tv [untitled] May 16, 2012 11:30am-12:00pm EDT
regulations and i suspect it will continue to do so. consistency across the agencies as they develop their rule making process and that help ensure that any rules that are -- regulations that are promulgated are dealt with appropriately. >> they're not going to make them more streamlined or more appropriate to just the bigger folks who are -- the problem areas and alleviate the smaller folks? >> fsoc itself is only -- not a regulatory agency and most of the -- >> certainly could provide some guidance, could it not? >> its members, many of its members are regulatory entities and they do discuss the -- their upcoming regulations with other council members. i don't know what those agencies plans are for -- >> okay. with the rules that are
promulgated, are there any on those rules. >> which rules? >> fsoc rules. >> has issued at least two rules i'm aware of. one is the rule we're discussing today that was finished, published in april. that is a rule that does not directly impose any restrictions or -- >> my time is limited. can you give me yes or no? >> so there is no need to do a cost benefit analysis on a rule that nearly describes the council's process. >> that's fine. what enforcement heck thicmecha in place? >> to enforce what? >> the rules. >> this rule does not -- as i said, put in place any restrictions or limitations on firms. what it does is it helps explain the council's process by which you will identify nonbank
financial entities. >> we leave it up to the regulators to enforce? >> yes. >> what's your enforcement mechanism? >> the same enforcement tools for enforcing the enhanced prudential standards on nonbank companies that we currently have. >> which are what? >> supervisory tools, examinations. >> what's your enforcement? if they're bad actors and do something wrong, what will you do? >> impose upon them written agreements, civil money penalties, the full range of tools we currently have with bank holding companies. >> whenever you designate someone as a sifi, is this going to be public knowledge or something that's internal between your agencies and the individual company? >> the final designation of any particular firm for enhanced prudential standards would be a
public event. >> one of the things that i quite frankly like about the dodd frank bill is that each one of these agencies -- or entities will have to put together a living will. would you describe to me what would be in a living will that would be important for you to see that were florithere and ho would operate? >> it requires that the company describe how it could be resolved under the bankruptcy code. so for companies that are very complicated, the lisk will nevi needs to have a description of how different legal entities within the company interact with one another so that if different legal entities are subject to different procedures or different regulatory procedures, how exposures of one entity aren't so tied in with another that it creates an intractable situation. by having that information in advance or especially by requiring the companies to
produce that information and understand what those impediments to resolution could be, we could then use our supervisory process to push the companies to reduce them. >> living will basically lays out the connectivity of all the things going on within that company? >> that's one of the important aspects of it, yes. >> what happens -- i see my time is up. thank you, madame chair. >> thank you. mr. miller, for five minutes. >> thank you, madame chair. significant credit portfolio and i don't claim to understand that entirely, but the details are sketchy. it also appears -- credits of the banks are taking too much pleasure in the hard to see this
as something to gloat over. it's not like a $200 factory burned down. it just sort of shifted $2 billion. it was chase's $2 billion around to probably some hedge funds. so it really appears that the only thing to worry about in all of that is the effect it might have on the soundness of any given bank engaged in these kinds of transactions or especially to the system as a whole, whether it creates a systemic risk. and i'm wondering how on earth we got a chance, even got a fighting chance to figure that out. ina drew, chief financial officer at chase who has now resigned was making $14 million last year. and she apparently did not understand these transactions and we're supposed to send in
some examiners on government salaries and they're supposed to figure out what risks are involved in these transactions. it would be easy for an examiner to say, well -- or think this kind of looks like a risk but it's a $2.3 trillion bank. even if they lose money on this, they're making it up somewhere else, they'll be okay. which is exactly the kind of attitude that can -- or the kind of thinking that can lead to a great risk for an institution that size if every division is taking risk like that. what sense does it make to create banks this big? they're actually bigger now than they were before the crisis. why do we need to combine what appear to be entirely discreet businesses all within one huge $2.3 trillion bank that will be impossible to regulate, to examine?
it will be impossible for the market to discipline. why not have smaller banks so that if they can't figure out what risk they've got and the risk pulls them down, it won't create quite the same effect on the entire economy and even if it's -- should be possible to figure out more what their business really is if they're smaller. why not have smaller banks? >> so, under the dodd frank act, in particular section 165 enhanced prudential standards we've been talking about today, the dodd frank act asks the federal reserve to imply -- >> part of my question is does dodd frank go far enough or should we have done more to take apart big banks? allows for breaking up banks based on very high standard of risk. should they just be smaller? >> so, what we'll be doing as we
implement dodd frank is to impose higher capital and other standards on the largest banks. we will be doing that in a graduated way that imposed the highest capital standards, for example, on the largest banks and less stringent capital standards on the smaller banks. so we'll have the effect of tilting the incentives away from becoming large simply for the sake of becoming large because the largest banks will be subject to even the capital is your charge eventually once the is your charge is implemented in the u.s. so whether it will work or not, i think, remains to be seen. we have a lot of work to implement that. it is going in the direction of putting in the requirements and less stiff requirements for smaller companies.
that is what we're implementing now. >> why have, apparently, entirely discreet lines of business consolidated into one firm? there appears to be no particular reason to do it and it creates conflict of interest. why not have services? why do they have to be an affiliate of a bank that holds second mortgages on homes that they're servicing? >> the approach we're taking by having higher capital standards on the largest banks will naturally create an incentive for if an activity can be done outside a bank, it can be done presumably more cost effectively. we are providing incentive for where there's not a synergy that creates a benefit that would not be passed along to the customers, then those activities logically -- there would be an
incentive to move them out of the largest banks. >> mr. mchenry? >> thank you, madame chair. mr. auer, so designated nonbank sifis, how much weight will the fsoc give to existing regulators? perhaps you have an international nonbank financial institution and in their home country they have supervisory authority that's very clear. would the fed be likely that the fed would be designated or less likely? >> both in the framework that the council lays out in its rule and guidance stages two and three, the council does plan to take into account existing regulatory scrutiny, whether
that scrutiny is domestic or foreign, whether at the conso d consolidated level or legal entity level. that would all be factors that would lead into the council's ultimate determination about whether or not that firm poses a threat to financial stability. >> mr. fwibson, you said earlier that you have the authority, the fed has the authority to tailor standards as appropriate to nonfinancial companies. now, isn't this unchartered territory for the fed? >> we have the authority to tailor the standards for nonbank financial companies. commercial companies would not be subject to the nonbank. so there are bank holding companies and financial holding
companies that own insurance companies that own asset management companies and a variety of other nonbank companies. so, we will use that experience that we have. and, if necessary, bring in more experience so that we're able to do a good job of supervising nonbank companies that are designated. >> will you be consulting with a federal insurance office? >> we already have -- we already are consulting with federal insurance office on our existing supervision of bank holding companies and financial holding companies that have financial operations. so, yes. >> moving on to another issue, it's my understanding that the counter party limits proposals or proposal, the fed currently has put forward. it's a pretty significant shift in how financial institutions manage their risk. and i appreciate the challenge of managing interconnectedness
in the financial system but what i'm concerned about is whether the feds putting the cart before the horse in that there's not sufficient analysis that we've seen in the public sphere on the impact that this proposal would have to banks, to clearing houses, to foreign sovereigns and the rest of the financial system. has there been -- is there significant data within the federal reserve on measuring that? >> so, we put out our proposal for section 165 in december in the comment period recently closed. one thing we asked for comment for was exactly the question of what would the impact of the single counter party credit limit proposal be, in terms of how constraining would that be for the banking agencies $50
billion and above. we have received a lot of comment and those comments do include -- we will be using all that data as we move forward toward the final rule. >> cost benefit analysis on the proposal? >> we look at the cost and benefits of every rule that we put out on this particular proposal. we're still gathering information on the particular counter party credit limits that were proposed and theternatives >> have you done any research on the current exposure? >> yes. >> would you be willing to share that data with us? >> in the proper way that doesn't require me to talk about confidential supervisory information, i would be happy to provide more information, including the information we've
gathered and information companies have submitted to us. companies have submitted information to us, both through their public comment letters, already available to you and confidential information to us through the supervisory process, which they intend for us to use as we move forward toward a final rule and have the best information available. we have all that information. >> so what will be public? that's sort of my question. i can't predict how we're going to move forward toward a final rule. when we do the final rule, we'll certainly come out with a discussion of how we weighed the comments we received and what judgments we made based on the comments to move to the final rule. >> thank you. >> mr. canseco. >> thank you, madame chair. i noticed at the february 1st fsoc meeting you updated the
council on comments that it had received regarding the second notice of proposed rule making. the meeting was gavelled in at 1:00 pm and concluded at 3:13 pm. your presentation was one of five or six items on that day. and i'm not certain how long the council discussed your presentation or what questions were asked. i assume it couldn't have been more than 20 or 30 minutes of discussion on one of the most important provisions of dodd frank. could you shed some light for us on what was discussed that day and some concerns that were raised by the council members? >> the discussions at that particular council meeting were not the first time that the nonbank designation rule had been discussed by the council. the council actually put out an advanced notice of rule making,
first notice of proposed rule making and a second notice of proposed rule making. all three cases, we received comments and all three cases the council discussed those comments, how the next iteration of the rule would incorporate and respond to those comments so that there was a thorough conversation at each point in the process about how the final rule responded to the comments. >> did you discuss the comments that you received? >> yes. >> and were those comments and comment letters, were they discussed at that time? >> yes. >> and what were some of the s dissensions? >> i don't know that there was any dissension. there was discussion among the principles about how -- and questions about how the rule addressed the comments and what changes were necessary at various points to address the
comments and how those were reflected in the final rule. >> so, everybody was on the same page? >> the -- all council members asked a lot of questions, but the ultimate vote, i believe, if i recall correctly, was unanimous in supporting the publication of the rule and guidance. >> so, the final rule was approved two months later. can you shed some light on specifically how comments were incorporated into the final rule? or were they not incorporated into the final rule? >> many comments were incorporated into the final rule throughout the process. the entire three-stage process enshrined in the rule are as a result of comments received over the course of the rule-making process. the very structure of the rule, in fact, is built around comments from industry.
the chents drove other changes to the rule and amendments to the rule since the desire that many firms had that it be given for advanced thts. that led to the stage three notification. that's an excellent example. there were other -- thfgs to the council. we elaborated on that. every series chent that came in was addressed one way or another. >> was it incorporated? were they incorporated or thrown out? >> depending on the comment, i think the rules addressed every comment, certainly the preamble to the final rule described all significant comments and described whether that comment was adopted wholesale, in a way that was adjusted or deemed not
relevant. >> thank you.you. mr. gibson, the final rule that was issued in april, it was noted that the fed has authority to issue regulations for determining if a company is predominantly engaged in financial activities and has issued a proposed rule under this authority. so if i'm interpreting it correctly if i say the fsoc has a final rule of saysing nations before the fed determined the definition of financial activities who is engaging in them? has it done that? >> so we have a proposed rule which has not been made final yet on the definition of financial as it applies to the nonbank designation. >> right. if that is the case then when
does the fed expect to finalize this rule? and shouldn't it have been done before the final fsoc rule. >> i'm not asking you about legal requirement. it seems to me it is putting the cart before the horse and that is a pretty common occurrence these days. >> so i think the rule that defines what it means to be activities that are financial in nature will be relevant for companies where there is some uncertainty about whether they are financial enough. i think as we mentioned it's the cutoff is 85% financial. there are some companies out there that are kind of on the boundary and are not sure. i think for the companies that are -- there are a lot of companies that are clearly financial and where the boundary
is drawn is not going to affect whether their determined to be financial or not. thank you madam chair for calling this hearing. i have problems in the fact that the proposed regulations sweep insurance companies into the same area as bank holding companies. and what's unfortunate about the inability to have all the witnesses on one panel is the fact that if you take a look at the testimony of met life which will occur shortly when william testifies it's the fact that the asset to liability structures of banks are much different than from insurance companies.
insurance companies are in for the long haul, very solid, fixed income, stable investments. banks borrow money on the short term and then put it into long term and could put them in a position where they could have a risk taking place. would you agree upon that? >> yeah. >> okay. that being the case, if met life failed -- all the question asked is this. if met life failed would the failure of the company threaten the financial stability of the united states? we believe the answer is no. we cannot think of a single firm that would be brought down by its exposure to met life. would you agree with that statement? >> met life has been supervised by the federal reserve because it is a bank holding company.
>> they are getting rid of their bank holding company. >> once they get rid of their bank holding company they will no longer be supervised by the federal reserve. >> would they come under the new regulati regulations? >> met life is a nonbank financial company. i'm fairly certain that 95% were not assets in nature. >> right. >> so -- i don't think the council has done an analysis -- i know the council has not done an analysis. >> it is a pretty easy question. >> i don't know whether the council plans to designate met life or not. >> that's not your decision. >> it's a bank holding company right now so for the moment the
council can't -- >> the reason i bring that out is the fact that if you take a large company like met life and you treat them like a bank holding company are you gaining anything? is anybody safer? >> so the difference in the regulation and supervision that the federal reserve has been engaged in with met life and other large insurance companies that chose to become bank holding companies is that we are a consolidated. >> they are shedding their bank holding company. they will be just insurance company. >> if you are talking about after they shed the bank holding company then it is up to the fsoc to decide if they should be regulated. >> what do you think? they propose no systemic risk. >> i will say it is up to the fsoc to make the judgment.
>> that's the reason for this hearing is the drag net that we see taking place here. you are imposing standards and creating standards and you don't know to whom it will apply. we show you -- when it is shown that a company like met life after it sheds its bank holding company would produce no systemic risk then it follows that they should not be regulated under the deregulation. >> if the council does decide to assess met life and it comes to the conclusion that met life does not pose a threat to financial stability then presumably -- >> three insurance companies got tarp funds. aig got it -- even the insurance under illinois rules, that was walled off. those assets were walled off because of illinois liquidity
requirements -- i'm sorry, reserve requirements. so what i'm suggesting to you is that i don't see the need to drag the insurance companies into this particular rule when, in fact, they do not present a systemic risk in the terms of met life we cannot think of a single firm we brought down that has exposure to met life. you don't have to answer that question. thank you. mr. grim for five minutes. >> thank you madam chair. i thank the panels for being here today. it is interesting, i'll tell you that. the last questions i think hit to the heart of why everyone is so confused. the amount of uncertainty has risen to an all-time high. and it's getting worse.
the gentleman from north carolina asked before why we don't have more smaller banks. that should be obvious to everyone in the room, because smaller banks can't compete. they can't keep up with the administrative costs of all of the rules and regulations. i would proport to you that as we continue to add it on in the hopes of getting rid of systemic risk you are going to be left with only a few large institutions that can afford to keep up therefore making them systemically risky. maybe i have it backwards. i don't know. maybe i'm missing something. let's talk a little bit about asset managers. with regard to asset managers has the council considered the
adverse effects? >> the council is in its proposed guidance describes how it is going to go about assessing whether or not a firm poses a threat to financial stability in the united states. the consequences of being designated is that a firm will be required enhance prudential standards including capital requirement, liquidity. >> is that a yes? >> the council is aware of what the consequences of designating an asset manager firm, yes. >> you have considered the adverse effects. >> i'm not sure i know what you mean by adverse effects. >> let me ask you this. the asset manager has been involved in the study to date? >>