ig's findings had to do with our model mainly with our model thozz ion procedures and are matters we will look into and attempt to strengthen. >> the chair recognizes the gentleman from missouri. > thank you. chairman yellen, i think it has been a little over a year ago since we since congress gave

ou the authority to tailor insurance companies those who would qualify for enhanced supervision. there is, as you know, a great angst over the fact that they don't know what's going on. and fear what may come. to the degree that you can i k about this publicly, would present you with that opportunity because it would asking s i am questions over and over again from that industry. >> we know that this is a very important matter. we understand that insurance companies are different than

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

comments that we will carefully respond to. >> well, i don't want to ask you to give me a date certain. but is the process moving along? and -- >> yes. people are working very hard. and i'm sorry i can't give you a date certain. but this is something that our staff is working on very hard. it's a high priority. similarly, the fed is a member of the international association of insurance supervisors. ur mission is to promote

global supervision of the industry. a point now k at where -- and maybe it is because of the e collapse everybody is nervous about everything and everybody is afraid that there is a new regulation that is going to come in to cause the world to collapse and allow the mets to in the world series. but there is no need for this hist tearia. is there? >> there's no need for his tearia at all. we are, as i said, working very carefully at our own firms to design an appropriate regime. and by participating in the iais we are trying to make sure that we weigh in on how other countries set up their own

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

basl attempted to influence the international decisions but we decide here what's the appropriate regime. >> thank you. >> the time of the gentleman has expired. the chair now recognizes the gentleman from illinois. >> thank you. i've been following the process. i sent a letter to you a couple weeks ago when a public outreach meeting was held. very supportive of the process and i imagine you are hearing many of the same concerns that i am hearing from banks in my district. in addition to the report that is mandated to be provided to congress. what relief can we expect as a esult of this process? well, we are listening to the concerns raised in the hearings and in the course of taking comments in this process.

and i'm very hopeful that there will be thing that is we can address and look to change that will reduce regulatory burden. an example of the kind of thing we are hearing, for example, has to do with appraisal requirements that many community banks think the cut-offs are too low and make lending difficult, particularly in rural areas. i'm sure that is something that we will take a look at reporting and so forth. >> can i just in on that. your written testimony notes the banking regulators have taken steps to reform the call report. as you're probably aware, it's grown from 18 pages back in 19 86 to 29 pages in 2003 to nearly 80 pages today. would you support legislation requiring the banking agencies to issue regulations allowing for reduced reporting requirement for the first and third quarter assuming they are highly rated specifically if they have composite rating of 1

or 2? >> i believe this is a matter studying ey are carefully. i think there is a desire to reduce burden on smaller institutions. i would suggest that you let that process play out and we are all trying to do what we can to reduce burden. >> we appreciate that. we continue to hear especially from our smaller and medium sized institutions of feeling the weight of this growing burden. as you know, the supplementry leverage ratio requires a banking regulation to hold a minimum amount of capital. regardless of the riskieness of the individual exposures. these capital requirements yield an economic cost to financial institutions and are a major driver what assets they're able to hold. why is the ratio applicable to funds banks deposits at the

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

urcharges. >> do you share the concern that the minimum interest rate paid by the fed is far below -- the banks would need to with the ratio? what advice would you give to banks which, as a core function of their business model hold large cash deposits for their individual customer base? and what advice would you give to their customers? >> i'm not positive i really understood the question. you were asking about the level of interest that we pay on reserve balance? >> that was the first part. and then i was trying to sneak in the last question. advice again where banks have a core function of holding large cash deposits for their institutional customer base. yet because there is a cost with that and it impacts again

the ratio that is they need to hold we're hearing concern from some important institutions. others that are feeling pressure from this. >> well, i would say with respect to interest we pay on reserves that is our key tool and we set that not to cover particular costs of banks but to establish a level of interest rates that is appropriate for the economy. >> my time has expired. i yield back trmplet time of the gentleman has expired. recognizes the gentlewoman from wisconsin. >> thank you so much for appearing. i was wondering and i hope that you haven't been asked this question over and over again. but i am curious about how going through another round of

living wills has informed you and other regulators on implementing the orderly liquidation facility and the cross border lickedation of large banks. nd of course nonbanks. >> so we have learned a lot from looking and evaluating the living wills of the firms that we have reviewed. we have recognized that cross border issues are among the most challenging. we have made progress in working with those firms to encourage them or even require set o adopt changes in a of financial contracts that uld under the existing rules trigger, make it difficult to resolve a firm by triggering early termination rights to derivative contracts.

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

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

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

burden. but this is a major innovation that i believe has resulted in much sounder supervision, especially of systemic firms. > well, thank you so much. >> the chair recognizes the gentleman from minnesota. >> thank you madam chair for being here this morning. i am going to go a different route. i don't think anybody has asked you this morning. will the federal open market committeer rule out going to negative interest rates? rule out is something we tend not to do. i don't at the moment see a need for negative interest rates. he committee is seeing a domestic economy that has been

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

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

e tlac proposal that was discussed last week. was that finalized last week? >> no. it's a notice of proposed rule making that's out for comment. >> it's been around for a while. you've been discussing it for a while. >> members of the fed and others have given speeches on this. it's something that is being discussed internationally in the fmp sb in fact. the united states has been contemplating this. we're working jointly with the fdic. it's an important step in ensuring that the fdic's single point of entry strategy would be workable in the title 2 resolution or in the bankruptcy resolution. we see it as very important. it's been under discussion for quite a long time. >> if i can interrupt you because in the short time left

i have some specific things to ask you. in fact some of the analysis that i have been provided regarding the zraft proposal suggest that is it penalizes firms for what is broadly nderstood to be a desireable business model gathering deposits and making loans. some have even suggest it had effect of the new rule could be interpreted as a tax on deposit funding. would the federal reserve benefit and have you done -- because i know this question has been asked before from a quantitate combrive pact study eing imducted by the new proposal? >> i think that's a mischaracterization of this proposal. the purpose of this proposal is to ensure that if a firm becomes insolvent that there is sufficient -- >> forgive me. i've got 20 seconds left. would you benefit from a quantitative impact study being

done prior to implementation? >> we have carefully analyzed this proposal. very have you done -- >> we have done a quantitative analysis. >> would you share that with us? >> there is information contained in the proposal that we published. >> all right. well, the analysis -- is there -- my time has expired. >> the point is that deposits capable of bility absorbing losses when a film is in trouble. we've seen that in financial crisis. is to point of this make sure there is enough assets to -- at risk. >> is to ake sure the gentleman from de. >> thank you for coming in today for a hearing you normally wouldn't do. thank you for filling in for that vacant position and for

listening and responding to all our questions. there's been a lot of debate here on both sides of the aisle and the committee, over the st several days, about regulatory relief. i would like to ask some questions about that. particularly the community banks being the lifeblood of our local communities. most of our districts across the country, particularly rural districts. not so much my state. e state of delaware, we have fairly sophisticated financial institutions. we're not talking about regulatory relief for those firms. but there's been a lot of debate about what's the best way to do it. one side of the argument is, well, the fsoc and regulators have the flexibility under dodd frank to tailor these enhansd regulations for the size of the

bank. i have a list of the bank holding companies that are $10 billion and above. so subject to that process which is the comprehensive capital analysis and review process that we've been talking about. this is what we hear from our banks in terms of the expense that's involved in all of that. governor trillo has said the $50 gl cutoff, these are 10 billion and above. 50 and above is a sfy and you have additional regulations that you are subject to if you are 50 and above. the comptroller has said that number is way too low. i talked to him and he said something far north of 100 considered d be today a bill in committee. i did not vote for it that would use a different approach. wouldn't have a size cutoff but

would apply to an activities approach. would s there a better way to do it? and part of the question is do you have the authority? i heard you say you do not have the authority to appropriately tailor the process for some of these smaller end community banks. >> by and large we have considerable ability to tailor what we do to get the complexity and systemic footprint of an institution. >> what did you mean when you say we don't have the ability to tailor for smaller banks as necessary? >> so banks $50 billion and above are under dodd frank subject to stress testing

requirements and resolution plan requirements that while we can tailor to some extent we can't completely remove. and what we found is that for some of the smaller institutions, we think -- >> my time is running out. >> the costs exceed the benefits. >> i would certainly be interested in having a conversation about what is a better way to do that and to give the authority flexibility and authority to enable you to provide the appropriate tailoring that's necessary. if you look at this list of banks jp morgan chase which is 2.5 trillion bank. and is a lot different than the bank of hawaii and some of these other, nordstrom, ink, which i didn't even though was a bank. and i suspect that some of

those that are much smaller than the top 5 or 6 don't have any systemic risk associated with them and shouldn't be subject to some of these more expensive -- they could do what they do, is lend money so that the people can build businesses and buy homes and the like. >> well, we have eight banks that have been designated as usg since. and those are subject to heightened set of requirements with risk based capital surcharges and enhanced leverage ratio and tlac requirements that the banks below that, those eight are not subject to. so even among the largest banks we have been able to tailor our rules. >> i would be interested in hearing more how we would tailor for some of the smaller banks. my time has run. thank you for being here. i yield back.

>> the time of the gentleman has expired. the chair recognizes the gentleman from indiana. >> thank you. i would like to talk a little bit about comments that you ake in your written testimony. regarding the lessons of the financial crisis that we have learned. you state to supervise financial firms in a manner that promotes the stability of the financial system as a whole and limit the systemic -- systemic damage that would result if a large financial institution does fail. i mean, obviously we always want to learn lessons from different situations that we have experienced prior to the llapse in 2008 the fed was eated to or was focused on

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

greater ability to survive adverse conditions and to continue to meet the credit needs of the economy. we have much more and higher quality capital, higher liquidity requirements. our stress testing procedures which discussed earlier this morning are providing a much more robust way of attempting to detect weaknesses in these organizations. so we are doing that. and then also we are working very hard to address too big to fail by making sure that if one faced with ms was insolvency that we could resolve that firm in a manner that would not created systemic risk with regard to the remained -- we guard the fnl system the

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

that kept us from some other greater collapse? about earlier ng crisises? >> correct. prior to 2008 the fed was focused on -- go ahead. >> i mean, i think the united states was very fortunate that from the great depression until 2008 we never suffered a major financial crisis. and i think conditions developed prior to the crisis. it was a variety of things that came together that provoked very, very serious crisis. >> let me ask you this quickly. what do you expect or why do you expect basl 3 to be more successful? >> i think that we have improved capital standards by raising the quantity and quality of capital we demand particularly of the most systemic organizations. and we have designed kind of

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

i'm not sure precisely how you would define contingent capital. >> in this memo, eligible internal ltb of foreign gsib's. >> oh, this is for foreign. >> right. >> but -- >> the federal reserve board will be operating the trigger for the convrgs of these. is that correct? >> you're talking about for the foreign banking organizations. >> yes. that we are making sure the u.s. subsidiaries of foreign banking organizations that will be required to set up an intermediate holding company have enough essentially debt that is that has been issued to them by their parents that if we -- it will make it easier for them to be resolved. >> right. they accomplish very similar things. >> they do. >> but the difference that i

see is that one friggers an insolvency. you have to -- there has to be determination by the regulator that u are not a going concern. >> that's correct. >> and that is a solution that appears to have been chosen for u.s. companies whereas you have appeared to have allowed or chosen the coco mechanism where the board would say you are in violation of your capital requirements. therefore, triggering the conversion to equity. and so it seems like you have -- my question is do you have in place and will the if he had be operating that triggering mechanism in the case of foreign owned subsidiaries? >> so clearly in the case for the u.s. scombsidries what we want is in a title 2 resolution enough loss absorbsy for the fdic to be able to recapitalize. >> what iche reaching for, if you -- the european solution,

is superior because it warns the banks when they are in danger of being -- there's a market based signal that warns the banks when they are in likely to be in violation of their capital requirements, not that they are likely to become insolvent. do you understand? and that i view is a major difference. i think that the political nature of that decision will be much easier and less fraught if you are talking about triggering the conversion to equity rather than into resolution. so that reason i think it is less plits sized and much more at ly to yield a going firm the end of this. so why did you decide to allow for foreign subsidiaries the mechanism of coco's and yet not included in the capital stack of u.s. firms and what the thinking was behind that. >> so i'm not sure if i'm going to be able to explain this to your satisfaction.

but we think in the case of a foreign firm many foreign regulators, if a firm got in trouble, would want to essentially engage in a single point of entry type of recapitalization and the structure that we have proposed i think would make that possible we would end up cooperating with foreign supervisor who was trying to resolve a firm. now -- >> but they don't trigger when the firm needs resolution. as i understand it they trigger when the firm violates its capital requirements but is not yet insolvent. is that correct? >> if a firm were under our supervision in the united states to violate the that requirement, we would demand i guess that it be refilled so that if the firm were to be in trouble and we needed to resolve it it wouldn't operate

in the manner you suggested. >> all right. soy guess so it sounds like you have in place the trigger. it was brought up before. the pree sponse that i've gotten is the trigger too complicated to set up. it sounds like you plan to set up such a trigger. would it be possible to get me a briefing? >> yes, sir. >> the time of the gentleman has expired. the chair recognizes the gentleman from south carolina. >> thank you. madam chair i know it's a relatively minor issue. but since this is an oversight hearing more than it is monetary policy hearing, i want to go back to congressman duffy's line of questioning regarding the 2012 leak generally your policies on those sorts of things when we're dealing with what we call information security rules that mr. duffy asked the question i don't know if we're able to get to the bottom of it. he said in your cover letter to him of about two weeks ago producing the document you

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

>> and general counsel to determine what the next step should be including whether it should be referred to the inspector general. now, my understanding of that policy, the way i understand that is that if there is a material breach it is appropriate to refer it to the inspector general. and i've done so. if these rules need arification, that is how the fomc chair is tasked with handling these investigations and that is my understanding of the rules and how i intend to -- >> let me see if i can cut to the chase on this. i think what you're saying is that you believe that your practice is entirely consistent with the policy. and that what your letter really said is that after the general counsel did their investigation i would immediately refer it to the

inspector general. >> well, i've taken the view of the soonest we have determined that there is a material breach i have asked the inspector general to look at it right away. >> and you wouldn't determine there is a material breach until after the general counsel and secretary this v done their -- >> they need to do a review. let me just get a sense of -- >> i'm actually agreeing with you. so if you want to take yes with an answer. >> the kind of thing that happens is sometimes somebody has a usb with a draft of something on it and it drops out of their pocket in a taxi or they lose their blackberry through security procedures both in usbs and then in blackberries that just basically should disable them and protect the information. but the fomc secretary receives reports of such things in general i wouldn't refer such things to the inspector general.

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

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

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

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

suggestions careful conversation and will be working closely with other banking agencies in developing a report to congress that the conclusion of the these egrpra which is a deregulation exercise. approximately when can we expect the report? > do you know? by the end of next year for sure. >> by the end of 2016. then i would encourage you to see if there is any distance between the ped yl and the med yl between velocity on that effort. it would play a part. i think it is important that you all be a part of this. bauts what i observe here is you have those who legitimately believe that we can do a whole lot less but that which many of

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

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

instruments will all rise across the board. and -- >> can i see if i can get one more in, in 14 seconds. >> yes. agencies the rating recently indicated that the exercise of living wills is actually working and they put it in writing. we're about to go through another round this winter. what is your forecast? living ve very detailed wills. they are much more detailed than previous versions. they have responded to instructions that we carefully gave out. we are carefully evaluating age recently them and will be making decisions in the coming months. >> the time of the gentleman has expired. the chair recognizes the gentleman from north carolina. >> thank you. good afternoon. i am going to see if we can set some kind of record together and answer five questions in five minutes. i'm following up on the chairman's questions regarding

the role of the fed. i'm going to read a quote from the financial times in august of 2014. it says if he had officials are also involving themselves in the kind of decisions the company management or board directors usually make. including whether employees should be fired or disciplined. which has been surprising. do you support this type of activity not withstanding you said it's not the policy but do you support this type of invase ive policy? >> well, when there is wrongdoing as we've seen for ample in the scandals, it is appropriate for us in addition to leveling fines to try to identify individuals who are guilty of wrong doing. >> it's an ongoing process. do you think it should be a that the fed for example

should be opining on resources decisions inside the boardroom as was quoted here? >> what exactly did they quote? >> they just said that they were including whether employees should be fired or disciplined. >> i'm not aware that we -- >> but would you approve of that? wrr we should not be managing firms. >> so should the fed then be micromanaging these board rooms and trying to dictate policy inside a board room? >> we're not managing the firm. we shouldn't be managing the firm. but we need to make sure that the firm is managing itself properly. following up. what would you say the fed could do to reduce regulatory burdens on communities

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

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

to make sure that we can provide the financial resources available and not have the regulatory impedments on financial institution that is frankly impact our business growth and their environment? they are -- why we s partly participate in international groups like the iais or the basl committee. the financial stability board. >> how would you measure success in this approach? do you think what you're doing is working now? because we haven't seen the measured success that we would participate like to see in terms of being able to attract companies. >> i think we have seen success. we have a much safer and sounder financial system and other countries are also raising the standards that they apply to their large banking. >> the time of the gentleman has expired. the chair recognizes the

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

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

threshhold and would save us some supervisery resources, this isn't a must-have. >> ok. well so a living will does the ery largest banks in the country are eevep larger today than during the financial crisis, the living will of dodd frank make sure they never threaten the economy again if they're found to be not credible. the last time they were evaluated the banks' living wills only the fdic took the official position that the wills were not credible. the fed's decision not to join the fdic has slowed both regulators ability to take additional action. hy would the fed voluntarily give up additional authorities to force changes at problem banks? > so we took the position that this was a completely new process and we stated this when out guidance on the

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

would be willing to offer your perspective on one of the observations of ben bernanke. came out with a memoir and he said it would have been his preference to have more investigation of individual action as obviously everything that went wrong or was illegal with you done by some individual. not by an abstract firm. so in that respect there should have been more accountability at the individual level. then of course loretta lynch under the d.o.j. said about a they're going to look into white collar prosecution a little bit more. do you have any observation on bernanke's observation? what about prosecuting some of these folks who engage in fraud? >> i completely agree with his assessment. now, we can't engage in criminal prosecutions but i that we to the extent

can identify individuals who have been responsible for wrongdoing and significant breaches where we've leveled the civil money fines, we are trying to take action against individuals as well. that means barring them from working for those organizations or potentially to banking industry. >> the time of the gentleman has expired. the chair recognizes the gentleman from kentucky. >> thank you, mr. chairman. welcome back to the committee. we routinely hear from president obama and senator warren and others that an absence of regulation was the principle cause of the financial crisis. i would like to explore with you today the threats to financial stability posed by too much regulation. let me take as an example, the market provides more than $400 billion in financing for hundreds of american companies and employ more than 5 million

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

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

we could have a look at. i would have to get back to you on it. >> i would appreciate it. i would love to have that discussion with you. let me move on to the discussion of ill liquidity in the market generally. secretary lieu has denied that there is a liquidity issue or some of the post crisis regulations are contributing to ill liquidity in the market. you said that you would not rule out the possibility that regulations are playing a role in decreased income liquidity. certainly your colleague acknowledged that regulations may be a factor in diminished fixed income and there's been a research on this. i'm quoting from one often cited piece of research. almost every institutional investor and every marked seemed worried about liquidity. they fear it will be gone tomorrow. they say that e trading is contributing to volume but little depth for those who need to trade in size.

the frequency of flash crashes without cause adds weight to the fears and the most frequently cited is that increased regulation has driven up the cost and reduced the appetite for risk and hence their ability to act as a ware how'ser between buyers and sellers. what would lead you to doubt that increased regulation is actually creating a destabilizing impact in terms of liquidity? >> well, there are a bunch of different things going on in these markets and we are trying to carefully study. the treasury market and the corporate bond market aren't the same. the conditions are quite different and the rule of the broker dealers is different. high frequency trading has become very prevalent in the treasury market. and -- >> and i hear that explanation. let me jump to one other potential theory here. and again, the same piece of research. the more liquidity central banks add the less there is in

markets. in addition to regulation central banks distortion of markets has reduced the hetro jen nate of the investor base. so the question is is central bank liquidity forcing investors to view them expensive making markets more prone to sudden corrections? >> well, we hold significantly more assets the federal reserve than other central banks than we did prior to the crisis. but we have very deep and liquid markets in the treasury securities and mortgage backed securities that we hold. so i'm not aware that our behavior is significantly influencing market functioning. i'm not aware of any evidence suggesting that. >> thank you for your testimony. >> the time of the gentleman has expired. to accommodate the chair's schedule the gentleman from maine will be the last member recognized. >> thank you mr. chair. and thank you chair yellen for

being here. they always save the best for last. that's what they say up in maine anyway. but i'm thrilled to have a discussion with you in the lobby before we came into the hearing where i would asked you ecifically what your thought process is now going forward about fsoc and your involvement as designating managers as systemically important financial institutions. and if that happens of course they have to succomb to regulations with respect to dodd frank and that can stifle rates of return for small savers. you mentioned something very interesting. you said right now the fed is not focused on designating assets managers. >> through fsoc. hat i said is that the fsoc is focusing on activities. and studying a set of activities involved in asset

management liquidity risks redemption risks, potential risks that -- >> i stand corrected. and you sit on that. >> that is right. so that fsoc focus at the moment is studying these areas, the s.e.c. is actively involved in rule making in these areas. and that has been the focus recently. >> thank you. what would be really helpful, i can suggest, if we had a written set of criteria that the industry, those folks that are in this space, is can look at something on paper to say you know if i had these various business practices that revolve around my business model or i manage these sort of assets, then i know the probability of me being designated as sify is very high or low. does that make sense? instead of saying our focus of fsoc is not to look at asset

managers a's zezzig nated as sife's but maybe down the road we will? do you have a written set of glines? >> there were a set of criterias that fsoc initially issued to indicate firm -- >> has that been updated? >> i'm not certain if it has. there was written -- >> if you don't mind we'll reach out to your staff to see if there's any updated criteria. do you have a set of cite combra that deals with an that a nonbank financial institution is designated as a sife and they know if they go down this path there will be an offramp for them? >> we evaluate each of these firms every single year to decide if it's no longer appropriate for them to be designated. >> but you have a set of written criteria?

if you're running a business it's really helpful if you have those glines. >> we're not trying to run these businesses. and we're not going to -- i don't think it would bei don't e appropriate for us to say that you need to do x, y, and z to be designated. these firms understand very well what it is to be designated and they understand what kind of changes in their business model would bring assessment and these are firms that decided to do these kinds of business. -- hey change that decision >> at a need to be rude, but this is where i worry. you have probably seen the study that was conducted by holtz begin,