[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]








                  SEMI-ANNUAL TESTIMONY ON THE FEDERAL
                  RESERVE'S SUPERVISION AND REGULATION
                        OF THE FINANCIAL SYSTEM

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 28, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-107







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel


























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 28, 2016...........................................     1
Appendix:
    September 28, 2016...........................................    57

                               WITNESSES
                     Wednesday, September 28, 2016

Yellen, Hon. Janet L., Chair, Board of Governors of the Federal 
  Reserve System.................................................     4

                                APPENDIX

Prepared statements:
    Yellen, Hon. Janet L.........................................    58

              Additional Material Submitted for the Record

Yellen, Hon. Janet L.:
    Written responses to questions for the record submitted by 
      Representative Hultgren....................................    72
    Written responses to questions for the record submitted by 
      Representative Love........................................    75
    Written responses to questions for the record submitted by 
      Representative Luetkemeyer.................................    79
    Written responses to questions for the record submitted by 
      Representative Mulvaney....................................    90
    Written responses to questions for the record submitted by 
      Representative Pittenger...................................    94
    Written responses to questions for the record submitted by 
      Representative Waters......................................    95

 
                  SEMI-ANNUAL TESTIMONY ON THE FEDERAL
                  RESERVE'S SUPERVISION AND REGULATION
                        OF THE FINANCIAL SYSTEM

                              ----------                              


                     Wednesday, September 28, 2016

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Royce, Lucas, 
Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer, 
Huizenga, Duffy, Stivers, Mulvaney, Hultgren, Ross, Pittenger, 
Wagner, Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, 
Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney, 
Velazquez, Sherman, Meeks, Capuano, Hinojosa, Lynch, Scott, 
Green, Cleaver, Moore, Ellison, Perlmutter, Himes, Carney, 
Foster, Murphy, Delaney, Sinema, Beatty, Heck, and Vargas.
    Chairman Hensarling. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``Semi-Annual Testimony on the 
Federal Reserve's Supervision and Regulation of the Financial 
System.''
    I now recognize myself for 3 minutes to give an opening 
statement. As we all know, the Dodd-Frank Act vastly increased 
the powers of the Fed way beyond its traditional monetary 
policy responsibilities. The Act has made the Fed omnipotent, 
but it cannot make it omniscient. No act can. Through the 
exercise of so-called heightened prudential standards, the Fed 
can now functionally control the largest financial institutions 
in our economy.
    Former Fed Governor Kevin Warsh recently wrote, ``Central 
bank power is permissible in a democracy only when its scope is 
limited, its track record strong, and its accountability 
assured.'' None of that do we observe today.
    Where has the Fed omnipotence taken us? The big banks are 
now bigger. The small banks are fewer. Economic growth lags. 
And there is scant evidence that our economy is more stable.
    Two new Fed expanded authorities granted under Dodd-Frank, 
living wills and stress tests, have been particularly 
controversial and problematic. The secrecy surrounding the 
stress test makes it almost impossible to measure the 
effectiveness of the Fed's regulatory oversight or the 
integrity of the test findings. As Columbia University 
professor Charles Calomiris has testified, ``It is hard to 
believe that the current structure of stress test could occur 
in a country like the United States, which prizes the rule of 
law, the protection of property rights, and the adherence to 
due process.''
    Dodd-Frank's living wills grant the FDIC and the Fed 
unbridled and unreviewable discretion to fundamentally 
restructure private businesses under a standardless process 
that relies entirely upon the personal discretion of Washington 
regulators.
    Indeed, the Fed stands at the center of Dodd-Frank's 
codification of too-big-to-fail. It functionally occupies the 
boardrooms of the largest financial institutions in our Nation 
and decides how they can deploy their capital, sending a clear 
signal that Washington will bail them out if they get in 
trouble.
    And despite claims by the Fed that it tailors regulations 
to fit the size of financial institutions, we know small banks 
are suffering disproportionally under Washington's thumb. As we 
lose, on average, one community financial institution per day, 
consumers lose options to help them achieve financial 
independence, small businesses lose opportunities to grow jobs, 
and the big banks just keep getting bigger. There is a better 
way.
    Former Fed Chair Alan Greenspan has said, ``Lawmakers and 
regulators, given elevated capital buffers, need to be far less 
concerned about the quality of the banks' loans and security 
portfolios since any losses would be absorbed by shareholders, 
not taxpayers. This would enable the Dodd-Frank Act on 
financial regulation of 2010 to be shelved, ending its 
potential to distort the markets--a potential scene in the 
recent decline in market liquidity and flexibility.''
    Tom Hoenig, current FDIC Vice Chair has said, ``U.S. banks 
engaged in core banking activities and operating with 
reasonable levels of capital should not incur the same 
regulatory burden as those that do not.''
    Former FDIC Chair Sheila Bair has also expressed support 
for the use of higher capital levels in place of regulatory 
risk-weighting. She has said, ``The Fed doesn't know what's 
risky. The FDIC doesn't know what's risky. Didn't we learn 
anything from the crisis?''
    The Financial CHOICE Act approved by this committee offers 
a better way. It has been endorsed by renowned economists 
nationwide, including three Nobel Prize winners, by promoting 
substantially higher loss-absorbing bank capital in exchange 
for relief from job-killing regulations. The Financial CHOICE 
Act fosters economic growth for all, bank bailouts for none, 
and ensures that the Fed is accountable and remains focused on 
good monetary policy.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman, for holding this 
hearing.
    And thank you, Chair Yellen, for making yourself available 
to testify today. Just a few weeks ago, we passed the ninth 
anniversary of the Lehman Brothers' failure. Leading up to 
2008, much of the risk in our banking system went entirely 
unchecked by regulators. Failure to quickly address fraud and 
mismanagement resulted in the loss of more than 8 million jobs 
as unemployment topped 10 percent. Millions of families lost 
their homes, and entire industries were on the brink of 
collapse. Congress responded to this devastation by passing the 
most comprehensive overhaul of our financial system since the 
Great Depression: the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    The Dodd-Frank Act greatly increased the Fed's 
responsibility and authority for safeguarding the financial 
system but also set minimum standards to ensure that regulators 
didn't lose sight of emerging risk again.
    The Dodd-Frank Act has required regulators to increase 
capital and liquidity standards, reduce interconnection in the 
financial markets and more closely scrutinize large financial 
firms' risk management. However, there is much work left to be 
done.
    As we have seen from the enormous failure of risk 
management at Wells Fargo, it is important to remind the 
committee and the public why these reforms were necessary in 
the first place. Fraudulent retail banking practices may not in 
and of themselves pose systemic risk, but they surely indicate 
mismanagement that could be catastrophic in riskier and more 
complex divisions of a bank holding company. Supervisors and 
law enforcement must continue to hold both institutions and 
individuals accountable.
    Chair Yellen, I know you will keep that in mind over the 
next several weeks as you review living wills from the five 
banks that failed their submissions in April, and that includes 
Wells Fargo. Chair Yellen, I am eager to hear about the Fed's 
progress in implementing Wall Street reform and how the Board's 
supervision practices have evolved over the last several years. 
Specifically, I am interested to hear more about how the Fed is 
using the flexibility embedded in Dodd-Frank to tailor 
regulations appropriate to the sizes and risk of different 
types of banks.
    Dodd-Frank also provided the Fed, in consultation with the 
Financial Stability Oversight Council, with new responsibility 
to regulate the activities of systemically risky nonbanks, 
entities such as the insurance company AIG, whose near failure 
imposed dire systemic consequences on our economy just 8 years 
ago. Since the passage of Dodd-Frank, Congress has given the 
Federal Reserve additional authority in setting capital 
standards for insurance firms subject to enhanced supervision. 
I look forward to hearing about the Board's progress on 
regulating insurers.
    Yet, just a few weeks ago in this committee, the 
Republicans pushed a bill that would severely undermine efforts 
by the Fed to regulate the financial system. The chairman's 
misguided legislation would repeal the Financial Stability 
Oversight Council's ability to designate nonbanks for enhanced 
supervision by the Fed, creating a huge swath of unmonitored 
risk in our financial system. The legislation would also 
replace carefully considered limits on banking activities with 
nothing but an insufficient 10 percent equity cushion, 
encouraging the reckless and risky behavior that nearly 
destroyed our economy in 2008.
    Moreover, as we in Congress consider another funding 
resolution, we must be mindful of continued attempts to defund 
regulators' work implementing Dodd-Frank. For the first time in 
recent memory, economic data indicates that the middle class is 
benefiting from the recovery. Failure to heed the lessons of 
the past will put that progress in jeopardy.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, chairman of our Financial 
Institutions Subcommittee, for 2 minutes.
    Mr. Neugebauer. I thank you, Mr. Chairman. Today's hearing 
is fundamental to understanding developments in the prudential 
supervision and regulation of our Nation's financial 
institutions. The role of Vice Chair of Supervision serves as 
the statutorily designated official within the Federal Reserve 
to oversee supervision and regulation. In 2010, former Fed 
Chairman Paul Volcker, champion of the Volcker Rule, noted that 
the creation of this spot might turn out to be one of the most 
important things in here, meaning the Dodd-Frank. It focuses 
the responsibility on one person.
    Yet President Obama has failed to nominate anyone to fill 
this important position, a position that sets prudential 
regulatory policy and represents the United States in 
international banking forums like the Financial Stability 
Board. I remain concerned that Governor Dan Tarullo continues 
to exercise these authorities outside the statutory construct 
in mandated oversight of Congress.
    Today, I hope to understand better many of the recent 
regulatory actions taken by the Federal Reserve. For example, 
how does the Federal Reserve's posture on reducing bank 
leverage interact with its recent recommendations to repeal the 
merchant banking authority? On what type of risk that the Fed 
is trying to mitigate in a recent capital proposal for 
commodities activity? Similarly, what would the impact be on 
end users if physical commodity activity decreases or stops? 
And, finally, does the Federal Reserve recognize the exposure-
reducing characteristics of segregated margin, and does it plan 
to reevaluate its position in the leverage ratio rule given 
recent Basel Committee discussions?
    While Chair Yellen may not be in the best position to 
answer these questions, it is incumbent upon her to do so, 
given the Presidential inaction.
    With that, Mr. Chairman, I want to say this is my last time 
to be in this committee with Chair Yellen, and I would like to 
thank the Chair for her making herself available to us. And 
thanks again for her service in her capacity.
    And, with that, I yield back.
    Chairman Hensarling. The gentleman yields back.
    Today, we welcome the testimony of the Honorable Janet 
Yellen. Chair Yellen has previously testified before our 
committee on a number of occasions, so I believe she needs no 
further introduction.
    Without objection, Chair Yellen, your written statement 
will be made a part of the record, and you are now recognized 
for 5 minutes to give an oral presentation of your testimony.
    Thank you.

  STATEMENT OF THE HONORABLE JANET L. YELLEN, CHAIR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mrs. Yellen. Thank you. Chairman Hensarling, Ranking Member 
Waters, and other members of the committee, I appreciate the 
opportunity to testify this morning on the Federal Reserve's 
regulation and supervision of financial institutions.
    One of the Federal Reserve's fundamental goals is to make 
sure that our regulatory and supervisory program is tailored to 
the risk that different financial institutions pose to the 
system as a whole. As we saw in 2007 and 2008, the failure of 
systemically important financial institutions can destabilize 
the financial system and undermine the real economy. The 
largest, most complicated firms must therefore be subject to 
prudential standards that are more stringent than the standards 
that apply to other firms. Small- and medium-sized banking 
organizations, whose failure would generally pose much less 
risk to the system, should be subject to standards that are 
materially less stringent.
    The Federal Reserve has made substantial progress in 
building a regulatory and supervisory program that is 
consistent with these principles. We have implemented key 
standards designed to limit the financial stability risks posed 
by the largest, most complex banking firms. We continue to work 
on some remaining standards and to assess the adequacy of this 
package of measures.
    With respect to small- and medium-sized banks, we must 
build on the steps we have already taken to ensure that they do 
not face undue regulatory burdens. Looking forward, we must 
continue to monitor for the emergence of new risks since 
another key lesson from the crisis is that financial stability 
threats change over time.
    The Federal Reserve's post-crisis efforts to strengthen its 
regulation and supervision of large banks have focused on 
promoting the safety and soundness of these firms and on 
limiting the adverse effects that their distress or failure 
could have on the financial system in the broader economy.
    We have aimed to increase the resiliency of the largest 
banking organizations by establishing a broad set of enhanced 
prudential standards, including capital liquidity requirements 
for large domestic and foreign banking organizations. And we 
have aimed to make large financial institutions more resolvable 
through, for example, the living will process and our proposed 
long-term debt requirements.
    The introduction of capital stress testing for large 
banking organizations has been one of our signature regulatory 
and supervisory innovations since the financial crisis. As 
events during the financial crisis demonstrated, capital 
buffers that seem adequate in a benign environment may turn out 
to be far less than adequate during periods of stress. For this 
reason, the Federal Reserve conducts supervisory stress tests 
each year on banking organizations with $50 billion or more in 
total assets to determine whether they have sufficient capital 
to continue operations through periods of economic stress and 
market turbulence and whether the capital planning frameworks 
are adequate to their risk profiles. The expectation embodied 
in our stress testing program that large banking organizations 
should maintain sufficient capital buffers to withstand a 
period of significant stress promotes the resilience of those 
firms and of the financial system more generally.
    While our stress testing program has been successful since 
it was first introduced in 2009, the crisis reinforced the need 
for regulators and supervisors to continually revisit the 
effectiveness of their tools and adjust as needed over time. As 
my written testimony indicates in more detail and as my 
colleague Governor Tarullo discussed in his speech earlier this 
week, we are now considering making several changes to our 
stress testing methodology and process.
    A leading idea that has emerged from a substantive review 
of our Comprehensive Capital Analysis Review, or CCAR, program 
is to integrate CCAR with our regulatory capital framework, 
thus effectively including GSIB surcharges in the stress test. 
We are also considering making certain changes to the stress 
test assumptions used in CCAR. In addition, we are considering 
exempting from the qualitative portions of CCAR any bank 
holding company that has less than $250 billion in total assets 
and that does not have significant international or nonbank 
activity as well as reducing the amount of data that these 
firms are required to submit for stress testing purposes.
    On this and other changes to CCAR that we are considering, 
we will, of course, seek public input before moving to adopt 
them.
    I know that community banks play a vital role in many of 
your districts. Among the lessons of my years of experience at 
the Federal Reserve have reinforced is that when it comes to 
bank regulation and supervision, one size does not fit all. To 
effectively promote safety and soundness and to ensure that 
institutions comply with applicable consumer protection laws 
without creating undue regulatory burden, rules and supervisory 
approaches should be tailored to different types of 
institutions such as community banks.
    The Federal Reserve has already done a considerable amount 
to reduce regulatory burden on community banking organizations, 
but we are looking for additional opportunities, including 
potential simplifications of the regulatory capital framework 
for community banks.
    In conclusion, our post-crisis approach to regulation and 
supervision is both forward-looking and tailored to the level 
of risk that firms pose to financial stability in the broader 
economy. Standards for the largest, most complex banking 
organizations are now significantly more stringent than the 
standards for small- and medium-sized banks, which is 
appropriate, given the impact that the failure or distress of 
those firms could have on the economy.
    As I have discussed, we anticipate taking additional 
actions in the near term to further tailor our regulatory and 
supervisory framework. Yet, even as we finalize the major 
elements of post-crisis reform, our work is not complete. We 
must carefully monitor the impact of the regulatory changes we 
have made and remain vigilant regarding the potential emergence 
of new risks to financial stability. We must stand ready to 
adjust our regulatory approach where changes are warranted. The 
work we do to ensure the financial system remains strong and 
stable is designed to protect and support the real economy that 
sustains the businesses and jobs on which American households 
rely.
    [The prepared statement of Chair Yellen can be found on 
page 58 of the appendix.]
    Chairman Hensarling. Thank you, Chair Yellen.
    The Chair now recognizes himself for 5 minutes for 
questions.
    First, Chair Yellen, please know that I was encouraged by 
many aspects of your testimony. I believe that there is, 
hopefully, growing bipartisan consensus that we need more 
tailoring of regulations, and particularly on page 13 of your 
testimony, your recommendation that Congress consider carving 
out community banks from the Volcker Rule and incentive 
compensation limits in Section 956. I was also encouraged by 
your announcement today and what we heard from Governor Tarullo 
a couple of days ago concerning CCAR's qualitative review 
exemption. I think that is wise and a very small step in the 
right direction.
    Chair Yellen, before we get to the application of 
heightened prudential standards, I want to take a step back to 
how we do the SIFI selection process in the first place. As a 
member of FSOC, as you probably know, Dodd-Frank demands that 
there are 11 different factors that must be considered in the 
SIFI selection process, such items as leverage, and off-
balance-sheet exposures.
    In the SIFI designation process, do you weigh each of these 
11 factors equally?
    Mrs. Yellen. Are you talking about the nonfinancial firms--
    Chairman Hensarling. Yes.
    Mrs. Yellen. --the FSOC has designated?
    Chairman Hensarling. Yes.
    Mrs. Yellen. In the case of those firms, as required, the 
FSOC prepares an analysis taking--
    Chairman Hensarling. I know, but my question is, of the 11 
statutory factors you must consider, do you consider each one 
equally? Or, for example, is leverage more important to 
systemic risk than factor four, importance of source of credit 
liquidity?
    Mrs. Yellen. When it comes down to looking at an actual 
firm, the question that FSOC has to consider, taking those 
factors into account, is special to that firm and--
    Chairman Hensarling. So it is individual to the firm?
    Mrs. Yellen. It is individual. The question is what--
    Chairman Hensarling. I guess where I am going with this 
is--
    Mrs. Yellen. What would be the systemic impact on the U.S. 
financial system of the distress of that particular firm?
    Chairman Hensarling. Well, with 11 different factors that 
are considered, combined, that leads to 2,048 different ways in 
which these 11 criteria can be combined. The statute says you, 
``shall consider,'' these, but can I safely assume that you and 
other members cannot process 2,048 different combinations of 
this, these 11 criteria?
    Mrs. Yellen. What the analysis presented to FSOC does is 
look at the specifics of the balance sheet and exposures of an 
individual firm under consideration and analyzes how those 
factors would come into play and impact financial stability.
    Chairman Hensarling. I guess my point, Chair Yellen, is it 
is hard not to conclude that ultimately this becomes a very 
discretionary process among members of FSOC.
    Let's now move to the living wills and CCAR process. So 11 
banking organizations submitted rather voluminous living wills 
in 2014 and the GAO found that the Fed and the FDIC had not 
reviewed those submissions. I understand many of these 
submissions are thousands of pages long with respect to living 
wills. I have had at least one testimony that the CCAR reports 
are tens of thousands of pages long; I have heard of one that 
is 42,000 pages long. So I guess my first question is, does 
anybody at the Fed actually read these reports, and can I 
safely assume you don't?
    Mrs. Yellen. You can safely assume that many people at the 
Fed read these reports. And--
    Chairman Hensarling. Does somebody really read a 42,000-
page report cover to cover and know what to do with it?
    Mrs. Yellen. Our staff and the FDIC staff do. And I think 
it is fair to say that all of the Governors reviewed--
    Chairman Hensarling. I find that very difficult to believe, 
but the GAO has said that these living wills can cost up to 
$105 million. The SBA estimates the average small business is 
capitalized with $30,000. So, de facto, you are taking away the 
opportunity to capitalize 3,500 small businesses with a living 
will that may or may not be read, that may or may not be 
useful.
    Do you consider the cost of this process as you impose it 
upon the financial institutions?
    Mrs. Yellen. We consider eliminating too-big-to-fail to be 
a key objective of Dodd-Frank so that the American taxpayers 
will not be forced to bear the burden of a failure of a large 
firm. And I will tell you that the full Board of Governors met 
on the order of 12 times. We had around 12 Board meetings to 
consider in great detail all of the key aspects of the living 
wills of each of these firms.
    Chairman Hensarling. I see my time has expired.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    As you know, the reforms we have passed to make the 
financial system are constantly under attack, and many accuse 
us of one-size-fits-all regulations. As you know, the Dodd-
Frank Act has provided the Federal Reserve with broad 
discretion to adjust the rules based on your evaluations of 
bank risk. I cannot count the number of Republican deregulatory 
bills that have passed the House Floor which were not serious 
enough to even be considered in the Republican-controlled 
Senate.
    However, I know that I, as well as other Democrats on this 
committee, have worked very constructively with you to identify 
areas of improvement and use your discretion to tailor 
regulations when necessary.
    Governor Tarullo's announcement regarding reforms to the 
stress testing process is a recent example of that cooperation. 
And I think you just said in your testimony that you were 
taking a look at banks with less than $250 billion in assets 
and that you were considering some changes, provided they were 
not involved in a lot of trading and international trading in 
particular.
    Would you tell us what that is all about again?
    Mrs. Yellen. Yes. There are two portions to the stress 
testing program for the institutions over $50 billion. One is a 
quantitative stress test to see what the impact in a severely 
adverse scenario would be on the firm's capital position. And 
we expect to continue subjecting all of the firms over $50 
billion to that quantitative part of the stress test. But there 
is also a qualitative part relating to a firm's capital 
planning process. And that is something that currently all of 
the firms above $50 billion are subject to, and we are 
proposing eliminating that and reducing some of the reporting 
requirements associated with stress testing for the banks under 
$250 billion, as you said, that don't have a lot of 
international activity or nonbanking--nonbanking business.
    And we think that our normal supervisory process where we 
would look at the capital planning processes of these firms is 
adequate and that many of these firms are meeting our 
expectations, and this is a significant burden that we think we 
can relieve these firms of.
    Ms. Waters. I would like to thank you for paying attention 
to the concerns that have been addressed by members of this 
committee, and I would like to thank you for recognizing that 
not only do we have concerns, but these are concerns that can 
be addressed if we would but work with you, rather than coming 
up with all of this legislation that really interferes with 
your ability to exercise the authority that you have. I am very 
appreciative for that. Let me go on to the next question.
    Chair Yellen, I have been closely following the progress on 
the living wills at the largest banks over the last 5 years. 
And I must say that I have not been encouraged by that 
progress. In April of this year, you and the FDIC finally took 
the important step of officially declaring five living wills as 
noncredible: JPMorgan Chase, Bank of America, Bank of New York 
Mellon, State Street, and Wells Fargo. These banks are required 
to submit their wills to you in the next week. These banks have 
had 5 years to identify and address problems within their 
organizations. If any of their living wills are still 
insufficient in October, will you use your additional authority 
under the Dodd-Frank Act to quickly and severely reduce the 
risk these banks present to our economy?
    Mrs. Yellen. We certainly do stand ready to use the 
authority that we have to impose higher capital and other 
standards on these firms if they have not corrected the 
deficiencies that we have identified. We have been very 
specific with the five firms in indicating what the 
deficiencies are. We have released to the public the letters 
that detail those deficiencies. We will carefully and quickly 
review the submissions that are due by October 1 to see if 
those deficiencies have been remedied.
    But I would say more broadly, for all of the firms, the 
FDIC and the Board identified a range of shortcomings, things 
that we did not think rose to the level of deficiencies but 
nevertheless are things that we want to see corrected. And we 
will be reviewing the next round of submissions due in 2017 to 
see if they have been corrected or not. And it is conceivable 
that if there has been no progress, those things could later 
rise to the level of deficiencies.
    Ms. Waters. Thank you very much.
    I yield back.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Financial Institutions 
Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Chair Yellen, this month the Fed along with the OCC and the 
FDIC put out its required report on bank investment activities 
required under section 620 of the Dodd-Frank. The Fed raised 
several concerns with physical commodity activity of financial 
holding companies under both the complementary authority and 
section 40 authority.
    Last week, the Fed issued a Notice of Proposed Rulemaking 
whereby it would impose significant capital requirements on 
covered physical commodity activities that would effectively 
prohibit many of these activities. In both of the documents, 
the Fed relies on the term, ``environmental catastrophic risk'' 
or ``catastrophic risk.''
    How does the Fed define that risk and how does the Fed 
measure it?
    Mrs. Yellen. Well, the Fed has been motivated in this 
rulemaking by looking at the enormous environmental 
consequences of things like oil spills, the BP disaster, and 
other things, and the kinds of consequences that those can 
cause financially for firms and also reputationally. And we are 
concerned and have done a rulemaking on physical commodity 
activities, as you indicated, that attempt to address the risks 
that we think exist in that area and have recommended to 
Congress repeal of the merchant banking authority for 
essentially the same set of reasons.
    Mr. Neugebauer. So, but I guess the question is, when you 
are analyzing risk, you go back and you look at past activities 
to determine, do I hedge my risk against that? I guess the 
question is, what past environmental catastrophes have posed a 
problem for financial holding companies? Can you point to 
something that said, ``Gosh, if that happens again, there is a 
problem?'' I can't think of an event that happened that 
impacted those financial holding companies.
    Mrs. Yellen. Well, under the merchant banking authority--
    Mr. Neugebauer. Yes, but this is a different--there are two 
different authorities here, the merchant banking and them being 
able to hold the commodities. I want to specifically talk about 
the commodities.
    Mrs. Yellen. We look at what is permissible and see that 
there could be environmental risks associated with it. It is 
not a question of just going back through history to see what 
has happened in the past. It is a forward-looking concern that 
the permissible activities could pose risks.
    Mr. Neugebauer. Yes, I am a little afraid that we are just 
trying to think of things that could happen, and then trying to 
make all of these financial institutions somehow pay a punitive 
penalty in either capital or regulation for events that may not 
have happened and may never happen again.
    I want to then turn to the GSIB surcharge and stress test. 
Some commentators have stated that the GSIB surcharge 
effectively works as a tax on capital market activities.
    Can you kind of name the components that make up the 
surcharge and what activities tend to increase the score?
    Mrs. Yellen. There are a set of factors that are considered 
in determining the GSIB surcharge, including things like 
interconnectedness and reliance on short-term wholesale funding 
factors that would increase the likely systemic repercussions 
of the failure of the firm. And as you said, the GSIB 
surcharges can be thought of as taxes imposed on these firms 
that serve two purposes. First, by insisting that firms hold 
more capital to address the risks that their failure could 
impose on society on the broader economy, they ought to be less 
liable to fail, and holding more capital accomplishes that. And 
it may create an incentive for these firms to restructure their 
activities in a way to--
    Mr. Neugebauer. So, when you look at that, for example, 
complexity is one of those. And that, I think talks about the 
size of the bank's asset that is involved in market making. And 
then interconnectedness components are primarily dealer-to-
dealer trading assets used for hedging and market-making 
activity and then cross-jurisdiction components of dealer-to-
dealer trading similar to the interconnectedness factor. And 
when you start to look at all of those things that you are 
penalizing those entities for, it is making markets in the 
capital markets. And I think what many of us are concerned 
about is the message to the banks right now is: just get out of 
the capital markets area because the regulators are making it 
very punitive to be in those activities.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you. Thank you, Mr. Chairman.
    I believe that Chair Yellen's performance so far has been 
nonpartisan, admirable, and has proven that she is more than 
capable of navigating these difficult waters and guiding the 
U.S. economy back to robust economic growth. So I am disturbed 
by anyone in a recent debate or anywhere who suggests that 
Chair Yellen is somehow acting politically. Nothing could be 
further from the truth.
    And I would like to thank you for the service to our 
country over your long career in government.
    Mrs. Yellen. Thank you, Congresswoman.
    Mrs. Maloney. And I would like to begin with a question on 
monetary policy before we get to regulation. You said last week 
at the FOMC meeting that one of the reasons the Fed didn't 
raise rates was because more people had come back into the 
labor force without the unemployment rate going down, which 
suggested to you that the economy ``had a little more room to 
run.''
    But you also said that if things stay on the current 
course, you expect one increase in interest rates before the 
end of this year. So what does that mean? Does that mean that 
you expect the unemployment rate to start falling again soon? 
So, in other words, does this mean that you think that the 
economy has a little more room to run but not that much room to 
run? Exactly what did you mean?
    Mrs. Yellen. Let me try to clarify. For this entire year, 
job creation has been running at a pace of about 180,000 jobs 
per month. And that is a pace--it is a little bit less than we 
saw in 2015, but nevertheless, well above the pace of job 
creation that is sustainable over the longer run given trends 
in the labor force.
    Now, I have been pleasantly surprised to see that the 
unemployment rate actually, as I mentioned, hasn't fallen over 
that time because people have been drawn back into the labor 
force and that really means--and with inflation running below 2 
percent--we are really not seeing meaningful upward pressure on 
inflation, and we haven't seen the unemployment rate fall.
    But monetary policy is accommodative. Eventually, continued 
job creation at that pace would cause the economy to overheat 
and would push the unemployment rate down to lower levels than 
now. So monetary policy is accommodative. We want to make sure 
that the expansion is won and the good performance of the job 
market is sustainable over the medium term. If we allow the 
economy to overheat, we could be faced with having to raise 
interest rates more rapidly than we would want, which could 
conceivably jeopardize that good state of affairs that we have 
come close to achieving.
    So we expect to see the unemployment rate fall farther. We 
expect to see solid job growth continue, but we do need, if 
things continue on their current course, to gradually remove 
the accommodation that is there.
    Now, it is probably not that much. Our estimate of how much 
accommodation there is has come down over time as economists 
have reconsidered what is a neutral stance of policy, but 
nevertheless, there is accommodation. And while there is no 
fixed timetable for removing it, many of my colleagues 
indicated in their recent projections, the majority, that they 
would see it as appropriate to make a move to take a step in 
that direction this year if things continue on the current path 
and no significant new risks arise.
    Mrs. Maloney. Okay. Thank you. Now, I would like to ask you 
about the stress test also. Some people have argued recently 
that the Fed should put the economic scenarios it develops for 
the stress test out for formal notice and comment for the 
public and for interested parties in order to let industry and 
others weigh in on the assumptions that you use. And of course, 
the fact that the Fed can tweak these scenarios every year to 
account for new market developments is one of the main reasons 
why I would say they are useful. So could you respond to that 
quickly? My time is up.
    Chairman Hensarling. Very briefly, please.
    Mrs. Yellen. Just very briefly, we want to make sure that 
those scenarios are based on timely information and address the 
most significant risks we see. We have put out for comment both 
the principles underlying our stress tests and information 
about how we construct the scenarios so firms have quite a good 
idea of what they can expect in terms of a scenario that they 
will face. But all of the details, we don't put out for 
comment. It would cause large delays.
    Chairman Hensarling. The time of the gentlelady from New 
York has expired.
    Mrs. Maloney. Thank you very much.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, chairman of our Capital Markets 
Subcommittee.
    Mr. Garrett. I thank the chairman.
    Thanks, Chair Yellen.
    As you know, last week, there was the big FOMC meeting and 
surprise--to no surprise, the Fed decided to do what? To 
continue the extraordinary accommodative monetary policy. Now, 
I know you have taken the position that the Fed's position are 
all purely data-driven and that is where some of the questions 
were before and that it has absolutely nothing to do with 
politics. But fewer and fewer people really do believe that. 
Let me just give you two or three headlines out of last week 
regarding the FOMC meeting. From Politico, right around here: 
``Yellen helps Clinton dodge a bullet.'' From the LA Times: 
``Is the Fed politically biased? Look at its interest-rate 
decisions as elections near.'' From MarketWatch: ``A Fed rate 
hike and other important decisions again being put off until 
after the election.''
    See, Chair Yellen, you have told our committee and the 
public on countless occasions that the Fed is not subject to 
undue political pressure. But as the saying goes, perception is 
reality. And whether you like it or not, the public 
increasingly believes that the Fed independence is nothing more 
than a myth. And the Fed has an unacceptable cozy relationship 
both with the Obama Administration and with higher-ups in the 
Democratic Party.
    Now, I brought this up a year ago, and let me run through 
some of those points that I raised then. You personally have 
weekly lunches with political and partisan heads over at the 
Department of Treasury. There is, in fact, a revolving door 
between the Treasury appointees and the Board of Governors. 
Your predecessor, Chairman Bernanke, had made a decision 
literally just weeks before the President had to go before the 
voters in 2012. And looking at your record, your speech on 
income inequality, something you never talked about before but 
which became a major political theme for the Administration, 
and you gave it just weeks before that last election.
    Now, let me give you one most recent one, and maybe you can 
just comment on this with a couple of yes and noes. There is 
little doubt about last week's FOMC meetings have potential 
implications for the markets and therefore the election, but it 
was reported earlier this year that Fed Governor Lael Brainard 
contributed the maximum amount to the Hillary Clinton campaign, 
and she did so while she was a sitting member of the Fed Board. 
And there were numerous reports that have come out, media 
reports, stating that the Governor is angling for a top job 
with the Clinton Administration if Hillary wins.
    So some basic questions. Knowing that is all out there on 
the table, because of the appearance of conflict and 
impropriety there, has Governor Brainard ever offered to recuse 
herself from voting at the FOMC? Has she?
    Mrs. Yellen. Governor Brainard, like all of us, is subject 
to the restrictions of the Hatch Act.
    Mr. Garrett. Right. And so has she offered to recuse 
herself because of her political involvement?
    Mrs. Yellen. No.
    Mr. Garrett. The answer is no. Have you ever asked the 
Governor--
    Mrs. Yellen. No.
    Mr. Garrett. I am sorry.
    Mrs. Yellen. The Hatch Act does not prohibit political 
contributions.
    Mr. Garrett. I get that, and so but we see the appearance 
of the conflict, and so it is a basic question. Has Governor 
Brainard ever offered to recuse herself? And the answer is no.
    Have you ever asked Governor Brainard to recuse herself 
because of her close involvement with the campaign in making 
contributions? Have you ever asked?
    Mrs. Yellen. She is acting in a way that is permitted by 
the rules we are subject to--
    Mr. Garrett. So your answer is--right.
    Mrs. Yellen. And each one of us has to decide--
    Mr. Garrett. I understand that, so the answer is--
    Mrs. Yellen. --for ourselves--
    Mr. Garrett. The answer is she has never offered to recuse 
herself. The answer is you have never asked her to recuse 
herself.
    To your knowledge, has Governor Brainard been in contact 
with the Clinton campaign regarding a potential job in a 
potential future Administration? Are you aware of that at all?
    Mrs. Yellen. I have absolutely no awareness of that.
    Mr. Garrett. There have been published media reports 
talking about that. So you are not familiar with those media 
reports?
    Mrs. Yellen. I have--what is important to me is whether or 
not in our decisionmaking, our collective decisionmaking, I see 
politics being brought to bear in reasoning about our 
decisions, and I have never seen that on the part of any of my 
colleagues.
    Mr. Garrett. So, if you learned that she has had 
communications with Clinton as far as trying to get a job, 
would that change your opinion as to whether she should be 
asked to recuse herself?
    Mrs. Yellen. I don't think that there is a conflict of 
interest there.
    Mr. Garrett. So someone can--a Federal Governor can be in 
direct negotiations with a political campaign looking for a 
future job, and that is not a conflict, as far as you are 
concerned?
    Mrs. Yellen. You know, we do have--
    Mr. Garrett. No. Is that a conflict or not, if they are 
having direct negotiations with either political party to ask 
for a job next year while they are a sitting Governor? Do you 
see that as a conflict?
    Ms. Waters. Will the gentleman yield?
    Chairman Hensarling. There is no time.
    Mr. Garrett. I would like to have an answer. Is that a 
conflict?
    Ms. Waters. Will the gentleman yield?
    Mr. Garrett. If it is a conflict, will you be asking the 
Governors whether they are engaged in such activity?
    Ms. Waters. Will the gentleman yield?
    Chairman Hensarling. The time of--the gentleman is 
apparently not yielding. The time of the gentleman has expired.
    Can the witness give a brief answer?
    Mrs. Yellen. I would have to consult my counsel. I am not 
aware that that is a conflict, but I would--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chair Yellen, Puerto Rico is currently facing a historic 
crisis: 46 percent of the population is below the poverty line, 
which is 3 times that of the U.S. mainland. Employment in 
Puerto Rico stands at roughly 1 million, down nearly 300,000 
from 2007. In the meantime, the U.S. economy has gained almost 
10 million jobs in the same timeframe. On top of this 
challenge, the island is struggling with Zika virus, and last 
week, a blackout swept the island.
    When the U.S. mainland faced severe challenges from 2007 to 
2009, Congress passed and the President signed sweeping 
stimulus legislation, the American Recovery and Reinvestment 
Act. Do you believe that this legislation was helpful in 
fostering an economic recovery for the U.S.?
    Mrs. Yellen. Well, I do think Puerto Rico faces very 
serious economic and fiscal problems, as you have described. 
They have been building for a long time, and the Commonwealth 
faces very significant challenges. I think the framework that 
Congress passed provides tools that maybe enable the 
Commonwealth to avert some worst-case scenarios. The ability to 
restructure debt should make it possible to put in place a 
fiscal adjustment that will be one that is less uncertain and 
hopefully entails smaller cuts to government spending.
    Ms. Velazquez. I understand all that, Chair Yellen. It will 
take time for the Fiscal Control Board to do its work. And the 
situation in Puerto Rico is really very difficult at this time. 
My question to you is, how can we spur investment in Puerto 
Rico? How can we foster economic growth and not wait for the 
Fiscal Control Board, because the reality is people are leaving 
the island? The most productive workforce is leaving the 
island. They are facing serious problems with a healthcare 
system that is broken. And my question to you is, do you 
believe that a Puerto Rico-focused stimulus plan will have a 
similar effect on the island's economy like we did here in 
2008-2009?
    Mrs. Yellen. So this is really something I am not an expert 
on, what the appropriate programs are for Puerto Rico to deal 
with its longstanding problems, and I think that is squarely a 
matter for Congress and the Administration to consider.
    Ms. Velazquez. Okay. Thank you for that answer.
    We cannot forget that Puerto Rico is part of the United 
States, that we have a responsibility and moral obligation. 
After all, we don't provide parity in some of the important 
issues that they are facing, such as Medicaid and Medicare.
    Chair Yellen, last Friday, the Federal Bank of Philadelphia 
launched a research and advocacy initiative to examine the 
interaction between economic inequality in the United States. 
And its implication for macroeconomic prosperity and growth. 
What is the Fed hoping to learn from this initiative, and how 
is the Fed hoping its findings will further the economic 
inequality discussion?
    Mrs. Yellen. So--
    Ms. Velazquez. I don't see it as a political plot. I see it 
as a contribution in terms of promoting economic growth among 
those who have been left behind.
    Mrs. Yellen. Yes. I think the high level of poverty and 
inequality in the United States is a concern, should be a 
concern to all Americans, and an important challenge that our 
Nation hopefully will address. And this initiative is really 
focused on trying to understand what some of the key factors 
are that are driving those outcomes and looking at practice to 
see, based on real-world experiences with programs that are 
attempting to address poverty, what works and what lessons can 
be learned that might be of use to communities trying to deal 
with entrenched poverty.
    Ms. Velazquez. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Housing and Insurance 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    And Chair Yellen, welcome.
    We spoke a lot about the sheer volume of rules coming out 
of the Federal Reserve. It is rule after rule, layer of 
regulation after layer of regulation, and that is really 
impacting financial institutions across this country, whether 
they serve a small community in Missouri or customers across 
the globe.
    Now we have the merchant banking and physical commodities 
involvement by the Fed, as my colleague Mr. Neugebauer has 
indicated. And I hope that you work with this body with regards 
to those rules. Fed officials have made statements to the 
effect that the benefits of merchant banks outweigh the 
potential risks, yet we seem to be intent on trying to find a 
solution where there is no problem. That concerns me greatly, 
and I can assure you we intend to have a number of questions, 
written questions, for you to respond to with regards to that 
issue.
    Today, though, I want to discuss some the SIFI designation 
stuff that Mr. Tarullo announced this past week. I think it is 
important. We certainly now recognize that the SIFI should be 
designated based on risk, not just on size. That is an 
important thing. Secretary Lew was here last week, made that 
same comment, basically, that we need to look at other factors 
rather than size. And that seems to be your position as well 
now.
    With regards to that, can you tell me what administrative 
costs will be incurred by the Fed to remove the CCAR 
requirement?
    Mrs. Yellen. I am sorry--
    Mr. Luetkemeyer. Can you tell me what the costs by the Fed 
would be to remove the CCAR requirement of being a SIFI, the 
stress test?
    Mrs. Yellen. Well, we believe that stress tests are a very 
important way--
    Mr. Luetkemeyer. I am not asking-- I am not talking about 
whether you do or do not do them. What is the cost that--what 
is the savings that you are going to have, or is there a cost 
to de-designate? Is there a cost to administratively remove the 
CCAR requirement? Is there a cost to do that?
    Mrs. Yellen. Is there a cost in terms of dollars and cents 
that we spend on it?
    Mr. Luetkemeyer. Yes. Does the Fed have to--does it cost 
you something to administratively remove the CCAR designation--
requirement?
    Mrs. Yellen. Does it cost us to implement it and to run the 
tests? And would we--are you asking me--
    Mr. Luetkemeyer. I am asking you if you don't--to remove 
the requirement, does it cost you money?
    Mrs. Yellen. Does it cost us money to remove the 
requirement? It does not.
    Mr. Luetkemeyer. Yes. The CCAR requirement, does it cost 
you money to do that?
    Mrs. Yellen. Does it cost us money? No.
    Mr. Luetkemeyer. Okay. That is what I want to know.
    Mrs. Yellen. But I think it would be a cost in terms of 
safety and soundness. I think that--
    Mr. Luetkemeyer. No. I am not talking about that. I am 
talking about the Fed. Does it cost you money to remove the 
CCAR requirement? You said no. That is what--that is the answer 
to my question.
    Mrs. Yellen. Well, any cost also that we incur in carrying 
out CCAR in the stress testing is passed on to those 
institutions who pay for the cost of their supervision.
    Mr. Luetkemeyer. Okay.
    Last February, the Office of Financial Research conducted 
an analysis of the systemic importance of 33 U.S. bank holding 
companies based on basically the tenets of my bill, H.R. 1309, 
and given that all of this work has been done, can you tell me 
what you think the costs would be for FSOC to de-designate and 
redesignate a financial institution--
    Mrs. Yellen. For FSOC to what?
    Mr. Luetkemeyer. --for FSOC to de-designate or redesignate 
these institutions if they are no longer SIFIs, according to 
the bill? I have a bill that says you have to look at these 
things and if the bill--if it shows that the institutions are 
not SIFIs, you have to de-designate them and then redesignate 
them if they are just in analyzing them. Is there a cost to 
that?
    Mrs. Yellen. Well, yes, I think it is clear that these 
institutions--
    Mr. Luetkemeyer. Can you give me a figure?
    Mrs. Yellen. No, I cannot give you a figure.
    Mr. Luetkemeyer. Okay. Can you give me a ballpark? Is it 
100 bucks, a thousand bucks, a million bucks, $10 million?
    Mrs. Yellen. I can't give you an estimate.
    Mr. Luetkemeyer. Okay. Well, the problem is that the FSOC 
staff, which includes the Federal Reserve, informed the CBO 
that the de-designation and potential redesignation of banks 
where they are over $50 billion in assets would have an 
administrative cost of over $60 million.
    Do you think that is reasonable?
    Mrs. Yellen. I honestly don't know. I have not looked at 
it.
    Mr. Luetkemeyer. Do you have any idea how your staff 
arrived at that figure?
    Mrs. Yellen. This is the FSOC staff.
    Mr. Luetkemeyer. Well, no, they did it in conjunction with 
the Federal Reserve staff, which is part of FSOC. Your staff 
came up with this figure. Do you have any--
    Mrs. Yellen. I have not reviewed how they came up with that 
figure.
    Mr. Luetkemeyer. Okay. So if we write you a letter, you 
will be able to give a response to that as well?
    Mrs. Yellen. I can try to do that.
    Mr. Luetkemeyer. Okay. Very quickly, you made the comment a 
minute ago with regards to what you have all done for community 
banks to help them with the regulatory problems with this 
inundation of rules and regulations. Can you give me several 
examples of that, please?
    Mrs. Yellen. Examples of what we have done?
    Mr. Luetkemeyer. Yes.
    Mrs. Yellen. We have changed the small bank holding company 
policy statement to raise the threshold for capital regulation.
    Mr. Luetkemeyer. I think we did that in Congress, if I am 
not mistaken, though.
    Mrs. Yellen. You did. But we put that into effect. We 
have--
    Mr. Luetkemeyer. Well, I am glad to know that you 
implemented our law. Thank you very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Madam Chair, good move or nonmove earlier this 
month at the FMOC.
    Now, some in politics on Monday will say that our economy 
is in such terrible shape that those who make economic policies 
are obviously incompetent. Then they will come back on 
Wednesday and say it is urgent that we raise interest rates 
because our economy may overheat and economic growth could get 
out of hand. Only in this room can you juxtapose those two 
positions.
    We need to allow small-business loans. I have been told by 
many bankers if there is a 2 percent or 3 percent risk that a 
business will go under, they can't make the loan. Jamie Dimon 
was sitting where you are now and said, well, he couldn't find 
qualified small-business borrowers under that standard. So he 
sent his money to London where it was eaten by a whale.
    It would do a lot for the security of our financial system 
and also hope the economy of this country if banks were able to 
make prime plus 3, prime plus 4 loans to businesses that had a 
little risk and, of course, provide a reasonable reserve. 
Instead, I am told if you don't qualify for prime plus two, you 
leave the office.
    I join the Chair in saying that it is a good idea to tailor 
your regulations. And I would say that the more SIFIs you 
designate, the less significantly you will regulate SIFIs. And 
it is the hugest institutions that are really systemic risks.
    But Madam Chair, I want to address the elephant in the 
room, or maybe I should say the stagecoach. I will remind you 
that the FSOC has the authority to break up the biggest banks. 
And for that--I have said that before in this room and people 
said, you must have animus to the true global SIFIs. No, 
studied microbiology. The protozoa reaches a certain size and 
then it divides. That is healthy. That is normal. If a protozoa 
can divide in a healthy manner, you would think the smartest 
minds on Wall Street could as well. Too Big To Fail is too big 
to exist. Let's look at the elements of that.
    Too big to fail is too big not to bail, that is why we 
bailed them out in 2008. Too big to fail is too big to jail, 
that is why Eric Holder said he can't indict certain executives 
and institutions, because if he did, it would have too big an 
effect on the economy. Too big to fail is too big to compete 
with, that is why some studies say they get 80 basis points off 
their cost of capital--it might be less--because of the 
expectation of those providing the capital that if they get in 
trouble, we will bail them out.
    But Wells Fargo has identified two additional reasons to 
break these institutions up. Because you--they created a system 
where they hired good Americans and turned 5,300 of them into 
felons. Two million felonies. They failed to monitor the 
system. When they saw that there was a--that some individuals 
had created phony accounts, they fired 1,000 of them and didn't 
change the system and didn't fire the executives that created 
the system that created the first thousand felons that led to 
5,300 felons.
    Now, from a Democratic side, I say too-big-to-fail is too 
big to manage. From a Republican side, I have heard too-big-to-
fail is too big to regulate. But whether the fault is the 
regulators who can't regulate it or the managers who can't 
manage it, too-big-to-fail is too big to exist.
    So my question for you is, will you seriously consider 
using your authority, as I think you are required to review and 
consider using your authority, will you at least seriously 
consider breaking up Wells Fargo?
    Mrs. Yellen. We will hold the largest organizations to 
exceptionally high standards of risk management, internal 
controls, consumer protection. We expect the--
    Mr. Sherman. But if you broke Wells Fargo up, then instead 
of trying to hold them up to those really high standards, 
people could choose which financial institution to go with. 
They wouldn't pose a systemic risk. By saying you are going to 
hold the giant institutions up to standard, something you have 
not been able to do, 2 million times, 2 million phony accounts, 
so you are saying you are just going to do--you are going to 
continue to do a great job of regulating the too-big-to-fail 
because you are not going to break them up?
    Mrs. Yellen. Well, we believe it is possible, even though 
it is extremely challenging for organizations to comply with 
the law.
    Mr. Sherman. Two million phony accounts not detected by the 
regulators. Break them up.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Monetary Policy and Trade 
Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And Madam Chair, I appreciate you being here, but quite 
honestly--no offense--I wish you weren't. We need to have the 
Vice Chair of Supervision here. This is a position that the 
Administration has refused to appoint for 6 years now.
    You know, Governor Tarullo has essentially fulfilled the 
function as position of the--from his position as Chair of the 
Feds Board's committee on supervision, but he is not in this 
position. And quite honestly, by refusing to fill this 
position, I believe that the President has deprived Congress 
and the American people an opportunity to hold the Fed 
accountable through these semiannual hearings.
    And this is a requirement of Dodd-Frank, the much vaunted 
Dodd-Frank, that some of my friends believe is somehow holy 
script that can't be changed or altered in any way. But they 
conveniently refuse some of those other areas.
    Do you believe that there should be a nomination to fill 
this position?
    Mrs. Yellen. We would certainly welcome a nomination.
    Mr. Huizenga. Have you brought that up with Secretary Lew 
in your weekly lunches?
    Mrs. Yellen. This is a matter for the Administration to 
decide.
    Mr. Huizenga. That is not my question. Have you brought it 
up? You are having to be here in somebody else's stead. Have 
you brought it up with the Administration or specifically with 
Secretary Lew or anybody else?
    Mrs. Yellen. I am not going to discuss what I have 
discussed or haven't with the Secretary.
    Mr. Huizenga. Okay. Well--
    Mrs. Yellen. As I say, it is an Administration 
responsibility, and we would certainly welcome a nomination.
    Mr. Huizenga. Well, I guess we will continue to hold you 
responsible for that obligation, which is something that you 
shouldn't be held for. But that is your decision.
    Mrs. Yellen. Well, I think--
    Mr. Huizenga. I am going to go on. But do you believe that 
any and all rulemaking regarding regulatory or supervisory--or 
supervision should be suspended until this Vice Chair is 
actually named?
    Mrs. Yellen. No. Because I think the Board of Governors is 
charged with supervision and putting in place regulations. And 
we are carrying that out.
    Mr. Huizenga. And then who do we hold responsible for that? 
Who do we hold responsible for that then?
    Mrs. Yellen. Well, I am responsible and my colleagues are 
responsible, and I am--
    Mr. Huizenga. Okay. Well, as long as you are willing to 
fulfill that obligation, that is an additional burden on you, 
but--
    Mrs. Yellen. We are. Congress assigned the Board of 
Governors that responsibility, and I am certainly sharing that 
responsibility with my colleagues.
    Mr. Huizenga. Okay. This is going fast so I need to move 
on. I want to talk a little bit about monetary policy versus 
regulatory and supervision and supervisory roles. The fact is, 
is that in my Fed Oversight Reform and Modernization Act, the 
FORM Act, and by extension the CHOICE Act, we are trying to 
bring some separation to your function as monetary policymakers 
as well as your regulatory and supervisory roles.
    Former Senator and Banking Committee Chairman Dodd-Frank--
or Chris Dodd as well as Chairman Frank at the time had 
advanced legislation or advanced the notion that those ought to 
be separate duties and that your regulatory and supervisory 
roles ought to be put on budget. And I am curious, were they 
wrong in that assessment?
    Mrs. Yellen. Well, Congress decided to--
    Mr. Huizenga. So you would welcome, then--if Congress 
decided, you would welcome having that separation and putting 
your regulatory and supervisory roles under budget and with 
review just like everybody else, every other regulator versus 
the separation of your monetary policy duties?
    Mrs. Yellen. The banking agencies do not have their budgets 
mandated by Congress. They are covered by collections from the 
industry. I would very much worry that we would lack the 
flexibility under congressional appropriations to ramp up our 
supervision at times when it appears to be--
    Mr. Huizenga. But we have an alphabet soup of all these 
other regulators that are there as well. And so it seems to me 
you are wanting to have your cake and eat it too. You want to 
have this super-duper regulatory role where it is Fed uber 
alles on this stuff. But you are not willing to subject 
yourselves to what the other regulators go through, and that 
just seems that--rarely do I say that I agree with Barney 
Frank, but I believe that Chairman Frank at the time had this 
right and that there is that separate role.
    My last issue as we are quickly closing out here, some have 
believed that Dodd-Frank cannot be changed at all in any way, 
shape, or form. You said on page 14, page 4 a number of times 
that there ought to be these adjustments. Have you spoken to 
these Senators or other reps who disagree with you and say that 
we cannot touch Dodd-Frank?
    Chairman Hensarling. A very brief answer, please.
    Mrs. Yellen. Well, we have said that those would be 
desirable changes.
    Mr. Huizenga. I hope you are expressing that to the 
members.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    And it is a pleasure to welcome you back to this committee. 
And let me just say at the outset, I also thank you for staying 
with who you are, being nonpartisan and independent, despite 
there being some, especially in the presidential politics which 
we are currently engaged in, who is trying to say that your 
decisions are based upon a partisan way. In fact, I think that 
it is good when you are criticized from both the left and the 
right and from everyone. That probably means that you are doing 
the right job because you are not focused on either side.
    And we in this committee specifically reinforced the 
banking supervision's powers of the Federal Reserve in Dodd-
Frank because there was clearly a need to heighten our banking 
examinations and regulatory framework. I think that that is 
clear from what took place back in 2008.
    The good news is that we are seeing banks taking bolder 
steps to reduce risk, as you have indicated, and to exit out of 
certain risky activities. We do see some of that happening. 
Even if some would say that banks are bigger today than there 
were before the financial crisis, that probably may be true 
from a simplistic perspective, but it is not a complete and 
accurate picture because, not only have banks exited some of 
their riskier businesses, they have also boosted their capital 
and liquidity buffers, which surely increases the size of their 
balance sheets, but it makes them safer and sounder 
institutions. So this is the complicated stuff, which is true. 
And then yet we still have Wells Fargo, which causes us to have 
great concerns as to what and where we need to go next, as we 
will have questions with him. So there has been some progress.
    But then there is also unintended consequences. And I want 
to shift to that now just because it is well-documented that 
one of those unintended consequences of banks derisking has 
been that banks are getting out of certain communities and 
countries, and they are also denying services to millions of 
lower income Americans, not because the risk is too high, but 
simply because the profit margins are not considered high 
enough. There have been serious consequences on vital 
correspondent banking relationships that are critical to 
international financial flows also.
    But another major problem happening in several communities 
here, including in a district like mine, is that banks are 
closing branches. In fact, economists from the Federal Reserve 
Bank of New York released a report last March entitled, 
``Banking Deserts, Branch Closings, and Soft Information,'' 
showing that U.S. banks have shut nearly 5,000 branches since 
the financial crisis as a result.
    Residents of low-income neighborhoods have become somewhat 
more likely to live in a banking desert. That is why I have 
called for the revamp of the Community Reinvestment Act in a 
letter that was just mailed to a number of banking regulators 
and cosigned by 40 of my colleagues. Some are still signing on.
    So Chair Yellen, it is obvious that CRA is not working as 
it was meant to work when it was passed 40 years ago. And I 
have had this discussion with OCC Comptroller Curry, and I 
strongly believe that part of the solution resides in enabling 
greater collaboration between large banks and CDFIs, including 
minority deposit institutions, so that these institutions can 
take over assets and branches before they close, and more 
importantly, so they can preserve banking services and 
relationships in low-income communities of color.
    So the comptroller and I are in constant dialogue on this, 
and I would love to get some of your thoughts on this matter.
    Mrs. Yellen. Well, I am concerned about banking services in 
low-income communities. And we are working with minority 
depository institutions to provide support to them in enhancing 
the very important and valuable role that they play in ensuring 
the provision of services to these communities.
    Mr. Meeks. So do you believe that we should--40 years ago 
there was one thought of you: Banking in CRA was put in so that 
we could make sure that you had institutions. Do you believe 
that there is ways that we can revitalize or revamp CRA to deal 
with the institutions and what is taking place today so that 
these communities are not neglected and then become part of 
banking deserts?
    Mrs. Yellen. Well, we are having a look at CRA and the 
agencies who have put out additional guidance in recent years 
that is meant to address issues that have arisen, and we will 
continue to look at what further guidance might be appropriate.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. Duffy. Madam Chair, welcome. Obviously, looking back to 
2008, the crisis had a huge impact, not just on the financial 
service sector, but had a huge impact across our country and on 
many of the families that we represent. And I would argue that 
this massive Dodd-Frank bill was passed in a time of fear, 
where people were concerned about the future of our country and 
the future of their family. And a 2,300-page bill was passed 
before the dust had even settled and we had a full analysis on 
what caused the crisis.
    And we were told by our friends across the aisle, who I 
would argue opened up their cabinets, their file cabinets and 
dumped in every wish bag issue that they had for probably a 
decade, but they made a promise to the American people that 
when they passed that bill, they would be ending too-big-to-
fail. Because people were concerned not just about the economy 
but the fact that the taxpayer, their money was going to bail 
out large financial institutions.
    Do you agree now, almost a decade on, that we have ended 
too-big-to-fail?
    Mrs. Yellen. Well, I think we have taken very significant 
steps toward--
    Mr. Duffy. No, no, no, no, Madam Chair, that is not my 
question. We were promised that we would end too-big-to-fail--I 
wasn't here--that they would end too-big-to-fail. So I think 
the American people have a right to know what you think. Have 
we ended too-big-to-fail? Yes or no.
    Mrs. Yellen. So as I said, I think too-big-to-fail is a 
less significant problem now than it was before. I don't--
    Mr. Duffy. So you are saying it is a still a problem. We 
haven't eradicated the threat, have we? Too big to fail still 
exists. Yes?
    Mrs. Yellen. I think we have made very, very important and 
meaningful strides toward ending it.
    Mr. Duffy. Madam Chair, these are simple questions.
    Mrs. Yellen. I am sorry, I don't think it is a black or 
white thing, yes or no.
    Mr. Duffy. You can say, I can tell you, Congressman Duffy, 
we have ended too-big-to-fail. America is better off for Dodd-
Frank and the fact that I am the Chair of the Fed. Or frankly, 
no, we haven't. We haven't ended too-big-to-fail. We have made 
progress, but we haven't ended it.
    Mrs. Yellen. We have done a great deal to make it possible 
for a systemic institution to be resolved successfully.
    Mr. Duffy. So I am going to take that--
    Mrs. Yellen. The odds of accomplishing that are much 
better.
    Mr. Duffy. You are not answering my question. I think what 
you are--if I am going to clear the smoke, you are saying, we 
have made progress but we haven't ended too-big-to-fail, and I 
think you are in a safe zone because Elizabeth Warren even 
admits we haven't ended too-big-to-fail. The ranking member and 
my friends across the aisle will admit, clearly in hearings 
here, we haven't ended too-big-to-fail.
    So my question for you is a 2,300-page bill giving you and 
other prudential regulators significant authority that had a 
huge impact on the financial sector and on our economy, if we 
haven't ended too-big-to-fail, is it a failure of Dodd-Frank or 
is it a failure of the Fed?
    Mrs. Yellen. I am sorry, I am not willing to describe it as 
a failure, because, number one--
    Mr. Duffy. We haven't ended too-big-to-fail.
    Mrs. Yellen. I am sorry, we have made great progress in 
trying to achieve that, and it is not a black or white issue.
    Mr. Duffy. Does that answer work for my constituents? When 
I go home and said, this was a devastating crisis, it had a 
huge impact on your family, we are 10 years on, we had a 2,300-
page bill, you can't get a loan from your credit union or your 
community bank--I am not done--or from your community bank, and 
Chair Yellen came in and she said we have made progress.
    Mrs. Yellen. So we have a system that is much safer and 
sounder. It is much more resilient. It has much more capital, 
much more liquidity, and better, although certainly not 
perfect, risk management.
    Mr. Duffy. I wholeheartedly disagree on many issues with 
Elizabeth Warren, but at least she is truthful on that.
    Larry Summers recently--I am sure you read his piece--said 
that, to our surprise, capital information is at least 
superficially inconsistent with the view that banks are far 
safer today than they were before the crisis and some support 
for the notion that risks have actually increased. Larry 
Summers. Do you disagree with Mr. Summers as well?
    Mrs. Yellen. Yes, I do, I disagree significantly with that 
conclusion because it is based on the notion that markets 
properly evaluated the risks in banking organizations before 
the crisis, and nothing could be further from the truth.
    Mr. Duffy. I am going to give you one quote. In 1788, James 
Madison worried that laws may become so voluminous that they 
cannot be read or so incoherent that they cannot be understood. 
2,300 pages in Dodd-Frank, 30,000 new regulatory restrictions, 
a 900-page Volcker Rule, 600 pages of Basel III, and you can't 
tell me with all that rule and regulation that you haven't 
eradicated the threat of too-big-to-fail.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chair.
    Thank you, Madam Chair, for being here again. I just want 
to clarify a few things I think some of my colleagues made. I 
am not aware of anybody who doesn't want to amend Dodd-Frank, 
including me. I want to amend it; I just don't want to gut it. 
Good amendments, thoughtful amendments, all for them. Gutting 
it, totally against. And that is pretty much the only bills we 
have been offered is the offered bills that would gut--
    Mr. Huizenga. Will the gentleman yield?
    Mr. Capuano. Not right now, no, but thank you.
    Mr. Huizenga. Hold my request.
    Mr. Capuano. Too big to fail? I agree. We should do more on 
it. That is why I offered the bill to bring back Glass-
Steagall. All my colleagues are welcome to join that bill. That 
is why I offered H.R. 888 that the community bankers support. 
All my colleagues are welcome to join that bill. And that is 
why I joined my colleague on the other side, Mr. Garrett.
    Now, my God, if you are not paying attention, when Garrett 
and I can agree on H.R. 2625 that directly relates to the Fed's 
ability to bail out banks. All my colleagues are welcome to 
join that bill as well. I know Mrs. Yellen wouldn't like that 
bill, and I appreciate that, but it doesn't kill you. It just 
kind of squeezes a little harder.
    There are bills that are out there to do more. All you have 
to do is read them and join us. If Garrett and I can do it, you 
sure as hell can find a way to do it. Don't get used to me and 
Garrett working together either, but that is a different issue.
    Mrs. Yellen, let's assume for the sake of discussion that 
we had a large bank, a big SIFI, one you are keeping a very 
close eye on, that over the last 5 years has had 16 
enforcements actions against them, including one from the Fed. 
Let's assume the bank had a Fed fine of $85 million, and in 
that agreement, the consent agreement that they signed with 
you, they said--well, you said, ``Internal controls are not 
adequate to detect and prevent instances when certain of its 
sales personnel, in order to meet sales performance standards 
and receive incentive compensation, altered or falsified income 
documents and inflated perspective borrower's incomes to 
qualify those borrowers for loans that they would not otherwise 
have been qualified to receive.'' That was 2011. Obviously, 
hypothetical, of course.
    And since that time, we have had 15 other violations across 
the Board with pretty much every alphabet agency you can find--
DOJ, CFPB, OCC, FinCEN, FHA, SEC, NCUA, and pretty much every 
State in the Nation--totaling $10 billion, almost $11 billion 
in fines. Those actions included defrauding student loans, 
mortgage holders, credit unions, identity protection, 
kickbacks, insider trading, defrauding Freddie, defrauding 
Fannie, worker health issues, discriminating against African 
Americans and Hispanics, defrauding investors, foreclosure 
abuses, and on and on and on.
    And then just this year, earlier, when you rejected their 
living will, your letter cited concerns about quality control, 
senior management oversight, accuracy, the consistency of 
financial and other information reported, even though the 
firm's leadership steering committee had input to the plan.
    And now we have a--same bank, same bank, just defrauded 2.5 
million of its own customers. Its own customers. I am sorry, 
1.5 million. Don't you think it is time the Fed does something? 
How long does this stuff go on before you get outraged and take 
action?
    Mrs. Yellen. As you pointed out, we have done something. 
The action that you described in 2011--
    Mr. Capuano. You know that an $85 million fine to this bank 
is laughable. You know that. I know you know that. It is a lot 
of money to me and everybody I know, but to this bank, they 
made $23 billion last year. God bless them. They are a very 
successful bank. An $85 million bank is barely a footnote in 
their annual report, and you know that.
    Mrs. Yellen. Well, as you pointed out, many regulators have 
been involved in--
    Mr. Capuano. Oh, I am going to have my fun with them too. 
It is just your turn today.
    Mrs. Yellen. So we are--in the case of this institution, we 
are the supervisor of the holding company. We have already 
instituted a review of all of the largest banking organizations 
because we are very concerned with all of the compliance 
problems and violations of laws that have occurred.
    Mr. Capuano. You know they are laughing at you, right? You 
know they are laughing at you.
    Mrs. Yellen. Well, we will--
    Chairman Hensarling. The time of the gentleman from 
Massachusetts has expired.
    The Chair now recognizes the gentleman from New Hampshire, 
Mr. Guinta.
    Mr. Guinta. Thank you, Mr. Chairman.
    Chair Yellen, to your right. Thank you. Thank you for being 
here today. I want to talk a little bit about community banks. 
You and I know the importance and the role that they play in 
our financial ecosystem. My State of New Hampshire is a small 
State yet a resilient State, 1.3 million people, and we have 
very close relationships with our community banks. We have 10 
Federally chartered banks, we have 16 State chartered banks, 
and we have 10 out-of-State chartered banks. So it is not a 
significant number, but they are very important and critical to 
consumers.
    But due to the severe regulations that community banks in 
my State are subject to, they are now limiting products and 
loans and services to their customers and my constituents. When 
community banks should be focused on providing access to credit 
for consumers, their focus and attention on meeting compliance 
with the burdensome regulatory requirements seems to take the 
priority of their time.
    I get reports from my community bankers on a regular basis 
that they can spend up to 25 percent of their time and 
resources on compliance, and this has been increasing as a 
result of the growth in the regulatory requirements that 
continue to be placed on them.
    So my first question would be, do you believe that there is 
a disproportionate impact of regulatory compliance on community 
financial institutions, institutions that are smaller that 
service customers in New Hampshire?
    Mrs. Yellen. So we want to do everything we can to reduce 
burdens on community banks and recognize that they are laboring 
under a significant set of regulatory burdens. We are going 
through the EGRPRA process and looking at a number of concrete 
ways in which we can reduce that burden. And we have taken a 
number of steps on our own to reduce the frequency and 
intrusiveness of exams to make it more risk focused, to do more 
work not on the premises of the bank to try to reduce burden.
    You asked if the burdens had fallen disproportionately--
    Mr. Guinta. Right.
    Mrs. Yellen. --on community banks. The fact that they are 
smaller means that these burdens can be significant relative to 
their budgets. But the most restrictive requirements have been 
focused on the larger institutions, particularly the U.S. G-
SIBs that are subject to a much more stringent set of--
    Mr. Guinta. But you do think there is a disproportionate 
impact on smaller banks, community banks?
    Mrs. Yellen. There is quite a bit of research that is 
taking place. In fact, we have a conference that is taking 
place at the moment that is looking at those burdens but--
    Mr. Guinta. Well, the reason I ask--
    Mrs. Yellen. --they are significant burdens for a very 
small bank. There is a certain fixed cost involved in doing 
that.
    Mr. Guinta. The reason I am asking is we have had two 
mergers in the last 6 months in the State of New Hampshire. And 
my fear is that that is going to continue. So I hope that you 
could identify very specifically and very quickly before the 
end of the year areas where we can reduce that regulatory 
burden. New Hampshire bankers are going to be coming to 
Washington tomorrow to meet on this very subject. They are very 
interested in it and--because our economy requires and relies 
on them.
    A different point I want to bring up, in your written 
testimony, you recommended that Congress consider carving out 
community banks from the Volcker Rule and the Dodd-Frank Act's 
incentive-based compensation rules. Regarding your 
recommendation that community banks be carved out of the 
Volcker Rule, would you agree in concept that an approach 
worthy of consideration would be to exempt the Volcker Rule 
those banking institutions that do not engage in a material way 
in the activities that the Volcker Rule seeks to regulate, but 
keep those entities that engage in trading activities subject 
to the Volcker Rule?
    Mrs. Yellen. So we have certainly said that we thought 
smaller institutions should be exempt, and the exact definition 
I would have to look at--I would have to look at more 
carefully.
    Mr. Guinta. Okay. You also talked earlier about the 80,000 
jobs per month that this economy is generating. Can you tell 
me--and you said the labor participation rate is changing. Can 
you tell me what percentage the labor participation rate is 
right now? Is it below 62 percent?
    Mrs. Yellen. No, I don't believe so. Let me just have a 
look.
    It is currently 62.8 percent.
    Mr. Guinta. Okay. I am sorry, my time has expired, but I 
don't think that that has changed over the last several months.
    Chairman Hensarling. The time of the gentleman has expired.
    Mrs. Yellen. It hasn't changed over the last several 
months.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa.
    Mr. Hinojosa. Thank you, Chairman Hensarling and Ranking 
Member Waters, for convening this hearing.
    Welcome, Chair Yellen, and please accept my sincere 
gratitude for your leadership at the Fed. I commend you for 
acting in the absence of a Vice Chair of supervision or 
regulation of bank holding companies and nonbank financial 
institutions.
    Confidence in the safety and stability of our financial 
system continues to strengthen, even in the face of global 
market unpredictability and other emerging threats. We can 
attribute continued growth in stronger and more resilient 
economy to your leadership and the protections afforded by 
Dodd-Frank Act.
    My first question, Chair Yellen, is, in your opinion, do 
our financial regulators currently have the discretion they 
need to correctly tailor regulatory and supervisory standards 
or should we in Congress take action?
    Mrs. Yellen. Well, I think by and large, we do have the 
scope we need to tailor these regulations. We have pointed out 
a few areas where we have limitations--the Volcker Rule is one 
and the incentive compensation rules are another--where we can 
do some tailoring, but not as much as we would like.
    Congress did act to address our--the restrictions we faced 
in the area of insurance in designing an appropriate set of 
capital standards for insurance-centered savings and loan 
holding companies. And we appreciate that and have used it to 
propose a set of capital standards for those companies that we 
think is appropriate.
    So there are some areas where we have needed Congress' 
help, but by and large, we have a good deal of scope to tailor 
as we see appropriate.
    Mr. Hinojosa. You need to know that I continue to hear from 
banks of all sizes in my congressional district that they are 
burdened by regulations and costly stress tests. Several 
changes to the yearly stress test, known as the Comprehensive 
Capital Analysis and Review, were announced on Monday. Can you 
tell us what changes are being made to this review process and 
how that is expected to help community banks that are not 
internationally active nor participating in risky nonbank 
activities?
    And also, there are regulatory relief--is rather--there was 
in the Wall Street Journal an article that talked about trying 
to have some regional bank systems given some--if they are from 
$200 billion in assets or less, being given some relief.
    Mrs. Yellen. Yes.
    Mr. Hinojosa. Talk about that for me.
    Mrs. Yellen. So at the moment, banks--over $50 billion have 
been part of our so-called CCAR, comprehensive capital and 
stress testing regimes. And the proposal that we put out on 
Monday that Governor Tarullo described would exempt from the 
qualitative parts of that process bank holding companies under 
$250 billion that do not have significant foreign activities or 
significant nonbanking activities.
    So the list complex of those banking organizations, they 
would need to conduct the quantitative stress test, and we 
would conduct that, but the remainder of the capital 
evaluation, the qualitative part, they would no longer be 
subject to.
    Mr. Hinojosa. I am also wanting to address the problems in 
Wall Street and some of the investors, especially working 
families investing in their 401(k)s. How are China's economic 
troubles affecting the United States' economy? And as the 
largest foreign holder of U.S. Treasuries with over $1 trillion 
in reserve, is the Federal Reserve concerned that recent 
selling of large quantities of treasuries by China could 
significantly and negatively affect the U.S. dollar?
    Mrs. Yellen. Well, China's economy has been slowing from 
decades of very rapid growth. That is something to be expected, 
given all the progress they have made and the desirability of 
transforming their economy to a more consumer-based economy. By 
and large, that process is proceeding and it is a good one from 
the standpoint of the United States, but it is very 
challenging.
    And earlier in the year and last year, there were 
disruptions in markets related to their currency, their 
approach to managing their exchange rate. They sold treasuries 
mainly to support their currency, which was under downward 
pressure. And in recent months, I think markets have been much 
calmer, I think, as the--
    Chairman Hensarling. The time of the gentleman from Texas 
has expired.
    Mr. Hinojosa. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Oklahoma, Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here. I share, along 
with my colleagues, Mr. Neugebauer and Mr. Luetkemeyer, concern 
over a proposed rule that the Fed released on Friday increasing 
the cost for financial companies to engage with their clients 
in physical commodity markets.
    As a member of this committee and a former chairman of the 
House Agriculture Committee, I have worked with a number of end 
users on issues associated with reform and regulation within 
the derivatives markets. And you and I have discussed on 
various occasions the nature of my district, or district of 
Oklahoma, and the importance of stable commodity markets to my 
district. Over the past few years, I have heard from a number 
of commodity end users about their concerns on this issue. And 
I too am concerned about the impact this will have on our 
businesses and municipalities and their ability to participate 
in commodity markets.
    While we should, of course, continue to address risk to 
safety and soundness within our financial system, it appears 
that this rule simply seeks to discourage a company's 
participation in these activities through capital requirements 
rather than through an actual effort to target and mitigate 
risk within the system.
    In crafting this proposal--I guess my questions would be 
the following: In crafting this proposal, did the Fed examine 
historic loss data for banks engaged in physical commodity 
activities as well as how losses in this business related to 
losses in other parts of the bank's business?
    Mrs. Yellen. We did take a very careful look at the nature 
of banks' involvement in these areas and considered the risks 
that that activity entails. And it is important to recognize 
that financial holding companies would still, under these 
proposals, be permitted to engage in physical commodities 
trading with end users. That is not something that would 
change.
    What this proposal does is put in place additional risk-
based capital requirements for activities that involve 
commodities for which Federal or State law would impose 
liabilities if the commodity were released into the 
environment. So we are worried about environmental risk.
    Mr. Lucas. Well, Chair Yellen, if you could provide us with 
the information on how you made those determinations, what the 
historic perspective was, how it has actually affected 
businesses, I think I and the rest of the committee would 
appreciate what the historic foundation was.
    It also appears that you are raising risk weighing to 300 
percent for companies that engage in this business, which will, 
of course, make it much more expensive for all of these 
companies. Could you also provide the committee with the 
analysis that was used to arrive at this 300 percent as an 
appropriate amount? How did you get there?
    Mrs. Yellen. We will get back to you on some details.
    Mr. Lucas. And I would simply note again, Chair Yellen, I 
commented earlier, you and I have discussed this on many 
occasions, my district is agriculture and energy. We are wheat 
and cattle, we are pork, we are cotton, we are oil and gas, we 
are electricity, more and more every day generated by wind 
power.
    Having the tools to be able to hedge our products, having 
more participants in the markets, give us, we believe, a much 
better price situation. If we restrict our tools to protect 
ourselves, if we restrict access to the markets by others, 
there is a great concern we will suffer and, of course, 
ultimately, the consumer who benefits from that supply will 
suffer too.
    One last thought or maybe a comment. And I would like to 
reinforce one more time with you, Chair, of my interest and 
concerns regarding how Basel III treats derivative customers 
and their margin. I understand that the Basel Committee 
negotiations continue, but recent reports are not encouraging 
for the end users in my district and the clearing 
infrastructure that has long supported their hedging needs.
    In this complicated world we live in, I guess what I am 
saying is, we need more tools, not fewer. We need more cost-
effective tools, not more expensive tools, as in the case with 
Basel III, help protect us from those kind of consequences if 
it gets out of hand.
    And with that, Mr. Chairman, I guess I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    And, Madam Chair, thank you for being here. Really 
appreciate it. I want to go back to Mr. Capuano's questions 
around the Wells Fargo scandal. Now, I do understand that there 
has been a small fine paid by Wells Fargo. But in light of what 
they did here--2 million fraudulent accounts, I know they fired 
5,000 lower-level employees, there has been a little bit of 
claw back by the bank itself--but in terms of your role, you 
are the primary regulator for the Wells Fargo holding company, 
right?
    Mrs. Yellen. We are the primary regulator for the holding 
company, but these abuses occurred in the bank.
    Mr. Lynch. I understand.
    Mrs. Yellen. And the Comptroller of the Currency and the 
CFPB have authority, and they are the ones who brought these 
actions. We weren't involved in it.
    Mr. Lynch. And I give them great credit for that, as well 
as, I think the L.A., Los Angeles authority was involved as 
well.
    Is there anything that you can do, looking at what happened 
here? This was widespread. This is a disgrace, really, what 
happened. Two million fraudulent accounts. And the low-level 
employees who were fired didn't just think this up themselves. 
They obviously had incentives that were put in place.
    Any ideas from your standpoint as what might be done as a 
regulation or as legislation to prevent this from happening 
again?
    Mrs. Yellen. Well, the Comptroller of the Currency and the 
CFPB have demanded in their actions that remedies be put in 
place. We now have initiated a broad-based review for all the 
largest banking organizations of their compliance regimes and 
governances--
    Mr. Lynch. Okay. Well, let me just ask you, this is a huge, 
huge thing here, again, 2 million fraudulent accounts. Can you 
think of any circumstances where a bank might be required to 
admit guilt? There was no admission of guilt here at all by the 
CEO or the bank itself. There was no admission of guilt. If it 
didn't happen here, how can we even imagine ever that a bank 
might be required to take responsibility for what they are 
doing?
    And I think by doing this, by continually letting the banks 
off the hook and nobody has to admit guilt, you actually build 
a perverse incentive for this stuff to happen. And I just--it 
blows my mind that they are getting away with this and they are 
paying a little slap-on-the-wrist fine that is not bothersome.
    And the CEO the other day said, well, it was only 5,000 
employees. We have 100,000 employees and 5,000 did this, and 
sort of just blowing it off. It just--
    Mrs. Yellen. I think it is very important that senior 
management be held accountable and that when there are 
individuals, identifiable individuals who have been involved in 
wrongdoing, that--
    Mr. Lynch. Yes. I know they are all lawyered up, but I 
think there is value in just getting after them, just getting--
I don't care if you get a conviction or not, just get after 
them and make their life hell. That is--and we have to create a 
disincentive in this system at some point for these CEOs to do 
the wrong thing. They completely--they completely ignored any 
of the safety and soundness and just basic responsibilities 
here. And I would like to see somebody held accountable for 
that at some point.
    Let me ask you, it is a very clubby environment, the banks. 
And I would be amazed if this practice were just limited to 
Wells Fargo. I think it is probably the practice at a lot of 
banks. There is a lot of cross-pollinization going on, people 
work for one bank, go to another bank. Are we looking at any 
other big banks doing this type of thing?
    Mrs. Yellen. Well, as I said, yes, we are. The CFPB is in 
all the largest banks. And we have undertaken--we are 
undertaking a look comprehensively, not only in the consumer 
area, but compliance generally, because there have been a very 
disturbing pattern of violations. They occurred in the mortgage 
area, in foreign exchange trading, in many different areas, 
sanctions violations, LIBOR, and we are taking a comprehensive 
look at the biggest banks at their control--
    Mr. Lynch. All right. Thank you. I have 17 seconds.
    I just want to say, in closing, what a wonderful job the 
OCC and especially CFPB did on this. This is why they are 
there. And I very seldom hear great things about the CFPB. They 
did an amazing job here. This is a huge, huge win for the CFPB, 
and it redoubles my faith in that agency.
    Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, chairman of the House Foreign Affairs Committee.
    Mr. Royce. Thank you, Mr. Chairman.
    Thank you, Chair Yellen. It's good to see you today. I had 
a question--maybe it is a bit to follow up on Mr. Guinta's 
point--about the unprecedented consolidation that we have seen 
in community financial institutions, where there are fewer and 
fewer of them. And these smaller institutions have fewer assets 
over which to spread their ever-growing compliance costs. So 
they often seek those economies then through mergers, and that 
is what leads to this conundrum now of a situation where we 
have fewer banks today than we did during the Great Depression.
    And are you worried about the consequences of consolidation 
in for communities and for our economies, and eventually for 
overleverages you end up with just a few big institutions 
having so much weight in them?
    Mrs. Yellen. Well, I do think it is essential that we have 
a vibrant set of community banks serving America's communities. 
They play a very special role in our financial system, and it 
is important that they remain healthy. Reducing regulatory 
burden, it is important. It is something that we will seek to 
foster using every available tool that we have.
    Community banks face a challenging environment, though, for 
reasons that go beyond regulation. The low level of interest 
rates and flat yield curve and slow pace of growth in the 
economy are also factors that are making it difficult for them 
to thrive. But they are tremendously important in the role they 
play for American households and businesses, and we will 
certainly do everything that we can to relieve burdens on them.
    Mr. Royce. Yes. And some of that is true by monetary 
policy, some of that is true by fiscal policy. So that is 
another way in which they are adversely impacted by decisions 
made in Washington.
    So it seems to me at the heart of the consolidation, as you 
say, are these--well, it is really an avalanche of rules that 
have forced small institutions to hire extra staff. That is the 
situation, the economy is a scale for them but--
    And with that in mind, you said earlier that you are 
looking for concrete ways to reduce regulatory burdens on 
community banks, and you gave us some very specific 
recommendations on merchant banking and commodities activities 
in the section 620 report that you released.
    Can you promise to send up specific legislative ideas that 
relate--as it relates to regulatory relief for community banks, 
if we could ask that of you?
    And then, for now, I have some questions on the report we 
received because it is part of the section 620 report. Did you 
study the effect that a repeal of merchant banking authorities 
and the loss of $27 billion in capital would have on small and 
mid-capped companies? And are you confident that if we act on 
those recommendations that are in that report, there will be 
alternative sources of capital for portfolio companies? That is 
one question I wanted to ask.
    And another is, based on your answer to my colleague 
earlier, is it correct to conclude that the recommendations for 
legislation in the report are based not on historical risks, 
they are based on, I guess, a projection of the possibility of 
potential future risks? And the reason I ask those questions is 
because, as we look back at the financial crisis, there is no 
evidence that merchant banking and commodity activities were 
part of the crisis. What was at the heart of the crisis was a 
concentration of risk in bad home loans and securities tied to 
those loans.
    So as you limit activities of these community banks, are 
you concerned that you are limiting the diversification of risk 
and thus adding to the concentration? The harder we make it on 
these banks, the more concentrated the risk in the big 
investment banks or the larger institutions. And that could 
have a very negative impact on safety and soundness. And that 
was what I was going to ask you.
    Mrs. Yellen. Our valuation was with respect to alternative 
sources of equity financing, that private equity venture 
capital would be alternative sources, and that the merchant 
banking ontribution here is not very large, that it would not 
have a significant negative affect. Of course, banks would 
still be able to provide a wide range of lending, advisory, and 
other financial services to customers, that would include 
startup firms, technology firms, and others. And they would 
have the ability to continue making investments in financial 
firms. So--
    Chairman Hensarling. The time of the gentleman from 
California has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mrs. Yellen. It is wonderful having 
you back again. You know, each time you come, we talk about an 
issue that is dear to my heart and that is the overwhelming 
unemployment rate facing young African American men.
    Last time we talked, you said your monetary policy was a 
blunt instrument, and you urged Congress to introduce 
legislation to target this. Well, I took your direction, and I 
and my cosponsors have introduced two pieces of legislation 
that I certainly hope you will say a kind word for. Because if 
you--and knowing your dual duty as both inflation as well as 
unemployment, if you say a word of support here, you can help 
us pass these two pieces of legislation.
    Now, the first one is the deal with our crumbling 
infrastructure. That is coming. That is a big, big, big issue. 
What we want to do on this first bill is to address and develop 
jobs and on-the-job training apprenticeship program, targeting 
African American young men, ages 18 to 39. Eighteen to 39, they 
are the hardest hit for unemployment nationally at 38 percent, 
and in some of our inner cities at over 50 percent, as you well 
know--it is in the news every day--of the condition that many 
of our African American communities are facing.
    And so we want to set that up. It will come under the 
Secretary of Labor, who will coordinate these programs. It will 
work with the labor unions, like the IBEW, the plumbers and 
pipe fitters, the ironworkers, steel workers, all of those 
unions who will be helping to build our crumbling 
infrastructure. And we will bring these training programs and 
job programs. And let me just say, they will be in high 
technology areas, because you can't do all this without 
computer coding, computer systems, the technical aspects that 
are so desperately needed. Very important for us to get those 
in there and get that program started.
    The second one has to do with the education component. As 
you know, every year, every 5 years we have to reinvest in our 
what we call land grant universities. Those 1890s and 1860s 
that were set up after the Civil War, schools like Tuskegee 
University in Alabama, Prairie View in Texas, Florida A&M, all 
of those. While we want to create a new area, now they can only 
spend the money in education research and extension. We want 
scholarships to get these young kids in there.
    The big jobs are opening in agriculture business. It is the 
food we eat, the clothes we wear, now energy, high finance with 
derivatives and all of that. So we want to do that, give each 
of these schools $1 million, which they can spread over that 5-
year period for scholarships.
    Now, these bills are bipartisan. We have some excellent 
cosponsors, folks like Kevin Cramer of North Dakota, Marcia 
Fudge of Ohio, Brad Ashford of Nebraska, Mia Love of Utah, Alma 
Adams of North Carolina, Gwen Graham of Florida, now Pete 
Sessions, who is our House Rules Committee chairman, all are on 
this bill.
    So a fine word from you would be very, very helpful. And I 
am going to ask my assistant if he may give you--would you take 
those to them right now, Tanner--so you could have those.
    All I am asking--now, I am not asking you to use a blunt 
instrument. I am asking to use your golden voice. And if you 
speak and say a kind word, it will help us get these bills 
passed. And not only will the African American community thank 
you, but all of America, white people, everybody. We all know 
that these young black men with this highest unemployment rate 
of 18 to 39 are also the child-producing ages. This goes 
directly at helping us deal with that family breakdown 
structure, so we thank you for that.
    Now, Madam Secretary, I want to ask you one other thing. 
You have an opportunity to do something very significant 
because I understand that your Fed regional bank president in 
my hometown of Atlanta, Dennis Lockhart, is retiring. We have 
never had an African American regional Fed president. I am 
asking you, take this opportunity to make history. We have many 
excellently qualified African Americans who could do this.
    And finally, I want to applaud you and Frank Tarullo for 
what you are doing with the CCAR stress test and committing to 
working with this continuing flexibility. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for being here. I just want to 
kind of catch up now that the gentlelady from New York has 
mentioned the problems in Puerto Rico. If you were to just 
summarize those in a phrase, basically, what is the root of the 
problem there?
    Mrs. Yellen. I think deep-seated structural problems 
pertaining to Puerto Rico's fundamental economic situation that 
have given rise and exacerbated fiscal problems--
    Mr. Pearce. Okay. All right, thanks. Now, when I am looking 
back through the 2008 crisis, I notice that your balance sheet 
jumped from about $900 billion to $2.2 or something like that. 
What was the reason your balance sheet jumped during that 
period of time?
    Mrs. Yellen. Primarily because we engaged in a program of 
purchasing long-term assets, both U.S. Treasury securities 
and--
    Mr. Pearce. So you got assets from the banks who were 
having problems and kind of stabilized the banks so you--
    Mrs. Yellen. Well, no, we didn't buy assets from the banks.
    Mr. Pearce. Bought assets from maybe Fannie or somebody. 
You bought MBS, right? You had mortgage-backed securities that 
you were purchasing that might have been toxic?
    Mrs. Yellen. Well, I don't know that they were toxic. They 
were put in receivership by the U.S. Government and--
    Mr. Pearce. The general perception is that they were toxic. 
Okay. All right. That is fine.
    Now, we were treated to Mr. Lew testifying to us a couple 
of day ago, and he identified in his testimony that he is 
required as head of the FSOC committee to identify and respond 
to emerging threats to U.S. financial stability. Now, I pointed 
out to him that one of the doves on low interest rates, Mr. 
Rosengren, came out with a statement on the 21st in The Wall 
Street Journal saying: I think we need to rethink that there is 
a cost--there is a cost to full employment, basically. So and 
he is talking about bubbling prices that might be caused by 
easy money. And so my question to Mr. Lew is, have the two of 
you ever talked that maybe one of the emerging threats to 
financial stability might be the easy-money policy? You all 
haven't had a discussion, or you have?
    Mrs. Yellen. We do discuss threats to financial stability. 
We monitor them closely.
    Mr. Pearce. About your easy-money policy. Have you 
specifically talked about that? If he is going to identify it, 
he ought to identify the easy-money policy. That is not coming 
from me. That is coming from the guy that is most often on the 
side of easy money.
    Mrs. Yellen. President Rosengren has singled out commercial 
real estate as an area that he is concerned with and--
    Mr. Pearce. He says that easy-money policies could be 
letting markets get out of hand. That sounds a little bit 
broader than REITs. Easy-money policies could be letting 
markets get out of hand.
    Mrs. Yellen. Well, there is the possibility that, in a 
world of very low interest rates, that investors will search 
for yield and take on additional risks. And we are very much 
aware of that. And--
    Mr. Pearce. Okay. So we got a difference of opinion among 
Board members. But then you get something like Virtu, says we 
are going to stay out of the bond market completely because it 
is hard to price the assets.
    Mrs. Yellen. Because of what?
    Mr. Pearce. Virtu, the largest e-trader signaling that his 
company is going to stay away from many securities because the 
underlying assets are hard to trade, setting the volatility of 
the trades, the inability to sell or trade heads of positions.
    Mrs. Yellen. What is he talking about? Corporate bonds, or 
what?
    Mr. Pearce. In my opinion, maybe the bond market overall. 
And so it just looks like that things aren't quite as stable. 
Maybe there are underlying problems. Maybe there are bubble 
prices, and remember that the housing market began as a bubble 
problem stimulated by government policy. And so to have 
everybody sort of looking the other way and saying everything 
is good, and then I look at your--I look at your asset, you 
typically increase--I just look at the fact that your balance 
sheet is now up to $4 trillion, so you have almost doubled in 
the last 4 or 5 years. So you are continuing to buy something, 
and generally if the market--and then I look at the debt. So 
Puerto Rico has a 76--roughly 76 percent debt-to-GDP ratio, and 
ours is 1 to 1.
    I am sorry, but I think somebody ought to be talking about 
stability of the financial market in the United States because 
it looks desperately unstable.
    Thank you, Mr. Chairman. I appreciate your indulgence.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, ranking member of our Oversight and Investigations 
Subcommittee.
    Mr. Green. Thank you, Mr. Chairman.
    Thank you also, ranking member.
    Madam Chair, thank you for being here today. I believe 
history will be kind to you as well as to Chairman Bernanke. 
What you did was extraordinary in a time of great crisis. And I 
just don't believe those who look back, those who look through 
the vista of time, I don't believe that they will see these as 
unkind, unfair, unwanted, or imprudent things. I think that 
they will judge you well and you will be treated very well by 
history.
    Now, just a few things. I am going to do my best to stay 
away from Wells Fargo. But I must tell you that it is difficult 
simply because for one reason, if I may just mention this one: 
the $185 million in penalties is, according to some standards, 
about 3 days of profits. So this becomes a line item under the 
cost of doing business. So it is hard.
    I have some other things, but first let me do this. Let me 
just discuss with you the whole notion of too-big-to-fail. 
Madam Chair, there is a bit of double speak taking place 
because a good many people, when they speak of too-big-to-fail, 
they mean that there will never be another bank that will fail 
as opposed to what I believe most people understand the case to 
be, not have a bank that is so big that when it fails, it 
creates misery throughout the economic order. That is what we 
are talking about. It can fail. We will put it out of its 
misery without it creating economic misery. That is what too-
big-to-fail is all about. That is what Dodd-Frank does.
    Mrs. Yellen. Yes.
    Mr. Green. We haven't finished Dodd-Frank yet. We are still 
implementing aspects of it. But too-big-to-fail is addressed in 
Dodd-Frank, and it is addressed in a very profound way: the 
living wills. That helps us to understand how to put these big 
institutions out of their misery. Dodd-Frank allows us to 
separate them if we need to and eviscerate them, if necessary. 
So too-big-to-fail is all about winding down these big AIGs of 
the world without them taking the economic order with them.
    I would like to make a point if I may before your respond 
to the question of community banks. Madam Chair, the big banks 
have hijacked the term ``community bank.'' They have hijacked 
this term. You and I understand that most banks in this country 
are under a billion dollars. Most of them. Probably 89 percent 
or thereabout.
    Mrs. Yellen. That is right.
    Mr. Green. Under $1 billion. Well, the big banks have 
concluded that you can be a $50 billion bank, a $100 billion 
bank, and still be a community bank. Therein lies the problem 
because when we make efforts to help the community banks, which 
are smaller banks, the big banks step in and they want all of 
the benefits that we would accord the smaller banks, the real 
community banks--a bit more double speak--the real community 
banks. They want those benefits. I applaud you for what you are 
looking at. I have looked--I have read your statement and you 
want to do something about this: an 18-month examination cycle.
    Look, there are people in Congress who would like to help 
community banks, but we cannot do it at the risk of bringing in 
the big institutions who would benefit from it to the detriment 
of what we have been trying to do in Dodd-Frank. So I am 
sharing these thoughts with you because I honestly believe that 
you have some great insight into these things. But my question 
has to do with something else.
    Here is my question. Given what we have done with the QE 
and all of the tools that you have utilized, how important is 
it for us to have some investment in infrastructure? Both 
Presidential candidates have talked about it. Interest rates 
are exceedingly low at this time. How important is it for us to 
invest in infrastructure? Or maybe I should put it another way. 
Would infrastructure investments be helpful in promoting sound 
economic growth? I welcome your answer.
    Mrs. Yellen. Well, I guess my perspective is that we have 
had a very disappointing pace of growth in the U.S. economy and 
productivity growth. The growth in output per worker has been 
exceptionally slow. A half percent per year for the last 5 
years, maybe twice that over the last decade, but low in 
historical terms. And that is critical to living standards, and 
investments of all sorts I think are essential to raise growth 
and promote improved living standards for Americans in the 
years to come.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Green. Thank you, Madam Chair.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from South Carolina, Mr. Mulvaney.
    Mr. Mulvaney. Chair Yellen, I have a couple of questions 
consistent with the hearing. Almost all of them are regulatory. 
But Mr. Neugebauer just actually handed me one that is monetary 
policy, so I want to ask one very brief question about that, 
which is: There has been some attention the last few months 
about the recent decision by the Bank of Japan to start 
purchasing equities. And my question to you is fairly simple. 
Is the United States Federal Reserve looking at the possibility 
of adding the purchase of equities to its toolbox as it looks 
at monetary policy?
    Mrs. Yellen. Well, the Federal Reserve is not permitted to 
purchase equities. We can only purchase U.S. Treasuries and 
agency securities. I did mention in a speech in Jackson Hole, 
though, where I discussed longer term issues and difficulties 
we could have in providing adequate monetary policy, 
accommodation maybe somewhere in the future down the line, that 
this is the kind of thing that Congress might consider. But if 
you were to do so, it is not something--
    Mr. Mulvaney. It would take--
    Mrs. Yellen. --that the Federal Reserve is asking for, and 
there are--
    Mr. Mulvaney. It would take a change in the law to do that 
is what you are saying?
    Mrs. Yellen. It would take a change in the law, and there 
would certainly be costs to take into account.
    Mr. Mulvaney. That is one part of the regulatory question, 
and I appreciate that. Thank you for straightening that out.
    Earlier, Mr. Neugebauer and Mr. Lucas both asked you about 
the proposed changes in the ways that you want to regulate 
commodities trading. And I guess my question then is fairly 
simple. Why are you doing this?
    Mrs. Yellen. Because we are worried about the risks that 
some forms of commodity activities pose to banking 
organizations.
    Mr. Mulvaney. I heard that, and I heard you give examples 
about environmental hazards and so forth. But the truth is that 
has never happened yet. Has it? That risk has never actually 
been incurred. No one trading in the commodities markets has 
ever been sued for an environmental--Exxon Valdez didn't end up 
in the commodities trader getting sued. The BP oil spill didn't 
end up with a commodities trader being sued. So there has never 
actually been that occurrence of that risk being incurred.
    Mrs. Yellen. Well, it doesn't broadly prohibit commodities 
trading. It is focused on activities where there are 
significant environmental hazards.
    Mr. Mulvaney. And we can save for another day whether or 
not 1,200 percent ratios prohibit. But the fact of the matter 
is you are trying to regulate a risk that has never actually in 
the real world been incurred by a commodities trader. Is that 
correct?
    Mrs. Yellen. Well, we have had huge environmental accidents 
that have created enormous liability, and we do have a couple 
of banking organizations that Congress has grandfathered broad 
rights to engage in commodities storage and distribution, and 
those risks certainly exist.
    Mr. Mulvaney. You could make the argument that there are 
other risks that banks incur that are actually more tangible 
and perhaps more likely than an environmental disaster leading 
to a claim against them based upon commodities trading. It is--
and no offense intended to any of my colleagues who are from 
the New York City area--it is risky for banks to be in New 
York, right? It is a target for terrorism. They have actually 
incurred that particular risk in the past.
    Could the Federal Reserve decide, in order to make banks 
safer, that they couldn't do business in New York City?
    Mrs. Yellen. No. We have certainly not decided that.
    Mr. Mulvaney. Could you, in theory?
    Mrs. Yellen. I don't know. I am not sure.
    Mr. Mulvaney. I would suggest that you probably could. If 
you could do this, if you could say, ``Look, we are going to 
require you to change your rules because of this risk that we 
perceive you might incur, even though you have never incurred 
this risk before,'' that that same line of reasoning could be 
applied to something as esoteric as terrorism.
    Mrs. Yellen. What we do require is that banks have robust 
business continuity plans and that they have backup 
authorities. So, for example, when we had Hurricane Sandy--that 
greatly affected New York--that there are backup sites--
    Mr. Mulvaney. Backup systems. Thank you for that.
    My last line of questioning has to do with something 
entirely different, which is cryptocurrencies and the 
blockchain technology. You a spoke at an international 
conference in June. I think there were 90 central bankers in 
the IMF, and you talked specifically about blockchain. And I 
wonder if you want to take this opportunity to talk about the 
Fed's commitment to a light regulatory touch and then also 
speak to whether or not you yourself at the Fed are looking at 
implementing blockchain technology in your operations?
    Mrs. Yellen. We are not looking ourselves at implementing 
it, but we are studying a whole set of FINTECH innovations and 
the ways in which blockchain is being considered for use by 
banks and nonbanks. It could have very significant implications 
for the payment system and for the conduct of business. We want 
to foster innovation. I think innovation using these 
technologies could be extremely helpful and bring benefits to 
society. At this point, we are simply trying to understand the 
nature of these innovations. At the same time, consumer 
protection will also be something that is important. But we are 
not doing rule writing in the setting where we are trying to 
understand the ways in which these innovations are shaping the 
financial--
    Chairman Hensarling. The time of the gentleman from South 
Carolina has expired.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Carney.
    Mr. Carney. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for coming in today to answer 
some of our questions. I have just a couple myself. Hopefully, 
I will be able to get to them. The first, under the Volcker 
Rule, Dodd-Frank allowed an additional period of time for 
groups to divest of illiquid assets, and the Fed has 
acknowledged that they will need to make adjustments to the 
timeline, which currently ends July 2016.
    These investments--I think there was a question earlier 
about the commodities--are largely commodities, physical 
investments which are difficult to sell, illiquid, by 
definition. I joined 11 other members, Democrats and 
Republicans, on the committee on a May letter to you asking you 
to refine your definition of illiquid asset and provide clarity 
on the timeline for institutions, so they are not forced in a 
fire sale situation, which actually could help pension funds 
and others that are holders of these.
    So you have extended the time, I understand, to July of 
2017, but further guidance and decision hasn't been made. And 
we did get a letter yesterday where you said the Federal 
Reserve Board in July indicated it would consider applications 
by firms for extension of the period to conform with these 
illiquid fund investments.
    Could you expand on that? Is that a case-by-case basis? You 
will you come out with a more general rule to provide some 
greater certainty for these institutions?
    Mrs. Yellen. Well, I think we are trying to establish some 
guidelines that would provide greater certainty. We are looking 
at that very carefully. I can't give you details, but we 
recognize there is a significant issue there, and we will try 
to provide clarity.
    Mr. Carney. Yes, that would be great. Just to provide some 
guidance so that they are going to have to start otherwise 
selling these assets, unwinding them--
    Mrs. Yellen. We understand. We understand that.
    Mr. Carney. That is great.
    So I read through your testimony, and I was pleased to see 
some of the things that were done--and we have had some 
discussion about this--with respect to modifying regulations, I 
guess CCAR in particular, for smaller banking institutions.
    Do you have a sense as to what--the complaint that we all 
hear from the smaller banks is that these regulations require 
and they incur additional costs, mostly with staff that they 
have to bring on. Do you have any sense as to whether this will 
enable the banks to reduce their costs of regulatory 
compliance?
    Mrs. Yellen. I think that this change to CCAR should be 
quite meaningful for the banking organizations that will be 
affected and make it a significantly less onerous process for 
them.
    Mr. Carney. And I guess at the end of the day, the question 
is whether or not they will actually be able to reduce their 
staff that is dedicated to that function right now. I have 
talked to local banks in my area, in my State, and other places 
and asked them. When they said, ``Look, this is additional 
cost,'' I said, ``Well, help me understand.'' And they, 
obviously, went through individuals that were hired to address 
compliance.
    Mrs. Yellen. So I can't give you an estimate--
    Mr. Carney. Sure.
    Mrs. Yellen. --of what the resource implications will be. 
They will still be required to conduct the quantitative 
portions of the stress test, but we are looking at ways for 
those smaller institutions to reduce data reporting burdens as 
well.
    Mr. Carney. That is great, and we appreciate your efforts 
in that respect.
    The last question is really kind of pretty general, but you 
have been through this and have provided in your testimony your 
supervisory activities. We all talk about what happened in 2008 
the last time. Where are you going forward? Do you think about 
going forward with respect to the current institutional banking 
framework as well and there has been some discussion of that in 
terms of too-big-to-fail. But what are the concerns that you 
have looking ahead.
    Mrs. Yellen. So I do think we have made progress within the 
regulated banking sector. I think it is safer, and I think we 
have begun to deal with too-big-to-fail and made progress 
there. I think we have addressed some things in the shadow 
banking sector that are of concern as well. Money market fund 
reform is going forward. Areas of concern, like the tri-party 
repo market. I think that has become safer. But I do worry 
about the migration of activities into less regulated parts or 
unregulated parts--
    Mr. Carney. So outside of the banking--
    Mrs. Yellen. --of the financial system. And new threats 
that may be different than the ones we have addressed in the 
past, like cyber threats, of course, are of tremendous concern.
    Mr. Carney. Thank you, Madam Chair. Keep up the good work.
    Mrs. Yellen. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    Chair Yellen, thank you very much for being here. I want to 
talk to you specifically about SIFI designations and I know 
that FSOC has the opportunity to designate SIFIs and the 
Financial Stability Board does it with G-SIFIs. When the FSB 
does that, if they were to suggest that there was an 
institution that was globally significantly important, does 
that permeate or otherwise affect or influence the designation 
as a SIFI for FSOC?
    Mrs. Yellen. No. FSOC has its own specific--
    Mr. Ross. Guidelines?
    Mrs. Yellen. --guidelines and does its own reviews.
    Mr. Ross. Let's talk about those guidelines because I know 
they were brought up earlier, and they are statutorily put in 
there. But, really, FSOC has had a tendency to deviate from 
those, haven't they?
    Mrs. Yellen. To do what?
    Mr. Ross. To deviate with those guidelines. In other words, 
let's look at the MetLife decision. The MetLife decision I 
think exposed something that we have been concerned about for 
quite some time, and that is the deviation from regulatory 
requirements that, for example, FSOC consider the actual losses 
of which, if a nonbank financial institution were to go under. 
And in the MetLife decision, I think the court found that that 
wasn't done. In fact, I think the court in that particular 
decision said that one of the reasons they were overturning 
that designation is because there was no assessment of costs or 
losses--I am sorry; that is another part--no assessment of 
losses that would have been sustained had MetLife experienced 
the financial trouble. Is that correct? Is that your 
understanding?
    Mrs. Yellen. Well, FSOC did a detailed study of what the 
potential consequences--
    Mr. Ross. But they didn't calculate the losses, and I think 
that's one of the reasons--so they basically went at this very 
capriciously. And what concerns me about this--and I think that 
is probably pretty much what the court said too--what concerns 
me about this--
    Mrs. Yellen. I was involved in the process, and I don't 
think it was capricious at all.
    Mr. Ross. And I understand that, Chair Yellen, which is why 
you would look to those who have the expertise in a particular 
field to rely upon making these decisions. And Roy Woodall, who 
is the only member of FSOC who has an insurance background, is 
the only one who voted to not designate MetLife, and yet that 
was ignored. I think he is getting a little bit of recognition 
from the court there, but why did you ignore his recommendation 
with his background, insurance commissioner, understanding of 
the requirements, a different set of risk than bank and other 
financial institutions have to have? It just seems like it 
wasn't--
    Mrs. Yellen. Well, there was a very detailed analysis done 
of the risks that MetLife's failure could pose to the U.S. 
financial system. Much of that analysis has been made available 
and is on the FSOC website.
    Mr. Ross. There has never been a run on an insurance 
company. Let's face it: they have a 30-year risk assessment 
there as opposed to a bank that has a day-to-day, minute-to-
minute. And I guess that--and I think this is what we are 
finding out from the MetLife decision is that we have to 
address these nonbank financial institutions in a whole 
different way than we address the banking industry. For 
example, would you not agree that if we are trying to prevent 
too big-to-fail, that we keep these institutions solvent, that 
we have some kind of criteria where they can be assessed, 
corrected, and then be able to not be designated if they are 
following a process or procedure that prevents them from being 
assessed as a SIFI.
    Mrs. Yellen. Well, only a few firms have been designated.
    Mr. Ross. But they don't know they are designated until 
they are in, what, stage 3?
    Mrs. Yellen. They find out earlier than that that they are 
being designated.
    Mr. Ross. But there is no off-ramp for them I guess is what 
I am suggesting.
    Mrs. Yellen. Well, there is obviously an off-ramp. GE 
Capital is--
    Mr. Ross. Well, they sold out. Now, GE Capital, that was an 
example--they basically said: We are just going to get rid of 
this because we don't even want to have that regulatory control 
to interrupt our book of business. That wasn't an off-ramp. 
That was a divestiture.
    Mrs. Yellen. If they changed their business model in a way 
that significantly alters the risks that they pose to the U.S. 
financial system, that is an off-ramp. FSOC reconsiders every 
year whether or not designations remain appropriate. It is an 
annual review process, and if a firm wants to, understanding 
why they were designated, make significant changes that reduce 
the risk they pose to the U.S. financial system, they can be 
redesignated.
    Mr. Ross. Thank you. And wouldn't it be in the best of the 
U.S. financial system to put them on notice as soon as possible 
so the correction can be made to keep them from having to be 
even considered as a SIFI?
    Mrs. Yellen. Well, I think that the firms understand what 
it is about their activities that causes them to be designated.
    Mr. Ross. Thank you. And I appreciate your testimony.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty.
    Mrs. Beatty. Thank you, Mr. Chairman.
    Thank you, ranking member.
    And thank you, Chair Yellen, for being here today. I just 
have a few things. But, first, let me say thank you for 
clearing up what we can and can't do under the Hatch Act, when 
my colleague from New Jersey was asking about Federal Reserve 
Governor Brainard and that. But, also, let me just say that I 
imagine, in your historic position, that you get a lot of 
people who want to have lunch with you or come and meet with 
you because of your scholarship and your brilliance.
    I can remember being over in the Rayburn room and could 
barely get in there when someone announced that you were 
there--high-powered people, more security in that room. And 
people just wanted to pick your brain and hear from you. So let 
me personally say to you: I am glad that people in high places 
want to come and learn about what we do.
    Also, I probably, and you can nod or not, can probably 
safely assume that no one has pressured you from the White 
House or with President Obama to hold interest steady to have 
some political influence. But it reminds me of 1972, during the 
Richard Nixon Administration, when Burns was in your position. 
And if you go back and you play those Nixon tapes, he succumbed 
to doing that because pressure was put on him by Republicans 
that he was meeting with to have an effect on that upcoming 
election. And I am pretty sure you have not been asked to do 
that by our President or Presidential candidate.
    Mrs. Yellen. I have certainly never been pressured in any 
way by the Administration. The Administration, in my 
experience, greatly respects the Fed's independence to make 
decisions in accord with our congressional mandate.
    Mrs. Beatty. Thank you so much, Mr. Chairman.
    I just wanted to make sure we got that entered, that while 
maybe my colleague from New Jersey brought it up because he was 
thinking about what Republicans had done in the past.
    But let me move on and say: I too join that letter that 
hundreds of Members of Congress sent to you and let me just say 
thank you for that quick response. So often, people in your 
positions will come in and repeatedly we have to hear about the 
letters that were written and how typically Democrats don't 
respond. Not only did you respond; it wasn't a form letter. You 
actually acknowledged the concerns we had about minorities, 
specifically African Americans and women.
    And, Mr. Chairman, she actually gave us not one but three 
suggestions of what we could do to meet this challenge. So I 
wanted to personally thank you because I have been very hard on 
you and all of the other Federal organizations about working 
with minorities to improve the unemployment rate and to make 
sure that we have more women and minorities working in your 
organization.
    But let me just say this. I would like to discuss the 
diversity of the 12 Reserve regional banks around the country, 
especially as it relates to the presidents of those 
organizations. Recently, there was an article that points out 
that we have had no African American presidents. We have had 
zero Latino presidents out of 134. So I want to make sure that 
we stay focused on that. I think we can do better than that.
    My staff and I were reminded of the Rooney rule, and I 
don't know if you get that sports analogy or not. But let me 
just say to you and my colleagues: I am going to have something 
that is called the Beatty rule where we would like to start 
with Federal organizations like yours and simply say that, as 
you look at these positions, you actually identify and at least 
interview one person who is a minority.
    Mrs. Yellen. Congresswoman, I am very focused on diversity 
in the Federal Reserve. And it is a key priority. We have made 
some progress, but we need to do better. And I have created a 
workstream at the Board to think about all of the different 
ways in which we can promote diversity in the work that we do. 
At the level of Presidential appointments, I very much hope 
that we can see greater diversity in the FOMC. And in the 
search process, we require the banks to seek public input. We 
make sure we at the Board ensure there is a broad national 
search, that every attempt is made to assemble a diversified 
pool, and that qualified candidates are considered. And I 
really do hope that--
    Chairman Hensarling. The time of the gentlelady from Ohio 
has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman, Chair Yellen.
    Chair Yellen, in his speech on Monday, Governor Tarullo 
notes improvements in the resolvability of GSIBs in recent 
years. He states that adjustments in all aspects of the program 
should be made as conditions and practices evolve. Well, the 
Fed has passed several rules pointing to resolvability: for 
example, margin requirements, a rule prohibiting derivatives, 
closeouts, and therefore a Lehman-like run, and single 
counterparty credit limits. In light of that, will you be 
recalibrating the GSIB surcharge before you consider including 
it in GSIB's post-stress minimums?
    Mrs. Yellen. Well, we will put out a proposal. We are 
likely to approve a proposal that would affect the treatment of 
GSIB surcharges in our stress-testing regime. We are not 
reconsidering at this time the calculation of those surcharges, 
but as Governor Tarullo explained, we have created an 
integrated system for incorporating those surcharges in our 
risk-based capital requirements and integrating the losses we 
identify in the stress test as part of the risk-based capital 
regime.
    Mr. Pittenger. To clarify, the GSIB surcharge, should it be 
recalibrated? I am sure that interacts with the other bank 
regulations.
    Mrs. Yellen. Well, I don't see a reason why it should be 
recalibrated at this time.
    Mr. Pittenger. Okay. Following up on Chairman Hensarling's 
questioning regarding the statutory factors, are you aware of 
any firmly grounded research that measured how each of the 11 
statutory factors that require your consideration contributes 
to systemic risk?
    Mrs. Yellen. Those are a set of factors that generally do 
contribute to systemic risk.
    Mr. Pittenger. Let me ask you this: What research did you 
have that measured how each of the 11 contributed? Did you have 
research that related to that? What helped you determine that?
    Mrs. Yellen. I believe there is a wide body of research 
that looks at factors bearing on financial instability that 
identifies those factors as relevant.
    Mr. Pittenger. The legislative authority demands that each 
factor be considered. So, yes or no, just please tell us, are 
you aware of any such research for each of these factors?
    Mrs. Yellen. That quantifies its importance?
    Mr. Pittenger. Yes. Yes, can you state with clarity the 
research, firmly grounded research that was attributed to 
establishing these factors?
    Mrs. Yellen. Well, there are lots of research papers on 
this topic, but I would not say ones that quantify the impact 
of each factor.
    Mr. Pittenger. Madam Chair, as you know there has been some 
controversy over the settlement of the longstanding dispute 
with Iran regarding the transfer of the $1.7 billion in 
currency to Tehran. I know the Fed helped facilitate this 
through the transfer pursuant to a comfort letter that was sent 
by Secretary Lew to Bill Dudley at the New York Fed. I don't 
care to really get into that, but I would like to address the 
issue that the Administration told members of this committee 
yesterday that Iran needed those bank notes to help support the 
value of the Iranian rial. You are an expert in international 
monetary currency flows, so I would like to ask you if there is 
any reason you can imagine why Iran having several pallets of 
euros and Swiss francs in the Central Bank of Tehran would help 
support the rial better than having that value on an account 
in, say, the New York Fed or Central Bank of the Netherlands?
    Mrs. Yellen. Sir, I don't have an opinion about that. We 
acted as fiscal agent of the Treasury and have no involvement 
beyond following instructions that they give us with respect to 
payments.
    Mr. Pittenger. You don't have an opinion on that?
    Mrs. Yellen. I don't have an opinion.
    Mr. Pittenger. It follows, then, wouldn't it be actually 
more difficult and more expensive to try to support a country's 
currency with pallets of cash, especially if they were inside a 
country still largely outside the normal financial system?
    Mrs. Yellen. I am sorry. It is just something I haven't 
looked at.
    Mr. Pittenger. Well, I ask this because some people believe 
that the real reason Iran wanted the cash was so that it could 
be used to enable acts of terrorism. And the committee has had 
a difficult time getting the Administration to explain why they 
didn't just wire the settlement money as they had made on 
previous other payments.
    Mrs. Yellen. I am sorry. That is something you are going to 
have to address to Treasury.
    Mr. Pittenger. Chair Yellen, we have dealt with the 
insurance factor some. Will the Fed first consult with the 
insurers primarily--well, my time has passed.
    Chairman Hensarling. The time of the gentleman from North 
Carolina has expired.
    Due to Chair Yellen's departure time, the Chair anticipates 
clearing Ms. Moore, Mr. Ellison, and Mr. Heck on the Democrat 
side; and Mrs. Wagner, Mr. Barr, and Mr. Rothfus on the 
Republican side.
    The gentlelady from Wisconsin, Ms. Moore, ranking member of 
our Monetary Policy and Trade Subcommittee, is now recognized.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And thank you, Honorable Chair Yellen, for joining us here 
today.
    I have a lot of questions, so I am going to move through 
them very quickly. You have had a lot of questions and concerns 
here today about why you have maintained interest rates so low, 
when you are going to raise them, and the inevitability of 
having to do that, but there is a growing chorus of community 
folk and workers who have challenged the Fed and their toolkit. 
They say that you have spent so much time worrying about 
inflation and being less concerned about labor market 
participation of vulnerable populations. Like people like to 
brag about the recovery of our economy, but African American 
labor market participation is still fledgling. So I wanted to 
give you an opportunity to sort of explain to us what other 
tools you may have in your toolkit and how you are not ignoring 
that problem.
    Mrs. Yellen. Well, the state of the economy and the labor 
market matters enormously to African Americans and 
disadvantaged groups. And it is very clear that, as the labor 
market improves, African Americans see outsized gains, and that 
is where we are right now, that they are seeing those gains, 
which is not to say they don't have much higher unemployment 
rates and there remain, obviously, significant forms of 
disadvantage. But there clearly are gains taking place for 
African Americans as the labor market is--
    Ms. Moore. How does that fit in with your decisions to 
raise interest rates?
    Mrs. Yellen. So Congress has charged us with pursuing 
maximum employment and price stability, and we have been very 
focused on our employment mandate and remain so. We are 
pursuing a policy that will result in further strengthening of 
the labor market, and that is a very good thing. We also have 
to keep our eye on inflation, and inflation is running under 
our 2-percent objective. That gives us some headroom and some 
running room to remain focused on the employment side of our 
objective, but we have to keep both things in mind and are 
keeping both things in mind because we do have a 2-percent 
inflation objective.
    Ms. Moore. Chairwoman Yellen, I want to ask you something 
that perhaps I haven't asked you before. I was here when we put 
Dodd-Frank together, when we put in place the Volcker Rule, and 
I spent a lot of time studying the efficacy of that. And yet we 
continue to hear calls to reinstate Glass-Steagall. Could you 
just share with us briefly about the importance of the Volcker 
Rule and the limitations--or the importance of reinstalling 
Glass-Steagall if you think that is the case?
    Mrs. Yellen. Well, the Volcker Rule does prohibit 
proprietary training, and the agencies that are charged with 
enforcing it are supervising to make sure that market making 
can continue. We have discussed liquidity in markets. And 
making sure that these firms can continue to make markets is 
important, but it does preclude proprietary trading.
    Ms. Moore. And Glass-Steagall, on the other hand, does not 
allow them to make markets. What would a Glass-Steagall look 
like in 2016?
    Mrs. Yellen. I guess what a Glass-Steagall would require 
would be the separation of commercial banking and investment 
banking and require restructuring of companies that now have 
substantial investment bank subsidiaries.
    Ms. Moore. Is that a practical thing that we should look 
at?
    Mrs. Yellen. Well, people have different views on this. We 
are trying to make sure that these combinations can operate in 
a safe and sound manner.
    Ms. Moore. Right.
    Mrs. Yellen. I would say that that is not what was really 
responsible, at least in my opinion, for the financial crisis. 
In fact, some of the most serious problems took place in 
standalone investment banks--
    Ms. Moore. Right.
    Mrs. Yellen. --like Lehman and Bear Stearns, that weren't 
part of bank holding companies at all.
    Ms. Moore. That is right.
    Mrs. Yellen. And now they are subject to consolidated 
supervision, which is arguably a safer system.
    Ms. Moore. Okay. And I have 10 seconds left. I am 
wondering, these, you have a proposal to meet loss-absorbing 
capacity and long-term debt requirements for--
    Mrs. Yellen. Yes.
    Ms. Moore. Sorry about that.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner.
    Mrs. Wagner. Thank you, Mr. Chairman.
    And welcome, Chair Yellen. As I know you are aware, the EU 
late last year issued a call for evidence to help provide data 
and feedback for a cumulative review of all of the post-
financial crisis regulations that have been issued in the past 
8 years. When asked whether the U.S. should implement a similar 
review, Governor Tarullo pushed back on the idea. Given that 
Governor Tarullo has not been appointed vice chairman for 
supervision, what are your thoughts on the U.S. doing such a 
review, Chair Yellen?
    Mrs. Yellen. Well, I think we are continuing to finalize 
these regulations and want to come to the end of implementing 
them, and targeted reviews of different aspects of the work 
that we have done become appropriate over time. As Governor 
Tarullo mentioned, I mentioned in my testimony, we have 
undertaken a comprehensive review of our stress testing 
program. We have consulted with the organizations that are 
affected by it, with outside academics. We have looked at its 
costs and burdens carefully, and we are going to be 
recommending and already have to some extent, changes that we 
think are appropriate in light of those reviews. And over time, 
my guess is that other areas will deserve reconsideration. 
But--
    Mrs. Wagner. Ma'am, what is your timing on some of the 
recommendations you will be making regarding some of the 
reviews that you have already taken?
    Mrs. Yellen. Well, we already put out earlier this week a 
proposal that would exempt the institutions that are under $250 
billion and don't engage in significant foreign or nonbanking 
activities to be exempt from the qualitative part of our CCAR 
review. So that is already out, and other aspects of the 
proposal should go out shortly.
    Mrs. Wagner. If I can continue, given that many foreign 
bank regulators, such as those in Europe, in Japan, and others 
on the Basel Committee, are pushing back against some of the 
capital rule proposals from the U.S., wouldn't it make sense 
for the U.S. to conduct such a kind of a comprehensive, I will 
say, review as they are doing in the EU, particularly since the 
U.S. regularly gold plates their regulations beyond what Basel 
calls for?
    Mrs. Yellen. Well, we have carefully looked at what is 
appropriate as we have undertaken these capital regulations. 
Some cost-benefit analysis has been done, and in the case of 
the GSIB surcharges, there was careful analysis done of the 
levels at which they should be set. And I don't think it is 
time now for a comprehensive rethink.
    Mrs. Wagner. Well, and you talked about the stress test--
and let me get to that. Governor Tarullo specifically said a 
U.S. call for evidence would be difficult to conduct in that it 
would require a very big model that would require a lot of 
assumptions.
    How is this any different, Chair Yellen, from the Fed's 
stress test, which also incorporates a lot of kind of macro 
assumptions?
    Mrs. Yellen. Well, in the case of the capital regulations 
and other aspects, what we are mainly talking about is reducing 
the probability and severity of a financial crisis. And one of 
the reasons that it becomes difficult to do the type of 
analysis that you are discussing is that financial crises 
fortunately are few and far between, and there is no clear 
rigorous way to establish what is the probability and how does 
a particular regulation affect the probability of what is a 
tail risk.
    Mrs. Wagner. In my remaining short time here, it has been 8 
years, 8 years, Chair Yellen, and certainly, the EU is calling 
vigorously, as are other countries, for a call for evidence and 
a review. Shouldn't the Fed at least attempt to understand the 
cumulative effects its rules are having on the economy? What 
are the other ways the Fed monitoring--monitors the impact its 
regulations are having on growth?
    Mrs. Yellen. Well, we are carefully monitoring how our 
regulations are working, and by and large, my conclusion is 
that we have a safer and sounder banking system.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. I want to thank the Chair and the ranking 
member.
    Chair Yellen, thank you for your great service. I 
definitely appreciate it. And I am of the opinion that some of 
the criticism that you have to endure from certain quarters is 
really shortsighted, considering that the Congress has certain 
responsibilities to provide fiscal stimulus as well, and I 
think we have not done it. I think we have really kind of 
failed on it. In fact, all we really ever talk about around 
here is how we can cut budgets as opposed to do things that I 
think really grow the economy.
    Anyway, that is just my opinion. I will leave that on the 
side.
    It is quite clear that Wells Fargo misused employment 
incentives, setting up an unattainable cross-selling goal, 
Eight is Great. I think it is a terrible corporate practice. 
Section 956 of Dodd-Frank directed the Federal Reserve, as well 
as other regulators, to finalize incentive-based compensation 
rules for financial institutions, such that those rules don't 
encourage ``material losses'' or ``inappropriate risks.'' Those 
rules were supposed to be completed 9 months after the passage 
of the Act. Can you give us a status update on when we can 
expect to see those rules?
    Mrs. Yellen. The regulation went out for comment. Comments 
have been received, and I believe the staffs of the agencies 
are working through those now. I very much hope that we can 
finalize this rule. It has been a very long time, and I will do 
everything that I can for the Federal Reserve to be ready to 
act on this as soon as possible.
    Mr. Ellison. And recognizing the sensitivity of this whole 
situation, one of the things that has occurred to me is that 
the CEO, the Chair of Wells Fargo, is pretty well-compensated. 
The number I found was like $19 million. He is not losing his 
job--apparently not yet. And yet we still see about 5,300 
people who were let go. I make no comment on whether they 
should have been let go or whether they deserve to be, but when 
you set up a situation where you are incentivizing them moving 
accounts the way that they were and some of the demands that 
were put on them, you can kind of see how it could happen.
    I guess my question to you is, how can line level workers 
be held accountable to the degree that they clearly have been 
and yet nobody in middle or upper management seems to be taking 
responsibility for it? They haven't lost their jobs. Can you 
give us some insight as to how some of our banking management 
practices are being practiced so that only the people at the 
bottom end of the food chain end up bearing all of the 
responsibility?
    Mrs. Yellen. Senior management has a responsibility, and it 
is essential that they be held accountable. Compensation 
schemes that, for example, are based solely on volume are 
prohibited under the rule that the six agencies have proposed, 
but even prior to the adoption of that, the banking agencies 
have put out, back in I think 2010 or 2011, supervisory 
guidance on compensation that had the same expectation. The 
Board of directors should be reviewing compensation schemes and 
performance plans throughout the organization at all levels to 
make sure that they don't result in compliance failures, in ill 
treatment, that they have to be consistent with fair treatment 
of customers and consider risks, and this is an expectation. 
And it will be formalized in a rule hopefully when the six 
agencies are able to finalize that. But senior executives are 
responsible, and they are responsible for setting up risk-
management schemes in their organization that would be 
detecting such problems, that they have a strong internal audit 
function that would be reviewing and detecting compliance 
problems, and that these problems would not only be acted on by 
senior management but escalated to the Board of directors that 
has an important responsibility here.
    Mr. Ellison. Thank you, and I really appreciate your 
answer, because I agree with it.
    Now, my good friend from Wisconsin, Congressman Duffy, was 
asking you to respond about an opinion piece by Larry Summers. 
I got the sense that you might want to elaborate a little bit 
more on what he asked you. Would you like to take the last 20 
or so seconds just to sort of stretch out on your answer a 
little bit?
    Mrs. Yellen. Yes, so thank you for that. So Summers finds 
that measures of riskiness of bank debt haven't diminished 
since the financial crisis. Two reasons. He finds that one is 
that, prior to the crisis, clearly market participants 
underestimated risk, and, second, we are dealing with too-big-
to-fail, and investors can no longer expect that they will be 
shielded from risks if things go wrong in their firm.
    Chairman Hensarling. The time of the gentleman from 
Minnesota has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    Chair Yellen, I want to touch first on monetary policy and 
then shift over to the Federal Reserve supervision and 
regulation of the financial system. Briefly, on monetary 
policy, in your press conference last week, you stated that the 
recent pickup in economic growth and continued progress in the 
labor market have strengthened the case for an increase in the 
Federal funds rate, and then you went on to say conditions in 
the labor market are strengthening, and we expect that to 
continue. And the headline on Bloomberg's website covering this 
hearing, this very hearing, is that, ``Yellen Sees Solid Job 
Growth.'' But in response to my colleague, Mr. Guinta, I think 
I heard you say that the labor force participation rate has not 
moved, and of course, we all know that economic growth is weak. 
The Bureau of Economic Analysis reports the GDP output in the 
first quarter of this year was only .8 percent; and the second 
quarter of this year, only 1.1 percent. And productivity, which 
is a real important indicator of economic growth, is in 
retreat. It has been decreasing by almost a half a percent over 
the last four quarters. So the question is, on monetary policy, 
how does your comments about economic growth and progress in 
the labor market square with these stubborn facts?
    Mrs. Yellen. Well, economic growth has been very slow, and 
that is extremely disappointing. Productivity growth in 
particular has been really very, very low, and as you 
mentioned, in recent years, negative, which is a very 
depressing finding. And in that sense, the economy is not doing 
well. But we are creating a lot of jobs. The unemployment rate 
has declined to the neighborhood of what most of us would 
consider to be full employment. And there is a very significant 
downward pressure on labor force participation that is coming 
from the aging of the population.
    Mr. Barr. Well, let's just say--okay, if I can just 
interject there--aging of the population may be one factor. The 
other factor is that unemployment is coming down, not for a 
good reason but for the wrong reason, namely that there is a 
frustrated workforce out there that has completely given up 
looking for work. Let me talk about maybe some of the causes of 
the drag on the economy. Obviously, you all have a role in 
conducting monetary policy, and one of the dual mandate 
functions is maximum employment. That is an objective of the 
Federal Reserve. But also supervision and regulating of banking 
institutions to ensure safety and soundness is another 
important mission. But what I am worried about, and maybe what 
might explain some of the drag in our economy, is that a 
regulatory overreach can be at cross purposes with your 
interest rate policies, and the left hand may not know what the 
right is doing. Let me give you an example of what I am talking 
about. In the post-Dodd-Frank world, financial firms are 
supervised by multiple agencies. More than ever before, the 
Federal Reserve, the FDIC, the OCC, the NCUA, the SEC, the 
CFTC, the CFPB, the FSOC, these agencies are promulgating 
regulations. They are performing examinations. With respect to 
rulemakings, the approach of market regulators sometimes 
conflicts with the safety and soundness regulators, which in 
turn can conflict with the consumer protection regulator. And 
on supervision, often the substance of examinations overlap, 
but the timetables don't, and so data collection among 
financial regulators can be duplicative and uncoordinated. So 
this is not only a burden on financial firms, an undue burden 
on financial firms, that may be a drag on our economy, but it 
also may lead to gaps in supervision, and so when you look at 
Wells Fargo and the scandal that we have seen there and the 
consumer fraud that went unpunished for 5 years, based on the 
timeline we have seen, and the primary consumer protection 
agency is coming in on the tail end of that, again, according 
to the timeline we have seen, do you acknowledge that maybe the 
lack of regulatory coordination and inefficiency may be a 
problem?
    And, secondly, what do you think about proposals to 
consolidate or at least reduce the number of financial 
regulators to reduce regulatory incompetence, to reduce 
regulatory duplication or conflict, or at least consolidate 
examinations and data collection efforts between and among 
regulators?
    Mrs. Yellen. Well, we have a complicated regulatory system. 
There is no doubt about it. And we recognize that the issues 
you are discussing can create a great deal of burden. For our 
part, we work very closely with the controller, with the FDIC, 
and also with the CFPB.
    Mr. Barr. Yes. In my remaining time, and I don't have much 
time, but on the merchant banking activities rule, will you 
commit to the committee that before the rule is finalized, you 
will provide us with an analysis of the type of costs that this 
could impose on companies?
    Mrs. Yellen. It was a recommendation to Congress and not a 
rule.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair wishes to remind all members that the Chair 
intends to recognize the gentleman from Washington and the 
gentleman from Pennsylvania, and then adjourn the hearing.
    The gentleman from Washington, Mr. Heck, is now recognized.
    Mr. Heck. Thank you, Mr. Chairman.
    Chair Yellen, thank you so very much for being here.
    We are obviously moving toward a healthier economy. We are 
not quite there yet. But that notwithstanding, I think it is 
kind of useful to look even further ahead to the next economic 
cycle. And that is why I read with interest that the committee 
projected last week that the Fed funds rate will top out at two 
and three-quarters to 3 percent. That didn't give you a lot of 
room to deal with the next recession, and as I am fond of 
saying, neither God nor anyone else has outlawed the business 
cycle. We will have another recession.
    So my question is, why don't you consider raising the 
inflation rate so that you have more bullets in your most 
powerful weapon to combat the next recession?
    Mrs. Yellen. Well, this is something that researchers are 
looking at and are talking about. And for the reasons that you 
gave, I think it is an appropriate subject for research and for 
consideration if we remain in a low interest rate environment 
for a very long period of time. It is not something that the 
FOMC is actively considering, not at this time.
    Mr. Heck. Are you open to it?
    Mrs. Yellen. At the moment, I think it is not a priority 
for us to consider that right now, but I would not say 
``never.'' I think it is appropriate for researchers to 
consider the cost and benefits of it carefully. It is not 
something we are actively looking at, but I wouldn't say that 
it is something that we could never look at.
    But we are focused on trying to achieve our 2 percent 
objective. We want to emphasize the 2 percent is not a ceiling 
on the inflation rate. It is the target where we would like to 
be that inflation can be above and below 2 percent at different 
times. We don't expect to always be there.
    I think we have realized--
    Mr. Heck. Are you not concerned? The basis of my question 
is you don't have enough bullets in your most powerful weapon. 
Are you not concerned at all?
    Mrs. Yellen. I am concerned, and I gave a speech at Jackson 
Hole that addresses this issue. First of all, I think that we 
may be required to use the same kinds of tools we used during 
the crisis in the event of a future downturn. And I emphasized 
that, that those probably need to be permanent parts of our 
arsenal.
    And beyond that, yes, further things, it is important to do 
research on other things. And I emphasize that Congress should 
also consider what its role should be, if you are in this--
    Mr. Heck. Thank you. I actually read the speech. Thank you.
    Last time you were here, I asked you, when does America get 
a raise?
    Mrs. Yellen. When does what?
    Mr. Heck. When does America get a raise. I want to go down 
this road with you a little bit again briefly. Obviously, the 
economy is moving, although not there in a healthy direction. 
Car sales are up. Home sales are up. Median household income 
was up fairly materially. But wage growth still stuck, I think, 
at about 2.5 percent. Even in the last--last--weak recovery, 
wage growth was 4 percent.
    Chair Yellen, when does America get a raise?
    Mrs. Yellen. So wage growth has increased a little bit, and 
I think, as the recovery progresses, we will see some more 
pickup in wages. But productivity growth is a very important 
determination of real wage growth or inflation-adjusted wage 
growth. If nominal wage growth were to pick up and inflation 
picked up in tandem, that wouldn't be a real wage increase.
    So what we want to see is wages going up without its 
involving inflation going up. And, ultimately, the size of 
those paycheck increases in the long run are driven by 
productivity growth, and productivity growth has been very low.
    And I think that is one of the things that is holding down 
the improvement in living standards. So we are seeing some 
signs of a pickup, but ultimately, if productivity growth 
doesn't pick up, then faster nominal wage growth would just 
prove to be inflationary. So that is a fundamental driver.
    Mr. Heck. So, quickly, what would you define as full 
employment as measured by U6, currently stuck at about 9.7?
    Mrs. Yellen. So I don't have a definition. It is not--it is 
higher than it was before the crisis, even though U3 is down to 
normal levels. And I think that does signify some remaining 
underutilization.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Chair Yellen, I just want to touch on one thing following 
up on Mr. Mulvaney's question. I think you testified with 
respect to needing legal authority in the event that the Fed 
wanted to purchase corporate equities. Is that right?
    Mrs. Yellen. Yes. I said we do not have legal--
    Mr. Rothfus. You do not have. So you would need additional 
legal before you did something.
    Mrs. Yellen. Right.
    Mr. Rothfus. Does that same hold true for corporate bonds?
    Mrs. Yellen. Yes. We cannot purchase corporate bonds.
    Mr. Rothfus. I want to take a few minutes to address some 
of the issues that I raised in my letter to you earlier this 
week. I am concerned about the level of influence that the FSB 
has on the FSOC SIFI designation process.
    In a letter in February 2015 to the G20 Finance Ministers 
and Central Bank Governors, Mark Carney, the FSB Chair, made 
clear that member Governors had ``ongoing commitment'' to 
implement FSB's policies, and that, ``full, consistent, and 
prompt implementation'' was essential. Though some may dismiss 
this as inconsequential prose, evidence suggests that FSOC 
operates in the spirit of Mr. Carney's words.
    Three U.S.-based insurers that the FSB identified as GSIIs 
have also been designated by FSOC for Fed supervision. With 
that in mind, I wanted to ask you a few specific questions 
about the relationship between FSB and FSOC decisionmaking. 
What is the role of the U.S. members of the FSB in considering 
whether to designate U.S. insurance companies under the GSII 
process?
    Mrs. Yellen. Well, a number of agencies take part in the 
FSB. The Federal Reserve, the Treasury, and the SEC are all 
members of the FSB and engage in their work.
    Mr. Rothfus. Under the FSB charter, member countries commit 
to implement international financial standards. What steps has 
the U.S. taken to implement FSB's designation of U.S. insurance 
companies--AIG, Prudential, and MetLife--as systemically 
important?
    Mrs. Yellen. Well, none, because the FSB designations have 
no impact in the United States, and the United States has to go 
through its own rulemaking process. The FSOC analysis is 
completely separate and focused on slightly different things 
than the FSB analysis. And they are entirely separate 
processes.
    Mr. Rothfus. Did the Federal Reserve support the FSB's 
designation of Prudential and MetLife as GSIIs before FSOC had 
designated them?
    Mrs. Yellen. The Federal Reserve only joined the IAIS that 
played a role here in 2013. And to the best of my knowledge, we 
didn't participate in their analysis that were the basis for 
some of the original designations.
    Mr. Rothfus. But the Federal Reserve does participate with 
the FSB, yes?
    Mrs. Yellen. We may--we do participate in the FSB.
    Mr. Rothfus. And in the process of the FSB designating 
these as GSIIs, what would the Federal Reserve's position have 
been?
    Mrs. Yellen. I believe that the--I have to check this out, 
but I believe that the FSOC designations of these firms 
occurred before the final--the designations by the FSB, but I 
have to look at that more carefully.
    Mr. Rothfus. Yes, we want to follow up on that, because my 
understanding is that it happened--the FSB designated them and 
then FSOC went and designated them. Because it seems that if 
you agree to designate a U.S. company as globally significant 
under the FSB regime, that that would end up influencing that 
the company is going to be designated as systemically important 
within the United States. Wouldn't you agree with that?
    Mrs. Yellen. Well, as I said, the FSOC process is separate, 
and I believe that the FSOC designations took place before the 
list of GSIIs was put out.
    Mr. Rothfus. Could an FSB GSII designation be considered an 
``other risk-related factor'' under section 113 of the Dodd-
Frank Act?
    Mrs. Yellen. I am sorry. I didn't get that.
    Mr. Rothfus. Could an FSB GSII designation, if the FSB 
designates an insurance company as a GSII, could that 
designation be considered an other risk-related factor under 
section 113 of the Dodd-Frank Act?
    Mrs. Yellen. Not to the best of my knowledge.
    Mr. Rothfus. I yield back, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    I would like to thank our witness for her testimony today.
    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 her responses in the record. I 
would ask our witness to please respond as promptly as you are 
able.
    Also, without objection, Members will have 5 legislative 
days to submit extraneous materials to the Chair for inclusion 
in the record.
    This hearing stands adjourned.
    [Whereupon, at 1:11 p.m., the hearing was adjourned.]










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