[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
WHO IS TOO BIG TO FAIL: DOES
DODD-FRANK AUTHORIZE THE
GOVERNMENT TO BREAK UP
FINANCIAL INSTITUTIONS?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
APRIL 16, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-14
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Oversight and Investigations
PATRICK T. McHENRY, North Carolina, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman EMANUEL CLEAVER, Missouri
PETER T. KING, New York KEITH ELLISON, Minnesota
MICHELE BACHMANN, Minnesota ED PERLMUTTER, Colorado
SEAN P. DUFFY, Wisconsin CAROLYN B. MALONEY, New York
MICHAEL G. GRIMM, New York JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona
RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio
DENNIS A. ROSS, Florida DENNY HECK, Washington
ANN WAGNER, Missouri
ANDY BARR, Kentucky
C O N T E N T S
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Page
Hearing held on:
April 16, 2013............................................... 1
Appendix:
April 16, 2013............................................... 43
WITNESSES
Tuesday, April 16, 2013
Alvarez, Scott G., General Counsel, Board of Governors of the
Federal Reserve System......................................... 5
Wigand, James R., Director, Office of Complex Financial
Institutions, Federal Deposit Insurance Corporation,
accompanied by Richard J. Osterman, Jr., Acting General
Counsel, Federal Deposit Insurance Corporation................. 7
APPENDIX
Prepared statements:
Alvarez, Scott G............................................. 44
Joint prepared statement of James R. Wigand and Richard J.
Osterman, Jr............................................... 52
Additional Material Submitted for the Record
McHenry, Hon. Patrick T.:
Letter to the Financial Stability Oversight Council from
Senator Bob Corker, dated March 12, 2013................... 61
Written responses to questions for the record submitted to
the FDIC................................................... 63
Written responses to questions for the record submitted to
the Federal Reserve........................................ 66
WHO IS TOO BIG TO FAIL: DOES
DODD-FRANK AUTHORIZE THE
GOVERNMENT TO BREAK UP
FINANCIAL INSTITUTIONS?
----------
Tuesday, April 16, 2013
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:29 p.m., in
room 2128, Rayburn House Office Building, Hon. Patrick T.
McHenry [chairman of the subcommittee] presiding.
Members present: Representatives McHenry, Fitzpatrick,
Duffy, Grimm, Hultgren, Ross, Wagner, Bachus; Green, Cleaver,
Ellison, Delaney, Sinema, Beatty, and Heck.
Also present: Representative Rothfus.
Chairman McHenry. The subcommittee will come to order.
And without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Also, without objection, members of the full committee who
are not members of this subcommittee may sit on the dais and
participate in today's hearing.
So, welcome. This is the second in a series of hearings on
ending ``too-big-to-fail'' and actually defining ``too-big-to-
fail.'' And this hearing is entitled, ``Who is Too Big to Fail:
Does Dodd-Frank Authorize the Government to Break Up Financial
Institutions?''
With that, I will now recognize myself for 5 minutes for an
opening statement. Let's start the time here.
The Dodd-Frank Act was enacted in July of 2010, nearly 3
years ago. The Dodd-Frank Act's drafters claimed that the Act
would end the phenomenon of ``too-big-to-fail'' by, among other
things, authorizing the regulators to take certain actions to
reduce both the likelihood that a large financial company would
fail and the impact if such a failure were to occur.
Our last hearing exploring ``too-big-to-fail'' focused on
the Financial Stability Oversight Council's failure to get up
to speed in a timely manner, as well as its inability to
identify and respond to emerging threats that risk the
stability of the U.S. financial system.
Today's hearing focuses on two sections of Dodd-Frank,
Sections 121 and 165. Our witnesses represent the two agencies
given what we believe to be enormous power under these
provisions, the FDIC and the Federal Reserve.
Section 121 of the Dodd-Frank Act authorizes the Federal
Reserve Board to act, with the approval of the FSOC, to
restrict a large financial company's activities or to require
it to divest assets or operations if the company imposes ``a
grave threat'' to the U.S. financial system, ``grave threat''
being used only one time within the Dodd-Frank Act, making it
potentially a special phrase.
Those who interpret this section broadly question whether
the Fed could use this authority against an institution that
may not presently pose a threat but, due to their size,
structure, or interconnectedness or perhaps some other reason
that we have not even dreamed up yet, they could pose a future
threat to the economy.
Section 165 gives the FDIC and the Federal Reserve
authority to demand so-called living wills to ensure that large
financial companies provide on a yearly basis how they can be
quickly resolved, and safely done so, under the Bankruptcy Code
in the event of financial distress. It also states, in the
event of a deficient living will, that the FDIC and the Fed
``may jointly impose more stringent capital leverage or
liquidity requirements or restrictions on the growth,
activities, or operations of a covered company.'' And then it
further continues, giving authority that it ``may jointly
direct by order to divest certain assets or operations.''
To date, the Fed and the FDIC have not judged a living will
deficient. However, certain Federal officials have indicated
that the Fed and the FDIC are prepared to use their authority
under Section 165 to impose substantive changes on company
structures. Even some government officials, interest groups,
news media sources, and other parties have argued that the
government should order certain large financial institutions to
divest assets or operations, break them up, as a means to
further reducing systemic risk. Large banks, they argue, derive
an unfair competitive advantage relative to firms that are not
deemed ``too-big-to-fail'' because their status allows them to
secure lower borrowing costs.
Now, we have heard these arguments before, and this is
certainly not news to our witnesses today, at least I would
hope not, based on their roles. This hearing is one of a series
of hearings to better understand the authority vested in the
Federal Reserve and the FDIC to order large interconnected
financial institutions to divest assets or operations, and the
potential legal ramifications of those actions that could
result from attempting to carry out this authority; also, for
the panel to be able to clarify whether respective agencies
view these provisions within Dodd-Frank as a broad authority to
break up financial institutions or, alternatively, a narrower
interpretation of this authority to operate in limited
circumstances.
Now, there is a lot to understand from policymakers on the
Hill about the ramifications of the law as written, not what we
had hoped the law to be, the phrases that we had hoped the law
would have, but to actually tell us what that text, how you and
the respective agencies interpret that, your planning for it,
and the process going forward. We need some clarity on this.
And this is why we are having this Oversight and Investigations
Subcommittee hearing, for both oversight purposes and to
investigate the actions that you have taken.
So, with that, I will recognize the ranking member of the
subcommittee, Mr. Green of Texas, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
I also want to thank the witnesses for appearing today.
Also, Mr. Chairman, if I may, I would like to take just a
moment and express my deepest sympathies for those who are
victims of this horrific tragedy that has occurred in Boston.
My prayers are with them. And I believe that our government is
doing all that it can as quickly as it can to bring justice to
this situation.
Mr. Chairman, ``too-big-to-fail'' is the right size to
regulate, not replicate. Please allow me to explain.
GAO has reported that the 2008 crisis cost the United
States $13 trillion in lost economic output and $9.1 trillion
in home equity and wealth. In 2008, the options were less than
few, there were two: bankruptcy or bailout. Lehman's collapse
proved that bankruptcy didn't work. And in addressing the
bailout option, columnist Allan Sloan stated it well in the
title of his July 8, 2011, article. It was styled, ``It was a
lowdown, no-good, god-awful bailout. But it paid.'' And
although taxpayers came out ahead, tax dollars should not have
been put at risk.
Dodd-Frank takes taxpayers off the hook. It does so by
repealing the Fed's Section 13(3) lending authority. It
explicitly prohibits any taxpayer loss. It provides bankruptcy
as a first option. Some things bear repeating: It provides
bankruptcy as a first option. And I emphasize this because it
seems to get lost in the messaging that bankruptcy is still an
option.
With FDIC-like orderly liquidation, FDIC-like--prior to
Dodd-Frank, we did not have the ability to wind down these huge
institutions that we had with banks, generally speaking,
because with banks, we had the FDIC. We could go in on Friday
and close a bank, and open it up on Monday under a new name.
But we didn't have that type of authority. Well, now we do. We
have FDIC-like orderly liquidation authority if bankruptcy
would result in a Lehman-like broad, systemic disruption. In
the event of these huge institutions possibly creating systemic
disruption, we have this wind-down authority.
It provides the Financial Stability Oversight Council with
authority to minimize and/or downsize ``too-big-to-fail''
institutions. It requires lending institutions to provide
living wills to demonstrate how they would be resolved under
bankruptcy laws. It limits the amount of their Tier 1 capital--
that is their core capital, primarily common stock--it limits
the Tier 1 capital a bank can invest in hedge and private
equity funds.
Some want to eliminate or undermine Dodd-Frank. To do so
will not end ``too-big-to-fail.'' Ending Dodd-Frank would take
us back to a future without the tools to deal with ``too-big-
to-fail,'' the same future that produced a $13 trillion loss in
economic output and a $9.1 trillion loss in home equity and
wealth.
``Too-big-to-fail'' is the right size to regulate, not
replicate. And, quite frankly, that is what Dodd-Frank does: It
regulates the ``too-big-to-fail'' institutions.
I yield back the balance of my time.
Chairman McHenry. I thank the ranking member.
And, with that, I will recognize Mr. Ross of Florida for 3
minutes.
Mr. Ross. Thank you, Mr. Chairman. I appreciate you holding
this important hearing today.
Today's hearing explores the authority of the Federal
Reserve and the Federal Deposit Insurance Corporation to break
up financial institutions under Sections 121 and 165 of the
Dodd-Frank Act. After over 2\1/2\ years, the Fed and the FDIC
have yet to clarify this authority and the circumstances under
which they would use it. Today, I look forward to hearing how
the Fed and the FDIC view their authority to break up financial
institutions under Dodd-Frank.
It is particularly important that we hold this hearing
today because, as recent congressional actions seem to
acknowledge, ``too-big-to-fail'' still exists, and Dodd-Frank
did not end ``too-big-to-fail.'' Under Section 121 of Dodd-
Frank, if the Fed determines that a bank holding company with
$50 billion or more in assets or a systemically important
nonbank financial company poses a ``grave threat'' to U.S.
financial stability, the Federal Reserve, with a two-thirds
vote of the FSOC, can take certain actions to limit or restrict
a company's activities. As a last resort, if restricting those
activities doesn't work, the Federal Reserve must require the
company to sell assets or off-balance-sheet items.
I, and I think the American people, have many questions
about how the Federal Reserve would decide if a company poses a
grave threat to our economy, since the term is not defined in
the Dodd-Frank Act. I also have many questions about whether
and under what circumstances the Federal Reserve will use this
authority. Unfortunately, the written testimony of the Federal
Reserve witness today does not reveal how the Fed construes
this power.
I look forward to the witnesses' answers to these
questions, and I thank the witnesses for testifying today.
Mr. Chairman, I yield back the balance of my time.
Chairman McHenry. I thank the gentleman.
I now recognize Mrs. Maloney for 3 minutes for an opening
statement.
Mrs. Maloney. Thank you very much, Chairman McHenry, and
Ranking Member Green.
And welcome to all of our witnesses today.
This is the second hearing we have had on the question of
``too-big-to-fail'' and whether Dodd-Frank ended the implicit
government guarantee. And while the last hearing looked at the
role of the FSOC and the OFR in identifying systemic risk, this
hearing is looking at the amendment that came to be called the
Kanjorski Amendment, Section 121, probably the most debated one
during the conference committee. We are also looking at Section
165, which imposes heightened prudential standards on larger
institutions, requiring them to complete living wills and to
present their plans for orderly liquidation.
So this is an important hearing as we look at these two
proposals and the specific tools that regulators are given now
through Dodd-Frank. During the crisis, they basically had two
roads they could go down. They could either close down an
institution, as we did with Lehman--not a good choice--or you
could bail them out. We bailed out AIG, again, not a good
choice.
This basically gives regulators the ability to go into a
troubled institution and force them to unwind and restructure
and really confront the crisis. The FDIC had these tools during
the crisis, and I believe they performed incredibly well in
taking steps to really stabilize the economy and to help
institutions to survive to continue serving the public.
So I look forward to this hearing--I think it is a very
important one--and to listening to the comments today. Thank
you for calling it, Mr. Chairman, and Mr. Ranking Member.
I yield back. Thank you.
Chairman McHenry. I certainly appreciate that.
And I appreciate the Members' timeliness for opening
statements, since we were delayed with the votes.
We will now recognize our distinguished panel of witnesses.
From the Federal Reserve Board of Governors, we have Mr.
Scott Alvarez, who serves as General Counsel of that
institution, and previously served as the Board's Assistant
General Counsel from 1989 to 1991. He earned a B.A. in
economics from Princeton, and a J.D. from Georgetown Law
Center.
Mr. James Wigand is the Director of the FDIC's Office of
Complex Financial Institutions, where he oversees planning for
resolving systemically important financial companies. He
previously was Deputy Director within the FDIC's Division of
Resolutions and Receiverships for 14 years. He received a B.S.
from the University of Maryland, and an MBA, with a
specialization in finance, from the University of Chicago. I
appreciate an ACC school being represented on the panel.
And Richard Osterman is currently serving as acting General
Counsel for the FDIC, and is otherwise the Deputy General
Counsel for the FDIC's Litigation and Resolutions Branch. He
has held several positions within the FDIC's Legal Division.
Before the FDIC, he worked at the Federal Home Loan Bank Board
and the Interstate Commerce Commission. He has a B.A. from
Swarthmore, and a J.D. from the University of Baltimore School
of Law.
Because we have two institutions represented today, and by
prior agreement, we will only have two testimonies today. We
will recognize Mr. Alvarez first for 5 minutes for his oral
opening statement, and then we will recognize Mr. Wigand for 5
minutes to give an opening statement on behalf of the FDIC.
And, without objection, each of your written statements
will be made a part of the record.
You know the deal with the lights: green means go; yellow
means hurry up; and red means stop. We want to make sure
Members have time to ask questions.
With that, Mr. Alvarez, you are recognized for 5 minutes.
STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Alvarez. Chairman McHenry, Ranking Member Green, and
members of the subcommittee, thank you very much for the
opportunity to testify on the provisions of the Dodd-Frank Act,
designed both to address the risks posed by systemically
important financial institutions and to ensure that no
institution is ``too-big-to-fail.''
The perception that an institution is ``too-big-to-fail''
reduces the incentives of the firm and its shareholders,
creditors, and management to limit risk-taking and distorts
competition by enabling the firm to fund itself more cheaply
than its competitors.
Dodd-Frank contains a number of provisions that address the
risks posed by these systemically important institutions. The
goal of the Federal Reserve in implementing these provisions is
to substantially reduce the probability of failure of our
largest, most complex financial firms and to minimize the
social losses if such a firm should fail. The steps we are
taking would also minimize the advantage these firms enjoy
based on perceptions of their systemic importance.
A critical way to reduce distortions from ``too-big-to-
fail'' is for our most systemic banking firms to have
substantial capital buffers. We are, therefore, strengthening
the basic bank regulatory capital framework and specifically
increasing capital requirements on the most systemic banking
firms.
Last year, the Federal Reserve and the other U.S. banking
agencies issued proposals to implement BASEL III capital
standards. These proposals would introduce a new common equity
requirement, raise the existing Tier 1 capital requirement,
implement a capital conservation buffer, and improve the
quality of regulatory capital. The largest banking firms would
also be subject to a supplementary leverage ratio, a
countercyclical capital buffer, and higher capital charges for
derivatives and trading exposures.
In addition, the Federal Reserve conducts an annual stress
test of the largest U.S. bank holding companies. Our stress-
test regime has helped produce a significant strengthening of
the capital bases of the largest U.S. banking firms since the
onset of the crisis. The aggregate Tier 1 common equity ratio
at the 18 largest banking firms has more than doubled, from 5.6
percent at the end of 2008 to 11.3 percent at the end of 2012,
reflecting an increase of about $400 billion in capital.
Dodd-Frank also requires the Federal Reserve to establish
enhanced prudential standards for large bank holding companies
that increase in stringency based on the systemic footprint of
those companies. Consistent with this mandate, the Federal
Reserve helped negotiate an international framework of capital
surcharges for the most systemic global banking firms and will
soon issue capital surcharge proposals for systemic U.S. bank
holding companies.
In addition, the Federal Reserve has proposed a broad set
of enhanced prudential requirements for the largest U.S.
banking firms and foreign banks operating in the United States.
Another Dodd-Frank provision empowers the orderly
liquidation of a major financial firm to reduce the potential
damage to the broader economy from the failure of the firm. The
Federal Reserve continues to work with the FDIC on the
development of the FDIC's OLA framework and is considering the
requirement that firms maintain a minimum amount of long-term,
unsecured debt to facilitate use of the OLA. The Federal
Reserve and the FDIC also are working together to review firm
resolution plans which will help identify and address
impediments to an orderly resolution.
Finally, the Dodd-Frank Act contains several provisions
that limit the size and growth of financial firms. For example,
Section 622 prohibits a firm from growing through acquisition,
with very limited exceptions, once the firm reaches a specified
size. And Section 121 authorizes the Federal Reserve, with the
consent of two-thirds of the Financial Stability Oversight
Council, to impose a variety of restrictions if a large bank
holding company or designated nonbank financial company poses a
grave threat to U.S. financial stability.
The Federal Reserve has made significant progress in the
past few years to address the risks posed by systemically
important financial institutions and to help ensure that no
institution is ``too-big-to-fail.'' However, more work remains
to be done, and the Federal Reserve, working along with the
FDIC and others, remains hard at work.
Thank you for your attention, and I would be pleased to
answer any questions that you may have.
[The prepared statement of Mr. Alvarez can be found on page
44 of the appendix.]
Chairman McHenry. I now recognize Mr. Wigand for his oral
statement.
STATEMENT OF JAMES R. WIGAND, DIRECTOR, OFFICE OF COMPLEX
FINANCIAL INSTITUTIONS, FEDERAL DEPOSIT INSURANCE CORPORATION,
ACCOMPANIED BY RICHARD J. OSTERMAN, JR., ACTING GENERAL
COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Wigand. Chairman McHenry, Ranking Member Green, and
members of the subcommittee, thank you for the opportunity to
testify on behalf of the Federal Deposit Insurance Corporation
on Sections 165 and 121 of the Dodd-Frank Act. My oral remarks
this afternoon will summarize the FDIC's role and progress in
implementing the resolution plan requirements of Section 165.
Under the Dodd-Frank Act, bankruptcy is the preferred
resolution framework in the event of a systemic financial
company's failure. To make this prospect achievable, Title I of
the Dodd-Frank Act requires that all large, systemic financial
companies prepare resolution plans, or living wills. These
plans must demonstrate how the company would be resolved in a
rapid and orderly manner under the Bankruptcy Code in the event
of a company's material financial distress or failure.
The FDIC intends to make the living will process under
Title I of the Dodd-Frank Act both timely and meaningful. The
living will process is a necessary and significant tool in
ensuring that large financial institutions can go through an
orderly resolution under bankruptcy.
In November 2011, the FDIC and the Federal Reserve Board
issued a joint rule to implement Section 165(d) requirements
for resolution plans. The Section 165(d) rule sets out the
information to be included in a firm's resolution plan. Under
the rule, among other requirements, each firm must identify
critical operations and core business lines, map those
operations and core business lines to each firm's material
legal entities, and identify the impediments to a rapid and
orderly resolution in bankruptcy.
In addition to the resolution plan requirements under the
Dodd-Frank Act, the FDIC issued a separate rule for all insured
depository institutions, or IDIs, with greater than $50 billion
in assets. This group of IDIs must submit resolution plans to
the FDIC for their orderly resolution under the Federal Deposit
Insurance Act.
The Section 165(d) rule and the IDI resolution plan rule
are designed to work in tandem by covering the full range of
business lines, legal entities, and capital structure
combinations within a large financial firm.
Bank holding companies and foreign banking organizations
with $250 billion or more in nonbank assets submitted their
initial resolution plans on July 1, 2012. The FDIC and the
Federal Reserve Board have reviewed this first set of
resolution plans for informational completeness to ensure that
all information requirements of the rule were addressed in the
plans. The 11 firms that submitted initial plans in 2012 will
be expected to revise and update their plans in their 2013
submissions.
Yesterday, the FDIC and the Federal Reserve Board issued
guidance which provides significant detail on our expectations
for the revised plans. The guidance focuses on key issues and
obstacles to an orderly resolution in bankruptcy, including
global cooperation and the risk of ring-fencing and other
precipitous actions. The revised plans must also address the
risk of multiple competing insolvency proceedings and the
firm's global liquidity management, including a detailed
understanding of funding operations and cash flows. Finally,
the revised plans should assure the continuity of critical
operations, particularly maintaining access to shared services
and payment and clearing systems, and address the potential
systemic consequences of counterparty actions.
In addition to informational content, the FDIC and the
Federal Reserve Board must review each plan's strategic
analysis. If, as a result of their review, the FDIC and the
Federal Reserve Board jointly determine that the resolution
plan is not credible or would not facilitate an orderly
resolution of a firm under the Bankruptcy Code, then the
company must resubmit the plan with revisions. The resubmitted
plan may, if necessary, include proposed changes in business
operations or corporate structure.
If the company fails to resubmit a credible plan that would
result in orderly resolution under the Bankruptcy Code, the
FDIC and the Federal Reserve may jointly impose more stringent
capital, leverage, or liquidity requirements; restrict growth,
activities, or operations; or 2 years after the imposition of
such requirements and in consultation with the FSOC, order the
company to divest certain assets or operations if the company
has failed to resubmit the resolution plan as required.
The FDIC's goal is to ensure that firms that could pose a
systemic risk to the financial system can undergo a rapid and
orderly resolution in bankruptcy. Achieving the goal that any
institution, regardless of size, complexity, or
interconnectedness, can be effectively resolved through a
bankruptcy process will contribute to the stability of our
financial system and will avoid many of the difficult choices
regulators faced in dealing with systemic institutions during
the last crisis.
That concludes my opening statement. I would be glad to
respond to your questions.
[The joint prepared statement of Mr. Wigand and Mr.
Osterman can be found on page 52 of the appendix.]
Chairman McHenry. Thank you very much.
And to restate the title of the hearing we are having
today, ``Who is Too Big to Fail: Does Dodd-Frank Authorize the
Government to Break Up Financial Institutions?'' This is about
Sections 121 and 165 of the Dodd-Frank Act.
I now recognize myself for the purpose of questioning the
witnesses. So, with that, we will begin.
Mr. Osterman, does Dodd-Frank give your agency the
authority to break up big banks under Sections 121 or 165?
Mr. Osterman. Thank you for the question, Chairman--
Chairman McHenry. Thanks. If you will pull your microphone
closer?
Mr. Osterman. Certainly. Can you hear me better now?
Chairman McHenry. Yes.
Mr. Osterman. Thank you for your question.
Section 121, of course, is the Federal Reserve's--
Chairman McHenry. You don't have to define it. I
understand. I'm sorry. Then I will--
Mr. Osterman. Section 165 requires the filing of living
wills and resolution plans to determine whether an institution
can be resolved in bankruptcy. The purpose of the provision--
Chairman McHenry. You don't have to tell me the purpose. I
just wanted to know your authority under that section. Do you
have the authority to break up large financial institutions?
Mr. Osterman. The authority is to resolve them in
bankruptcy, to determine whether they can be resolved in
bankruptcy. If the institution can be resolved in bankruptcy,
then it is not going to cause a systemic risk to the United
States financial system. That is the way the statute is being--
Chairman McHenry. So let me actually re-pose this--
Mr. Osterman. Yes.
Chairman McHenry. --okay? Does the FDIC have the authority,
in conjunction with the Federal Reserve, to force the
institution to sell assets?
Mr. Osterman. The FDIC and the Fed through the--
Chairman McHenry. It says in the text of the law that you
do.
Let me move on, to Mr. Alvarez.
Mr. Alvarez, let me pose the same question to you. Under
Sections 121 or 165, does Dodd-Frank give your agency the
authority, in conjunction with the FDIC, if you will, to break
up big banks?
Mr. Alvarez. So, as you read, Section 121 allows the
Federal Reserve, in consultation with the FSOC, not the FDIC,
to require large firms to sell assets.
However, it imposes a high hurdle on the requirement. We
must find and the FSOC must agree, two-thirds of the FSOC must
agree, that the institution poses a grave threat, not just any
threat, a grave threat, to financial stability. And we are
required by statute to consider a variety of alternatives
first, including restrictions on growth, restrictions on
activities, conditions on operations, many other things, as
precursors to the sale of assets. The sale of assets is the
last on the list.
Chairman McHenry. Okay. Have you defined the term ``grave
threat?''
Mr. Alvarez. No, we have not. We think that would be a
determination that is going to depend very much on the facts
and circumstances of the case. It will depend very much on the
activities the institution is engaged in, whether the
institution is unique or has a special place in the financial
system. Obviously, size would be one of the factors, the way in
which it conducts activities. There is a variety of things. And
we think because of that variety of circumstances, it is very
difficult to have a uniform rule that would be clear in all
circumstances.
Chairman McHenry. So it would be situational?
Mr. Alvarez. Yes.
Chairman McHenry. Could it be based on what the market is
doing at that moment, as well?
Mr. Alvarez. It could take into account the economics at
the time, that is correct.
Chairman McHenry. Okay.
Now, can you utilize this? Does the Federal Reserve
believe, in your legal judgment, that it can use this authority
outside of moments that are financial crises?
Mr. Alvarez. Section 121 does not impose the requirement
that it only be used in a financial crisis. It is very open-
ended. At any point at which the Fed and the FSOC agree that an
institution poses a grave threat to the financial stability,
then it could be used.
Chairman McHenry. Okay. Now, is there a size challenge
here? Are certain institutions more the focus of your view from
the Fed?
Mr. Alvarez. Oh, absolutely. Section 121 applies just to
institutions that are $50 billion or larger or have been
designated by the FSOC as systemically important. It would not
apply to community banks or even regional banks.
Chairman McHenry. So a grave threat could happen in times
of relative peace and harmony and accord?
Mr. Alvarez. It could.
Chairman McHenry. Okay.
All right. With that, I will now recognize--at the
direction of the ranking member, I will recognize Mr. Cleaver
for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking
Member.
Mr. Alvarez, would you agree that with some different, more
stringent accounting standards, that the so-called ``too-big-
to-fail'' banks are actually twice as large as they appear in
the rearview mirror on the passenger side?
Mr. Alvarez. Congressman, I am not an expert on accounting.
The accounting changes since the crisis, in the last 2 years,
have required institutions to bring onto their balance sheet
many assets that before the crisis were not counted. So, for
example, a lot of securitizations are now reflected on the
balance sheet of banks, so their size is more transparent than
it once was.
And the capital requirements that we are designing, the
BASEL III capital requirements, also take into account off-
balance-sheet items in a more robust way. So we are beginning
to take that into account as we design higher capital
requirements.
Mr. Cleaver. So would you or Mr. Wigand agree that--let me
ask you this: Did Dodd-Frank rule out the cause of the 2008
financial crisis which resulted in massive losses in the U.S.
economy? Was it repaired?
Mr. Alvarez. I think what Dodd-Frank did was to provide the
agencies with far better tools to both prevent the problems of
large institutions and then, if there is a problem, to resolve
the institution. So the enhanced prudential capital standards,
Section 165, the orderly liquidation authority in Title II are
two very valuable tools that we think help.
Mr. Cleaver. Okay. Mr. Wigand, go ahead, and then, I have a
follow-up.
Mr. Wigand. Yes, sir. I would echo Mr. Alvarez's comments.
There are two key elements that I think are substantial tools
in ending ``too-big-to-fail.'' One is the set of enhanced
prudential supervisory standards found in Section 161, which go
to reducing the probability that one of these systemically
important companies will fail.
The second tool is the orderly liquidation authority, or
Title II, which in the event that bankruptcy cannot handle a
failure, serves as a backstop which then allows for a
systemically important financial company to fail in a manner
without cost to taxpayers, and imposes market discipline by
forcing losses upon the creditors and shareholders of the
institution, and also results in the management of the company
being held accountable for the failure itself.
These are elements that didn't exist in the early parts
of--or at all during the 2008 crisis.
Mr. Cleaver. But most of these banks are larger than they
were when the crisis began, and the community banks in the
BASEL III are experiencing much more pain and difficulty in
operating.
So, if the deposits are going with the larger banks and the
smaller banks are struggling, what have we done?
Mr. Alvarez. Congressman, that is a very good point, and
that is one of the motivators for some of the capital and other
requirements that we are imposing. That puts back to the large
institutions some of the cost of their size and takes away some
of the advantage they have as a result of their size, thereby
more equalizing competition. So, they are no longer able to
rely on lower capital requirements and better funding. They
have higher capital requirements, which make up for their
better--
Mr. Cleaver. Those higher capital requirements have also
been imposed by the regulators on community banks.
Mr. Alvarez. To that point, we have--
Mr. Cleaver. Unfortunately and tragically. But go ahead.
Mr. Alvarez. We do have a special set of requirements that
we are imposing only on the largest institutions, not on
community banks, so $50 billion and up.
We also understand that the BASEL III proposal we put out
has had some effects on smaller institutions in ways we hadn't
anticipated. We have been working with those smaller
institutions to understand how to address that, and we are
fully thinking through ways to address those problems.
Mr. Cleaver. Yes, I appreciate that. My time is running
out. But they don't seem to know it.
Mr. Alvarez. We haven't finished the rulemaking yet. So
when it is complete, they will know.
Mr. Cleaver. All right. Thank you.
Chairman McHenry. With that, we will recognize the former
chairman of the full Financial Services Committee, Mr. Bachus
of Alabama, for 5 minutes.
Mr. Bachus. Thank you.
This question, I think, will be for you, General Counsel
Alvarez. And I am specifically referring to Section 165(b),
where you require foreign banks, if they are operating U.S.
subsidiaries, to have an intermediate holding company.
Mr. Alvarez. Yes.
Mr. Bachus. All right. I think you have acknowledged that
this might increase the cost to capital and the liquidity
requirements may cause them to have some--in some cases,
requirements that their U.S. competitors may not have, for
instance, if they are broker-dealers.
Is there a negative to requiring this? I understand that
this was in response to some of the runs, because at least some
of these U.S. subsidiaries did rely on a lot of short-term
lending. But is there another way to address that? Do you have
any concerns over the fact that we may lose some of their
services and their capital?
Mr. Alvarez. We have a proposal out for comment, as you
alluded to, and we are receiving comments now. The comment
period is actually still open, so we expect we will get quite a
lot of advice on how best to regulate the U.S. operations of
foreign banks.
The motivation for that proposal is that with foreign
banks, if they are allowed to operate in the United States
while maintaining capital back home in the foreign country,
that capital may not be available in the United States at a
time when the U.S. operations need the capital. And so the
idea--
Mr. Bachus. That would be centralized with their home
country?
Mr. Alvarez. Correct.
Mr. Bachus. But isn't that true of our domestic banks
operating in other countries, they tend to keep their capital
here? And I am just wondering if we might--I know some of the
international banking associations have talked about that.
Could this cause some sort of a--those regulators in those
countries to require that we increase capital in our
subsidiaries operating in those countries?
Mr. Alvarez. Yes, and that is something that we have asked
for comment about. It is worthy of note, though, that some
foreign countries have already begun that process. The United
Kingdom, for example, is already requiring some
subsidiarization in the U.K., which is a place where a lot of
U.S. entities have operations.
So we definitely want to be sensitive to the possibility
that this might encourage more ring-fencing. On the other hand,
we also have to balance that with the need to protect the
financial stability of the United States and ensure that
institutions in the United States have adequate capital. So it
is a difficult question, and that is why we put a proposal out
for comment, to see how best to balance those needs.
Mr. Bachus. Because I think you do agree that it could
affect banking competition in the United States and the
competitiveness of our U.S. banks abroad if the regulators in
those countries respond to it.
Mr. Alvarez. Right. The competition is interesting in both
places. So it could affect the way U.S. entities compete
abroad, but the other thing to keep in mind is how foreign
entities compete in the United States. And if they are allowed
to compete in the United States without the same capital
requirements and without the same prudential limits that apply
to other U.S. organizations in the United States, that could
give the foreign entities a competitive advantage here, as well
as exposing our system to more financial risk.
So, there are competitive balances on both sides that we
have to weigh.
Mr. Bachus. Yes. But you are aware of their concerns and, I
think, are at least trying to address those in a way that at
least addresses their concerns and at the same time protects
our national interest not to have a--
Mr. Alvarez. Yes. If they have visited you, you can be sure
they have visited us at least twice as often.
Mr. Bachus. Okay. Thank you very much.
Chairman McHenry. I thank the former chairman.
We will now recognize Mr. Ellison of Minnesota for 5
minutes.
Mr. Ellison. Thank you, Mr. Chairman.
Mr. Chairman, and Mr. Ranking Member, I guess I have a few
kind of basic questions for the panel.
One is, having gone through some of the rulemaking
requirements, would you say that Dodd-Frank takes an arbitrary
or an objective approach to determining which financial
institutions are ``too-big-to-fail?''
Mr. Osterman. I will take a first shot at your question.
I think Dodd-Frank takes a very thoughtful approach to
addressing ``too-big-to-fail.'' There is the living will
process, which requires promulgated regulations that would
require resolution plans which outline how the institution
could be resolved in the bankruptcy process.
The resolution plan is jointly reviewed by both the Fed and
the FDIC to determine if it meets that standard. If it does
not, then we go back and we advise the institution of the
things that need to be done to meet the standard of whether the
plan is credible and shows the institution can be resolved in
bankruptcy.
If the resubmitted plan comes back and it doesn't meet that
standard, again, we have to jointly determine that it doesn't
meet those standards, and then we apply additional requirements
such as higher capital or leverage or liquidity requirements,
restrictions on growth. And if the plan comes back and it still
doesn't meet that standard, then we get to the situation of
potential divestiture.
Mr. Ellison. But have any of the three of you ever heard
the saying that the government should not ``pick winners and
losers?'' Have you ever heard that terminology before?
Mr. Alvarez. Yes.
Mr. Ellison. I guess my question to you is, in the
situation where you have a ``too-big-to-fail'' financial
institution, one might argue that Dodd-Frank is trying to pick
winners and losers, but if a firm were to be in the criteria of
``too-big-to-fail'' and therefore draw additional scrutiny from
the government--and the government wouldn't be picking that
company out. That would be the features and the attributes and
the size and the interconnectedness of that company. Am I right
about that?
Mr. Osterman. That is correct.
Mr. Ellison. Would you like to add to that, Mr. Alvarez?
Mr. Alvarez. I guess I don't think about Dodd-Frank as
picking firms as ``too-big-to-fail.''
Mr. Ellison. Okay.
Mr. Alvarez. The idea is actually to get rid of ``too-big-
to-fail.''
Mr. Ellison. Correct.
Mr. Alvarez. And so what Dodd-Frank does is say for large
institutions, in order to ensure that no one believes they are
``too-big-to-fail,''we are going to do at least two things, two
major things.
The first is, we are going to regulate them more because
they pose more risk, large firms pose more risk. Whether they
are ``too-big-to-fail'' or not in some person's mind, they
deserve extra supervision and regulatory requirements.
And then second, we have an orderly liquidation authority
so that no one is ``too-big-to-fail.'' We now have a mechanism
for closing down and making shareholders take losses for any
institution, no matter what their size.
Mr. Ellison. But you would agree that it is not just some
arbitrary bureaucrat saying, ``You are too-big-to-fail. We are
going to go after you.'' There are specific criteria that might
make a firm hit that criteria.
Mr. Alvarez. So the small piece of arbitrariness is the $50
billion cutoff for most of the provisions that are in the
statute. The statute sets the $50 billion requirement. Once you
are--
Mr. Ellison. Right. But that requirement is not different
for different firms. It is $50 billion, right?
Mr. Alvarez. Right. Plus, it also gives the agencies
authority to tailor things as they get larger--
Mr. Ellison. Right.
Mr. Alvarez. --so we take away some of that arbitrariness.
Mr. Ellison. The Sunlight Foundation noted that the top 20
banks and banking associations met with just 3 agencies--the
Treasury, the Federal Reserve, and the Commodity Futures
Trading Commission--a total of 1,298 times over a 2-year period
from, say, July 2010 to July 2012. That is an average of about
12 meetings a week. Financial reform groups met with regulators
significantly less than that.
How do you assess just the amount of contact that the
entire financial services world is getting with the Federal
Government? Do you have any concern that the larger banks are
just flat out getting more attention from agencies like
Treasury, the Fed, and the CFTC?
Mr. Alvarez. Of course, you can do a lot with statistics,
and how you group things makes a difference. That said, it
doesn't surprise me that financial institutions meet more with
those three agencies. We are all doing a lot of rulemaking that
affects them directly. By law, we have to get comments from
people who are affected by those rules. So, they are the most
affected and would want to have the most meetings.
I would say that the Federal Reserve, in particular, has an
open-door policy of meeting with folks. We meet with community
groups, we meet with consumer advocacy groups. We meet with a
lot of folks on our rulemakings. So it is not limited to or
even focused on financial institutions.
Mr. Ellison. Thank you.
I yield back.
Chairman McHenry. Mr. Ross of Florida is recognized for 5
minutes.
Mr. Ross. Thank you, Mr. Chairman.
Let's talk about ``grave threat.''
Mr. Alvarez, you say that it is institutional as to how we
really assign ``grave threat,'' but really we haven't defined
it. So it really isn't only institutional, but it is also
environmental. In other words, it depends on the current
economic environment at the time. Wouldn't you say that is
correct?
Mr. Alvarez. Yes, I think those are both factors.
Mr. Ross. So it is more or less a game-time decision as to
determine whether a grave threat exists. How else would you
anticipate it?
Mr. Alvarez. Yes.
Mr. Ross. And if that is the case, then let me ask you, are
there any particular financial institutions today, without
naming names, is there presently any company that poses a grave
threat to the U.S. financial system within the meaning of
Section 121 today?
Mr. Alvarez. So, the other part that fits into--
Mr. Ross. But are there--you have had 2\1/2\ years.
Mr. Alvarez. I'm sorry?
Mr. Ross. You have had 2\1/2\ years to determine whether
there is a grave threat by any institution or any company. So
are there any today, again without naming names, that you would
consider pose a grave threat to the financial stability of the
United States?
Mr. Alvarez. Remember, the other thing we have to take into
account in deciding grave threat is whether the mitigants, that
the higher capital, restrictions on activities, other
regulatory and statutory factors--
Mr. Ross. But absent--
Mr. Alvarez. --have reduced the risk of the institution.
Mr. Ross. But absent the--
Mr. Alvarez. So we are in the process of still doing those
rules and getting those requirements--
Mr. Ross. So there aren't any? Essentially, there aren't
any, then? There are no--
Mr. Alvarez. We have made no findings of that so far.
Mr. Ross. Okay. Why? Because there are no quantitative
metrics existing as to how to apply grave threat?
Mr. Alvarez. Because we have still the Dodd-Frank Act
provisions, the preliminary requirements to get completed and
imposed, and then react to--
Mr. Ross. So let me ask you this point blank. Do you have
any quantitative metrics that you use now to determine whether
a company may be a grave threat?
Mr. Alvarez. We do not have a quantitative measure. That
is--
Mr. Ross. Do you anticipate having any?
Mr. Alvarez. That is a possibility.
Mr. Ross. Within the next year?
Mr. Alvarez. It is a real--we are in the process of doing
what the statute requires, which is to put in place the
mitigants that then are applied to all large institutions to
see--
Mr. Ross. I understand the logic and reason here. How can
you quantify the expense associated with mitigating a threat
you can't even quantify?
In other words, this is a situation where you have no
standard; there is no standard, as we know, that exists for
grave threat. You determine based on, I guess, discretion at
the moment that what may be considered to be a grave threat
today may not be a grave threat tomorrow.
So if there are no quantitative metrics and there are no
standards, what all has the Fed done in the last 2\1/2\ years
in discussing what would constitute a grave threat?
Mr. Alvarez. As I indicated, we are following the process
Congress has set out for us. That includes establishing these
mitigating factors, which are higher capital, restrictions on
growth, restrictions on activities--
Mr. Ross. So, it could be size. It could be capitalization.
It could be a number of things.
Mr. Alvarez. Yes.
Mr. Ross. And who would the grave threat be to? Consumers?
Mr. Alvarez. To the financial stability of the United
States economy.
Mr. Ross. And how did you determine that? Have you had
discussions as to how you would determine the grave threats to
the United States?
Mr. Alvarez. Certainly, we think about many things at the
Federal Reserve, including what we will do with grave threat,
but we have not made any proposals or made any findings at this
time.
Mr. Ross. So does it take--under Section 121, does it
require that a company must first be in bankruptcy as a
precondition to be considered a grave threat?
Mr. Alvarez. No, it doesn't.
Mr. Ross. Under Section 165, then, you can really be a
grave threat if you just don't have an appropriate living will?
Is that correct? If it doesn't meet your standard?
Mr. Alvarez. You mean, required to sell assets?
Mr. Ross. Right.
Mr. Alvarez. There is no connection between the grave
threat and Sections 121 and 165.
Mr. Ross. Right. Grave threat is under Section 121, but--
Mr. Alvarez. Under Section 121, the institution has to have
a plan that is not credible and refuse--and the agencies have
to jointly determine that. We then have to impose other
requirements on the firm. The firm has to not only not live up
to those requirements but not put in another credible capital
plan. And then there is a--
Mr. Ross. But--
Mr. Alvarez. --2-year waiting period.
Mr. Ross. Really quick; I only have a couple of seconds. I
guess what I am getting at, and my point is, that there are no
standards available right now to determine grave threat for
either a bank SIFI or a nonbank SIFI. Is that correct?
Mr. Alvarez. That is right.
Mr. Ross. And it seems to me, then, that we are not
discussing whether a bank or any other institution is ``too-
big-to-fail.'' What it seems to me that we are discussing is
that for 2\1/2\ years, having a lack or procedure and
regulatory rule implemented, we have a situation of ``too late
to save.'' Because you are not going to be able to save these
institutions if you have no standards in place by which they
know how to correct what they don't even know is incorrect.
I believe my time is up, so I will yield back.
Chairman McHenry. I thank the gentleman.
Mr. Heck is recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
Depending on how you count, last Friday or Saturday was our
100th day in the 113th session. I sometimes feel as though I
have been sentenced to sit in a darkroom exposed to a
continuous loop of the old beer commercial in which the two
sides yell at each other: ``Less filling,'' ``Tastes great,''
``Less filling,'' ``Tastes great.''
Look, here is what I hear when I listen to people back home
about what all of this ``too-big-to-fail'' business means. The
average person, they look at this and they want to know the
answer to two questions. And the two questions are: First, what
can you say to assure me that I am not going to have to dig
into my pocket in order to bail out a company again, a bank
that is teetering? And second, what can you tell me to assure
me that some bank, either through its own imprudent business
practices or lack of regulatory oversight will not fail so
miserably that it materially harms the economy and I lose my
job or I lose net worth through lower home value or whatever?
So, gentlemen, my only question to each of the three of you
is, what can you say to assure that person, who really only
defines ``too-big-to-fail'' from where I sit in those two ways,
what is it that you can say to assure them that they are not
going to have to dig in their pocket to bail out a bank again,
number one? And, number two, what can you say in succinct and
cogent terms to assure them that no bank is ever going to do a
face-plant again sufficient to cost them their home or their
job?
Mr. Osterman. In terms of your first question about no
bailout, the statute now provides that no taxpayer funds can be
used to resolve an institution.
We have Title I that provides for living wills so we can
try to address these institutions so they can be resolved in
bankruptcy. And if they cannot be, we have the backup of Title
II, which allows us to use the powers that the FDIC has used
for the last 80 years to successfully resolve institutions and
maintain confidence in the financial system.
Mr. Wigand. I would reiterate Mr. Osterman's remarks that
Title II contains a provision which explicitly prohibits any
losses being borne by taxpayers associated with the use of
Title II authority. With respect to orderly liquidation
authority and its application, a provision within the statute
itself prohibits the use of taxpayer dollars in the application
of that authority. With respect to at least an application of
Title II, there is an assurance that authority will not use
taxpayer funds in a resolution process.
Additionally, what is important--and I think all of the
panelists spoke to this at some level--is that Title I puts
enhanced prudential supervisory requirements and regulatory
requirements upon institutions to reduce the probability or the
likelihood that these institutions will fail. And--
Mr. Heck. Sir, is that what you would recommend I say to my
constituents back home? Using those words, that is what you
would recommend I say to assure them?
Mr. Wigand. Title I imposes new standards upon these
institutions that they were not subject to before. Hopefully,
as a result of those standards, the probability or the
likelihood that these companies will fail has changed.
Mr. Alvarez. I think that is the answer we are using, all
the powers Congress gave us in the Dodd-Frank Act to reduce the
likelihood that a large firm is going to fail. And the things
we are doing are very substantial: the higher capital
requirements; liquidity requirements; new stress tests; new
management requirements; the living will provisions to have a
glide path towards resolution. Those are all very important.
They are all new.
I think the second part is we can't guarantee that a large
firm is not going to fail. Something will go wrong someday,
somewhere. But what we have now that we did not have in 2008 is
an orderly liquidation authority. We can now put a large firm
into a resolution authority and cause the shareholders to take
those losses, the creditors to take those losses, reduce the
cost to society of that failure, and do it without taxpayer
expense.
Mr. Heck. Thank you, gentlemen, very much.
Chairman McHenry. Mr. Hultgren of Illinois is recognized
for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you all for being here.
I think the one thing that has become clear to me over the
last few minutes is how much still is unclear in this, and that
concerns me. Really, there is a lot of uncertainty even in how
this is going to be applied. I know there is a lot of power
that you all have, but how it is actually going to be applied,
I think, pushes off a great amount of uncertainty on the
markets and I think adds to some of the instability out there.
So I am hoping just to get a few more answers to my
questions. And really following up on some of Mr. Ross'
questions, we have already talked a little bit about under
Section 121, how FSOC must approve the Federal Reserve's
determination to restrict a company's activities or divest
assets by a two-thirds vote. My question, and I will address
this to Mr. Alvarez, is what information will the Federal
Reserve provide to the FSOC to justify the Federal Reserve's
actions under Section 121?
Mr. Alvarez. We have a very good relationship with the
FSOC. Of course my chairman is a member of the FSOC, so we
share information with the FSOC and its member agencies on a
regular basis. As we move towards making the determination to
Section 121, we will be sharing all the information we have
that would provide a basis for the determination of grave
threat with the FSOC so we can make a reasonable determination.
Mr. Hultgren. Particularly beyond that, will the Federal
Reserve prove to the FSOC that a company poses a grave threat?
Is there a proof standard?
Mr. Alvarez. Proof is a very legal term and it has a
context in a court--
Mr. Hultgren. But I think it also provides some certainty.
I get back to people understanding where are we at, and I think
that is where we need. So, we need to know what to expect.
Mr. Alvarez. The way I think about it is the FSOC will have
to have enough information that it is satisfied that it can
make this determination. The FSOC has not been and will not be
a rubber stamp. It will make its own determination, and we will
provide whatever information we have so that the FSOC can make
that determination, and it will agree or disagree as it wants.
Mr. Hultgren. So you provide information from your
perspective that would prove that an action should be taken to
follow up whether it is again divesting or whatever, but
proving the grave threat, but it is up to them if they actually
will agree with you or not with the information that you
provide, but you are not sure what that information is right
now.
Mr. Alvarez. Right. The other thing I would point out is
the FSOC has its own independent source of information. It can
use the OFR, which is set up by Congress to gather information
as well about markets and individual participants. And the
other members of the FSOC agencies have windows into these
firms as well, so they would be able to provide information. So
the FSOC is not going to be narrowly limited to just what the
Federal Reserve decides to provide it. We will share robustly
with them, but they will have many sources of information.
Mr. Hultgren. Let me move on quickly. The gentlemen from
the FDIC, either one of you, whoever is better equipped to
answer this, the FDIC does not have authority under Section
121, however FSOC does have authority and the FDIC's Chairman,
as Mr. Alvarez said, is a voting member. He talked about more
of the Fed side, but also the FDIC's Chairman is a voting
member of the FSOC.
Accordingly, what does the FDIC Chairman understand his
obligation to be when voting to authorize an action by the
Federal Reserve under Section 121? And does the Chairman
believe that the FSOC must make particular findings or
determinations before authorizing that action?
Mr. Osterman. I will attempt to answer your question, sir.
I can't speak for our Chairman, but knowing him, he is very
thoughtful, and I am sure that we will look at both the
information that the Fed provides, as well as our own
information. We have our own research group which will provide
information, and it will have to meet standards of showing that
there is a grave threat to the financial stability of the
United States.
In the last crisis, we addressed systemic risk several
times in determining that there was a grave threat to the
financial stability of the United States but it was only after
very careful--
Mr. Hultgren. Okay. So it is unclear, but you trust that he
would use that authority well.
Let me switch really quick; I only have 45 seconds left.
Mr. Alvarez, a quick question for you, how does the Federal
Reserve's authority to restrict a company's activities or to
order it to divest assets under Section 121 differ from its
authority under other statutes that it administers? Is it
broader? And how so?
Mr. Alvarez. We have authority under the Bank Holding
Company Act, 5(e) of the Bank Holding Company Act, to require
bank holding companies to divest subsidiaries or assets. The
two authorities are different, though, because under 5(e), we
can only require divestiture if the nonbank activities or
affiliate poses a risk to the safety and soundness of an
insured depository institution affiliate. So, it is a very
narrow authority.
Mr. Hultgren. So you would say authority under Section 121
is broader?
Mr. Alvarez. Broader. Yes.
Mr. Hultgren. Okay. My time is up. I yield back, Mr.
Chairman. Thank you.
Chairman McHenry. I thank my colleague.
We will now recognize the ranking member for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
Let me start with Section 121 and the grave threat
authority. Is it true that this requires a two-thirds vote? I
think it has been said, but I just like to make sure that we
agree. Let's talk about two-thirds and who are we talking about
when we say two-thirds vote? Would you list the members of the
FSOC, so that there can be some clarity as to who would be
casting these votes?
Mr. Alvarez. Certainly. First of all, you are right that it
requires a two-thirds vote in the affirmative by the FSOC. The
FSOC voting members include the Secretary of the Treasury, the
Chairman of the Federal Reserve, the Chairman of the FDIC, the
Comptroller of the Currency, the Director of the CFPB, the
Director of the FHFA, the Chairman of the SEC, and the Chairman
of the CFTC. There is an independent insurance member, and
there is one more that I have forgotten.
Mr. Osterman. The Chairman of the NCUA.
Mr. Alvarez. The Chairman of the NCUA.
Mr. Green. And suffice it to say that we are talking about
persons--
Chairman McHenry. If the gentleman would yield--and I will
give you the time--it is pretty amazing that he actually went
through that. I think we could put that in the record. And I
will yield back.
Mr. Green. Thank you. I thought he would have a written
list myself to be quite candid with you. So my compliments to
you as well.
But the point is that the two-thirds vote comes from the
heads of these various Federal agencies, and this is done only
after some deliberation, after reviewing empirical evidence.
And this is an evolving system. You are right now in your
infancy, and you are currently drafting and crafting these
various rules, regulations and standards. Is that a fair
statement?
Mr. Alvarez. That is correct.
Mr. Green. And is it true that as you go through this
process, you do allow input from various other agencies or
entities?
Mr. Alvarez. Yes. There are several nonvoting members of
the FSOC, including State banking and securities and insurance
regulators.
Mr. Green. And one can conclude that you don't do this
arbitrarily and capriciously, that you are doing it in a
systematic way so as to come to reasonable conclusions?
Mr. Alvarez. That is right.
Mr. Green. Let's move now to the notion of divestiture.
This was mentioned. There is a 2-year window involved with
divestiture, is that correct?
Mr. Alvarez. That is under Section 165, the living wills
provision.
Mr. Green. Yes. Explain that please, so that we can
understand that this does not just happen overnight.
Mr. Wigand. I will take the question. There has to be a
joint finding by the FDIC and the Federal Reserve Board of
Governors that the living will is deficient, meaning that it
does not provide for or facilitate an orderly resolution under
the Bankruptcy Code or is otherwise not credible.
Upon that finding of deficiency, the firm has an
opportunity to correct their deficiency. If the firm fails to
do, so the first course of action is for the FDIC and the
Federal Reserve to jointly impose higher capital or liquidity
requirements, and restrict growth activities or operations.
These actions are what we characterize as customary supervisory
enforcement actions that could be undertaken.
If, upon after the imposition of those actions, there is a
failure still to remediate the problem associated with the
firm's lack of resolvability, then the FDIC and the Federal
Reserve Board, after consultation with the FSOC, may order
divestiture of assets or operations of a firm.
Mr. Green. And we are talking about institutions that have
assets at above $50 billion, is that right?
Mr. Wigand. Those are the only ones that are subject to
this provision.
Mr. Green. And a billion is still a thousand million, is
that correct?
Mr. Alvarez. It still is.
Mr. Green. Still a thousand million. So, you are talking
about 50,000 million companies.
Mr. Alvarez. Yes.
Mr. Green. And we can also note now that prior to Dodd-
Frank, we didn't have a means of dealing with these 50--what
did I say?--50,000 million. That seems like a rather large
number, and it seems like we ought to have the ability to wind
down a $50,000 million business that may pose a threat to the
economic order, we call it a grave threat. But it just seems
that we have provided that. And with this, I will yield back
the balance of my time.
Chairman McHenry. I thank the ranking member.
I now recognize Mrs. Wagner from Missouri.
Mrs. Wagner. Thank you. Thank you, Mr. Chairman. I would
also like to take this opportunity to welcome our newest member
of the Financial Services Committee, the gentleman from the
12th District of Pennsylvania, Keith Rothfus, who has joined us
today as a new Member of the 113th Congress freshman class.
Welcome to you, Congressman Rothfus.
In our quest for more clarity here, Mr. Alvarez, let me
take a little different tack. During the debate over Dodd-
Frank, the Financial Times described an early version of
Section 121, the Kanjorski Amendment, as having ``potential
parallels with the Sherman Antitrust Act of 1890,'' creating
the legal basis for preemptive action against overly powerful
big business, and also noted that the early version of Section
121 would allow regulators to break up even healthy financial
companies.
In your view, are there potential parallels between Section
121 and the Sherman Antitrust Act, sir?
Mr. Alvarez. If you look hard enough, there are parallels
between any two things.
Mrs. Wagner. So, that is a ``yes?''
Mr. Alvarez. I think that there are some parallels. It is
true that Section 121 can apply to institutions that are
healthy and not failing, so there is a parallel there. I think
it is also true that the Sherman Act prohibits monopolization,
so it is a forward-looking as well as backward-looking statute.
I think the difference there is that Section 121 requires that
the institution actually pose a grave threat. It is not,
``might pose a grave threat'' or ``could at some time pose a
grave threat.''
Mrs. Wagner. Let me pick up on that, then. Does it have to
pose a grave threat, Mr. Alvarez, or in fact does Section 121
give regulators the authority to break up a healthy financial
company?
Mr. Alvarez. Only if it actually poses a grave threat. That
is the standard set out in the statute.
Mrs. Wagner. And going back again to the definition of
grave threat, as so many have tried to get some kind of clarity
on here, do you still agree with your comment that it is in
fact a very open-ended definition?
Mr. Alvarez. I don't think I said that it was open-ended in
the sense that it has no meaning. I think it has to be
considered in the context of the other parts of the Dodd-Frank
Act. There are a number of provisions, and the chairman alluded
to this in his opening remarks. ``Grave threat'' is unique in
its use in Section 121. The rest of the Dodd-Frank Act speaks
about risks to financial stability. And so, those standards are
much less. We are allowed to take actions under other
provisions if there is a risk to financial stability; Section
121 says not a risk to financial stability, a threat to
financial stability, and not any threat, but a grave threat to
financial stability. So it is a very high standard in
comparison to the other standards.
Mrs. Wagner. A standard that has no quantitative measure at
this point in time.
Let me move on, Mr. Alvarez. Dodd-Frank opened a whole host
of issues when it comes to interacting with foreign-based
financial institutions and foreign regulators. And I would like
to address some of those here as well. What are the challenges,
Mr. Alvarez, of applying Section 121 to foreign SIFIs and how
is the Federal Reserve addressing those challenges?
Mr. Alvarez. The challenge in applying any of the Dodd-
Frank provisions to foreign organizations is the difference in
their organizational structure. Foreign organizations tend to
have their capital and liquidity outside the United States.
They could be very, very large, $1 trillion, $2 trillion, $3
trillion, so as large as U.S. organizations, but have only a
small piece in the United States. So you have to take into
account both their large size worldwide and their presence in
the United States. That requires a different kind of balancing
than, for example, looking at a U.S. organization.
Mrs. Wagner. And to that point, Section 165 of Dodd-Frank,
regarding it, does the Federal Reserve plan on consulting with
home regulators of foreign-based companies when determining
whether that company's living will, for instance, is deficient?
Mr. Alvarez. The living will provision is under Section 121
and can take care of that.
Mrs. Wagner. Under Section 165, correct?
Mr. Alvarez. But under Section 121, I would expect we would
have consultations with foreign supervisors because a condition
of Section 121 is that we take a variety of steps short of
requiring breakup before we are allowed to even consider
breaking up the firm. So we would want to have discussions with
foreign supervisors before we took those steps.
Mrs. Wagner. My time is running out, but what if the Fed
imposes sanctions as a result of a deficient living will? Would
you consult with those home regulators?
Mr. Wigand. Yes.
Mrs. Wagner. Thank you.
Mr. Chairman, I yield back.
Chairman McHenry. I thank my colleague.
We will now recognize Mr. Grimm for 5 minutes.
Mr. Grimm. Thank you, Mr. Chairman. And I thank the
witnesses for being here today.
Just to throw it out there to get the frame of mind of
where we are, and I will ask all three of you, in your opinion
should we break up the banks?
Mr. Alvarez. The Dodd-Frank Act lays out a game plan for
dealing with the large institutions. It includes a lot of
provisions, and Section 121 is one of them, but Section 165 has
a variety of steps that the agencies must take in order to
reduce the probability that firms, large firms, will fail, and
to improve the chances that if they do fail, they won't harm
the economy--
Mr. Grimm. I was actually asking just your opinion in
general.
Mr. Alvarez. My opinion is that we can make a lot of
progress in addressing ``too-big-to-fail'' if we implement the
program that is in Dodd-Frank.
Mr. Grimm. That is a nice way of saying, ``I am not
answering your question.'' Is anyone else willing to answer my
question?
Mr. Wigand. I think it is an open question. It is a very
important question, and it is certainly beyond my pay grade.
And this issue I believe was debated when financial reform
legislation was being discussed, and I think that perhaps the
Congress is the appropriate place, given the importance of that
question, for that type of debate.
Mr. Osterman. I would concur with Mr. Wigand's statement.
Mr. Grimm. Okay. So it is okay to say you are not going to
opine. But that is fine. I appreciate your candor.
Looking at Section 165, is there any concern if the Federal
Reserve, these enhanced prudential standards, I want to make
sure I use the right terminology, for the foreign banking
organizations, is there a concern that it is going to make it
very challenging, if not, some would say impossible, for
foreign firms to manage their capital effectively across
borders? I know it was touched on before, but I would like to
dive into that a little bit more. Mr. Alvarez?
Mr. Alvarez. I don't think that makes it impossible. It
certainly raises the costs for foreign firms. There is no
question about that. Just as it has raised the costs for U.S.
firms in the foreign jurisdictions that have taken this
approach. So it is more expensive for U.S. firms operating in
London--
Mr. Grimm. So that begs the question, does it concern you
that some of these organizations will just not do as much
business here in the United States, which will lead to less
product and less availability for Americans?
Mr. Alvarez. We have very competitive markets here and very
many institutions that are competing in these markets. So
competition is clearly something we have to take into account.
But there is also on the other side the need to ensure
financial stability and that there isn't a failure of
institutions in the United States.
We could greatly increase competition if we removed all our
restrictions on folks competing here, and that would be
something for Congress to decide. Right now, we are
implementing the rules that Dodd-Frank requires us to do, and
trying to do it in both a fair way and a way that protects the
financial stability here in the United States.
Mr. Grimm. Is there any concern, and are you speaking about
the fact that some of these other foreign sovereigns may
increase their requirements on U.S. banks, making it much more
difficult for the U.S. banks to compete abroad?
Mr. Alvarez. Yes, there is concern about that. As I
mentioned, some have done that before the Federal Reserve
proposal was put out. But that is something we have to weigh
and something we have to consider and something we are
watching.
Mr. Grimm. Okay. Most of the other stuff was already
covered on Section 121, so I am going to yield back, Mr.
Chairman.
Chairman McHenry. Would my colleague yield to me?
Mr. Grimm. Absolutely, Mr. Chairman.
Chairman McHenry. I appreciate it. Thank you.
Mr. Alvarez, I asked this before, but just to make sure we
have this on the record correctly, has the Federal Reserve
developed a set of metrics to evaluate whether a firm poses a
grave threat?
Mr. Alvarez. No, sir. We have not.
Chairman McHenry. Okay. Do you anticipate putting together
metrics for that?
Mr. Alvarez. As I mentioned earlier, this is a decision
that depends very much on the facts and circumstances, so it is
very hard in this area to set a uniform rule. I don't know
whether the Board will at some point do that. My immediate
expectation is that we would not.
Chairman McHenry. I would assume the Board would ask you
and your staff to define that term?
Mr. Alvarez. Yes, if we wanted to go in that direction,
that is correct.
Chairman McHenry. Okay. I will now recognize my colleague
from Wisconsin, Mr. Duffy, for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
Going back to the chairman's last question, you are saying
you are not going to set out metrics, and it is very
complicated. Isn't all of this complicated? All of the metrics
that are set out within Dodd-Frank, it is all very complicated
stuff. But are you telling us that you guys can't come forward
with a metrics that is going to set up a standard for a grave
threat? Explain that. Is this more complicated than everything
else that we have seen in Dodd-Frank?
Mr. Alvarez. Some things are easier to measure than others,
even though they are complicated. Capital is something, for
example, that we have been measuring and restricting for many
years. I think folks have a very good understanding of how to
make capital rules, even though they are complicated,
effective.
We don't have experience with the grave threat idea. That
is something we will have to gain some experience on, and think
through carefully. We also, as I mentioned, are required by the
statute to put in place these other provisions and see if those
mitigate the risks that these large firms pose, and it is only
if they don't mitigate the risks--
Mr. Duffy. Reclaiming my time, so you don't have a
standard, and you don't have metrics. It has been 2\1/2\ years
since the law was passed, and you have no intent of setting
forth standards or metrics for a grave threat under Section
121?
Is the standard really that, ``I will know it when I see
it?'' When I see it, I will know it, and then I am going to put
it under the grave threat category? Isn't that what the
standard is?
Mr. Alvarez. ``Grave threat'' is a standard itself. So just
like many other--
Mr. Duffy. Isn't that metrics? You will know it when you
see it?
Mr. Alvarez. We do not have a metric.
Mr. Duffy. So when you see it, you will know it, right?
Mr. Alvarez. And it may depend on many things--
Mr. Duffy. Is that it? When you see it, you will know what
a grave threat is? You can't tell me today what a grave threat
is because there is no metrics for it. When you see it, you
will know it.
Mr. Alvarez. Yes.
Mr. Duffy. The answer is yes?
Mr. Alvarez. Yes.
Mr. Duffy. And so for those who want to breed stability
within the sector, does your standard of, when I see it, I will
know it, really breed that stability and certainty?
Mr. Alvarez. I think stability gets built by the other
pieces of Dodd-Frank that we are putting together, the enhanced
prudential standards, the capital requirements, liquidity
requirements, building up and working out details on the
orderly liquidation authority, the resolution plans, those
things are what build stability.
Mr. Duffy. I think people who are subject to Section 121
would disagree with you.
Listen, there is the ability to have a written hearing or
an oral hearing, oral testimony, right?
Mr. Alvarez. That is correct.
Mr. Duffy. And have you set up a standard for which someone
would get a written hearing versus an oral hearing with oral
testimony?
Mr. Alvarez. The Board's rules provide for a written
hearing as a default matter, for most matters presented to--
decisions--
Mr. Duffy. What is the standard to get an oral hearing or
oral testimony?
Mr. Alvarez. Oral testimony is something the Board allows
whenever the circumstances indicate that you can't provide the
arguments effectively in writing.
Mr. Duffy. When you see it--
Mr. Alvarez. We had oral hearings before, but very few
institutions actually ask for oral hearings. Almost all
institutions--
Mr. Duffy. There is no standard in place. There is no
standard to dictate when it is written and when it is oral.
Mr. Alvarez. There is a standard.
Mr. Duffy. What is the standard?
Mr. Alvarez. The standard is when the Board believes that
oral testimony would be most useful.
Mr. Duffy. So the standard is when the Board believes.
Mr. Alvarez. Yes.
Mr. Duffy. And that is a standard that you think people can
readily understand and use?
Mr. Alvarez. Yes.
Mr. Duffy. Okay. I think many of us would disagree with
that standard.
Mr. Alvarez. It is has worked very effectively for the last
50 years at the Federal Reserve.
Mr. Duffy. I am sure it has.
With regard to Section 121, it is fair to say that this
section doesn't really work in times of crisis, right? When we
have a crisis, we have a review process, 30 days, a hearing
process. So if, for instance, Lehman took place, this Section
121 wouldn't really work. This is really a pre-crisis mechanism
to find those SIFIs or large banks that are a grave threat,
yes?
Mr. Alvarez. I think Congress did set up Section 121 more
as a pre-crisis arrangement and Title II as the crisis
management stage.
Mr. Duffy. I am sure you have seen this petition by Public
Citizen, yes?
Mr. Alvarez. I don't know.
Mr. Duffy. You haven't seen a petition that has been made
with regard to Public Citizen in regard to a very large bank,
Bank of America?
Mr. Alvarez. I have not.
Mr. Duffy. You haven't seen that. Have you guys responded
to any petitions that have been filed under Section 121?
Mr. Alvarez. No, we have not.
Mr. Duffy. I yield back.
Chairman McHenry. I thank my colleague. And at this point,
we will now recognize Mr. Rothfus for his first series of
questions as a brand new member of the Financial Services
Committee.
Mr. Green. Mr. Chairman, just a point of clarification
please. Mr. Delaney has arrived, and he has not been heard
from. May he now be heard?
Chairman McHenry. I'm sorry, I didn't recognize his
arrival. I'm sorry, Mr. Rothfus, you are going to have to wait
5 minutes. Welcome to the committee. Mr. Delaney, go right
ahead.
Mr. Delaney. Thank you, Mr. Chairman.
My question is slightly more of a high-level kind of lift-
up question dealing with the orientation of the various
regulators in light of the general concern that the actions
within Dodd-Frank have somehow made the notion of ``too-big-to-
fail'' permanent in our financial system. Whether people agree
or disagree with that concept, there is obviously a fair amount
of discussion, and this hearing is first evidence of that.
So the question I have--and I have been hearing a lot from
the industry about a sense of kind of capital creep that is
occurring with respect to the regulations of individual
institutions. In other words, the new normal for well-
capitalized institutions with respect to a capital standard
continues to move up both as reflected in specific rulemaking,
but also but in practice in terms of being implemented with the
regulators.
In other words, the new normal for a well-capitalized
institution is 8 percent in terms of capital to assets, but
there is a sense that number is moving to 10, but that is not
specifically memorialized in any set of rulemaking or
legislation.
And so I am interested in the panelists' view as to whether
they think that is actually occurring in the industry, in other
words, are regulators moving up capital in light of the concern
that we have somehow made ``too-big-to-fail'' permanent as a
way of mitigating concerns that we have, in fact, done that. I
will let each of the panelists respond to that.
Mr. Alvarez. Congressman, we clearly are intentionally
raising the capital requirements on large institutions. We are
doing that in rulemakings; it is a very public process. We have
already done that in several areas, for example institutions
that have large trading books have had their capital increase.
We have proposed various surcharges, increases in the quality
and type of capital at a variety of levels, and we are
negotiating some further increases with Basel that we probably
will put out for comment shortly.
So the capital requirements are being increased. It is
focused on the large institutions. There are some capital
proposals that are more broad. And to anticipate part of where
you were heading with your question, we are considering whether
some of those proposals need to be modified to address small
banks that haven't had the same problems as the large banks.
But I would say that we have been up front about the
capital increases that we are doing at the large institutions.
We haven't done those behind the scenes.
Mr. Delaney. Where do you think the standard for an under
$10 billion in assets institution is to be considered well-
capitalized right now in terms of capital as a percentage of
assets, not risk-based capital but just--
Mr. Alvarez. What is the leverage ratio--
Mr. Delaney. Yes. What do you think the well-capitalized
ratio is right now?
Mr. Alvarez. I think the minimum leverage ratio is 4
percent.
Mr. Delaney. But what is considered well-capitalized for an
under $10 billion in your judgment?
Mr. Alvarez. I have no judgment on that. And we don't have
a definition for well-capitalized for a leverage ratio for
well-capitalized.
Mr. Delaney. Maybe one of the other panelists?
Mr. Wigand. I echo Mr. Alvarez's comments.
Mr. Osterman. Addressing the ``too-big-to-fail'' issue, the
capital requirements are part of the heightened prudential
standards that Title I addresses. In the last crisis and before
we had these Dodd-Frank provisions, we didn't have these tools.
We were left with either the bailout situation or the
bankruptcy situation, neither of which worked. I do think we
have the tools now to address ``too-big-to-fail,'' and I find
it interesting that people think Dodd-Frank actually
institutionalizes what I think we had before.
Mr. Delaney. So, Mr. Alvarez, back to your earlier comment,
you think 4 percent is the minimum capital standard for an
under $10 billion institution?
Mr. Alvarez. The leverage ratio. You said putting aside the
risk-based ratio.
Mr. Delaney. Right. So 4 percent capital as a percentage of
the total assets on an institution?
Mr. Alvarez. Right.
Mr. Delaney. And so the notion that is common in the
regulatory world that 8 percent is considered well-capitalized,
where do you think that comes from? Just kind of--
Mr. Alvarez. A large part of capital, particularly at the
smaller institutions, under $10 billion institutions, depends
on their activities and their needs. I am hesitant to try to
answer that without reference to the risk-based capital--
Mr. Delaney. Right. So what do you think the risk-based
capital minimum is?
Mr. Alvarez. The risk-based capital minimums are 6 and 8
percent, and they are--
Mr. Delaney. 6 and 8 percent?
Mr. Alvarez. Yes.
Mr. Delaney. Okay. Do you think those are moving up?
Mr. Alvarez. Yes, they are.
Mr. Delaney. Okay. Where do you think they are going to?
Mr. Alvarez. That is what we are doing a rulemaking about.
So we will--
Mr. Delaney. I see.
Mr. Alvarez. So we are in the process of thinking that
through.
Chairman McHenry. The gentleman's time has expired.
We will now recognize Mr. Rothfus for his first round of
questions. Delayed but not deterred, Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman, and thank you to our
panel for being here today and going through some fairly
complicated issues.
I wanted to focus a little bit on, again, the grave threat
as we try--or as I personally try to get my arms around it. As
part of Dodd-Frank, several clearing and settlement financial
utilities were deemed systemically important financial
institutions that are now eligible to receive government
support in the event of a potentially destabilizing failure.
One of these ``too-big-to-fail'' institutions, the National
Securities Clearing Corporation (NSCC), after consultation with
its regulators, has put forward a proposal where many of our
Nation's biggest banks will be able to make a loan commitment
to the NSCC as part of a program to enhance collateral at the
utility, while the banks broker-dealer competitors, who also
clear through the facility, would have to post cash in the
amount of billions of dollars. Posting cash is clearly a much
more burdensome requirement.
Mr. Alvarez, isn't the proposed cash collateral requirement
from the broker-dealers to collateralize the NSCC simply
another bank subsidy?
Mr. Alvarez. If I could back up just a little bit to talk
about the facts that you have presented, Dodd-Frank requires
that there be more clearing on exchanges. And so, it is
requiring institutions to do more business on these exchanges.
In order to do that safely, the exchange has to require
collateral by the institutions. These central clearing
organizations take away risks and make the system safer because
they are able to get good collateral and they deal with each
counterparty separately with the clearing corporation in the
middle.
Dodd-Frank recognized that. Dodd-Frank builds quite a lot
on that. It is not unusual that counterparties would provide
collateral, but the central institution itself would not be.
Mr. Rothfus. But there is different collateral there. The
broker-dealers are going to be asked to put up cash--
Mr. Alvarez. Because they are clearing on--they are
clearing.
Mr. Rothfus. --versus the bank would be able to--
Mr. Alvarez. I think they deal with all of their
counterparties in the same way. So perhaps because this is a
complicated issue, it may be one that is best--that maybe we
could talk with you about and provide you some information on
how--
Mr. Rothfus. Absolutely. But it appears that the banks are
being asked for a different type of collateral. It is not a
direct collateral. And wouldn't the Fed's apparent
unwillingness to ask banks for direct collateral be an
indication that the banks can't spare the collateral?
Mr. Alvarez. I don't think that is quite right. I think
there isn't a difference between the broker-dealers and the
banks when they are dealing with these central counterparties.
Mr. Rothfus. Again, I looked at it, okay, the types of
collateral that are going to be put up, and if the banks are
not able to have the direct collateral that the broker-dealers
are going to be required to do, would that indicate that the
banks pose a grave threat because they don't have that capacity
for the direct collateral?
Mr. Alvarez. I think the premise of the question is not
correct as a factual matter. So that is why I think it might be
helpful if we had a discussion, because I don't understand the
situation to be the way you presented it.
Mr. Rothfus. Thank you. I look forward to following up with
you.
I yield back, Mr. Chairman.
Chairman McHenry. I thank my colleague for yielding back.
We will now move on to an additional round of questions. I
recognize myself for 5 minutes.
So, Mr. Alvarez, does Section 121 allow regulators to
determine the ideal size of a financial institution?
Mr. Alvarez. I think Section 121 was designed to be a fact-
specific determination about a particular institution and
whether that institution, its activities, the risks of its
activities, the capital complexity, size, all of the various
factors for that institution pose a grave threat to the
economy. So I think that makes it difficult to say one size
fits all institutions because complexity and risk and other
things would factor into the determination.
Chairman McHenry. So, a very complex institution. Let me
ask this in a different way: Does Section 121 allow regulators
to determine, in essence, the ability of a financial
institution to do what it is doing? I am trying to ask this in
a different way to elicit a different answer from you. Your
blank look tells me I am not succeeding. So, I am going to try
again.
The question about an ideal size of an institution, or, in
a different way, a cap on a size of an institution, is that a
decision that could be contemplated under Section 121 and
therefore limit the size of an institution or institutions?
Mr. Alvarez. Congress has already set caps on the size of
financial institutions, so I would expect that Section 121
would apply to institutions that are below the caps set by
Congress. There are two already. One is a longstanding cap on
interstate banking.
Chairman McHenry. Yes, cap on deposits.
Mr. Alvarez. That is in the Bank Holding Company Act. And
then the second cap is one put in Dodd-Frank, that no
institution may have more than 10 percent of the total
liabilities of financial institutions in the United States. So,
the caps have already been set by Congress.
Chairman McHenry. Let me, because you are not saying no, it
cannot be provided, so under Section 121, you say you could set
a lower cap than that?
Mr. Alvarez. As I said, I think that Section 121 is
designed to be an institution-by-institution kind of
determination. A universal cap doesn't fit very well there. In
order to meet a universal cap, the Board would have to show and
the FSOC would have to agree that everybody who meets that size
automatically poses a grave threat to the economy, so that
would be a difficult decision.
Chairman McHenry. But would that be one they would be able
to make under the existing law? If your boss comes to you and
says, do I have the legal authority to cap the size of all
institutions because I deem them to be a grave threat to the
financial--I am sorry--stability, I thank my colleague--would
you advise him or her, whoever it may be, whatever time it may
be, that is something under operation of law that they could
do?
Mr. Alvarez. So, as I said, the other thing that we have to
take into account--and Section 121 requires this--is how that
particular institution has mitigated the risks of its
activities through restrictions that we impose on activities,
through conditions we impose on the institution. I find it very
hard in that context to see how a blind cap could work well. As
a policy, I have a hard time seeing how it would work.
Chairman McHenry. Okay. Let me ask you a different
question. Is there a law that prevents you from setting a
maximum size for an institution?
Mr. Alvarez. Of course, we have to be able to sustain
ourselves under Section 121, and that would be the authority.
So if an institution were to challenge our determination on
Section 121 because we didn't take into account the
characteristics of the firm, that would be very difficult.
Chairman McHenry. So you would say it is very difficult but
not barred?
Mr. Alvarez. I am having a hard time imagining a world
where it would work.
Chairman McHenry. Okay. But under operation of law, there
is no limitation on the Federal Reserve from setting a maximum
size for an institution?
Mr. Alvarez. Congressman, I resist because I don't think
that is a fruitful way to think about Section 121.
Chairman McHenry. I understand. And your answer is actually
answer enough.
And so with that, I will now yield to my ranking member for
5 minutes.
Mr. Green. Thank you very much, Mr. Chairman.
A lot has been said today about the grave threat. And in my
opening statement I mentioned that we accorded FSOC, or Dodd-
Frank accords FDIC-like authority. And I would like to just
talk a moment about the FDIC. It was formed in 1933, about 80
years ago, and there are people who would like to know when a
bank is going to fail. The FDIC does not announce that a bank
is going to fail.
Similarly, the power granted under Dodd-Frank would not
require, and I don't think they should announce that an
institution is ``too-big-to-fail'' or about to fail.
The point is it seems to me that there is a desire to be
able to predict certain things with a certain definition. But
with the FDIC, many things will go into deciding whether or not
a bank will fail. And no one has ever lost any insured deposits
in 80 years, and we still don't--we cannot predict what FDIC
will do. It is done on a Friday, banks open up on Mondays,
usually. Now, is this a fair statement, Mr. Osterman?
Mr. Osterman. Yes, it is, sir.
Mr. Green. And with 80 years of experience and the FDIC not
predicting or you can't really predict when a bank will fail--
you can't always, sometimes you can. In fact, there are rating
agencies that try to do this, and they fail in trying to do it.
So my point is we are not going to be able to codify a
definition that is going to allow onlookers to predict how FSOC
will behave when it is confronted with a possibility of a grave
threat. FSOC will have to do some internal thought processes,
and after this, after having an internal thought process, a
deliberation, then a decision will be made, and it can't just
depend on the size of an institution.
One of our very capable and competent assistants has
indicated to us that complexity has a lot to do with it, how it
fits into the financial markets.
So with all of these things going into the equation, it is
very difficult to have one metric that is going to give an
onlooker an absolute indication as to whether or not an
institution will be declared a grave threat.
Mr. Osterman, since I brought the FDIC into this, I would
like for you to respond, please.
Mr. Osterman. Yes. We have, as you indicate, had the
authority to resolve failing financial institutions for the
last 80 years. Actually, we are not even the entity that
determines whether the institution is going to fail. It is
typically the primary Federal regulator or the State regulators
who make that call. Then, we come in and we have to determine
the least costly approach for addressing that failure under the
law, which requires either a payout of deposit insurance or a
purchase and assumption agreement.
The bottom line is that through this process--and I think
during this last crisis we handled over 470 failures--no one
has lost a penny of their insured deposits. I think one of the
things that Dodd-Frank does is it gives us the ability now,
which we did not have when this crisis began, to resolve one of
these large systemically important financial institutions, and
we now have the tools to address ``too-big-to-fail.''
Mr. Green. Thank you.
Would anyone else care to respond? Yes, sir?
Mr. Wigand. I would just add to Mr. Osterman's remarks that
the process that the FDIC has used to resolve failing
depository institutions is one that now has become actually
predictable in that there is confidence by insured depositors
that their funds are protected. And even though the sequence
leading up to the failure itself is one that is only known to a
handful of regulators and perhaps other participants or
stakeholders associated with the particular failure itself, the
reality is that it is the confidence of knowing how deposits
will be treated and that insured depositors are protected that
provides the financial stability that is the FDIC's purpose as
part of our financial system.
Mr. Green. And Dodd-Frank provides that same confidence for
taxpayers knowing that taxpayer dollars will not be used to
bail out institutions, is that correct?
Mr. Osterman. The law is explicit that Title II cannot use
taxpayer funds in its application.
Chairman McHenry. I thank the ranking member.
Mr. Duffy for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
I want to go back to Section 121, which obviously we have
covered quite exhaustively today, and the grave threat standard
and your comment that it is, ``I will know it when I see it.''
One of my concerns, and I think this was brought up in the
initial hearings on Dodd-Frank, is that when we don't have a
clear standard, when we can't point to clear, bright line
specifics, it can allow for situations that don't provide for
good governance.
And so, could you use Section 121 to apply political
pressure? I am not saying that you would. But political
pressure could be applied just by the threat of finding that a
financial institution is a grave threat. That is substantial
pressure on that institution to do what the Fed would like it
to do.
Can you strong-arm them into doing something that they may
not ordinarily want to do but for the threat of being a grave
threat under Section 121? That is pretty powerful stuff, and I
am not saying, I am not accusing anyone of doing that. But when
you don't have clear standards in place, I think it opens the
door for bad governance.
And the fact that you guys haven't put out a clear standard
and there is no intent to put out a clear standard, that
concerns me. And then when we look and say, well, petitions
have been filed and they haven't been answered, we are really
sitting here in the dark. And I don't think that bodes well for
anybody who sits in your seat or sits in the seat of one of
these financial institutions.
Mr. Alvarez?
Mr. Alvarez. I take your point. I understand that very well
and I understand that uncertainty can be very difficult for
firms to deal with. There are some protections in Section 121
that I think help in this regard. One is you have the FSOC and
a two-thirds vote of the FSOC. That is a very strong protection
against the Federal Reserve being arbitrary in what it does.
I think the second protection is actually that Congress
requires us to go through this list of other mitigants before
we can get to selling assets. So we have to start with the idea
of restricting their activities, or imposing conditions on
operations, or limiting growth. They are expressly laid out in
the statute. So that helps, too, because a firm will know if we
are moving down this path because we have a long road to go to
before we can get to selling assets.
Mr. Duffy. And I understand there is a long road and I
understand the protection of FSOC--
Mr. Alvarez. And then, there is the hearing requirement
which Congress has built in. So there is a lot of protection in
Section 121.
Mr. Duffy. There is, but the threat of Section 121, to have
to go down that path is a very, very powerful threat. I don't
know anyone who would minimize the threat of Section 121. And
that is my concern. I am not saying that we would get through a
two-thirds vote on FSOC, but to make any organization go
through it is a very, very powerful threat.
Mr. Alvarez. I appreciate that.
Mr. Duffy. In regards to petitions that have been filed,
you indicated there have been several, is that right? You are
not familiar with any of them, but petitions have been filed
under Section 121?
Mr. Alvarez. I am not certain of numbers. You mentioned
one. I haven't read that. I can look into that.
Mr. Duffy. But you have read others?
Mr. Alvarez. No, I have read none.
Mr. Duffy. Okay. If you would look into that and give me
your opinion on the one I referenced? I can ask that to you in
writing so you have the information on it. I would appreciate
that. Is that a yes?
Mr. Alvarez. I will do the best that I can. I am a staff
person. My opinion on a particular thing may have no value
whatsoever. As long as you keep that in mind.
Mr. Duffy. You were sent here today, so it must have some
value.
Just quickly to get your opinion on this one, and for its
value, if the Fed concluded that a large financial company paid
less to borrow funds because the market perceived that the
government would bail out the company if it became distressed,
would that benefit be relevant in determining whether the
company posed a grave threat under Section 121? So if we have
this benefit of saying, hey, if I fail, I have a government
guaranty here, is that a characteristic that could--
Mr. Alvarez. First of all, we are doing an awful lot of
work to remove that potential advantage, to reduce that
subsidy. And that is where I think the Section 165 provisions
that we have been talking about today are really important.
Mr. Duffy. But could that be a trigger?
Mr. Alvarez. I would have to think about that. I don't see
how that itself poses a grave threat.
Mr. Duffy. In itself, it does pose a grave threat, right?
Mr. Alvarez. No. If a firm has some operational benefit
because of its size, the subsidy itself may be an indication
that it is large and may be an indication that it is viewed by
the markets as important and having government support, but I
am not sure how that indicates that it poses a grave threat.
Chairman McHenry. The gentleman's time has expired.
Mr. Duffy. I yield back.
Chairman McHenry. Mr. Cleaver for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Osterman, if you had a kind of sleazy cousin who was
interested in going into banking, would you advise him to try
to get hired at the Kansas City Community Bank or at the Bank
of Universality? Understanding he is sleazy.
Mr. Osterman. I would advise him not to get into banking,
because that is something that we really don't want or need. It
is a very important position, and it is one that we review in
terms of the standards. We provide training for people who are
interested in getting into banking, in terms of directors and
officers and other professionals, so that they can understand
the very important undertaking that they are assuming and the
responsibilities that they take on when they take on those
important positions.
Mr. Cleaver. But do you agree that complexity is the slick,
sleazy person's greatest friend in banking?
Mr. Osterman. I see. Certainly, complexity makes it a lot
easier to slip things by somebody. If it is complex, it is a
lot harder to understand, and that definitely can complicate
things.
Mr. Cleaver. The Attorney General has said that one of the
obstacles to prosecuting folks who might have done things that
resulted in the 2008 economic collapse in this country is
complexity, that these banks are so huge and complex that they
can't prosecute. So you swindle money in a little bank and you
are going to probably get caught. And so in the big banks, the
Attorney General is saying it is tough to find out what someone
did and how they did it. Go ahead?
Mr. Osterman. We certainly don't agree that the fact that
somebody is involved in a large institution means that they
shouldn't be prosecuted. We think--
Mr. Cleaver. Of course, they haven't.
Mr. Osterman. Understood. But that is certainly not
something that we would agree with.
Mr. Cleaver. My fear is that when all of this is over,
nothing will have happened to the people who did the greatest
amount of damage to the U.S. economy, that they are going to
get--they will be buying new homes on Venus and living the
grand life because they knew how to rip off the biggest
financial institutions while community banks--I am really
concerned about what is happening to community banks. As Moses
would say, let my community banks go. They are getting beat up.
They have all of the problems and the burdens, and the bigger
banks seem to be getting away with everything.
The other issue that I am somewhat concerned about is that
the rulemaking is seemingly very slow. And I know Mr. Alvarez
talked about how you are trying to get things worked out. But
many of these banks, at least in my district and the rural
parts of Missouri, are just being overwhelmed, and survival
depends on how much time it is going to take. I have a
photograph in my office--I didn't bring it with me--of one of
my bankers holding up regulations so thick that he needs to
hire new people to come in. This is a little, small bank. And
if we continue to do that, I think it is just one of the great
shames of our time.
Mr. Chairman, I would like to yield back the balance of my
time to the ranking member.
Mr. Green. Thank you, Mr. Cleaver.
Let's talk for a moment about the living wills. This is
something that we are currently putting in place, and it is a
part of the process. And I would like for you to explain how
the living will can help us to determine whether or not banks
or large institutions are subject to being declared a grave
threat.
Mr. Alvarez. To start with, the living wills don't tie into
the grave threat provision directly. But what the living wills
do provide is a supervisory tool for the Federal Reserve, it
may be slightly different for the FDIC, but for the Federal
Reserve it is a window into how firms think about their
resolution. We know a lot about how they plan for their healthy
operation, that has been the focus of our supervision over the
last few years. Now, we are getting a view into how they plan
for their death. And that is a different way of thinking about
the supervisory problems. It focuses you on structure, on
complexity, on internal operations, on resiliency of
operations. All those things help point out, help you, help
accent the way firms might fail. So we are learning a lot about
that. And that could provide information that would help us
understand if the firm poses a grave threat, because we would
know more about the likelihood of its failure, the spillover
effects of its failure and things like that, which I think is
important.
At the same time, the living wills give us an opportunity
to fix some of those problems. And we in the FDIC are very
focused on translating what we learn from the living will
process into changes in our examination process to require
institutions to simplify themselves, to remove obstacles for
their resolution, and to become safer institutions.
Chairman McHenry. The gentleman's time has expired.
Mr. Heck?
Mr. Heck. Thank you, Mr. Chairman. First of all, I want to
say how very, very sorry I am that Congressman Rothfus has
left, insofar as his arrival renders me no longer the 61st most
senior member out of 61 members of this committee. I welcome
him.
Chairman McHenry. Congratulations. I sat next to Debbie
Wasserman Schultz on your side of the aisle. That was my first
seat--
Mr. Heck. Peas in a pod.
Chairman McHenry. Yes. And so, I will give you back your
time.
Mr. Heck. It is all right.
Mr. Alvarez, in your submitted testimony you said the
following: Our goal in working with other U.S. regulators and
our counterparts around the world is to produce a well-
integrated set of rules and supervisory practices that
substantially reduce the probability of failure of our largest,
most complex financial firms and that minimizes the losses to
the financial system and the economy if such a firm should
fail.
These steps also force large firms to internalize the costs
that their failure would impose on the broader financial
system, minimize the advantage these firms enjoy due to market
perceptions of their systemic importance, and give the firms
regulatory incentives to reduce their systemic footprint.
My question, Mr. Alvarez, is if your objective is to manage
the regulatory process to reduce the advantage in the
marketplace, I assume that you have some quantifiable notion as
to what that advantage is that you are trying to manage to, and
I would ask you to talk about that if you would, please, sir.
Mr. Alvarez. We do not have a quantitative measure that we
are managing to, as far as the advantage that a firm might
have. In fact, I think the way we think about it is we are
trying to make the--the overall objective is to end ``too-big-
to-fail'' and to make firms more resilient against failure even
in bad economic times. There are various ways you can measure
the kind of subsidy that firms get or have--
Mr. Heck. Do you have a range? Can you look at a range?
Mr. Alvarez. You can look at CDS spreads. You can look at a
variety of different metrics of that. And we are concerned that
they have a subsidy, and we are trying to eliminate that
subsidy by imposing higher capital requirements, which cost the
firms some money and makes them more resilient against failure.
We are trying to reimpose liquidity requirements, which make
them more resilient against failure, but also come with a cost.
Those things all reduce their subsidy.
But the goal here isn't just to eliminate the subsidy. The
goal here is to make the firms more resilient. And what I have
in mind here is, even if you reduce the subsidy to zero, the
failure of these large firms will have a cost on society. And
so we want to minimize the potential that society will have to
bear the cost of a failure of an institution. Even if they put
it through OLA, it will have ramifications for the economy, and
you want to minimize as much as possible that failure.
So that would indicate you should have prudential
requirements and financial stability requirements that may be
greater than would be necessary to eliminate the subsidy. We
want to get instead to making them as resilient as possible
while allowing them to operate efficiently. So that is why we
focus less on the--we do not manage to the elimination of that
subsidy.
Mr. Heck. Your point here, however, in your presented
testimony is that it would in fact minimize--
Mr. Alvarez. It does do that.
Mr. Heck. --the subsidy, but if you don't know how large it
is, how will you know whether or not it has been minimized?
Mr. Alvarez. There is a variety of ways to look at how it
is being reduced. For example, as we have begun already with
Dodd-Frank, we have noticed that the uplift that the credit
rating agencies give to large firms, so the subsidy they get on
the credit rating side, has been reduced. So that is one thing
we will look at.
My point is that, suppose we eliminate the credit rating
uplift altogether? Does that mean, and I took your question to
mean you have now managed to get rid of that subsidy. Should
you stop? And at that point, I think we have to assess whether
there is another goal, and the goal is the protection of the
financial system.
Mr. Heck. Understood. Thank you, sir.
Chairman McHenry. I thank my colleague. And without
objection, we will have 5 additional minutes of questioning on
each side. Thank you. And so with that, I will recognize myself
for 5 minutes.
Mr. Alvarez, since you are a representative from the
Federal Reserve, I will ask you a question. I sent Chairman
Bernanke a letter dated March 20th and asked for a response by
April 3rd. We had spoken with the Federal Reserve's legislative
affairs staff on April 9th. They said the response has not been
finalized, and they would advise when it is ready. Any ideas on
when this response will be ready?
Mr. Alvarez. So this is the letter that you have written
on--
Chairman McHenry. I will give you the details. Yes. I wrote
Chairman Bernanke to get more information on the analysis
relied upon by the Justice Department making prosecutorial
decisions in cases involving large financial institutions.
Governor Powell testified before the Senate that the
Justice Department asked the Federal Reserve for information
about whether certain statutes would inhibit investment
activity in a company that was convicted of a felony.
In my letter, I asked Chairman Bernanke to provide the
names of persons who were contacted within the Federal Reserve
from the Justice Department, and furthermore asked for who
contacted them within the Justice Department. We have very
little information on that, so we are just trying to nail down
what this question that my colleague, Mr. Cleaver, asked about
in terms of Attorney General Holder's comments that certain
institutions were just, in essence, were a lot deemed as too
big to jail.
Mr. Alvarez. I will look into that as soon as I get back.
Chairman McHenry. Okay.
Mr. Alvarez. And I will get you a response right away.
Chairman McHenry. I certainly would appreciate it. And
since you are a representative of the Federal Reserve, I felt
the obligation to ask you.
Mr. Alvarez. I would be happy to do that. Thank you very
much.
Chairman McHenry. By any chance, have you been contacted by
the Justice Department on this issue?
Mr. Alvarez. I have not personally been contacted by the
Department of Justice. I will say I talk to them all the time
about a whole variety of matters, but, no, I haven't been
contacted by them.
Chairman McHenry. Okay. And is there anything that would
prevent the Federal Reserve from providing economic analysis
for the Justice Department on this issue of prosecuting large
financial institutions?
Mr. Alvarez. We share a lot of information with the
Department of Justice. If they asked for some information like
that, we would do our best to provide them what we could.
Chairman McHenry. Okay. And would you recommend that the
FSOC or the OFR instead perform this type of analysis for the
Justice Department?
Mr. Alvarez. I think actually all the agencies should
cooperate with the Department of Justice whenever they are
asked by the Department.
Chairman McHenry. That is a good ``lawyerly'' answer.
Mr. Alvarez. It is a very difficult job to do, and we
should help them.
Chairman McHenry. Okay. So, I covered those areas in
particular. Now, I do want to just ask briefly about a
deficient living will. Has the Federal Reserve determined what
a deficient living will is?
Mr. Alvarez. We have been through one round, so far.
Chairman McHenry. With how many institutions?
Mr. Alvarez. With 11 institutions.
Chairman McHenry. Okay.
Mr. Alvarez. And we are just now starting our second round
with those same 11 institutions. I think we all learned a lot
from the first round. The firms have been taking this very
seriously. They have been very diligent in responding to our
questions and providing information, and they have provided
thousands of pages of information. So this has been a good
process, from our perspective. We have learned quite a lot from
the institutions, and we think the firms are giving us the
information that we are asking them for.
Chairman McHenry. Okay. Within this provision, there is the
question of it is deficient if it is not credible.
Mr. Alvarez. Right.
Chairman McHenry. You have two different cases here that
would not result in orderly liquidation under the Bankruptcy
Code.
Are those different standards, just in your opinion, Mr.
Osterman?
Mr. Osterman. I think they can be. The statute reads
``or,'' so, credibility could be, for example, in the guidance
we put out just yesterday, talks about certain assumptions. You
can't rely on provision of extraordinary support from the
United States, for example. If we had a plan that did rely on
that, it wouldn't be credible.
And then in terms of resolution under the Bankruptcy Code,
there it is pretty clear we are looking at how the institution
would be resolved. If resolving it under the Bankruptcy Code
meant that we would need our special powers to do this in order
to avoid impact on financial stability. If our special powers
aren't needed, then it would meet the standard. If they are,
then it would not.
Chairman McHenry. Is liquidity a part of that, though? If
it is being resolved under the Bankruptcy Code, you have to
have liquidity support to keep the institution going. So is
liquidity a part of that?
Mr. Osterman. Yes.
Mr. Wigand. Yes. It certainly would be a factor,
absolutely.
Chairman McHenry. Mr. Alvarez?
Mr. Alvarez. Yes. Absolutely. We asked for a lot of
information on liquidity even at the entity level throughout
the organization.
Chairman McHenry. Okay. So being resolved in a Bankruptcy
Code and a requirement within the living will has to be some
capacity for liquidity support as they are unwound under the
Bankruptcy Code, or resolved.
Mr. Wigand. More specifically, what is required is for the
firm to outline how they will handle the liquidity management
of the bankruptcy process. We aren't asking the firms to
specifically identify where that liquidity support will be
drawn from, but it is a liquidity analysis to indicate how the
firm can unwind itself or go through the bankruptcy process
without posing systemic consequences. It is a very case-by-case
analysis because of the different business models these
institutions operate under and their needs for liquidity and
how their strategic application of the bankruptcy process
affects both the sources of liquidity and the demands for it.
Chairman McHenry. Any objection to that, Mr. Alvarez?
Mr. Alvarez. [Nonverbal response.]
Mr. Green. Mr. Chairman, allow me, as ranking member, to
note that we are 6 minutes and 31 seconds into your 5 minutes.
Chairman McHenry. I appreciate that. I certainly was
generous with the ranking member and would endeavor to do so in
the future. And with his kindness, I now give him 6 minutes and
39 seconds. The gentlemen can use it up.
Mr. Green. No, sir. I will return some of it to you.
Let me start with you, Mr. Alvarez. You were very kind, and
I appreciate the way you responded to the chairman's inquiry
with reference to a letter to the Chairman of the Fed. My
suspicion is that you don't maintain his calendar. Is that a
fair statement?
Mr. Alvarez. That is definitely true.
Mr. Green. My suspicion is that you don't write his letters
or respond to his letters. Is this correct?
Mr. Alvarez. Sometimes, I do.
Mr. Green. Is it a fair statement that the best person to
ask about a letter written to Mr. Bernanke might be Mr.
Bernanke?
Mr. Alvarez. I am happy to take the message back and look
for it, get a response to the letter.
Mr. Green. I understand. But nothing precludes the
chairperson from talking to Mr. Bernanke or contacting Mr.
Bernanke about his inquiry. Is that a fair statement?
Mr. Alvarez. That is true, but I would rather take the
message back than to disturb both of them.
Mr. Green. I appreciate your doing so.
Now, let's go back to the living wills. The living wills
have a specific purpose. They are to give us some insight as to
how one of these mega-corporations can be wound down. Is this a
fair statement, Mr. Alvarez?
Mr. Alvarez. Yes. That is right.
Mr. Green. Does anyone differ on that?
Mr. Wigand. No.
Mr. Osterman. No. We agree.
Mr. Green. And the living will also, as you have indicated,
while it does not directly relate to the notion of an
institution being a grave threat, but you can get some insight
into how it would have to be wound down, and as a result you
can understand the complexity of the institution and it would
help you to understand whether or not it can become a grave
threat if it is not properly capitalized or if it is not
properly adhering to certain standards and regulations. Is that
a fair statement?
Mr. Alvarez. Yes, sir.
Mr. Green. So what we are trying to do is give the American
public the same level of confidence in these mega-institutions
that we have given in banks by using the FDIC. And that is what
Dodd-Frank hopes to accomplish, and I believe it is
accomplishing this.
Are we better off with Dodd-Frank than without it, Mr.
Alvarez?
Mr. Alvarez. We certainly have gotten some very useful
tools in Dodd-Frank that I think were tools we asked for and
tools that we think will help us to make firms more resilient.
Mr. Green. And do you agree, the other two witness, please?
Either of you can respond, one at a time.
Mr. Wigand. Yes. We believe there are tools that are
available as a result of the financial reform legislation that
the government did not have before, and that these tools can be
used both to reduce the likelihood that one of these companies
will fail and to lower the cost in the event that one of these
companies fails.
Mr. Osterman. I agree.
Mr. Green. And let's just quickly look at some of the
tools. You have enhanced capital requirements. Is that a fair
statement? You can do this?
Mr. Wigand. Yes.
Mr. Alvarez. Yes.
Mr. Green. New liquidity requirements?
Mr. Alvarez. Yes.
Mr. Green. Enhanced prudential regulations for large banks?
Mr. Alvarez. Yes.
Mr. Green. A new resolution process for systemically
important financial institutions, these SIFIs, as they are
called?
Mr. Wigand. Yes.
Mr. Green. Required resolution plans, the living will;
capital surcharges on systemic firms; proprietary trading ban
through the Volcker Rule; size limits and restrictions on
mergers. So you have these new tools that you can impose and
that you can use, and these will help you to prevent an
institution from failing and, in the process, causing the
entire economic order to have a downturn. Is that a fair
statement? If properly used.
Mr. Alvarez. Yes. I think I would caution--
Mr. Green. Yes, sir.
Mr. Alvarez. --that doesn't mean no firm will fail. We
can't make it absolutely certain that no one will ever fail.
Mr. Green. No.
Mr. Alvarez. But that is why the OLA is an important tool
as well, the orderly liquidation authority.
Mr. Green. Right. No guarantee that you won't have a
failure, but what you can do is try to minimize the impact that
it will have on the economy. Is that a fair statement?
Mr. Alvarez. That is right.
Mr. Wigand. Yes.
Mr. Green. All right. I thank you for your attendance
today. And I am absolutely convinced that Mr. Bernanke will
have an opportunity to come before us and respond to questions
that are of concern. Thank you very much.
Chairman McHenry. I thank the ranking member. And I guess,
at the ranking member's request, the natural request would be
if the Chairman of the Federal Reserve would come before this
subcommittee. Now, I am smiling, because your head of
Legislative Affairs is giving a very wry smile to that.
But I thank you all for your--
Mr. Green. Mr. Chairman, if I may. Since you bothered to
give a commentary, I would like to give one. My comment was if
that he might go before the committee, and you are a part of
the full committee and you will have your opportunity to ask
your questions when he is before the full committee.
Chairman McHenry. Great.
So, I thank the witnesses for testifying today. And I want
to thank the three of you for your service to your government
as civil servants. I thank your staffs as well for the
preparation today.
Oversight is very important, and we are trying to
understand the components of Dodd-Frank and actually have a
deeper conversation. This is the first hearing about Sections
121 and 165. We learned a few things today. One in particular
is that the Federal Reserve has not defined grave threat nor
the metrics of measurements.
Mr. Green. Mr. Chairman, if I may, a point of inquiry: Are
we giving summaries, each of us today, as to what we have
ascertained from this hearing?
Chairman McHenry. Well, if the ranking member doesn't wish
to hear what the next hearing is, then I will stop right here,
and thank the witnesses for their testimony.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And without objection, this hearing is now adjourned.
[Whereupon, at 4:45 p.m., the hearing was adjourned.]
A P P E N D I X
April 16, 2013
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