tv [untitled] May 18, 2012 11:00pm-11:30pm EDT
about your observation of market perception. >> so, it certainly is true that some market perception still exists, as was mentioned previously by rating agencies and others. the market does not seem to be fully convinced that the tools given under dodd/frank will be used. and i think we, the regulators, still have a ways to go to prove to the market that we will use those tools in a way -- >> so the act the market perception is just that the market doesn't understand it, is that what you're trying to tell me? >> i think the market is skeptical that the regulators will have the means and the will to use the tools and they're waiting to see. >> count me as part of the market. the other question i have, i think the gentleman from ohio, mr. renacci, asked a somewhat similar question.
but when we're looking at potentially designating nonbank entities and we're looking at the first part test of the financial activities, i mean, a company that the market may not perceive to be financial -- if they, for example, import some type of raw material from overseas, they have to manage potential security risk, monetary risk, operational shipping risk and i think the shipping risk and i thank the chamber for their upcoming testimony in helping elucidate this question. if these activities are found to be financial in nature, if this helps trigger the threshold test, isn't it possible that some firms who wish to -- nonbank financial firms who wish
to -- nonbank firms may indeed decide to choose not to hedge certain risks, in which case, have we not perhaps concentrated more risk where we don't want it? maybe they will go naked on these positions. and so has that been considered by fsoc? mr. gibson, i will go to you first. >> so, the federal reserve has a proposed rule out for comment on the definition of what our financial activities that would make a firm potentially subject to designation. there has to be predominantly financial, very high percentage financial. >> the activities i described financial or not financial or does it depend upon the motives? does it depend upon the underlying business entity? what does it depend on? >> it depends on the particular activities as they're defined in the current bank holding company
regulations for what are permissible activities. some are being used for the definition of financial here but it's a high threshold. a commercial company that does a small amount, hedging or financing, typically would not be deemed freedom it nantly financial. however, it depends on the facts and circumstances of the particular company. >> but also included in fsoc's rules, once you outline the criteria by which one is adjudged in stage one to potentially be a nonbank entity to go to stage two, isn't your last criteria essentially we can ignore all our other criteria and still decide to send a potential firm to stage two? in which i'm trying to figure out, if you're trying to add some clarity to the definition, you seemingly take whatever you provide with one hand you take away with another.
where is the clarity here? >> so, let me just make one point. in order for a firm to be designated and determined to be a nonbank financial company, at least 85% of its assets or 85% of its revenues must be financial in nature. so, that should be very effective in limiting the types of firms that are merely engaging in some hedging activities with their commercial business. such firms would be very unlikely to trip the 85% threshold. the council in designing the stage one thresholds want to provide clarity with the types of firms it is likely to focus on. and for further evaluation and to give some clarity about its thinking in that regard. and to act as an initial screen. however, the council was reluctant to put itself into a
position where a very risky firm that through whatever sort of gaming techniques was able to avoid the stage one threshold that thereby -- >> mr. auer, my time has expired. if i could, as i read the guidance provided from fsoc, it says that fsoc may advantage any that irrespective of whether such company meets the thresholds in stage one. again, i see no clarity here. >> mr. green for two minutes -- i mean five minutes. excuse me. >> thank you, madame chair. i thank you and the ranking member again. let's start with siffy.
to a good many members of the public, it is sci-fi. it really is. perhaps we can find a way to explain this in a much more intelligible fashion for persons who are not privy to much of the intelligence that you two fine witnesses are sharing with us. let's start with the very basic question. was aig a nonbank financial institution? mr. gibson? thank you. >> yes. >> thank you. i tend to ask questions that you can answer yes or no. was aig into many different kinds of products, if you will, exotic products, credit swaps, derivatives? was aig into what we now refer to as exotic products, mr. gibson?
>> well, with the caveat that the federal reserve was not the supervisor of aig, i'm pretty sure the answer to your question is yes. >> i understand that the federal reserve was not and i'm not going there. but i am going here. was aig the type of institution that fsoc would be designed to have an impact on? you want to pass mr. gibson -- i'm still with you. >> i would say that looking at the quantitative screens in stage one of the fsoc's process, aig would trip many or maybe all of those. >> of course it would. it was over $50 billion, wasn't it? >> yes. >> go on. elaborate. tell us why aig would come under the auspices of fsoc. >> under fsoc's rule, the category -- the characteristics that make up
systemic importance, which have already been listed off -- some of the most important ones are size of the company and the interconnectedness of the company. what we learned about aig after its near failure was that its size was of an extent that was seen to pose a systemic risk and interconnectedness with other large financial firms was substantial. >> who knew that aig was part of the glue that was holding the economic order together? mr. auer, am i pronouncing your name correctly, sir? >> yes. >> aig, after the fact, we discovered, was part of the glue holding the order together, true? >> aig was intimately involved and highly interconnected with a great number of other financial firms. >> that is your way of saying yes? >> yes. >> thank you. now, given that we know that there are other aigs -- not in
the sense that they are right now about to go out of business, but there are other big businesses that may pose systemic risk. they may become sifis. and because we know that they may become -- or maybe they are sifis, is this not a means by which we can deal with them without making an attempt to prevent them from making bad business decisions? here is what i'm saying. we can't stop businesses from making bad business decisions. my belief is that that happens and that's part of the ebb and flow of doing business. but we can deal with the consequences of bad decisions. and is that what we're attempting to do here, mr. gibson, deal with the consequences of bad decisions by these mega businesses? >> yes. and one of the enhanced prudential standards that
nonbank companies that are designated by the council will be subject to is enhanced capital requirements that will make sure that a buffer exists to cover unexpected losses of the type you're describing. >> and for he hedification procs foes those who would like, go back to the stock market crash. read about how the resistance that took place when we were trying to put fdic in place, and fdic has proven to be very beneficial when we are looking for an orderly means by which we can liquidate banks. true, mr. gibson? >> yes. >> are we trying to do the same thing now with nonbank institutions? >> that is the intention of the title 2 early liquidation authority, to extend what the fkic has for banks to nonbanks. >> and i would close with this. we can do this and not overregula overregulate.
i think that's what we're trying to accomplish today. do you agree, mr. gibson? >> that is what we're trying to do. >> mr. auer? >> i would agree. >> thank you. thank you, madame chair. >> mr. luetkemeyer. >> thanks for coming today, gentlemen. a couple of questions with regards to fsoc. coming from the small bank, community bank pr expectative, some of the things that have come down, there are a lot of rules. i believe that frank was sort of shotgun approach. are we going to come back and take some of the pellets out of the bullets and go back to a rifle approach? make sure the rules are specific to the larger institutions and take some of those back off the smaller institutions and nonbank lending folks? >> so the fsoc regularly discusses existing upcoming regulations that are part of dodd/frank and i expect 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 regards to 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 mechanisms are 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? >> we will have the same enforcement tools for enforcing the enhanced prudential standards on any 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 agreement, mon memorandum of understanding, 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 tenets would be in a living will that would be important for you to see that were there and how it 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 living will 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 bankruptcy procedures or different regulatory procedures, how exposure of one entity aren't so tied in with another that it just 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 the impediments. >> 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. my questions are about the losses in chase'synthetic portfolio. i don't claim to understand that entirely, but the details are sketchy. it also appears -- credits of the banks are taking too much blepleasure in the loss. it's also hard to see this as something to grief over because it's not like a factory burned down.
it was actually making something useful and getting jobs to people who want to make an honest living. it's sort of shifted $2 billion that 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 we can't figure what risk they've got and the out 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? i know the amendment 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. but for now, it is going in the direction of putting in the requirements and less stiff requirements for smaller companies. and 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 servicing? 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 put on -- how much weight will the fsoc give to companies that have 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 11 statutory considerations as well as 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 consolidated level or legal entity level. the quality and extend will 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. gibson, you said earlier that you have the authority, the fed has the authority to tailor standards as appropriate to tailor standards as appropriate. 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 insurance 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 of the things we asked for comment for was exactly the question of what would the impact much of the single counter party credit limit proposal be, in terms of how constraining would that be for the banking organizations $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. >> so have you done a cost b 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 the alternatives suggested by the commenters as well. >> 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 from the proposed rule 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 gaveled 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 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?