fsoc filled that void. it serves as an advanced warn ing system to identify and address posed by large complex companies, products and activities before they threaten the economy. the counsel has ensured that for the first time that our financial regulators are working collaboratively to identify and respond to emerging threats to financial stability, and with their february announcement outlining enhanced engagement and opportunities for public input, they've doubled their efforts to engage with the industry and congress in a transparent matter. we have taken important steps to prevent another economic disaster from happening including making our large banks resilient. leveraged and liquidity standards. covering oversight gaps in our financial system. designating complex interconnected nonbanks for consolidated supervision and reforming key markets like asset backed securities and money market mutual funds. however, five years after dodd frank became law, my republic colleagues remain fighting the battles

you've seen it in the fsoc annual report. there was a drive by of it in the multi agency report that came out last october. and i've been around this town long enough there always has to be a boogeyman somewhere when you're trying to misdirect. i think this is an area that we need to encourage and not run away from and not vilify, not accept the standard pushback that we're getting. and the second point, too which is this notion of the aggregate impact of regulation. and your question, which i think is a good one, how much of it is standard post crisis and how much of it is regulation. i was listening closely to sandy. i think we've reached a point where we've seen historically 2008 to maybe into '11 where there was a lot of prudent risk management undertaken in response to a crisis. i don't think you can parse them out any longer. you can't say it's basul, it's dodd frank, you go down the road and then it's prudent risk management because what risk is there to manage when you've been told to derisk everything? so there is th

let's look at fsoc. fsoc is an amalgamation of regulars hitting agencies that either help cause of the financial crisis or were largely neglected in preventing it in the first place, notwithstanding their the regulatory authority to do so. dodd-frank rewards their fears their fears background criminal sweeping powers over our capital markets since then you do. dodd-frank allows federal regulators to unilaterally define vague statutory terms like systemic risk financial stress, and financial stability. and by defining these terms fsoc can dictate capital standards, product mix and lending activities of the major financial firms within our economy. should firms not bow down to fsoc's will fsoc is even empowered to break them up. this is nothing short of a functional occupation of the commanding type of our economy by federal regulators who have nonow been empowered to be central planners. with the exception of agencies dealing and classified information relating to national security, fsoc may very well be

we shared concern about the fsoc need to conduct a thoughtful review of the industry before moving toesignate individual insurers. since sending that letter, the fsoc has taken additional steps to understand the acid industry which was needed after the office of financial research report. specifically federal reserve governor carullo has engaged in a market wide analysis and review. taken steps tote understand the insurance industry. do you think it would be appropriate to conduct a thorough study and analysis of the insurance industry? shouldn't all non-bank financial institutions facing similar process for review? industryset management is one where fsoc thought it appropriate to focus on activities and to look at whether or not there are systemic risks associated with some asset management activities. examples would include liquidity and redemption risk and use of off-balance sheet leverage. with respect to insurance -- this is not a matter of going from reviews of individual activities type of approach. it's not something that fsoc, to the best of my knowledge, has discussed. >> l

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 replac

is this dialogue going on within fsoc to your knowledge? >> my knowledge isn't really great with respect to fsoc because they don't really tell us much. i read the annual report and in the annual report it says this is something they're looking at. i think it was on about page 117 and it talks quickly about electronic trading in that context. that's what i was referring to earlier. i think setting up the potentialing into givepotential ing into -- boogieman. when folks hope that we're doing things in washington when we know they're not, i hope they're doing this as opposed to spending their time figuring out whether to make institutions that should be able to fail too big to fail and designating that. i hope they address it soon but i honestly chairman don't know. >> i don't sit in on those meetings. this report, this joint one, if it's any indication in terms of how our agencies can work together then i'm excited about what they will do for us. >> let me make a comment on that. so there is something in the annual report so that is somethin

the fsoc and s.e.c. seemed to take their cues from the fsb. madam chair, now that the fed is riding a capital rule for insurance companies, i would encourage to you break from the tradition of leading from the 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 already write rules and export them back to our country. i would also encourage you in your capacity as a member of the iais to take that lead in that body promoting activity-based regulations of insurers as a group that reconsiders its g-side designation methodology late they are year. it appears governor truillo committed the fed to activities-based approach to asset managers but i haven't heard him say he would do the same for insurers. will you commit the fed will take the lead and follow these courses of action on insurance companies, capital standards and promoting the replacement of deregulation based insurance? i think senator rounds was starting down thi

i want to talk about the ultimate goal of fsoc. fsoc's goal is to reduce risk in the markets, is it not? >> yes, it's to reduce, make sure we have financial stability always on our minds. and reduce the risk of -- >> and the elimination of risks too. i don't think that's the ultimate goal. without risk you have no return. let's talk about why i focused on stability. let's talk good stability. in gaining stability. we need to make sure our institutions have a proper road map. right now, we have a designation of a sifi that leads to an institution now trying to find out how they get out. i give you credit with what happened in february. with some of the transparency rules that you promulgated. and the opportunity every five years to get a decertification of being a sifi. my concern is, why don't we have in place a road map. a precautionary measure to prevent them from ever being designated as a sifi. >> the process is not one where we assume everyone could be a sifi. to go through, the firms that present themselves because of their s

title 1 gives the fsoc authority to designate certain large nonbank firms as sifis. the sifi idea is based on the notion that all large financial firms were are interconnected. you'll hear this all the time. you'll read it in the papers. they're all inter connected. and if one fails, this is the theory, it will drag down others. that's why sifis have to be specially regulated by the fed under dodd/frank to reduce their risk of failing. however, we can see from looking at what happened after lehman brothers, and this may seem counter intuitive, after lehman brothers failed, that this idea is wrong. no other large financial institution failed as a result of on lehman's failure. and this is true even though lehman was one of the largest nonbank financial firms and a major player in the credit default swap mark. and also its bankruptcy occurred at a time when market participants were very worried about market in stability. this shows that large nonbank financial firms are not dangerously interconnected. and if one of them were to fail it would not drag down others. so th

should firms not bow down to fsoc's will, fsoc is even empowered to break them up. this is nothing short of the functional occupation of the commanding heights of our economy by federal regulators who have now been empowered to be central planners. with the exception of agencies dealing in classified information relating to national security, fsoc may have well be the nation's least transparent federal agency. they consistently advocate for more regulation of the financial system said, fsoc's proceedings make it look open by comparison. and with the risk of the shadow banking system yet a far greater danger is imposed by the regulatory system, which operates beyond checks and balances, as enshrined in our constitution. when our founder set up a system of governments, they included constitutional protections for the the great national economy under the rule of law. they wanted a society of commerce and of frad, of industry, of work, of entrepreneur ship and dismantled high government barriers to these activities. they had a noble purpose. they wanted all citizens inc

>> well, fsoc is charged with attempting to identify threats to the financial stability of our country and issued a public notice indicating what they're going to do is to look out particular activities -- >> okay -- >> not firms, but asset management activity that could pose risk so that that's the focus. >> i'd like to switch gears if i can in my remaining minute. you stated on a number of occasions you are concerned about unsustainable deficit spending in this country from how it might impact economic growth and job creation, and i agree. everybody knows who is one of the family budget or small business you can spend more than you taken for longer to time our to make up the difference without getting into trouble that's exactly what congress has done and that's why we have an $18 trillion national debt. we have some folks who come before our committee concluding secretary of the treasury mr. luke who was here a few weeks ago instead $500 billion annual deficit, no big deal because it's only 3% of our gdp. i disagree under that you do. our state treasurer -- i was state treasurer tre

title 1 gives the fsoc authority to designate certain large nonbank firms as sifis. the sifi idea is based on the notion that all large financial firms were are interconnected. you'll hear this all the time. you'll read it in the papers. they're all inter connected. and if one fails, this is the theory, it will drag down others. that's why sifis have to be specially regulated by the fed under dodd frank, to reduce their risk of failing. however, we can see from looking at what happened after lehman brothers, and this may seem counterintuitive, after lehman brothers failed, that this idea is wrong. no other large financial institution failed as a result of on lehman's failure. and this is true even though lehman was one of the largest nonbank financial firms and a major player in the credit default swap market. and also its bankruptcy occurred at a time when market participants were very worried about market instability. this shows that large nonbank financial firms are not dangerously interconnected. and if one of them were to fail, it would not drag down others. so

fsoc simply refuses to look in the mirror. it omits any references to specific government policies or agencies helping cause this systemic risk it identifies. greater risk taking across the financial system is encouraged by the historically low yield environment the council reports. yet the council refuses to identify the obvious source of this apparent risk, one of its own members the federal reserve and the feds unprecedented loose monetary policy. the council warns of reduced liquidity, yet never acknowledges that dodd frank's volcker rule have reduced liquidity. risk taking of large complex financial institutions as a threat. yet again it fails to mention that dodd frank amplifies the threat by empowering the council to designate certain firms as too big to fail thus enshrining the concept into law. the designations will make worst profound threat ignored by the council, recently identified by the federal reserve bank of richmond and their bailout barometer. taxpayers implicitly are now on the hook for a staggering 60% of

the fsoc designation authority should be repealed. title ii of the act is called the orderly liquidation authority and provides extraordinary power for the fdic to resolve large feeling financial terms including banks and nonbank. from what i said earlier about lehman should be clear there is no need for a special system for resolving our rescuing non-banks. they can fail and they result in bankruptcy without harm to the rest of the economy. limits banquet he caused chaos to be sure. that was because he represented the government's complete reversal of the policy of rescuing large firms that market participants thought the government had established with the rescue of bear stearns about six months earlier. until the sunday before them and filed for bankruptcy, the treasury and the fed.they had to buy the firm. when that fell through the government had no plan b. have refused to put up signs so they miss he became inevitable. although they miss bankruptcy lawyer was contacted in the preceding week he was not authorized to draw any pape

we need to protect the ability of fsoc to prevent risk. fsoc is critical to understanding how developments affect the financial system. it is growing through hedge funds, pension funds, and mutual funds. this evolution of the financial system means that we must consider a different kind of risk and be open to different kinds of policy responses. we must always be looking ahead and ask what the risks are in the future to make sure the financial system is safe. that is why we need to look ahead. we must finalize the important rules, like the ones that raise standards on analysts and fix compensation practices with shareholders, taxpayers, and customers. we have seen attempts to roll back safeguards by slipping provisions into bills. this use of riders is on acceptable. let me be clear, the administration will oppose the efforts. the bills that threaten to push the clock acts two 2008 and leave the american people vulnerable, i recommend the president the dowveto them. in the aftermath of the crisis, we have seen proof of what we have always

if not the fsoc itself is to attempt to vilify in this context electronic trading specifically as the cause of the lack of liquidity, which to me is turning the world on its head. i listened to dr. harris and i'm intryinged by his notions when i've been following for while, maybe a thousand chutes will grow from the chaos of all these rules that have decreased liquidity. maybe it will be a hedge fund or maybe it will be a broker dealer that trades fixed income. but employing new technology, new business models, electronic trading is happening in the aftermath of all of these other changes yet being pointed at,

fsoc has met over four times. they have dealt with a number of institutions through mutual funds and so forth. dealing with non-bank financial institutions that pose risk to the society. looking over the horizon to make sure they're not product lines or institutions that can cause the kind of difficulty in the past. it doesn't mean you'll stop crisis from happening. but we have the ability to spot them. and the liquidation process, the shelby dodd amendment that passed with 90 votes the first amendment up on the floor of the senate deal ing with legislation and stabbing the stress test, the whole unwinding, if you will that was required in the

title i gives the fsoc authority to designate certain large nonbank firms as sifis. the sifi idea is based on the notion that all large financial firms are interconnected. you'll hear this all the time. you'll read it in the papers. they're all interconnected. and if one fails -- this is the theory -- it will drag down others. that's why sifis have to be specially regulated by the fed under dodd-frank to reduce their risk of failing. however, we can see from looking at what happened after lehman brothers -- and this may seem counterintuitive -- after lehman brothers failed, that this idea is wrong. no other large financial institution failed as a result of lehman's failure. and this is true even though lehman was one of the largest than bank financial firms and -- nonb bank financial firms and a major player in the credit default swap market. and also its bankruptcy occurred at a time when market participants were very worried about market instability. this shows that large nonbank financial firms are not dangerously interconnected, and if one of them were to fail, i

it's not something that fsoc to the best of my knowledge has discussed. >> let me go to my last question. and their brave 2014 i asked about the deepening crisis in the commonwealth of puerto rico. he said then that the federal reserve was monitoring developments and continue to analyze potential consequences for financial stability of these events. you also said it would be best to not have the federal reserve stepped in as a creditor of a state or municipality. you said that it is more appropriate for congress and not the federal reserve to address financial issues based by states and municipalities. do you believe the best.com would be the puerto rico electric power authority and its creditors come to an agreement without any government intervention with respect to this issue? >> with out what? >> without government intervention but instead work it out between the power authority and the creditors. >> this isn't a manner in which i have an opinion. the federal reserve comments something that the federal reserve can't and shouldn't be involved in. i think it's appropriate for congress

and there are several that have been designated for supervision by fsoc that -- or you know, also subject to enhanced supervision. >> switching gears. we've already had some discussion on this as it relates to employment. 5% is full employment. right now 5.3%. so we're pretty close there. why do you think we haven't had and felt that wage growth yet, and what do you think needs to be done to feel that? >> first of all, i think there is more slack in the labor market than you would think by the 5.3% measure, somewhat more. and i've pointed to the very high levels, unusually high and we detail this in the monetary policy report. the fact that involuntary part-time employment is unusually high given the unemployment rate. so that's one factor. in addition i think that labor force participation, while it's mainly declined for demographic reasons, there seems some component of suppressed labor force participation that does reflect a weak economy, a weak labor market that many would rejoin the labor market if it were stronger. to my mind, the 5.3, somewhat overstates just how strong the labor m

janet yellen: the sso seed is is chargedh -- fsoc with trying to identify the financial stability ofur country. issued a public notice indicating that what they're going to do is to look at particular activities. not firms, but asset management activities. they could pose risks. rep. poliquin: i appreciate that. i would like to switch gears of i can in my remaining minute. he stated on a number of occasions that you are very concerned about unsustainable debt in this country and how it might impact job growth in this country and i agree. everyone knows on a family budget that you cannot spend more than you take in for long periods of time and borrow and make up the difference without getting in trouble. is exactly what congress has done. that is why we have an $18 trillion national debt. we have had some folks come before our committee, including the secretary of treasury mr. lou. you said that it is no big deal because it is only 3% of our gdp. i disagree with that and i bet you do, too. i'm a state treasurer in maine and i can tell you that high levels of public debt caused by long

fsoc has met over four times. they have dealt with a number of institutions through mutual funds and so forth. dealing with non-bank financial institutions that pose risk to the society. looking over the horizon to make sure they're not product lines or institutions that can cause the kind of difficulty in the past. it doesn't mean you'll stop crisis from happening. but we have the ability to spot them. and the liquidation process, the shelby dodd amendment that passed with 90 votes the first amendment up on the floor of the senate deal ing with legislation and stabbing the stress test, the whole unwinding, if you will that was required in the legislation. we think it's going to work. the fdic has the history in being able to do that. clearly we're in far better shape than we were. of all the economies around the world the one that's doing the best is ours. it wasn't a miracle. it was because of hard work that we put in place here that allowed us to -- >> aren't there unintended consequences such as the issues of

fsoc is focused on shadow banking, and the financial stability board has a large program devoted to shadow banking. we are thinking about regulations 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 are the sec in money market funds, which was an important piece of the shadow banking system, where risk developed leading to the crisis. you are absolutely right. absolutely right to focus on that, and we are attempting to address those risks as best we can. donnelly: thank you, madam chair, mr. chairman. >> senator scott. scott: as i travel across america, people express concerns about america leading from behind, whether they are the failure of red lines in syria, or more recently in south carolina, has the sense that the nation is tentative and comfortable taking keys from foreign actors rather than occupying our traditional role as leader of the world. now, i am certainly not suggesting that you are somehow in

we also need to protect the ability of the fsoc to ask the hard questions and identify potential risks to the financial system wherever those risks reside. the fsoc is critical to understanding how new developments change the landscape of the financial system. today our financial system is growing more through the assets of hedge funds, pension funds and mutual funds than it is through the assets of large complex financial institutions. this evolution of our financial system means that we must consider a different kind of risk and be open to different kinds of policy responses. and we need to always be looking ahead and asking what are the risks of the future? to make sure our financial system is safe, that's why we need to look ahead. and we must finalize important rules like the ones that raise standards on analysts who provide retirement and investment advice and the ones that fix compensation practices to align incentives between executives shareholders creditors, taxpayers and customers. we've seen attempt to roll back key safeguards by slipping complex provisions into unrelated b

>> well fsoc reviews every single year the designations of firms and considers whether or not they're appropriate or no longer appropriate. and firms that are designated are given very detailed. >> okay. >> material to enable them to understand the basis for the designation. >> i would encourage you every year to be sure you put something like that in there so there is some certainty on the part of those folks that are designated. one quick question in here with regards to the board is charged with adopting capital stand for fellow supervisors insurers. the capital standards are of concern from the standpoint this is the first time that the fed has gotten involved in capital stapd rds for insurance companies and i know through fio you're looking at international capital standards for companies. would you commit to prioritizing domest domestic capital standards. >> international capital standards would not become effective in the united states unless a regulation or rule were proposed. >> that's my concern. >> went through full debate. >> that's my concern. we want to make sure that th

report to you a very abbreviated summary of special -- especially of the work that we've been doing for fsoche last two years we've supported commanding general charles cleveland whose just retired as the commander of the green berets, and we've compiled two reports on the use of irregular warfare by groups like isis, but also a nation state actor such as iran and russia. and also a very in depth study on the central gravity of isis. i'm going to talk to you very briefly about those reports and also the doctrine, the strategy that isis is following on the ground today. so what is the current threat environment? the current threat environment is a very, very ugly one. whether you are a christian girl in nigeria, kidnapped against your will because of what you believe, whether you are yazidis hounded up a mountain topped by isis or someone somewhere in syria and iraq who got on the wrong side of isis and had to be crucified or whether you're one of these poor wretches who was decapitated recently or the unfortunate lieutenant of the royal air force. this is your reality. and it isn't just, of

should firms not bow down to fsocs will, it's empowered to break them up. >>> in relating to senate security, it may very well be the nation's least transparent federal agency. better markets advocates for more regulation of the financial system says the proceedings make it look open by comparison. it was the risk of the shadow bank bg system and yet a far greater danger instead was imposed by the shadow regulatory system that operates beyond checks and balances of the three branches of government inshrined in the constitution. when the founders set up a system of governance they set up for a national economy under the rule of law, and they wanted a society of entrepreneurship, and they dismantled high barriers to these. they wanted all citizens including those in the old world that were at the bottom of the ladder, the needy and poor to arise in the new land of promise. it was not arrogance that made america the new land of promise for they knew there was a contradiction between the land of promise and the millions in bondage, here whose human worth and natural rights were denied. the found

stability to the system, which i think is hugely important point that can be lost especially in the fsoc debates on systemic importance. but for them the definition of liquidity, if it's one i hear economists use, the price at which you can execute a transaction, you're able to do it, it's just at what price. in the agency construct, that is a more relevant definition. you're going to get the deal done, you're doing if on behalf of somebody else, they're going to get more or less back based on the price. in the context of regulated entities. and capital leverage, the charges. it's wholly separate, avoiding the concentrations, the type of definition that has driven the inventories down, which i guess is a good segue to your next question that you pose to me, is there less liquidity in the markets, as a policy maker, not a trader, nothing somebody on the street, the data that we've seen is what caused me three years ago to give my first speech. issuance is up, inventory's down, it's just basic math. as bad as i was at math, i was able to get that one with some assistance from my council, i

so dodd-frank, of course also created so the called fsoc. what is that? the financial stability oversight council. which during its current existence has done virtually nothing to enhance the stability of the financial market. in fact, if you look at it, through its systemically important designation of institutions, fsoc has gone in the other direction. it has put taxpayers now on the hook not just for banks and bank bailouts but the potential bailout of nonbank institutions as well. so a law that has made the big banks bigger, gave regulators expansion of authority and put taxpayers now at so much risk cannot be called having ended too big to fail. it's not just those on our side of the aisle who are skeptical of dodd-frank's claims. here's an example. the g.a.o. in a january, 2013, report concluded, quote, there is no clear consensus on the extent to which, if at all the dodd-frank act will help reduce the probability or severity of future crises. and a former senior official at the fed reserve stated recently, quote, if the whole purpose of dodd-frank

me one of the real flaws of dodd-frank is it extends the pre-crisis system whether it's the cfpb, fsoc, the theme of dodd-frank is let's expand bank-like regulation to everybody else. so again, think about it that way. the notion of dodd-frank is that if only aig had been as regulated as well as citibank was regulated everything would have been fine. [laughter] [applause] >> thank you, mark. i'm going to let each of the panelists in order add something if he likes or take up something somebody else said or reiterate a point. maybe about two minutes each or so. peter? >> yeah, thanks. there were a couple of things that occurred to me that we might add a little bit. first of all, i've heard a lot about the costs of swaps and you didn't cover that as much as we might have covered it. but that and also the question of hedging under the volcker rule. that's also a problem where you talked about market making. market making is a problem. you can't distinguish market making from prop trailing very well but it's also -- trading very well, but it's also a problem with hedging. a lot of activity

the financial stability oversight council, the fsoc, in wits 2014 annual report, specifically named the transfer of mortgage servicing rights to nonbanks as a potentially -- potential emerging threat. report says m.s.r.'s are increasingly being transfered to nonbank mortgage servicing companies while the cfpb and state regulators have some authority over these companies, many are currently not subject to prudential standards such as capital liquidity or risk management. adam levinson, the democratic witness at our hear, spoke favorably in support of the bill, saying m.s.r.'s have traditionally been an important class for demozzer tos as they provide a countercyclical offset to mortgage origination activity and it's subject to give depositories room to smooth their earnings. bazell 3 changes make m.s.r.'s an unattractive asset for banks. representative luetkemeyer and i have questioned whether the prudential regulators struck the right balance between limiting risk exposure and making sure they can still compete with nonbanks in the mortgage servicing arena. from conversations we have ha

is this dialogue going on within fsoc to your knowledge? >> my interesting isn't really great with respect to fsoc because they don't tell us much. and i read the annual report and in the annual report this is something they're looking at. i think it was on about page 117 and it talk ss real quickly about the context. so i don't know. i hope more citizens of this country when they sit back and hope that we in washington are doing things that i know we're not, i hope that they're doing this as opposed to spending all their time figuring out whether to make institutions that should be able to fail too big to fail and designating them. i hope they're going to commit to that. but i honestly, chairman don't know. >> this report that's a joint one is any indication in terms of how our agencies can work together then i'm pretty excited about what they will do for us. >> so there is something in the annual report. that is something that the principals of the council have discussed. and, again this report is an interagency effort which is -- the cft