[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE ANNUAL REPORT OF THE OFFICE
OF FINANCIAL RESEARCH
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 5, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-63
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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:
February 5, 2014............................................. 1
Appendix:
February 5, 2014............................................. 31
WITNESSES
Wednesday, February 5, 2014
Berner, Hon. Richard, Director, Office of Financial Research
(OFR), U.S. Department of the Treasury......................... 4
APPENDIX
Prepared statements:
Berner, Hon. Richard......................................... 32
Additional Material Submitted for the Record
McHenry, Hon. Patrick:
Letter to the SEC from Better Markets, Inc., dated November
1, 2013.................................................... 43
Letter to Hon. Patrick McHenry and Hon. Al Green from the
U.S. Chamber of Commerce, dated February 4, 2014........... 55
Letter to the SEC from the Vanguard Group, Inc., dated
November 26, 2013.......................................... 58
Maloney, Hon. Carolyn:
Letter to Hon. Richard Berner dated August 18, 2011.......... 68
Letter to Hon. Gene Dodaro dated August 23, 2013............. 70
THE ANNUAL REPORT OF THE OFFICE
OF FINANCIAL RESEARCH
----------
Wednesday, February 5, 2014
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Patrick T.
McHenry [chairman of the subcommittee] presiding.
Members present: Representatives McHenry, Fitzpatrick,
Duffy, Hultgren, Wagner, Barr, Rothfus; Green, Ellison,
Maloney, Delaney, Sinema, and Beatty.
Chairman McHenry. This hearing of the Subcommittee on
Oversight and Investigations will come to order. Today, we are
pleased to welcome the Director of the Office of Financial
Research for the annual report of the Office of Financial
Research, a statutorily required element of the Dodd-Frank Act.
And without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
I will now recognize myself for 5 minutes for an opening
statement. As a creation of the Dodd-Frank Act, the Office of
Financial Research (OFR) was established with the promise of
being an independent, transparent, and apolitical agency that
would be able to identify systemic risks to the economy and
emerging threats to the financial stability of the United
States; yet 3 years later, OFR has failed to provide useful
information about the biggest risks facing our economy.
In the 2013 annual report, OFR delivers narrative
descriptions of a variety of activities, policies, financial
products, and financial institutions which it maintains pose a
threat to the economy. However, it does not prioritize any of
these risks, making it incredibly difficult for policymakers to
determine which risks are considered the most pressing and
demand immediate attention.
Just last week in The New York Times, Simon Johnson, the
former chief economist of the International Monetary Fund,
described the annual report as ``not impressive,'' saying, ``It
read like some of the less informative systemic risk
assessments that we saw prior to 2007.''
This past September, the credibility of OFR's systemic risk
analysis was called into question upon the release of the Asset
Manager's Report, which critics panned as a study that
reflected a fundamental lack of understanding of the asset
management industry. I concur.
And the criticism did not come from industry trade
associations and asset management firms alone. In fact, left-
leaning financial advocate group, Better Markets, said through
one of their leaders, Dennis Kelleher--in a comment letter to
the SEC, he said, ``Rather than focusing on the known systemic
risks which materialized just 5 years ago, which inflicted
widespread economic wreckage across the country, OFR chooses to
take aim at the asset management buy side of the financial
industry, which, by comparison, presents much lower risk and
played no role or virtually no role in the most recent
financial crash.''
The former chairman of this committee, Barney Frank--whom I
do not often quote--said about the asset management report,
``It just seems to me a listing of possible horror stories with
no indications that there was any significant likelihood of any
of it happening.''
Certainly, Barney said it with a little more flair than I
just gave you and certainly a lot faster, but having said that,
Dr. Berner, the OFR was sold to Congress and to the American
people as an entity that would act as an early warning system.
Through the promise of topnotch research, OFR was expected to
help predict the next crisis. With an annual budget of roughly
$86 million this last year, the OFR really needs to show it is
a value to the American people, which to date you have failed
to do.
So, I appreciate you being here.
And I yield the balance of my time to my colleague from
Missouri, Ms. Wagner.
Mrs. Wagner. Thank you, Mr. Chairman.
Out of all the regulatory creations in Dodd-Frank, I am not
sure there is anything more troubling than the Office of
Financial Research. As if Americans needed yet another agency
collecting unlimited amounts of information from the American
public for bureaucrats to pore over, there is tremendous
concern that this agency will do nothing but misinform
regulatory decisions and increase the risk of crippling cyber
attacks.
Beyond these operational concerns, the OFR was created
under a false premise that regulators did not possess enough
information leading up to the financial crisis, but as any
well-informed autopsy of the crisis will tell us, it was lack
of will, not lack of information, which contributed to the
regulatory failures of the past decade. Or as one witness put
it to this committee at a 2011 hearing on OFR, ``The risk of
Fannie Mae could be seen on an abacus.'' It is therefore no
surprise that the OFR's recent report on asset managers was
greeted with criticism from all sides of the political
spectrum. And when you unite the left and the right these days
in opposition to what you are doing, it is fair to say
something is more than amiss.
I believe this to be an unnecessary and potentially
dangerous agency. And I think the question today should not be
what reforms could improve a fundamentally flawed agency, but
whether the OFR should be outright abolished.
I thank you, Mr. Chairman, and I yield back.
Chairman McHenry. We will now recognize the ranking member
of the subcommittee, the distinguished colleague of mine from
Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And thank you, Dr. Berner, for your testimony today. I
would also like to thank the staff for the exceedingly good job
that has been done in helping with the preparation for this
hearing.
Today's hearing is an opportunity to learn more about the
Office of Financial Research's work last year as well as what
we can expect from their 2014 agenda. By the end of 2007, the
top 5 banks had assets of $6.8 trillion or 49 percent of GDP.
Similarly, the top securities firms accounted for $3.8 trillion
or about 27 percent of GDP.
In the years leading up to the financial crisis, our
regulatory framework was simply unprepared to handle the
growing risk and eventual collapse of a large interconnected
financial institution. The financial crisis revealed
deficiencies in our understanding of the financial system,
including the extent of leverage, the migration of financial
activities to underregulated or lightly regulated markets and
entities, and the potential for disruptions to spread across
interconnected companies and markets.
The crisis also revealed that the data available to monitor
the financial system was too aggregated, too limited in scope,
out of date, or otherwise incomplete. Accordingly, Wall Street
reform created the Office of Financial Research (OFR) to
support the Financial Stability Oversight Council (FSOC) and
its member agencies.
The OFR's mandate includes standardizing financial data,
performing essential research, and developing new tools to
measure and monitor risk to the financial system. The OFR is
designed to complement the work of FSOC member agencies by
filling gaps in data and knowledge about the financial system.
As such, the OFR's 2013 annual report highlights the progress
we have made in reducing the risk in our financial system as
well as identifies areas where further information is needed.
OFR's report on asset management and financial stability is
consistent with its mandate to support the Council in its
efforts to identify and mitigate threats to financial
stability. The report was produced at the FSOC's request, which
asked OFR to examine how activities of the asset management
industry could transmit risk through the financial system.
Admittedly, OFR itself identified significant data gaps in
its report that limited a full evaluation of the industry.
However, OFR has since assured us that it will continue to work
with the Council member agencies to identify those gaps,
prioritize them, and assist the Council as it continues to work
to analyze the asset management industry.
We should be clear, Mr. Chairman, as to what this report is
and what it is not. It is not a green light to designate actors
in the industry as systemically important institutions. Rather,
it is a first step towards better understanding a critical part
of our financial markets.
The asset management industry provides important points of
access into capital markets for commercial investors and can be
an important piece of wealth building for the American middle
class.
Mr. Chairman, the FSOC and the Office of Financial Research
are central to the overarching objectives of Wall Street
reform, and they must be given the opportunity to refine their
research, rulemaking, and deliberative process.
We understand from the financial crisis that there was a
lack of collaboration and information sharing between the
regulators. Both the FSOC and the OFR are important to ensure
regulators are working together to monitor systemic risk.
Similar Councils have been formed in Europe, and if given time,
they should all work together effectively to ensure the global
financial system is not threatened as it was in 2008.
I yield back the balance of my time, Mr. Chairman, and
thank you for being generous.
Chairman McHenry. I certainly appreciate the ranking
member.
Today, we will hear from the Director of the Office of
Financial Research, Richard Berner. Prior to his confirmation
as OFR Director, Dr. Berner served as a Counselor to the
Secretary of the Treasury, with responsibility for standing up
the OFR. Before joining Treasury in April of 2011, Director
Berner was co-head of the global economics division of Morgan
Stanley, and previously served in senior positions at Mellon
Bank, Salomon Brothers, Morgan Guaranty Trust Company, and the
Federal Reserve Board, all fairly well-known institutions. And
Director Berner has won several economic forecasting awards as
well. He received his bachelor's degree from Harvard College,
and a Ph.D. from the University of Pennsylvania, again, other
well-known institutions.
Dr. Berner, you are familiar with the process of testifying
on the Hill. We have the lighting system, very simple for us
Members of Congress: green means go; red means stop; and yellow
means hurry up. So with that, we will give you 5 minutes to
summarize your written statement.
STATEMENT OF THE HONORABLE RICHARD BERNER, DIRECTOR, OFFICE OF
FINANCIAL RESEARCH (OFR), U.S. DEPARTMENT OF THE TREASURY
Mr. Berner. Chairman McHenry, Ranking Member Green, and
members of the subcommittee, thank you for the opportunity to
testify this afternoon on behalf of the Office of Financial
Research about our 2013 annual report. It is good to be back
here.
Let me take this opportunity to reaffirm two commitments:
first, to make the OFR a valued resource for Congress, the
Financial Stability Oversight Council, and the American people;
and second, to be transparent and accountable. Our annual
report and my testimony here are two of the ways we honor those
commitments.
Last March when I was here, I discussed our progress as a
startup organization. Today, we are not only standing on our
own, but we are making significant contributions to promote
U.S. financial stability.
This second annual report to Congress and our other work
described in the report are evidence of that. In my written
testimony, I discussed four key topics in our annual report:
monitoring and analyzing potential threats to financial
stability; data collection and analysis; data standards; and
data security. I would like to give you some highlights from
each of those.
Thanks to an array of policy measures and industry actions,
the U.S. financial system has grown stronger and more stable
since we issued our inaugural annual report in July of 2012,
however, threats to U.S. financial stability remain, and we
must remain vigilant.
To help identify and monitor those threats, we have
developed a new tool, our prototype financial stability
monitor. Our annual report discussed a first version, which we
will refine and improve over time. Our report identified and
analyzed eight threats to financial stability. Recent events
have thrown one of them into sharp relief. Emerging markets
have come under significant pressure and the stress has spilled
over quickly into global markets for other assets. We are
continuing to monitor these developments carefully.
Taking stock of existing data is necessary to fill data
gaps and to avoid duplication in data collection. To that end,
we recently published and will maintain an interagency data
inventory of data held by all Council member agencies.
Our report outlines several initiatives to improve the
scope and quality of financial data, including our work with
the Federal Reserve Bank of New York on data related to short-
term wholesale funding markets.
It is essential to analyze the data that we and others
collect. For example, our first look at hedge fund leverage
using aggregated data from foreign PF, which is collected by
the SEC and the CFTC.
Data standards are critical to improve financial data
quality. The OFR has led an initiative for a standard, called
the Legal Entity Identifier (LEI). Like barcodes for financial
transactions, LEI's benefit industry by helping to lower
reporting costs, they benefit regulators with better data for
policy decisions, and they benefit researchers with consistent
data for analysis.
We have worked with others in the Council to highlight the
need for another data standard, a single cradle-to-grave
standard for mortgage data, called the Universal Mortgage
Identifier. To be truly useful, data standards must be
universally adopted, so I have called on regulators in the
United States, and globally, to require use of the LEI and
other standards through regulatory rulemaking.
No objective is more important to us than keeping data safe
and secure. We have a multifaceted data security program that
builds on the security infrastructure of the Treasury
Department. We also have specific safeguards tailored to our
unique mission, as well as securities standards and policies
for acquiring, managing, and sharing data.
We want to be sure that you and the Congress are fully
informed about our work. I look forward to opportunities like
this hearing in the future. More broadly, we will engage with
you and your staffs to assure that our dialogue is frequent,
open, and informative.
Thank you again for inviting me here today, and I will be
happy to respond to your questions.
[The prepared statement of Director Berner can be found on
page 32 of the appendix.]
Chairman McHenry. Without objection, the witness' written
statement will be made a part of the record.
Dr. Berner, I sent you a letter dated in--well, actually,
in December of this year, and in my letter, I asked for
information about the individuals who contributed to the asset
management report and the relevant background and experience in
the asset management industry, and you responded, but you did
not answer that question. Furthermore, I also asked you to
provide a list and description of all the meetings that the OFR
held with representatives for the asset management industry in
preparing this report. Again, you acknowledged that you and
your staff met with folks from the asset management industry,
but you did not provide the information we requested. I am now
asking if you would be willing to provide that information.
Mr. Berner. Mr. Chairman, I would be happy to provide that
information, meet with you and your staff to provide that
information. If you felt our letter was not responsive, we want
to make sure that it is.
Chairman McHenry. I believe it was not responsive,
unfortunately. And I certainly appreciate your willingness to
have frequent conversations and dialogue. I just want to ensure
that the folks who wrote the report have the sterling
credentials or similar credentials that you do. And I know that
is an important part to make sure that when we have analysis of
data, that our government agencies provide sterling data and
sterling insight to that data.
Now, as a part of this, can you explain how policymakers
are supposed to act on the OFR's research if the OFR fails to
prioritize all identified risks?
Mr. Berner. Mr. Chairman, the annual report that we
presented identifies eight risks to financial stability. We
could probably enumerate some more, but those are the top
eight. So in that sense, we did prioritize what we thought were
the most important risks.
Chairman McHenry. So of those top eight, is there priority
of those top eight?
Mr. Berner. Mr. Chairman, when we think about threats to
financial stability, sometimes those risks are interrelated.
Indeed, when we looked at the top--the first three that we
enumerated, those are--as I indicated in my written testimony,
those three are related, and they are related to a fourth.
The basic theme there is that where market positioning is,
markets may be vulnerable to a sharp unexpected rise in
interest rates or in volatility.
Chairman McHenry. Sure.
Mr. Berner. And that is--there is a--
Chairman McHenry. Bloomberg--for instance, anyone can pay
the money to get a Bloomberg screen and know that level of
information.
Now, the question is the magnitude of these risks. So if I
were to ask you what is the single most significant risk to the
U.S. economy, what would you say?
Mr. Berner. That is a hard question, Mr. Chairman, because
when we think about financial stability, risks to the financial
stability, the reason we talk about threats is that many times
they don't come in 1's or 2's, they may come in several
flavors, and it is the combination of those threats when
exposed to a shock which can expose vulnerabilities in our
financial system that have an interplay among them, so it is
really difficult to say what the top risk is right now.
I would say that there are remaining vulnerabilities in our
financial system. One of the ones that we identify in the list
of eight relates to short-term wholesale funding markets, which
I alluded to in my comments a moment ago. That is a risk that
has been partly addressed by policymakers, but not completely.
Chairman McHenry. Okay. But in terms of the difficulty of
assigning a level of risk, I understand, but you have an $86
million budget and you are in--what you are supposed to do in
standing up this agency is to lay out those risks and
prioritize those risks, are you not? Aren't you a part of the
process to identify the next financial crisis so we can avoid
it?
Mr. Berner. Actually, Mr. Chairman, I am not sure that we
can identify when the next financial crisis will occur, nor can
we prevent financial crises. What we can do is identify what
the risks are to the financial system, where its
vulnerabilities are in order to inform policymakers about
strengthening those vulnerabilities and making our system
more--
Chairman McHenry. And you said as much before the Senate
Banking Committee a few weeks ago, a very similar quote, in
fact, that you can't predict the next financial crisis. So why
are we spending $86 million on an agency that can't do the
thing it is supposed to do? It is a basic question.
Mr. Berner. Mr. Chairman, the Dodd-Frank Act created the
Office of Financial Research--
Chairman McHenry. I am familiar. Yes, sir.
Mr. Berner. --to inform the Council and the American
people. We think that is exactly what we are doing. We think
that we are giving information to the Council and to the
American people in order to strengthen the financial system.
We learned in the financial crisis that it was exactly
those weaknesses that had not been immediately visible that
contributed greatly to the financial crisis. Our job is to help
strengthen those weaknesses.
Chairman McHenry. My time has expired, but I would say
this, that when Simon Johnson says that your annual report is
not impressive and it reads like some of the less informative
systemic risk assessments that we saw prior to 2011, that
should be deeply troubling to you, with your sterling academic
credentials. And you should be willing to correct that and to
improve that, and I hope you will.
With that, we will now recognize Mrs. Maloney from New York
for 5 minutes.
Mrs. Maloney. I thank the ranking member and the chairman
for calling this important hearing.
And I thank our witness.
The purpose of the Office of Financial Research--and I was
one of the contributors in authoring it--was based upon
language set forth in Dodd-Frank to collect industry trade and
transactional data for review and analysis to proactively
prevent any future meltdowns like we saw in the Great
Recession, and your Office was granted a sizeable budget to
achieve this goal. And I am going to read from the law right
now. It says your first duty was to collect data on behalf of
the Council and provide that data back to the Council and
member agencies; and secondly, to standardize the types and
formats of data reported and collected.
Can you get us in writing what data elements you are
collecting now? Are you sending that data back?
And also, one of the important parts of this bill, the
Office of Research, was that the data should not come from the
industry, because we had data from the industry that was
collected, and no one could perceive what happened in 2008. So
the data was supposed to be concrete actions, such as trades,
where you could really see what was happening. And so my
question is, what data have you collected and have you come out
with a standardized form?
A problem with the LEI, when do you expect to see the LEI
completed? What is the completion date? And as I understand it,
foreign areas are part of this, and they are refusing to
cooperate, so it seems to me it would be better to just collect
the data so at least you have something.
I do want to put into the record two letters that I sent to
the Office asking for responses in writing. I never received
any responses. Chairman McHenry, may I place in the record the
two letters that I sent? I would like you all to review them
and see if you would like to send your own letter. Maybe it is
because I am in the Minority, that I don't get an answer. Maybe
the Majority could get an answer.
Chairman McHenry. I would be happy to review that, and we
will include it in the record of this hearing.
Mrs. Maloney. Thank you.
Chairman McHenry. Without objection, it is so ordered.
Mrs. Maloney. So what data elements are you collecting now?
Mr. Berner. Congresswoman Maloney, thank you very much for
your question and thanks for your support for the Office.
We are actually in the process of collecting data through
other agencies, through financial market utilities. And, as you
know, the statute requires that we first make sure that the
data that we want to collect, the data we need to do our
analysis, that the Council needs to do its analysis are not
available elsewhere. So in order to do that, we have
constructed the data inventory, which I mentioned earlier,
which catalogues all the data held by all the Council member
agencies.
We are collecting in very granular form position and
transaction data related to OTC derivative transactions. That
is the first step. We are getting those data from a financial
market utility. Those data are being--
Mrs. Maloney. Have you made any contracts with anyone to
collect this data? How do you collect this data?
Mr. Berner. In the case of those data, Congresswoman, we
enter into a memorandum of understanding with the financial
market utility to collect the data, to use them for our
research purposes and to make sure that we keep them safe and
secure.
Mrs. Maloney. But the collection, if you are getting it--it
was our intent to get it from open trades that you know are
true as opposed to information that may be handed to you from
somebody in the industry that may not be true.
Mr. Berner. Right. And there are--
Mrs. Maloney. And I would like to also go to the LEI.
Nowhere in our legislation did we mention the LEI or did we
require an LEI. We were after raw, factual, independent data.
And I would like you to get back to me on what raw, factual,
independent data you are collecting. It appears that the trades
would be the best, that is what people in the industry tell me,
because that is a factual data element that you can track.
Mr. Berner. Congresswoman--
Mrs. Maloney. And the LEI is problematic, I am told,
because some people who don't have to comply are just not
complying, but let me ask one question on the LEI. When do you
intend to complete the LEI project and how much have you spent
to date on the LEI project, which we did not even require?
Mr. Berner. Congresswoman, the LEI is a great example of
data standards, which we are required to promote and implement
through the statute.
Mrs. Maloney. No. The statute does not mention the LEI.
Mr. Berner. It does not mention the LEI.
Mrs. Maloney. I read it. I wrote it. I was part of the team
who wrote it. We did not mention the LEI. We wanted independent
data elements.
Mr. Berner. Right. And when you talk about transaction
data, raw data elements, a good example of that would be the
data that we are working with the New York Fed to collect on
repo transactions, positions, position date that will be very
granular, as you describe it, true and accurate. We are working
hard to start out collecting those data and will do so, and we
will be happy to come back to you and report our progress on
that for you.
Mrs. Maloney. My time is up, but I would like to, in a
handshake of bipartisanship, with the ranking member's
permission, request that we come to your site. We would like to
see what--it has been, what, 3 years, where over 150 million
has been--what data elements are there? Can we come to your
Office and see how you are collecting it, where is it? And are
these bids, these contracts that are collecting it, are they
competitively bid? You have said you are getting the
information directly from the industry. We wanted it from
independent sources.
So, Mr. McHenry, would you join me in going to the Office
and seeing how they are collecting this data?
Chairman McHenry. Actually, if the gentlelady would yield,
and I will ask unanimous consent that the gentlelady has an
additional minute, if that is okay.
Mrs. Maloney. Thank you.
Chairman McHenry. And if the gentlelady will yield, I would
respectfully ask the Director, with the number of comments we
have received on the asset management report, and the question
the gentlelady has on this identifier, we have a number of
questions as Members of Congress, but I think that would be a
very helpful thing if the Director would be willing to sit down
with us on his site to show us what he is doing.
Mrs. Maloney. Thank you.
Mr. Berner. I would be happy to have you come to my site or
meet with you in your Offices or anywhere in between--
Chairman McHenry. Okay.
Mr. Berner. --Congressman.
Chairman McHenry. Thank you. And as a corollary to that,
would you be willing to have a public forum on the asset
management report?
Mr. Berner. We have been engaging publicly on the asset
management industry. We engaged publicly back in December at a
public forum on that. But I am always willing, always more than
willing to engage and to have more public forums, more
engagement with the industry, with you, and with the American
people on any subject, not just asset management.
Chairman McHenry. So that would be a qualified yes, then?
Mr. Berner. It would be a yes.
Chairman McHenry. Okay. Thank you.
Mrs. Maloney. Thank you, I yield back.
Mr. McHenry. Okay. I thank the gentlelady. We are the
Oversight Subcommittee. A note of bipartisanship is a very nice
thing. I want to thank my colleague for that.
We will now recognize the vice chairman of the
subcommittee, Mr. Fitzpatrick, for 5 minutes.
Mr. Fitzpatrick. I thank the chairman.
Director Berner, we all appreciate your testimony here
today, not just required by the Act, but we all find it very
helpful, both bodies, as we do our oversight, and where Mrs.
Maloney asked a series of questions about what kind of data is
being collected, provided to OFR, my questions have to do with
once that data is collected. What actions is the Office of
Financial Research taking to protect that data against
unauthorized disclosure?
As you are aware, Dodd-Frank requires the Office's
Director, and this is a quote from the Act, to ensure that the
data collected and maintained by the Office of Financial
Research's data center are kept secure and protected against
unauthorized disclosure. However, the annual report, which has
been provided to the committee, the 2013 report, provides
really no indication that OFR has achieved this data-protection
goal. For example, there is no detailed discussion on how OFR
is protecting its data from data breaches and cyber attacks.
There is no accounting of the cyber attacks perhaps that
OFR has experienced so far. The 2013 annual report does,
however, state that you have certain priorities for 2014. They
include collecting more data in a broad range of financial
activities and institutions, including the repo market,
securities lending, and asset management firms, as well as
implementing systems that can analyze and process large data
sets.
So, given these 20--first, I should ask, and I know that
you did in your written testimony provide some information on
data security, for instance, this is in the written testimony,
you say that technology is necessary but insufficient alone to
ensure security. So the systems we are building for data
acquisition, management, and dissemination are accompanied by
strict and clear rules for data security and data sharing.
It sounds like you are continuing to build the systems. Is
that correct?
Mr. Berner. Congressman, this is an ongoing process,
building data security. But I think we start from a very strong
foundation. As I indicated in my written testimony that you
just pointed to, we start with the governance from the Treasury
Department and we use their standards as a starting point for
our security systems. We build on that, using technology, using
governance, using protocols for access to information,
depending on the level of sensitivity of the information.
We have taken an active role. One of the aspects of keeping
data secure is making sure that when they are appropriately
shared, for example, with another Council member or agency on
the Financial Stability Oversight Council, that they are kept
just as secure by us and by the third party in the Council as
they are by the original provider of the data.
So all of those things are being worked on. I am pleased to
report to you that the process of engagement with the Council
on getting agreement on those protocols is well under way and
nearly complete, and that ensures that the controls which are
applied to data that one agency has will be consistent with all
the controls across the Council.
Limiting access to data, making sure that the right people
have access to the data, only those who need to know, that is
also important. The technology governs or controls that access
to some extent. But we build in the human element just to make
sure that there is a check and balance system so that nobody
has access to data they shouldn't.
Mr. Fitzpatrick. Given the fact that, it is, I guess you
could describe it as a work in progress, what kind of
assurances can you give either this committee or the original
owners of the data that supplied it were required to supply to
OFR that it is protected today? I understand that going
forward, there will be changes, there will be new protections.
How do we know it is protected today?
And the second question would be, if there has been a cyber
attack or if there has been an unauthorized disclosure of that
information how would we be notified? How would the owner of
the information be notified?
Mr. Berner. Congressman, as I indicated, we build on the
foundation laid by the Treasury Department. And the Treasury
systems have proven over a long period of time to be secure,
and so that is one example of that. I would be happy to sit
down with you and your staff to talk about the particulars of
these--
Mr. Fitzpatrick. Have there been incidents of unauthorized
access?
Mr. Berner. There have been no incidents of unauthorized
access, to my knowledge. But that does not mean that we can
take comfort that there would not be. We live in a world where
that is an everyday occurrence. We live in a world where we
need to safeguard--
Mr. Fitzpatrick. Right.
Mr. Berner. --and protect our data and we are taking every
step, every precaution to do that.
Mr. Fitzpatrick. If there was a cyber attack or an
unauthorized disclosure, how would we be notified and how would
the public be notified?
Mr. Berner. We would make sure that we follow appropriate
protocols to let the appropriate people know, including you in
your right to know as Members of Congress.
Mr. Fitzpatrick. I yield back. Thank you.
Chairman McHenry. We will now recognize Mrs. Beatty for 5
minutes.
Mrs. Beatty. Thank you, Chairman McHenry, and Ranking
Member Green.
And thank you to our witness, Dr. Berner, for being here
today. You have had a lot of questions about forms and data. So
let me just add another thread to that. In both the annual
report and in your written testimony, you talked about the new
tool the OFR can use to track changes in stability in domestic
financial markets, and that is the financial stability monitor.
One of the things I noticed as I looked at the five areas that
it also monitors, it is supposed to gauge the possible risks to
the market stability based on the data collected by OFR. But,
unfortunately, you mentioned that it only looks at the past and
the current data that exists.
So I guess when you talk about these forward-thinking
indicators, my question is, can you address to us or share with
us if you anticipate from researchers in your Office what kind
of future versions of this financial stability market do you
have in mind for what those indicators are?
Mr. Berner. Sure. Thanks for your question, Congresswoman.
It is a good question because it is very important that we
have more forward-looking indicators in any summary statistic
that looks at financial stability. So one of the ways to make
the indicators that we use more forward looking is to try to
incorporate the relationship between volatility in financial
markets, how much they move up and down and at what frequency,
and the leverage that financial market participants may use.
And there's theoretical work and empirical work which shows
that there is a relationship between those, namely the lower
the volatility, the more leverage that investors, market
participants are encouraged to use.
That has future consequences; we know that from the
financial crisis. That is one of the things we are trying to
build in to make the financial stability monitor more forward
looking in the future, and we are hard at work at that right
now.
Mrs. Beatty. And you mentioned the volatility. Do you have
confidence or believe that this financial stability monitor
will be able to accurately predict the instability based on the
current information we have? And if so, why?
Mr. Berner. It is a new tool. We are testing it. We are
looking to assess what information can come out of it. I want
to emphasize that no tool by itself is a failsafe indicator of
where threats may lie.
Obviously, tools are used to inform judgment. And that is
precisely the reason that we came up with this tool, because it
does provide a comprehensive look across the financial system
and across five key measures or buckets, if you will, of risk.
Those are functional buckets of risk. We think that they are
the right ones. Macroeconomic, funding and liquidity, market,
credit risk, and contagion, which expresses the extent to which
threats get transmitted across the financial system.
So we are working to improve it constantly. We are going to
be testing it. We are going to try to assess its validity and
its utility as a tool to inform our judgment.
Mrs. Beatty. In my last minute, let me shift, you talked
about risks, so let me ask you to address a different type of
risk. Also in the annual report, the OFR speaks of several
different currencies to the domestic financial market
stability, ranging from the risks of risk in the repurchase
market to exposure to duration risks. So we know we are now in
the month of February, and we are approaching our whole debt
ceiling date, and in your report you also talk a little bit
about the one-upsmanship, the brinksmanship in how we are
looking at this on our side of the aisle and on the other side
of the aisle.
So as we are approaching the borrowing limit authorized
under the deal to end the shutdown at the temporary raising the
debt ceiling, I reflect back on what happened last year. And so
I guess what I want to ask you is, as we approach this date,
and maybe we are looking at that we are not really accepting
the use of full faith credit of the United States as an
unacceptable bargaining tool for a whole host of reasons,
certainly by not anybody in this committee, but as we look in
the broader sense.
Can you tell us or prognosticate if we have this fiscal
policy brinksmanship and how it would disrupt the market or if
we wait until we get to the nth hour of looking at how we are
going to take care of our debt ceiling, where are we? We are in
February. We are getting close.
Mr. Berner. Congresswoman, thanks for your question. I am
going to answer briefly because I see that the time is running
out. But as you point out, the 2011 experience was instructive
in that regard, and provided us maybe a taste of what could
happen if we go down that road again. No two of these episodes
are alike, but I think we can learn from that experience that
markets don't like uncertainty and that the kind of
developments surrounding that event were disruptive to markets,
and indeed had some spillover into economic activity.
Mrs. Beatty. Thank you.
Chairman McHenry. We will now recognize Mr. Duffy for 5
minutes. And if I may ask that gentlemen to yield?
Mr. Duffy. Yes.
Chairman McHenry. Thank you.
Dr. Berner, have you been part of any Congress contingency
planning within Treasury? Has Treasury asked you to do any
research on this debt limit question?
Mr. Berner. Mr. Chairman, no, they have not.
Chairman McHenry. Thank you. I will yield back.
Mr. Duffy. So we are not speaking with data knowledge. And
I guess I am not going to go into the $17.3 trillion of debt
that we have and what happens to countries which experience a
debt crisis and what that does to their markets. Sure, it is
not very pleasant.
I want to go back to your collection of data and the
systems that you have in place to secure that data. I believe
that you testified earlier that the security portion is a work
in progress; is that true?
Mr. Berner. Congressman, I did say that. It is a work in
progress. And--
Mr. Duffy. And I guess, just quickly, I know that you are
currently collecting data, right? You are not waiting until you
have a great security system in place, you are actually
collecting it currently, yes?
Mr. Berner. Congressman--
Mr. Duffy. Are you collecting data?
Mr. Berner. We do have a very good security system in
place--
Mr. Duffy. My question is, are you collecting data right
now?
Mr. Berner. We are collecting data right--
Mr. Duffy. And you are directing data. And you are coming
in here and telling us that the security system isn't really
ready, it is a work in progress. You don't leave us a lot of
confidence in regard to the information which you are taking
and that it is going to be secure.
I am going to follow up on the vice chairman's comments.
Have there been any cyber attacks or data breaches on your
system?
Mr. Berner. Congressman, I prefer not to use those in a
public forum. If there have been any, not to my knowledge, as I
indicated, but I would be happy to come up and talk to you and
your staff both about the steps we are taking to continually
strengthen security, which is already strong, as well as the
possible risks that may arise from any attacks.
Mr. Duffy. I appreciate that. And I will take you up on the
offer to meet with me privately. I know there could be some
concerns about bringing things up publicly. But in this public
forum, that also gives me concern that if there have been
security breaches or cyber attacks, that necessarily hasn't
been made public and hasn't been brought to our attention. And
so if there has been data that has been compromised, it goes
back to, I think, the chairman's earlier point. Is there a
system in place to actually let people know that there are
breaches and that there are cyber attacks that potentially have
been successful?
And I know you have referenced, I believe, Treasury and
their standards. You couldn't really articulate them for us,
and we are going to ask you on a whole wide range of issues,
and you can't be prepared on everything, I am sensitive to
that. I wish you would be able to tell us about the security
that you have in place. And the process you have that is
available to notify individuals and Congress of those breaches.
Are you currently collecting information from firms and/or
consumers?
Mr. Berner. Congressman, we are not collecting information
from firms, with one exception.
Mr. Duffy. Okay.
Mr. Berner. In serving the needs of the Financial Stability
Oversight Council and in a ministerial role, as an agent role,
for the Council's non-bank designation process, we have been
asked to collect data to support that process from firms.
Mr. Duffy. Do you have plans to collect consumer
information in the future?
Mr. Berner. Congressman, consumer data are not our focus in
the Office--
Mr. Duffy. That is not my question. Do you have plans to
collect--
Mr. Berner. We have no current plans to collect any
consumer data.
Mr. Duffy. And in regard to the universal mortgage
identifier, are you going to be collecting mortgage
information? I know you are working with the CFPB on this.
Mr. Berner. Actually, Congressman, our role in the
universal mortgage identifier was to provide conceptual
information. We produced a concept paper, which is a paper on
our Web site. And the purpose of that was to articulate the
standards and the protocols that would be used in a universal
mortgage identifier. Mortgage data would be collected by the
primary regulator for housing finance, for example.
Mr. Duffy. To be clear, you are just going to set the
standards? You are not going to be involved in the collection
of data?
Mr. Berner. We have no current plans to collect any
mortgage data.
Mr. Duffy. Okay. But you are working on the universal
mortgage identifier to be used by the CFPB. Is that your
testimony?
Mr. Berner. My testimony is that we are using--we are
working on the universal mortgage identifier conceptually to
assist the CFPB, to assist the FHFA, and the Council in
general.
Mr. Duffy. I just want to be clear--other agencies are
collecting the consumer information, which we are aware of, we
have talked to the CFPB about this.
Mr. Berner. Right.
Mr. Duffy. But not yours?
Mr. Berner. That is correct.
Mr. Duffy. Okay. I yield back.
Chairman McHenry. I thank my colleague.
And I will now recognize the ranking member for 5 minutes.
Mr. Green. Mr. Chairman, I ask unanimous consent to reserve
my time.
Chairman McHenry. Without objection. The gentleman will
reserve his time.
We will now go to my colleague from Missouri, Mrs. Wagner.
Mrs. Wagner. Thank you, Mr. Chairman.
Director Berner, did the OFR originally plan on releasing
its asset management report to the public?
Mr. Berner. Congresswoman, when we got the request from the
Council to prepare our report, it was actually to prepare to
study the asset management industry. Subsequently, we believed
in the interest of transparency and accountability.
Mrs. Wagner. That is a yes-or-no question. Did you
originally plan on releasing this report?
Mr. Berner. We always want to be transparent and
accountable and publishing the report on our Web site is one
piece of evidence of that.
Mrs. Wagner. The OFR spent about 18 months working on the
asset management report; is that correct?
Mr. Berner. Actually, Congresswoman, the Council, starting
with a process in the interagency working group on the asset
management industry, started working on looking at the asset
management industry even before that. So, our work is a
continuation of that work.
Mrs. Wagner. During the time, did the OFR make it clear to
asset managers that the report would be made available to the
public?
Mr. Berner. I'm sorry. Could you repeat the question?
Mrs. Wagner. Did the OFR make it clear to asset managers
that the report would be made available to the public?
Mr. Berner. We said that decision was up to the Council. We
presented our work to the Council, and we asked the Council if
they would like to publish the report. They said yes, and we
agreed.
Mrs. Wagner. I am going to go back one more time. Did you
originally plan on releasing the asset management report to the
public?
Mr. Berner. Congresswoman, the report was requested, the
study was requested by the Council. So the--
Mrs. Wagner. Yes-or-no answer.
Mr. Berner. Any decision--
Mrs. Wagner. Was it originally planned that you were going
to release this management report? Asset management report?
Mr. Berner. Congresswoman, any decision on that score was
really, since this was something requested by the Council, was
the Council's decision.
Mrs. Wagner. Taking back my time, exactly when did OFR
decide to make the asset management report publicly available?
When?
Mr. Berner. The OFR decided after we talked to the Council
and the Council agreed to make the report public.
Mrs. Wagner. Can you provide us with a date or at least a
specific month when that decision was made?
Mr. Berner. I believe it was in early September, about 3
weeks before the report was released.
Mrs. Wagner. In early September, 3 weeks, is when the
decision was made to make this public?
Mr. Berner. The decision was made by the Council to release
the report and make it public. The Council had to review the
report before they made that decision. We presented the report
to the Council. It was the Council's decision. And they made
the decision to--
Mrs. Wagner. One more time: Did asset managers know that
this report would be made available to the public?
Mr. Berner. When we engaged with asset managers, we told
them that all of our work would be transparent and open and
made available to the public at an appropriate time.
Mrs. Wagner. Dr. Berner, last week, before the Senate
Banking Committee, you said of the asset management report,
``We engaged the SEC almost from the start because they are the
primary regulator for most of these companies and they had the
expertise long acquired to look at these companies.''
But as you know, the SEC took the absolutely unprecedented
step of opening up the OFR report to public comment. Why
shouldn't Congress interpret this as a sign that there was very
little collaboration or agreement between the OFR and the SEC?
Mr. Berner. Because, Congresswoman, there was robust and
longstanding collaboration between the OFR and the SEC, indeed,
between the OFR and all members of the Financial Stability
Oversight Council.
Mrs. Wagner. Why would the asset management industry and
some financial reform advocates submit dozens of long comment
letters to the SEC if they believed that their input was
included in the asset management report?
Mr. Berner. Congresswoman, I can't speak for them. I can
only speak to the fact that we have every interest in being, as
I indicated, transparent and accountable. That is precisely why
we posted the report on our Web site for public review.
Understand that the report was produced in the sense that we
are a research and data organization. Our job is to inform the
Council. We put the report on our Web site fully expecting--
Mrs. Wagner. That is great. I appreciate that, and I really
appreciate your trying to work towards transparency. And in
that vein, will you commit to providing this committee, in
writing, a record of all the meetings that you or OFR staff had
with the SEC and who was present at those meetings, please?
Mr. Berner. I am happy to sit down with you and provide
that information.
Mrs. Wagner. Will you provide that to the committee,
please?
Mr. Berner. Yes, I will.
Mrs. Wagner. Thank you. I appreciate that.
One other thing, since I have a little bit of time left.
Looking at the report, the report has listed so many
incorrect things, misrepresentations. It lists an incorrect for
Fidelity's highest level asset manager and its entity and
misreports the amount of its assets under management,
improperly classified Vanguard's structure, and misreported the
amount of assets under management for PIMCO. Thankfully, the
Securities and Exchange Commission provided stakeholders with
an opportunity to point out these careless mistakes. Director
Berner, don't you agree that such carelessness is just
indefensible?
Mr. Berner. Congresswoman, there are no errors in our
report, save for one chart that has been mislabeled, and we
have examined every comment, every letter, every submission,
and every claim of mistakes in our report and have found none.
Mrs. Wagner. I believe I am out of time.
Chairman McHenry. I ask unanimous consent to submit for the
record the comments of left-leaning financial activist group
Better Markets, the quote by Dennis Kelleher that says,
``Rather than focusing on the known systemic risks of the OFR
report which materialized just 5 years ago, and which inflicted
widespread economic wreckage across the country, OFR chooses to
take aim at the asset management buy side of the financial
industry which by comparison presents much lower risk and
played no role or virtually no role in the most recent
financial crash.''
Without objection, that will be ordered.
And then, we have an additional comment from Vanguard that
I would submit for the record, which refers to an incorrect
classification of Vanguard as a non-deposit trust company
member within the OFR report.
And without objection, we will submit that for the record.
We will now recognize Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman. And welcome,
Director. OFR is projecting a staff, including permanent,
reimbursable, and detailed staff of 282 individuals in Fiscal
Year 2015. Could you explain for us the process OFR used to
determine that 282 was the right number of staff?
Mr. Berner. Congressman, we try to outline our workforce
plan, as we have done and are required to do under the statute
for the first 5 years of our existence, in a report to
Congress. By linking our plans for hiring to first our
strategy, our strategic goals, we outlined those strategic
goals first in our strategic framework for the first 2 years of
our existence, or from 2012 to 2014. It is now 2014. We are
taking a hard look at that because we anticipated that being a
start-up organization, we would need to revisit that strategic
plan and the goals that were contained in it.
We are in the process of doing that, so by 2015 I can
report back to you and talk about how we have revised those and
how they affect the way that we are hiring. The hiring is
linked to the goals and the way we carry out our mission. And
those two things are firmly connected.
Mr. Rothfus. OFR is outside the normal appropriations
process and has a sole principal, yourself. If you or another
OFR Director decided that OFR required, say, 1,000 or more
staff, could Congress do anything to stop you?
Mr. Berner. Congressman, we are subject to a number of
checks and balances and substantial oversight. I am required as
Director to consult with the Chairperson of the Council, who is
also the Secretary of the Treasury, on matters of budget, and
on hiring and compensation. So, there are checks and balances
there. Second, our budget is published in the President's
budget and so it is made public. I think that was referred to
earlier today.
Mr. Rothfus. But there is nothing that Congress can do to
limit the number of folks you would be hiring, or your budget,
for that matter?
Mr. Berner. We are also subject to oversight by the various
Inspectors General and by the Government Accountability Office,
which is an arm of Congress. And, in fact, when I was here 10
months ago, I testified on a report about transparency and
accountability.
Mr. Rothfus. But does that give Congress the authority to
set a limit on the amount of folks that you can hire?
Mr. Berner. There is substantial oversight.
Mr. Rothfus. There is oversight, but there is no limit, is
there?
Mr. Berner. There is substantial oversight, but we are
following the statute in the way that we proceed. And again, I
have accountability to you as a Member of Congress to report
back to you on exactly what we are doing and why we are doing
it.
Mr. Rothfus. OFR funds itself with assessments on industry
which are placed in its financial research fund. Dodd-Frank
Section 155(a)(3) allows OFR to request the investment of the
portion of the financial research fund that is not required to
meet the needs of the Office. Do you know the current balance
of OFR's investments?
Mr. Berner. Congressman, the way that the financial
research fund is set up, it funds actually not just the Office,
but also the Secretary of the Financial Stability Oversight
Council, certain activities of the FDIC to resolve large
complex financial institutions, and some other institutions. We
build into the process the idea in our assessment process which
was the subject of a Treasury rule that we would collect. Every
6 months, we would collect 6 months of operating expenses for
those entities and we would collect 12 months of capital
expenditures projected, because capital expenditures, as you
are well aware, can fluctuate, and are lumpy and hard to
predict. And so, we do have a balance. I will get back to you
with what is--
Mr. Rothfus. I appreciate that. We will follow up with you
in writing on that.
Mr. Berner. --in the fund currently. But that is the reason
that any funds accumulate. Because when you assess every 6
months, you don't spend the money immediately.
Mr. Rothfus. It is widely acknowledged including by you in
your annual report that U.S. Treasuries stand apart in terms of
their creditworthiness in the highly liquid markets in which
they trade, and that these attributes help tremendously in
periods of market volatility.
You have indicated that you are focusing on activities in
the asset management industry, and in doing so, what
consideration is being given and what steps are you taking to
preserve the deepest, most liquid market possible in
Treasuries?
Mr. Berner. Congressman, in our report on asset management,
we didn't really address any aspects of any particular market.
Rather, we focused on the activities of asset managers. The
breadth, depth, and liquidity of the Treasury market are
obviously a great asset to the United States. And you know--
Mr. Rothfus. Have you thought at all about the implications
on the Treasuries market of your scrutiny of asset managers?
Mr. Berner. We haven't linked those two things together
directly, Congressman. But in our annual report, we do have a
research study on financial market liquidity, particularly what
is called market liquidity, or the ability to transact. And
that study may inform some aspects of trading in the Treasury
market.
Mr. Rothfus. I thank the chairman.
Chairman McHenry. We will now recognize my colleague from
Kentucky, Mr. Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
And thank you, Mr. Berner, for your testimony today. As you
are well aware, the GAO in 2012 issued an audit of your agency.
That audit outlined concerns both of your agency and of the
Council. And one of those concerns was a lack of transparency.
I appreciate your testimony today and your commitment to
enhancing or improving your reputation as an Office for better
transparency. I do have a question related to that and the
asset management report that was recently released. If your
agency is committed to transparency, why did the Office not
allow for public comment prior to releasing the asset
management report?
Mr. Berner. Congressman, when we do research, we want to
make it available, and we look at a particular aspect of
financial markets. We post as soon as it is ready to be posted,
ready for public comment on our Web site. Seeking public
comment is not something that is part of that process. I would
tell you that when we do research, and when research is done
generally in finance and economics or any other discipline, for
that matter, it is common practice to make the research
available, to welcome comment on it.
That is why, in fact, people call papers ``discussion
papers'' or ``working papers.'' We have 12 of those on our Web
site. The whole purpose of doing that is to invite discussion,
debate, and to further the state of our knowledge by having
that discussion and debate.
Mr. Barr. If you are not incorporating the input from the
asset managers themselves, how can you have confidence in the
accuracy of the report? And as a followup, will you commit in
the future to accepting comments and incorporating those into
your reports?
Mr. Berner. Congressman, because we didn't seek public
comment the way that people do in rulemaking or the way that
was done by another agency on this report does not mean we
don't take seriously the comments that were made. We have
looked at every single comment, and we have looked at every
single issue that was raised in those comments.
We continue to look at those and we continue to welcome
comments on our work and as we work forward, and we think about
issues related to asset management and financial stability, we
are taking into consideration those comments as we go forward.
Mr. Barr. The bottom line is in that case, you did not take
into consideration those comments because you didn't make it
available for public comment prior to putting it out. And
according to the Treasury press release accompanying OFR's
asset management report release, the Council requested the
report in connection with the Council's review of non-bank
financial companies, indicating that the report would have a
direct bearing on future Section 113 non-bank SIFI
designations.
Will the OFR asset management report that did not take into
account the comments from the asset management industry be used
for purposes of SIFI designations.
Mr. Berner. Congressman, as you know, designation is a
policy choice of the Council, and I can't predict--I am a non-
voting member of the Council, but I can't predict what the
Council will do. Our job is to present information to the
Council for their information. We continue to do that, as I
indicated earlier.
And the Council may ask us for additional research and data
in the performance of their investigation into non-bank
designation.
I would point out to you, Congressman, that designation is
a firm-specific tool. We looked at the asset management
industry and the activities in that industry. We did not look
at particular firms. So we can't--you certainly could not use
the report by itself as an input into the designation process.
Mr. Barr. Let me just follow up with a point that was made
by Hester Peirce of the Mercatus Center related to this asset
management report and the potential unintended consequences of
applying bankcentric regulations for asset managers. She wrote,
``Attempting to fit the asset management industry into a bank
regulatory scheme might have the unintended consequence of
further homogenizing the financial sector so that it is less
able to meet investors' needs and more vulnerable to financial
market shocks.''
Are you concerned that your Office's asset management
report may be used to support the case that asset managers
should be subject to these bankcentric prudential regulation by
the Federal Reserve?
Mr. Berner. Congressman, we didn't indicate any preference
for any remedy to any threat that might arise in asset
management activities in our report, nor have we so indicated.
Really, when you look at our report, it was designed, again, to
inform the Council in its deliberations. What the Council
chooses to do with that is really the Council's decision.
I would also add that we highlight on the first page of the
report that asset managers and their businesses on their
activities are significantly different in significant ways from
those of other financial institutions, as we indicated.
So as I testified last week, we agree that asset management
activities and businesses are quite different from traditional
banking activities or, for that matter, other activities in the
financial markets and in the industry.
Mr. Barr. Thank you.
I yield back.
Chairman McHenry. We will now recognize the ranking member,
who is last at bat.
Mr. Green. Thank you, Mr. Chairman.
And I thank the witness again for appearing.
Mr. Director, do you report to FSOC? Is that correct?
Mr. Berner. Congressman, I don't report to FSOC. I serve
the needs of the FSOC. But I am accountable to, as dictated by
the statute, the Chair of the Council, who is the Secretary of
the Treasury.
Mr. Green. Thank you for that indication.
And is it true that you pass on your intelligence to FSOC?
Mr. Berner. That is correct, Congressman.
Mr. Green. And is it true that you don't make policy?
Mr. Berner. That is correct.
Mr. Green. You do get involved in some rulemaking for the
entity that you work with, but you don't set policy for FSOC;
FSOC determines what the policy is?
Mr. Berner. The only rulemaking that we get involved with,
and we haven't done that yet, will relate to data collection
when and if we prosecute the need to collect data from
financial firms. But so far we haven't done that. That is in
the future. But that is the only rulemaking in which we are
engaged. Other than that, you are absolutely correct, we don't
make policy and we don't make rules.
Mr. Green. There was some concern about the number of
employees as well as the budget. Is it true that you, meaning
your agency, are a creature of Congress; Congress gave birth to
you?
Mr. Berner. That is correct, under the statute.
Mr. Green. And there was a gestation period?
Mr. Berner. That is absolutely correct. We were, as I
testified last March when I was here and I noted today, then a
startup, still a start-up organization. Today, we are standing
on our own. And, we are delivering on our promise and our
mission.
Mr. Green. And is it true that in your world, what the
Congress giveth, the Congress can take away, blessed be the
Congress?
Mr. Berner. Absolutely, Congressman.
Mr. Green. Meaning, if the Congress decides it wants you to
have fewer employees, the same Congress that gave you life can
also limit your existence?
Mr. Berner. Congressman, if Congress decides to change the
laws, which Congress obviously has the power to do--
Mr. Green. We can change the laws. If we choose to, we can
eliminate your existence, your very existence. You are a
creature of Congress, you exist because Congress decided that
you should be there?
Mr. Berner. That is correct.
Mr. Green. So if we want to limit the number of employees,
we have that within our power?
Mr. Berner. That is correct.
Mr. Green. That is, we have conferred upon you the
authority to do what you are doing and that you cannot do more
than we have accorded you. Is that a fair statement?
Mr. Berner. That is true.
Mr. Green. Now, let's talk quickly about the LEI. Would you
just give me a brief overview of what the LEI is contemplated
to be and how you contemplate getting this up and running,
please?
Mr. Berner. The LEI is contemplated to be and in fact
already is a unique identifier that helps us identify parties
to financial transactions. So it assigns an identifier to the
legal entities within a company around the world.
Currently, after only 2 years of existence, really 3 years
since the LEI was simply a concept on the piece of paper, the
LEI is up and running on a global basis: 27 countries have been
involved; and 150,000 LEIs have already been issued, and more
are coming at a rapid clip.
Nobody is compelled to use the LEI at present. These are
all voluntary adherents, because this is so valuable to the
industry in improving the quality of the data that they use
that they report to us and to others, and to make it exactly
clear, where their exposures are.
Back in the crisis, as you know, many people were exposed
to particular counterparties, and they were not aware of that
because the names did not indicate that they were exposed to A,
B, or C; for example, Lehman Brothers. It turns out that had
the LEI been in use at that time, then they would have known
that exposure, they would have been better able to evaluate
that exposure. Likewise, for regulators, as I indicated.
It gives us better quality data for researchers. It gives
us better quality data. So earlier it was asked, when would the
project be complete. It is like a process of surveillance. It
is like a process of any other process that is ongoing, it is a
journey, not a destination. We are already well in train. This
process has not reached quite steady state yet, but the
governance around it and the technology around it and the
integrity of the process all are nearing completion.
Mr. Green. Thank you, Mr. Chairman.
And I will yield back.
Chairman McHenry. I thank the ranking member.
And I misspoke. Mr. Green wasn't the last at bat. That
would be Mr. Ellison from Minnesota, who is recognized for 5
minutes.
Mr. Ellison. Yes, sir. Thank you, Mr. Chairman.
And thank you, Ranking Member Green.
I won't be long, just a few questions.
I just want to say that I was in Congress in 2008, and I
will never forget the frantic calls we were receiving, the
difficulty of managing the whole financial crisis.
And, in my opinion, one of the things that we did was we
were responsive government. We passed the Dodd-Frank Reforming
Consumer Protection Act, which created your Office, and I think
that was a good thing.
I want to thank you for your public service, and I want to
express my appreciation for the work you and your staff are
doing. You are doing it in a difficult political environment.
Mr. Berner. Thank you, Congressman.
Mr. Ellison. You bet.
But I would like to just point out something that I think
you are doing that I think makes some sense. And so, let me ask
you about the Universal Mortgage Identifier.
Can you tell us about the idea behind it?
Mr. Berner. Yes, I can.
The idea behind the Universal Mortgage Identifier is to
fill a gap in our knowledge. We learned in the financial crisis
that despite the great volume of mortgage data available,
neither regulators nor market participants, nor, for that
matter, sometimes the people who originated the loans could
link first liens to second liens. So they couldn't assess where
the problems might lie. If you want to think about the sum of
those two things as representing the debt on a piece of
property, you couldn't identify those things.
As you know, in the depths of the crisis, when people were
trying to refinance their mortgages, they were not empowered to
do so by virtue of the fact that some of the second lienholders
were reluctant to let them do that to refinance their first
lien. So there were efforts and steps taken to combine them, to
refinance them as a package and so on. But the lack of
information made that process much more difficult, much more
complicated.
This proposal arose out of those difficulties, and it is
designed to provide on a secure basis, without identifying
personally identifiable information attached to the mortgage,
either first or second lien or other characteristics, the loan
from cradle to grave, as I indicated, and any other liens that
may be linked to it so that regulators have better information.
Mortgage originators, mortgage servicers, and investors who
invest in securitized mortgages all will have much better
information about the mortgages that are the underlying
collateral in those investments.
Mr. Ellison. It is a good idea. And in my own district--we
have more than 35,000 foreclosures in Hennepin County, in the
district I represent in Minnesota, and between 2007 and 2014,
thousands more homes in delinquency, and finding out who owns
the property can be a nightmare.
I think it is a good idea, and I applaud your
recommendation, and I hope that you are staying in touch with
us to help bring it into reality because I think it is an idea
with a lot of merit.
I would like to ask you about a particular area of research
that you might consider. So I am glad that the Office of
Financial Research partnered with the National Science
Foundation to sponsor research. It is important.
I have a question on your first grant, the one focused on
the real threat from high-speed trading in the financial
system. We have seen flash crashes. You might open the paper or
look around and see these things happen from time to time and
cause a lot of trouble.
Do you know if the research will include a comparison
between the impact and risk of high-speed trading of nations
with and without a financial transaction tax?
Because I am curious to know if these financial transaction
taxes actually have the effect of slowing high-frequency
trading?
And I am not asking you to opine an opinion. Of course, I
would welcome it if you do. But, really, I am asking: Is this a
research area that might be fruitful?
Mr. Berner. Let me answer your specific question,
Congressman.
The grant is funding research using U.S. domestic data.
Mr. Ellison. Okay.
Mr. Berner. It may and should yield insights into market
stability, working with large data sets in the area of
computing that needs to be undertaken, but tax policy is not
one of the factors that the researchers on this grant are
considering.
Mr. Ellison. Okay.
Mr. Berner. You raise a good question, though, and it is
something that perhaps we could sit down with you and your
staff and discuss.
Mr. Ellison. We would be more than happy to do that.
So, that yellow light means I have to hurry up, but I just
want to say that I am glad the report addressed the swaps
market. These $400 trillion markets were unregulated until
Dodd-Frank. Swaps markets contributed to the collapse of AIG
and others, which worsened the financial crisis.
I am out of time, but I just want to know as I wrap up--and
I will get your answer perhaps in writing--
Chairman McHenry. Yes. That would be great.
Mr. Ellison. Okay. Thank you.
So, we would like to talk to you about swaps at a better
time when there is more time.
Mr. Berner. I would be happy to sit down and talk to you
about the work that we are doing in collaboration with the CFTC
and, by extension, with the SEC on making sure that the data we
collect from swap data repositories and trade repositories has
the highest integrity and can be used for policy purposes,
monitoring purposes and research purposes.
Mr. Ellison. Thank you, sir.
Chairman McHenry. I am not too familiar with the rules of
baseball or the practice of baseball, but last at bat, then
last at bat, and now I might actually mean it with our
colleague from Maryland who just arrived.
Mr. Delaney is recognized for 5 minutes. Perhaps that means
that--what is the batting order where you are batting cleanup?
That actually might be you, Mr. Green, with the order of
things.
But Mr. Delaney is recognized for 5 minutes.
Mr. Delaney. Thank you, Mr. Chairman.
And thank you, Director Berner, for joining us here today.
I apologize for being late.
But I did have one question about asset managers. And
before I ask my question, I think it is fair for me to share
with you my views on the issue, which is I don't believe asset
managers should be deemed systemically important for a whole
variety of reasons.
And I understand that you are here in your capacity as
heading up the research component of this analysis; so, I want
to make sure my question is narrowly framed in that regard.
But I noticed in the report you identified certain
vulnerabilities with the asset management industry, or
potential vulnerabilities that the asset management industry
poses, and I was wondering--because, in my experience, asset
managers, particularly the large ones, have hundreds and, in
many cases, potentially thousands of different funds that they
manage either on a discretionary basis or in different kind of
structures with their investors, and the investors are
different in profile. Some are long term in their orientation;
some are short term in their orientation. Some have significant
limits of redemptions; some have very little limits of
redemptions. Some employ leverage; some don't. Some are
designed to be long in the market; some are designed to be
short in the market. Some are designed to be distressed in
orientation, et cetera.
And it seems to me, when you think about the asset
management industry, you have to almost disaggregate each one
of those funds individually and almost make a determination if
a fund itself is systemically important as opposed to the
firm's--firmwide, because my sense is the underlying activities
of all these funds at a minimum probably cancel each other out,
or in many ways the funds are--asset managers are inherently
hedged because they have all kinds of funds doing different
things with different types of investors.
And it just--to say that the asset management industry
presents vulnerabilities, it is almost like saying the market
presents vulnerabilities; in other words, it is a little
circular, because, in fact, these big firms represent the whole
of the market. And to observe that they--markets do panic. That
is a vulnerability, a psychological vulnerability, and that
just is human nature, and it is still reflected in markets. And
so to almost deem asset managers systemically important is
almost like saying the market is systemically important, which
is not a very productive statement.
And so, I am curious as to how you think about them when
you come to this conclusion that they have vulnerabilities. Did
you, in fact, disaggregate them, or did you take into
consideration the fact that they are structured the way they
are as opposed to with one balance sheet and one or two sources
of liquidity, which is typically what you find in banks, being
most the obvious example, or other balance sheet-oriented
lenders?
Mr. Berner. Congressman Delaney, I am really glad you asked
that question because it highlights something that is very
important about our study, namely, that instead of focusing on
firms, our analysis focused on activities as the basic building
block for the work that we did, and, as a consequence, we don't
focus so much on firms as specific activities, which actually
is very close to what you were just talking about in terms of
different funds have different objectives, employ different
degrees of leverage and other characteristics that are
different.
In fact, a basic conclusion of our report is that the
industry and activities in which it engages are diverse, the
business models of asset managers are diverse, the business mix
of asset managers is diverse.
And so, that is one of the reasons that we went to visit 10
asset managers who themselves represented a spectrum of
diversity across the industry to learn more about their
business mix and their business models, how they manage their
risk, for example, and all those things.
Our report concluded that activities was the best way to
focus on the industry, to look at the risks that might be found
in those activities rather than in firms. And, consequently, we
focused on some activities in particular, some where we lacked
information before we could come up with a more complete
judgment; for example, activities in separately managed
accounts--
Mr. Delaney. Right.
Mr. Berner. --second, in securities lending, and, in
particular, in the reinvestment of cash collateral in
securities lending, which is very close to a repo transaction,
and the unwind from which could look very much like the unwind
of a repo transaction; repurchase agreements used by asset
managers themselves in certain respects. And so those are some
of the things that we identified.
Mr. Delaney. I appreciate it. I just want to make one
comment before you--because we are running out of time here.
And I appreciate the response.
I would just make one suggestion as we think about asset
managers. Definitely if you have concentrated banks, and the
markets behave a certain way, and several banks dominate the
banking industry, their behavior will clearly result in
different outcomes in the market.
But it would seem to me that it would be interesting just
to think about asset managers, think about the asset management
industry and you--in one case there were several big ones, and,
in another case, there were no big ones, just small ones. My
suspicion is that, if you were to model that, the outcomes
would be no different in terms of how the markets would behave
because, in fact, again, they kind of reflect the market.
But I appreciate your answer. Thank you, sir.
Mr. Berner. That is an interesting question, Congressman. I
welcome the opportunity to talk to you about it further.
Mr. Delaney. Great. Thank you.
Mr. Berner. Thank you.
Chairman McHenry. I want to thank my colleagues for the
questions.
We will now have an additional round of questions. But by
prior agreement, I would ask unanimous consent that we have 5
minutes for the Majority side and 5 minutes for the Minority
side, at which point the hearing will end. So for our witness
to be aware of that is only right and just. Right?
I will now recognize Mr. Barr of Kentucky for 5 minutes.
Mr. Barr. Mr. Berner, I appreciate your indulgence for just
a quick second set of questions here.
The Dodd-Frank Act, as you are very familiar with this
provision, requires you, as the Director of the OFR, to report
and testify before the Senate Banking Committee and this
committee annually, which is what you are doing here today, but
statutorily to provide an assessment of the Office of
significant financial market developments and potential
emerging threats to the financial stability of the United
States.
In your annual testimony to the Senate Banking Committee,
Subcommittee on Economic Policy, I believe last week, you
testified that, ``when we think about the financial system, it
is very hard to predict financial crises. In fact, I am not
sure we can really predict crises.''
I am not suggesting that you are a fortune teller or that
your staff or the people who work with you can foretell all
emerging threats, but isn't this the statutory obligation and
responsibility with which your Office is charged? Aren't you
supposed to be able to do the best you can to identify these
emerging threats and predict financial crises?
Mr. Berner. Congressman, I am not a lawyer, so I am not
going to interpret the statute. But my read of my
responsibilities is that our job is to identify vulnerabilities
in the financial system that might give rise to, at some point
in the future, maybe the immediate future, threats that could
create risks of financial stability.
And so, by identifying those threats, those vulnerabilities
and the shocks that could expose them, without being able to
predict them, nonetheless, if we see that the vulnerabilities
are there, our job to you and our responsibility to you is to
identify those, to point those out, to point them out as weak
spots in the financial system that need to be strengthened.
Because if we have a stronger financial system, then whenever
the shock comes, if it does--and, again, I don't think we can
predict when that happens--that we will be more able to
withstand those shocks.
Mr. Barr. I appreciate that response.
But I suppose that, as an oversight subcommittee, our
responsibility is to make sure that--on behalf of the taxpayer,
that your Office, that your agency, is adding value, that you
all are actually contributing to the financial stability of the
United States by notifying the public, warning the public,
warning the Congress about emerging threats.
And so, in fulfilling your statutory responsibility here
today, please specifically identify the emerging threats that
you see which could potentially lead to a financial crisis.
Mr. Berner. Last week, I talked about three such threats. I
talked about the impact of a--perhaps a sharp and unanticipated
increase in interest rates or in volatility, given the current
market setting, given the environment in which we live, where
positioning in financial markets is not positioned for that. In
fact, what we have seen lately is a sharp decline over the past
few weeks in interest rates, given what is going on in emerging
markets.
But if there is a sharp increase in volatility or in rates,
that is one threat that we identified both at that hearing last
week and, also, in our annual report.
Second, I talked about the vulnerabilities that still
remain in short-term wholesale funding markets. Those are
issues that have been partly addressed. Particularly the
Federal Reserve and others have addressed some of those
vulnerabilities in the so-called triparty repo market, but we
really don't think that we have addressed all those
vulnerabilities.
That market in particular is still vulnerable to shocks
that could produce runs in fire sales, which were elements in
the recent financial crisis, which could play a role in any
future financial crisis. So, we need to strengthen that market.
Other aspects of short-term wholesale funding are important as
well.
And I identified a third risk among the many; that is,
vulnerabilities that come to us from outside our financial
markets, but which may exist in the global financial markets.
And I think we have seen play out in markets--not that I am
saying that this is currently a real threat to financial
stability--the tremors that have recently occurred in the
emerging markets that--
Mr. Barr. If I may reclaim my time, I hear your three
identified potential threats, and what I didn't hear in those
three threats was the failure to make certain SIFI designations
and that not being a potential threat.
Let me ask you one kind of final question about the role of
the OFR relative to FSOC.
In your written testimony, you say: The OFR report--the
annual report provides an independent assessment of the state
of the U.S. financial system, although we solicit impact--
solicit and incorporate feedback from the Council member
agencies and other subject matter experts. And then you all are
obviously providing information to the Council.
It appears to me that is a bit circular. And my question to
you is: What is it that you all do that cannot be performed by
the Council?
Mr. Berner. As you indicated, Congressman, we do provide an
independent view. We are interested in getting feedback not
just from Council member agencies, but from others in
performing that analysis and making that assessment.
We, for example, have a financial research advisory
committee, an independent group whom we don't pay, but who
comes to us because they are interested in providing us with
advice.
So we are interested in making sure that, when we make our
judgments about where the threats to financial stability are,
that they are based on facts, that they are based on solid
analysis. That is the counsel that we seek from outside, but
the judgments are ours.
Mr. Barr. Thank you for your testimony.
I yield back.
Chairman McHenry. We will now recognize the ranking member
for the final word.
Mr. Green. Thank you, Mr. Chairman.
And, again, I thank you, Mr. Director.
With reference to a statement from your report indicating
that the financial system is stronger today, yet there are
still some concerns that have to be addressed, the strength of
which you speak, is that, in part, related to Dodd-Frank? And,
if so, can you give some indication as to how Dodd-Frank has
had a positive impact on the financial system with reference to
its stability?
Mr. Berner. Congressman, yes, absolutely it is related to
some of the things that were mandated in Dodd-Frank. I would
point to the regulation of the derivatives markets which were
previously not subject to the kind of regulation that they are
today.
Transparency in those markets is essential, and Dodd-Frank
mandated several things that had to be done, such as clearing
of derivatives through a variety of mechanisms that would make
those markets more transparent, that would improve what is
called price discovery in those markets.
So the oversight in the derivatives markets, which
amplified the effects of the financial crisis when they
occurred, is a major accomplishment.
More fundamentally, I think that Dodd-Frank obviously is
consistent with the kinds of increases in capital requirements,
the proposed increases in liquidity requirements for a
financial institution, and last, but not least, the creation of
the Financial Stability Oversight Council so that regulators
across the financial system could share their insights, could
collaborate on implementing the things that were mandated by
Dodd-Frank, so that they can come together in a coherent way to
make sure that all those rules that came out of the
implementation were consistent with each other.
Mr. Green. I thank you for your testimony.
And, Mr. Chairman, I will yield back my time such that the
witness may be excused.
Chairman McHenry. I thank the ranking member. And I want to
thank my colleagues on the panel for their bipartisan note.
Director Berner, I want to thank you for your
responsiveness, and that is noted and appreciated.
I certainly appreciate your willingness to have the open
forum on the asset manager report, to respond to the
inadequacies that I outlined in your response to my letter, as
well as your response to Carolyn Maloney and Ann Wagner's
requests as well. I certainly appreciate that, and I thank you
so much for your testimony.
The Chair notes that some Members may have additional
questions for this witness, 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 this witness and to place his 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 adjourned.
[Whereupon, at 4:39 p.m., the hearing was adjourned.]
A P P E N D I X
February 5, 2014
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