Responsive Documents - CREW: Federal Reserve Board of Governors: Regarding Efforts To Influence Financial Regulatory Reform: 6/27/2011 Board of Gov. Fed Reserve Response 6-27-2011

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BOARD OF GOVERNORS
Or THE
FECERAL RESERVE SYSTEM

WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE

TO THE BOARD
June 27, 2011
Mr. Adam Rappaport

Citizens for Responsibility
and Ethics in Washington
1400 Eye Street, NW
Suite 450
Washington, DC 20005
Dear Mr. Rappaport:
This is in initial response to your letter dated and received by the Board's
Freedom oflnformation office on March 26,2010. Pursuant to the Freedom of
Information Act, 5 U.S.C. 552, you request, for the period January 20,2009,
through March 26, 2010, correspondence (including e-mails) between the Board
and any member, committee, or employee of Congress, possessed by the Board's
Congressional Liaison Office, regarding the following:
1.
financial regulatory reforms proposed by President Obama

and Treasury Secretary Timothy Geithner on June 17, 2009;
2.
a group of reform bills passed by the House Financial

Services Committee from October-December 2009 that were
combined into the Wall Street Reform and Consumer
Protection Act (H.R. 4173) and passed by the House on
December 11, 2009;
3.
legislation proposed by Senate Banking, Housing, and Urban

Affairs Chairman Chris Dodd on November 11, 2009; and
4.
new legislation proposed by Chairman Dodd on March 15,

2010. 1
You originally requested copies of all correspondence between the Board and any
member, committee, or employee of Congress related to all financial regulatory
reform proposals and suggestions, whether initiated within the Board or Congress,
between March 1, 2008 and the present. You subsequently limited your request to
the matters described above during telephone conversations with Ms. Amory
Goldberg of the Board's Legal Division.
Staff searched Board records and located a large volume of information that
is responsive to your request. A portion of the records consists of official
correspondence between Board members or staff and specific members of
Congress in possession of the Congressional Liaison Office. This information will
be provided to you in full under separate cover by the Board's Freedom of
Information office.
The remaining documents, consisting of e-mail exchanges in possession of
the Congressional Liaison Office between Board members or staff and
congressional staff, are under review. We will provide a final response to you
regarding these documents as soon as practicable.
Very truly yours,
Jennifer J. Johnson
Secretary of the Board
WASHINGTON, DC 20510-6075
Jooe 15, 2009
Ms. A. Patricia White

Associate Director, Division of Research & Statistics
Board of Governors of the Federal Reserve System
20th Street and Constitution A venue, NW
Dear Ms. White:
You are invited to appear before the Senate Banking, Housing, and Urban Affairs
Subconunittee on Securities, Insurance, and Investment to testify at a hearing entitled "Over-theCounter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks.'' The
hearing is scheduled for Monday, June 22, 2009 in room 538 of the Dirksen Senate Oftlce
Building at 3:00PM.
This hearing will discuss options for modernizing regulation of over-the-counter
derivatives markets and participants. In your testimony and Mitten statement, please provide the
Subcommittee with your views on the following questions:
1) How can Congress best modernize oversight of the over-the-counter derivatives markets
to increase transparency and reduce risks?
2) As Congress weighs proposals to move more over-the-counter derivatives transactions to
central counterparties or exchanges, what key decisions need to be considered?
3) How would various proposals to enhance oversight of OTC derivatives affect different
market participants?
4) How does the issue of improved OTC derivatives regulation relate to broader regulatory
modernization issues such as the creation of a new systemic risk regulator, and to what
extent do these efforts require international coordination?
For purposes of the Committee Record and printing, your \Vritten statement must be
double spaced and submitted in electronic form by email to Kara_Stein@recd.senate.gov. Also,
two original copies of the statement must be included for the printers, along with 73 copies for
the use of Committee members and staff. Your statement should be sent no later than 12PM on
Friday, June 19, 2009. You should expect to have approximately 5 minutes to give your
testimony at the hearing. Your full statement will be made part of the hearing record.
If you have any questions regarding the hearing, please contact Kara Stein at 202-2244705 or Randy Fasnacht at 202-224-3249. Thank you for participating in the Subcommittee's
deliberations.
Sincerely,
'liniwi ~mtrs tcwu.sc of ]Zrprc.srnratiurn

~ommittce: on jfimmcial ;ocrnicc.s
BARNEY FRANK. MA. CHAIRMAN
212.9 l\apburn Jjoune
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Honorable Ben S. Bernanke
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Federal Reserve Board
20th Street and Constitution Avenue
Dear Chairman Bernanke:
The Subcommittee on Domestic Monetary Policy & ':fechnology will hold a hearing
entitled "Regulatory Restructuring: Balancing the Independence ofthe Federal Reserve
Regarding Monetary Policy with Systemic Risk Regulation" on Thursday, July 9, 2009, at
2:00 p.m. in room 2128 Rayburn House Office Building. I am writing to confirm our
invitation for you, or your designee, to testify at this hearing.
On June 17, 2009, the President announced his plan for financial regulatory reform,
including granting the Federal Reserve .new powers to regulate systemically significant
entities and, along with a newly formed "Financial Services Oversight Council," to manage
systemic risk throughout the economy. This hearing will examine how to balance the Fed's
proposed authority as the macroprudential systemic risk regulator with its traditional role
as the independent authority on monetary policy. Please direct your testimony to the
following questions:
To what e}..-tent, if any, would the newly proposed role as systemic risk
regulator be in conflict (real or perceived) with the Fed's traditional role as
the independent authority on monetary policy?
II
Would it be necessary to insulate the Fed's traditional independence in

executing monetary policy from its new role as the systemic risk regulator
and, if so, how could that be accomplished?
What are public policy considerations for and against making the Fed the
systemic risk regulator, given its role as central banker and independent
authority on monetary policy?
Should the Fed relinquish any roles and why?
I
I
i

Page2
Please read the following carefully. It is intended as a guide to your rights and
obligations as a witness under the Rules of the Committee on Financial Services and will be
adhered to by the Subcommittee.
:r
The Form of your Testimony. Under ru1e 3(d)(2) of the Rules of the Committee on
Financial Services, each witness who is to testify before the Committee or its
subcommittees must file with the Clerk of the Committee a written statement of proposed
testimony of any reasonable length. This must be filed at least two business days before
your appearance. Please note that changes to the written statement will not be permitted
after the hearing begins. Failure to comply with this requirement may result in the
exclusion of your written testimony from the hearing record. Your oral testimony should not
exceed five minutes and should summarize your written remarks. The Chair reserves the
right ~ exclude from the printed hearing record any supplemental materials submitted
with a written statement due to space limitations or printing expense.
Submission of your Testimony. Please submit at least 100 copies of your proposed
written .statement to the Clerk of the Committee not less than two business days in
advance of your appearance. These copies should be delivered to: Clerk, Committee on
Financial Services, 2129 Rayburn House Office Building, Washington, D.C. 20515.
Due to heightened security restrictions, many common forms of delivery experience
significant delays in delivery to the Committee. This includes packages sent via the U.S.
Postal Service, Federal Express, UPS, and other similar carriers, which typically arrive 3 to
5 days later than normal. The United States Capitol Police have specifically requested that
the Committee refuse deliveries by courier. The best method fo:r delivery of your testimony
is to have an employee from your organization deliver your testimony in an unsealed
package to the address above. If you are unable to comply with this procedure, please
contact the Committee to discuss alternative methods for delivery of your testimony.
The Rules of the Committee require, to the ext-ent practicable~ that you also submit
your written testimony in electronic form. The preferred method of submission of t,estimony
in electronic form is to send it via electronic mail to fsctestimony@mail.house.gov. The
electronic copy of your testimony may be in any major ft.le format, including WordPerfect,
Microsoft Word, or ASCII text for either Windows or Macintosh. Your electronic mail
message should specify the date and which committee or subcommittee you are scheduled
to testifY before. You may also submit testimony in electronic form on a disk or CD~ROM at
the time of delivery of the copies of your written testimony. Submission of testimony in
electronic form facilitates the production of the printed hearing record and posting of your
t-estimony on the Committee's Internet site.
Your Rights as a Witness. Under clause 2(k) of rule Xl of the Rules of the House,
witnesses at hearings may be accompanied by their own counsel to advise them con9erning
their constitutional rights. I reserve the right to place any witness under oath. Finally, a
witness may obtain a transcript copy of his testimony given in open, public session, or in a
closed session only when authorized by the Committee or subcommittee. However, by
appearing before the Committee or its subcommittees, you authorize the Committee to
make technical, grammatical, and typographical corrections to the transcript in accordance
with the rules of the Committee and the House.

Page3
The Rules of the Committee on Financial Services, and the applicable rules of the
House, are available on the Committee's website at http://financialservices.house.gov.
Copies can also be sent to you upon request.
The Committee on Financial Services endeavors to make its facilities accessible to

persons with disabilities. If you are in need of special accommodations, or have any
questions regarding special accommodations generally, please contact the Committee in
advance of the scheduled event (4 business days notice is requested) at (202) 225-4247;
'ITY: 202-226-1591; or write to the Committee at the address above.
Please note that space in the Committee's hearing room is extremely limited.
Therefore, the Committee will only reserve 1 seat for staff accompanying you during your
appearance (a total of 2 seats). In order to maintain our obligation under the Rules of the
House to ensure that Committee hearings are open to the public, we cannot deviate from
this policy.
Should you or your staff have any questions or need additional information, please
contact Sanders Adu at (202) 226-2888.
Sincerely,
~-e.~
Melvin L. Watt
Chairman
Subcommittee on Domestic Monetary

Policy and Technology
MLW/sa
cc: The Honorable Ron Paul
BARNEY
FR~NK,
MA. CHAIRMAN
OF'
1lnite.d ;5tate.s !~ousc of fuprrnrntatintS

ltommittee on financial ~crnircs
RECEIVED
;:Wlc%~J~~fH~~TARY
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SPENCER BACHUS, Al, RANKING MEMBER
2129 l\apburtt ~oust \f)ffice ]SuHl:ling

ilJgshingron,
2o515
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July 13, 2009
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HonorableBenS.Bernanke
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Chairman
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Federal Reserve Board
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20th Street and Constitution Avenue ~ ~L
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The Financial Services Committee Subcommittee on Domestic Monetary Policy &

Technology will hold a hearing entitled "Regulatory Restructuring: Safeguarding Consumer
Protection and the Role of the Federal Reserve" on Thursday, July 16, 2009, at 2:00p.m. ]n
room 2128 Rayburn House Office Building. I am writing to confinn our invitation for you,
or your designee, to testilY at this hearing.
On June 17, 2009, the President announced his plan for financial regulatory reform,
including the creation of the Consumer Financial Protection Agency (CFPA) that would
bring under one agency responsibility for consumer protection of financial products
currently dispersed among various agencies. This hearing will examine the public policy
rationales behind the proposed CFPA and whether the Federal Reserve should retain some
consumer protection functioilE. Please direct your testimony to the following questioilE:
What are the public policy reasons for and against consolidating the
govenunent's oversight and regulation of consumer financial products under
the CFPA?
Should the Federal Reserve retain a role in corummer protection? If so, what
role(s) and how should it interact with the proposed CFPA?
Should federal banking agencies retain a role in consumer protection? If so,

what role(s) and how should they interact with the proposed CFPA?
If the Federal Reserve retains a role in consumer protection, how could it
effectively balance consumer protection, systemic risk regulation and

monetary policy?
Please read the following carefully. It is intended as a guide to your rights and
obligations as a witness under the Rules of the Committee on Financial Sernces and will be
adhered to by the Subcommittee.

Page2
The Form of your Testimony; Under rule 3(d)(2) of the Rules ofthe Committee on
your appearance. Please note that changes ~o the written statement will not be permitted
right to exclude from the printed hearing record any supplemental materials submitted
Submission of your Testimony. Ple~e submit at least 50 copies of your proposed
written statement to the Clerk of the Committee not less than two business days, in
Due to heightened security restrictiop.s, many common forms of delivery experience
the Committee refuse deliveries by courier. The best method for delivery of your testimony
The Rules of the Committee require, to the extent practicable, that you also submit
your written testimony in electronic form. The preferred method of submission of testimony
:in electronic form is to send it via electronic mail to fsctestimony@mail.house.gov. The
electronic copy of your testimony may be in any major file format, including WordPerfect,
to testify before. You may also submit testimony in electronic form on a disk or CD-ROM at
electronic form facilitates the production of the printed bearing record and posting of your
testimony on the Committee's Internet site.
Your Rights as a Witness. Under clause 2(k) of rule XI of the Rules of the House,
witnesses at hearings may be accompanied by their own counsel to advise them concerning
their constitutional right-s. I reserve the right to place any witness under oath. Finally, a
closed session only when aut}?.orized by the Committee or subcommittee. However, by
The Ru1es of the Conunittee on Financial Services, and the applicable rules of the

PageS

'ITY: 202-226-1591; write to the Committee at the address above.
or
appearance (a total of 2 seats). In order tO maintain our obligation under the Rules of the
this policy.
contact Sanders Adu at (202) 226-2888.
Melvin L. Watt
Chairman
Subcommittee on Domestic Monetary Policy
and Trade
MLW/sa
cc: The Honorable Ron Paul
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July 17, 2009
The Honorable Daniel K. Tarullo

Member
Board of the Governors of the Federal Reserve System
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20 h Street and Constitution Avenue, N. W.
Dear Governor Taru1lo:
On behalf of the Senate Committee on Banking, Housing, and Urban Affairs, I am writing to
confirm that you will testify before the Committee at our hearing entitled "Establishing a Framework
for Systemic Risk Regulation." The hearing is scheduled for Thursday, July 23, 2009 at 9:30 am in
Room 538 of the Dirksen Senate Office Building.
The Banking Committee is continuing a series of hearings on the modernization of the financial
regulatory framework, which must be based on lessons learned from the current financial crisis and
designed to safeguard consumers and foster a robust economy.
The Committee requests that your testimony discuss the merits of the Administration's proposal for
regulating systemic risk and for resolving systemically important financial companies that would:
provide new authority to the Federal Reserve to identify, regulate and supervise all financial
companies (which could include nonbanks such as securities and insurance companies)
considered systemically important, while also establishing a council of financial regulators
serving an advisory function; and
create a new resolution regime to provide a framework for the orderly resolution of
systemically important bank holding companies and other nonbank financial companies.
If you believe that a framework for systemic risk regulation comprised of an enhanced Federal
Reserve and an advisory council is not appropriate or adequate, the Committee requests your testimony
on any alternative approaches. In describing an alternative approach, you may want to consider the
following:
How should a systemic risk regulatory authority be structured? Should there be a

governing board consisting of financial regulators and an independently appointed head?
Should there be full-time professional staff?
July 17, 2009

Page2
What powers would a systemic risk regulatory authority need? Should it have the power to
obtain information or assistance from fmancial regulators? To direct financial regulators to
take specific actions? To promulgate regulations to mitigate systemic risk?
In addition, the Committee asks you to discuss:
how systemic risk should be defmed and to what extent there is a need for a systemic risk
regulatory authority;
how a systemic risk regulatory authority should interact v.ith financial regulators;
how resolution of systemically important financial companies should be funded; and
the need for international coordination, especially with regard to a resolution regime.
For purposes of the Committee Record and printing, your written statement must be submitted in
electronic fonn by either email to Charles Yi@banking.senate.gov and
dawn ratliff@banking.senate.gov, or on a CDRW in WordPerfect (or other comparable program)
format and typed double spaced. Also, two ORIGINAL copies of the statement must be included for
the printers, along with 73 copies for the use of Committee members and staff. Your statement should
be sent no later than 24 hours prior to the hearing. You should expect to have approximately 5 minutes
to provide oral testimony at the hearing. Your full statement will be made part of the hearing record.
If you have any questions regarding this hearing, please contact Charles Yi at 202-224-1564.
Sincerely,
CHRISTOPHER J. DODD
Chairman
l.lnitet1 .Statcg Houge of l\cprcscntatiurn
SPENCF.H UACHUS. AL fli\NKII'H) :vH:~.mcn:
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OFFICE 0~Ef~tVllcR
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July 22, 2009
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The Honorable Ben S. Bernanke
Chainnan
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20th & C Streets, NW
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Dear Mr. Chairman:
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The Committee on Financial Services will hold a hearing on the "Regulatory

Perspectives on the Obama Administration's Financial Regulatory Reform Proposals-Part
Two" at 10:30 a.m. on Friday, July 24, 2009, in room 2128 Rayburn House Office Building.
I am writing to confirm your invitation to testify at thls hearing.
The hearing will focus broadly on all aspects of President Obama's white paper
entitled Financial Regulatory Reform: A New Foundation. Please address as many specific
components of the white paper as are relevant to your agency.
Please read the following material carefu1ly. It is intended as a guide to your rights
and obligations as a witness under the rules of the Committee on Financial Services.
The Form of your Testimony. Under rule 3(d)(2) of the Rules of the Committee on
subcommittees must file with the Clerk of the Committee a wr]tton statement of proposed
your appearance. Please note that changes to the wlitten statement will not be permitted
Submission ofyour Testimony. Please submit at least 100 copies of your proposed
written statement to the Clerk of the Committee not less than two business days in
Due to heightened security restrictions, many common forms of delivery experience
the Committee refuse deliveries by courier. The best method for delivc1y of your testimony
The Honorable Ben S. Bemanke

Page Z
in electronic form is to send it via electronic mail to fsctestimony@mail.house.gov. The
closed session only when authorized by the Committee or subcommittee. However, by
House, are available on the Committee's website at httrd/financialservices.house.gov.
questions regarding special accommodations genel'ally, please contact the Committee in
TI'Y: 202-226-1591; or write to the Committee at the address above.
appearance (a total of 2 seats). In order to maintain our obligation tmder the Rules of the
House to ensme that Committee hearings are open to the public, we cannot deviate from
this policy.
Should you or yom staff have any questions or need additional information, please
contact Kellie Larkin at (202) 225-4247.
BF!kl
cc: The Honorable Spencer Bachus
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July 28, 2009
Y"

Member
Board ofthe Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington,DC20551
DearGovemorTarullo:
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On behalf of the Senate Committee on Banking, Housing, and Urban Affairs, I am writing
confinn that you will testify before the Committee at our hearing entitled "Str-engthening and
Streamlining Prudential Bank Supervision." The hearing is scheduled for Tuesday, August 4, 2009
at 9:30am in Room 538 of the Dirksen Senate Office Building.
This hearing is part of a continuing series of hearings to examine ways to modernize the
American financial regulatory system. The purpose of this hearing is to consider proposals to
improve bank supervision through regulatory consolidation.
The Committee requests that your testimony discuss the merits of the Administration's proposal
to establish a National Bank Supervisor comprised of the OCC and the OTS and to enhance the
Federal Reserve System's prudential supervision of holding companies. You may also address the
Administration's proposal to abolish the federal thrift charter and eliminate the exception in the
Bank Holding Company Act for thrifts and industrial loan companies.
Please discuss whether you believe further consolidation of the federal banking agencies is
warranted, and if not, why supervision is enhanced by having more than one federal banking
regulator. Additionally, the Committee would like your views on the need for a holding company
regulator that is distinct from the prudential regulator as is now the case, or whether you believe a
consolidated prudential bank supervisor could also regulate holding companies. The Committee
would also appreciate your views on what you consider to be the appropriate role of the prudential
supervisor in relation to the systemic risk regulator- in other words, what is the proper delineation
of responsibilities between these agencies.
For purposes of the Committee Record and printing, your written statement must be submitted
in electronic form by either email to amy friend@banking.senate.gov and
dawn ratliff@banking.senate.gov, or on a CDRW in WordPerfect (or other comparable program)
fonnat and typed double spaced. Also, two ORIGINAL copies of the statement must be included
for the printers, along with 73 copies for the use of Committee members and staff Your statement
should be sent no later than 24 hours prior to the hearing. You should expect to have approximately
5 minutes to provide oral testimony at the hearing. Your full statement will be made part of the
hearing record.
July 2&, 2009

Page2
/
If you have any questions regarding this hearing, please contact Amy Friend at 202-224-0331.
CHRISTOPHER J. DODD
Chairman
DISTRICT OFFICES:
ABRAMS ROAD
Su1TE 243
DALLAS, TX 75231
JEB HENSARLING
6510
TEXAS, 5TH DISTRICT
(214) 349--9996
DEPUTY REPUBLICAN WHIP
702 EAST CoRSICANA SrAEET

ATHENS, TX 75751
(903) 675-8288
COMMITTEES:
BUDGET
VICE RANKING MEMBER
FINANCIAL SERVICES
Qtongre~s
RANKING MEMBER,
SuBCOMMITTEE ON fiNANCIAL
INSTITUTIONS AND CONSUMER CREDIT
of tbe Wniteb ~tates
1$ou~e
WEa OmcE:
www.hensarling.house.gov
of l\eptt~entatibe~
~asbington,JB((
20515
August 7, 2009
The Honorable Ben Bemanke, Chairman

Twentieth and Constitution A venue, NW
Dear Chairman Bemanke:

Please find enclosed a copy of a letter I sent to Treasury Secretary Timothy G~tJmer ~
earlier this week for your reference. Please let me know if you have any questions. ;.; ;:!.JA
;~
:-)
_i:.)
---
129 CANNON HOUSE OFFICE BUILDING, WASHINGTON, DC 20515
(202) 225-3484
c:::~;.'
Qr:on.grss of tip~ 'mniteo sfaiei

Wushinghm, DO: 20515
August 4, 2009
The Honorable Timothy Geitlmer
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Mr. Secretary:

We were alarmed at allegations that surfaced today regarding your purported intimidation
of federal financial regulators, including Federal Reserve Board Chairman Ben Bernanke, who
had expressed their concerns about aspects of the President's regulatory refom1 proposal. In
addition to Chairman Bemanke, this group of regulators reportedly also included FDIC
Chairman Shelia Bair, Comptroller of the Cunency John Dugan, Office of Thrift Supervision
Acting Director John Bowman, SEC Chairman Mary Schapiro, CFTC Chairman Gary Gensler,
and fed Governor Daniel Tarullo.
As reported in Wall Street Journal today, <Uld apparently confim1cd by several regulators
during their testimony before the Senate Banking Committee this morning, last vveek you
summoned these independent regulators to your offices and excoriated them for having voiced
their concerns over the Administration's restructuring plans. During the meeting, the Wall Street
Journal reported that you ''blasted" those present in an "expletive-laced critique" featuring the
"repeated use of obscenities" and an "aggressive pos/llre" designed to tell those regulators that
"enough is enough." Such attempted suppression of the judgment of independent regulators has
no place in our or any other financial system, and is directly contrary to the Administration's
stated goals of increasing transparency and creating a safer, more stable economy.
If these allegations are conect, we are gravely concerned that you would attempt to abuse
your position to silence the cxpc11 opinions of the very public servants who are charged with
ensuring the safety and soundness of our financial system. Federal regulators at the Fed, FDIC,
SEC, OCC, CFTC, and OTS are statutorily designated as independent for a specific rc<.lson - so
that they can provide unbiased assessments to Members of Congr~ss and the public regarding the
health of our financial system. Any attempt to intimidate these officials flom speaking their
minds or to suppress their concerns on issues affecting their agencies because it does not fit into
your Administration's political agenda would be a signi:t1cant abrogation of the public's trust and
a substantial deviation from the Administration's commitment to transpar~ncy. Thus, we request
that you provide an explanation of the nature of this meeting, including what if any limits you
attempted to place on these ofticials as well as a written explanation of Treasury's internal
policies and procedures with respect to its interaction with these independent agencies.
Sincerely,
Member of Congress
FBIN'T0 Of< RCVCtH1 PAI'l'R
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DISTRICT OFFICES:
JEB HENSARLING
6510 ABRAMS ROAD
TI!'"N\.5, 5TH DISTRICT
Sum
243
DALLAS, TX 75231
(214) 349-9996
DEPUTY REPUBLICAN WHIP

702
COMMITTEES;
BUDGET
EAST CORSICANA STREET

ATHENS, TX 75751
1903) 675-8288
VICE RANKING MEMBER
~ongress
FINANCIAL SERVICES
RANKING MEMBER,
SuBCOMMITTEE oN FiNANCIAL
INSTITUTIONS AND CONSUMER CREDIT
of tbe Wntteb j)tates
WEB OFFICE:
www.hensarling.house.gov
J!}ouse of l\epresentatibes
~asbington, jBq[
20515
August 7, 2009
The Honorable Daniel K. Tarullo, Governor

Twentieth and Constitution Avenue, NW
Dear Governor Tarullo:

Please find enclosed a copy of a letter I sent to Treasury Secretary Timothy Geithner
earlier this week for your reference. Please let me know if you have any questions.
Yours respectfully,
Hl~m..o_,; .,. .
ber of Congress
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August 4, 2009
The Honorable Timothy Geitlmer
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Dear Mr. Secretary:

We were alam1ed at allegations that surfaced today regarding your purported intimidation
of federal financial regulators, including Federal Reserve Board Chairman Ben Bernanke, who
had expressed their concerns about aspects of the President's regulatory refonn proposal. Jn
addition to Chairman Bemanke, this group of regulators reportedly also included FDIC
Chairman Shelia Bair, Comptroller of the Cunency John Dugan, Office of Thrift Supervision
Acting Director John Bowman, SEC Chainnan Mary Schapiro, CFTC Chairman Gary Gensler,
and Fed Governor Daniel Tarullo.

As reported in Wall Street Journal today, and apparently confinned by several regulators
during their testimony before the Senate Banking Committee tbis morning, last week you
summoned these independent regulators to your offices and excoriated them for having voiced
their concerns over the Administration's restructuring plans. During the meeting, the Wall Street
Jomnal reported that you "blasted" those present in an "expletive-laced critique" featuring the
"repeated use of obscenities" and an "aggressive posture" designed to tell those regulators that
"enough is enough." Such attempted suppression of the judgment of independent regulators has
no place in our or any other financial system, and is directly controry to the Administration's
stated goals of increasing transparency and creating a safer, more stable economy.
If these allegations are correct, we are gravely concerned that you would attempt to abuse
your position to silence the expert opinions of the very public servants who are charged with
ensuring the safety and soundness of our financial system. Federal regulators at the Fed, FDIC,
SEC, OCC, CFTC, and OTS are statutorily designated as independent for a specific reason - so
that they can provide unbiased assessments to Members of Congress and the public regarding the
health of our financial system. Any attempt to intimidate U1ese officials from speaking their
minds or to suppress their concerns on issues affecting their agencies because it does not fit into
your Administration's political agenda would be a significant abrogation of the public's trust and
a substantial deviation from the Administration's commitment to transparency. Thus, we request
that you provide an explanation of the nature of this meeting, including what iC any limits you
attempted to place on these officials as well as a written explanation of Treasury's internal
policies and procedures with respect to its interaction with these independent agencies.
Sincerely,
Member of Congress
PRINHO ON Ht.CYClED PIII'ER
0 C1l
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, G. C. 20551
EL!ZASETH A. DUKE
Mf:MBf:R Of' THE BOARD
August 31, 2009
The Honorable Melvin L. Watt

Chairman
Subcommittee on Domestic Monetary
Policy and Teclmo1ogy
Committee on Financial Services
House of Representatives
Dear Mr. Chairman:
I am pleased to enclose my responses to your questions received following

the July 16, 2009, hearing before the Conunittee entitled, "Regulatory Restructuring:
Safeguarding Consumer Protection and the Role of the Federal Reserve."

Please let me know if I can be of further assistance.
Sincerely,
(signed) Elizabeth A. Duke
co
lJ
Enclosure
MFI-Vmjht (382, 09-9346)
Governor Elizabeth Duke subsequently submitted the following in response to written

questions received from Congressman Watt in connection with the July 16, 2009, hearing
before the Subcommittee on Domestic Monetary Policy and Technology:
1. If the Federal Reserve had authority to issue rules implementing the Home
Ownership and Equity Protection Act (HOEP A) beginning in 1994, why did the
Fed wait until 2008 to issue rules?
The Federal Reserve Board has primary rule writing responsibility for the Truth in
Lending Act and the Home Ownership and Equity Protection Act (HOEP A), which
amended TILA. The Board has exercised this authority to respond to various consumer
protection concerns that have arisen in the mortgage marketplace. The most recent of
these rulemakings was issued in July 2008, which strengthened consumer protections,
and further augmented rules finalized in 2001, and industry guidance issued in 2006 and
2007.
In March 1995, the Board published rules to implement HOEP .A:, which are
contained in the Board's Regulation Z. These rules became effective in October 1995.
HOEPA also gives the Board responsibility for prohibiting acts or practices in connection
with mortgage loans found to be unfair or deceptive. The statute further requires the
Board to conduct public hearings periodically, to examine the home equity lending
market, and the adequacy of existing laws, and regulations in protecting consumers, and
low-income consumers in particular. Under this mandate, the Board held public hearings
to gather information about mortgage lending practices of concern in 1997, 2000, 2006,
and 2007.
The 2000 hearings led the Board to expand HOEPA's protections in December
2001 to respond to concerns about predatory or abusive practices in the marketplace at
the time. Those rules, issued in December 2001, included the following consumer
protections: lowered HOEPA's rate higger to extend the act's protections to a potentially
larger number of high-cost loans; expanded its fee trigger to include single-premium
credit insurance to address concerns that high-cost HOEPA loans were "packed" with
products that increased loan cost without commensurate benefit to consumers; added an
anti-loan flipping restliction, and strengthened HOEPA's prohibition on unaffordable
lending by advising creditors generally to document and verify the borrower's ability to
repay a high-cost HOBP A loan.
Most recently, the Board held hearings in 2006 and 2007, to gather information
on concerns about new "predatory lending" practices that had emerged as the subprimc
market continued to grow. Issues cit~d related to increasing use by mortgage lenders of
relaxed underwriting practices, including qualifying borrowers based on discounted
initial rates and the expanded use of"stated income" or "no doc" loans. In 2006 and
2007, the Board and other federal financial regulatory agencies adopted interagency
guidance for banking institutions addressing certain risks and emerging issues relating to
non-traditional and subprirne mortgage lending practices, particularly adjustable-rate
mortgages. The issuance of interagency guidance was viewed as a more expedient means
-2than rule writing to address practices of concern in the marketplace at the time, although
it did not apply to nonbank lenders.
In light of the information received at the 2006 hearings and the rise of defaults
that began soon after, the Board held an additional hearing in June 2007, to explore how
it could use its authority under HOEPA to curb the abusive practices without unduly
restricting credit. At the 2007 hearing, and from hearing-related public conunents, the
Board received input from a broad spectrum of informed parties. Following these
hearings, in December 2007, the Board proposed sweeping new rules to strengthen
protections for consumers seeking mortgage credit. Final rules were issued in July 2008.
Among other things, the new HOEP A rules strengthened consumer protections
for a newly defined category of"higher-priced mortgage loans" by: prohibiting a lender
from making a loan without regard to the borrower's ability to repay the loan from
income and assets other than the home's value; requiring creditors to verify the income
and assets they rely upon to determine repayment ability; and banning any prepayment
penalty if the payment can change in the initial four years. For other higher-priced loans,
a prepayment penalty period cannot last for more than two years, and creditors are
required to establish escrow accounts for property taxes and homeowner's insurance for
all first-lien mortgage loans.
For all mortgage loans secured by a borrower's principal dwelling, the mles
prohibit creditors and mortgage brokers from engaging in certain practices, such as
pyramiding late fees. In addition, servicers are required to credit consumers' loan
payments as of the date of receipt and provide a payoff statement within a reasonable
time of request. Creditors must provide consumers with transaction-specific mortgage
loan disclosures within three business days after application. Finally, the rules also
address deceptive mortgage advertisements and unfair practices related to real estate
appraisals and mortgage servicing.
With the benefit of hindsight, the Federal Reserve could have acted more quickly
to adopt rules to reign in harmful lending practices. The process of identifying emerging
issues, proposing rules, reviewing comments, developing final rules, and allowing
reasonable time for implementation was too protracted given the rapid changes in the
mortgage market, including loan terms, pricing, underwriting standards, and marketing
practices. We also recognize the value ofholding public hearings to gather information
about mortgage lending practices with greater frequency, in order to identify emerging
risks to consumers on a more timely basis.
The Board is fully conunitted to continuing its efforts to enhance consumer
protections in the residential mortgage market. Last month, we proposed significant
changes to Regulation Z intended to improve the disclosures consumers receive in
connection with mortgage transactions. These proposed rules also prohibit payments to a
mortgage broker or a loan officer that are based on the loan's interest rate or other terms;
and they prohibit a mortgage broker or loan officer from "steering" consumers to
transactions that are not in their interest in order to increase mortgage broker or loan
-3-
officer compensation. These actions are further described in our response to question
number three on page 6.
2. What is the Federal Reserve's current staffing and budget levels allocated to
safety and soundness in FY 2009? What are the staffing and budget levels for
consumer protection in FY 2009?
The budget and staffing numbers in the table below reflect the 2009 budget
amounts for most Federal Reserve System resources that are directly involved in
consumer protection and prudential supervision activities. Some costs are not included in
these figures as explained further below the table. Furthermore, actual expenses and
staffing levels for 2009 are likely to exceed the budgeted amounts given the additional
resources needed to respond to recent events. For example, the budget numbers do not
reflect anticipated costs for the development of a program for consumer compliance
examinations of nonbank subsidiaries ofbank holding companies. Also, prudential and
consumer supervision resource needs are likely to increase due to the recent conversion
of several large, complex organizations to bank holding companies.
2009 Budget
(Direct Costs)
2009 Budgeted
ANP*
Consumer Protection
Supervision and Rule writing
$65.3 million
396
Prudential Supervision
$330.3 million
1,851
Other Supervisory Activities

tor both Consumer Protection
and Prudential Supervision
$145.7 million
905
*The tenn average number of personnel (ANP) describes levels and changes in
employment at the Reserve Banks. ANP is the average number of employees in terms of
full-time positions for the period. For instance, a full-time employee who starts work on
July 1 counts as 0.5 ANP for that calendar year; two half-time employees who start on
January 1 count as one ANP. Budgeted staff positions at the Board of Governors are also
included.
Consumer Protection Supervision and Rule Writing- This category includes expenses
for the Board's Division of Consumer and Community Affairs, which develops and
oversees programs for rule writing, consumer compliance supervision, community
affairs, consumer complaint call center and complaint resolution, the Consumer Advisory
Council, and consumer education and research which includes consumer testing. It also
includes consumer compliance examinations and other related supervisory expenses in
the twelve Reserve Banks.
-4-
Prudential Supervision- This category includes expenses for the Board's Division of
Bank Supervision and Regulation, which has responsibility for developing and
overseeing programs for pnrdential supervision and regulation of state member banks and
bank and financial holding companies. It also includes expenses for the twelve Reserve
Banks for examinations and related supervisory activities.
Other Supervisory Activities - This category includes those costs in the Reserve Banks for
activities that benefit both consumer protection and prudential supervision and cannot be
easily separated, including bank and holding company applications processing, examiner
training and commissioning programs, some automation and IT support, regulatory
reports processing, shared national credit review, and supervisory policy and research.
Not Included in Costs Above - It is also important to note that the budget amounts
provided do not include community affairs staff in all twelve Reserve Banks as well as
some general administrative support costs for both functions. Certain national IT costs,
such as data processing charges related to the National Information Center, maintaining
supervisory databases such as the National Examination Data, and servers and network
costs are under the responsibility of the Board's and System central information
technology functions and are not included. Also, the figures above do not include costs
incurred by other divisions and functions at the Board, such as economic research,
information technology, and bank operations, for activities that benefit consumer
protection or safety and soundness supervision. Some Board research economists
conduct research and collect and analyze data that support the consumer and community
affairs functions, such as understanding consumer finances and wealth building, and
providing analytical support for nrle writing. For exan1ple, economists reviewed
available data on mortgage pricing to help the Board determine the appropriate threshold
to define which mortgage loans should be considered "high cost" and, therefore, subject
to new rules issued under the Board's HOEP A authority as described in question one.
Likewise, research economists played a significant role in the recent Supervisory Capital
Assessment Program (SCAP) analysis for prudential supervision, but their costs are also
not included.
3. During the current financial crisis, the Fed was responsible for both safety and
soundness and consumer protection, yet did not discover abuses in subprime
mortgages and other abuses until too late. Has the Fed performed any analyses
of what '"ent wrong? If so, please provide copies of each such analysis.
We have considered the many factors that contributed to problems in subprime
lending and the recent economic crisis and have focused on identifying areas where we
can make improvements in our programs for both safety and soundness supervision and
consumer protection. As Chairman Bemanke and Governor Tarullo noted in their recent
testimony, the roots of this crisis included global imbalances in savings and capital flows,
the rapid integration oflending activities with the issuance, trading, and financing of
securities, the existence of gaps in the regulatory structure for the financial system, and
widespread failures of risk management across a range of financial institutions. The
crisis revealed supervisory shortcomings among all regulators, and demonstrated that the
-5framework for supervision and regulation had not kept pace with changes in the structure,
activities, and growing interrelationships of the financial sector.
Consumer Protection
With respect to consumer protection, gaps in supervision and enforcement with
respect to nonbank mortgage lenders contributed to the inability of supervisors to detect
and contain abusive lending practices. Most subprime loans were issued by entities
outside the supervisory jurisdiction of the Federal Reserve and other federal bank
regulators, and consequently, these entities were not subject to examinations to assess
compliance with federal consumer protection laws. With respect to nonbank entities
owned by bank holding companies, the Federal Reserve's consumer compliance
examination authority is limited to only certain laws.
The Federal Reserve has worked to overcome this gap through a multiagency
partnership initiated in June 2007, to conduct targeted consumer compliance reviews of
selected nonbank lenders with significant subprime mortgage operations. The joint effort
represented the first time multiple agencies have collaborated to plan and conduct
consumer compliance reviews of independent mortgage lenders and nonbank subsidiaries
of bank and thrift holding companies, as weH as mortgage brokers doing business with, or
working for, these entities. The pilot program has been completed, and the Federal
Reserve is fully committed to implementing its own program of supervision of nonbank
subsidiaries ofholding companies on an ongoing basis. As with the pilot, we will
continue to work cooperatively and share information with other agencies with
overlapping jurisdictions. W c have also created a special unit to oversee consumer
protection issues in the subsidiaries of the largest financial institutions that are active in
consumer credit and payment services and have expanded our complaint resolution
program to include these institutions.
The current crisis has also illustrated clearly that consumer protection issues and
safety and soundness risks are linked and can affect financial stability. We have been
committed to strengthening our consumer protection program to more effectively detect
and respond to changing and emerging markets and products, particularly for those that
pose risks to consumers. Along these lines, we have added resources and worked to
strengthen our internal processes to detect and address emerging risks and issues facing
consumers. We have also expanded resources to improve timeliness of rule writing and
to better identify consumer needs through consumer testing. Specifically, we have
conducted extensive consumer testing as part of the mle writing process to improve the
effectiveness of disclosures to provide consumers with useful information when they are
shopping for credit. Consumer testing has also served to identify issues that can only be
remedied through substantive regulation and to direct consumer education efforts.
Finally, we have also instituted a web-based comment system to improve consumer
access for making comments on proposed rules.
We have also learned that disclosures alone may not always sufficiently protect
consumers from unfair practices. As such, we have taken a number of specific actions to
- 6-
strengthen consumer protections through rule-making. Over the last year, the Federal
Reserve issued sweeping new mortgage and credit card rules that significantly expand
protections for consumers of these credit products. For mortgage loans, the Board has
issued rules that establish comprehensive new regulatory protections for consumers in the
residential mortgage market. Importantly, these rules apply to all mortgage lenders, not
just the depository institutions that are supervised by the federal banking and thrift
agencies. The rules are designed to provide transaction-specific disclosures early enough
to facilitate shopping and to protect consumers from unfair or deceptive acts or practices
in mortgage lending, while supporting sustainable home ownership. They are intended to
respond to the most troublesome practices in the mortgage industry that contributed to the
recent subprime market meltdown. The Board also adopted rules governing mortgage
advertisements to ensure that they provide accurate and balanced information and do not
contain misleading or deceptive representations. Further, this past July the Board
proposed significant new rule changes to improve consumer disclosures for all mortgage
transactions. In particular, the proposed disclosures focus consumer attention on
understanding the risks they are taking by identifying "key questions to ask." Many of
the proposed disclosures are the result of extensive consumer testing, a technique that has
become integral to the Board's rule making.
Prudential Supervision
With respect to prudential supervision, the Federal Reserve, acting within its
existing statutory authorities, is taking steps to strengthen the supervision ofbanks and
bank. holding companies to respond to lessons learned from the recent crisis. Working
with other domestic and foreign supervisors, we have been engaged in a series of
initiatives to strengthen capital, liquidity, and risk management at banking organizations.
Regarding capital adequacy, for example, there is little doubt that in the period before the
crisis capital levels were insufficient to serve as a needed buffer against loss. Efforts are
under way to improve the quality of the capital used to satisfy minimum capital ratios, to
strengthen the capital requirements for on- and off-balance-sheet exposures, and to
establish capital buffers in good times that can be drawn down as economic and financial
conditions deteriorate.
Recent experience has also reinforced the value of holding company supervision
in addition to, and distinct from, bank supervision. Large organizations increasingly
operate and manage their businesses on an integrated basis with little regard for the
corporate boundaries that typically define the jurisdictions of individual functional
supervisors. In October, we issued new guidance for consolidated supervision of bank
holding companies that provides for supervisory objectives and actions to be calibrated
more directly to the systemic significance of individual institutions and clarities
supervisory expectations for corporate governance, risk management, and internal
controls ofthe largest, most complex organizations. We are also adapting our intemal
organization of supervisory activities to take better advantage of the information and
insight that the economic and financial analytic capacities of the Federal Reserve can
bring to bear in financial regulation.
-7Finally, we are prioritizing and expanding our program of horizontal

examinations to assess key operations, risks, and risk-management activities oflarge
institutions. In addition to onsite examination activities for the largest and most complex
firms, we are creating an enhanced surveillance program that will use supervisory
information, fim1-specific data analysis, and market-based indicators to identify
developing strains and imbalances that may affect multiple institutions, as well as
emerging risks to specific firms. Periodic scenario analyses across large firms will
enhance our understanding of the potential impact of adverse changes in the operating
environment on individual firms and on the system as a whole. This work will likely be
performed by a multi-disciplinary group including experts in economic and market
research, bank supervision, market operations, and accounting and legal issues.
4. If legislation is passed to create the Consumer Financial Protection Agency, what
are the impediments, if any, to current Federal Reserve staff being transferred
to the CFPA?
The current proposals for a new Consumer Financial Protection Agency offer
some helpful ideas in considering how best to handle the challenging task of combining
staff from a number of agencies with minimum disruption to those affected. Nonetheless,
there are some issues with the transfer of key staff and potential loss of expertise that
would need to be addressed. Federal Reserve consumer protection staff members
routinely utilize the consumer expertise of staff members engaged primarily in other
central bank functions. For example, research economists analyze lllvfDA data or other
consumer data, but also perform other important research and are not likely to transfer to
a new agency. Furthermore, roughly half of the System consumer compliance examiners
are cross trained or have expertise in safety and soundness supervision, including
expertise in accounting, audit, commercial real estate lending, information technology,
assessments of corporate governance and enterprise risk management. Transferring those
examiners may cause the Federal Reserve to lose important skills needed for other
functions and would require additional investments in staff training to make up the lost
expertise. Conversely, should some of the cross-trained examiners elect to remain with
the Federal Reserve; the new agency would not have the benefit of their expertise in
consumer compliance.
Additionally, the call center infrastructure that supports the Federal Reserve
System consumer complaint and inquiry program also supp01is the call center needs of
other functions across the Federal Reserve System.
Finally, there are other issues to address related to data systems and IT support.
Data bases for the Home Mortgage Disclosure Act (HMDA) data, consumer complaints
(CAESER), and other examination tools for analyzing fair lending and compliance with
CRA, may be difficult to transfer and blend with systems from other agencies.
Supervisory information for both consumer protection and pmdential supervision is
housed in shared databases, potentially leading to difficulties in determining how to
provide access and to separate or maintain the infom1ation going fonvard. Given some of
- 8the staffing, information technology and operational issues, a new agency may require
some time after enactment to become fully operational.
5. Describe the Federal Reserve's present statutory mission and the extent to which
this mission includes consumer protection?
Through the Federal Reserve Act and other laws, Congress has assigned several
duties and responsibilities to the Federal Reserve. These include responsibility for
conducting monetary policy to achieve the objectives set forth in section 2A of the
Federal Reserve Act, providing financial services to depository institutions, the U.S.
government and foreign official institutions, and operating and overseeing aspects of the
nation's payments system.
The Federal Reserve also has statutory responsibility conveyed through various
laws, including the Federal Reserve Act, Federal Deposit Insurance Act, and the Bank
Holding Company Act for supervising and regulating bank holding companies, state
member banks, and certain other types of financial institutions (collectively, banking
organizations) for prudential purposes. In connection with our safety and soundness
examinations of state member banks and bank holding companies, we evaluate the
adequacy of the organization's risk-management systems, including the systems used
to ensure compliance with consumer protection and other laws and regulations. The
Federal Reserve also conducts regular exan1inations of state member banks to evaluate
compliance with consumer protection laws, the fair lending laws, and the Community
Reinvestment Act.
In addition, Congress has vested the Federal Reserve with authority for writing
regulations to implement a wide variety of consumer protection laws designed to protect
consumers in financial transactions. These include the Truth in Lending Act, the Truth in
Savings Act, and the Equal Credit Opportunity Act, among others. For many of these
statutes, the rules established by the Federal Reserve apply to all lenders or depository
institutions within the scope of the relevant act- not just those supervised by the Federal
Reserve for prudential purposes.
The Federal Reserve is committed to improving consumer protections and
promoting responsible lending practices through each of the roles we play as supervisor
for safety and soundness and consumer compliance, and as rule writer. In my testimony,
I suggested certain actions that Congress could take to help ensure that the commitment
demonstrated by the Board to consumer protection in financial services is maintained
over time. One way would be for Congress to formally codify consumer protection as a
core mission or responsibility for the Federal Reserve, similar to banking supervision and
regulation. This would provide a clear and ongoing understanding that consumer
protection matters should be viewed as an integral part of the Federal Reserve's overall
mission. In addition, Congress could require the Chairman of the Federal Reserve Board
to report periodically regarding the "state of consumer protection" in the financial
services industry, similar to the semiannual monetary policy report to the Congress. Such
reporting could include a comprehensive review of the Federal Reserve's actions taken to
-9strengthen consumer protection, the adequacy of existing consumer protection laws and
regulations, planned future actions to address potentially unfair and deceptive acts and
practices, enforcement actions taken on consumer protection matters, studies of consumer
finances, and the availability of financial services especially in underserved areas.
6. Please provide the Subcommittee with specific exampJe(s) of conflicts that the
Federal Reserve has experienced arising from the exercise of your consumer
protection and prudential supervisory responsibilities? How were these conflicts
resolved?
Rule writing requires extensive analysis from a number of perspectives, which
highlights the complementary nature of rule writing with other functions in the Federal
Reserve that I mentioned in my testimony. Any effort to develop new rules involves
weighing the costs and benefits of those rules to consumers, as well as implementation
and compliance costs for the industry. Implementing unduly strict limitations on product
features or practices can result in reduced access to affordable credit or services for
consumers;and rules that are costly to implement can result in reduced efficiency for the
provider and higher costs that are ultimately passed on to consumers.
Every rule writing exercise that the Board has undertaken in recent years,
including rules for home equity lines of credit (HELOCs), credit cards, mortgage lending,
and the current review of overdraft protections, has involved weighing a number of issues
and the relative costs and benefits to consumers, as well as the impact on the institutions'
ability to offer the credit or service at an affordable price. In conducting the analysis,
staff routinely identifies issues for which different interests need to be reconciled at an
early enough stage in the process to allow for timely issuance of well crafted rules. For
example, rule changes can affect the business model, risk profile, and potentially the
profitability of lending for institutions, and they also ultimately affect the pricing and
availability of credit for consumers. Issues such as these have been reviewed, studied,
and resolved as part of the rule writing process, with input from experts in consumer
regulation, prudential supervision, payments systems, and economic analysis. If
consumer protection rule writing is separated from prudential supervision, provision
should be made for interagency consultation early in the rule writing process. Early
consultation could reduce the likelihood of later unresolved conflicts, or extension of the
time required for rule writing. In addition, such consultation could surface issues that
might otherwise lessen the availability or increase the cost of financial services.
Similarly, the conduct of consumer protection and prudential supervisory
responsibilities often require close coordination in order to avoid conflicting supervisory
policy direction or messages to individual institutions through examinations. The recent
experience with home equity lines of credit provides an example of the need for
supervisors to balance prudential and consumer protection concerns. Many individuals
and small businesses rely on home equity lines of credit to finance their businesses and
pursue new opportunities. Given current economic conditions, prudential supervisors
may have concerns about the size of individual institutions' credit exposures, while
- 10-
consumer compliance supervisors may cite concerns with cutting available credit lines,
particularly for creditworthy borrowers who have made payments as agreed. Issues such
as this are currently resolved within the agency during the course of policy development
or for individual institutions, during an exan1ination prior to issuing a final examination
report. If unresolved, institutions would receive conflicting messages and direction
affecting their home equity lending programs. In addition to policy issues, potential areas
requiring coordination may also involve lower level issues related to coordination of
examination schedules, the relative weight examiners give to supervisory concerns, and
recommended corrective actions. Thus, it would also be important to determine a process
to resolve differences among the agencies that arise in both rule writing and in the
conduct of supervision.
7. In your written testimony, you indicate that the Federal Reserve has completed a
multiagency pilot program of targeted consumer compliance reviews for selected
non bank lenders and "is fully committed to implementing its own program of
supervision of nonbank subsidiaries of holding companies on an ongoing basis,"
a. What clarifications of the Federal Reserve's supervisory authority for nonbank subsidiaries under Gramm-Leach~Biiley would assist in your ability to
protect consumer interests and conduct consumer compliance examinations
for these institutions?
As noted in the response to question 3 on page 5, the Federal Reserve is fully
committed to implementing a program for supervision of nonbank affiliates ofbank
holding companies for consumer compliance. To be fully effective, consolidated
supervisors need the information and ability to identify and address risks throughout an
organization. However, the Bank Holding Company Act as amended by the so-called
"Fed-lite" provisions of the Gramm-Leach-Bliley Act, places material limitations on the
ability of the Federal Reserve to examine, obtain reports from, or take actions to identify
or address risks with respect to both nonbank and depository institution subsidiaries
of a bank holding company that are supervised by other agencies. It also places limits
on the authority ofthe Federal Reserve to obtain reports from or examine other nonfunctionally-regulated subsidiaries. Consistent with these provisions, we have worked
with other regulators and, wherever possible, sought to make good use of the information
and analysis they provide. In the process, we have built cooperative relationships with
other regulators--relationships that we expect to continue and strengthen further.
Nevertheless, the restrictions in current law still can present challenges to timely
and effective consolidated supervision in light of, among other things, differences in
supervisory models. At times, organizations have used the "Fed-lite" provisions to
challenge the Federal Reserve's authority to request or obtain certain information. To
ensure that consolidated supervisors have the necessary tools and authorities to monitor
and address safety and soundness and consumer protection concerns in all parts of an
organization on a timely basis, we would urge statutory modifications to the Fed-lite
provisions of the Gramm-Leach-Bliley Act. Such changes, for example, should remove
the limits first imposed in 1999 on the examination and information-gathering authority
- 11 -
that the Federal Reserve has over subsidiaries of bank holding companies in furtherance
of its consolidated supervision responsibilities, and on the ability of the Federal Reserve
to take action against subsidiaries, whether or not they are also supervised by another
agency, to address unsafe and unsound practices and enforce compliance with applicable
law.
b. What gaps, if any, still remain in the supervision and enforcement of
non-banking mortgage originators?
Strong rules are the foundation for ensuring consumer protections, but strong
oversight and enforcement are critically important. Gaps in enforcement and oversight,
particularly with nonbank lenders, contributed to current problems in mortgage lending.
Most subprime loans were originated by entities outside the supervisory jurisdiction of
the Federal Reserve or other federal bank regulators and thus, not subject to examinations
to assess their compliance with federal consumer protection laws. Our efforts to
overcome this supervisory gap through collaboration among various agencies are
discussed in the response to question three.
Currently, independent nonbank lenders and financial services providers are
regulated by a combination of the Federal Trade Commission (FTC) and the states.
However, the FTC does not have the authority, tools, or resources to conduct routine onsite examinations of these entities to monitor and enforce compliance, which is the nom1
for depository institutions. While several states have put forth noteworthy efforts in this
regard, the state enforcement scheme across the country is still uneven, with inadequate
resources being a primary concern. We believe it is appropriate that Congress consider
alternatives to close this gap as part of ongoing discussions of regulatory reform.
QUESTIONS FOR THE RECORD FROM CHAIRMAN MELVIN L. WATT
The Financial Services Committee, Subcommittee on Domestic Monetary Policy

& Technology appreciates your participation in the hearing entitled, "Regulatory
Restructuring: Safeguarding Consumer Protection and the Role of the Federal Reserve"
on July 16, 2009. Please provide written responses to these questions for the
record within 30 days of receipt.
Elizabeth Duke -Federal Reserve Governor

(1) If the Federal Reserve had authority to issue rules implementing the
Home Ownership and Equity Protection Act (HOEPA) beginning in 1994,
why did the Fed wait until2008 to issue rules?
(2) What are the Federal Reserve's current staffing and budget levels
allocated to safety and soundness in FY 2009? What are the staffing and
budget levels for consumer protection in FY 2009?
(3) During the current financial crisis, the Fed was responsible for both safety
and soundness and consumer protection, yet did not discover abuses in
subprime mortgages and other abuses until too late. Has the Fed
performed any analyses of what went wrong? If so, please provide copies
of each such analysis.
(4) If legislation is passed to create the Consumer Financial Protection
Agency, what are the impediments, if any, to current Federal Reserve staff
being transferred to the CFPA?
(5) Describe the Federal Reserve's present statutory mission and the extent to
which this mission includes consumer protection?
(6) Please provide the Subcommittee with specific example(s) of conflicts that
the Federal Reserve has experienced arising from the exercise of your
consumer protection and prudential supervisory responsibilities? How
were these conflicts resolved?
(7) In your written testimony, you indicate that the Federal Reserve has
completed a multiagency pilot program of targeted consumer compliance
reviews for selected nonbank lenders and "is fully committed to
implementing its own program of supervision of nonbank subsidiaries of

holding companies on an ongoing basis."
a. What clarifications of the Federal Reserve's supervisory authority for
non-bank subsidiaries under Gramm-Leach-Bliley would assist in your
ability to protect consumer interests and conduct consumer compliance
examinations for these institutions?
b. What gaps, if any, still remain in the supervision and enforcement of nonbanking mortgage originators?
Aug. 28. 2009 11:51AM
August 26, 2009
Chairman Berijamin Bemanke

Office of the Chairman
Twentieth and Constitution Avenue, NW . -~
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DearChainnanBernankae,
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Each year the Congressional Black Caucus Foundation produces its Annual
Legislative Conference, a four-day event held in September at tho Walter E.
Washington Convention Center in Washington, D.C. During th1s event,
~Mi~~~~~~i?M#@~~~- thousands of elected officials, business and industry leaders. celebrities. media
and everyday Americans come together to discuss issues affecting the AfricanAmerican community.
Members of the Congressional Black Caucus.assist with this exchange ofideas
by chairing poHcy forums and general sessions. It is my hope that you, along
with Treasury Secretary Geithner and FDIC Chairman Bair, wi!l join me in a
public discussion of how the Admin:istration,s regulatory reform proposals will
impact the African-American community.
This forum is scheduled for Friday1 September 25, 2009 and will take place
between 9;00 a.m. and ll :50 a.m. The session will focus on the 1'0les that
minority partners have played in federal financial recovery programs such as the
Term Asset-Backed Securities Lmm FacHity and the Public-Private Investment
Program. We will also spend some time publicly discussing how each agency
or regulator involves min,ority-owned firms in its day-to-day financial
operaTions, such as the FDJC's use of outside contractors in its) hank resolution
efforts.
I will arrange a phone call to personally discuss the forum end t11ank you in
advance for your attendance. In the meantime, please do not hesi~te to contact
Mikael Moore at (202) 225~8246 or Matthew Janiga at ('202) 226-3503 with any
questions.
Sin)f~~
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Maxine Waters
HOI133S SOH033}J
Chairwoman
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Financial Services Committee
Subcommittee on Housing and Community Opportunity
BOARD OF GOVERNORS
OF THE

DONALD t-. KOHN
VICE: CHAIRMAN
September 9, 2009
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The Honorable Melvin Watt

Subcommittee on Domestic Monetary Policy
and Technology
House ofRepresentatives
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Enclosed are my responses to the questions you submitted following the July 9,
2009, hearing before the Subcommittee on "Regulatory Restructuring: Balancing the
Independence of the Federal Reserve in Monetary Policy with Systemic Risk
Regulation." A copy has also been forwarded to the Committee for inclusion in the
hearing record.
I hope this information is helpful. Please let me know if I can provide any further
Sincerely,
Enclosure
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assistance.
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Vice Chairman Donald Kohn subsequently submitted the following in response to written
questions received from Chairman Melvin Watt in connection with the July 9, 2009, hearing
before the Subcommittee on Domestic Monetary Policy and Technology:
(1) Should Federal Reserve Board monetary policy decisions be subject to different levels
of transparency than a) the Board's supervisory and regulatory functions and b) single
company credit facilities such as Bear Stearns and AIG? Describe the levels of
transparency you believe should be applicable to these areas of responsibility.
Audits and reviews by the Government Accountability Office (GAO) are an appropriate
means of promoting transparency for most areas ofFederal Reserve activity, including our
supervisory and regulatory functions and our single-company credit facilities. An array of
information related to these activities is available to the public on the Board's web site, including
information on applications filed by financial institutions and actions taken by the Board on
those applications, legal interpretations issued, and aggregate and institution-specific data
derived from public reports. The Feder-al Reserve Bank of New York provides substantial
additional information on the single-company credit facilities on its web site, including detailed
descriptions of transactions and copies of relevant agreements.
The Federal Reserve Board is also highly transparent in monetary policy. Experience has
shoV!11 that granting central banks operational independence in the conduct of monetary policy
leads to improved economic performance, but monetary policy independence does not imply a
lack of transparency. Indeed, to some extent it necessitates even greater efforts to promote or
ensure transparency. For example, the Federal Reserve publishes a semiannual Monetary Policy
Report to the Congress, issues statements and minutes after monetary policy meetings, and
makes available on our website information on all aspects of monetary policy. In addition,
Federal Reserve officials regularly testify before the Congress and give speeches to the public on
monetary policy.
However, in the area of monetary policy, financial markets are keenly aware of the
potential for inflationary outcomes when short-term political pressures influence policy actions.
GAO reviews of monetary policy actions taken by the Federal Reserve would likely be perceived
by the market as an attempt by Congress to influence Federal Reserve decisionmak:ing. A
reduction in the perceived independence of the Federal Reserve to conduct monetary po1icy
would likely increase long-term interest rates and reduce economic and financial stability. It is
for this reason that the Congress, after debating the issue in 1978, purposely excluded monetary
policy from the scope of potential GAO reviews.
(2) What specific additional resources does the Fed need from Congress to adequately staff
both existing responsibilities for executing monetary policy and proposed new
responsibilities for implementing systemic risk regulation?
The Federal Reserve continuously evaluates its staffing levels and expertise in Jight of
chang]ng needs and challenges. As we discussed at the hearing, since the beginning of the
financial crisis, both the Board and the Reserve Banks have added staff with appropriate skills to
-2-
ensure that critical functions are performed in a thorough and timely fashion. For example,
additional staff resources have been required to supervise several large financial firms previously
not subject to mandatory consolidated supervision that elected to become bank holding
companies--including Goldman Sachs, Morgan Stanley, and American Express. While the
number of additional financial institutions that would be subject to supervision under the
Administration's proposal would depend on standards or guidelines adopted by the Congress, the
criteria offered by the Administration suggest that the initial number of newly regulated firms
would probably be relatively limited. The new responsibilities and authorities that are
contemplated in the Administration's proposal would require some expansion of staff but we
anticipate that expansion would be an incremental and a natural extension of the Federal
Reserve's existing supervisory and regulatory responsibilities. Given the manner in which
Federal Reserve operations are financed, no appropriation would be required to fund any
necessary increases in staff.
(3) If the Federal Reserve is granted powers to regulate systemically significant entities,
bow would the Fed harmonize systemic risk and monetary policy responsibilities with other
central banks around the woriCl?
With the world's economies and financial systems becoming increasingly integrated, and
with financial stability a prerequisite to achieving our dual mandate of maximum employment
and price stability, the Federal Reserve already places a high priority on close cooperation with
foreign regulators and monetary policyrnakers. Federal Reserve officials discuss monetary and
economic policy issues with their foreign counterparts in a broad array of forums, including
.regular meetings sponsored by the BIS, OECD, G8, and G20. Similarly, the Basel Committee
and Financial Stability Board, among other groups, provide a framework for addressing the
common challenges to financial stability around the world. Outside of such venues, Federal
Reserve officials maintain close contact with foreign authorities in a wide range of countries in
order to share information and lay the basis for further cooperation. If the Federal Reserve were
given additional responsibilities, the need for additional international consultation would need to
be carefully considered in light ofthe exact nature of those responsibilities. In any case, as the
global economy becomes ever more tightly knit, and as the role of the Federal Reserve evolves,
we will continue to work closely with our counterparts abroad.
QUESTIONS FOR THE RECORD FROM CHAIRMAN MELVIN L. WAIT
The Financial Services Committ~, Subcommittee on Domestic Monetary Policy

& Teclmology appreciates your participation in the hearing entitled, "Regulatory
Restructuring: Balancing the Independence of the Federal Reserve in Monetary Policy

with Systemic Risk Regulation" on July 9, 2009. Please provide written responses
to these questions for the record within 30 days of receipt.
Vice Chairman of the Fed -Donald Kohn
(1) Should Federal Reserve Board monetary policy decisions be subject to

different levels of transparency than a) the Board's supervisory and
regulatory functions and b) single company credit facilities such as Bear
Stearns and AIG? Descnoe the levels of transparency you believe should
be applicable to these areas of responsibility.
I
(2) What specific additional resources does the Fed need from Congress to
adequately staff both existing responsibilities for executing monetary
policy and proposed new responsibilities for implementing systemic risk
regulation?
(3) If the Federal Reserve is granted powers to regulate systemically
significant entities, how would the Fed harmonize systemic risk and
monetary policy responsibilities with other central banks around the
world?
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I am \vriting to confirm that you will testify before the Senate Banking, Housing and Urban
Atlairs Subcommittee on Security and International Trade and Finance at a bearing entitled
"lntt:mational Cooperation to Modernize Financial Regulation." The hearing is scheduled for
\Vednesday, September 30.2009 in room 538 of the Dirksen Senate Office Building at 2:30pm.
The hearing will focus on the international aspects of regulatory reform-the e1Torts put in place
at the G20 Summit, and the key international regulatory priorities of your organization. In your
testimony llil.d written statement, please provide the Subcommittee with your responses to the
follo\ving issues:
I.
G20 Summit in Pittsburgh
Please summarize what transpired during the G20 Summit in Pittsburgh on the
international harmonization aspects of regulatory reform in your respcc.tive area of
expertise. Specifically, the US goals of the Summit relating to international
regulatory reform, if objectives were accomplished, the roles played by the respeetive
agencies (either at the Summit or in preparation) and the status of any proposals
presented by the Financiol Stability Board (FSB).
ll. lntcrnotional Regulatory Modernization Priorities
Please provide an outline of the key issues and priorities most relevant in your
deo.lings on intemational alignment.
In that outline, please educate the Committee on the process in place to pursue those
objectives, an explanation of the existing framework for dialogue with their
international counterparts (whether it is through bilateraUmultilateral discussions
and/or the Financial Stability Board), whether that infrastructure is adequate to
achieve the goals necessary, and whether any additional authority is needed.
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If applicable, please address any steps Congress can, or should, take to

assist the process of international regulatory coordination.
Please highlight your role on the Financial Stability Board, benchmarks

accomplished by the FSB, upcoming implementation deadlines, and
whether appropriate enforcement mechanisms arc in place to ensure
member country compliance with principles and proposals implemented
by the fSB.
for purposes of the Committee Record and printing, your written statement must be double
spaced and submitted in electronic form by email to Devin Hartley
(Devin_Hartley@banking.senatc.gov) and Ellen Chube (Ellen_chube@bayh.senate.gov). Also,
two original copies of the statcme1ll_must be included for the printers, along with 73 copies for
the use ol'Committee members and staiT. Your statement should be sent no later than 24 hours
pnor to the hearing. You should expect to have approximately 5 minutes to give your testimony
at the hearing. Your full statement will be made part of the hearing record.
lf you have any questions regarding the hearing, please contact Ellen Chube at 202~224-8726 or
Julie Chon at 202-224-3977. Thank you for participating in the Subcommittee's deliberations.
Sincerely,
Ev<m Bayh
United States Senator
BOARD OF GOVERNORS
OF THE

WASHINGTON. D. C. 20551
BEN S_ BERNANKE
CHAlRMAN
September 29, 2009

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The Honorable Melissa L Bean

Dear Congresswoman:
Enclosed is my response to the question you submitted following the July 24,
2009, hearing before the Committee on Financial Services on "Regulatory Perspectives
on the Obama Administration's Financial Regulatory Refonn Proposals--Part Two." A
copy has also been forwarded to the Committee for inclusion in the hearing record.
I hope this information is helpfuL Please let me know if I can provide any further
assistance.
Sincerely,
Enclosure
Chairman Bemanke subsequently submitted the following in response to a v..Titten question

received from Congresswoman Bean in connection with the July 24, 2009, hearing before the
Committee on Financial Services:
Over the last five years, how many enforcement actions has your agency taken on
consumer protection violations?
Since 2004, the Federal Reserve has taken a number of formal and informal enforcement
actions against the institutions under its supervision to address issues arising from consumer
compliance examinations that involve violations of consumer protection laws and regulations.
Our actions include:
3
Written Agreements and Cease and Desist Orders;
37
Civil Money Penalties (primarily to address noncompliance with

Federal Flood Disaster Protection laws);
91
Memoranda of Understanding and Board of Director Resolutions; and
22
Referrals to the U.S. Department ofJustice involving patterns or

practices of discrimination under the ECOA and Fair Housing Act.
The Federal Reserve conducts conslm1er compliance examination of state member banks
under an established frequency schedule and has done so for more than 30 years. These
examinations are generally separate from safety and soundness examinations and are conducted
by specially trained consumer compliance exan1iners. We have found that most banks
voluntarily take prompt action to address weaknesses in compliance risk management programs
and to correct instances of noncompliance with laws and regulations. Thus, the use of
enforcement tools, infom1al or formal, is typically not necessary to ensure that problems are
rectified. Nonetheless, we will not hesitate to take enforcement action and use our authority
when appropriate. The severity of the action taken (formal vs. informal) corresponds to the
degree of noncompliance, the breadth of the issues involved, and the level of responsiveness of a
bank's management to supervisory concems.
Panel Two- Chairman Bernanke

1. Over the last five years, how many enforcement actions has your agency taken on
consumer protections violations?
7/24/09 HFSC hearing re "Regulatory Perspectives on the Obama Administration's

Financial Regulatory Reform Proposals-Part Two."
tJRnitrct 5!itt1trn 1t-1ousc of 1Rcprcscntatincn
BARNEY fRANK, M1\, CHAIRMAN
SPENCtR llACHUS, Al, RANKING MEMBER
\tommittee on jrtnonclol ~crulccs

2!20 l\ap!Jurn )!)ou%e Wee J.@ullb!ng
RECEIVED
OFFICE OF THE SECRETARY
RECORDS SECTION
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-=t'Uilshinnton, B(I: 20515

September 29, 2009

Chairman
20th & C Streets, NW
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The Committee on Financial Services will hold a hearing entitled "Federal Reserve
Perspectives on Financial Regulatory Refo1m Proposals" at 9 a.m. on Thursday, October 1,
2009, in room 2128 Rayburn House Office Building. I am writing to confirm your invitation
to testify at this hearing.
The hearing will focus b1oadly on all aspects of the Administration's proposal for
Financial Regulatory Reform. Please address as many specific components of the proposal
as are relevant to your agency, including the impact on consumers, the institutions you
currently regulate and the financial health of the U.S. and global economy. In addition,
please also be prepared to address concerns that certain actions taken by regulators during
the examination process may be pro-cyclical in nature, increasing capital, reserve and other
requirements when lending capacity is already constrained, thereby impeding efforts to
improve the flow of credit and aid economic recovery.
Please read the following material carefully. It is intended as a guide to your rights
and obligations as a witness under the rules of the Committee on Financial Services.
The J?orrn of your Testim.ony. Under rule 3(d)(2) of the Rules ofthe Committee on
your appearance. Please note that changes to the written statement will not be pe1mitted
Submission ofymtr Testimony. Please submit at least 100 copies of your proposed
written statement to the Clerk of the Committee not less than two business days in

Page 2
Due to heightened security restrictions, many common fonns of delivery experience
significant delays in delivery to the Committee. 'l'his includes packages sent via the U.S.
Postal Service, Federal Express, UPS, and other similar caniers, which typically arrive 3 to
5 days later th~n nonnal. The United States Capitol Police have specifically requested that
the Committee refuse deliveries by courier. The best method for delivery of your testimony
is to have an employee from your organization deliver yom testimony in an unsealed
in electronic form is to send it via electronic mail to fsctestimony@rnail.house.gov. The
message should specify the date and which committee or sobcomrnittee you are scheduled
closed session only when authorized by the Committee or subconunittee. However, by
TrY: 202-226-1591; or write to the Committee at the address above.
Therefore, the Conunittee will only reserve 1 seat for staff accompanying you during your
appearance (a total of 2 seats). In order to maintain OW' obligation under the Rules of the
this policy.

Page 3
contact David Smith at (202) 225-4247.
Sincerely,
Chairman
BF/ds
cc: The Honorable Spencer Bachus
BOARD OF GOVERNORS
OF THE

9Ef'~
S. BERNANKE
CHAIRMAN
October 6, 2009
The Honorable Shelley Moore Capito

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Dear Congresswoman:
..0
on the Obama Administration's Financial Regulatory Reform Proposals--Part Two." A
I hope this information is helpful. Please let me know ifl can provide any further
assistance.
Sincerely,
Enclosure
(B-186, 09-10747)
Chairman Bernanke subsequently submitted the following in response to written

questions received from Congresswoman Capito in connection with the July 24, 2009,
hearing before the Committee on Financial Services:
Chairman Bernanke, in past economic downturns, rural areas often do not feel the
pain as quickly as the rest of the nation and do not recover as quickly. What are
you seeing with the current economic conditions in rural areas? Do you believe that
there will be a significant lag in these communities recovering as opposed to our
more urban areas?
For quite some time, economic conditions in rural areas increasingly have become
integrated with the general economy, and to the extent that this has occurred, rural
communities have shared in the distress arising from the recent tunnoil in financial
markets and the decline in overall economic activity. Within the agricultural sector,
Department of Agriculture projections suggest that net farm income this year will be
$54 billion, down substantially from the $87 billion recorded in 2008, and this is a
serious financial blow to farm communities. However, fam1 entrepreneurs had several
years of remarkable profitability earlier in the decade, allowing them to build a
substantial financial cushion. The USDA estimates that the value offann assets totaled
around $2 trillion in 2008, and that despite the depth of the recession they project the
value will fall only about 3-112 percent in 2009. With regard to agricultural banks, the
annualized rate of return on their assets (ROA) was 0.8 percent during the first half of
2009, considerably below the ten-year average of about 1.2 percent; by way of
comparison, the ROA over the first half of2009 at nonagricultural small banks was 0.0.
The leadership in Congress has placed a high emphasis on an energy policy that, in
my view, punishes usc of our carbon based natural resources. If a cap and trade
policy were to be implemented, what do you see being the economic affect
nationally?
With regard to a cap and trade policy, as you know I have avoided taking a
position on explicit fiscal policy issues during my tenure as Chainnan of the Federal
Reserve Board. I believe that these are fundamental decisions that must be made by the
Congress, the Administration, and the American people. Instead, I have attempted to
articulate general principles that I believe most economists would agree are important for
the long-tem1 performance of the economy and for helping fiscal policy to contribute as
much as possible to that performance.
As highlighted in a recent report by the Congressional Budget Office, there are a
number of factors that are relevant when considering the economic effects of a cap and
trade policy. 1 For instance, the effects on the economy would depend on the specific
design of the policy, including: the stringency of the emission reductions required by the
policy; the flexibility in the policy for determining the timing, location, and manner in
1
Cont,rressional Budget Office, The Economic E.tJecls of Legislation to Reduce Greenhouse-Gas Emissions,
September 2009.
-2'
which emissions could be reduced; and how the emission allowances would be allocated.
Also, the costs of the policy would be determined by the flexibility of the economy in
adapting to shifts in production and employment as energy consumption moved from
carbon-based sources toward alternative sources. Moreover, the effects of a cap and
trade policy on the U.S. economy would be influenced by whether other countries also
imposed similar emission-reduction policies. Furthermore, the economic costs of a cap
and trade policy should be weighed against the economic costs of climate change that
could occur in the absence of an emission-reduction policy. Of course, this will involve
making difficult decisions as there appears to be considerable uncertainty in estimating
both the economic effects of global climate change and the economic effects of emissionreduction policies.
Congresswoman Shelley :Moore Capito

Hearing entitled "Regulatory Perspectives on the
Obama Administration's Financial Regulatory
Reform Proposals-Part Two"
July 24, 2009
Questions for Hon. Ben Bernanke, Chairman Board of Governor of the
Federal Reserve System:
o Chairman Bernanke, in past economic downturns, rural areas often do not
feel the pain as quickly as the rest of the nation and do not recover as
quickly. What are yo~ seeing with the current economic conditions in rural
areas? Do you believe that there will be a significant lag in these
communities recovering as opposed to our more urban areas?
o The leadership in Congress has placed a high emphasis on an energy policy

that, in my view, punishes use of our carbon based natural resources. If a
cap and trade policy were to be implemented, what do you see being the
economic affect nationally?
BOARD OF GOVERNORS
OF THE

WASHINGTON, 0. C. 20551
"
....
The Honorable John Conyers, Jr.

Chairman
Committee on the Judiciary
October 21,2009
SEN S. BRNANK
CHAIRMAN
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Dear Mr. Chairman:

Experience over the past two years clearly demonstrates that the United States needs a
comprehensive strategy to help reduce and contain systemic risk and address the related problem
of financial institutions that are deemed too big--or perhaps too interconnected--to fail. In light
of the topic of the Conm1ittee' s October 22 hearing, 1will focus on one critical aspect of such an
agenda for reform--establishment of a new resolution regime for systemically important financial
firms.
The Federal Reserve believes that, whenever possible, the difficulties experienced by
financial firms in distress should be addressed through private-sector arrangements, such as, for
example, by capital injections from private sources, as many financial firms have done or by
reorganization or liquidation under the bankruptcy code like other types of firms. However, in
the midst of a crisis and when no private sector solution is available, authorities--acting in the
public's interest--may need an alternative to the disorderly failure of a large, highly
interconnected financial firm because of the risks such a failure would pose to the financial
system, the broader economy, and ultimately households and businesses.
Large, complex financial institutions tend to be highly interconnected with other financial
firms and markets. Indeed, in recent years the interlinkages within the financial system have
become even closer as a result of, an1ong other things, the integration oflending activities with
financial markets through increased use of securitization, the expansion of derivative hedging
and trading activities among counterparties, and the growth of arrangements--such as tri-party
repurchase and securities lending arrangements--through which holders of securities can obtain
short-term financing from risk averse investors through collateralized loans.
In light of these and other factors, the bankruptcy of a large, complex financial firm can
have serious adverse consequences for other firms and financial markets, and, consequently, for
the flow of credit and for economic conditions more broadly. Such spillovers may be
particularly large at times when financial markets and institutions already are under stress and
the economy is weak. In such periods, the disorderly failure of a large, interconnected financial
firm may result in substantial pressures on other finns seen by investors as having similar
exposures or business models, dislocations in a range of financial markets, and disruptions in the

Page 2
flow of credit to households and businesses. Losses sustained by other financial firms could
erode their financial strength, limiting their ability to play their intermediation role, or even cause
them to fail, reinforcing financial pressures. Moreover, the disorderly failure of a large,
interconnected firm during a time of pre-existing financial and economic stress could undermine
confidence in the US. financial sector more broadly, potentially triggering a widespread
withdrawal of funding by investors and an additional tightening of credit conditions, which
could, in tum, cause a further reduction in economic activity. Historical experience shows that,
once begun, a financial panic can spread rapidly and unpredictably.
Indeed, this is precisely what happened following the bankruptcy ofLelunan Brothers
Holdings, Inc. (Lehman) in September 2008. At that time, the U.S. and global financial system
had already been under significant strains for more than a year, strains that initially were
triggered by the end of the housing boom in the United States and other countries and the
associated problems in markets for mortgage-related assets. These developments had resulted in
a sharp decline in the valuations of mortgage-related assets, widespread pressures in funding
markets, tighter credit conditions for businesses and households, and substantial"declines in
business and constuner confidence around the world. Over the months leading up to Lehman's
failure, a weakening U.S. economy and continued financial turbulence led to a broad loss of
confidence in financial firms. These strains were punctuated by the government's decision in
early September to place the government-sponsored enterprises Fannie Mae and Freddie Mac
into conservatorship due to concerns about their solvency.
In this environment, the bankmptcy ofLehman on September 15 led to a substantial
intensification of the financial crisis, with corresponding negative effects on the flow of credit
and economic conditions more broadly, both here and abroad. Concerns about the potential
direct and indirect losses that Lehman's failure could impose on other firms undermined
confidence in wholesale bank funding markets, leading to further increases in bank borrowing
costs and a tightening of credit availability from banks. Other investment banks, which were
perceived to have weaknesses similar to those at Lehman, faced substantial pressures as investors
pulled back from exposures to them, thus requiring the Federal Reserve to step up its provision
of liquidity to such firms as well as to banking institutions. Nonetheless, in the following weeks,
several large financial institutions failed, came to the brink of failure, or were acquired by
competitors under distressed circumstances.
Moreover, on September 16, the Reserve Primary Fund, a money market mutual fund,
announced that it "broke the buck" as a result oflosses on its holdings of Lehman commercial
paper. This announcement prompted investors to withdraw large amounts not only from the
Reserve Primary Fund, but also from other so-called prime funds, which usually invest mainly in
private debt securities and which were seen by investors as having exposures potentially similar
to those of the Reserve Primary Fund. A severe run on much of the prime money market fund
industry ensued, with withdrawals totaling hundreds of billions of dollars and more than
100 funds losing a substantial volume of assets in the span of just a few weeks. The magnitude
of these withdrawals decreased only after the Treasury announced a guarantee program for
money market mutual fund investors and the Federal Reserve established a new lending program
to support liquidity in the asset-backed commercial paper market Nevertheless, these massive

Page 3
outflows undermined the stability of short-term funding markets, particularly the commercial
paper market, upon which corporations rely heavily to meet their short-term borrowing needs.
Against this backdrop, investors pulled back broadly from risk-taking in September and
October. Liquidity in short-term funding markets vanished for a time, and prices plunged across
asset classes. Securitization markets--a key source of financing for consumers and businesses-essentially shut down with the exception of those for government-supported mortgages.
Reflecting in part these developments, economic activity dropped sharply in late 2008, with the
pace of job losses accelerating, continued steep declines in housing activity, and widespread
cutbacks in capital spending by business.
It was precisely to avoid these types of consequences that the Federal Reserve, with the
full support of the Treasury Department, acted to prevent the disorderly failure of Bear Steams in
1
March 2008 and of American International Group, Inc. (AIG) the day after Lehman's failure.
While these actions were necessary in the environment then prevailing to address unacceptable
risks to the global financial system and our economy, these actions have exacerbated the belief of
market participants that some financial firms are too big to fail. This belief has many
undesirable effects. While shareholders of Bear Stearns and AIG suffered significant losses,
creditors of the firms were shielded from Joss, creating an expectation among managers and
investors of similar treatment going forward. This outcome reduces market discipline and
encourages excessive risk-taking by financial firms that are perceived as being too big to fail. It
also provides an artificial incentive for firms to grow in order to be perceived as too big to fail.
And it creates an unlevel playing field with smaller finns, which may not be regarded as having
the same degree of government support. Moreover, government rescues of too-big-to-fail finns
can, as we have seen in the current crisis, involve the commitment of substantial amounts of
public funds.
For these reasons, it is essential that policymakers make changes to the financial mles of
the game to address the too-big-to-fail problem. This will require actions on n.vo fronts. First,
we must reduce the potential for large, highly interconnected firms to place the financial system
at risk. To do so, policymakers must ensure that all systemically important financial institutions
are subject to a robust and effective regime for consolidated supervision. Supervision also must
be strengthened to better protect the safety and soundness of individual institutions and must be
reoriented to better take account of the risks that an institution may pose on the financial system
as a whole. The Federal Reserve has already taken a number of important steps to improve its
In light of the tools available at the time, the U.S. government was unable to prevent the failure
ofLelm1an. The amount of available collateral at Lehman fell well short of the amount needed
to secure a Federal Reserve loan of sufficient size to meet Lehman's funding needs for survival.
Also, at the time of Lelunan' s demise, Treasury lacked the ability to inject capital into financial
institutions to maintain financial stability because the Emergency Economic Stabilization Act of
2009 had not yet been enacted. Thus, when attempts to find a buyer for the company and
develop an industry solution proved unavailing, Lehman's failure became unavoidable.

Page4
regulation and su~ervision oflarge financial groups along these lines, building on lessons from
the current crisis.
Second, and the focus of the Committee's hearing, a new, alternative resolution process
should be created that would allow the government to wind down in an orderly manner a failing
systemically important financial institution whose disorderly collapse would pose substantial
risks to the financial system and the broader economy. Indeed, after the Lehman, Bear Stearns,
and AIG experiences, there is little doubt that there needs to be a third option to the existing
choices of bankruptcy and bailout for these firms.
In most cases, the federal bankruptcy laws provide an appropriate framework for the
resolution of nonbank financial institutions. However, the bankruptcy code does not sufficiently
protect the public's strong interest in ensuring the orderly resolution of a nonbank financial firm
whose failure would pose substantial risks to the financial system and to the economy. An
alternative, orderly resolution regime already exists for banks: If a bank approaches insolvency,
the Federal Deposit Insurance Corporation (FDIC) is empowered to intervene as needed to
protect depositors, sell the bank's assets, and take any necessary steps to prevent broader
consequences to the financial system. A similar regime should be established for systemically
important nonbank financial institutions, including bank holding companies.
Such a regime should provide the government with the tools to restructure or wind down
a failing systemically important firm in a way that mitigates the risks to financial stability and the
economy and thus protects the public interest. For example, such tools should include the ability
to take control ofthe management and operations of the failing firm; to sell assets, liabilities, and
business units of the firm; to transfer the viable portions of the firm to a new "bridge" entity that
can continue these operations with minimal disruptions while preserving value; and to repudiate
contracts of the firm, subject to appropriate recompense. In addition, establishing credible
processes for imposing losses on shareholders and creditors of the firm is essential to restoring a
meaningful degree of market discipline and addressing the too-big-to-fail problem.
As I noted at the outset, financial firms--including those that might be considered
systemically important--should be resolved under the bankruptcy code whenever possible. Thus,
this new regime should serve as an alternative to the bankruptcy code only when needed to
address systemic concerns, and its use should be subject to high standards and checks and
balances. The Administration's proposal would allow the new regime to be invoked with respect
to a particular firm only with the approval of multiple agencies, including the Federal Reserve,
and only upon a determination that the firm's failure and resolution under the bankruptcy code or
otherwise applicable law would have serious adverse effects on financial stability and the U.S.
economy. These standards, which are similar to those governing use of the systemic risk
exception to least-cost resolution in the Federal Deposit Insurance Act (FDI Act), appear
appropriate. The Federal Reserve's participation in this decision-making process would be an
extension of our long-standing role in fostering financial stability, involvement in the current
2
See Ben S. Bernanke (2009), testimony before the House Financial Services Committee,
Oct. 1.

Page 5
process for invoking the systemic risk exception under the FDI Act, and status as consolldated
supervisor for large banking organizations. The Federal Reserve, however, is not well suited,
nor do we seek, to serve as the resolution agency for systemically important institutions under
the new framework.
As we have seen during the recent crisis, a substantial commitment of public funds may
be needed, at least on a temporary basis, to stabilize and facilitate the orderly resolution of a
large, highly interconnected financial firm. The Administration's proposal provides for such
funding needs to be addressed by the Treasury, with the ultimate costs of any assistance to be
recouped through the sale or dissolution of the troubled firm supplemented by assessments on
financial firms over an extended period of time if necessary. W c believe this approach provides
the appropriate source of funding for the resolution of systemically important financial
institutions, given the unpredictable and inherently fiscal nature of this function and the
importance of protecting taxpayers from losses.
Thank you for the opportunity to provide the views of the Federal Reserve on these
important matters. I hope this information .is helpful.
Sincerely,
Identical letter also sent to: Ranking Member Lamar S. Smith, Committee on the
Judiciary.
OCl BOARD OF GOVERNORS

OF THE

WASHINGTON. 0 C. 20551
November 13, 2009
SEN S, BERNANK
CHAIRMAN
The Honorable Keith Ellison

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Dear Congressman:
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This is in response to your letter dated September 24, 2009, requesting the Board'~iew
on whether Congress should specify leverage requirements for banking organizations.
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The purpose of the leverage ratio is to place a constraint on the maximum degree to
which an institution can leverage its equity capital base, and, as you noted in your letter, is an
important complement to the risk-based capital requirements. 1 The Board strongly supports the
current statutory requirement that all insured depository institutions meet a minimum leverage
requirement. However, we believe that specific minimum capital requirements for financial
institutions arc most effective when established by the institution's regulator. This flexibility
allows bank supervisors to establish general restraints on leverage for the industry while
retaining the ability to set further restraints for individual institutions as circumstances warrant.
In this connection, the Board has established a minimum leverage ratio by regulation for its
supervised institutions, but may require a higher ratio for any banking organization it supervises
if warranted by its particular circumstances or risk profile. 2
You point out that the leverage ratio does not take into account off-balance sheet assets.
While the computation of the leverage ratio does not include off-balance sheet items, the riskbased capital rules do address many of them. Importantly, for banking organizations supervised
by the Board, it has been the Board's longstanding practice to evaluate a banking organization's
off-balance sheet activities when assessing its overall capital adequacy. If an organization's
capital is deemed inadequate, whether due to off-balance sheet exposures or other circumstances,
the Board may take appropriate action to require the organization to raise additional capital.
The Board's autho1ity and flexibility in establishing capital requirements, including
leverage requirements, have been key to the Board's ability to require additional capital where
needed based on a banking organization's risk profile. One ofthe lessons learned in the recent
financial crisis is the need for financial supervisors to have the ability to react quickly to
changing circumstances, as in the capital assessments conducted in the Supervisory Capital
Assessment Program. The Board and other federal banking agencies initiated this program to
conduct a comprehensive, forward-looking assessment ofthe capital positions ofthe nation's 19
largest bank holding companies (BHCs). The Board's authority to mandate specific levels of
capital was critical to this exercise because each BHC had a unique set of risks and
1
See 12 CFR part 208, Appendix B, Section I; 12 CFR part 225, Appendix D, Section l.
l2 CFR part 208, Appendix B, Section II; 12 CFR part 225, Appendix D, Section II.
t 1 :lSO
The Honorable Keith Ellison

Page Two
circumstances that demanded careful supervisory scmtiny and evaluation in order to identify the
amount of capital appropriate for its safe and sound operation. The Board required corrective
actions on a case-by-case basis and continues to assess the capital positions of these institutions
as well as all others under its supervision.
We note that in other contexts, statutorily prescribed minimum leverage ratios have not
necessarily served pmdential regulators of financial institutions well. Previously, the minimum
capital requirements for the housing government-sponsored enterprises Fannie Mae and Freddie
Mac (collectively, "GSEs") were fixed in statute; the risk-based capital requirement for the GSEs
was based on a stress test that was also set forth in statute; and the GSE's regulator, the Director
of the Office of Financial Housing Enterprise Oversight (the predecessor agency to the Federal
Housing Finance Authority) did not have the authority to establish additional capital
requirements for the GSEs. 3 This limitation was different from the authority that the federal
banking agencies have to set the leverage and risk-based capital requirements for banking
organizations. In 2008, Congress enacted the Housing and Economic Recovery Act of2008,
which created FHF A and empowered it to establish additional minimum leverage and "risk-based
4
capital requirements for the GSEs.
With regard to the Board and other U.S. banking agencies' efforts to join with
international supervisors to strengthen capital requirements for internationally active banking
organizations, the Basel Committee is working on proposals for an international supplement to
minimum risk-based capital ratios. While this work is in process, it is likely that these efforts
will take the form of a minimum leverage ratio. It will be important for the international
regulatory community to carefully calibrate the aggregate effect of this initiative, along with
other efforts underway that are intended to strengthen capital requirements, to ensure that they
protect against future financial crises while not raising capital requirements to such a degree that
the availability of credit to support economic growth is unduly constrained. The current
authority and flexibility the Board has to establish and modify leverage ratios as a banking
organization regulator is very important to the successful participation of the Board in the
process of establishing and calibrating an international leverage ratio.
I hope this information is useful. Please let me know if I can be further assistance.
Sincerely,
(Signed) Ben Bemanke
12 U.S.C. 4612. The statutory minimum capital requirement (essentially a leverage ratio requirement)
and risk-based capital requirements for the GSEs has been supplemented by a provision allowing the
Director of the FHFA to establish additional capital requirements. See 12 U.S.C. 4612(e).
4
Div. A of Pub. L. 110-289 (July 30, 2008), 122 Stat. 2654; ~ee note to 12 U.S. C. 4501.
KEITH ELLISON
FINANCtAL SERVICES COMMITTEE

SVOCCMIWT<l: ON ~lNA-"~CIAliNSTfTUTIONS
-'NO CONSUM;;R CREDIT

Su&tOM!'.Hn'EE ON HOUS!N::i A.NO.
1122 LONGWORTH HOuSE 0FFIC 8UilOING
COMMUN!n'
DC 20515
12021 22'>--4755
FAX: {202) 22'>--4886
WASHINGTON,
0PPOR1vNfN
Susco;...~-unn ON 0oMf$T:c
MoNt:lARY PouCY ANO 'TtcHNotOGY
FOREIGN AFFAIRS COMMinEE

2100 PLYMOOTH AvENVE NORTH
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CONGRESS OF THE UNITED STATES

HOUSE OF REPRESENTATIVES
Su.acoMMITIEE ON INHH\NATIONAI.
O~GANilAil01"f5, HUMAN fhGiiTS,
SvaCOMMtTifE oN MIOCtE
A~ SOUTH
ellison.hous e. gov
AsiA
September 24, 2009
The Honorable Ben S. Bemanke

Chairman
Board of Governors ofthe Federal Reserve System
20th Street & Constitution Avenue, NW
Washington, DC 2055 I
The Honorable Timothy Geithner
Secretary
U.S. Department ofthe Treasury
1500 Permsylvania Avenue, NW
Dear Chairman Bemanke and Secretary Geithner,
As you know, excessive leverage was a key component of the financial crisis. Investment banks
leveraged their balance sheets to stratospheric levels by using shorttenn wholesale financing
(like repurchase agreements and commercial paper). Meanwhile, some entities regulated as bank
holding companies (BHCs) used off-balance-sheet entities to warehouse risky assets, thereby
evading their regulatory capital requirements. These entities' reliance on short-term debt to fund
the purchase of oftentimes illiquid and risky assets made them susceptible to a classic bank
panic. The key difference was that this panic wasn't a run on deposits by scared individuals, but
a run on collateral by sophisticated counterparties.
The Treasury highlights this very problem in its policy statement before the recent summit ofG20 frnance ministers in London. To address this problem, the Treasury advocates stronger
capital and liquidity standards tor banking firms, including "a simple, non-risk-based leverage
constraint." The U.S. is one of only a few countries that already has leverage requirements for
banks. Leverage requirements supplement risk-based capital requirements that federal banking
regulators have in place pursuant to the Basel I1 Accord, an international capital agreement.
While important features of our system of financial regulation, leverage requirements only apply
to banks and bank holding companies and therefore have not covered a wide array of financial
institutions, including many that are systemically important. Moreover, leverage requirements
have generally not captured the considerable risks associated with off-balance-sheet activities.
0 f course, the Administration looks to address the shortcomings in the existing regulatory
system through a proposal to regulate large, systemically-signifi(;ant financial institutions as Tier
I Financial Holding Companies (FHCs). Building UJXln its existing authority as the consolidated
supervisor of all BHCs (which includes FHCs), the Federal Reserve would be responsible for
rnnH!::OON RlC.YCU:D PAffR
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overseeing and regulating the Tier l FHCs under the plan. In the legislative draft of the
proposa~ the Federal Reserve would have the authority to prescnbe capital requirements and
other prudential standards for these institutions that are stronger than those for all other BHCs.
To that point, the text specifically says, "The prudential standards shall be more stringent than
the standards applicable to bank holding companies to reflect the potential risk posed to financial
stability by United States Tier 1 financial holding companies and shall include, but not be limited
to-(A) risk-based capital requirements; (B) leverage limits; (C) liquidity requirements; and (D)
overall risk management requirements."
The application of leverage limits- as advanced by the Treasury's G-20 policy statement and by
the Administration's financial regulatory reform plan- is a simple and elegant way to limit risk
at specific financial institutions (and within the overall fmancial system). The financial crisis has
underscored the importance of leverage requirements and manifested the problems associated
with relying upon risk-based capital requirements alone. While the ostensible purpose behind
the Basel II Accord was to align economic and regulatory capital, the agreement's reliance upon
the ratings of credit rating agencies and on the internal risk assessments of the banks themselves
has been seriously called into question by recent event-s. A leverage requirement has the
advantage of setting a minimum standard irrespective of what more subjective and assumptionbased capital calculations may suggest.
Nevertheless, there are some open questions regarding exactly how a leverage requirement
should be applied. Some scholars and policy experts have advocated putting in place a leverage
requirement for banks and other financial institutions that is set in statute. As Congress moves
forward on comprehensive financial regulatory refo1111, it may consider such a requirement. I
would therefore be interested to hear your views regarding the wisdom of such an approach.
As you know, setting capital standards requires decisions regarding what institutions would be
covered, how capital would be defined, and what levels the requirements would be set. In light
ofthat, what specific difficulties would you anticipate Congress facing with respect to specifying
such a requirement? In addition, would a statutory requirement be too inflexible and place too
many constraints on regulators with respect to refining regulatory capital requirements and
negotiating with bank regulators from other countries?
Thank you for your consideration of these questions. I look forward to your responses.
Sincerely,
~{;/(_~
Rep. Keith Ellison
.......
BOARD OF GOVERNORS
OF THE

BEN S. 8ERNANKE
CHAIRMAN
November 17, 2009
The Honorable Jim Bunning

United States Senate
Dear Senator:
2009, hearing before the Committee on Banking, Housing, and Urban Affairs on "The
Semiannual Monetary Policy Report to Congress." A copy has also been forwarded to
the Committee for inclusion in the hearing record.
I hope this infom1ation is helpful. Please let me know ifl can provide any further
assistance.
Sincerely,
.(Signed) Ben Bemante:
Enclosure
(B-169' 09-9718)
Chairman Bernanke subsequently submitted the following in response to written questions

received from Senator Bunning in connection with the July 22, 2009, hearing before the
Committee on Banking, Housing, and Urban Affairs:
1. Back in March, Secretary Geithner, who was F.O.M.C. Vice-Chair under you and
Chairman Greenspan, said he now thinks easy money policies by central banks were a
cause of the housing bubble and financial crisis. Do you agree with him?
I do not believe that money policies by central banks in advanced economies were a
significant cause of the recent boom and bust in the U.S. housing sector and the associated
financial crisis. The accommodative stance of monetary policy in the United States was
necessary and appropriate to address the economic weakness and deflationary pressures earlier in
this decade. As I have noted previously, I believe that an important part of the crisis was caused
by global saving imbalances. Those global saving imbalances increased the availability of credit
to the U.S. housing sector and to other sectors of the U.S. economy, leading to a boom in
housing construction and an associated credit boom. The role of global savings imbalances in
the credit and housing boom and bust was amplified by a number of other factors, including
inadequate mortgage underwriting, inadequate risk management practices by investors,
regulatory loopholes that allowed some key financial institutions to assume very large risk
posWons without adequate supervision, and inaccurate assessments of risks by credit ratings
agenctes.
2. You said you think you can stop the expansion of the money supply from being
inflationary. Does that mean you think the expansion of the money supply is permanent?
Broad measures of the money supply, such as M2, have not grown particularly rapidly
over the course ofthe financial crisis. By contrast, narrower measures, such as the monetary
base, have grown significantly more rapidly. That growth can be attributed to the rapid
expansion of bank reserves that has resulted from the liquidity programs that the Federal Reserve
has implemented in order to stabilize financial markets and support economic activity. Nearly
all of the increase in reserve is excess reserves--that is, reserves held by banks in addition to the
level that they must hold to meet their reserve requirements. As long as banks are willing to hold
those excess reserves, they will not contribute to more rapid expansion of the money supply.
Moreover, as the Federal Reserve's acquisition of assets slows, growth of reserves will also
slow. When economic conditions improve sufficiently, the Federal Reserve will begin to
normalize the stance of monetary policy; those actions will involve a reduction in the quantity of
excess reserves and an increase in short-term market rates, which will likely result in a reduction
in some narrow measures of the money supply, such as the monetary base, and will keep the
growth of the broad money aggregates to rates consistent with sustainable grO\vth and price
stability. As a result of appropriate monetary policy actions, the above-trend expansion of
narrow measures of money supply will not be pem1anent and will not lead to inflation pressures.
- 23. Do you think a permanent expansion of the money supply, even if done in a noninflationary matter, is monetization of federal debt?
As noted above, growth of broad measures of the money supply, such as M2, has not
been particularly rapid, and any above-trend growth of the money stock wi11 not be permanent.
Monetization of the debt generally is taken to mean a purchase of government debt for
the purpose of making deficit finance possible or to reduce the cost of government finance. The
Federal Reserve's liquidity programs, including its purchases of Treasury securities, were not
designed for such purposes; indeed, it is worth noting that even with the expansion of the Federal
Reserve's balance sheet, the Federal Reserve's holdings of Treasury securities are lower now
than in 2007 before the onset of the crisis. The Federal Reserve's liquidity programs are
intended to support growth of private spending and thus overall economic activity by fostering
the extension of credit to households and firms.
4. Do you believe fonvard-looking signs like the dollar, commodity prices, and bond yields
are the best signs of coming inflation?
We use a variety of indicators, including those that you mention, to help gauge the likely
direction of inflation. A rise in commodity prices can add to finns' costs and so create pressure
for mgher prices; this is especially the case for energy prices, which are an important component
of costs for finns in a wide variety of industries. Similarly, a fall in the value of the dollar exerts
upward pressure on prices of both imported goods and the domestic goods that compete with
them.
A central element in the dynamics of inflation, however, is the role played by inflation
expectations. Even if firms were to pass higher costs from commodity prices or changes in the
exchange rate into domestic prices, unless any such price increases become built into
expectations of inflation and so into future wage and price decisions, those price increases would
likely be a one-time event rather than the start of a higher ongoing rate of inflation. In this
regard, it should be noted that survey measures oflong-run inflation expectations have thus far
remained relatively stable, pointing to neither a rise in inflation nor a decline in inflation to
unwanted levels.
A rise in bond yields--the third indicator you mention--could itself be evidence of an
upward movement in expected inflation. More specifically, a rise in yields on nominal Treasury
securities that is not matched by a rise in yields on inflation-indexed securities (TIPS) could
reflect higher expected inflation. Indeed, such movements in yields have occurred so far this
year. However, the rise in nominal Treasury yields started from an exceptionally low level that
likely reflected heightened dem<md for the liquidity of these securities and other special factors
associated with the functioning of Treasury markets. Those factors influencing nominal
Treasury yields have made it particularly difficult recently to draw inferences about expected
inflation from the TIPS market. The FOMC will remain alert to these and other indicators of
inflation as we gauge our future policy actions in pursuit of our dual mandate of maximum
employment and price stability.
- 3-
Sa. Other central banks that pay interest on reserves set their policy rate using that tool.
Now that you have the power to pay interest on excess reserves, are you going to change the
method of setting the target rate?
At least for the foreseeable future, the Federal Reserve expects to continue to set a target
(or a target range) for the federal funds rate as part of its procedures for conducting monetary
policy. The authority to pay interest on reserves gives the Federal Reserve an additional tool for
hitting its target and thus affords the Federal Reserve the ability to modify its operating
procedures in ways that could make the implementation of policy more efficient and effective.
Also, the Federal Reserve is in the process of designing various tools for reserve management
that could be helpful in the removal of policy accommodation at the appropriate time and that
use the authority to pay interest on reserves. However, the Federal Reserve has made no
decisions at this time on possible changes to its framework for monetary policy implementation.
5b. Assuming you were to make such a change, would that lead to a permanent expansion
of the money supply?
No. These tools are designed to implement monetary policy more efficiently and
effectively. Their use would have no significant effect on broad measures of the money supply.
It is possible that such a change could involve a permanently higher level of reserves in the
banking system. However, the level of reserves under any such regime would still likely be
much lower than at present and, in any case, would be fully consistent with banks' demand for
reserves at the FOMC's target rate. As a result, the higher level of reserves in such a system
would not have any implication for broad measures of money.
Sc. Would such an expansion essentially mean you have accomplished a one-time
monetization of the federal debt?
No. If the Federal Reserve were to change its operating procedures in a way that
involved a permanently higher level of banking system reserves, it is possible that the
corresponding change on the asset side of the Federal Reserve's balance sheet would be a
permanently higher level of Treasury securities, but the change could also be accounted for by a
higher level of other assets--for example, repurchase agreements conducted with the private
sector. The purpose of any permanent increase in the level of the Federal Reserve's holdings of
Treasury securities would be to accommodate a higher level of reserves in the banking system
rather than to facilitate the Treasury's debt management.
6. Is the government's refusal to rescue CIT a sign that the bailouts are over and there is
no more too big to fail problem?
The Federal Reserve does not comment on the condition of individual financial
institutions such as CIT.
-4-
7. Do you plan to bold the Treasury and G.S.E. securities on your books to maturity?
The evolution of the economy, the financial system, and inflation pressures remain
subject to considerable uncertainty. Reflecting this uncertainty, the way in which various
monetary policy tools will be used in the future by the Federal Reserve has not yet been
determined. In particular, the Federal Reserve has not developed specific plans for its holdings
ofTreasury and GSE securities.
8. Which 13-3 facilities do you think are monetary policy and not rescue programs'!
The Federal Reserve developed all of the facilities that are available to multiple
institutions as a means of supporting the availability of credit to firms and households and thus
buoying economic growth. Because supporting economic growth when the economy has been
adversely affected by various types of shocks is a key function of monetary policy, all of the
facilities that are available to multiple institutions can be considered part of the Federal
Reserve's monetary policy response to the crisis. In contrast, the facilities that the Federal
Reserve established for single and specific institutions would ordinarily not be considered part of
monetary policy.
9. Given the central role the President of the New York Fed has played in all the bailout
actions by the Fed, why sbouldn 't that job be subject to Senate confirmation in the future?
Federal Reserve policymakers are highly accountable and answerable to the government
ofthe United States and to the American people. The seven members of the Board of Governors
of the Federal Reserve System are appointed by the President and confirmed by the Senate after
a thorough process of public examination. The key positions of Chairman and Vice Chairman
are subject to presidential and congressional review every four years, a separate and shorter
schedule than the 14-year tenns ofBoard members. The members of the Board of Governors
account for seven seats on the FOMC. By statute, the other five members of the FOMC are
drawn from the presidents of the 12 Federal Reserve Banks. District presidents are appointed
through a process involving a broad search of qualified individuals by local boards of directors;
the choice must then be approved by the Board of Governors. In creating the Federal Reserve
System, the Congress combined a Washington-based Board with strong regional representation
to carefully balance the variety of interests of a diverse nation. The Federal Reserve Banks
strengthen our policy deliberations by bringing real-time information about the economy from
their district contacts and by their diverse perspectives.
10. The current structure of the regional Federal Reserve Banks gives the banks that O\'\''D
the regional Feds governance powers, and thus regulatory powers over themselves. And
with investment banks now under Fed regulation, it gives them power over their
competitors. Don't you think that is conflict of interest that we should address?
Congress established the makeup of the boards of directors of the Federal Reserve Banks.
The potential for conflicts of interest that might arise from the ownership of the shares of a
Federal Reserve Bank by banking organizations in that Bank's district are addressed in several
statutory and policy provisions. Section 4 of the Federal Reserve Act provides that the board of
-5directors of Reserve Banks "shall administer the affairs of said bank fairly and impartially and
without discrimination in favor of or against any member bank or banks." 12 U.S.C. 301.
Reserve Bank directors are explicitly included among officials subject to the federal conflict of
interest statute, 18 U.S.C. 208. That statute imposes criminal penalties on Reserve Bank
directors who participate personally and substantially as a director in any particular matter
which, to the director's knowledge, will affect the director's financial interests or those of his or
her spouse, minor children, or partner, or any firm or person of which the director is an officer,
director, trustee, general partner, or employee, or any other firm or person with whom the
director is negotiating for employment. Reserve Banks routinely provide training for their new
directors that includes specific training on section 208, and Reserve Bank corporate secretaries
are trained to respond to inquiries regarding possible conflicts in order to assist directors in
complying with the statute. The Board also has adopted a policy specifically prohibiting Reserve
Bank directors from, among other things, using their position for private gain or giving
unwarranted preferential treatment to any organization.
Reserve Bank directors are not permitted to be involved in matters relating to the
supervision of particular banks or bank holding companies nor are they consulted regarding bank
examination ratings, potential enforcement actions, or similar supervisory issues. In addition,
while the Board of Governors' rules delegate to the Reserve Banks certain authorities for
approval of specific types of applications and notices, Reserve Bank directors are not involved
with oversight of those functions. Moreover, in order to avoid even the appearance of
impropriety, the Board of Governors' delegation rules withdraw the Reserve Banks' authority
where a senior officer or director of an involved party is also a director of a Reserve Bank or
branch. Directors are also not involved in decisions regarding discount window lending to any
financial institution. Finally, directors are not involved in awarding most contracts by the
Reserve Banks. In the rare case where a contract requires director approval, directors who might
have a conflict as a result of affiliation or stock ownership routinely recuse themselves or resign
from the Reserve Bank board, and any involvement they would have in such a contract would be
subject to the prohibitions in section 208 discussed above.
11. Do you think access to the discount window should be opened to non-banks by
Congress?
The current episode has illustrated that nonbank financial institutions can occasionally
experience severe liquidity needs that can pose significant systemic risks. In many cases, the
Federal Reserve's 13(3) authority may be sufficient to address these situations, which should
arise relatively infrequently. However, a case could be made that certain types of nonbank
institutions, such as primary dealers, should have ongoing access to the discount window; any
such increased access would need to be coupled with more stringent regulation and supervision.
The Federal Reserve also believes that the smooth functioning of various types of regulated
payment, clearing, and settlement utilities, some of which are organized as nonbanks, is critical
to financial stability; a case could also be made that such organizations should be granted
ongoing access to discount window credit.
-6-
12. Do you think any of the 13-3 facilities should be made permanent by Congress?
As noted above, the issue of appropriate access to central bank credit by certain types of
nonbank financial institutions deserves careful consideration by policymakers. The financial
crisis has illustrated that various types of nonbank financial institutions can experience severe
liquidity strains that pose risks to the entire financial system. However, whether access to the
discount window should be granted to such institutions depends on a wide range of
considerations and any decision would need to be based on careful study of all of the relevant
lSSUeS.
13. For several reasons, I am doubtful that the Fed or anyone else can effectively regulate
systemic risk. A better approach may be to limit the size and scope of firms so that future
failures will not pose a danger to the system. Do you think that is a better way to go?
I believe that it is important to improve the US. financial regulatory system so as to
contain systemic risk and to address the related problem of too-big-to-fail financial institutions.
The Federal Reserve and the Administration have proposed a number of ways to limit systemic
risk and the problem of too-big-to-fail financial institutions.
Imposing artificial limits on the size or scope of individual firms will not necessarily
reduce systemic risk and could reduce competiveness. A challenge of this approach would be to
address the financial institutions that already are large and complex. Such institutions enjoy
certain competitive benefits including global access to credit.
At any point in time, the systemic importance of an individual firm depends on a wide
range of factors. Size is only one relevant consideration. The impact of a firm's financial
distress depends also on the degree to which it is interconnected, either receiving funding from,
or providing funding to, other potentially systemically important firms, as well as on whether it
perfom1s crucial services that cannot easily or quickly be executed by other financial institutions.
In addition, the impact varies over time: the more fragile the overall financial backdrop and the
condition of other financial institutions, the more likely a given firm is to be judged systemically
important. If the ability of the financial system to absorb adverse shocks is low, the threshold for
systemic importance wil1 more easily be reached. Judging vvhether a financial firm is
systemically important is thus not a straightforward task, especially because a determination
must be based on an assessment of whether the firm's failure would likely have systemic effects
during a future stress event, the precise parameters of which cannot be fully known.
I am confident that the Federal Reserve is well positioned both to identify systemically
important firms and to supervise them. We look forward to working with Congress and the
Administration to enact meaningful regulatory reform that will strengthen the financial system
and reduce both the probability and severity of future crises.
-714. Given your concerns about opening monetary policy to GAO review, what monetary
policy information, specifically, do you not want in the hands of the public?
The Federal Reserve believes that a substantial degree of transparency in monetary
policymaking is appropriate and has initiated numerous measures to increase its transparency. In
addition to a policy announcement made at the conclusion of each FOMC meeting, the Federal
Reserve releases detailed minutes of each FOMC meeting three weeks after the conclusion of the
meeting. These minutes provide a great deal of information about the range of topics discussed
and the views of meeting participants at each FOMC meeting. Regarding its liquidity programs,
the Federal Reserve has provided a great deal of information regarding these programs on its
public website at http://www.federalreserve.gov/monetarypolicy/bst.htrn. In addition, the
Federal Reserve has initiated a monthly report to Congress providing detailed information on the
operations of its programs, types and amounts of collateral accepted, and quarterly updates on
Federal Reserve income and valuations of the Maiden Lane facilities. This infommtion is also
available on the website at
http://www.federalreserve.gov/monetarypolicy/bst reportsresources.htrn.
The Federal Reserve believes that it should be as transparent as possible consistent with
the effective conduct of the responsibilities with which it has been charged by the Congress. The
Federal Reserve has noted its effectiveness in conducting monetary policy depends critically on
the confidentiality of its policy deliberations. It has also noted that the effectiveness of its tools
to provide liquidity to the financial system and the economy depends importantly on the
willingness ofbanks and other entities in sound financial condition to use the Federal Reserve's
credit facilities when appropriate. That willingness is supported by assuring borrowers that their
usage of credit facilities will be treated as confidential by the Federal Reserve. As a result of
these considerations, the Federal Reserve believes that the release of detailed information
regarding monetary policy deliberations or the names of firms borrowing from Federal Reserve
facilities would not be in the public interest.
.,
Questions for the Hearing on "The Semiannual Monetary Policv Reoort to

Congress"
July 22, 2009
Questions for The Honorable Ben Bernanke, Chairman, Board of Governors of the Federal
Reserve System, from Senator Bunning;:
1.
Back in March, Secretary Geithner, who was F.O.M.C. Vice-Chair under you and
Chairman Greenspan, said he now thinks easy money policies by central banks were a cause of
the housing bubble and financial crisis. Do you agree with him?
2.
You said you think you can stop the expansion of the money supply from being
inflationary. Does that mean you think the expansion of the money supply is pennanent?
3.
Do you think a permanent expansion of the money supply, even if done in a noninflationary matter, is monetization of federal debt?
~
4.)
Do you believe forward-looking signs like the dollar, commodity prices, and bond yields
~he best signs of coming inflation?
Sa.
Other central banks that pay interest on reserves set their policy rate using that tool. Now
that you have the power to pay interest on excess reserves, are you going to change the method
of setting the target rate?
Sb.
Assu.nUng you were to make such a change, would that lead to a permanent expansion of
the money supply?
Sc.
Would such an expansion essentially mean you have accomplished a one-time

monetization of the federal debt?
6.
Is the government's refusal to rescue CIT a sign that the bailouts are over and there is no
more too big to fail problem?
7.
Do you plan to hold the Treasury and G.S.E. securities on your books to maturity?
8.
Which 13-3 facilities do you think are monetary policy and not rescue programs?
9. .
Given the central role the President of the New York Fed has played in all the bailout
actions by the Fed, why shouldn't that job be subject to Senate confirmation in the future?
10.
The current structure of the regional Federal Reserve Banks gives the banks that own the
regional Feds governance powers, and thus regulatory powers over themselves. And with
investment banks now under Fed regulation, it gives them power over their competitors. Don't
you think that is conflict of interest that we should address?
Questions for the Hearing on
'~The
Semiannual Monetary Policy Report to

Congress"
July 22, 2009
II.
Do you think access to the discount window should be opened to non-banks by
Congress?
12.
Do you think any of the 13-3 facilities should be made permanent by Congress?
13.
For several reasons, I am doubtful that the Fed or anyone else can effectively regulate
systemic risk. A better approach may be to limit the size and scope offinns so that future
failures\\@ not pose a danger to the system. Do you think that is a better way to go?
14.
Given your concerns about opening monetary policy to GAO review, what monetary
policy information, specifically, do you not want in the hands of the public?
r) ) --
BOARD OF GOVERNORS
OF THE

November 18, 2009
SEN S. Sf.:RNANKE
CHAIRMAN
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Dear Senator:
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I am responding to your letter of October 2, 2009, in which you asked for a

progress report on efforts to strengthen the infrastructure for over-the-counter (OTC)
derivatives marlrets. These efforts are important components of proposals to mitigate
systemic risk and improve the transparency of OTC derivatives markets, as you note in
your letter.
At the encouragement of regulators, the industry implemented central clearing for

credit default swaps (CDS) in early 2009. Central counterparties (CCPs) are being
developed or operating in the United States, Europe, and Asia. As of October 5, 2009,
the cumulative notional amounts of cleared CDS transactions totaled roughly $2.3 trillion
in North America and 513.6 billion in Europe.
Efforts to widen the risk mitigating benefits from CCPs are occurring along
several fronts. In June 2009, major market participants made several commitments to
regulators, including: 1) broadening the range of products supported for clearing;
2) increasing clearing for currently supported products; 3) extending the benefits of
clearing to a wider range of market participants; and 4) providing greater transparency of
the entire population of OTC derivatives transactions.
To broaden the range of cleared products, the industry continues to increase the
standardization of single-name CDS contracts and has committed to clear single-name
CDS and other CDS products over the course of2009-2010. To increase the level of
clearing for supported products, in September 2009, major dealers set performance
targets for the use of central clearing for both credit and interest rate derivatives; and
starting in October 2009, dealer firms will begin reporting their individual perfom1ance
data to regulators. Regulators will regularly review performance data, and we anticipate
that target levels for the use of clearing will be increased on a continual basis. To extend
the benefits of clearing to a broader range of market participants, the industry has also
committed to support customer access to CDS clearing platfom1s by December 15,2009.
Dealers and buy-side firms are working with CCPs to develop launch plans and begin
testing clearing of buy-side trades.
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The Honorable Mike Crapo

Page Two
Finally, regulators continue to work with the industry to increase the information
available to authorities and the public on the universe of OTC derivatives transactions.
Since the centralized repository for CDS contracts (the DTCC Trade Information
Warehouse) was established in November 2006, major OTC derivatives dealers have
registered current and historical CDS trades totaling $26.7 trillion in notional amounts.
With the strong encouragement of regulators, the repository began weekly reporting of
aggregate trade data in November 2008, increasing public awareness of the level of
activity in the market. Similar efforts to create central repositories for interest rate and
equity derivatives are undenvay.
Expansion of clearing \Vill be a significant change for end-users, dealers, and
infrastructure providers of OTC derivatives markets. An important challenge in
designing and implementing a new clearing infrastructure is deciding which products to
clear. Clt:taring organizations should limit the contracts they are willing to clear to those
for which they can manage the risk and develop appropriate default procedures. From
the perspective of end-users, there will always be occasions when the end-user's riskmanagement needs can11ot be met by cleared OTC products or by exchange-traded
products. Thus an important issue is to preserve the ability of counterparties to contract
customized deals while properly managing the risk of these deals. End-users have not
typically created the large exposures to counterparties that are the focus of efforts to
reduce systemic risk through broader clearing. End-user activity does, however, raise
important policy issues such as the need to protect less sophisticated parties from entering
into inappropriate derivatives transactions or the need to ensure that the collateral and
positions of end-users and other buy-side firms is properly protected in clearing
arrangements. These issues are part of the current regulatory refonn debate.
If you or your staff members would like to monitor developments in this area,
press releases that detail efforts by the supervisory community to reduce risks in the OTC
derivatives markets are posted on the web site of the Federal Reserve Bank ofNew York.
A recent posting detailing the events summarized above is available at:
http://www.newyorkfed.org/newsevents/news/markets/2009/ma090908.html.
Sincerely,
Identical letter also sent to Senator Mike .Johanns.

APW:ote (B-197, 09-11596)
i!ongrc~s
of U;c 'Qtlniteo ~tates
Q:'i:k>IJington, IDl 20:315
October 2, 2009

Chairman
Board of Governors of the Federal Reserve
20th Street and Constitution Avenue NW
William C. Dudley
President
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
Dear Chairman Bernanke and President Dudley:

Thank you for leading the efforts to accelerate the progress of market participants to
develop a longer-term plan for a more reliable operational infrastructure for credit
default swaps and other over-the-counter derivatives. The creation of clearinghouses
and transmission of increased information to trade information warehouses are positive
steps to strengthen the infrastructure for clearing and settling credit default swaps.
We would appreciate a progress report on the commitments that you have received
from market participants to establish clearinghouses, set and meet specific target levels
for expanding clearing, and report information-to trade information warehouses. It is our
understanding that these steps have increased regulatory transparency with respect to
credit default swaps and there has been progress in broadening the set of derivative
products eligible for clearing.
While central counterparty clearing and exchange trading of simple, standardized
contracts with liquid markets has the potential to reduce risk and increase market
efficiency, market participants must be permitted to continue to negotiate customized
bilateral contracts in over-the-counter markets. American manufacturing companies,
energy producers, and agri-businesses have testified before Congress that if they were
required to clear their OTC risk management transactions they would lose the benefits
of customization and the costs to them of cash collateralization would be significant and
in some cases insurmountable. We would appreciate your advising us whether you
have seen evidence that these companies' use of risk management products
contributed to the financial crisis or posed systemic risk to our financial system.
Even though there are risk-reduction benefits that can be realized through clearing, we
do not believe it would be wise to mandate clearing of particular derivative transactions
before it is demonstrated that a clearinghouse is able to manage the risks associated
with clearing those contracts. Do you agree that this should be a factor in determining
whether clearing of particular transactions should be required?
.#
Thank you for your attention and we look forward to you response at your earliest
convenience.
Sincerely,
Mike Crapo
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0 01, ' -I
BOARD OF GOVERNORS
OF THE

DANIEL K. TARULL.O
NEMSf::R Of' THE: SOARD
December 2, 2009
The Honorable Richard C. Shelby

Ranking Member
Committee on Banking, Housing,
and Urban Affairs
Dear Senator:
I am pleased to enclose my responses to the ques-tions you submitted in

connection with the July 23, 2009, hearing before the Committee. A copy of my
responses has been forwarded to the Chief Clerk of the Committee for inclusion in the
hearing record.
Sincerely,
(signed) Daniel K. Tarullo
Enclosure
(3 98, 09-1 0466)
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Governor Daniel Tarullo subsequently submitted the following in response to written questions
received from Ranking Member Shelby in connection with the July 23, 2009, hearing before the
Committee on Banking, Housing, and Urban Affairs:
AIG
Governor Tarullo, I am very concerned that the Fed currently has too many
responsibilities. The Fed's bail out of AIG has put the Fed in the position of having to
unwind one of the world's largest and most complex financial institutions. Resolving AIG
without imposing loses on the U.S. taxpayer is proving to be a time-consuming and difficult
task. It could even potentially distract tbe Fed from its core mission of monetary policy.
Approximately how many hours have you personally dedicated to overseeing the
Fed's investments in AIG?
How does this compare with the number of hours yoH have spent on monetary
policy issues?
what assurance can you provide that the Fed is devoting enough time and attention
to both AIG and monetary policy?
I joined the Board at the end of January 2009 and thus was not involved in matters
involving the American International Group, Inc. (AIG) before that date. While we do not have
records of the exact number of hours I have spent addressing AIG matters since I joined the
Board, these matters do not occupy a significant part of my ongoing workload and do not detract
from my other responsibilities as a member of the Board, including the conduct of monetary
policy.
The oversight of the federal financial assistance provided to AIG is shared by the
Federal Reserve, which has provided several credit facilities designed to stabilize AIG, and the
Treasury Department, which holds equity interests in the company. The day-to-day oversight of
the Federal Reserve credit facilities is carried out by a team of staff at the Federal Reserve Bank
of New York and the Board of Governors, assisted by expert advisers we have retained. In our
role as a creditor of AIG, the Federal Reserve oversight staff makes sure that we are adequately
informed on such matters as funding, cash flows, liquidity, earnings, risk management, and
progress in pursuing the company's divestiture plan, so that we can protect the interests of the
System and the ta.xpayers in repayment of the credit extended. With respect to the credit
facilities extended to special purpose entities that purchased assets connected with AIG
operations, the staffs oversight activities consist primarily of monitoring the portfolio operations
of each of the entities, which are managed by a third party investment manager. The Federal
Reserve staff involved in the ongoing oversight of AIG periodically report to the Board of
Governors about material developments regarding the administration of these credit facilities.
-2-
The Federal Reserve oversight staff for AIG works closely with the Treasury staff who
oversee and manage the Treasury's relationship with AIG. As the holder of significant equity
interests in the company, Treasury plays an important role in stabilizing AlG's financial
condition, overseeing the execution of its divestiture plan, and protecting the taxpayers' interests.
With respect to time expended by the Reserve Bank members of the Federal Open
Market Committee, the President of the New York Reserve Bank devotes significant attention to
AIG. However, as noted above, day-to-day responsibility for overseeing the Bank's interests as
lender to AIG has been delegated to a team of senior Bank managers. The President regularly
consults with the AIG team--in particular he receives a daily morning briefing on AIG as well as
other significant Bank activities, receives updates throughout the day on an ad hoc basis as
circumstances warrant, and occasionally intervenes personally on particular issues. The
President believes that he is able to adequately balance the time and resources he allocates to
AIG with the other Bank activities that warrant his personal attention, induding his
responsibilities as a voting member ofthe FOMC.
Safetv and Soundness Regulation

Governor Tarullo, in your testimony you state that there are synergies between monetary
policy and systemic risk regulation. In order to capture these synergies, you argue that the
F'cd should become a systemic risk regulator. Yesterday, Chairman Bernanke testified that
he believed there are synergies between prudential bank regulation and consumer
protection. This argues in favor of establishing one consolidated bank regulator.
In your judgmen4 is it on the whole better to have prudential supervision and

consumer protection consolidated in one agency, or separated into two different
agencies?
There are important connections and complementarities bet\veen consumer protection

and pmdential supervision. For example, sound underwriting benefits consumers as well as the
relevant financial institution, and strong consumer protections can add certainty to the markets
and reduce risks to the institutions. Moreover, the most effective and efficient consumer
protection requires the in-depth understanding of bank practices that is gained through the
prudential supervisory process. Indeed, the Board's separate divisions for consumer protection
and pmdential supervision work closely in developing examination policy and industry guidance.
Both types of supervision benefit from this close coordination, which allows for a broader
perspective on the quality of management and the risks facing a financial organization. Thus,
placing consumer protection mle-writing, examination, and enforcement activities in a separate
organization that does not have prudential supervisory responsibilities would have costs, as well
as benefits.
Achieving the synergies between prudential supervision and consumer protection does
not require that responsibility for both functions and for all banking organizations to be
concentrated in a single, consolidated bank regulator. Under the current framework for bank
supervision, the Board has pmdential supervisory responsibilities for a substantial cross-section
- 3of banking organizations in the United States, as well as rule-writing, examination, and
enforcement authority for consumer protection. Likewise, the other federal banking agencies all
have both prudential supervisory authority for certain types ofbanking organizations and
consumer protection examination and enforcement responsibilities for these organizations.
Moreover, as I indicated in my July 23rd testimony to the Committee, the United States
needs a comprehensive agenda to contain systemic risk and address the problem of too-big-tofail financial institutions. We should seek to marshal and build on the individual and collective
expertise and resources of all financial supervisors in the effort to contain systemic risks within
the financial system, rather than rely on a single "systemic risk regulator." This means new or
enhanced responsibilities for a number of federal agencies and departments, including the
Securities and Exchange Commission, the Commodity Futures Trading Commission, and the
Federal Deposit Insurance Corporation.
One important aspect of such an agenda is ensuring that all systemically important
financial institutions--and not just those that own a bank--are subject to a robust framework for
supervision on a consolidated or group-wide basis, thereby closing an important gap in. the
current regulatory framework. The Federal Reserve already serves as the consolidated
supervisor of all bank holding companies, including a number of the largest and most complex
banking organizations and a number of very large financial finns--such as Goldman Sachs,
Morgan Stanley, and American Express--that became a bank holding company during the
financial crisis. This expertise, as well as the infom1ation and perspective that the Federal
Reserve has as a result of its central bank responsibilities, makes the Federal Reserve well suited
to serve as consolidated supervisor for all systemically important financial fim1s.
As Chainnan Bemanke recently noted, there are substantial synergies between the
Federal Reserve's role as prudential supervisor and its other central bank responsibilities. Price
stability and financial stability are closely related policy goals. The benefits of maintaining a
Federal Reserve role in supervision have been particularly evident in the recent financial crisis.
Over the past two years, supervisory expertise and information have helped the Federal Reserve
to better understand the emerging pressures on financial finns and to use monetary policy and
other tools to respond to those pressures. This understanding contributed to more timely and
decisive monetary policy actions and proved invaluable in helping us to address potential
systemic risks involving specific t1mmcia1 institutions and markets. More broadly, our
supervisors' knowledge of interbank lending markets and other sources of bank funding
contributed to the development of new tools to address financial stress.
Questions for the Hearing on "Establishing a Framewor~ for

Regulation"
July 23, 2009
Syst~mic _Risk
Questions for The Honorable Daniel Tarullo, Governor, Board of Governors of the Federal
Reserve Svstem, from Ranking Member Shelby:
AlG
Governor Tarullo, I am very concerned that the Fed currently has too many responsibilities. The
Fed's bail out of AIG has put the Fed in the position of having to unwind one ofthe world's
largest and most complex financial institutions. Resolving AIG without imposing losses on the
U.S. taxpayer is proving to be a time-consuming and difficult task. It could even potentially
distract the Fed from its core mission of monetary policy.
Approximately how many hours have you personally dedicated to overseeing the Fed's
investments in AIG?
How does this compare with the number of hours you have spent on monetary policy
issues?
What assurance can you provide that the Fed is devoting enough time and attention to
both AIG and monetary policy?
Safety & Soundness Regulation

Governor Tarullo, in your testimony you state that there are synergies between monetary policy
and systemic risk regulation. In order to capture these synergies, you argue that the Fed should
become a systemic risk regulator. Yesterday, Cbairn1an Bernanke testified that he believed there
are synergies between prudential bank regulation and consumer protection. This argues in favor
of establishing one consolidated bank regulator.
In your judgment, is it on the whole better to have prudential supervision and consumer
protection consolidated in one agency, or separated into two different agencies?
BOARD OF GOVERNORS
OF THE

'.VASHINGTON, 0. C. 20551
8C:~
S. 6ERNANKE
CHAiRMAN
December 14, 2009
The Honorable Jeff Merkley

Dear Senator:
Enclosed are my responses to -the written questions you submitted following the
December 3, 2009, hearing before the Committee on Banking, Housing, and Urban Affairs
concerning my renomination. A copy has also been forwarded to the Chief Clerk of the
Committee for inclusion in the hearing record.
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Reserve Svstem. from Senator Merkley:
Regulatory Approach
1) When people think of the Federal Reserve, they usually think of monetary policy. But
under the system we have today, the Fed holds a central position in our bank regulatory
system and is being asked by the Administration and the House of Representatives to hold
a larger position. The Federal Reserve made a series of decisions that led directly to this
crisis, including
Refusing to provide basic consumer protections on mortgages;

Fighting regulation of the over-the~counter derivatives market;
Permitting regulated banks to use off-balance sheet vehicles to bold large amounts
of assets;
Permitting overreliance on short-term funding market ("repo'');
Driving the development of risk-based capital, first Basel I which was too reliant on
rating agencies and then Basel II, which the SEC applied to the investment banks
and outsourced to the banks the evaluation of their own capital adequacy; and
Permitting the rise of unregulated highly complex securitization- CDOs and CDOsquareds -which when combined with Basel I~ were used by banks to game
regulatory capital.
Certainly not all of these were your decisions, but you were on the Board for a
substantial period of the time while these decisions were made and in 2006, just before this
very crisis, you spoke on record in favor of many of these regulatory approaches. Has your
regulatory philosophy fundamentally changed because of this crisis, and if so, how?
The crisis has reinforced some elements of my regulatory philosophy and changed others. I have
long believed that, because of their access to the safety net, bank holding companies are not
subject to effective market disciphne and therefore need robust consolidated supervision. The
financial crisis has demonstrated that, because they may be perceived as too big to fail, very
large complex nonbank financial institutions must also be subject to robust consolidated
supervision. Furthermore, the crisis has made clear to me that consolidated supervision needs to
take into account macro-prudential as well as micro-prudential considera6ons. Finally, the crisis
has convinced me that we must take steps to enhance market discipline on large banks and
nonbank financial institutions. The critical step in that regard is to create authority for resolving
such firms that carries with it a credible threat that their creditors will bear significant losses in
the event the firm becomes insolvent.
Systemic
Risk~
proprietary trading
2) Even as this economic crisis only begins to abate, I am particularly concerned that
certain large banks engage in a substantial amount of proprietary trading even though they
are guaranteed by the federal safety net. Even though banks are making billions trading
on own accounts, it only takes a day or nvo of large losses to cause a failure. Moreover, I
continue to bear about serious conflicts ofinterest between banks as client-oriented brokerdealers and hedge fund-like principal investors.
I am pleased that Chairman Dodd's discussion draft includes a vigorous GAO study on
this issue, but we need to get ahead of the curve. \Vhat is to prevent another Long-Term
Capital Management or Barings, where a large bank's trading positions get it jammed by
an unexpected turn in the market?
"Proprietary trading'' or a banking organization's active trading and position taking in financia1
instruments for its own account occurs in several forms. In the nonnal course of making markets
to meet customers' needs for financial assets and liabilities, banking organizations must maintain
inventories of securities that may or may not be hedged. As a result, a certain amount of
inventory position taking is inherent in the investment banking and market making business.
Banks may also take positions above the levels required for market making activity with the
hope of generating additional income. When such positions occur within the same accounts used
for customer accommodation, it can be difficult to segment the positions taken for marketmaking purposes from those taken for other purposes. More explicitly, proprietary trading can
also occur when ba11ks employ multiple desks of traders devoted solely to position taking for the
bank's own account. Both types of trading operations, market making and proprietary position
taking are subject to conflicts of interest requirements dictated by regulation and supervisory
guidance, as well as by industry adopted sound practices.
Customer accommodation and proprietary trading operations at banking organizations are also
subject to requirements on the adequacy of their internal risk management processes including
the need for board of directors and senior management oversight of established risk tolerances,
limits on risk taking, risk measurement systems and various types of internal controls. Banks are
expected to employ multiple measures and limits on the risk exposures of their trading operations
and are encouraged to avoid over-reliance on any single measure or limit. Minimum capital
requirements and other regulatory constraints are also important safeguards in controlling the
potential impacts of losses in proprietary risk taking, as is the market discipline that arises from
appropriate disclosure of the scale of proprietary trading at banking organizations.
The recent crisis has surfaced a number of areas for improvement, and both intemational and
U.S. supervisors are moving forward to address these issues. For example, the Basel Committee
on Bank Supervision (BCBS) has released international standards for stress testing all of a
bank's material risk exposures. The BCBS has also substantively revised the risk management
- and capital sta11dards applied to banks' trading activities a11d will shortly pr<:lpose new global
standa1ds for bank liquidity management that should significantly affect the scope and-size of
banks' proprietary risk taking.
Consumer Protection -interest rates and state usury laws
3) One of the defining features of our financial system in recent decades has been the
spread of financial products that carry extraordinarily high interest rates.
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I grew up in a working class family- my dad was a millwright. My parents and our
neighbors worked bard to send their kids to good schools and to own their own homes, and
it angers me when I see schemes and scams that seem almost exclusively geared towards
unfairly stripping money out of the pockets of working families. When I was Speaker in
the Oregon legislature, we capped the interest that payday lenders could charge- but we
couldn't act in other areas because we were told its federal regulation that we couldn't
touch.
It's widely known that just in the payday lending industry, 75% of customers are
repeat customers- they come in again and again because they are trapped in a cycle of
high-interest debt that they simply cannot escape from. i am hopeful that we will see the
creation of a strong Consumer Financial Protection Agency to police some of these
products, but none of the proposals give the agency the power to set a national usury rate,
nor does there seem to be much interest in giving states the power to set the usury rate for
lending from national banks.
Would you- agree that interest rates on some financial products, such as payday loans
and even some credit cards, are simply too high? Why not let states determine the highest
rate of interest for consumers in their state, and if the citizens of a state wish to adopt
policies that restrkt their own credit, let that be the decision of that state?
The maximum interest rate that a national bank can charge is generally the highest rate allowed
by the laws of the state where the bank is located. This is dictated by the National Bank Act, and
the Supreme Court has held that a national bank may charge the rate allowed by its home state to
customers in other states. However, if the Congress determined that nahonal banks should
follow the laws of each state when doing business in that state, it could amend the National Bank
Act.
On the one hand, states often are good laboratories for new consumer protections to address
troublesome products and practices. In fact, the Federal Reserve looked at state predatory
lending laws in developing our HOEPA tules. States can also address concerns that are regional
in nature. On the other hand, there is some benefit and efficiency to a national standard, as long
as that standard is strong enough to adequately protect consumers.
With respect to payday loans, they do appear to be a very expensive fonn of credit, and some
states have legislated in this area by adopting restrictions for such loans. The Federal Reserve
encourages mainstream banks toreach out to unbanked consumers, especially in low- and
moderate-income neighborhoods, to offer them more cost-effective products; and we support
financial literacy programs to help consumers make better choices.
Trade and Monetary Policy
4) For a long time, I've been concerned about the regulatory arbitrage inherent in
international trade between countries with sound labor and environmental laws and those
without, and how that affects our employment situation. More recently, Pve also become
concerned about how international trade imbalances affect our monetary policy.
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Failures in consumer protection turned the housing bubble into a foreclosure and
financial crisis, but as you have noted, the existence of the housing bubble itself comes from
the global savings glut, mostly emanating from trade imbalances coming from Asia. The
challenge is that traditional monetary tools might not even address problems emanating
from trade imbalances.
Are you concerned about the monetary policy implications of global trade imbalances,
and if so, what monetary tools do you have to deal with the imbalance going forward? Do
you also think that we should reduce regulatory arbitrage in trade by requiring our trade
agreements include stronger provisions to raise global labor and environmental rules?
Policymakers should be concerned about the potential implications of global imbalances for the
sustainability of economic growth as well as the stability of the fmancial system. Countries with
large current account surpluses should reduce the gap between saving and investment by
strengthening domestic demand and reducing their dependence on external demand. The United
States, which runs sizeable current account deficits, should increase national savings, importantly
by committing to reduce federal budget deficits over time and establishing a sustainable
trajectory for the public debt.
The goal of monetary policy in the United States, as mandated by Congress, is to pursue
maximum sustainable employment and stable prices. Global imbalances affect the formation of
monetary policy insofar as they have implications for financial markets, economic activity,
employment, and intlation. However, monetary policy, by itself, is not well suited to address
external imbalances. Rather, the goal of the Federal Reserve, as given to us by Cont,rress, is to
pursue maximum employment and stable prices, not to achieve a particular level of the trade
balance. Our role is to ensure the strongest possible macroeconomic environment, by pursuing
the two legs of our mandate, and to work with fiscal and other policymakers to create conditions
that will foster a sustainable external position. Toward this end, the Federal Reserve participates
actively in the G-20 and other international organizations in a cooperative effort to devise
strategies for dealing with these issues.
Whether labor and environmental standards should be required in trade agreements is a matter of
public policy to be detennined by the Executive and Legislative branches. Clearly, policymakers
should resist both unfair trade practices and protectionist measures. We must also find ways to
assuage the pain of dislocation that trade may bring to some households, firms, and communities.
But at the same time, we must not lose sight of the fact that our parti<;ipation .in a free and open
international trading system allows us to enjoy both a more productive economy and higher.
living standards.
Federal Reserve Transparency
5) Many of my constituents are deeply angry with the way this financial crisis bas
unfolded. $30 billion in direct asset purchases were provided so JP Morgan could acquire
Bear Stearns. $300 billion in loan guarantees were provided to Citibank, and of course $80
billion in direct lending was provided to rescue AIG. And that is just from the Fed alone-
-4-
not even counting T ARP. All the while, banks have reduced lending and foreclosed on
peoples' homes.
While the Federal Reserve's actions kept the banking system from collapse, many
people are deeply concerned that the Fed could deploy this amount money without any
checks and balances and without any oversight. I recognize that GAO review of monetary
policy would be unwise, but when the Fed is engaged in propping up failed institutions, that
is not monetary policy: thafs a bailout and should be subject to robust audit.
For a democratic citizenry to have trust in its government, transparency is absolutely
essential. You have stated your willingness to work with us, and I appreciate the
receptivity that you have shown to my staff as we have worked on these issues. Are you
ready to accept a robust audit of the Fed's actions relating to emergency bailouts, even as
w~ acknowledge that legitimate monetary policy should remain independent?
I agree that, in a democracy, any significant degree of independence by a government agency
must be accompanied by substanti"al accountability and transparency. Federal Reserve
policymakers are highly accountable and answerable to the government of the United States and
to the American people. As you know, the financial statements of the Federal Reserve System
(including the Reserve Banks) are audited on an annual basis by an independent public
accounting firm and these audited statements are provided to the Congress and made publicly
available. In addition, the Federal Reserve provides the Congress and the public substantial
infom1ation concerning our actions and operations, including the actions we have taken during
the crisis to protect the stability of the financial system and promote the flow of credit For
example, Federal Reserve officials regularly testify before Congress and we publish a detailed
balance sheet on a weekly basis. We also provide Congress and the public detailed monthly
reports on our liquidity programs that detail, among other things, the number and distribution of
bonowers under each facility; the value, type, and quality of the collateral that secures advances
under each facility, inctuding the loans to prevent the disorderly failure of Bear Stearns and AIG;
and trends in borrowing under the facilities. Moreover, the GAO already has full authority to
audit the credit facilities the Federal Reserve provided to "single and specific" companies under
the authority provided by section 13(3) of the Federal Reserve Act. These facilities include the
loans provided to, or created for, AIG, Bear Stearns, and Citigroup under section 13(3).
We believe permitting the GAO to review the operational integrity of the broadly available credit
facilities established under section 13(3) could provide Congress and the public additional
comfort regarding the manner in whichthe EederaLReser:ve is ~xerc1sing_ its responsibilities and
protecting the taxpayer in its operation of these f~1cilities without endangering our ability to independently determine and implement monetary policy. A review of the operational integrity
of these facilities could be structured so as not to involve a review of the monetary policy aspects
of the facility, such as the decision to begin or end the facility or the choices made regarding, the
structure, scope, design, or tenns ofthe facility. 'Ne remain willing to work with you and other
members of Congress to implement and perfect such an approach. As you recognize, in doing so
it is vitally important that the independence of monetary policy be preserved. Actions that are
viewed as weakening monetary policy independence likely would increase inflation fears and
market interest rates and, ultimately, damage economic stability and job creation.
-5-
Federal Reserve Governance
6) Although Chairman Dodd's legislations strips the Federal Reserve System of its role as
a banking regulator, the Administration and the House have increased the responsibility of
the Fed for oversight of bank holding companies and other systemically significant firms.
While the Board of Governors in Washington is ultimately responsible for this supervision,
the day~to-day supervision is conducted by the Reserve Banks under the direction of each
Reserve Bank president. Although the selection of each Reserve Bank's president is
overseen by the Board of Governors, the boards of directors of the Reserve Banks, which
are dominated by the member banks, play critical roles and effectively have veto power to
prevent a regulator they see as too tough. If the Federal Reserve does maintain its
regulatory authority, do you think it is time to change Reserve Bank governance or
regulatory oversight structure so that the bankers do not have any say over who their
primary regulator is?
Under the policies ohhe Hoard and the Reserve Banks, the boards of directors of the Reserve
Banks play no role in the supervision or regulation of banking organizations by the Federal
Reserve and do not have a veto over any supervisory or regulatory policy. Supervisory and
regulatory policy, directions, and decisions are vested in the Board of Govemors of the Federal
Reserve System, all the members of which are appointed by the President of the United States
and confirmed by the U.S. Senate. The Board of Governors has and retains full and unfettered
authority to remove any officer of a Reserve Bank, including the president of a Reserve Bank
and any examiner or supervisor employed by the Reserve Bank, that does not abide by and fully
implement the policies, directions, or decisions of the Board of Governors regarding supervision
and regulation of banking organizations.
The structure of the Federal Reserve, which the Congress enacted, has worked well for nearly
100 years and has added great strength to the Federal Reserve System. It allows the Federal
Reserve Board to meet its responsibilities for supervising and regulating a diverse group of
banking organizations throughout the United States. At the same time, it allm,vs the Federal
Reserve System to benefit from contacts in numerous local communities throughout the United
States in collecting information related to monetary policy. This access to a broad array of
cormnunity and business contacts throughout the United States adds real "Main Street" anecdotes
and information to the economic statistics collected nationally.
Mortgage-Backed Securities Purchases _.
7) One of the more creative applications of monetary policy in this crisis is the Federal
Reserve's purchases of agency mortgage-backed securities. By directly purchasing
mortgage backed securities, the Fed has supported the availability of credit in the housing
market. Only a few weeks ago, the Fed's purchases of these agency MBS topped $1 trillion,
and the program was announced to remain in effect through March. Moreover, TA.LF,
which supports the private label securitization markets, has been extended through June of
2010.
-6-
Wben will the housing and other securitization markets be strong enough to operate on
their own? What risk is the Fed taking on in these purchases? Is this an appropriate type
of monetary policy action over the long term, one that you expect to use again?
Financial market functioning has, in general, improved substantially since the spring of this year.
For example, spreads between yields on private debt securities and Treasury debt have returned
toward more normal levels at both short and long maturities even as corporate bond issuance this
year has exceeded last year's issuance. In private-label securitization markets, issuance of
shorter-term asset-backed securities backed by consumer and small business loans has increased:
Some of those issues were supported by TALF; others were not. Recently, the TALF financed
the first new commercial mortgage-backed security (CMBS) since 2008; other C.tv1BS have since
come to market without T ALF support. While usage of the TALF has continued to expand at a
modest rate, usage of the Federal Reserve's other credit and liquidity facilities has declined
rapidly as market functioning improved.
In light of the ongoing improvement in financial market functioning, usage of the Federal
Reserve's liquidity facilities has declined dramatically, and a number of these facilities are
scheduled to close early next year. We also anticipate ending the current program ofMBS
purchases at the end of the first quarter. The Board and the FOMC will of course continue to
evaluate the evolving economic outlook and conditions in financial markets and are prepared to
extend some or aU of its programs if that proves necessary.
With respect to risks the Federal Reserve has taken on, we have, as noted in the question,
purchased agency-guaranteed MBS. Because of the agency guarantee, the Federal Reserve has
no exposure to credit losses stemming from defaults on the underlying mortgages. However, the
tair market value ofMBS can and does vary in response to movements in longer-tenn interest
rates.
Finally, the Federal Reserve believes that the TALF, other liquidity and credit facilities, and
large-scale asset purchases were appropriate steps in light of the severe financial dysfunction and
contracting economic activity, as well as the fact that the Federal Reserve had taken the federal
funds rate essentially as low as possible. In general, these steps would be neither necessary nor
appropriate in more normal times, and I certainly hope conditions will not wanant using them
again.
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BOARD OF GOVERNORS
OF THE

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6..N S. BE-RNANKE:
CHAIRMAN
December 28, 2009
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The Honorable Spencer Bachus

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Enclosed arc my responses to the questions you subrnitted following the July 24,
on the Obama Administration's Financial Regulatory Reform Proposals--Part Two." A
I hope this infonnation is helpful. Please let me know ifl can provide any funher
assistance.
Sincerely,
{Signed) Ben Bemanke
Enclosure
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Dear Congressman:
(B-177, 09-9799)
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UDAP Questions:
1. Under the Federal Trade Commission Act, only the Board of Governors of the Federal
Reserve System ("Fed") has the authority to issue rules or regulations defining what
acts or practices are unfair or deceptive with respect to all banks, including those for
which the FDIC or the OCC is the primary federal regulator. Neither the FDIC nor the
OCC has the authority to adopt such rules or regulations for the banks they regulate.
The Fed, FDIC and OCC, however, have taken the position that the FDIC and the OCC
may define what acts or practices they think are unfair or deceptive on a case-by-case
basis in the context of administrative enforcement proceedings, and the FDIC has done
just that, as reflected in a series of Consent Cease and Desist Orders recently issued by
the FDIC, including those regarding Advanta Bank Corporation; American Express
Centurion Bank of Salt Lake City, Utah; and the CompuCredit-related cease and desist
orders against Columbus Bank and Trust, Columbus, Georgia, First Bank of Delaware,
Wilmington, Delaware, and First Bank & Trust, Brookings, South Dakota.
a. The FTC Act explicitly confers upon the Federal Reserve Board, the Federal
Home Loan Bank Board, and the National Credit Union Administration Board
the authority to "define with speciticity" unfair and deceptive acts and practices.
While the FfC Act grants enforcement authority to the FDIC and OCC, the Act
does not explicitly grant the FDIC and OCC the authority to define unfair or
deceptive acts and practices. In other words, under the express language of the
ITC Act, the FDIC and the OCC do not have"the statutory authority to decide
for the banks they regulate that a particular act or practice is unsafe or unsound,
either by adopting a regulation or on a case-by-case basis in enforcement
proceedings.
i.
Has you General Counsel's office performed its own analysis and
prepared its own written opinion'!
ii. Have any of the opinions that may have been prepared by the FDIC,
OCC and/or the Fed regarding this issue been reviewed by any
independent third party, such as the relevant Inspectors General or the
Justice Department'?
b. \Vhat, if any, procedures have been established to assure that the Fed, OCC and
the FDIC are all in agreement as to what acts or practices are unfair or
deceptive?
i.
How do the regulators ensure that the OCC and/or the FDIC do not
adopt a UDAP rule in a case through their respective adjudicatory
processing that has been , or is not, also adopted by the other banking
agencies'? Do you see a problem with the possibility of inconsistent
rulings or positions between or among the federal banking agencies
regarding what acts or practices re unfair or deceptive?
-2-
ii. Are you aware of any inconsistent positions that exist as of today, i.e.,
situations where the FDIC or OCC or Fed bas determined in the context
of an administrative enforcement proceeding that a particular act of
practice is unfair or deceptive, while one or both of the other agencies
have not and do not regard the conduct at issue as a violation of the FTC
Act'! How would you find out if that were the case?
As you point out, section 18()(1) ofthe FTC Act provides that the Board (with respect to
banks), the OTS (with respect to savings associations), and the NCUA (with respect to federal
credit unions) are responsible for prescribing "regulations defining with specificity ... unfair or
deceptive acts or practices, and containing requirements prescribed for the purpose of preventing
such acts or practices." 15 U.S.C. 57a(f)(l). Section 18()(2) of the FTC Act authorizes a
number of agencies, including agencies not empowered to write rules under the FTC Act, to
enforce these rules.
Hovvever, these provisions do not define the full extent of the authority of the agencies to
address unfair and deceptive acts or practices. The prohibition against unfair acts or practices in
section 5(a) of the FTC Act applies to all banks as a matter oflaw. Each banking agency is
authorized to enforce compliance with any law under section 8 of the Federal Deposit Insurance
Act (FDI Act) on a case-by case basis against their respective institutions. See 12 U.S. C. 1818.
This authority is independent from the banking agencies' authority under section 18()(2) to
enforce any regulations the Board may promulgate. Thus, the agencies are authorized to identify
and address potentially unfair or deceptive practices using infonnation from consumer
complaints, the examination process and, ultimately the fom1al enforcement process.
The expectation that the banking agencies would use this enforcement authority is
reflected in section 18()(1) ofthc FTC Act, which provides that ''each agency specified in
paragraphs (2) or (3) [that is, the Board, OCC, FDIC, and OTS) shall establish a separate
division of consumer affairs which shall receive and take appropriate action upon complaints
with respect to such acts or practices by banks or savings and loan institutions described in
paragraph (3) subject to its jurisdiction." This section contemplates that the agencies would
"take appropriate action" with respect to unfair and deceptive acts or practices without reference
to whether or not the specific act or practice had been identified by regulation. Indeed, the courts
have long recognized that the FTC Act prohibits all unfair or deceptive acts or practices, not only
those identified by regulation. See FTC v. Orkin, 849 F.2d 1354 ( 11 ih Cir. 1988); FTC v.
Cyberspace.com, 453 F.3d 1196 (9th Cir. 2006).
The Board considered this legal position in connection with the adoption of its policy
statemene confirming the broad authority of the agencies to enforce the FTC Act The statement
1
FRB and FDIC Policy Statement on Unfair or Deceptive Acts or Practices by State~Chartercd Banks (March 11,
2004) (available at http://www.federalreserve.gov/boarddocs/press!bcreg/2004/20040311/default.htm). The Board
also has consumer compliance examination procedures in place for section 5 of the FTC Act. The OCC also issued
an advisory letter in 2002 setting forth the standards the agency uses to determine whether an act or practice is unfair
or deceptive, and providing general guidance on the activities examiners should scrutinize. Guidance on Unfair or
Deceptive Acts OT Practices (March 22, 2002) (available at http://w\vw.occ.rreas.gov/ftp/advisorv/2002-3.txt).
- -')
.)
describes the standards and principles the agencies will follow in determining on a case-by-case
basis whether an act or practice constitutes a violation of section 5 of the FTC Act and also
outlines guidance on best practices to address some areas with the greatest potential for
unfairness or deception. In enforcing the FTC Act, the Board applies those principles to the
specific facts and circumstances of the case before it.
While there is no formal process for conducting interagency discussions about practices
that may be under review in a pending examination or administrative enforcement proceeding,
staff of the agencies discuss cases involving unfair or deceptive practices on an informal basis.
The agencies work towards maintaining uniform examination procedures through the FFIEC
consumer compliance task force.
1. Treasury Secretary Geithner has warned that "no financial recovery plan will be
successful unless it helps restart securitization markets .... " At the same time, the
Financial Accounting Standards Board (FASB) bas recently finalized significant and
retroactive changes to securitization accounting that will have a tremendous impact on
existing assets and future lending. These changes -which become effective January 1,
2010 could seriously complicate efforts to repair financial markets.
The Administration bas made the securitized credit markets the centerpiece of the
Financial Stability Plan (through TALF, PPIP, etc). However, in promulgating FAS 166
and 167, FASB has sought to retroactively eliminate the securitization accounting
vehicle knm-Yn as the "Qualified Special Purpose Entity," which will require some bond
investors to 11 consolidate" an entire pool ofloans on their balance sheet, despite only
owning 2-3% of the transaction. "What will be the impact of this "consolidation" on
bond investors \Yho are critical to the extension of credit and the future of our
securitized credit markets?
In the process of considering lessons learned from the financial crisis, the President's
Working Group on Financial Markets and the Securities and Exchange Commission encouraged
the FASB to re-assess its accounting standards for off-balance sheet vehicles. In response and
following a period of public comment on the proposal, FASB recently modified GAAP through
FAS 166 and 167.
Under the new accounting standards, an enterprise (e.g., company, individual, or group of
bond holders) is required to consolidate certain special purpose entities (SPEs) whenever it has a
"controlling financial interest" in the SPE, that is, the enterprise has the po\ver to direct the
SPE's most significant activities and the right to receive benefits from, or obligatiort to bear
losses of, the SPE. The accounting standards also require disclosure of the enterprise's
involvement with such SPEs and any significant changes in risk exposure that result.
Whether an enterprise will be required to consolidate an SPE will depend on the specific
facts and circumstances of each transaction. Beginning in 2010, many banking organizations
that sponsor securitizations will be required to consolidate the associated SPEs. Certain assetbacked conm1ercial paper conduits, revolving sccuritizations structured as master trusts (such as
-4credit card securitizations), mortgage loan securitizations not guaranteed by the U.S. government
or a U.S. government-sponsored agency, and term Joan securitizations (such as auto and student
loan securitizations), are among the types of securitization SPEs that will likely require
consolidation by their sponsoring banking organization. In almost all cases, the SPE
consolidation requirements will not apply to investors in the asset-backed securities, because
such investors generally do n'ot have power to direct the SPE's most significant activities.
2. The same statutory capital ratios apply to every federally insured depository institution
for purposes of determining what their level of capital adequacy is, e.g., wen capitalized,
adequately capitalized, undercapitalized, etc. However, each of the federal banking
agencies also bas the authority to require a given institution it regulates to achieve and
maintain capital ratios (e.g., for total risk-based capital, core capital, etc.) at specific
levels set by the agency, which may be even higher than the statutory ratios used to
define a "well-capitalized" institution. In connection with these individual capital
requirements:
a. Does your agency consult with the other federal banking agencies in an effort to
achieve uniformity with respect to the factors that will be evaluated and the
standards that will be applied in arriving at such individual capital requirements
for institutions'?
b. Should the federal banking agencies apply the same criteria to determine the
capital ratios for a regulated institution?
c. Is there consistency between and among the federal banking agencies regarding
the criteria they use to determine whether to establish individual capital
requirements'!
While the federal banking agencies (the Board, the Federal Deposit Insurance
Corporation (FDIC), the Office ofthe Comptroller of the Currency (OCC), and the Office of
Thrift Supervision (OTS)) have substantially consistent minimum regulatory capital rules,
depository institutions are general1y expected to operate well above these minimums and in all
cases hold capital commensurate with the magnitude and nature of risks to which they arc
exposed. 2 The federal banking agencies apply consistent criteria when evaluating a depository
institution's capital adequacy and potential need for additional capitaL The agencies assess the
capital adequacy of depository institutions using the interagency Unifom1 Financial Institutions
Ratings System (UFJRS), commonly known by the acronym CAMELS (capital adequacy, asset
3
quality, management and administration, earnings, liquidity, and sensitivity to market risk).
Under this system, the agencies endeavor to ensure that all financial institutions are evaluated
comprehensively and unifonnly and that supervisory attention is appropriately focused on the
financial institutions exhibiting financial and operational weaknesses or adverse trends.
2
3
See,~' 12 CFR parts 208 and 225, Appendix A.
Board SR letter 96-38 (December 27, 1996), available at

http://www. federalrcservc. gov /board docs/ srle tters/199 6/sr963 8 .htrn.
- 5With respect to capital adequacy, the UFIRS states:

A financial institution is expected to maintain capital commensurate with
its risks and the ability of management to identify, measure, monitor, and control
these risks. The effect of credit, market, and other risks on the institution's
financial condition should be considered when evaluating the adequacy of capital.
The types and quantity of risk inherent in an institution's activities will determine
the need to maintain capital at levels above required regulatory minimums to
properly reflect the potentially adverse consequences of these risks on the
institution's capital.
The capital adequacy of an institution is rated based on, but not limited to,
an assessment of the following evaluation factors:
the level and quality of capital and the overall financial condition ofthe
institution
the ability of management to address emerging needs for additional

capital
the nature, trend, and volume of problem assets, and the adequacy of
allowances for loan and lease losses and other valuation reserves
balance-sheet composition, including the nature and amount of
intangible assets, market risk, concentration tisk, and risks associated
with nontraditional activities
risk exposure represented by off-balance-sheet activities

the quality and strength of eamings, and the reasonableness of
dividends
prospects and plans for growth, as well as past experience in managing
growth
access to capital markets and other sources of capital, including support
provided by a parent holding company.
The agencies periodically issue joint supplementary guidance regarding risk assessment
and capital adequacy as specific issues arise. For example, interagency Expanded Guidance on
Subprime Lending and gujdance on Concentrations in Commercial Real Estate Lending identify
factors that.institutions and examiners should consider when evaluating the risks and capital
4
needs of particular portfolios.
4
See Board SR letter 01-4 (January 31, 2001), available at

http://v..ww. fedcralreservc.gov/boarddocs/srletters/200 l/srOlQ4.htm (Subprime Lending Guidance) and Board SR
-6Each depository institution is responsible for assessing the level of capital appropriate for
its specific risk profile, and the agencies consider this analysis when making their own
assessments of capital adequacy. Some institutions require the use of more sophisticated
internal processes to assess capital adequacy because of their size, complexity, and the
corresponding limitations of regulatory capital requirements to fully capture their risk profile.
Federal Reserve guidance supplements the interagency standards described above by describing
how supervisory staff should evaluate a large or complex banking organization's internal capital
management processes to judge whether they meaningfully tie the identification, monitoring, and
evaluation of risk to the determination of the institution's capital needs. 5 In cases where the
appropriate federal banking agency determines that a depository institution's level of capital does
not fully support its risk profile, the agency may require that the institution improve its capital
position, even ifthe institution's regulatory capital levels exceed minimum regulatory and
.
6
statutory requuements.
(d) Does your agency use an economic model to determine the capital ratios a given
institution should maintain in light of its particular risk profile in order to be
considered adequately capitalized or well-capitalized?
i.
If you don't use a model, how do you make that determination'?
ii. If you do use a model, whose model is it?

1. Was it constructed by your agency alone?
2. Did you discuss it with the other banking agencies, or consult with
them regarding what, if any, models they use for such purposes?
3. T<J the extent you know what differences there are between any
model that your agency uses and any model used by any other
banking agency, how do you go about resolving those differences, if
at all?
The Board does not use a particular model for determining a depository institution's
prompt corrective action category or overall capital adequacy. 7 A banking organization's
regulatory capital ratios are the starting point for assessing its capital adequacy. Currently, all
banking organizations subject to the Board's capital guidelines must calculate their minimum
letter 07-l (January 4, 2007), available at bttp://fedweb.frb.gov/fedweb/bsr/srltrs/SR070l.htm (Commercial Real

Estate Guidance).
5
See Board SR letter 99-18 (July 1, 1999), available at http://fedwcb.frb_gov/fedwcb/bsr/srltrs/SR9918.htm.
12 U.S.C. 3907(a)(2).
Bank holding companies are not subject to the statutory prompt corrective action framework. See 12 U.S.C.
!831 (o). They are, however, required to meet minimum risk-based capital ratios that are used for various
supervisory purposes, including the evaluation of applications from such organizations. See 12 CFR part 225,
Appendix A, IV; 12 CFR 225.2(r).
-7capital requirements based on the Board's general risk-based capital rules, which generally use a
standard risk weighting of assets by asset category to determine minimum regulatory capital
requirements for credit risk. 8 The federal banking agencies all have similar general risk-based
capital rules. 9
With respect to banking organizations that are required to calculate regulatory capital
requirements for market risk, the Board, FDIC, and OCC have substantially consistent rules that
require a banking organization with substantial exposure to market risk to use its own internal
models to determine a value at risk (VaR)-based measure of market risk. This VaR-based
measure is incorporated into the organization's risk-based capital ratio. A banking
organization's market risk internal models must meet qualitative and quantitative standards, and
the banking organization must meet associated risk management and governance requirements.
In addition, large, internationally active U.S. banking organizations are in the process of
implementing the advanced approaches of Basel II, which also use organizations' internal
models.to detennine inputs into the risk-based capital ratios. Like the market risk rule, the
advanced approaches rule includes quantitative, qualitative, risk management, and governance
requirements. The advanced approaches rule is consistent across the federal banking agencies.
At this time, however, no banking organization is using the advanced approaches to calculate its
risk-based capital ratios. 10
Under the Board's regulations, a state member bank is "adequately capitalized" for PCA
purposes if its regulatory capital ratios meet the regulatory minimums, typically a four percent
tier 1 leverage ratio, four percent tier 1 risk-based capital ratio, and eight percent total capital
ratio. 11 A state member bank is "well capitalized" ifhas at least a five percent tier 1 leverage
ratio, six percent tier 1 risk-based capital ratio, and ten percent total risk-based capital ratio,
unless the institution is subject to any written agreement, order, capital directive, or prompt
12
corrective action directive to meet and maintain a specific capital level for any capital measure.
In making the detennination whether to issue such corrective measures, as well as whether to
informally encourage an institution to strengthen its capital position, the Federal Reserve
considers the factors outlined above with respect to the capital adequacy analysis required by
UlFRS.
12 CFR parts 208 and 225, Appendix A.
See 12 CFR part 8, Appendix A (OCC); 12 CFR parts 208 and 225, Appendix A (Board); 12 CFR part 325,
Appendix A (FDIC).
10
See, f.k, 12 CFR part 208, Appendix F; 12 CFR part 225, Appendix G.
II
12 CFR 208.43(b)(2).
12
12 CFR 208.43(b)(l).
-8~
4. Do you have a set of standards you use in evaluating capital

adequacy models that are employed by tbe institutions you regulate
and, if so, what are they and were they developed in consultation
with any other agencies'?
Banking organizations are responsible for validating the internal models they use for
capital adequacy and other risk management purposes. Review of validation documentation and
output is a long-standing component of supervisory activities in the United States. Through the
supervisory process, the Federal Reserve has a robust system for reviewing the results of
validation activities and following up when validation efforts are inadequate.
Two examples of interagency coordination of model validation standards are the uniform
standards described in the market risk rule and the advanced approaches rule. 13 The market risk
rule standards include annual independent model review and validation and model stress testing
and backtesting. The standards in the advanced approaches are more granular and include
'review ofthe appropriateness of the data and theoretical framework upon which a model is
based, review of model perfom1ance relative to alternative methods of measuring the desired
output, and review of actual model performance relative to realized results. In addition,
Federal Reserve supervisory letter 99-18 describes the process Federal Reserve supervisors use
to review models and other approaches used by institutions in their own internal assessments of
capital adequacy, which for many of the largest firms include economic capital and stress testing
models. 14
3. It is my understanding that the Federal Reserve may be considering changing
capital requirements for "banks" to address the impact of FASB's consolidation rules. Is it
true that the Federal Reserve can only reactively address some of these issues for "banks,"
while the universe of impacted market participants is much larger and could include bond
investors, life insurers, and mutual and pension funds'?
The Boards authoiity to establish minimum capital requirements is limited to certain
affiliates ofhanks, including bank holding companies, and state-chartered banks that are
members of the Federal Reserve; it does not extend to other financial market participants, such as
insurance companies and mutual and pension funds, unless such entities are bank holding
companies. 15
See,~' 12 CFR parts 208 and 225, Appendix E (market risk rule); 12 CFR part 208, Appendix F, section 22U),
and 12 CFR part 225, Appendix G, section 22 U) (advanced approaches rule).
13
14
See Board SR letter 99-18 (July 1, 1999), available at http://fCdweb.frb.gov/fedwebibsr/sr1trs/SR9918.htm.
15
12 U.S.C. 1831(o); 12 U.S.C. 3907(a)(l), 3909(a)(2).
'ADDITIONAL QUESTIONS FOR CHAJRDIL<\N BERNANKE FROM

JULY 24, 2009 HEARING:
"REGULATORY PERSPECTIVES ON THE OBAL\tiA ADMINISTRA.TION'S FINAL"l"CIAL
REGULATORY REFORM PROPOSALS- PART II"
Representative Spencer Bachus
Response Requested by September 7, 2009
,UDAP Questions:
1. Under the Federal Trade Commission Act, only the Board of Governors of the Federal
Reserve System ("Fed") has the authority to issue rules or regulations defining what
acts or practices are unfair or deceptive with respect to all banks, including those for
which the FDIC or the OCC is the primary federal regulator. Neither the FDIC nor the
OCC has the authority to adopt such rules or regulations for the banks they regulate.
The Fed, FDIC and OCC, however, have taken the position that the FDIC and the OCC
may defme what acts or practices they think are unfair or deceptive on a case-by-case
basis in the context of administrative enforcement proceedings, and the FDIC has done
just that, as reflected in a series of Consent Cease and Desist Orders recently issued by
the FDIC, including those regarding Advanta Bank Corporation; American Express
Centurion Bank of Salt Lake City, Utah; and the CompuCredit-related cease and desist
orders against Columbus Bank and Trust, Columbus, Georgia, First Bank of Delaware,
Wilmington, Delaware, and First Bank & Trust, Brookings, South Dakota.
a. The FTC Act explicitly confers upon the Federal Reserve Board, the Federal
Home Loan Bank Board, and the National Credit Union Administration
Board the authority to "define with specificity" unfair and deceptive acts and
practices. vVhile the I<l'C Act grants enforcement authority to the FDIC and
OCC, the Act does not explicitly grant the FDIC and OCC the authority to
define unfair or deceptive acts and practices. In other words, undeT the
express language of the FTC Act, the FDIC and the OCC do not have the
statutory authority to decide for the banks they regulate that a particular act
or practice is unsafe or unsound, either by adopting a regulation or on a case
by-case basis in enforcement proceedings.
1.
Has your General Counsel's office performed its own analysis and
prepared its own written opinion?
u. Have any of the opinions that may have been prepared by the FDIC,
OCC and/or the Fed regarding this issue been reviewed by any
independent third party, such as the relevant Inspectors General or
the Justice Department?
b. What, if any, procedures have been established to assure that the Fed, OCC
and the FDIC are all in agreement as to what acts or practices are unfair or
deceptive?
1.
How do the regulators ensure that the OCC and/or the FDIC do not
adopt a UDAP rule in a case through their respective adjudicatory
processes that has not been, or is not, also adopted by the other
banking agencies? Do you see a problem with the possibility of
inconsistent rulings or positions between or among the federal
banking agencies regarding what acts or practices are unfair or
deceptive?
11.
Are you aware of any inconsistent positions that exist as of today, i.e.,
situations where the FDIC or OCC or Fed has determined in the
context of an administrative enforcement proceeding that a particular
act or practice is unfair or deceptive, while one or both of the other
agencies have not and do not regard the conduct at issue as a violation
of the FrC Act? How would you find out if that were the case?
QUESTIONS ON FAS 166 AND 167

1. Treasury Secretary Geithner has warned that "no financial recovery plan will be
t:uccessful unless it helps restart securitization markets ...." At the same time, the
Financial Accounting Standards Board (FASB) has recently finalized significant and
retroactive changes to securitization accounting that will have a tremendous impact
on existing assets and future lending. These changes- which become effective
January 1 2010- could seriously complicate efforts to repair financial markets.
The Administration has made the securitized credit markets the centerpiece of the
Financial Stability Plan (through TALF, PPIP, etc). However, in promulgating FAS
166 and 167, I<''ASB has sought to retroactively eliminate the securitization
accounting vehicle known as the "Qualified Special Purpose Entity," which will
require some bond investors to "consolidate" an entire pool of loans on their balance
sheet, despite only owning 2-3% of the transaction. What will be the impact of this
"consolidation" on bond investors who are critical to the extension of credit and the
future of our securitized credit markets?
2. The same statutory capital ratios apply to every federally insured depository
institution for purposes of determining what their level of capital adequacy is, e.g.,
well capitalized, adequately capitalized, undercapitalized, etc. However, each of the
federal banking agencies also has the authority to require a given institution it
regulates to achieve and maintain capital ratios (e.g., for total risk-based capital,
core capital, etc.) at specific levels set by the agency, which may be even higher than
the statutory ratios used to define a "well-capitalized" institution. In connection
with these individual capital requirements:
a. Does your agency consult with the other federal banking agencies in an effort
to achieve uniformity with respect to the factors that will be evaluated and
the standards that will be applied in arriving at such individual capital
requirements for institutions?
b. Should the federal banking agencies apply the same criteria to determine the
capital ratios for a regulated institution?
c. Is there consistency between and among the federal banking agencies

regarding the criteria they use to determine whether to establish individual
capital requirements?
d. Does your agency use an economic model to determine the capital ratios a
given institution should maintain in light of its particular risk profile in order
to be considered adequately capitalized or well-capitalized?
1.
11.
If you don't use a model, how do you make that determination?
If you do use a model, whose model is it?

1. Was it constructed by your agency alone?
2. Did you discuss it with the other banking agencies, or consult

with them regarding what, if any, models they use for such
purposes?
3. To the extent you know what differences there are between any
model that your agency uses and any model used by any other
banking agency, how do you go about resolving those
differences, if at all?
4. Do you have a set of standards you use in evaluating capital
adequacy models that are employed by the institutions you
regulate and, if so, what are they and were they developed in
consultation with any other agencies?
3. It is my understanding that the Federal Reserve may be considering changing
capital requirements for "banks" to address the impact of FASB's consolidation
rules. Is it true that the Federal Reserve can only reactively address some of these
issues for "banks," while the universe of impacted market participants is much
larger and could include bond investors, life insurers, and mutual and pension
funds?
BOARD OF GOVERNORS
OF THE

WASHINGTON, 0
C. 2055>
January 5, 2010
The Honorable Gary G. Miller

-- -__ ,
.. .r
Dear Congressman:
Thank you for the opportunity to respond to the questions you posed on the Board's
recent mlemaking on appraiser independence during the House Committee on Financial
Services' October 1, 2009, hearing entitled, "Federal Reserve Perspectives on Financial
Regulatory Reform Proposals."
You raised three questions: Do I think that the Federal Reserve's recent regulation on
appraisals achieves a balance between prohibiting improper influence on appraisers and ensuring
appraiser independence while not unintentionally increasing the cost of obtaining a mortgage
loan for consumers? Is there a need for the Home Valuation Code of Conduct ("HVCC") given
the Board's regulation? Is the Federal Reserve aware of any problems that the HVCC is causing
consumers and the housing market?
As you indicated in the hearing, the Board has taken a less prescriptive approach to
appraiser independence than does the HVCC. The Board recently amended its Regulation Z by
adding requirements designed to ensure mortgage appraiser independence and prohibit improper
influence on appraisers. The final rule amending Regulation Z prohibits mortgage brokers,
mortgage lenders, and their affiliates from coercing, influencing, or otherwise encouraging
appraisers to misstate or misrepresent the value of a consumer's principal dwelling. These
amendments to Regulation Z are consistent \Vith the Board's longstanding concerns about
appraiser independence. The Board and the other banking agencies have long held that
depository institutions should order appraisals. In addition, the Board's and the other banking
agencies' appraisal mles relating to depository institutions and bank holding companies, adopted
in 1990, require that the parties ordering appraisals be administratively separate from the lending
function. We believe that this stmcture strikes an appropriate balance between ensuring
appraiser independence and adversely affecting consumers and the housing market.
In response to your second question, the amendments to Regulation Z and the HV CC use
similar descriptions of prohibited behavior deemed likely to be coercive of appraisers.
Notwithstanding these similarities, during the development of the HVCC, the Board, along with
the Office of the Comptroller of the Currency, the Office ofThrift Supervision, the Federal
Deposit Insurance Corporation, and the National Credit Union Administration (collectively, the
"Agencies"), issued a comment letter identifying concerns about the proposed HVCC and
'
The Honorable Gary G. Miller

Page Two
recommending that it be withdrawn bcca1,1se the HVCC "conflicts in material ways with the mles
and guidance established by the Agencies and undermines appropriate risk-management and
consumer protection practices at federally regulated lenders." A copy of this comment Jetter,
\vhich details the conf1icts that raised our concerns, is enclosed.
In response to your third question, the Board has received letters complaining about the
current functioning of the appraisal industry. These concerns include questions about appraiser
qualifications, appraising in declining markets, the oversight of appraisal management
companies, broker price opinions, and fees paid to appraisers. At this time, it is not clear
whether, or to what extent, the HVCC plays a role in the deficiencies discussed in the
complaints.
I hope this infmmation is helpful. Please let me know ifl can be of further assistance.
Sincerely,
Enclosure
[Enclosure: 06-19-08 letter to Director Lockhart (OHIEO) from Governor Kroszner (FRB),
Director Reich (OTS), Comptroller Dugan (OCC), and Chairman Johnson (NCUA).]
BWM:SGA:pte (B-211, 09-12601)
Office of the Comptroller of the Currency

Board of Governors of the Federal Resene System
Office of Thrift Supenision
National Credit Union Administration
June 19,2008
Mr. James B. Lockhart, Ill
Director
Office of Federal Housing Enterprise Oversight
1700 G Street, N.W.
Dear Director Lockhart;
The Federal Reserve Board ("Board"), the Office of the Comptroller of the
Currency ("OCC"), the Office of Thrift Supervision ("OTS"), and the National Credit Union
Administration (collectively, the "Agencies") appreciate the opportunity to convey our concerns
about the Home Valuation Protection Program and Cooperation Agreements ("Agreements")
between your agency, the New York State Attorney General, and the Federal National }vfortgage
Association and the Federal Home Loan Mortgage Corporation (collectiyely, the "GSEs"). 1 The
Agreements require mortgage lenders, including federally regulated financial institutions and
organizations ("federally regulated lenders"), seeking to sell single-family mortgage loans to the
GSEs to adopt the Home Valuation Code of Conduct ("Code") attached to the Agreements and
to comply with certain practices imposed by the Code.
\Ve strongly support the goals of protecting appraisers from coercion or other
undue influence by lenders, borrowers, brokers, or others involved in the mortgage lending and
securitization process. Appraiser independence and reliable valuations of real estate collateral
for loans in the primary and secondary residential mortgage markets are a necessary part of the
foundation to protect lenders in making safe and sound residential mortgage credit decisions,
consumers in their borrowing decisions, and investors in their decisions to purchase mortgagebacked securities.
We are very concerned, however, that the requirements imposed hy the
Agreements and Code would uruJccessarily undermine the safe and sound extension of mortgage
credit, reduce the availability of mortgage credit to many consumers, and ultimately lead to less
reliability and accuracy in real estate appraisals. Moreover, issues regarding appraiser
independence and protection from coercion are already adequately addressed by current and
pending rutcs and guidance of the Agencies. In addition, we believe tha\ insufficient inforrnation
has been collected and inadequate analysis has been perfonncd to permit confidence that the
1
The OCC and the OTS have previously submitted separate comment teners concerning the
legal and policy issues presented by the Agreements and the Code. See letter dated April 30,
2008, from Timo:hy T. Ward, Deputy Director, OTS, to Senior Vice President, Credit Risk
Oversight, Freddie Mac; and lener dated May 27,2008, from John C. Dugan, Comptroller of the
C1.l'Tency, to Ja;"Ties B. Lock.IJ.art, Director, OFHEO.
Cede will appropriately address the issue of potential coercion and other undue influence of
appraisers without causing other significantly adverse, unintended consequences. We believe,
therefore, that the Agreements and Code should be withdrawn. lfno1 ;vithdrawn, the
Agreements and Code shouJd be revised to exempt federally regulated lenders, and the
implcJnentat[on of the Agreements and Code should be deferred until th~ significantly adverse
con~equences are prevented and the other material legal and policy concerns expressed in this
Jetter and by others are satisfactorily addressed.
The Code conflicts in material ways with the rules and guidance established by
the Agencies and undermines appropriate risk-management and consumer protection practices at
federally regulated lenders. The Code inappropriately attempts to regulate the corporate
structure and internal operations of federally regulated lenders in cormection with their mortgage
lending operations. In addition, the Code contravenes appropriate risk-management practices of
federally regulated lenders by banning the use of appraisals prepared by in-house appraisers,
appraisers employed by affiliates, or appraisers at entities that also provide loan settlement
services. The Code also hinders the ability of federally regulated lenders to perform other types
of quality controls necessary to ensure the accuracy and quality of appraisals used in lending
decisions and, thereby, protect the safety and soundness of such institutions and organiz.ations.
For example, the Code overly restricts lenders from ordering or using a second or subsequent
appraisal to ensure the reliability of the collateral valuation. Such appraisals are an important
quality control tool for lenders, particularly when markets are turning and public data updates are
d~laycd, as recently demonsttated in various declining markets;
The Agencies have significant concerns that compliance with overly restrictive
requirements in the Code will materially disrupt mortgage lending processes and raise costs to
consumers without enhancing protections for consumers, lenders, or the mortgage markets.
Implementation of the Code will result in higher loan origination costs for federally regulated
lenders and other mortgage lenders and thereby increase costs to consumers. For example, the
Code's unwarranted restriction on a lender using any appraisal performed by an in-house
appraiser or ordered by a broker will likely result in loan application processing delays and
require the consumer frequently to pay for multiple appraisals for a loan. 1-Jigher costs and
disruptions in mortgage lending processes also will result from the Code's resLrictions on using
appraisals from appraisal management companies that are affiliates of\enders or that provide
both appraisal and settlement-related services for institutions. The unwarranted Joss of the
significant efficiencies these companies can provide to mortgage lenders tha1 provide loans to
consumers where the lender has few, if any, loan undervniting offices, and particularly 10 small
financial institutions, is likely to resull in loan processing delays, higher costs for consumers, and
reductions in the availability of mortgage credit in many areas. We believe thalthe Code's
draconian approach sacrifices quality, efficiency, and cost for a result that would not materially
enhance protections against undue influence on appraisers.
The Agencies have issued and proposed appraisal regulations and supervisory
guidance, applicable to federally regulated lenders, that promote sound apprdisal practices;
require lenders 10 originate, purchase, and sell mortgage loans based on reliable appraisals; and
protect appraisers from inappropriate influence by loan production stafi, borrowers, or other third
3
parties 2 The Agencies require separation of the appraisal function from the loan production,
investment, and collection functions to prevent the threat of coercion or vther undue influence on
appraisers. This measured approach recognizes that staff appraisers can provide the lender with
impartial, independent and reliable appraisals. Importantly, staff appraisers can provide effective
reviews of appraisals performed by unaffiliated appraisers to verify that such appraisals are
accurate, supportable, and comply with the Agencies' appraisal regulations and guidance and the
lender's appraisal standards. The Agencies already require that these quality control functions be
performed independently and without any influence by the lender's loan production staff. The
constraints on the role of staff appraisers imposed by the Code would inhibit these quality
control functions and impose increased costs for verifying and ensuring the quality and accuracy
of appraisals on mortgage lenders and ultimately on consumers without any demonstrable
benefit.
The appraisal regulatory framework established by the rules and guidance of the
Agencies is based on balanced requirements to help ensure that federally regulated lenders use
reliable appraisals that were prepared independently by competent appraisers who are separated,
and protected from coercion or other undue influence, from the lender's loan production,
investment, and collection functions or any third party. The Agencies' appraisal regulations and
supervisory guidance reflect our belief that the reliability of appraisals is not dependent on a
blanket prohibition that requires that !enders use only appraisals prepared by third parties that do
not provide settlement services. The key to promoting reliable appraisals is that the appraisal
function be separated from the loan production function, whether those functions reside in one
organization, affiliated organizations, or unaffiliated third parties. Federally regulated lenders
must couple the independence of those functions with robust credit and compliance
risk-management systems to ensure appraiser impartiality, appraiser independence, and the
reliability of the appraisals used in underwriting residential real estate loans.
The Agencies' appraisal regulatory framework is monitored and enforced through
examinations that review the operations of the federally regulated lenders' mortgage lending
functions. Such entities are instructed to establish adequate internal controls to ensure appraiser
independence through separation of the appraisal ordering, preparation, and quality control
processes from the institution's and organization's loan production staff and lending precesses,
including separation of responsibilities and reporting lines between the appraiser and the lending
function. Under the Agencies' appraisal regulations and supervisory guidance, an appraisal
ordered or prepared by a third party also must meet these impartiality and independence
1
12 CFR pan208, subpa1t E (Board); !2 CFR pan 34, subpart C (OCC); 12 CFR pm 564
(OTS); and 12 CFR part 722 (NCUA). See Interagency Appraisal and Evaluation Guidelines,
SR letter 94-55 (Board), Comptroller's Handbook, Commercial Real Estate and Construction
Lending (Appendix E) (1998) (OCC), and Thrift Bulletin 55 a (OTS). See also Frequently Asked
Questions on the Appraisal Regulations and the lnteragency Statement on Independent Appraisal
and Evaluation Functions (2005), SR Letter 05-5 (Board), OCC Bulletin 2005-6 (OCC), CEO
Memorandum No. 213 (OTS), and NCUA Letter to Credit Unions 05-CU-06 (NCUA); and
Interagency Statement on lndependenr Appraisal and Evaluation Functions (2003),
SR Letter 03-18 (Board), Advisory Letter 2003-9 (OCC), CEO Memorandum No. 184 (OTS),
and NCUA Letter to Credit Unions 03-CU-l 7 (NCUA).
requirements, and lenders are instructed to review any broker-ordered appraisals thoroughly to
ensure that the appraisal ;:;ompiies with the Agencies' regulations and guidance and the
institution's appraisal policies.
A federally regulated lender must demonstrate that its appraisal process complies
with our requirements to protect appraiser impartiality and independence, and requires quality,
independent opinions of collateral market value through appraisals that conform to minimum
regulatory appraisal standards, including the Uniform Standards of Professional Appraisal
Practice (USPAP). Appraisals also must be prepared by appropriately credentialed and
competent appraisers protected from coercion. The real estate appraisal and evaluation policies
and procedures of federally regulated entitks are reviewed by examiners, and the Agencies
require corrective action when deficiencies are discovered.
In addition, the Board is currently considering revisions to its Regulation Z to
enhance further the protection of consumers from improperly influenced real estate appraisals.'
The Regulation Z proposal prohibits all creditors and mortgage brokers from pressuring an
appraiser to misrepresent a dwelling's value and prohibits all creditors from extending credit if
the creditor knows or has reason to know that an appraiser has been coerced to misstate a
dwelling's value. TI1e proposed amendment to Regulation Z would cover all mortgage lenders
(both federally and non-federally regulated lenders) and would apply to all consumer credit
transactions secured by the consumer's principal dwelling, whether the mortgage is guaranteed
by the GSEs or not.
The GSEs recently invited interested persons to submit their concerns regarding
the Agreements and the Code. The new requirements to be imposed by OFHEO and the GSEs
through the Agreements and the Code, 'l'v'ith their far-reaching and burdensome effects on
federally regulated lenders and other mortgage lenders across the nation, are the type of
federally-imposed requirements that should be subject to the full panoply oflaws designed to
protect the procedural and other rights of citizens and corporate entities from improper
governmental action. The comment process employed, however, does not confer the protections
or rigor required by the Administrative Procedures Act and other applicable laws. Use of
requirements set by the GSEs to impose obligations on the entire mortgage lending industry and
on consumers is tantamount to government agency action and strongly implies tha~ the GSEs are
acting as governmental agencies that should be subject to all the procedural and other laws
applicable to agency action.
OFHEO requested comment from the Agencies on the implementation timetable
for the Agreements and the Code to ensure that no disruption in the marketplace would occur.
We believe that the time available for carefully considering the extensive number of comments
and obtaining concurrence on changes needed to 1he Code to address 1he many serious concerns
identified by the Agencies and the commcnters will require substantial delay and revision to the
content and process for the implementation of the Code, if the Agreements and Code are not
3
Regulation Z--Truth in Lending, 73 Fed. Reg. 1672, 1726 (proposed January 9, 2008) (to be
codified at 12 CFR pt. 226). The proposal was released for comment on January 9, 2008. The
proposal's comment period ended on April 2, 2008, and Board staff is analyzing the more than
4,000 comment letters received on the proposal to determine what modifications, if any, to make
to the draft regulation.
withdrawn. Under the Agreements, the new requirements will apply to all single-family
mortgage loans (except government-insured loans) that are originated on or afte; January 1,
2009, and delivered to a GSE. The actual effective date of the restrictions, however, will of
necessity precede that date by a number of months due to L!Jc length of time for completion of the
origination process, particularly with the new requirements. We expect that the significant
number of concerns and adverse consequences identified by the Agencies and commenters will,
in fact, result in further disruption of the residential mortgage lending market.
We strongly encourage that the Agreements and the Code be withdrawn. If not
withdrawn, the Agreements and Code should be revised to exempt federally regulated lenders,
and the implementation of the Agreements and Code should be deferred until the significantly
adverse consequences are prevented and the other material legal and policy concerns expressed
in this letter and by others are satisfactorily addressed. The Agreements' and Code's overly
burdensome restrictions and mandates on such a significant segment of the mortgage market
would constrain the ability of our regulated institutions and organizations to provide mcrtgage
credit to creditworthy consumers on a safe and sound and timely basis, without increased costs.
The Agencies are committed to addressing any weaknesses and deficiencies in mortgage lending
practices, including appraisal practices, at any of our regulated lenders through our regulatory
and supervisory processes, as necessary. Moreover, the Agencies would be v,~lling to work with
OFHEO and the GSEs to identify and address any unresolved issues regarding appraiser
coercion.
Sincerely,
$,47-Randall S. Kro.szner
Governor
Board of Governors of the
Federal Reserve System
~
'::::~:?,
4iec~;
Office of Tnrift Supervision
JoAnn M. Jolu1son
Chainnan
National Credit Union Administration
cc:
federal National ~vJortgage Association

Federal Home Loan Mortgage Corporation
Congressman _<;;ary G. Miller

Hearing on "Federal Reserve Perspectives on Financial Regulatory Reform Proposals"
Questions for Federal Reserve Chairman Ben Bernanke
October 1, 2009
Background:
On June 12,2009, FASB announced new standards, FAS 166 and 167, that must be implemented
by January 1, 2010, that according to the FDICwill have a material effect on the amount of
assets and liabilities reported on the balance sheets of some banking organizations, and
consequently on these banking organizations' regulatory capital requirements.
Additionally, the FDIC as recently adopted a Notice of Proposed Rulemaking that would require
insured institutions to prepay their estimated quarterly risl:c-based assessments for the fourth
quarter of2009 and for all of2010, 2011 and 2012. The FDIC estimates that the total prepaid.
assessments collected would be approximately $45 billion.
Question:
FAS 166 and 167 and the FDIC rule seem to conflict with the Administration's goal of
increasing liquidity. How will the new FASB and FDIC policies affect lending and overall
liquidity in the markets? Do you think we should postpone the January 1, 2010 implementation
date for FAS 166 and 167, so they are not imposed during a credit crisis? Are there other ways
the FDIC could replenish the fund that would not have an immediate impact on bank lending
capabilities?
BOARD OF GOVERNORS
OF THE:

SEN S. BEI'lNANKE
CHAIRMAN
January 25,2010
The Honorable Robert P. Casey, Jr.

Dear Senator:
I am pleased to enclose in response to your letter of January 20, 2010, the answers
to questions you posed in connection with the upcoming vote on my confirmation for a
second tem1 as Chaim1an of the Board of Governors of the Federal Reserve System.
Sincerely,
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Chainnan Ben Bernankc submitted the following in response to written questions received from
Senator Robert Casey in connection with the U.S. Senate confinnation for a second tenn as
Chairman of the Board of Governors of the Federal Reserve System:
The Federal Reserve is responsible for monetary policies key to the health of our economy.
A critical aspect of this responsibility is the ability to identify and act when the economy is
imbalanced due to speculation and hyper-growth. Looking back over your first term, bow
could the Federal Reserve have intervened more effectively to slow the housing bubble and
credit glut that led to the economic downturn? Specifically, based on the lessons learned
from the residential housing crisis, bow would you enhance the capability to more
accurately identify emerging troubled industries and markets?
Identifying emerging economic and financial imbalances in real time has always been
difficult in the past and will remain difficult in the future. During the period leading up to the
recent financial crisis, financial institutions, investors, and regulators here in the United States
and around the world failed to appreciate the full extent of the pressures that were building in the
financial system and the devastating consequences those pressures would have as they were
released. Despite the challenges that will always be associated with identifying emerging
imbalances in a timely manner, important steps can and should be taken to ensure better
pcrfom1ance in the future on this score. Some of these steps will require Congressional action,
while other steps can be taken by regulators under existing authority.
One such step is to ensure that all firms with the potential to destabilize the financial
system and the broader economy are subject to a robust, statutory framework for consolidated
supervision. During the period leading to the financial crisis, many of the large, complex, and
interconnected financial firms whose collapse contributed importantly to the financial crisis
avoided the more stringent consolidated supervision that is imposed on bank holding companies
by the Federal Reserve; they avoided such supervision because they were not organized as bank
holding companies. Effective consolidated supervision of such organizations would have
generated a far more comprehensive picture of the risks they were undertaking and the threat
they posed to financial stability and the economy. For the present and immediate future, this
issue is of diminished concern because so many systemically important fim1s converted their
fonn of organization to one that is subject to consolidated supervision by the Federal Reserve.
However, over the longer tem1, it will be critical to ensure that all large, complex, and
interconnected firms that may threaten fmancial stability are supervised effectively on a groupwide basis.
A second step is to ensure that financial supervisors take account of systemic, or
"macropmdential," risks as well as the more traditional safety-and-soundness risks affecting
individual finns. During the mn-up to the financial crisis, none of the federal regulators had
sufficient authority to focus on the systemic risk that large financial organizations posed. A
regulatory body, such as the council that the Federal Reserve has supported, with authority to
focus on systemic risk would have been helpful in identifying not only the risks that individual
institutions were accumulating, but also the ways in which such institutions might destabilize one
another, either through their direct interactions or mediated through financial markets.
- 2A third step is to ensure that financial institutions face stronger incentives to monitor their
own risk positions. Institutions that face appropriate incentives will limit their ow-n risk-taking
and present smaller threats to other firms and markets. One way to enhance the incentives that
institutions have to undertake only appropriate levels of risk-taking is to enhance the
requirements that such institutions in fact hold capital. Toward that end, the Federal Reserve has
been working through the Basel Committee on Bank Supervision and the Financial Stability
Board to ensure that systemically critical financial institutions hold more and higher-quality
capital and employ more robust liquidity management.
A fourth step is to ensure that the individuals who are employed by financial institutions
do not have the incentive to undertake inappropriate or imprudent risks. An appropriate
compensation structure will not provide an incentive for individuals to "swing for the fences,"
knowing that if they happen to connect, they will reap a rich reward, but if they miss, the federal
taxpayer will be there to clean up the mess. Toward this end, the Federal Reserve has played a
key role both internationally and domestically to ensure that banks use compensation structures
that provide appropriate performance and risk-taking incentives.
By taking these and other steps, we can ensure that the actions of private-sector firms and
investors and of public-sector regulators are aligned in containing risk in the financial system to
levels that do not threaten to undermine financial stability.
In the future, you will be faced with critical decisions about shifting the Federal Reserve's
monetary policies with emerging economic growth. Looking at the lessons of past
recessions, these decisions are oftentimes difficult and unpopular. Specifically, you will be
faced with the difficult decision regarding the appropriate time to raise interest rates.
What indicators are you reviewing in determining whether to raise interest rates?
As I and my colleagues on the FOMC have affirmed in statements released after each of
the Committee's recent meetings, we anticipate that economic conditions, including low rates of
resource utilization, subdued inflation trends, and stable inflation expectations, are likely to
warrant exceptionally low levels of the federal funds rate for an extended period. As your
question suggests, it will eventually become necessary to begin raising interest rates to sustain
economic expansion by preventing overheating and rising inflation. The appropriate time to
begin raising interest rates will depend primarily on how the outlook for economic activity,
employment, and inflation--and the risks to that outlook--evolve. Accordingly, all indicators that
inform economic forecasts will enter into the decision. More specifically, I anticipate that my
colleagues and I will be guided in part by indications that resource slack, as measured by
unemployment and unused production capacity, is on and will continue on a downward trend.
Because <rctual inflation responds to cost pressures and the public's inflation expectations, I
anticipate that we will also be guided to some extent by evidence on the trends in production
costs and the behavior of measures of expected inflation. Finally, tight credit conditions have
been restraining the economy and thus have been an important factor behind the Committee's
decisions to target an exceptionally low level of the federal funds rate. Accordingly, I anticipate
that the timing of the eventual decision to raise the target will be informed by evidence that
credit is becoming more readily available. In sum, monetary policy decisions going forward will
-3-
be guided by the Committee's interpretation of the implications of a broad range of economic

and financial data for the outlook for economic activity, employment, and inflation.
The Federal Reserve has advocated for increased powers, including but not limited to
greater resolution authority and a prominent place as the lead regulator in a proposed
counsel of regulators. If granted such authority, what reforms would you institute at the
Federal Reserve that would assist the American people?
The United States needs a comprehensive agenda to contain systemic risk and address the
problem of financial institutions that are viewed as being too big to faiL This agenda should seek
to marshal and build on the individual and collective expertise and resources of all financial
supervisors--not just the Federal Reserve--to contain systemic risks within the financial system.
No agency has the expertise and breadth of information needed to effectively serve as the sole
"systemic risk regulator" for the entire financial system. Indeed, legislative proposals would
provide new or enhanced responsibilities for a number of federal agencies and departments. For
example, current proposals would provide the Securities and Exchange Commission and
Commodity Futures Trading Commission additional authority and responsibility for over-thecounter derivatives. These proposals also would provide the Federal Deposit Insurance
Corporation, working in conjunction with the Treasury Department, the responsibility for
winding down a failing systemically important financial firm in a way that is both orderly and
imposes losses on the firm's shareholders and creditors. As I have indicated previously, the
Federal Reserve does not seek to serve as the resolution agency for systemically important
institutions under the new framework.
To effectively contain systemic risks, these enhanced authorities for individual
supervisors should be supplemented by a broad-based council for the financial system as a
whole. Such a council composed of all the financial agencies and departments involved in
financial supervision and regulation would be very helpful in monitoring and identifying
emerging systemic risks across the full range of financial institutions and markets. In addition,
such a council usefully could coordinate the supervisory and regulatory responses of financial
supervisors to emerging systemic threats, thereby promoting greater harmony and efficiency in
supervisory and regulatory matters of systemic importance. Under the proposal advanced by the
Administration and the legislation passed by the House of Representatives, the Secretary of the
Treasury would serve as chairman of this council, a role that we believe is appropriate.
There are important aspects of a reform agenda, however, that the Federal Reserve is
uniquely qualified to fulfill--consolidated supervision and macroprudential supervision. The
financial crisis has clearly demonstrated that all systemically important financial institutions--and
not just those that own a bank--should be subject to a robust framework for supervision on a
consolidated or group-wide basis. Many of the large, complex, and interconnected financial
firms whose collapse contributed importantly to the financial crisis avoided the more stringent
consolidated supervision that is imposed on bank holding companies by the Federal Reserve.
These fim1s--which included American International Group, Washington Mutual, Countrywide,
Bear Steams, and Lehman Brothers--were instead subject to no consolidated supervision or to
statutory or regulatory schemes that were far less comprehensive than that applicable to bank
holding companies. The crisis also has demonstrated that the supervision of financial firms must
-4-
take account of systemic, or "macroprudential" risks as well as the more tradit1onal safety-andsoundness risks affecting individual firms.
The Federal Reserve currently serves as the consolidated supervisor of all bank holding
companies, including a number of the largest and most complex banking organizations and a
number of very large fmancial finns--such as Goldman Sachs, Morgan Stanley, and American
Express--that became a bank holding company during the financial crisis. The Federal Reserve
also took the lead in developing and implementing the Supervisory Capital Assessment Program
(SCAP) also knmvn as the stress test. This test, which was critical to restoring confidence in the
banking system, was a watershed event for modem macroprudential supervision and drew
heavily on the Federal Reserve's macroeconomic and markets expertise to model potential credit
losses and revenues at the large banking organizations participating in the SCAP. The expertise
gained from these activities, as well as the information and perspective that the Federal Reserve
has as a result of its central bank responsibilities, makes the Federal Reserve well suited to serve
as consolidated supervisor for all systemically important financial finns and to ensure that the
framework for consolidated supervision addresses both safety-and-soundn~ss risks at individual
institutions and macropmdential risks.
The Federal Reserve already is taking important steps to improve the supervision of
large, intercormected firms and to incorporate macroprudential considerations into our
supervision of financial firms. We believe these refom1s should significantly improve the
resilience of the financial system and help protect the American people and economy. For
example, working through the Basel Committee on Bank Supervision and the Financial Stability
Board, the Federal Reserve has played a key part in efforts to ensure that systemically critical
financial institutions hold more and higher-quality capital and employ more robust liquidity
management. The Federal Reserve also played a key role in international work to ensure that
banks use compensation structures that provide appropriate pcrfonnance and risk-taking
incentives. Domestically, it has taken the lead in addressing flawed compensation practices,
issuing proposed guidance that would require banking organizations to review their
compensation practices to ensure that they do not encourage excessive risk-taking, are subject to
effective controls and risk management, and are supported by strong corporate governance,
including oversight by their boards of directors.
In the fall of2008, the Federal Reserve updated its guidance on consolidated supervision,
reaffirming the importance of such supervision, particularly for large complex firms, and
emphasizing the importance of bringing a macroprudential perspective, as well as an individualinstitution safety-and-soundness perspective, to consolidated supervision. Of considerable
importance, the Federal Reserve has taken steps to ensure that, when risk-management
shortcomings are identified, its supervisors hold managers accountable and make sure that
weaknesses receive proper attention at senior levels and are resolved promptly. This requires
routinely and promptly communicating important supervisory concerns to the highest levels of
bank management, including through more frequent involvement of senior bank managers and
boards of directors and senior Federal Reserve officials. This approach proved especially
efiective during the SCAP and in other circumstances when clear expectations for prompt
remediation were forcefully communicated to large banking organizations.
-5The Federal Reserve has also begun to make fundamental changes to its supervision and
regulation oflarge bank holding eompanies to include a macroprudential perspective, as well as
an individual-institution safety-and-soundness perspective, to supervision. For example, the
Federal Reserve is developing a program of enhanced quantitative surveillance of large bank
holding companies. Enhanced quantitative surveillance combines aggregate economic data,
firm-level market-based indicators, and supervisory infonnation to provide a fuller picture of the
financial condition of firms, the risks they face, and their potential effects on the broader system.
Examples of this approach are the indicative systemwide loss and pre-provision net revenue
estimates that were developed for the SCAP and used in the subsequent analysis of the Troubled
Asset Relief Program redemption requests, and the firm-specific loss and revenue estimates that
were developed by combining these systemwide estimates with supervisory information.
The Federal Reserve also is working with other domestic and international regulators and
market participants to overcome the collective action problems that often plague efforts to
strengthen market infrastructure. Since 2005, the Federal Reserve has been leading efforts by
market participants and domestic and international regulators to strengthen the infrastructure of
the credit derivatives and other over-the-counter derivatives markets. While further progress is
needed, without the progress that was achieved since 2005, the failures of major dealers and
defaults by some of the very largest nan1es traded in the credit derivatives markets surely would
have been far more disruptive than they were. Likewise, this year the Federal Reserve took the
lead in organizing a private-sector group that is developing recommendations for cooperative
measures to strengthen margin and settlement practices in the triparty repo markets.
Finally, the Federal Reserve also is making changes designed to fully employ its
expertise to effectively supervise large banking firms. The new supervisory framework will
better accommodate a macroprudential orientation that goes beyond the traditional focus on
individual institutions and better supports the identification and analysis of interconnected risks
and sources of financial contagion. The new approach will implement a more centralized
approach to the supervision of large, complex banks that are potentially systemically important.
Consumer protection is a looming issue that must be addressed in our efforts at reform.
\Vhat are your thoughts about the creation of a separate agency tasked with this mission?
If instead the Federal Reserve was granted greater responsibility over consumer
protection, how would you design and implement this new responsibility?
A strong argument for an independent consumer agency within the financial regulatory
structure is that it will focus single-mindcdly on consumer protection as its primary mission. The
argument is that the leadership of an agency with multiple functions may trade one off against
the other or, at times, be distracted by responsibilities in one area and less attentive to problems
in the other. A corollary of this basic point is that the agency would be more inclined to act to
deter use ofhannful financia1 products and, if properly structured and funded, may be less
susceptible to the sway of powerful industry influences.
We believe there are also advantages in maintaining consumer protection functions in the
same agency that provides safety and soundness supervision in that the two are linked both
substantively and practically. There are substantial efficiency and infom1ation advantages from
- 6having the two functions housed in the same agency. For example, risk assessments related to an
institution's management of consumer compliance functions are closely linked with other safety
and soundness risks, and factor in to assessments of bank management and financial, legal and
reputation risks. Furthermore, determinations that certain products or practices are "unfair and
deceptive" in some cases require an understanding of how products are priced, offered, and
marketed in an individual institution. This information is efficiently obtained through
supervisory monitoring and examinations.
Should Congress decide the Federal Reserve should retain responsibility in the consumer
protection area, we believe that the Federal Reserve has the expertise and is prepared to capably
perform these functions. Key elements of our program include r;ule writing, consumer testing
necessary to develop effective disclosures, supervision and enforcement of consumer protection
and fair lending laws, consumer complaint processing, research to support policy development
and understand regional differences, consumer education, and outreach to consumer and
community groups, industry and other experts to gain a broad range of perspectives.
In recent years, the Federal Reserve has taken a nurriber of important steps to strengthen
consumer protections through robust new rules for mortgages, credit cards, gift cards, student
loans, and overdraft protection programs, among other regulatory changes. In addition, we have
expanded our supervisory program to include on-site examinations of certain nonbank
subsidiaries of bank holding companies to assess their compliance with certain consumer
protection laws and regulations, and evaluation of consumer complaints about their transactions
with nonbank affiliates. This new program, announced in September 2009, promises to better
inform supervisors and rule writers about trends in consumer lending and potentially harmful
products or services being offered through nonbank lenders. We have also improved our
visibility and access for consumers by establishing a centralized call center, web site, and
800 telephone number for receiving consumer complaints.
We have increased staff resources to speed our response time for drafting new mles to
address emerging trends that may pose new risks for consumers. In addition, a new specialized
unit is working to identify and analyze trends in consumer financial services to provide early
warnings on emerging conswner problems for rule-writers and examiners. This will also allow
for more timely and useful communications to consumers and nonprofit support organizations.
During your first confirmation hearing in 2006, you stated that there would be greater
transparency at the Federal Rescn'c; how have you increased transparency since 2006 and
what are your plans to improve upon transparency if confirmed'!
The Federal Reserve has significantly enhanced transparency in a number of important

dimensions since 2006. On matters related to the conduct of monetary policy, the Federal
Reserve was already one of the most transparent central banks in the world prior to 2006. The
Federal Open Market Committee (FOMC) releases statements following every meeting that
provide a rationale for the policy decision along with the record of voting and explanations for
any dissents. In addition, detailed minutes of each FOMC meeting are made public three weeks
following each meeting. The minutes provide a great deal of information about the range of
- 7-
policymakers' views on the economic situation and outlook, and on their deliberations about the
appropriate stance of monetary policy.
Since 2006, we have taken another important step forward in this area by providing a
quarterly Summary of Economic Projections (SEP) of Board members and Reserve Bank
presidents. These projections and the accompanying summary analysis provide detailed
information regarding policymakers' views about the future path of economic growth, inflation,
and unemployment, including the long-run values of these variables assuming appropriate
monetary policy.
FOMC statements and minutes, the Summary of Economic Projections, and other related
information are conveniently available on the Board's website (see
http://mvw.federalreserve.gov/monetarypolicy/fomc.htm).
The Federal Reserve implemented a number of credit and liquidity programs during the
financial crisis to support the liquidity of key financial markets and institutions. We have taken a
number of steps to ensure appropriate transparency and accountability in operating these
programs.
The Board's weekly H.4.1 statistical release has been greatly expanded to provide a
wealth of information on the Federal Reserve's balance sheet and the various credit and liquidity
facilities. This release is closely watched in financial markets and by the public for nearly
real-time information on the evolution of the Federal Reserve's balance sheet (see
http://mvw. federalrescrve.gov/releases/h41 /).
The Federal Reserve has also developed a public website focused on its credit and
liquidity programs that provides background information on all the facilities, along with data on
the number and types of borrowers utilizing various facilities, and the types and value of
collateral pledged (see http://WVAv.federalreserve.gov/monetarypolicy/bst.htm). In addition, the
Federal Reserve produces a monthly report to Congress that provides more detailed infom1ation
on the full range of credit and liquidity programs implemented during the crisis. This report also
includes information on borrowing and collateral under all the facilities, detailed information on
the assets held in the Maiden Lane facilities and other special lending facilities, and quarterly
financial statements for the Federal Reserve System. The Federal Reserve has also issued
reports to Congress in fulfillment of section 129 of the Emergency Economic Stabilization Act of
2008. Furthermore, these reports provide detailed information on all of the programs that rely on
emergency lending authorities, including the Federal Reserve's assessment of the expected cost
to the Federal Reserve and the U.S. taxpayer of various Federal Reserve programs implemented
during the crisis. As oftoday, the Federal Reserve does not expect to sustain losses on any of the
credit and liquidity programs implemented during the crisis.
All of these reports are available on the Federal Reserve's public website (see
http://www.federalreserve.gov/monetarypolicy/bst_reports.htm).
To provide further transparency regarding the Federal Reserve's transactions with AIG,
we recently issued a request for a full GAO review of all aspects ofthe Federal Reserve's
- 8involvement with the extension of credit to AIG (see

http://www.federalreserve.gov/monetarypolicy/files/letter_aig_201 00119 .pdt).
The Federal Reserve has also been transparent about the management of its programs.
Various programs employ private sector firms as purchasing and settlement agents and to
perform other functions; the contracts for all of these vendor arrangements are available on the
website of the Federal Reserve Bank ofNew York (see
http://www.newyorkfed.org/aboutthefedlvendor information.html).
The Federal Reserve has also recently begun to publish detailed CUSIP-level data
regarding its holdings of Treasury, agency, and agency-backed mortgage-backed securities; these
data provide the public with precise information about the maturity and asset composition ofthe
Federal Reserve's securities holdings (see
http://www .newyorkfed. org/markets/soma/sysopen_ accho ldings.html ).
Recently, the Federal Reserve Bank ofNew York published a revised policy governing
the designation of primary dealers. An important motivation in issuing revised guidance in this
area was to make the process for becoming a primary dealer more transparent.
Looking ahead, the Federal Reserve will continue to examine ways that it can further
enhance transparency. As I have emphasized on many occasions, transparency is essential in
ensuring appropriate accountability to the Congress and the general public. Moreover,
transparency is a key principle of modern central banking and can enhance the effectiveness of
the central bank in achieving its macroeconomic objectives. We will continue to review all of
our disclosure policies to ensure that we are providing the greatest amount of information to the
public that is consistent with the Federal Reserve's statutory objectives of fostering maximum
employment and price stability.
?.OBERT P. CASEY, JR.
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IAiJOR, ,J.NO "ENSiJ'\S
United Statrs
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C"'WASHI'.;GTO">L JC 20510
SPC:C:;\L CC.\lMJJ:'EE ON ~GING
JOlt..( f ECO;<iOJ"itiC
January 20,2010
The l Ionorable Ben S. Bemanke

Chairman, Board of Govemors of the Federal Reserve System
Twentieth Street and Constitution Avenue, NW

In the coming vceks, the Senate will likely vote on your confirmation for a second term as
Chairman of the Board of Governors of the Federal Reserve System. In anticipation of your
reconfirmation, I have enclosed questions I would like you to address. The purpose of these
questions is to inform me of your opinion on what I see to be the pressing economic issues facing
the Federal Reserve and the broader economy.
The Federal Reserve is responsible for monetary policies key to health of our economy. A
critical aspect of this responsibility is the ability to identify and act when the economy is
imbalanced due to speculation and hyper-growth. Looking back over your first term, how could
the Federal Reserve have intervened more effectively to slow the housing bubble and credit glut
that Jed to the economic dov.ntum? Specifically, based on the lessons learned from the
residential housing crisis, how would you enhance the capability to more accurately identify
emerging troubled industries and markets'?
In the future, you will be faced with critical decisions about shifting the Federal Reserve's
monetary policies with emerging economic grovvth. Looking at the lessons of past recessions,
these decisions are oftentimes difficult and tmpopular. Specifically, you will be faced with the
dift1cult decision regarding the appropriate time to raise interest rates. What indicators are you
reviewing in detennining whdher to raise interest rates?
Lastly, as Congress contemplates making necessary reforms to the financial system to modernize
the regulatory system and avoid the pitfalls of this recession, the Federal Reserve is certain to
play a significant role. I have a number of questions on the role of the Federal Reserve:
The Federal Reserve has advocated for increased powers, including but not limited to
greater resolution authority and a prominent place as the lead regulator in a proposed
counsel of regulators. lf granted such authority, what refonns would you institute at the
Federal Reserve that would better assist the American people?
Consumer protection is a looming issue that must be addressed in our efforts at reform.
What are your thoughts about the creation of a separate agency tasked with this mission?
If instead the Federal Reserve was granted greater responsibility over consumer
protection, how would you design and implement this new responsibility?
During your first confirmation hearing in 2006, you stated that there would be greater
transparency at the Federal Reserve; how have you increased transparency since 2006
and what are your plans to improve upon transparency if confirmed?
In closing, I would like to commend you for your fine service during these difficult times. I am
certain that your knowledge and expertise have served the Federal Reserve and our country welL
That said, significant work remains ahead in promoting economic growth and future vitality. 1
am eager to learn more about your plans tor leading U1e Federal Reserve in a second tenn. r look
forward to your response.
Sincerely,
{/}1)1._ ~ ~'
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Robert P. Casey, Jr.

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JtA1'IlNE SHAHEEN
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United ~tares ~rnatc

WASHINGTON, DC 20510
February 3, 2010
The Honorable f3en S. l3ernanke
Chairman
20th Street and Constitution Avenue NW
lam writing to follow up on our telephone conversation last week because
my decision to vote for your confirmation was in p(lrt based on your assurances that
you support strong financial regulatory reform and greater transparency of Federal
Reserve actions ~mel that you consider the continuing high levels of unemployment
to be unacceptable.
I believe it is essential that we enact comprehensive regulatory reform that
prevents the irresponsible risk taking that brought11s to the brink of a worldwide
financial collapse, a collapse avoided only because of the unprecedented financing
made available by the Federal Reserve and the Treasury to Wall Street firms
deemed "too big to fail." As 1am sure you arc avvare, the big banks are engaged in a
full-court effort to weaken, if not completely derail, reform legislation. The path to
regulatory reform becomes even more diftlcult vvhen existing regulatory agencies
balk at provisions that would shift jurisdiction away from them to other agencies. I
trust, based on our convcrs<Jtion, that you will not place the institutional
prerogatives of the FedcrJI Reserve over what is in the best interests of taxpayers
and consumers during the Congressional deliberations over regulatory reform and,
that under your leadership, the Federal Reserve will usc all the tools it has to
contain irresponsible risk taking and protect taxpayers.
Consumer and small business confidence will not be at the levels needed for
sustained economic growth in this country so long as people believe federal
agencies care more about Wall Street firms than they do about them. The l<1ck of
transparency in the actions the Federal Hcserve took in 2008 to help rescue entities
deemed "too big to fail" has contributed to the mistrust so many Americans have
today. Actions that the Fcderal!<cscrvc took to prop up Wall Street firms should be
subject to full disclosure. This can be done without compromising the f-ederal
Reserve's independence in setting monetary policy; indeed, if it can't, that spet~ks to

shifting the Federal Reserve's responsibilities for anything but monetary policy to
other agencies, rather than to maintaining a cloak of secrecy. Based on our
converst~tion, I believe you understand the need for greater transparency of Federal
Reserve actions.
I respect the need for you and other members of the Federal Reserve Board
to make decisions on monetary policy independent of political influence. I did not
and do not expect you to make commitments with respect to interest rates and
money supply, but it was reassuring to me that you agreed that the continuing high
levels of unemployment we are experiencing are not acceptable.
ln voting last week to confirm you as Chairman of the Federal Reserve, land
a bipartisan majority of Senators placed great trust in your future ste'Yvardship. I am
hopeful that your new term as Chairman will be one that restores public confidence
in our financial system.
Sincerely,
~!~-
{_,../
Jeanne Shaheen
United States SeJntor
Questions for the Hearing on "Strengthening and Streamlining Prudential Bank

Supervision"
August 4, 2009
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Questions for The Honorable Daniel Tarullo, Governor, Board of Governors Of'!he ~f!al
Reserve Svstem. from Senator Bunning:
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1.
What is the best way to decrease concentration in the banking industry? Is it f#.c ~~
limitations, rolling back state pre-emption, higher capital requirements, or something~e?
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2.
Treasury has proposed making the new banking regulator a bureau of the Treasury
Department. Putting aside whether we should merge the current regulators, does placing the new
regulator in Treasury rather than as a separate agency provide enough independence from
political influence?
3.
Given the damage caused by widespread use of subprimc and non-traditional mortgagesparticularly low documentation mortgages- it seems that products that are hannful to the
consumer arc also hannful to the banks that sell them. If bank regulators do their job and stop
banks from selling products that are dangerous to the banks themselves, other than to set
standards for currently unregulated fim1s, why do \Vc need a separate consumer protection
agency?
4.
Since the two most recent banking meltdowns were caused by mortgage lending, do you
think it is wise to have a charter focused on mortgage lending? In other words, why should we
have a thrift charter?
5.
Should banking regulators continue to be funded by fees on the regulated firms, or is
there a better way?
6.
Why should we have a different regulator for holding companies than for the banks
themselves?
7.
Assuming we keep thrifts and thrift holding companies, should thrift holding companies
be regulated by the same regulator as bank holding companies?
8.
The proposed risk council is separate from the normal safety and soundness regulator of
banks and other finns. The idea is that the council will set rules that the other regulators will

Supervision"
August 4, 2009
enforce. That sounds a lot like the current system we have today, where different regulators read
and enforce the same rules different ways. Under such a council, how would you make sure the
rules were being enforced the same across the board?
BOARD OF GOVERNORS
Of THE
FEO ERAL RESERVE SYSTEM

February 17,2010
The Honorable Jim Bunning

Dear Senator:
I enclose my responses to the questions you submitted in connection with the
August 4, 2009, hearing on "Strengthening and Streamlining Prudential Bank

Supervision." I apologize for the delay in transmitting these responses. I have instructed
Board staff that, when written questions are directed to me following a hearing, I want to
review a copy of the question(s) immediately, so that I can be sure to send a prompt
response. A copy of my responses has been forwarded to the Chief Clerk of the
Sincerely,
Enclosure
(400, 09-10794)
BOARD OF GOVERNORS
OF THE

WASHINGTON, 0. C. 20SSI
DANIEl K, iARULLD
M Et-1B~R
Of THE
SOA~O
february 17,2010
The Honorable Jim Burming

Dear Senator:
I enclose my responses to the questions you submitted in connection with the
August 4, 2009, hearing on "Strengthening and Streamlining Prudential Bank
Supervision." I apologize for the delay in transmitting these responses. I have instructed
Board statT that, vvhen written questions are directed to me following a hearing, I want to
review a copy of the question(s) immediately, so that I can be sure to send a prompt
response A copy of my responses has been forvvarcled to the Chief Clerk of the
Sincerely,
Enclosure

Super-vision"
1. What is the best way to decrease concentration in the banking industry? Is it

size limitations, rolling back state pre-emption, higher capital requirements, or
something else?
The banking industry is already subject to antitrust law. For example, the Federal Reserve
Board is instructed by the Bank Holding Company to determine, in consultation with the
Department of Justice, whether a proposed acquisition or merger involving a holding
company "may ... substantially ... lesscn competition, or ... tend to create <1 monopoly, or
... in any other manner would be in restraint of trade.'' 12 U.S.C. l842(c) Other bank
regulatory agencies must apply the same standard in considering transactions under the
Bank Merger Act, 12 U.S.C. 1828(c), and the Change in Bank Control Act, 12 U.S.C.
l817(j). The agencies have the authority to disallow a transaction that would violate
this standard.
The concerns with financial industry concentration voiced in [he aftermath of the
financial crisis have been directed less at traditional competition considerations and more
at the possible implications of concentration for systemic risk generally, and too-big-tofail concerns in particular. Each of the various legislative proposals to address the
systemic implications of size, concentration, or interconnectedness in the financial
industry should be evaluated with an eye to its likely efficacy in containing systemic risk,
the costs it might entail for credit availability and capital investment, and its
adrninistrability. Apart from possible statutory changes, banking agencies are considering
proposals to create a special charge on finm based on their systemic importance. This
idea has substantial conceptual appeal. If well calibrated, such an approach could help
promote internalization of the potential systemic risks associated with a firm, and thus
offset those risks to some degree. A number of thoughtful proposals along these lines are
being discussed, though each presents considerable challenges in the transition from good
idea to fully elaborated regulatory mechanism.
2. Treasury has proposed making the new banking regulator a bureau of the
Treasury Department. Putting aside whether we should merge the current
regulator, does placing tl1e new regulator in Treasury rather than as a separate
agency provide enough independence from political influence?
H.R. 417 3 as adopted by the House of Representatives docs not change the legal status of
the current regulator of national banks, the Office of the Comptroller of the Currency, as
a bureau of the Department of the Treasury. The legislation would transfer to the OCC
the functions of the Office of Thrift Supervision (other than functions with respect to
savings and loan holding companies and their non-savings association affiliates which
would be transferred to the Federal Reserve). The Comptroller is appointed by the
President with the advice and consent of the U.S. Senate for a five year term. Although
the President may remove the Comptroller from office, the President musr communicate
-2his reasons for doing so to the Senate. Moreover, various statutory provisions are
intended to give the Comptroller independence from political inf1uence, such as the
prohibition upon the Secretary ofT reasury delaying or preventing the issuance of any
rule or regulation by the Comptroller.
3. Given the damage caused by widespread use of subprime and non-traditional
mortgagesparticularly low documentation mortgages- it seems that products
that are harmful to the consumer are also harmful to the banks that sell them. If
bank regulators do their job and stop banks from selling products that are
dangerous to the banks themselves, other than to set standards for currently
unregulated firms, why do we need a separate consumer protection agency'!
It is indeed the case that many poorly underwritten subprime mortgages over the last
decade were both bad for consumers and imprudent for the fim1s that made those loans,
or bad investments for those who bought the loans from the originating institutions.
However, there arc many other practices associated v:ith the extension of credit that may
be unfair or deceptive for consumers, but that arc not particularly risky for the origjnating
institution. Thus, \Vhether housed in an independent agency -- as some have proposed or located \\ithin banking regulators- as under current law-- it is important that there be
a particularized focus on consumer protection. At the Federal Reserve, a separate
Division of Consumer and Community Affairs (CCA) promulgates regulations
implementing consumer protection laws. This organization is meant to ensure that the
consumer protections enacted by Congress are not subordinated to safety and soundness
concerns. At the same time, through interaction \;>,'ith the Division of Supervision and
Regulation, CCA can bring to the attention of prudential supervisors practices that may
begin as consumer problems, but can evolve into safety and soundness problems.
4. Since the two most recent banking meltdowns were caused by mortgage lending,
do you think it is wise to have a charter focused on mortgage lending? In other
words, why sho~1ld we have a thrift charter?
The business of a savings association is fundamentally a banking business, albeit focused
on certain sectors of the market. \\'hether to offer a specialized charter for an institution
that conducts only this type of business is a policy question for the Congress to decide. If
Congress determines to retain the thrift charter, the rules applicable to, and the
supervision of, a savings association and any holding company parent should be
structured so as to assure safe and sound operation of the regulated entities and provide a
level playing field with banks and bank holding companies.
5.
Should banking regulators continue to he funded by fees on regulated firms or

is there a better way?
Whether banking regulators should be funded through the imposition of fees on regulated
firms is a question that is the subject of serious debate. On one hand, some have worried
that a supervisory authority funded through fees can be more susceptible to capture by the
fim1s it super:ises, especially when a bank has a choice among chartering authorities.
Such critics fear that the authority might be more lenient in bad times or reduce fees in
good times, possibly reducing supervisory resources which might be needed to address
future problems. On the other hand, unless the authority has other sources of funds with
which to finance its supervisory activities (as do the Federal Reserve and the FDIC), the
only alternative to fee-based financing is for taxpayers to foot the bill. A taxpayerfinanced system also has drawbacks. Funding for supervision might not keep pace with
greater demands placed on the supervisors by industry growth and complexity.
6. Why should we have a different regulator for holding companies than for the
banks themselves?
7. Assuming we keep thrifts and thrift holding companies, should thrift holding
companies be regulated by the same regulator as bank holding companies?
Effective supervision and regulation of insured depository institutions is essential to
ensure they can operate in a safe and sound manner while meeting the needs of their local
communities. Applicable regulations must be well-designed to promote the safety a_nd
soundness of the insured depository institution. Recent experience reinforces the value of
holding company supervision in addition to, and distinct from, bank supervision. The
task of holding company supervision involves an examination of the relationships
betvveen the bank and its affiliates as well as an evaluation of risks associated with those
nonbank affiliates. Consolidated capital requirements play a key role by helping ensure
that a holding company maintains adequate capital to support its group-wide activities
and does not become excessively leveraged.
When a hank holding company is essentially a shell, with negligible activities or
ownership stakes outside the bank itself, holding company regulation can be modest in
scope. But when material activities or funding arc conducted at the holding company
level, or when the parent owns nonbank entities, closer scrutiny is necessary to protect
the bank from both the direct and indirect risks of such activities or affiliations. Analysis
performed by primary bank supervisors is an essential input into bank holding company
supervision. However, large complex banking organizations increa..;;ingly operate and
manage their businesses on an integrated basis with little regard for legal structure or
supervisory jurisdictions. l\1orcovcr, the holding company's non-bank affiliates engage in
activities that raise risks very different from those that arise in traditional bank lending.
The Federal Reserve, as consolidated supervisor for all bank holding companies, has
expertise in evaluating nonbank risks and the inter-relationships between such activities
and affiliated depository institutions.
As vvas demonstrated in the recent crisis, systemic risk can arise wholly outside of
insured depository institutions. The need for greater att.ention to the potential for damage
to the bank and, in some cases, the financial system generally, requires a comprehensive
and integrated assessment of activities throughout the holding company. Appropriate
enhancements of both prudential and consolidated supervision will increase the need for
supenisors to be able to draw on a broad foundation of economic and financial
knowledge and experience.
-4-
These principles should apply equally to holding companies that own banks and those
that own savings associations.
8. The proposed risk council is separate from the normal safety and soundness
regulator of banks and other firms. The idea is that the council will set rules that
the other regulators will enforce. That sounds a lot like the current system we have
today, where different regulators read and enforce the same rules different ways.
Under such a council, how would you make sure the rules were being enforced
across the board?
For purposes of both effectiveness and accountability, the consolidated supervision of an

individual finn, whether or not it is systemically important, is best vested with a single
agency. However, the broader task of monitoring and addressing systemic risks that
might arise from the interaction of different types of financial institutions and markets-both regulated and unregulated--may exceed the capacity of any individual supervisor.
Instead, vve should seek to marshal the collective expertise and infonnation of all
financial supervisors to identify and respond to developments that threaten the stability of
the system as a whole. This objective can be accomplished by modifying the regulatory
architecture in hvo important \vays.
First, an oversight council--composed of representatives of the agencies and departments
involved in the oversight of the financial sector--should be established to monitor and
identify emerging systemic risks across the full range of financial institutions and
markets. Examples of such potential risks include rising and correlated risk exposures
across firms and markets; significant increases in leverage that could result in systemic
fragility; and gaps in regulatory coverage that arise in the course of financial change and
innovation, including the development of new practices, products, and institutions. A
council could also play useful roles in coordinating responses by member agencies to
mitigate emerging systemic risks, in recommending actions to reduce procyciicahty in
regulatory and supervisory practices, and in identifying financial firms that may deserve
designation as systemically important. To fulfill its responsibilities, a council would need
access to a broad range of information from its member agencies regarding the
institutions and markets they supervise and, when the necessary information is not
available through that source, the authority to collect such information directly from
financial institutions and markets.
Second, the Congress should support a reorientation of individual agency mandates to
include not only the responsibility to oversee the individual firms or markets within each
agency's scope of authority, but also the responsibility to try to identify and respond to
the risks those entities may pose, either individually or through their interactions with
other fin11S or markets, to the financial system more broadly. These actions could be
taken by financial supervisors on their own initiative or based on a request or
recommendation of the oversight council. Importantly, each supervisor's participation in
the oversight council would greatly strengthen that supervisor's ability to see and
understand emerging risks to financial stability. At the same time, this type of approach
vvould vest the a.gency that has responsibility and accountability for the relevant finns or
-5markets with the authority for developing and implementing effective and tailored
responses to systemic threats arising \vithin their purview. To maximize effectiveness, the
oversight council could help coordinate responses when risks cross regulatory
boundaries, which often will be the case. 1
See Chairman Bemanke, "Regulatory Refonn," testimony before the Committee on Financial Services,
US House of Representatives, October l, 2009, Governor Tarullo, 'Regulatory Refonn," testimony before
the Committee on Financial Services, U.S. House of Representatives, October 29, 2009.
April 9, 2010
The Honorable Ben Bernanke
Chainnan
Board of Govemors of
the Federal Reserve System
20 111 Street & Constitution Ave, NW
Thank you for agreeing to testify at a hearing of the Joint Economic Committee trf=
be held at 10:00 A.M. on Wednesday, April 1-1, 2010, entitled ''The Economic
Outlook." The hearing will be held in room l 06 of the Dirksen Senate Office Building.
At this hearing, the Committee will examine the outlook for economic growth,
employment and int1ation as well as the Federal Reserve's continuing efforts to stabilize
the economy. The Committee would appreciate your evaluation of the macroeconomic
outlook through 2010, as well as the longer term outlook. Your appraisal of the strengths
and weaknesses in U.S. economic conditions would be welcome, along with your view of
uncertainties in the outlook. The Committee is interested in your views on costs and
benefits in engaging in further monetary stimulus, given low inflationary expectations.
weak bank lending, and the consensus view that the economy will continue to operate
well below its potential for some time. The Committee has been focused on solutions to
the large number of \Yorkers who have been unemployed for a long period of time and
whether additional monetary policy or targeted fiscal policy would be warranted to
reduce the rolls of the long-term unemployed during the expansion.
Committee members are also interested in the potential impact of the Fed's
withdrawal from purchases of mortgage-backed securities and GSE debt on the housing
market and mortgage interest rates. ln particular, they are interested in finding out
whether the Fed plans on selling those assets back in to the market to reduce the Fed's
balance sheet, which indicators the Fed used to determine that its \Vithdrawal from this
market was warranted, and what data the Fed will use -such as an expansion of the gap
bel ween l 0 year Treasury rates and mortgage interest rates- to determine whether future
purchases are necessary to stabilize the housing market.
Committee members are interested to hear your views about on-going efforts to
refom1 regulation of financial markets and the potential for those rcfonns to prevent
future financial market instability. In addition, committee members will be especially
interested in the potential financial contagion effects from the on-going sovereign debt
crisis in Greece.
Please e-mail a copy of your prepared testimony, which should take no longer than
I 0 minutes to deliver orally, along with any supplementary materials to the committee
by close of business on Tuesday, April 13, 2010. The material you provide will be
entered into the record in its entirety and disseminated to Committee Members and staff
before the hearing. Additionally, it will be distributed to the news media on the day of
the hearing. Pkase have l 00 copies of your testimony delivered to Dirksen G-0 l an
hour before the hearing.
The Committee's contact is Gail Cohen, Deputy Staff Director and Chief
Economist, who can be reached at gail cohen0'jcc.senate.ov or by phone at (202)2280717 or (202)631-1179. I look forward to your testimony.
Sincerely,
Carolyn B. Maloney
Chair
For release on delivery

10:00 a.m. EDT
April 14,2010
Statement by
Ben S. Bcrnanke
Chainnan
Board of Governors of the federal Reserve System
before the
Joint Economic Committee
U.S. Congress
Aprill4, 2010
Chair Maloney, Vice Chainnan Schumer, Ranking Members Brownback and Brady, and
other members of the Committee, I am pleased to be here today to discuss economic and
financial developments. l will also make a fC\v remarks on the fiscal situation.
The Economic Outlook

Supported by stimulative monetary and fiscal policies and the concerted efforts of
policymakers to stabilize the financial system, a recovery in economic activity appears to have
begun in the second half of last year. An important impetus to the expansion \vas finns' success
in working down the excess inventories that had built up during the contraction, which left
companies more willing to expand production. Indeed, the boost from the slovver drawdown in
inventories accounted for the majority of the sharp rise in real gross domestic product (GDP) in
the fourth quarter of last year, during which real GDP increased at an annual rate of 5.6 percent.
With inventories now much better aligned with final sales, however, and with the support from
fiscal policy set to diminish in the coming year, further economic expansion will depend on
continued growth in private final demand.
On balance, the incoming data suggest that grow1h in private final demand will be
sutlicient to promote a moderate economic recovery in coming quarters. Consumer spending
continued to increase in the first two months of this year and has now risen at an annual rate of
about 2-1/2 percent in real tcnns since the middle of2009. ln particular, after slowing in January
and February, sales of new light motor vehicles bounced back in March as manufacturers offered
a new round of incentives. Going forward, consumer spending should be aided by a gradual
pickup in jobs and earnings, the recovery in household wealth from recent lows, and some
improvement in credit availability.
- 2In the business sector, capital spending on equipment and software appears to have
increased at a solid pace again in the first quarter. U.S. manufacturing output. which is
benefiting fiom stronger export demand as well as the inventory adjustment I noted earlier, rose
at an annual rate of 8 percent during the eight months ending in february. Also, as I will discuss
tl1rther in a moment financial conditions continue to strengthen, thus reducing an important
headwind for the economy.
To be sure, significant restraints on the pace of the recovery remain, including \Veakncss
in both residential and nonresidential construction and the poor fiscal condition of many state
and local governments. Sales of new and existing homes dropped back in January and February,
and the pace of new single-family housing starts has changed little since the middle oflast year.
Outlays for nonresidential construction continue to contract amid rising vacancy rates, falling
property prices, and difticulties in obtaining financing. Pressures on state and local budgets,
though tempered by ongoing federal support, have led to continuing declines in employment and
construction spending by state and local governments.
As you know, the labor market was particularly hard hit by the recession. Recently, we
have seen some encouraging signs that layoffs are slowing and that employment has tumed up.
Manufacturing employment increased for a third month in March, and the number of temporary
jobs--often a precursor of more permanent employment--has been rising since last October. New
claims for unemployment insurance continue on a generally dO\:mward trend. However, if the
pace of recovery is moderate, as I expect, a significant amount of time
\Viii
be required to restore
the 8-1/2 million jobs that were lost during the past two years. I am particularly concerned about
the fact that, in March, 44 percent of the unemployed had been without a job for six months or
more. Long periods without work erode individuals skills and hurt future employment
- .., _)
prospects. Younger workers may be par1icularly adversely affected if a weak labor market
prevents them from finding a first job or from gaining important work experience.
On the inflation front, recent data continue to show a subdued rate of increase in
consumer prices. For the three months ended in February, prices for personal consumption
expenditures rose at an annual rate of J -1/4 percent despite a further steep run-up in energy
prices; core inflation, which excludes prices of food and energy, slowed to an aruma! rate of 1/2
percent. The moderation in inflation has been broadly based, affecting most categories of goods
and services with the principal exception of some globally traded commodities and materials,
including crude oil. Long-run inflation expectations appear stable; for example, expected
inflation over the next 5 to 10 years, as measured by the Thomson Reuters/University of
Michigan Surveys of Consumers was 2-3/4 percent in March, \vhich is at the lower end of the
narrow range that has prevailed for the past few years.
Financial Market Developments
Financial markets have improved considerably since I last testifled before this Committee
in May oflast year. Conditions in short-tem1 credit markets have continued to normalize;
spreads in bank funding markets and the commercial paper market have returned to near precrisis levels. In light of these improvements, the federal Reserve has largely wound down the
extraordinary liquidity programs that it created to support financial markets during the crisis.
The only remaining program, apart from the discount window, is the Term Asset-Backed
Securities Loan Facility for loans backed by new-issue commercial mmigage-backed securities,
and that facility is scheduled to close at the end of June. Overall, the Federal Reserve's liquidity
programs appear to have made a significant contribution to the stabilization of the financial
system, and they did so at no cost to taxpayers and with no credit losses.
-4-
The Federal Reserve also recently completed its purchases of $1.25 trillion of federal
agency mortgage-backed securities and about $I 75 billion of agency debt. Purchases under
these programs were phased down gradually, and to date, the transition in markets has been
relatively smooth. The Federal Reserve's asset-purchase program appears to have improved
market functioning and reduced interest-rate spreads not only in the mortgage market but in other
longer-term debt markets as well.
On net, the financial condition ofbanking finns has strengthened markedly during recent
quarters. Last spring, the Federal Reserve and other banking regulators evaluated the nation's
largest bank holding companies under the Supervisory Capital Assessment Program, popularly
known as the stress test, to ensure that they would have sufficient capital to remain viable and to
lend to creditworthy borrowers even in a worse-than-expected economic scenario. 1 The release
of the stress test results significantly increased market confidence in the banking system. Greater
investor confidence in turn allowed the banks to raise substantial amounts of new equity capital
and, in many cases, to repay government capital. The Federal Reserve and other bank regulators
continue to encourage the banks to build up their capitaL ensure that they have adequate
liquidity, improve their risk management, and restructure their employee compensation programs
to better align risk and rc\vard.
Despite their stronger financial positions, banks' lending to both households and
businesses has continued to fall. The decline in large part reflects sluggish loan demand and the
fact that many potential borrowers no longer qualify for credit, both results of a weak economy.
1
For more on the SCAP. see Ben S. Bcmanke (2009), "The Supervisory Capital Assessment Program," speech
delivered at the Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, Jekylllsland. Ga., May l I.
www.federalreserve.gov/newsevents/spcech/bemanke200905ll a.htm; Board of Governors of the Federal Reserve
System (2009), "Federal Reserve, OCC, and FDIC release results ofthe Supervisory Capital Assessment Program,"
press release. May 7, www.federalreserve.gov/newseventsipress/bcreg/20090507a.htm; and Daniel K. Tarullo
(20 10), "Lessons from the Crisis Stress Tests: speech delivered at the Federal Reserve Board International
Research Forum on Monetary Policy, Washington, March 26,
www. federalreserve.gov/newsevents/speech/taru IJo20 l 00326a.htm.
-5The high rate of write-downs has also reduced the quantity of loans on banks books. Banks
have also been conservative in their lending policies, imposing tough lending standards and
tenns; this caution re1ects bankers" concerns about the economic outlook and uncertainty about
their own future losses and capital positions.
The Federal Reserve has been working to ensure that our bank supervision does not
inadvertently impede sound lending and thus slow the recovery. Achieving the appropriate
balance between necessary prudence and the need to continue making sound loans to
creditworthy borrowers is in the interest of banks, bonowers, and the economy as a whole.
Toward this end, in cooperation with the other banking regulators, -vve have issued policy
statements to bankers and examiners emphasizing the importance of lending to creditworthy
customers, working \Vith troubled borrowers to restructure loans, managing commercial real
estate exposures appropriately, and taking a careful hut balanced approach to small business
lcnding. 2 We have accompanied our guidance with training programs for both Federal Reserve
and state examiners, and with outreach to bankers throughout the industry. For example, we just
completed a training initiative that reached about 1,000 examiners. We are also conducting a
series of meetings across the country with private- and public-sector partners to gather
infonnation about the credit needs of small businesses and how those needs can best be met.
See Board ofGovemors of the Federal Reserve System. Federal Deposit Insurance Corporation, Office of the
Comptroller of the Currency, and Oftlce of Thrift Supervision (2008), 'Interagency Statement on Meeting the Needs
of Creditworthy Borrowers," joint press release, November 12,
www.federalreserve.gov/newsevents/prcss/bcreg/2008lll2a.htrn: Board of Govemors of the Federal Reserve
System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of
the Currency, Office ofThrift Supervision, and Conference of State Bank Supervisors (2010), "Regulators Issue
Statement on Lending to Creditworthy Small Businesses," joint press release, February 5,
www.tederalreserve.gov/newsevents/press/bcreg/20 100205a.htm; Board of Governors of the Federal Reserve
System, Division of Banking Supervision and Regulation (2009), "Prudent Commercial Real Estate Loan
Workouts,'' Supervision and Regulation Letter SR 09-7 (October 30),
www. federalreserve.gov!boarddocs/srletters/2009/SR0907 .htm; and Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation, Federal Reserve Board. Federal Financial Institutions Examination Council
and Office of Thrift Supervision (2009), ''Policy Statement on Prudent Commercial Real Estate Loan Workouts,"
joint policy statement, October 30, ww\v.fedcralrcserve.gov/boarddocs/srletters/2009/sr0907a l.pdf.
- 6-
We have also stepped up our information gathering, so that we can better understand
factors that may be inhibiting bank lending. These efforts include a survey by examiners of
banks' practices in working out loans, the results of vvhich will serve as a baseline against which
\Ve \Viii assess the effectiveness of our supervisory guidance. We are also obtaining additional
information on small business credit conditions. For example, we assisted the National
Federation oflndependent Business in developing a survey to assess barriers to credit access by
small businesses. 3 And we are using our own Senior Loan Officer Opinion Survey on Bank
Lending Practices to monitor changes in bank lending to small businesses.
Fiscal Policy
In addition to the near-term challenge of f()stering improved economic perfonnance and
stronger labor markets, we as a nation face the difficult but essential task of achieving longertenn sustainability ofthe nation's fiscal position. The federal budget deficit is on track this year
to be nearly as wide as the $1.4 trillion gap recorded in fiscal year 2009. To an important extent,
these extremely large deficits are the result of the effects of the weak economy on revenues and
outlays, along with the necessary actions that \Vere taken to counter the recession and restore
financial stability. But an important part of the deficit appears to be structural; that is, it is
expected to remain even atter economic and financial conditions have returned to nonnal.
In particular, the Administration and the Congressional Budget Office (CBO) project that
the deficit will recede somewhat over the next two years as the temporary stimulus measures
wind down and as economic recovery leads to higher revenues. Thereafter, however, the annual
deficit is expected to remain high through 2020. in the neighborhood of 4 to 5 percent of GDP.
' See William J. Dennis (20 I 0). ''Small Business Credit in a Deep Recession," National Federation of Small
Business Research Foundation (Washini:,'10n: NFIB. February), available at www.nfib.com/RescarchFoundation.
4
See Board ofGovemors of the Federal Reserve System, "Senior Loan Officer Opinion Survey on Bank Lending
Practices." webpage, www. federalrcscrvc.gov /boarddocs/Sn Loan Survey.
-7Deficits at that level would lead the ratio of federal debt held by the public to the GDP, already
expected to be greater than 70 percent at the end of fiscal 2012, to rise considerably further. This
baseline projection assumes that most discretionary spending grovvs more slowly than nominal
GDP, that no expiring tax cuts are extended, and that current provisions that provide most
taxpayers relief from the alternative minimum tax are not further extended. Under an alternative
scenario that drops those assumptions, the deficit at the end of2020 would be 9 percent ofGDP
and the federal debt would balloon to more than 100 percent ofGDP.
Although sizable deficits are unavoidable in the near term, maintaining the confidence of
the public and financial markets requires that policymakers move decisively to set the federal
budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal sustainability
could yield substantial near-term benefits in tern1s of lower long-term interest rates and increased
consumer and business confidence. Timely attention to these issues is important, not only for
maintaining credibility, but because budgetary changes are less likely to create hardship or
dislocations when the individuals affected are given adequate time to plan and adjust. In other
words, addressing the country's fiscal problems will require difficult choices, but postponing
them will only make them more difficult.
Thank you. I would be pleased to take your questions.
These figures have been calculated by the Federal Reserve using the CBO's estimates of the budgetary effects of
selected policy alternatives to adjust the CEO's baseline budget projection released in a recent report (see
Congressional Budget Office (20 l 0), The BuJget anJ Economic Our look. Fiscal Years 2010 to 2020 (Washington:
CBO, January), also available at www.cbo.gov/ftpdocs/1 08xx/doc l 0871 /frontmaner.shtml). The specific alternative
policies used in these calculations included the CEO's estimates of the effects of reducing troop levels in overseas
military operations to 60,000 by 2015, increasing regular discretionary appropriations at the rate of growth of
nominal GOP, extending all expiring tax provisions. and indexing the alternative minimum tax for inflation.
30ARO OF GOVERNORS
OF THE

V/AS:-iL't:::;TON. D
2:JSSI
8N S. SSRNANK
CH..:..lRMAN
Aprill5,2010
The I Ionorable Jim Bunning

Dear Senator:
Enclosed arc my responses to the writte.n questions you submitted following the
February 25, 2010, hearing before the Committee on Banking. Housing and Urban
Affairs. i\ copy has also been fonvardcd to the Committee for inclusion in the hearing
record.
Sincerely,
Enclosure
Reserve Svstcm, from Senator Bunning:
1. Treasury recently announced they '''ere starting up the Supplemental Financing
Program again. Under that Program, Treasury issues debt and deposits the cash with the
Fed. That is effectively the same thing as the Fed issuing its own debt, which is not allowed.
What are the legal grounds the Fed and Treasury usc to justify that program? And did
anyone in the Fed or Treasury raise objections when the program was created?
Section 15 of the Federal Reserve Act requires the Federal Reserve to act as fiscal agent for the
United States and authorizes the Treasury to deposit money held in the general fund of the
Treasury in the Federal Reserve Banks. Balances held by the Reserve Banks in the Treasury's
Supplementary Financing Account (SF A) arc deposited and held under this authority. Although
the Treasury and the Federal Reserve have consulted closely on matters regarding the
Supplemental Financing Program (SFP), the Treasury makes all decisions on balances to be held
in the SF!\.
I am not <:\ware of any staff member or policymakcr raising legal objections to the creation of the
SFP. I Iovve\ocr, at least one Federal Reserve policymaker has publicly expressed policy concerns
with the SFP. Sec Real Time Economics, WSJ Blogs, "Q&A: Philly Fed's Plosser Takes on
'Extended Period' Language,'' March 1, 2010.
2. Given what you learned during the AIG crisis and bailout, do you think Congress
should be doing something to address insurance regulation or the commercial paper
market?
The financial crisis bas made clear that all financial institutions that arc so large and
interconnected their failure could threaten the stability of the financial system and the economy
must be subject to consolidated supervision. Lack of strong consolidated supervision of
systemically critical firms not organized as txmk holding companies. such as AIG, proved to be
a serious regulatory gap. The Federal Reserve strongly supports ongoing efforts in the Congress
to refonn financial regulation and close existing gaps in the regulatory framework.
An effective framework for financial supervision and regulation also must address
macroprudential risks--thGt is, risks to the financial system as a whole. The disruptions in the
commercial paper market following the failure of Lehman Brothers on September 15, 2008 and
the breaking of the buck by a large money fund the follov,ing day are examples of such
macroprudential risks.
Legislative proposals in both the House and Senate would also improve the exchange of
information and the cross-fertilization of ideas by creating an oversight council composed of
representatives of the agencies and depm1ments involved in the oversight ofthe financial sector
that would be responsible for monitoring and identifying emerging systemic risks across the full
range of flnancial institutions and markets. The council \Vould have the ability to coordinate
responses by member agencies to mitigate identified threats to financial stability and,
importantly, would have the authority to recommend that its member agencies, either
- 2-
individually or collectively, adopt heightened prudential standards for the firms under the
agencies' supervision in order to mitigate potential systemic risks.
3a. When did you know that AIG's swaps partners were going to be paid off at effectively
par value in the J\'laiden Lane 3 transaction?
3b. Did you or the Board approve the payments?

I was not directly involved in the negotiations with the counterparties that sold multi-sector
collateralized debt obligations ("COOs") to Maiden Lane III LLC ("'ML III") in return for
termination of credit default swaps AIG had written on those COOs. These negotiations were
handled by the staff of the Federal Reserve Bank of New York ("FRBNY"). I participated in and
support the final action of the Board to authorize lending by the FRBNY to ML 111 for the
purpose of purchasing the COOs in order to remove an enormous obstacle to AIG's financial
stability and thereby help prevent a disorderly failure of AIG during troubled economic times.
J\s explained in the testimony of Thomas Baxter, Executive Vice President and General Counsel,
FRBNY, before the Committee on Oversight and Government Reform on January 27, 2010, the
Federal Reserve loan to ML Ill was used by ML Ill to purchase the multi-sector CDOs
underlying AIG's CDS at their cuncnt market value (approximately $29 billion), which
represented a significant discount to their par value ($62 billion). Collateral already posted by
AIG (not ML !If) under the terms of the CDS contracts was also relinquished by AIG in retum
for tearing-up the contracts and freeing AIG of further obligations under the CDS contracts.
Before agreeing to the transaction, the Federal Reserve consulted independent financial advisors
to assess the value of the underlying COOs and the expectation that the value of the CDOs \Vould
be recovered. The advisors bdievcd that the cash f1mv and returns on the CDOs would be
sufficient, even under highly stressed conditions, to fully repay the federal Reserve's loan to ML
Ill. lJnclcr the terms of the agreement negotiated with AIG, the Federal Reserve \Viii also
receive two-thirds of any profits received on the COOs after the Federal Reserve's loan and
AIG's subordinated equity position arc repaid in fulL
3c.
\Vhen did you find out about the cover-up of the amount of the payments?
3d.
Did you approve of the efforts to cover up the amount of the payments?
If you did not approve of the cover-up at the time, do you believe that it was the
3e.
right decision?
The amount of the payments to the CDS counterparties was fully disclosed by AlG. Moreover,
the Federal Reserve fully disclosed the amount of its loan to ML III and the fair value ofthe
assets that serve as collateral tor that loan in both the weekly balance sheet of the
Federal Reserve (available on the Board's website) and in the Board's reports to Congress as
required by law.
AIG \Vas at all times responsible for complying \Vith the disclosure requirements of the various
securities laws. I was not imolvcd in the discussions between the Federal Reserve and AICJ
- 3related to AIG's securities Lnv filings. I fully supported AIG's decision to release publicly in
March 2009 the identities of these counterparties.
4. The Fed has been out in the press talking about how they are going to make money on
their AIG loans, making it sound like a good deal for the taxpayers. HoweYer, that is not
the whole story because Treasury has committed some $70 billion to the AIG bailout. So
the taxpayers are still exposed to AIG, and in fact arc likely to take losses. Do you agree
that the Fed's exposure to AIG is not the whole story and the taxpayers arc likely to face
losses from the AIG bailout'?
As you know, the Federal Reserve provided liquidity to AlG through a direct line of credit and
through loans provided to two Maiden Lane facilities that funded certain assets of AIG.
Extensive information about each of these credits is available on the Board's vebsite and in
reports and testimony provided by the Federal Reserve to Congress. Based on analysis of the
collateral supporting these loans by experienced third party advisors and the FRBNY, the
Federal Reserve expects to be fully repaid on each of these credits, \vith no loss to the taxpayers.
The Treasury Depar1ment has provided equity to AIG. Like the liquidity provided by the
Federal Reserve, this equity was provided in order to prevent the disorderly collapse of AIG
during a period of extreme financial stress that could have caused significant economic distress
for policy holders, municipalities, and small and large businesses, and led to even greater
financial chaos and a far deeper economic slump than the very severe one \Ve have experienced.
5. Did you or the Board approve of then New York Fed President Geithncr staying on at
the New York Fed while working for the Obama transition team'? If yes, why did you
think that was a good idea?
Timothy Gcithncr was appointed President of the Feel era! Rcser>/e Bank of New York for a li vc
year term that extended until February 28, 2011. \Vhen President Geithner was asked by the
President-elect of the United States to serve as Secretary of the Treasury, President Geithncr
withdrew from the I3ank's day-to-day management pending his confirmation by the Senate. He
also relinquished his Federal Open Market Committee (FOMC) responsibilities which \Vere
assumed by Christine Cumming, the Reserve Bank's alternate representative elected in
accordance with the Federal Reserve Act. President Geithner did not attend the December 2008
FOMC meeting. Ms. Cumming served as a voting member of the FOivtC until President
Geithner's successor took office. It was expected that President Gcithncr would continue to
serve as President of the Reserve I3ank at least through the end of his term if he did not become
Secretary of the Treasury.
6. Is the Fed now, or has the Fed in recent years, purchased Greek Government or bank
debt?
The Federal Reserve has not purchased debt of the government of C:ircece nor has the Federal
Reserve purchased the debt of any Greek financial institution. Detailed information on the
Federal Reserve's foreign exchange holdings. both currency and investments, is available in the
quarterly Treasur_v and Federal Reserve Foreign Exchange Operotions report published by the
-4-
Federal Reserve Bank of New York. See

http://v.:-\v\v.newvorkkcl.om./markets/quar reports.html.
7. Unemployment numbers continue to bounce up and down every week. As this year goes
on, the Census is going to be hiring 700,000 to 800,000 workers on a temporary basis. Are
you worried those numbers will distort the true jobs picture, and that economic forecasts
that use those jobs numbers will be wrong?
As you suggest, hiring of temporary \Vorkers by the U.S. Bureau of the Census in support of the
decennial census will elevate the total payroll employment counts reported by the Bureau of
Labor Statistics (BLS) each month because these temporary workers are included in federal
govemmcnt employment in the Current Employment Statistics (CES) survey. However, I do not
think that Census hiring will make it much more difficult than usual to interpret the monthly
employment reports. The BLS is publishing information each month on the number of
temporary census workers in the CES data, and thus it will be straightforward to adjust the data
to calculate the monthly changes in payroll employment excluding the effects of Census hiring;
moreover, Census hiring will not distort the BLS estimates of employment change in the private
sector. ln addition, the Bureau of the Census has made available its hiring plans for coming
months, which economic forecasters can usc in making their projections of employment changes
for the remainder of this year. Although these plans are subject to change, based on this
information, the Department of Commerce expects the effect on the level of payroll employment
reported by the BLS to peak at about 635,000 jobs in May 2010 and to fall back to roughly
25,000 jobs by September. The extent to \vhich Census hiring reduces the measured
unemployment rate is more difficult to estimate because that effect depends on the prior labor
force status of the temporary Census workers. However, based on the employment estimates, the
peak effect on the unemployment rate in May would probably be between ~~ and lf2 percentage
point.
8. Please explain how term deposits and reverse rcpo transactions arc not the economic
equivalent of the Fed issuing debt.
There are a number of similarities and differences between term deposits, reverse repurchase
agreements and agency debt obligations. In principle, c:Kh could be used to drain reserves from
the financial system in order to reduce the potential for inflation and thereby maintain price
stability. Indeed, various central banks usc instruments similar to these to help manage interest
rates and maintain price stability.
In the United States, Congress has srccifically authorized the federal Reserve to accept deposits
from depository institutions. (See 12 USC 342). Congress has also specifically authorized the
Federal Open Market Committee to direct Reserve Banks to purchase and sell in the open market
obligations of, or obligations guaranteed as to principal and interest by, the United States or its
agencies. (See 12 USC 263 and 355). Reverse repurchase agreements represent the sale and
purchase of obligations ot~ or obligations guaranteed as to principal and interest by, the
United States or its agencies. Congress has not specifically authorized the Federal Reserve to
issue its own agency debt obligations.
- 5Unlike deposits and reverse repurchase agreements, agency obligations are freely transferable.
T em1 deposits may only be accepted from depository institutions and are not transferable.
Reverse repurchase agreements also arc not transferable and occur only with counterpartics that
are interested in purchasing qualifying govenunent or agency securities.
9. Given that you have signaled that the Fed will be using the interest on reserves rate as a
policy tool in the near future, do you believe that rate should be set by the Federal Open
Market Committee rather than the Board of Governors?
As you know, the Congress has assigned to the Board the responsibility for detennining the rate
paid on reserves. Although the Federal Open Market Committee (FOMC) by law is responsible
for directing open market operations, the Congress has also assigned to the Board the
responsibility for determining certain other important terms that are relevant for the conduct of
monetary policy--for example, the Board "reviews and determines'' the discount rates that arc
established by the Federal Reserve Banks; the fOMC has no statutory role in setting the discount
rate. Similarly, the Board sets reserve requirements subject to the constraints established by the
Congress; the FOMC has no statutory role in setting reserve requirements.
For many years, the Board and the FOMC have worked collcgially and cooperatively in setting
the discount rate, the federal funds target rate, and other instmments of monetary policy. I am
convinced that the Board and the FOMC wi11 continue to work cooperatively in the future in
adjusting all of the instruments of monetary policy.
6CARO CF GOVERNORS
o~
~Hc:

8..::--l
U!::PI'!ANKE
CHA1~M.~N
Aprill5,:2010
The I Ionorabk Richard Sbdby

Dear Senator:
Enclosed arc my responses to the \Vritten questions you submitted following the
February 25, 20 l 0, hearing before the Committee on Barlking, Housing and Urban
Affairs. A copy bas also been fonvarded to the Committee for inclusion in the hearing
record.
Please kt me know if I can be of further assistance.
Sincerdv,
/l~
Enclosure
Resen e Svstem, from Ranking "Iember Shelbv:
L Emergency Lending under Section 13(3)

Charles Plosser, President of the Federal Reserve Bank of Philadelphia, stated in a recent
speech his belief that the Fed's emergency 13(3) lending authority should be either
eliminated or severely curtailed ("The Federal Reserve System: Balancing Independence
and Accountability," presented February 17, 2010 by President Plosser to the World
Affairs Council of Philadelphia). He stated:
"I believe that the Fed's 13(3) lending authority should be either eliminated or severely
curtailed. Such lending should be done by the fiscal authorities only in emergencies and, if
the Fed is involved, only upon the written request of the Treasury. Any non-Treasury
securities or collateral acquired by the Fed under such lending should he promptly
swapped for Treasury securities so that it is clear that the responsibility and accountability
for such lending rests explicitly with the fiscal authorities, not the Federal Reserve. To
codify this arra~gement, I believe we s"ho~ld establish a new Fed-Treasury Accord. This
would eliminate the ability of the Fed to engage in 'bailouts' of individual firms or sectors
and place such responsibilit} with the Treasury and Congress, squarely where it belongs."
Do you agree with President Plosscr?
Since the fall of 200::.~, I have advocated that Congress establish a statutory resolution regime that
provides a workable alternative to Government bailouts and disorderly bankruptcies. With
enactment of a workable resolution regime for systemically importanl finns, 1 have also called
f(w removal of the Federal Reserve's authority under section 13(3) to extend credit to troublt:d
nonb::mking entities.
Hmvcvcr, I believe that it would be appropriate for the Federal Reserve to retain the authority to
lend to establish broad market-based credit facilities in unusual and exigent circumstances. In
exceptional circumstances the preservation of financial stability may require that the Federal
Reserve have the authority to provide liquidity to restart or encourage markets to operate,
thereby providing liquidity needed to allow households, small businesses, depositors and others
access to working liquid markets. The need for such authority was fully evident during the
financial crisis, \Vhcn preventing a financial catastrophe required that the Federal Reserve
provide liquidity to money market mutual funds, primary dealers, the cmnmercial paper market,
and the market for student loans, credit card loans, small business loans and the commercial real
estate market.
Do you believe that modifications to Section 13(3) of the Federal Reserve Act \VOuld be
useful in clarifying emergency responses of various branches of government to financial
crises'? If so, what modifications do you believe would be most useful?
Apart from a possible elimination of the authority t\) lend to single firms (as discussed above), I
do not believe that significant modifications to section 13(3) are necessary or appropriJtc The
Federal Reserve has historically been extremely cautious in using the section 13(3) authority:
Prior to the recent financial crisis, the Federal Reserve had authorized the e:-:tension of credit
under section 13(3) in only on<: circumstance since the Great Depressi<)t1 and had not in [;Jet
extendeJ credit under this section since the 1930s.
During this financial crisis, the Federal Reserve worked closely with the Department of the
Treasury before exercising authority under section 13(3). V/e bdicvc this consultation is
import~mt and appropriate and vvoukl not object to a statutory provision requiring consultation
with or approval by the Secretary of the Treasury prior to authorizing an extension of credit
under section 13(3).
Do you favor the establishment of a new Fed~Treasury Accord to provide greater

distinction between fiscal policy actions and lender-of~last resort actions taken by the
Federal Reserve in an emergency'?
The Federal Reserve and the Treasury have an accord that sets forth the principles applied by
each in addressing the cunent crisis. \'/c would favor a legislative provision allowing the
Federal Reserve to transfer to the Treasury obligations that, while acquired in the course of
Federal Reserve action as the lender of last resort, become fiscal obligations more appropriately
managed by the Treasury Department. We would be happy to work with you on developing this
type of approach.
2. Interest on Heserves
Congress provided the authority to pay interest on reserves to the Board of Governors of
the Federal Hescrve, and not the Federal Open Market Committee (FOMC). Similarly, the
Board of Governors, and not the FOMC, has authority over setting the discount rate and
reserve requirements. According to minutes of the January 26~27, 2010, FOMC meeting,
the interest rate paid on excess reserve balances (the IOER rate) is one of the tools
available to support a gradual return to a more normal monetary policy stance. Quoting
from the minutes:
"Participants expressed a range of views about the tools and strategy for removing policy
accommodation when that step becomes appropriate. AU agreed that raising the IOER
rate and the target for the federal funds rate would be a key element of a move to less
accommodative monetary policy."
Are there any possible future conflicts or difficulties that you could imagine might arise
from having the Federal Reserve's target for the federal funds rate determined by the
f'OI\IC >vhilc the IOER and discount rate arc determined by the Board of Governors'?
As it moves to>vard a more normal monetary policy stance, the Federal Reserve may
use the IOER rate to help manage reserve balances. If the IOER rate, rather than a
target for a market rate, becomes an indicator of the stance of monetary policy for a
time, will the balance of power over monetary policy between the FO:VIC and the
Federal Reserve Board change?
- '' As you know, the C ongrcss has assigned to the: Bc'ard the responsibility for determining the rate
paid on rest:r>:es. Although the Feder:1l Open \.brket Committee (FOi'vlC) by Lt\.V is responsibk
for directing open market oper:1tions. the Congress has also assigned to the Board the
responsibility for Jctem1ining certain other important terms that are relevant for the conduct of
monetary policy--for example, the Board "reviews and detcrn1incs" the discount r:ltcs that arc
established by the Federal Reserve Banks; the Federal Open Tvlarket Committee has no statutory
role in sening the discount rate. Similarly, the Board sets reserve requirements subject to the
constraints established by the Congress; the Federal Open l\1arket Committee has no statutory
role in setting reserve requirements.
For many years, the Doard and the FOMC have worked collegially and cooperatively in setting
the discount rate, the federal funds target rate, and other instruments of monetary policy. I am
convinced that the Board and the F0fv1C will continue to \.Vork cooperatively in the future in
3. Monetarv Policy and Fiscal Polin' Distinction
Several regional Federal R~serve bank presidents have expressed concern that actions
taken by the Fed, many under Section 13(3) authority. were actions to channel credit to
specific firms or specific segments of financial markets and the economy. The concern is
that some actions amounted to fiscal, and not lender of last resort, policies. IVloreovcr, in a
.March 23, 2009 joint press releasel the I'ed and the Treasury stated the following:
"The Federal Reserve to avoid credit risk and credit allocation

The Federal Reserve's lender-of-last-resort responsibilities involve lending against
collateral, secured to the satisfaction of the responsible Federal Reserve Bank Actions
taken by the Federal Reserve should also aim to improve financial or credit conditions
broadly, not to allocate credit to narrowly-defined sectors or classes of borro\vers.
Government dedsions to influence the allocation of credit arc the province of the fiscal
authorities."
In accord with the joint statement, should the Fed's stock of agency debt and
mortgage-backed securities along with its Maiden Lane holdings be swapped for
Treasury securities, thereby transparently placing the channeling of credit support to
the housing sector firmly in the hands of fiscal authorities'?
The Federal Reserve's purchases of agency debt and mortgage-backed securities, and the credit it
has extended to the Maiden Lane entities, arose for different reasons and deserve different
treatment.
The primary purpose of the Federal Reserve's purchases of securities issued or guaranteed by
federal agencies was a monetary policy response intended to support the overall economy by
providing support to the mortgage and housing sectors. The Federal Reserve believes that in
routine circum::>tanccs the modes of government support for the housing sector should be
detem1ined by the Congress and carried out thJough agencies other than the Federal Reser>ie.
-4 -
For that reason, the federal Reserve in recent decades minimized its participaticm in the agency
securities mmkets. Ho\\evcr. the highly str:.1ineJ financial market conditions of the past fe\v
years prevented the Fcder3l Rcserve's monetary polic: actions to lu\\er interest rates from being
fully transmitted to housing markets, as would have happened in more normal times, and the
Federal Reserve's ability to lov~er short-term interest rates further \vas constraim:d after shortterm r:1tes were lowered to essentially zero. In the circumstances, the Federal Reserve initiated a
progr3m to purchase agency debt and mortgage-backed securities.
The credit extcnsiLms to AIG and the .tvlaiden Lane entities represent exercise of the Federal
Reserve's authority as lender of last resort. The Treasury Department is better suited to make the
policy and management decisions that attend the longer term relationship with a nonbanking firm
that requires government assistance. Accordingly, the Federal Reserve would suppot1 a transfer
to the Treasury of its AIG and Maiden Lane credits. The issues regarding a possible swap of
agency debt and Iv1BS securities for Treasury securities are somewhat more complex and would
require careful study.
The Fed has f?Ur.chascd over $1 trillion of agency mortgage-backed-securities and

intends to complete purchases of $1.25 trillion of those securities by the end of"March.
To help finance those purchases, the Fed uses supplemental borrowing from the
Treasury and issues interest-bearing reserve balances. In effect, the Fed is borrowing
from the public, including banks, with promises to repay the borrowed sums plus
interest. The :Fed will continue that borrowing in order to hold on to its mortgagehacked-securities until those assets gradually decline as they mature or arc prepaid or
sold. \Vhen the Fed effectively finances an enormous portfolio holding of a specific
class of assets using interest bearing debt issued to the public, how is that not a fiscal
policy exercise?
rdonctary policy and fiscnl policy arc different tools that both can be used to stimulate the
economy. The purpose of the Federal Reserve's large-scale asset purchases was primarily to
apply macroeconomic stimulus by lmvering longer-term interest rates and by improving financial
market functioning; fiscal policy applies stimulus by adjusting overall government spending or
revenues. Because the Federal Reserve's large-scale asset purchases involved changes in the
central bank's balance sheet--and, in particular, the creation of a large volume of reserves, it is
clear that the purchases were a monetary policy action. lvlorcover. the Federal Reserve's
decision to purchase a large v~)tumc of longer-term assets in the crisis was consistent with its
statutory mandate to promote maximum employment and price stability, and it was clearly
supported by its statutory authorities_ These transactions can and will be unwound in a manner
consistent \ViL~ these sumc mandates.
4. Systemic Risk Regulation

Your February 25, 2010, testimony identifies that the Fed is making fundamental changes
in its supervision of bank holding companies to, in your words, "incorporate a
macroprudential perspective that goes beyond the traditional focus on safety and
soundness of individual institutions."
-5
Could you precisely define what you mean by a "macroprudential perspective,'' and
what metrics guide that perspective'?
Our supervisory approach should better retlect our mission, as a central bank, to promote
financial stability. As \vas evident in the financial crisis, complex, glob::ll financial firms can be
profound!; interconnected in ways that can threaten the viability of individual fin11s, the
functioning of' key financial markets, and the stability of the broader economy. A
macroprudential perspective requires a more system-\vide approach to the supervision of
systemically critical firms that considers the interdependencies among firms and markets that
have the potential to undermine the stability of the financial system. To that end, we have
supported the creation of a council of regulators that would gather information from across the
financial system, identify and assess potential risks to the tinancial system, and work with
member agencies to address those risks.
In our own supervisory efforts, we are reorienting our approach to some of the largest holding
companies to better anticipate and mitigate systemic risks. For example, we expect to increase
the use of horizontal reviews, which focus on particular risks or activities across a group of
banking organizations. In doing so, we have drawn on our experience \Vith the Supervisory
Capital Assessment Program (SCAP), in which the Federal Reserve led a coordinated effort by
the bank supervisors to evaluate on a consistent basis the capital needs of the largest banking
institutions in an adverse economic scenario. Because the SCAP involn:d the simultaneous
evaluation of potential credit exposures across all of the included firms, we were bGttcr able to
consider the systemic implications of financial stress under an adverse economic scenario, in
addition to the impact of an adverse scenario on individual firms.
The SCAP also showed the benefits of drawing on the work of a wide range of staff--including
supervisors, economists, and market and payments system experts--to comprehensively evaluate
the risks f~1cing financial finns. Going f(mvard, the Federal Reserve is instituting a data-driven,
quantitative surveillance mechanism that will draw on a similar range of staff expertise to
provide an indcpencknt view of the risks facing large banking tirms. As part of that effort, we
are developing quantitative tools to help identify vulnerabilities at both the firm level and for the
aggregate financial sector. We anticipate that these tools \Vill incorporate macroeconomic
forecasts, including spillover and feedback effects. \Ve also expect to develop indicators of
interconnectedness, which could encompass common credit, market, and funding exposures.
Tbe development of specific mctrics will also depend, in part, on tt1e availability of timely and
comparabk data from systemically important firms.
Does the Fed intend to redefine what regulators should regard as "safety and
soundness?"
Ensuring the safety and soundness of institutions has been a comerstone of the Federal Reserve's
supervision program. The recent crisis has shown that large, interconnected fin11S can be
buffeted by a market-driven crisis, magnifying weaknesses in risk management practices, and
revealing capital and liquidity buffc:rs calibrated to withstand institution-specific stress events to
be insufficient. For this reason, leading supervisors in the United States and abroad are
reviewing the prudential standards needed to ensure safety and soundness for individual fin11s
and the financial system as a whole. The Federal Reserve is participating in a range ofjoint
-6efforts to ensure that large, systemically critical financial instimtions hold more and higherquality capital, improve their risk-management practices. have more robust liquidity
management, employ compensation structures that provide appropriate performance and risktaking incentives, and deal fairly with consumers.
\Vc are working vvith our domestic and international coumerparts to develop capital and
prudential requirements that take account of the systemic importance of large, complex. firms
whose failure \vould pose a significant threat to overall financial stability. Options under
consideration include assessing a capital surcharge on these institutions or requiring that a
greater share ofth~ir capital be in the form of common equity. For additional protection,
systemically important institutions could be required to issue contingent capital, such as debt-llke
securities that convert to common equity in times of macroeconomic stress or when losses erode
the institution's capital base. U.S. supervisory agencies have already increased capital
requirements for trading activities and securitization exposures, tvvo of the areas in which losses
\Vere especially high.
Liquidity requirements should also he strengthened for systemically critical firms, as even
solvent financial institutions can be brought dO\;vn by liquidity problems. The hank regulatory
agencies arc implementing strengthened guidance on liquidity risk management and vveigbing
proposals for quantitatively based requirements. In addition to insufficient capital and
inadequate liquidity risk management, flawed compensation practices at financial institutions
also contributed to the crisis. Compensation should appropriately link pay to performance and
pr6vidc sound incentives. The Federal Reserve has issued proposed guidance that would require
banking organizations to review their compensation practices to ensure they do not encourage
excessive risk-taking, are subject to effective controls and risk management, and are supported
by strong corporate governance including board-level oversight.
5. Federal Reserve's
Ass(~t
Holdings
Charles Plosscr, President of the Federal Reserve Bank of I'hiladelphia, stated in a recent
speech that "... the Fed could help preserve its independence by limiting the scope of its
ability to engage in activities that blur the boundary lines between monetary and fiscal
policy. Thus, as the economic recovery gains strength and monetary policy begins to
normalize, I would Ln:or our beginning to sell some of the agency mortgage-backed
securities from our portfolio rather than relying only on redemptions of these assets. Doing
so would help extricate the Fed from the realm of fiscal policy and housing finance."
l provided my views on asset sales in my March 25, 2010, testimony before the House
Committee on Financial Services. The relevant passage is reproduced below.
\Vhen these tools (reverse repurchase agreements and term deposits] arc used to drain reserves
from the banking system, they do so by replacing bank reserves with other liabilities; the asset
side and the overall size of the Federal Reserve's balance sheet remain unchanged. lf necessary,
as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming
or selling securities. The redemption or sale of securities would have the effect of reducing the
-7size of the Federal Reserve's balance sheet as well as further reducing the quantity of reserves in
the banking system. Restoring the size and composition of the balance sheet to a more nonnal
configuration is a longer-term objective of our policies. In any case. the sequencing of steps and
the combination of tools that the Federal Reserve uses as it exits from its currently very
accommodative policy stance will depend on economic and financial developments and on our
best judgments about how to meet the Federal Reserve's dual mandate of maximum employment
and price stability.
6. Treasurv Financing Account at the Fed
On February 23,2010, the Treasury announced, rather suddenly and surprisingly, and
without much explanation, that it anticipates increasing its Supplementary Financing
Account at the Fed by around S200 billion over the next two months. This means,
essentially, that the Treasury will borrow on behalf of the Fed and simply hold the funds in
the Treasury's account at the Fed. 1 understand that the Treasury's Supplementary
Financing Program helps the Fed absorb reserves from the banking system and manage its
balance sheet. I ,,onder, htnHver, about the lack of information concerning why the
Treasury suddenly decided to increase its balance at the Fed.
\Vas the Treasury's February 23 announcement planned in advance and coordinated

with the Fed, or was it a surprise to the Fed?
\Vhat are the future plans for the size of the Treasury's Supplemental Financing
Account'?
Who will dcciue what will be the future balances in the Supplemental Financing
Account'?
The Treasury and the Federal Reserve consulted closely on the Treasury's February 23
announcement regarding the Supplementary Financing Program. However, the Treasury makes
all decisions on balances to be held in the Supplementary Financing Account.
7. Efforts to Toughen Capital and Liquiditv I<eguirements
Your testimony on Februat-y 25,2010 identifies that " ... the Federal Reserve has been
playing a l<ey international role in international efforts to toughen capital and liquidity
requirements for financial institutions, particularly systemically critical firms ... "
Could you describe what those efforts have been?
The Federal Reserve has an active leadership role within the Finance Stability Board, the Basel
Committee for Banking Supervision, and various other international supervisory fora. Through
these fora, especially the Basel Committee, the Federal Reserve has worked diligently with
supervisors from around the world to develop a comprehensive series of refonns to address the
lessons that we have learned from the recent global financial crisis. The goal of the Basel
Committee's reform pacb.ge is to irnprove the international banking sector's ability to deal with
- 8future ecGnomic and financial stress, thus reJucing the contagion risk from the
the real economy.
fin~mciJ.l
sector to
The Federal Reserve co-chairs thn:e Basel Committee v,:orking groups that are focusing on
refom1s especially pertinent to systemically important institutions. These groups arc developing:
a) revisions to the capital regulations tl.x trading book activities, designed to enhance risk
measurement and to significantly increase the capital requirement associated with various
financial instruments that contributed to losses at systemically important institutions during the
crisis: b) enhanced and higher cJ.pital charges for counterparty credit risk, including a new
charge for credit valuation allowances (CVA), vvhich were a significant source of loss during the
crisis; and c) new liquidity standards, which directly address a major chG.llenge during the global
tunnoil. With regard to the latter, the proposed stmdards draw heavily from conceptual design
work contributed by Federal Reserve staff. In addition, Federal Reserve staff made significant
contributions to the Basel Committee's Principles for Sound Liquidity Risk Management and
supervision issued in September 2008. In many cases, the international principles articulated
dre\v heavily from established Federal Reserve guidance. Moreover, Federal Reserve
economists and supervisors have been heavily involved in work conducted by the Basel
Committee and by the Committee of Global Financial Stability to develop forward looking
measures of systc1nic liquidity risks and in assessing the cunent state of funding and liquidity
risk management at internationally active financial institutions.
Federal Reserve staff also are key players in the Basel Committee's working groups developing a
ne>v international leverage ratio standard, which is largely inspired by the {J.S. leverage standard,
and a new delinition of regulatory capital for banking organizations, which is an area where the
Federal Reserve provides insightful experience since almost all banking capital issuance in the
U.S. is executed at the bank holding company level. 1 fv1oreover, the Federal Reserve has also
played an active role in the Basel Committee's working group that recently issued
2
recommendations to strc:Hzthen
the resolution of svstemicallv siunificant
cross-border banks.
.....
...__
.)
~-
Could you define a ''systemic~11ly critical" firm and identify how many such firms
currently operate in the United States'?
A "systemically critical" firm is one whose failure would have significant adverse effects on
1inancial markets or the economy. At any point in time, the systemic importance of an individual
tirrn depends on a \vide range of factors including whether the firm has extensive on- and offb;Jlance sheet activities, whether the finn is intercormected--eithcr receiving funding from, or
providing funding to other systemically important firms--whether the firm plays a major role in
key financial markets, and! or whether the firm provides crucial senices to its customers that
cannot easily or quickly be provided by otha financial institutions. That said, the identification
of systemic importance requires considerable judgment because each stress event is different,
because market stmcture, business practices, financial products, technologies, supervisory
practices and regulatory environments evolve over time. This evolution, of course, changes the
Sec ''Strengthening the resilience of the banking sector-consultative document" (December 2009), av:~ilable at
\\'Ww.bis.org/pubL-'bcbs l64.htm.
2
See ''Report and recommendations of the Cross-border Bank Rcsoluttllil Group-final paper" (\1arch 2009),
1
available at www bis.org/publibcbs 169 htm.
-9interconnections betv,;een firms, their relative sizes, their functions and services, and the extent to
which services can be obtained from other firms or in financi::ll markets. :\s a pwctic:.1l matter, it
is likelv that the number of firms th:lt are considered svstcmicallv critical will be kss than fiftY.
For example, only about 35 US financial firms, \vith publicly-traded stock outstanding, have total
assets over $100 billion as of2008:Q4.
....
.I
"'
For release on delivery

9:00 a.m. EST
February 25. 20 l 0
Semiannual Monetary Policy Report to the Congress

Ben S. Bcrnanke
Chainnan
Board of Governors of the f edcral Reserve System
bef{xe the
Committee on Banking. Housing and Urban Affairs

February 25. 20 l 0
Chairman Dodd, Ranking Member Shelby, and other members of the Committee, I am
pleased to present the Federal Reserves semiannual Monetary Poli(v Reporrto the Congress.
I will begin today with some comments on the outlook for the economy and tor monetary policy,
then touch briefly on several other important issues.
The Economic Outlook

Although the recession of:t1cially began more than two years ago, U.S. economic activity
contracted particularly sharply tollov..ing the intensification of the global financial crisis in the
fall of2008. Concerted efforts by the federal Reserve, the Treasury Department, and other U.S.
authorities to stabilize the t1nancial system, together with highly stimulative monetary and f1scal
policies, helped arrest the decline and arc supporting a nascent economic recovery. Indeed,
the U.S. economy expanded at about a 4 percent annual rate during the second half oflast year.
A significant portion of that grovvth, however, can be attributed to the progress firms made in
working down unwanted inventories of unsold goods, which left them more wiJling to increase
production. As the impetus provided by the inventory cycle is temporary, and as the fiscal
support for economic grow1h likely will diminish later this year, a sustained recovery will
depend on continued gro\v1h in private-sector final demand tor goods and services.
Private final demand docs seem to be growing at a moderate pace, buoyed in part by
a general improvement in tinancial conditions. In particular, consumer spending has recently
picked up, reflecting gains in real disposable income and household wealth and tentative signs of
stabilization in the labor market. Business investment in equipment and soihvare has risen
significantly. And intemational trade--supported by a recovery in the economics of many of our
trading partners--is rebounding from its deep contraction of a year ago. However. stm1s of
single-family homes, which rose noticeably this past spring, have recently been roughly flat, and
-2commercial construction is declining sharply, reflecting poor fundamentals and continued

ditJiculty in obtaining financing.
The job market has been hit especially hard by the recession, as employers reacted to
sharp sales declines and conccms about credit availability by deeply cutting their workfi.>rces in
late 2008 and in 2009. Some recent indicators suggest the deterioration in the labor market is
abating: Job losses have slowed considerably, and the number of full-time jobs in manufacturing
rose modestly in January. Initial claims for unemployment insurance have continued to trend
lower, and the temporary services industry, often considered a bellwether for the employment
outlook, has been expanding steadily since October. Notwithstanding these positive signs, the
job market remains quite weak, with the unemployment rate ncar 10 percent and job openings
scarce. Of particular concem, because of its long-tem1 implications for workers' skills and
wages, is the increasing incidence of long-tenn unemployment; indeed, more than 40 percent of
the unemployed have been out of work six months or more, nearly double the share of a year
ago.
Increases in energy prices resulted in a pickup in consumer price inflation in the second
half of last year, but oil prices have 1lattened out over recent months. and most indicators suggest
that inflation likely will be subdued for some time. Slack in labor and product markets has
reduced wage and price pressures in most markets, and sharp increases in productivity have
further reduced producers' unit labor costs. The cost of shelter, which receives a heavy weight
in consumer price indexes, is rising very slowly, reflecting high vacancy rates. ln addition,
according to most measures, longer-tem1 inflation expectations have remained relatively stable.
The improvement in financial markets that began last spring continues. Conditions in
short-tem1 funding markets have returned to near pre-crisis levels. Many (mostly larger) finns
- _)., have been able to issue corporate bonds or nc\v equity and do not seem to be hampered by a lack
of credit. In contrast, bank !ending continues to contract. reflecting both tightened lending
standards and weak demand for credit amid uncertain economic prospects.
In conjunction with the January meeting of the Federal Open Market Committee
(FOMC), Board members and Reserve Bank presidents prepared projections for economic
growth. unemployment, and int1ation for the years 2010 through 2012 and over the longer run.
The contours of these forecasts are broadly similar to those I reported to the Congress last July.
FOMC pm1icipants continue to anticipate a moderate pace of economic recovery, with economic
growih of roughly 3 to 3-1/2 percent in 2010 and 3-1/2 to 4-1/2 percent in 2011. Consistent with
moderate economic growth, participants expect the unemployment rate to decline only slowly,
to a range of roughly 6-1/2 to 7-1/2 percent by the end of2012, still well above their estimate of
the long-run sustainable rate of about 5 percent. lnf1ation is expected to remain subdued, with
consumer prices rising at rates between 1 and 2 percent in 2010 through 2012. fn the longer
term, inflation is expected to be between 1-3/4 and 2 percent, the range that most FOMC
participants judge to be consistent with the Federal Reserve's dual mandate of price stability and
maximum employment.
Monetary Policy
Over the past year, the Federal Reserve has employed a wide array of tools to promote
economic recovery and preserve price stability. The target for the federal funds rate has been
maintained at a historically low range of 0 to I /4 percent since December 2008. The FOMC
continues to anticipate that economic conditions--including low rates of resource utilization,
subdued inflation trends, and stable inf1ation expectations--are likely to warrant exceptionally
JO\v levels of the federal funds rate for an extended period.
- 4-
To provide support to mortgage lending and housing markets and to improve overall
conditions in private credit markets, the Federal Reserve is in the process of purchasing
$1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.
We have been gradually slowing the pace of these purchases in order to promote a smooth
transition in markets and anticipate that these transactions will be completed by the end of
March. The FOMC will continue to evaluate its purchases of securities in light of the evolving
economic outlook and conditions in financial markets.
In response to the substantial improvements in the functioning of most financial markets,
the Federal Reserve is winding down the special liquidity facilities it created during the crisis.
On February 1, a number of these facilities, including credit facilities for primary dealers,
lending programs intended to help stabilize money market mutual funds and the commercial
paper market, and temporary liquidity S\vap lines \Vith foreign central banks, were allowed to
1
expire. The only remaining lending program for multiple borrowers created under the Federal
Reserve's emergency authorities, the Tern1 Asset-Backed Securities Loan Facility, is scheduled
to close on March 31 for loans backed by all types of collateral except newly issued commercial
mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.
In addition to closing its special facilities, the Federal Reserve is normalizing its lending
to commercial banks through the discount window. The final auction of discount-windmv funds
to depositories through the Tcnn Auction Facility, which was created in the early stages of the
crisis to improve the liquidity of the banking system, Yvill occur on March 8. Last week we
announced that the maximum ten11 of discount \Yindow loans, which was increased to as much as
90 days during the crisis, would be returned to overnight for most banks, as it was before the
Primary dealers arc broker-dealers that act as counterpart!es to the Federal Reserve Bank of New York in its
conduct of open market operations.
-5crisis erupted in August 2007. To discourage banks from relying on the discount window rather
than private funding markets
tor short-term credit,
last week we also increased the discount rate
by 25 basis points, raising the spread between the discount rate and the top of the target range for
the federal funds rate to 50 basis points. These changes, like the closure of most of the special
lending facilities earlier this month. are in response to the improved functioning of financial
markets, which has reduced the need for extraordinary assistance from the Federal Reserve.
These adjustments are not expected to lead to tighter financial conditions for households and
businesses and should not be interpreted as signaling any change in the outlook for monetary
policy, which remains about the same as it was at the time of the January meeting of the FOMC.
Although the federal funds rate is likely to remain exceptionally low for an extended
period, as the expansion matures, the Federal Reserve vvill at some point need to begin to tighten
monetary conditions to prevent the development of in11ationary pressures. Notwithstanding the
substantial increase in the size of its balance sheet associated with its purchases of Treasury and
agency securities, we are confident that we have the tools we need to finn the stance of monetary
policy at the appropriate time.
Most importantly, in October 2008 the Congress gave statutory authority to the Federal
Reserve to pay interest on banks' holdings of reserve balances at Federal Reserve Banks. Ry
increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward
pressure on all short-term interest rates. Actual and prospective increases in short-term interest
rates will be reflected in turn in longer-term interest rates and in financial conditions more
generally.
ror further details on these tools and the Federal Reserve's exit strategy, see Ben S. Bernanke C:W l 0), ''federal
Rcscrves Exit Strategy,'' statement before the Committee on Financial Services. U.S. House of Representatives,
February l 0, www.federalrcserve.gov/newscvents/testimony.,bcrnankc10 1002 IOa.htm.
- 6The Federal Reserve has also been developing a number of additional tools to reduce the
large quantity of reserves held by the banking system, which will improve the Federal Reserve's
control of financial conditions by leading to a tighter relationship between the interest rate paid
on reserves and other short-term interest rates. Notably, our operational capacity for conducting
reverse repurchase agreements, a tool that the Federal Reserve has historically used to absorb
reserves from the banking system, is being expanded so that such transactions can be used to
absorb large quantities of resen.cs. 3 The Federal Reserve is also currently refining plans for a
term deposit facility that could convert a portion of depository institutions' holdings of reserve
balances into deposits that are less liquid and could not be used to meet reserve requirements.
In addition, tbe FOMC has the option of redeeming or selling securities as a means of reducing
outstanding bank reserves and applying monetary restraint. Of course, the sequencing of steps
and the combination of tools that the Federal Reserve uses as it exits from its currently very
accommodative policy stance will depend on economic and financial developments. I provided
more discussion ofthcsc options and possible sequencing in a recent testimony. 5
Federal Reserve Transparency

The Federal Reserve is committed to ensuring that the Congress and the public have
all the information needed to understand our decisions and to be assured of the integrity of our
operations. Indeed, on matters related to the conduct of monetary policy, the Federal Reserve is
1
The Federal Reserve has recently developed the ability to engage in reverse repurchase agreements in the triparty
market t(Jr repurchase agreements. with primary dealers as counter-par1ies and using Treasury and agency debt
securities as collateral, and it is developing the capacity to carry out these transactions with a wider set of
counterparties c~uch as money market mutual funds and the mortgage-related government-sponsored enterprises)
and using agcncv mortgage-backed securities as collateral.
4
In Dec;mber
Fed;ral Reserve published a proposal describing a term deposit tacility in the Federal Regisler
(see Board of Governors of the Federal Reserve System (2009), "Federal Reserve Board Proposes Amendments to
Regulation D That \Vould Enable the Establishment of a Tenn Deposit Facility," press release, December 28,
www.federalreserve.gov/newsevcnts/press/rnonctary/20091228a.htm). \Ve are now in the process of analyzing the
public comments that have been received. A revised proposal will be reviewed by the Federal Reserve Board. and
test transactions could commence during the second quarter.
5
See Bernanke, 'federal Reserve's Exit Strategy,'' in note 2.
the
-7already one of the most transparent central banks in the world. providing detailed records and
explanations of its decisions. Over the past year. the Federal Reserve also took a number of
steps to enhance the transparency of its special credit and liquidity facilities, including the
provision of regular, extensive reports to the Congress and the public; and we have worked
closely with the Govemment Accountability Oftice (GAO), the Office of the Special Inspector
General for the Troubled Asset Relief Program, the Congress, and private-sector auditors on a
range of matters relating to these facilities.
While the emergency credit and liquidity facilities were important tools for implementing
monetary policy during the crisis. we understand that the unusual nature of those facilities
creates a special obligation to assure the Congress and the public of the integrity of their
operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve's
management of all ta.cilities created under emergency authorities.
In particulaL we would
support legislation authorizing the GAO to audit the operational integrity, collateral policies, use
of third-party contractors, accounting, financial reporting, and internal controls of these special
credit and liquidity facilities. The Federal Reserve will, of course, cooperate fully and actively in
all reviews. W c arc also prepared to support legislation that would require the release of the
identities of the finns that participated in each special facility after an appropriate delay. It is
impm1ant that the release occur after a lag that is sufficiently long that investors will not view an
institution "s use of one of the facilities as a possible indication of ongoing financial problems,
thereby undermining market confidence in the institution or discouraging use of any future
''Last month the Federal Reserve said that it would welcome a full review by the GAO of all aspects of the Federal
Reserve's involvement in the extension of credit to the American lntemational Group, Inc. (see Ben S. Bcmanke
(2010), letter to Gene L. Dodaro, January 19.
www.federalreservc.gov/monctarypolicy/filcs/letter_aig. 20 I 00 Il9.pdf). The Federal Reserve would support
legislation authorizing a review by the GAO of the Federal Reserve's operations of its facilities created under
emergency authorities: the Asset-Backed Commercial Paper Money tvlarkct Mutual Fund Liquidity Facility, the
Commercial Paper Funding Facility, the Money Market Investor Funding Facility. the Primary Dealer Credit
Facility, the Term Asset-Racked Securities Loan Facility, and the Tenn Securities Lending Facility.
-8facility that might become necessary to protect the U.S. economy. An appropriate delay \:Vould
also allow finns adequate time to iniom1 investors through annual reports and other public
documents of their use of Federal Reserve facilities.
Looking ahead, we will continue Io work with the Congress in identifying approaches for
enhancing the federal Reserve's transparency that are consistent with our statutory objectives of
fostering maximum employment and price stability. In particular, it is vital that the conduct of
monetary policy continue to be insulated from short-term political pressures so that the FOMC
can make policy decisions in the longer-tenn economic interests of the American people.
Moreover, the confidentiality of discount window lending to individual depository institutions
must be maintained so that the federal Reserve continues to have effective ways to provide
liquidity to depository institutions under circumstances where other sources of funding are not
available. The Federal Reserve's ability to inject liquidity into the financial system is critical tor
preserving financial stability and for supporting depositories' key role in meeting the ongoing
credit needs of firms and households.
Regulatory Reform
Strengthening our financial regulatory system is essential for the long-term economic
stability of the nation. Among the lessons of the crisis arc the crucial importance of
macroprudential regulation--that is. regulation and supervision aimed at addressing risks to

the financial system as a whole--and the need for effective consolidated supervision of every
financial institution that is so large or interconnected that its failure could threaten the
functioning of the entire financial system.
The Federal Reserve strongly supports the Congress's ongoing efforts to achieve
comprehensive financial ref(m11. In the meantime, to strengthen the federal Rcscrvcs oversight
-9of banking organizations, we have been conducting an intensive self-examination of our

regulatory and supervisory responsibilities and have been actively implementing improvements.
For example, the Federal Reserve has been playing a key role in international efforts to toughen
capital and liquidity requirements for financial institutions, particularly systemically critical
llrms, and we have been taking the lead in ensuring that compensation structures at banking
organizations provide appropriate incentives without encouraging excessive risk-taking.
The Federal Reserve is also making fundamental changes in its supervision of large,
complex bank holding companies, both to improve the effectiveness of consolidated supervision
and to incoqxxate a macroprudential perspective that goes beyond the traditional focus on safety
and soundness of individual institutions. We arc overhauling our supervisory framework and
procedures to improve coordination within our own supervisory statT and with other supervisory
agencies and to facilitate more-integrated assessments of risks within each holding company and
across groups of companies.
Last spring the Federal Reserve led the successful Supervisory Capital Assessment
Program. popularly known as the bank stress tests. An important lesson of that program was that
combining on-site bank examinations with a suite of quantitative and analytical tools can greatly
improve comparability of the results and better identify potential risks. In that spirit. the Federal
Reserve is also in the process of developing an enhanced quantitative surveillance program
for large bank holding companies. Supervisory infom1ation will be combined with fim1-leveL
market-based indicators and aggregate economic data to provide a more complete picture of
the risks lacing these institutions and the broader financial system. Making use of the Federal
Reserve s unparalleled breadth of expertise, this program will apply a multidisciplinary approach
7
For further information. see Board ofGovcmors of the Federal Reserve System (2009). "'Federal Reserve Issues
Proposed Guidance on Incentive Compensation: press release. October 22,
\vww. fcderalreserve.gov/newsevcnts!press/bcreg/20091 022a.htm.
- l0 that involves economists, specialists in particular financial markets, payments systems experts,
and other professionals, as well as bank supervisors.
The recent crisis bas also underscored the extent to which direct involvement in
the oversight of banks and bank holding companies contributes to the Federal Reserves
effectiveness in carrying out its responsibilities as a central bank, including the making of
monetary policy and the management of the discount window. Most important, as the crisis
has once again demonstrated, the Federal Reserves ability to identify and address diverse and
hard-to-predict threats to financial stability depends critically on the infonnation, expe11ise,
and powers that it has by virtue of being both a bank supervisor and a central bank.
The Federal Reserve continues to demonstrate its commitment to strengthening consumer
protections in the financial services arena. Since the time of the previous Monetmy Policy
Report in July, the Federal Reserve has proposed a comprehensive overhaul of the regulations
goveming consumer mortgage transactions, and we are collaborating with the Department of
I lousing and Urban Development to assess how v.re might further increase transparency in the
mortgage process. 8 We have issued rules implementing enhanced consumer protections for
credit card accounts and private student loans as well as new rules to ensure that consumers have
meaningful opportunities to avoid ovcrdrall fecs. 9 In addition, the Federal Reserve has
For further information. sec Board ofGovemors ofthe Federal Reserve System (2009), ''Federal Reserve Proposes
Significant Changes to Regulation Z (Truth in Lending) Intended to Improve the Disclosures Consumers Receive in
Connection with Closed-End Mortgages and Home-Equity Lines of Credit. press release. July 23.
www. federalreserve .gov/newsevents/press;bcreg/20090723 a.htm.
9
for more information, see Board of Governors of the Federal Reserve System (2009), 'federal Reserve Approves
Final Amendments to Regulation Z That Revise Disclosure Requirements for Private Education Loans:' press
release. July 30, www.fedcralreservc.gov/newscvcnts/press/bcreg/20090730a.htm; Board of Governors of the
Federal Reserve System (2009), "Federal Reserve Announces Final Rules Prohibiting Institutions from Charging
Fees for Overdrafts on ATM and One-Time Debit Card Transactions," press release. November 12,
www.tederalreserve.gov/newsevents/presstbcreg/2009lll2a.htm; and Board of Governors of the Federal Reserve
System (20 l 0). "Federal Reserve Approves Final Rules to Protect Credit Card Users from a Number of Costly
Practices," press release. January I 2. www.federalreserve.govhle\vsevents/press/bcreg/20 I 00 I I 2a.htm.
- 11 implemented an expanded consumer compliance supervision program for nonbank subsidiaries

of bank holding companies and foreign banking organizations. 10
l'vlore generally, the federal Reserve is committed to doing all that can be done to ensure
that our economy is never again devastated by a financial collapse. We look forward to working
with the Congress to develop effective and comprehensive refonn of the financial regulatory
framework.
For further information. see Board of Governors of the Federal Reserve System (2009), .. Federal Reserve tO
Jmplement Consumer Compliance Supervision Program of Nonbank Subsidiaries of Bank Holding Companies and
Foreign Banking Organizations," press release, September 15,
www. fcdera !reserve. gov/newsevents/pressibcreg/20090915a. htm.
1
March 5, 2010
The Honorable Ben Bcmanke

Chairman
201h Street and Constitution Avenue, NW
Thank you for tcsti fying before the Committee on Banking, Housing, and Urban Affairs
on February 25, 2010. In order to complete the hearing record, we would appreciate your
answers to the enclosed questions as soon as possible.
Please repeat the question, then your answer, single spacing both question and answer.
Please do not use all capitals.
Send your reply to iv1s. Dav,rn L. Ratliff, the Committee's Chief Clerk. She will transmit
copies to the appropriate offices, including the committee's publications office. Due to cuncnt
procedures regarding Senate mail, it is recommended that you send replies via e-mail in a !viS
Word, WordPerfect or .pdf attachment to Dawn Ratliff@banking.scnate.;rov.
If you have any questions about this letter, please contact Ms. Ratliff at (202)224-3043.
Sincerely,
CHRISTOPHER 1. DODD
Chaim1an
CJD/dr
Reserve Svstem. from Senator Bunning:
1.
Treasury recently announced they were starting up the Supplemental Financing Program
again. Under that program, Treasury issues debt and deposits the cash with the Fed. That is
effectively the same thing as the Fed issuing its own debt, which is not allowed. What are the
legal grounds the Fed and Treasury usc to justify that program? And did anyone in the Fed or
Treasury raise objections when the program was created?
2.
Given what you learned during the AIG crisis and bailout, do you think Congress should
be doing something to address insurance regulation or the commercial paper market?
3a.
When did you know that AIG 's swaps partners were going to be paid off at effectively
par value in the Maiden Lane 3 transaction?
3b.
Did you or the Board approve the payments?
3c.
When did you find out about the cover-up of the amount of the payments?
3d.
Did you approve of the efforts to cover up the amount of the payments?
3e.
If you did not approve of the cover-up at the time, do you it that was the right decision?
4.
The Fed has been out in the press talking about ho\V they arc going to make money on
their AIG loans, making it sound like a good deal for the taxpayers. However, that is not the
whole story because Treasury has committed some $70 billion to the AIG bailout. So the
taxpayers are still exposed to AIG, and in fact are likely to take losses. Do you agree that the
Fed's exposure to AIG is not the whole story and the taxpayers arc likely to face losses from the
AIG bailout?
Did you or the Board approve of then New York Fed President Geithner staying on at the
5.
New York Fed while working for the Obama transition team? If yes, why c\jd you think that was
a good idea?
6.
Is the Fed now, or has the Fed in recent years, purchased Greek govcmmcnt or bank
debt?
7.
Unemployment numbers continue to bounce up and down every week. As this year goes
on, the Census is going to be hiring 700,000 to 800,000 workers on a temporary basis. Are you
worried those numbers will distort the true jobs picture, and th<1t economic forecasts that use
those jobs numbers will be wrong?
8.
Please explain how tenn deposits and reverse rcpo transactions are not the economic
9.
Given th<1t you have signaled that the Fed will be using the interest on reserves rate as a
policy tool in the near future, do you believe that rate should be set by the Federal Open Market
Committee rather than the Board of Govemors?
Reserve Svstem, from Ranking Member Shelbv:
1. Emergency lending under Section 13{3}
Charles Plosser, President ofthe Federal Reserve Bank of Philadelphia, stated in a recent speech
his belief that the Fed's emergency 13(3) lending authority should be either eliminated or
severely curtailed ("The Federal Reserve System: Balancing Independence and Accountability,"
presented February 17, 2010 by President Plosser to the World Affairs Council of Philadelphia).
He stated:
"I believe that the Fed's 13(3) lending authority should be either eliminated or severely
curtailed. Such lending should be done by the fiscal authorities only in emergencies and,
if the Fed is involved, only upon the written request of the Treasury. Any non-Treasury
securities or collateral acquired by the Fed under such lending should be promptly
swapped for Treasury secmities so that it is clear that the responsibility and
accountability for such lending rests explicitly with the fiscal authorities, not the Federal
Reserve. To codify this arrangement, I believe we should establish a new Fed-Treasury
Accord ... This would eliminate the ability of the Fed to engage in 'bailouts' of individual
firms or sectors and place such responsibility with the Treasury and Congress, squarely
where it belongs."
Do you agree with President Plosser?
Do you believe that modifications to Section 13(3) of the Federal Reserve Act would be
useful in clarifying emergency responses of various branches of government to financial
crises? If so, what modifications do you believe would be most useful?
Do you favor the establishment of a new Fed-Treasury Accord to provide greater distinction
between fiscal policy actions and lender-of-last resort actions taken by the Federal Reserve in
an emergency?
2.
Interest on Reserves
Congress provided the authority to pay interest on reserves to the Board of Governors of the
Federal Reserve, and not the Federal Open Market Committee (FOMC). Similarly, the Board of
Governors, and not the FOMC, has authority over setting the discount rate and reserve
requirements. According to minutes ofthe January 26-27,2010, FOMC meeting, the interest
rate paid on excess reserve balances (the JOER rate) is one ofthe tools available to support a
gradual retum to a more normal monetary policy stance. Quoting from the minutes:
"Participants expressed a range of views about the tools and strategy for removing policy
accommodation when that step becomes appropriate. All agreed that raising the IOER rate
and the target for the federal funds rate \vould be a key clement of a move to less
accommodative monetary policy."
Arc there any possible future conflicts or difficulties that you could imagine might arise from
having the Federal Reserve's target for the federal funds rate determined by the FOMC while
the IOER and discount rate are detem1ined by the Board of Governors?
As it moves toward a more normal monetary policy stance, the Federal Reserve may usc the
IOER rate to help manage reserve balances. If the IOER rate, rather than a target for a
market rate, becomes an indicator of the stance of monetary policy for a time, will the
balance of power over monetary policy between the FOf...,IC and the Federal Reserve Board
change?
3.
Monetary Policy and Fiscal Policy Distinction
Several regional Federal Reserve bank presidents have expressed conccm that actions taken by
the Fed, many under Section 13(3) authority, were actions to channel credit to specific firms or
specific segments of financial markets and the economy. The concern is that some actions
amounted to fiscal, and not lender oflast res01i, policies. Moreover, in a March 23, 2009 joint
press release, the Fed and the Treasury stated the following:
"The Federal Resen-e to avoid credit risk and credit allocation

The Federal Reserve's lender-of-last-resort responsibilities involve lending against
collateral, secured to the satisfaction of the responsible Federal Reserve Bank. Actions
taken by the Federal Reserve should also aim to improve financial or credit conditions
broaJly, not to allocate credit to narrowly-defined sectors or classes of borrowers.
Government decisions to influence the allocation of credit are the province of the fiscal
authorities."
In accord with the joint statement, should the Fed's stock of agency debt and mortgagebacked secmities along with its Maiden Lane holdings be swapped for Treasury securities,
thereby transparently placing the channeling of credit support to the housing sector firmly in
the hands of fiscal authorities?
The Fed has purchased over $1 trillion of agency mortgage-backed-securities and intends to
complete purchases of $1.25 trillion of those securities by the end of March. To help finance
those purchases, the Fed uses supplemental borrowing from the Treasury and issues interestbearing reserve balances. In effect, the Fed is borrowing from the public, including banks,
with promises to repay the borrowed sums plus interest. The Fed will continue that
borrowing in order to hold on to its mortgage-backed-securities until those assets gradually
decline as they mature or are prepaid or sold. \Vhcn the Fed effectively finances an
enom10us portfolio holding of a specific class of assets using interest bearing debt issued to
the public, ho\v is that not a fiscal policy exercise?
4.
Systemic Risk Regulation
Your Fcbmary 25,2010, testimony identifies that the Fed is making fundamental changes in its
supervision of bank holding companies to, in your words, "incorporate a macropmdential
perspective that goes beyond the traditional focus on safety and soundness of individual
institutions."
Could you precisely define what you mean by a "rnacropmdential perspective," and what
metrics guide that perspective?
Does the Fed intend to redefine \vhat regulators should regard as "safety and soundness?"
5. Federal Reserve's Asset Holdings
Charles Plosser, President of the Federal Reserve Bank of Philadelphia, stated in a recent speec.,
that " ... the Fed could help preserve its independence by limiting the scope of its ability to engage
in activities that blur the boundary lines between monetary and fiscal policy. Thus, as the
economic recovery gains strength and monetary policy begins to nom1alize, I would favor our
beginning to sell some of the agency mortgage-backed securities from our portfolio rather than
relying only on redemptions of these assets. Doing so would help extricate the Feel from the
realm of fiscal policy and housing finance."
6. Treasury Financing Account at the Fed
On Febmary 23, 2010, the Treasury announced, rather suddenly and surprisingly, and without
much explanation, that it anticipates increasing its Supplementary Financing Account at the Fed
by around $200 billion over the next two months. This means, essentially, that the Treasury will
borrow on behalf of the Fed and simply hold the funds in the Treasury's account at the Fed. I
understand that the Treasury's Supplementary Financing Program helps the Fed absorb reserves
from the banking system and manage its balance sheet. I wonder, however, about the lack of
infonnation concerning why the Treasury suddenly decided to increase its balance at the Fed.
Was the Treasury's February 23 announcement planned in advance and coordinated with
the Fed, or was it a surprise to the Fed?
What are the future plans for the size of the Treasury's Supplemental financing Account?
Who \Vill decide what will be the future balances in the Supplemental Financing Account?
7. Efforts to Toughen Capital and Liguiditv Requirements

Your testimony on February 25, 20 l 0 identifies that" ... the Federal Reserve has been playing a
key international role in international efforts to toughen capital and liquidity requirements tor
financial institutions, particularly systemically critical firms ... ''
Could you describe what those efforts have been?
Could you define a "systemically critical" firm and identify how many such fim1s cunently
operate in the United States?
30ARO OF GOVERNORS
OF THE

VIASM!.N::;TON. 0
2CJSSI
Bt:N 5. BE:PNANK.E
::HAlRMAN
April 15,2010
The I Ionorabk Jim Bunning

Dear Senator:
Enclosed arc my responses to the \vritten questions you submitted following the
february 25,2010, hearing before the Committee on Banking. Housing and Urban
Amtirs. !\ copy has also been forward.:d to the Committee for inclusion in the hearing
record.
Sincerely,
Enclosure
Questions for The Honorable Ben Bernanke, Chairman. Board of Governors of the Federal
Rcscnc Svstem, from Senator Bunning:
l. Treasury recently announced they were starting up the Supplemental Financing
Program again. Under that Program, Treasury issues debt and deposits the cash '"''ith the
Fed. That is effectively the same thing as the Fed issuing its own debt, which is not allowed.
What are the legal grounds the Fed and Treasury use to justify that program'? And did
anyone in the Fed or Treasury raise objections vrhen the program ;vas created'?
Section 15 of the Federal Reserve Act requires the Fcdcr;:tl Reserve to act as fiscal agent for the
United States and authorizes the Treasury to deposit money held in the general fund of the
Treasury in the Federal Reserve Banks. Balances held by the Reserve Banks in the Treasury's
Supplementary Financing Account (SF A) arc deposited and held under this authority. Although
the Treasury and the Federal Reserve have consulted closely on matters regarding the
Supplemental Financing Program (SFP), the Treasury makes all decisions on balances to be held
in the SFA.
I arn not aware of any staff member or poiicymaker raising legal objections to the creation of the
SFP. J Iovvevcr, at least one Federal Reserve policymaker has publicly expressed policy concerns
with the SFP. See Real Time Economics, WSJ Blogs, "Q&A: Philly Fed's Plosser Takes on
'Extended Period' Language," March 1, 20 10.
2. Given what you learned during the AIG crisis and bailout, do you think Congress
should be doing something to address insurance regulation or the commercial paper
market?
The financial crisis has made clear that all financial institutions that arc so large and
intcrconn<:cted their failure could threaten the stability of the financial system and the economy
must be subject to consolidated supervision. Lack of strong consolidated supervision of
systemically critical firms not organized as bank holding companies. such as AIG, proved to be
a serious regulatory gap. The Federal Reserve strongly supports ongoing efforts in the Congress
to refonn financial regulation and close existing gaps in the regulatory framework.
An effecti vc framework for financial supervision and regulation also must address
macroprudential risks--that is. risks to the financial system as a whole. The disruptions in the
commercial paper market following the failure of Lehman Brothers on September 15, 2008 and
the breaking of the buck by a large money fund the follov.;ing day are examples of such
macroprudential risks.
Legislative proposals in both the House and Senate would also improve the exchange of
information and the cross-fertilization of ideas by creating an oversight council composed of
representatives of the agencies and depm1mcnts involved in the oversight ofthe financial sector
that would be responsible for monitoring and identifying emerging systemic risks across the full
range of financial institutions and markets. The council would have the ability to coordinate
responses by member agencies to mitigate identified threats to financial stability and,
importantly, would have the authority to recommend that its member agencies, either
-}
individually or collectively, adopt height<o:necl prudential standards for the firms under the
agencies' supervision in order to mitigate potential systemic risks.
3a. When did you know that AIG's swaps partners were going to be paid off at effectively
par value in the Maiden Lane 3 transaction?
3b. Did you or the Board approve the payments?
I was not directly involved in the negotiations with the counterparties that sold multi-sector
collateralized debt obligations (''COOs") to Maiden Lane III LLC ("ML III") in retum for
termination of credit default swaps AIG had written on those COOs. These negotiations were
handled by the staff of the Federal Reserve Bank of New York ("FRBNY"). I participated in and
support the final action of the Board to authorize lending by the FRBNY to ML Ill for the
purpose of purchasing the CDOs in order to remove an enormous obstacle to AIG 's financial
stability and thereby help prevent a disorderly failure of AIG during troubled economic times.
As explained in the testimony of Thomas Baxter, Executive Vice President and General Counsel,
FRBNY, before the Committee on Oversight and Govemment Reform on January 27,2010, the
Federal Reserve loan to ML III was used by ML I1l to purchase the multi-sector CDOs
underlying AIG's CDS at their current market value (approximately $29 billion), which
represented a significant discount to their par value ($62 billion). Collateral already posted by
AIG (not ML III) under the terms of the CDS contracts \vas also relinquished by AIG in retum
for tearing-up the contracts and freeing AIG of further obligations under the CDS contracts.
Before agreeing to the transaction, the federal Reserve consulted independent financial advisors
to assess the value of the underlying CDOs and the expectation that the value of the COOs would
be recovered. The advisors believed that the cash flmv and returns on the CDOs would be
sufficient, even under highly stressed conditions, to fully repay the Federal Reserve's loan to f'v1L
III. Under the terms of the agreement negotiated with AIG, the Federal Reserve will also
receive t\vo-thircls of any profits received on the COOs after the Federal Reserve's loan and
AIG's subordinated equity position arc repaid in full.
3c.
\Vhen did you find out about the cover-up of the amount of the payments'?
3d.
J)id you approve of the efforts to cover up the amount of the payments'?
3e.
If you did not approve of the cover-up at the time, do you believe that it was the
right decision?
The amount of the payments to the CDS counterparties was fully disclosed by AIG. Moreover,
the federal Reserve fully disclosed the amount of its loan to ML III and the fair value of the
assets that serve as collateral for that loan in both the weekly balance sheet of the
Federal Reserve (available on the Board's website) and in the Board's reports to Congress as
required by law.
AIG was at all times responsible for complying with the disclosure requirements of the various
securities laws. I was not involved in the discussions between the Federal Reserve and AJ(]
- 3-
related to AIG's securities Jaw filings. I fully supported AIG's decision to release publicly in
March 2009 the identities of these counterparties.
4. The Fed has been out in the press talking about how they are going to make money on
their AIG loans, making it sound like a good deal for the taxpayers. However, that is not
the whole story because Treasury has committed some $70 billion to the AIG bailout. So
the taxpayers are still exposed to AIG, and in fact arc likely to take losses. Do you agree
that the Fed's exposure to AIG is not the whole story and the taxpayers are likely to face
losses from the AIG bailout'!
As you know, the Federal Reserve provided liquidity to AIG through a direct line of credit and
through loans provided to two Maiden Lane facilities that funded certain assets of AIG.
Extensive information about each of these credits is available on the Board's website and in
reports and testimony provided by the Federal Reserve to Congress. Based on analysis of the
collateral supporting these loans by experienced third party advisors and the FRBNY, the
Federal Reserve expects to be fully repaid on each of these credits, vvith no loss to the taxpayers.
The Treasury Department has provided equity to AIG. Like the liquidity provided by the
Federal Reserve, this equity was provided in order to prevent the disorderly collapse of AIG
during a period of extreme financial stress that could have caused significant economic distress
for policy holders, municipalities, and small and large businesses, and led to even greater
financial chaos and a far deeper economic slump than the very severe one we have experienced.
5. Did you or the Board approve of then New York Fed President Geithner staying on at
the New York Fed while working for the Obama flansitlon team? If yes, why did you
think that was a good idea?
Timothy Gcithncr was appointed President of the Federal Reserve Bank of New York for a five
year term that extended until February 28, 2011. When President Gcithner was asked by the
President-elect of the United States to serve as Secretary of the Treasury, President Geithner
withdrew from the Bank's day-to-day management pending his confirmation by the Senate. He
also relinquished his Federal Open Market Committee (FOMC) responsibilities which were
assumed by Christine Cumming, the Reserve Bank's alternate representative elected in
accordance with the Federal Reserve Act. President Geithner did not attend the December 2008
FOMC meeting. Ms. Cumming served as a voting member of the FOMC until President
Gcitlmer's successor took office. It was expected that President Gcithner \vould continue to
serve as President of the Reserve Bank at least through the end ofhis term if he did not become
Secretary of the Treasury.
6. Is the Fed now, or has the f'ed in recent years, purchased Greek Government or bank
debt'?
The Federal Reserve has not purchased debt of the government of Greece nor has the Federal
Reserve purchased the debt of any Greek financial institution. Detailed information on the
Federal Reserve's foreign exchange holdings, both currency and investments, is available in the
quarterly Treasury and Federal Reserve Foreign Exchange Operations report published by the
- 4-
Federal Reserve Bank of New York. Sec

http://v.-\\\V.newvorkfed.om./markets/quar reports.html.
7. Unemployment numbers continue to bounce up and down every week. As this year goes
on, the Census is going to be hiring 700,000 to 800,000 workers on a temporary basis. Are
you worried those numbers will distort the true jobs picture, and that economic forecasts
that usc those jobs numbers will be wrong?
As you suggest, hiring of temporary \VOrkers by the U.S. Bureau of the Census in support of the
decennial census vvill elevate the total payroll employment counts reported by the Bureau of
Labor Statistics (BLS) each month because these temporary workers are included in federal
govcmmcnt employment in the Current Employment Statistics (CES) survey. However, I do not
think that Census hiring will make it much more difficult than usual to interpret the monthly
employment reports. The BLS is publishing information each month on the number of
temporary census workers in the CES data, and thus it will be straightforward to adjust the data
to calculate the monthly changes in payroll employment excluding the effects of Census hiring;
moreover, Census hiring will not distort the BLS estimates of employment change in the private
sector. In addition, the Bureau of the Census has made available its hiring plans for coming
months. which economic forecasters can use in making their projections of employment changes
for the remainder of this year. Although these plans are subject to change, based on this
information, the Department of Commerce expects the effect on the level of payroll employment
reported by the BLS to peak at about 635,000 jobs in May 2010 and to fall back to roughly
25,000 jobs by September. The extent to which Census hiring reduces the measured
unemployment rate is more difficult to estimate because that effect depends on the prior labor
force status of the temporary Census workers. However, based on the employment estimates, the
peak effect on the unemployment rate in May would probably be between l/,; and Y" percentage
point.
8. Please explain how term deposits and reverse repo transactions arc not the economic
There are a number of similarities and differences bet\veen term deposits, reverse repurchase
agreements and agency debt obligations. In principle, each could he used to drain reserves from
the financial system in order to reduce the potential for inflation and thereby maintain price
stability. Indeed, various central banks usc instruments similar to these to help manage interest
rates and maintain price stability.
In the United States, Congress has specifically authorized the Federal Reserve to accept deposits
from depository institutions. (See l2 USC 342). Congress has also specifically authorized the
Federal Open Market Committee to direct Reserve Banks to purchase and sell in the open market
obligations of, or obligations guaranteed as to principal and interest by, the United States or its
agencies. (See 12 USC 263 and 355). Reverse repurchase agreements represent the sale and
purchase of obligations ot~ or obligations guaranteed as to principal and interest by, the
United States or its agencies. Congress has not specifically authorized the Federal Reserve to
issue its O\Vn agency debt obligations.
- 5Unlike deposits and reverse repurchase agreements, agency obligations are freely transferable.
T em1 deposits may only be accepted from depository institutions and are not transferable.
Reverse repurchase agreements also arc not transferable and occur only \Vith counterparties that
are interested in purchasing qualifying govenunent or agency securities.
9. Given that you have signaled that the Fed will be using the interest on reserves rate as a
policy tool in the near future, do you believe that rate should be set by the Federal Open
Market Committee rather than the Board of Governors?
As you know, the Congress has assigned to the Board the responsibility for determining the rate
paid on reserves. Although the Federal Open Market Committee (FOMC) by law is responsible
for directing open market operations, the Congress has also assigned to the Board the
responsibility for determining certain other important terms that are relevant for the conduct of
monetary policy--for example, the Board "reviews and determines'' the discount rates that are
established by the Federal Reserve Banks; the FOMC has no statutory role in setting the discount
rate. Similarly, the Board sets reserve requirements subject to the constraints established by the
Congress; the FOMC has no statutory role in setting reserve requirements.
For many years, the Board and the FOMC have worked collcgially and cooperatively in setting
the discount rate, the federal funds target rate, and other instruments of monetary policy. I am
convinced that the Board and the FOMC will continue to work cooperatively in the f11ture in
8QARO OF GOVERNORS
OF THE

VJASH>NGTON. 0, C 205Si
8EN 5
8E.RNAI'-JKE:
;:H_.:l,!Rtv1AN
April 16,2010
The Honorable Melissa Bean

Dear Congresswoman:
Enclosed are my responses to the written questions you submitted follmving the
October l, 2009, hearing before the Committee on Financial Services entitled "Federal
Reserve Perspectives on Financial Regulatory Reform Proposals." A copy has also been
forwarded to the Committee for inclusion in the hearing record.
Please let me know ifi can be of further assistance.

Sincerdv. ,
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Questions for The Honorable Chairman Ben Bernanke, Chairman, Board of Governors of
the Federal Reserve Svstem, from Representative Bean:
l. The proposal of having the Federal Reserve being the consolidated regulator of tier 1
holding companies calls for the Fed to supersede the regulatory authority of the functional
regulator which is different from the relationship between the Fed and the functional
regulators for bank holding companies (Fed defers to functional regulator in most cases).
If ABC Bank Holding Company is determined to be a Tier 1 holding company, do you
envision the Federal Reserve becoming the functional regulator for a national bank within
the bank holding company instead of the National Bank Supervisor? What if XYZ holding
company that owns an insurance subsidiary is determined to be a Tier l holding company,
do you envision the Federal Rescn'c conducting day to day supervision over the current
state insurance regulators?
The Federal Reserve would not become the functional regulator of either national banks or
insurance companies under any of the pending financial reform proposals. The Office of the
Comptroller of the Currency [or its successor] would continue to perform day-to-day supervision
of national banks and the appropriate state insurance supervisors would continue to supervise
insurance companies. Where the national bank or insurance company is part of a bank holding
company structure, the authority of these functional supervisors \VOu!d continue to be
complemented by prudential supervision by the Federal Reserve across the organization as a
whole.
To be fully effective, consolidated supervisors must have clear authority to monitor and address
safety and soundness concerns and systemic risks in all parts of an organization, working in
coordination with other supervisors \vherever possible. As the crisis has demonstrated, large
firms increasingly operate and manage their businesses on an integrated, firm-wide basis. with
little regard for the corporate or national boundaries that define the jurisdictions of individual
functional supervisors, and stresses at one subsidiary can rapidly spread within the consolidated
organization. A consolidated supervisor thus needs the ability to understand and address risks
that may affect the risk profile of the organization as a whole, whether those risks arise from one
subsidiary or from the linkages between depository institutions and nondepository affiliates. The
financial reform legislation recently passed by the House of Representatives would make useful
modifications to the provisions added to the law by the Gramm-Leach-Bliley Act in 1999 that
limit the ability of a consolidated supervisor to monitor and address risks within an organization
and its subsidiaries on a group-wide basis. The Federal Reserve supports these modifications.
The legislation passed by the House of Representatives would suppkment these enhanced
authorities for individual supervisors by a broad-based council for the financial system as a
whole. Such a council composed of all the financial agencies and departments involved in
financial supervision and regulation would be very helpful in monitoring and identifying
emerging systemic risks across the full range of financial institutions and markets. In addition,
such a council usefully could coordinate the supervisory and regulatory responses of financial
supervisors to emerging systemic threats, thereby promoting greater harmony and efficiency in
supervisory and regulatory matters of systemic importance.
L~ 1'2~\..\.\.\.;{'r-~~)"--- \~-\i'-ti',\-'i'{'k:-"--"
Rep. Melissa Bean Question for the Record

House Committee on Financial Services Hearing Entitled: Federal Reserve Perspectives on
Financial Regulatory Reform Proposals
October 1, 2009
l. The proposal of having the Federal Reserve being the consolidated regulator of tier 1
holding companies calls for the Fed to supersede the regulatory authority of the
functional regulator which is different from the relationship between the Fed and
functional regulators for bank holding companies (Fed defers to functional regulator in
most cases). If ABC Bank Holding Company is detem1ined to be a Tier 1 holding
company, do you envision the Federal Reserve becoming the functional regulator for a
national bank within the bank holding company instead of the National Bank Supervisor?
What ifXYZ holding company that owns an insurance subsidiary is determined to be a
Tier 1 holding company, do you envision the Federal Reserve conducting day to day
supervision over the current state insurance regulators?
OC)- I;{& DO
BOARD OF GOVERNORS

W;..SrilNGTON, D C 20551
3N 5. SLRNANXL
CiAiR:v\,."\N
April 16,2010
The Honorable Bill Foster

Washington. D.C. 20515
Dear Congressman:
Enclosed arc my responses to the written questions you submitted following the
October 1, 2009, hearing before the Committee on Financial Services entitled "federal
Reserve Perspectives on Financial Regulatory Reform Proposals." A copy has also been
forwarded to the Committee for inclusion in the hearing record.
Enclosure
Questions for The Honorable Chairman Ben Bernanke, Chairman, Board of Governors of
the Federal Reserve System, from Representative Foster:
L On what time scale might we expect that Congress might enumerate guidance on
principles for determining which firms are systemically important?
It is expected that the final version of financial services refom1 legislation enacted by Congress
\vill establish criteria to be used to identify systemically important firms.
Determining precisely which firms arc systemically important will require analysis of a number
of factors, including the linkages between firms and markets, drawing as much or more on
economic and financial analysis as on bank supervisory expertise. The consequences of a fim1's
failure are also more likely to be severe if the firm is large, taking account of both its on- and offbalance sheet activities. In addition, the impact varies over time: the more fragile the overall
financial backdrop and the condition of other financial institutions, the more likely a given firm
is to be judged systemically important. If the ability of the financial system to absorb adverse
shocks is low, the threshold for systemic importance will more easily be reached.
2. It appears that you arc institutionalizing periodic stress tests for Tier I FHCs. What
parameters, frequency, and public reporting requirements arc contemplated? Would the
periodic stress tests be applied to a subset of firms designated to be systemically important'?
Drawing on our experience in the successful Supervisory Capital Assessment Program (SCAP),
we have increased our emphasis on horizontal examinations, which focus on particular risks or
activities across a group of banking organizations, and we have broadened the scope of the
resources we bring to bear on these rcviev,'s. We also are in the process of creating an enhanced
quantitative surveillance program for large, complex organizations that will use supervisory
information, firm-specific data analysis, and market-based indicators to identify emerging risks
to specific finns as \veil as to the industry as a whole. We have not yet determined whether or, if
so, how frequently to conduct stress tests like SCAP. We arc exploring the benefits of each tinn
incorporating specific parameters into its own stress tests as an alternative.
3. What are the staffing and technical capabilities that should be associated with the
.systemic risk oversight council'? Would it be comparable to the risk management efforts at
large firms'?
The financial reform legislation passed by the House would establish an oversight council-composed of representatives of the agencies and departments involved in the oversight of the
financial sector--that would be responsible for monitoring and identifying emerging systemic
risks across the full range of financial institutions and markets. In addition, the council would
have the ability to coordinate responses by member agencies to mitigate identified threats to
financial stability. And, importantly, the oversight council would have the authority to
recommend that its member agencies, either individually or collectively, adopt heightened
prudential standards for the firms under the agencies' supervision in order to mitigate potential
systemic risks. Examples of such risks could include rising and correlated risk exposures across
firms and markets; significant increases in leverage that could result in systemic fragility; and
-2-
gaps in regulatory coverage that arise in the course of financial change and iru10vation, including
the development of new practices, products, and institutions. The council also \Vould identify
those financial firms that should be subjected to enhanced prudential standards and supervision
on a consolidated basis.
While the council would require some dedicated staffing to fulfill its mandate, we envision that
the bulk of the staffing and technical expertise required for the council could be drawn from the
member agencies. For exan1ple, the Federal Reserve would provide resources and information
with respect to its role as a consolidated supervisor of financial groups while individual
functional regulators would do the same with respect to the institutions under their direct
supervision. Enhanced coordination and information sharing among the member agencies of the
council will be a critically important component of the process.
I-.
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I) On what time scale might we expect that Congress might enumerate guidance Oil
principles for dctcm1ining which firms are systemically important?
2) It appears that you are institutionalizing periodic stress tests for Tier I FHC's. What
parameters, frequency, and public reporting requirements are contemplated? Would the
periodic stress tests be applied to a subset or a superset of finns designated to be
systemically important?
3) What are the staffing and technical capabilities that should be associated with the
systemic risk oversight council? Would it be comparable to the risk management efforts
at large financial firms?
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2129 3:.\apburn ~ou5e ~Ulte ji)niilJin!!
~astm~ton, 191!: 20515
October 16, 2009

Chairman
20lh & C Streets, NW
Thank you for testifying at the October 1, 2009, Couunittee on Financial Services
hearing entitled, "Federal Reserve Perspectives on Financial Regulatory Reform Proposals."
A copy of your transcript. has been provided should you wish to make any
corrections. Please indicate these corrections direclly on the transcript. Due to the
disruption of mail service to the House of Representatives we ask that you fax the
transcript in lieu of mailing it. Please fax only the pages on which you have made
corrections, within (15) business days upon receipt to:

ATTN: Terrie Allison
Fax (202) 225-4254
Rule XI, clause 2(e)(l)(A) of the Rules of the House and Rule 8(a)(1) of the H.u1es of
the Committee state that the transcript of any meeting or hearing shall be ''a substantially
verbatim account of the remarks actually made during the proceedings, subject only to
technical, grammatical, and typographical corrections authorized by the person maldng the
remarks involved." We therefore ask that you keep your corrections to a 1~inimum.
Also included are questions submitted by Representatives Bean, Foster, and Miller.
We ask that you respond to these questions in writing for the hearing record. Your
responses may be faxed to the above number, along with your transcript corrections.
Please contact Terrie Allison at (202) 225-4548 if there are no corrections to your
transcript.
If during the hearing you: (1) offered to submit additional material; or (2) were
requested to submit additional material; please submit this material via electronic mail by
sending it to terrie.al1ison@mail.house.gov. If you are unable to submit the material
electronically, please contact the Committee staff to aiTange for submission.
Page 2
Thank you for your cooperation, and again for your testimony.
1{;:~ ~" -0v" v Thomas G. Duncan

General Counsel
TGD/ta
Enclosure
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GF T H;::
April15, 2010

Dear Senator:
Enclosed arc my responses to the written questions you submitted follovving the
February 25, 2010, hearing before the Committee on Banking, Housing and Urban
AII1irs. A copy has :1lso been
f~mvarded
to the Committee for inclusion in the
he::~ring
record.
Please let me know ifi can be of further assistance.
Sincerely,
Enclosure
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Questions for The Honorable Chairman Ben Bernanke, Chairman, Board of
Governors of the Federal Reser..-e S>stem, from Senator ;\[erklev:

I. The homeowncrship rate in Canada is almost identical to that of the United
States. Yet the percentage of U.S. mortgages in arrears is fast approaching ten
percent while the percentage of Canadian mortgages in arrears has been relatively
stable for the past two decades at less than one percent. What characteristics of the
mortgage market in Canada do you believe have helped that country avoid a similar
foreclosure crisis?
A number of characteristics of the Canadian mortgage market helped Canada avoid a

foreclosure crisis. Canadian homeowners typically maintain greater equity in their
homes, in part because mortgage insurance, which is required \vben loan-to-value ratios
exceed 80 percent, is more costly than in the United States. Moreover, Canadian
mortgages arc subject to substantial pre-payment penalties, reducing the incentives of
households to regularly refinance their mortgages. \Vhile in general this limits
households' ability to take advantage of-falling interest rates, it also reduces the number
of"cash out" refinancings, increasing the average equity held by households.
In addition, a greater fraction of Canadian mortgages are prime mortgnges, which default
at lower rates than sub-prime mortgages. One reason the sub-prime market \Vas slov.;er to
grow in Canada is because of the incentives, noted above, for borrowers to make higher
downpayrnents. Another reason is that a smaller fraction of mortgages in Canada are
securitized, because even mortgages that have been securitized and resold carry a capital
charge, giving Canadian banks less incentive to securitize mortgage::>. A mortgage knder
that plans to hold a mortgage to maturity likely employs higher underwriting standards
than a mortgage lender that plans to securitize the loan.
Finally, Canada has experienced a comparatively milder labor-market dov.;ntum than the
United States and only a modest decline in house prices. These factors, too, have helped
reduce the incidence of default
2. All of the six major banks in C::~nada own investment banking and insurance
subsidiaries. All five of the major banks in Canada would probably be considered
"too-big-to-fail." Howcvcr, the Canadian bankiug regulators have prudently
enforced more stringent capital requirements including a 7 percent minimum of
Tier 1 capital and 10 percent minimum of total capital. Additionally, there is an
Assets-to-Capital :Multiple maximum of20 (or leverage ratio).
\Vhat lessons have you learned from observing the actions that Canadian regulators
have taken regarding the use of more stringent capital requirements than those
required under Basel Il?
At present, the U.S. regulatory capital rules result in a requirement for banking
organizations to hold capitzd at levels that are equal to, or exceed, Canadian peers;
notwithstanding that the stated required minimum Tier 1 risk-baseJ capit:1l ratio is
six pc:rce1:t t(>r --well capiulized" banks under PCA '- Because of stannorily requir;:;d
responses to the breeching of a PCA capital threshold. m::trkct forces generally nccessit:1te
banks ctnd bank holding companies to h,ld subst:mtially nwrc c<lpital than the "m:ll
capitalized" ratio requirements to ensure that significant losses can be absorhcd before a
'well capitaliLcd" ratio is breached. The following table outlines the Tier l, Total and
Leverage rattl)S of the top six U.S. bank holding companies and provides our estimate of
their respective Assets-to-Capital :tv1u!tiplc as computed under the Canadian regulatory
capital regime. As shown belov.;, each of the top six U.S. bank holding companies \Vould
easily exceed the Canadian standards outlined above.
Selected Capital Ratios

Six Largest U.S. Bank Holding Companies
(as of December 3 I, 2009)
Assets-to-Tier
1 Capital
Multiple
(Inverse of
Assets-toCapital
Multiple
(Canadian
Definition)
Total
RiskI3ased
Capital
Tier l
Leverage
Ratio
10.41 '','(,
14.67%
6.91%
14.5
1 f.6
Chase
ll.!O%
14.78%
6.88'%
l-t5
13.7
Citigroup
ll.67'ro
15.25'?/o
6.89'~;,
14.5
12.7
WcUs Fargo
9.25%
l3.26~o
7.87~o
!2.7
9.6
Goldman
Sachs
14.97%
18.17%
7.55%
l ... ;
123
1\lorgan
Stanley
15.30%
16.38%
5.80%,
17.2
17.1
Tier 1
Risk-Based
Capital
Bank of
America
U.S.
Leverage
R:1tio)
JP Morgan
_') ....;.
The Federal Reserve believes that, going forward, capital requirements \Vill need to be
rccalibr:.1ted to directly address the inappropriate incemives that \verc the underlying
causes of the financial crisis. We arc engaged inn significam efi\.)rt both here in the t:.s.
and :1broad to achieve this objective..
To b<O consid.:rcd "well capitalized'' under the lJ S Prompt Conectivc Acti,)n (PC:\) rcqlllr.:rnents, a b,m.k
must have a Tier I Leverage ratio of no less than )%, a Tier l risk-basd .:apital ratio of no ies-> than 6'',-:,, a
Total risk -based capinl ratio of no less than l 0~ "
_)
3. Canada has an independent consumer protection agency, called the Consumer

Financial Agency of Canada. Do you believe that this agency's mission and
independence has helped the Canadian financial markets remain stable and well
capitalized, enn under the current economic conditions?
Consumer protection la . . vs are very important fur maintaining a well-functioning financial

The financial Consumer Agency of Canada (FCAC) is responsible for ensuring
compliance with consumer protection laws and regulations; monitoring financial
institutions' compliance with voluntary codes of conduct; and informing consumers of
their rights and responsibilities as \veil as providing general infonnation on fina.ncia!
products.
S)''Stern.
Ensuring compliance with consumer protection laws is an important defense against

future financial problems, and informed consumers are undoubtedly less likely to enter
unfavorable mortgage agreements. It is difficult to gauge, however, the extent to which
the quality of consumer information and extent of consumer protection help explain why
Canada had relatively few of the exotic, hard-to-understand sub-prime mortgages that
have had such high ddintlt ratt.;s in the United States. i\s noted in the answer to the
preceding question, other f~1ctors--the structure of the mortgage market and bank capital
regulation in Cmada--appear tl) represent more tangible reasons \Vhy the sub-prime
market was slow to develop in Canada.
4. Throughout the past year, many witnesses before the Senate Banl<ing Committee
have argued that the Yvidcsprcad practice of securitizing mortgages helped
propagate bad underwriting practices and contributed to the toxic nature of many,
if not all, investmmts in subprimc mortgages. The Canadian mortgage market only
has approximately 5 pcn:ent of outstanding mortgages categorized as "subprime."
Additionally, according to the Bank of Canada, 68 percent of mortgages remain on
the balance sheet of the lender and most residential mortgage financing is funded
through deposits. Do you think that banks who keep major portions of their
residential real estate lending "on the books" arc less likely to engage in the
financing of 'sub prime' mortgage lending?
lt is unlikely that a requirement to keep mortgage exposures on balance sheet \vould

make banking organintions less likely to underwrite ''subprime'' exposures. For
instance, prior to the financial crisis, many banking organizations entered into
"subprimc" mortgage sccuritizations and retained the 'first loss'' positions "on the
books," re11ecting a high risk tolerance for exposure to the 'subprimc" mortgage market.
Additiomlly, many other banking organizations proYidcd reC<)urse on "subprime"
mortgage exposures that they sold to securitization structures; again, a ref1ecli\ll1 of a high
risk tolerance 'subprime" mortgage exposures. If banking organizations \ven: no longer
allowed to place "subprime" mortgages into securitization vehicles. it could be
reasonably posited that banking organizations would continue to undcnvritc "subprime"
mortgages given the higher yield earned from these exposures and the fact that the
current risk-based capital hamevvork levies an identical capital requirement for a
"subprime" exposure as it does for a "prime" exposure.
-4-
There are several distinct differences benveen the U.S. and C:madian rnong;:rge markets
that raise difficulty in using the Canadian expcricnce as a comparator. For exampk, the
Cmada Mortgage and Housing Corporation (C\1HC), vvhich serves a similar function as
Freddie and Fannie, is guaranteed by the full taith and credit of Canada, in the same
manner as GN.\L\ is guaranteed by the United States. !\sa result, banking organintions
that invest in securitization structures through the C:VHIC arc required to hold no
regulatory capital against their investment (0 percent risk-weight exposure), versus in the
U.S. \\here banking organizations must risk-weight exposures to Freddie or Fannie at
20 percent. In addition, Canadian banking organizations are required to obtain private
mot1gJgc insurance (P.\tl) for all mortgages \Vith a loan-to-value ratio O\'Cr 80 percent
and they rnust maintain the P!'vll for the life of the loan, regardless of any subsequent
reduction in a mortgage's LTV that may result from loan repayment or house
appreciation. Bm.vever, banks that rely on private mortgage insurers receive a
government guarantee against losses that exceed 10 percent of the original mortgage in
the event of an insurer failure. As a result, Canadian banking organizations arc required
to hold relativdy little capital against mortgage exposures that are held on balance sheet-either through on-.balancc sheet mortgage portfc>lios or through investments in CMHC
sccuritizJtions.
The market for 'suhprime'' mortgages was all but ended for Canadian banking
organizations in 200?~ \Vhcn the CMI IC decided to no longer insure "subprimc"
mortgages. This provided a significant regulatory capital disincentive for Canadian
banking organizations tG underwrite "subprimc'' mortgages.
OF THE
FEDER.A.L RESERVE SYSTEM

81'; S, BE:RNANK
::
>-~">..
Rlv'.t:-.1'-l
April 15, 2010
The Honorable Sherrod Brown

UniteJ States Senate
\Va:;hington, D.C. 20510
Dear Senator:
Enclosed arc my responses to the written questions you submitted following tho
Affairs. A copy hJs also been forwarded to the Committee for inclusion in the hearing
record.
Please let me
kno'~<v
if I can be of further assistance.

Sincerely,
Enclosure
Questions for The Honor:1ble Chairman Ben Bernanke. Chairman. Board of Governors of
the Federal Reserve S-vstem. from Senator Bnnvn:
Bank Lending
I have heard from Ohio banks that banking regulators arc preventing them from
expanding commercial lending by requiring them to maintain greater capital reserves. I
agree that we need to ensure that uur banks are well capitalized, but at some point we've
got to get lending going again, particularly to businesses that \Vill use their money to hire
workers.
J. Hmv can banks strike a balance between being ''veil capitalized and still lending like they
arc supposed to?
The loss absorbing characteristics of capital proviJc the economic bedrock that supports pmdcnt
bank tending and, as such, it is not inconsistent for banks to remain \Vell capitalit:cd and
concomitantly engage in healthy lending practices. IIowcver, during the financial crisis, many
banks recorded significant financial losses that eroded their capital base and as a res\tlt, some
banks may be operating with reduced capital bases to support lending activities. In other
instances, well capitalized banks may be reluctant to lend if their outlook on economic
conditions lead thcrn to believe that additional losses are likely in the near term, which \:Vould
fi1rther erode their current capita! position. The Federal Reserve bdievcs tiut, in cases v.,;bere
banks arc concerned about potential additional losses, a prudent response would be for those
banks to increase their capital position in order to address this concern and to take advantage of
any clemancl in coJnmcrciallending. Likewise, we believe that an irnproving economic outlook
should help banks to bolster their capital kvcls and contribute to increased Yvillingness of banks
to !end.
2. Have yon considered taking any specific steps, like lowering the Fed's interest paymtnts
on excess bank reserves. or perhaps evtn imposing a penalty on hoarding money, to
promote greater lending?
The Federal Reserve's payment of interest on excess reserves is unlikely to be a significant

bctor in banks' current reluctance to lend. The Fcdcr~d Reserve is currently paying interest ;1t a
rate of only one quarter of one percent on banks' reserve balances. By contrast, the prime rme is
currently at 3-l/4 percent, and many bank lending rates arc considerably higher than the prime
rak. Given the large difference between the interest mtc paid on excess reserves and the interest
rates on banks, the ability to earn interest on excess reserves is unl ikcly to he an important reason
for the tightening of banks' lending standards and terms over the past few yc:1rs. Incleecl, survey
results suggest that the major reason that banks have tightened lending terms and standards over
the past t\VO years or so was their concern about the economic outlOc)k. As you know, the
Fe(kral Reserve has acted aggressively from the outset of the financial crisis to stabilize financial
market conditions and promote sustainable economic growth. An improving economic outlook
should contribute to increased willingness of banks to lend.
Bank Concentration
Banks are borrowing at record !m" intt:rest rates-particularly those banks that are
viewed as "too big to fail." According to the Center for Economic and Policy
Research, the 18 biggest banks arc getting what amounts to a :534.1 billion a year
subsidy because of their implicit government guarantee. More recent data from the
FDIC sho...-vs that big banks are turning a profit, but small banks arc not Data from
1999 shows that large banks' fees for overdrafts are 41% higher than at small banks
aml bounced check fees are 43% higher. Now borrowers arc having their lines of
acdit slashed and their bank fees arc still increasing.
3. So it appears that comumcrs and small banks arc suffering, while the big hanks
thrive. And the market is only getting more concentrated: 319 banks were forced to
merge or fail in 2009.
4. What steps is the Fed taking to ensure that there is not excessive concentration in the
banking industry, and that consumers are being well served through me.aningful
compctiiion?
The 1\iegle-Neal Interstate Banking and Branching Efficiency Act (lBBEA) of 1994 provides
prudential protection against excessive: concentration in the banking industry by prohibiting the
Federal RcscrYc from approving a bank acquisition that would result in a bank holding company
exceeding a natiom.vide deposit concentration limi!IItion of more than 10 percent of the total
amount of deposits of insured depository institutions in the l.Jnited States.
Not\vithstanding that protection, there arc many other potential methods to address the subsidies
that may arise because of perceptions that large financial firms are "too-big-to-f~lil.'' for
example, firms that might reasonably be considered "too-big-to-f:til" may be subject to higher
capital (and liquidity) requirements, rnore highly tailored resolution mechanisms, tighter deposit
shJ.re caps, required issuance of contingent capital instruments and/or subordinated debt
instruments, limitations on, or a ban of, certain etctivities (e.g .. heJge funds or private equity
fi.mds), and taxes on non-deposit balance-sheet liabilities. As the financial crisis winds down,
many of these types of proposals to reduce the subsidies that arise from implicit guarantees are
under consideration in the United States and abroad. In f~H:t, Federal Reserve staff are
participating on rnany international working groups that arc considering the potential effects,
including unintended consequences, that may arise from implementing such proposals either
singularly, or in combin:1tion. A key factor in such analyses is the impact on competition here in
the United States and internationally across borders.
Research on whether consumers benefit from "too-big-to-fail" subsidies is scant. It is plausible
that large financial institutions might pass along some of their subsidies to consumers to fuel
their own grO\vth at the expense of smaller peers. Some evidence, however, suggests othenvise.
For example, Passmore, Burgess, Hancock, Lebnat, and Shcrlund (in a presentation at the
Fcderal Reserve Bank of Chicago Bank Structure Conference, May 18, 2006) estimate that just
5 percent of the Fannie !'viae and Freddie ivfac 's borrowing advantage tlowcd through to
mortgage rates. resulting in just a few basis points reduction in conforming mortgage ]oJ.n rates.
.)
Evc:n if tinancial firms do nvt pass along their ''too-big-to-Llil'' subsidies to consumers, it does
not nc:cess;.:trily imp!; that the;' cannot pass along the hi~hcr costs thal \\Ould result from the
reduction of such subsiLlies. Indeed. larger finns m;:ry set the mark::t prices for some financial
products because of other cost advantages associated vvith their size. In such circumstances,
consumers may end up paying higher prices when "too-big-to-fail" subsidies are reduced (or
eliminated) even though they did not previously much benefit from such subsidies. That said, all
consumers benefit from a more stable financial system with less systemic risk and this is the goal
of reducing or eliminating ''too-big-to-fail" subsiJies.
Resolution of Failed Banks
You have previously said that you favor "establishing a process that would alion a failing,
systemically important non-bank financial institution to be wound down in any orderly
fashion, without jeopardizing financial stability." There's been a lot of talk about whether
this job should be done by banking regulators or a bankruptcy court.
5. Do you have an opinion about this, particularly whether the FDIC is doing a good job
with its resolution authority?

In rnost cases, the federal bankruptcy laws provide an appropriate
f]:.~mcwork
for the resolution
of nonbank financial institutions. However, the bankruptcy code docs not sufiicicntly protect the
public's strong inten;st in ensuring the orderly resolution of a nonbank financial firm whose
failure would pose substantial risks to the financial system and to the economy.
1\ new resolution regime for systemically-important nonbank financial firms, analogous to the
regime currently used by the Federal Deposit Insurance Corporation for b:mks, would provide
the government the tools to restructure or wind down such a firm in a way that mitigates the risks
to financial stability ;:md the economy and thus protects the public interest. It also would provide
the government a mechanism for imposing losses on the shareholders and creditors of the firm.
Establishing credible processes for imposing such losses is essential to restoring a meaningful
degree of market discipline and addressing the "too-big-to-fail" problem.
It would be appropriate to establish a high stJ.ndard for invocation of this new resolution regime
and to creak checks and halance::; on its potential usc, similar to the provisions governing use of
the systemic risk exception to least-cost resolution in the Federal Deposit Insurance Act (FDI
Act). The Federal Reserve's participation in this decision-making process would be an extension
of our long-standing role in protecting financial stability, involvement in the current process for
invoking the systemic risk exception under the FDI Act and status as consolidated supervisor for
large banking organizations. The Federal Reserve, however, is not well suited, nor do \Ve seck,
to serve as the resolution agency for systemically important institutions under a ne-...v framework.
Because the suitability of an entity to serve as the resolution agency for any particular finn may
depend on the flrn1 's structure and activities, the Treasury Department should be giYen flexibility
to appoint a receiver that has the requisite expertise to address the issues presented by a \vinddovvn of that firm.
- f -
Banks Trading Commodities Futures Derivatives

You gaYe an address at Harvard in 2008 in which you talked about out-of-control crude oil
prices. You said that "demand growth and constrained supplies" nere responsible for
"intense pressure on [gas] prices.'' Senator Carl Levin investigated the crude oil market
and found that speculation "appears to have altered the historical relationship between
[crude oil] price and inventory." In 2003, at the request of Citigroup and UBS, the Fed
authorized bank holding companies to trade energy futures, both on exchanges and overthe-counter.
6. GiHn that commodity prices affect the Consumer Price Index, which affects inflation,
have you investigated what effect the rule change, and the resulting investments in
commodities futures and other commodities-related derivatives, have had on oil prices'?
7. If not, how can you conclude that rises in gasoline prices arc due solely to simple
changes in supply and demand?
8. If presented with evidence that energy speculation was driving up prices or affecting
inf1ation, would you consider revoking the banks' authority to trade energy futures?
The broad movements in oil and other commodity prices have been in line with developments in
the global economy. They rose when global growth was strong and supply \Vas constrained, and
they collapsed with the onset of the global recession. As the global economy began to recover
and financial conditions began to normalize, commodity prices rebounded.
Nonetheless, the extreme price swings, particularly in the case of oil, have been surprising.
Some have argued that speculative activities on the part of financial investors have been
responsible for these outsized price movements. Notwithstanding considerable study, however,
conclusive evidence of the role of speculators and financial investors remains elusive. The
fundamentals of supply and denw.mt along with expectations for how these fundamentals >vill
evolvt~ in the future, remain the best cxplanatinn for the movements in commodity prices. That
said, we must remain open to other possibilities, and if conclusive evidence emerged that
commodity markets were not performing their price discovery an,i allocativc role efft~ctively.
then changes in regulatory policies may be appropriate.
Fed Purchases of Foreign Currencv Derivatives
In the wake of the Greek debt crisis, I'm concerned about governments' use of foreign
curnncy exchanges-that other governments might he using foreign currency swaps to
mask their debt, or for other purposes. We know that the federal H.eserve entered into
swaps nith Foreign Central Banks and then those Foreign Central Banks hailed out their
own banking systems. For example, the Federal Reserve worked with the Swiss central
bank on the rescue effort for LBS, securing dollars through a swap agreement for francs.
As of December 31,2008, the U.S. had entered into $550 billion in liquidity s;vaps with
foreign central banks.
-5-
9. How are these arrangements behvecn the Federal Reserve and the other central banks
structured'?
The dollar liquidity swap arrangements that the Federal Reserve entered into v.:ith foreign central
banks were fundamentally different from the currency s\vaps that have been discussed in the
Greek context According to reports, the Greek cross-currency S\\aps were highly srmctured
arrangements initiated eight or nine years ago between the government of Greece and a privatesector financial institution. These swaps apparently entailed payment obligations over a period
of 15 to 20 years v:ith large balloon payments at maturity, and they allowed the Greek
government to exchange into euros the proceeds of borrowing it had done in Japanese yen and
U.S. dollars at off-market rates of exchange.
The dollar liquidity swaps, the volume of v.:hich is now zero following the termination of the
arrangements in February, vvere more straigbtfonvard, shorter-term arrangements with foreign
central banks of the highest credit standing. In each dollar liquidity swap transaction, the Federal
Reserve provided U.S. dollars to a foreign central bank in exchange for an equivalent amount of
funds in the currency of the foreign central bzmk, based on the market exchange rate at the time
of the transaction. The parties agreed to swap back these quantities of their two currencies at a
specified date in the future, which \Vas at most three months ahead, using the same exchange rate
as in the initial exchange. The Federal Reserve also received interest corresponding to tbc
maturity of the swap drawing
Because the terms of each swap transaction \Vcrc set in advance, !1uctuations in exchange rates
following the initial exchange did not alter the eventual payments. Accordingly, these swap
operations carried. no exchange rate or other market risks. In addition, we judged our swap line
exposures to be of the highest quality and safety. The foreign cunency held by the Federal
R\.:scrve during the term of the swap provided an impo1tant safeguard. Furthermore, our
exposures were not to the institutions ultimately receiving the dollar liquidity in the foreign
countries but to the foreign central banks. We have had long and close relationships with these
central hanks, many of which hold substantial quantities of U.S. dollar reserves in accounts at the
Federal Reserve Bank ofNew York, and these dealings provided a track record that justified a
high degree of trust and cooperation. The short tenor of the swaps, \Vhich ranged from overnight
to three months at most, also offered sornc protection, in that positions could be wound dovm
relatively quickly were it judged appropriate to do so.
10. Are these swaps being used in any way to mask U.S. government debt'?
1'\o. These S\Naps were I imited to the exchange of U.S. dollar liquidity for f(weign-currcncy
liquidity and \vere not used in any way to mask tJS. government debt.
11. Docs the Federal Reserve keep track of which foreign banks ultimately receive U,S.
money from foreign central banks? If so, \\hat banks have gotten U.S. money, ami ho\v
muth has each gotten?
The Federal Reserve's cuntractual relationships were \ViTh the foreign central banks and not \Vith
the financial institutions ultimately obtaining the dollar funding provided by these operations.
Accordingly, the Federal Reserve did not track the names of the instituti~_ms f(~ceiving the dollar
-6 -
liquidity from the foreign central banks but instead kft w the t(m~ign central banks the
respons1biiity for managing the distributivn of the dollar funding. This responsibilit: included
dctcm1ining the eligibility of instiwti,ms that c,)tdd participate in the dollar icnding operations.
assessi11g the acceptability of the collateral offered, and bearing any residual credit risk that
might have arisen as a result of the lending operations.
12. Is the C.S. Treasury issuing Treasury bonds which the Fell is then buying through the
ll.K. or other foreign governments'?
No.
BOARD OF GOVERNORS
OF THE

WASHINGTON, D.C. 20551
April 15,2010
The Honorable Sherrod Brown

Dear Senator:
Enclosed arc my responses to the written questions you submitted following the
Affairs. A copy has also been forwarded to the Committee for inclusion in the hearing
record.
Sincerely,
Enclosure
(B-30, 10-3129)
BOARD OF GOVERNORS
OF THE

Aprill5,2010

Dear Senator:
Enclosed are my responses to the written questions you submitted following the
Affairs. 1\. copy has also been forwarded to the Committee for inclusion in the hearing
record.
Sincerely,
Enclosure
(B-30, 10-3129)
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v;CHAiJ. BfNI\ET, COLOHADO
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COMMITTEE ON BAf\IKING, HOUSING, AND

URBAN AFFAiRS
tC.\IARO S!i Vi::H\~ML STAP' ~R(CfOH

WILU,\M V OUNNK. R!:F'Ut-'.l iCM-! STA!-i' O!R(CfOR AND C:)L>NS(l
WASHINGTON, DC 20510-6075
March 5, 20 lO
The Honorable Ben Bernankc

Chainnan
Board ofGovcmors of the Federal Reserve Svstem
20'h Street and Constitution A venue, NW
"
Dear Chairman Bcrnanke:
Thank you for testifying before the Committee on Banking, Housing, and Urban Affairs
on February 25, 2010. In order to complete the hearing record, we would appreciate your
answers to the enclosed questions as soon as possible.
Please repeat the question, then your ans\ver, single spacing both question and ans\ver.
Please do not usc all capitals.
Send your reply to Ms. Dawn L. Ratliff, the Committee's Chief Clerk. She will transmit
copies to the appropriate onices, including the committee's publications office. Due to cunent
procedures regarding Senate mail, it is recommended that you send replies via e-mail in a MS
Word, WordPerfect or .pdf attachment to Da\vn Ratli fflct)bankin. senate. \!.OV.
If you have any qtJestions about this letter, please contact !VIs. Ratliff at (202)224-3043.
Sincerely,
CHRISTOPHER J. DODD
Chairman
CJD/dr
Questions for the Hearing on "The Semiannual

:\fonetary Policy Report to Congress"
February 25, 2010
Questions for The Honorable Ben Bernanke, Chairman. Board of Governors of the Federal
Reserve Svstem, from Senator Brown:
Bank Lending
I have heard fiom Ohio banks that banking regulators are preventing them from expanding
commercial lending by requiring them to maintain greater capital reserves. I agree that we need
to ensure that our banks are well capitalized, but at some point we've got to get lending going
again, particularly to businesses that will use their money to hire workers.
How can banks strike a balance between being well capitali:rcd and still lending like they arc
supposed to?
Have you considered taking any specific steps, like lowering the Fed's interest payments on
excess bank reserves, or perhaps even imposing a penalty on hoarding money, to promote greater
lending?
Bank Concentration
Banks are borrov,:ing at record low interest rates- particularly those banks that are viewed as
"too big to fail." According to the Center for Economic and Policy Research, the 18 biggest
banks are getting what amounts to a $34.1 billion a year subsidy because of their implicit
govemmcnt guarantee. i'v'1ore recent data from the FDIC shows that big banks are tuming a
pro1it, but small banks arc not. Data from 1999 shows that large banks' fees for overdrafts arc
41% higher than at small banks, and bounced check fees arc 43% higher. Now bon-0\vers are
having their lines of credit slashed and their bank fees arc still increasing.
So it appears that consumers and small banks are suffering, \vhilc the big banks thrive. And the
market is only getting more concentrated: 319 banks were forced to merge or fail in 2009.
\Vhat steps is the Fed taking to ensure that there is not excessive concentration in the banking
industry, and that consumers arc being \Vell served through meaningful competition?
Resolution of Failed Banks
You have previously said that you favor "establishing a process that would allow a failing,
systemically important non-bank financial institution to be wound down in an orderly fashion,
vvithout jeopardizing financial stability." There's been a lot of talk about whether this job should
be done by banking regulators or a bankruptcy court.
Do you have any opinion about this, particularly whether the FDIC is doing a good job with its
resolution authority?
Questions for the Hearing on "'The Semiannual
l\lonetary Policy Report to Congress"

February 25, 2010
Banks Trading Commodities Futures Derivatives
You gave an address at Harvard in 2008 in \Vhich you talked about out-of-control crude oil
prices. You said that "demand growth and constrained supplies" were responsible for "intense
pressure on [gas] prices." Senator Carl Levin investigated the crude oil market and found that
speculation 'appears to have alkrcd the historical relationship between [crude oil] price and
inventory." ln 2003, at the request ofCitigroup and UBS, the Fed authorized bank holding
companies to trade energy futures, both on exchanges and over-the-counter.
Given that commodity prices affect the Consumer Price Index, which affects inflation, have you
investigated what effect the rule change, and the resulting investments in commodities futures
and other commodities-related derivatives, have had on oil prices?
If not, how can you conclude that rises in gasoline prices are due solely to simple changes in
supply and demand?
If presented with evidence that energy speculation v.-as driving up prices or affecting inflation,
would you consider revoking the banks' authority to trade energy futures'J
Fed Purchases of Foreign Currency Derivatives

In the wake of the Greek debt crisis, I'm concerned about governments' use of foreign currency
exchanges- that other governments might be using foreign currency swaps to mask their debt, or
for other purposes. We know that the Federal Reserve entered into S\vaps with Foreign Central
Banks and then those Foreign Central Banks bailed out their own banking systems. For example,
the Federal Reserve worked \Vith the S\viss central bank on the rescue effort for UBS, securing
dollars through a swap agreement for francs. As of December 31,2008, the U.S. had entered into
$550 billion in liquidity s\vaps with foreign central banks.
HO\v arc these anangemcnts between the Federal Reserve and the other central banks structured?
Are these swaps being used in any way to mask U.S. govcmment debt?
Does the Federal Reserve keep track of which foreign banks ultimately receive U.S. money from
foreign central banks?
If so, what banks have gotten U.S. money, and how much has each gotten?
Is the U.S. Treasury issuing Treasury bonds which the Fed is then buying through the U.K. or
other foreign govemments?
Questions for the Hearing on "The Semiannual

Monetary Policy Report to Congress"
February 25,2010
Reserve Svstem, from Senator Mcrklcv:
1) The homcownership rate in Canada is almost identical to that of the United States. Yct,
the percentage of U.S. mortgages in arrears is fast approaching ten percent while the
percentage of Canadian mortgages in arrears has been relatively stable for the past two
decades at less than one percent. What characteristics of the mot1gage market in Canada
do you believe have helped that country avoid a similar foreclosure crisis''
2)
All of the six major banks in Canada own investment banking and insurance
subsidiaries. All five of the major banks in Canada would probably be considered "toobig-to-fail." Hmvcver, the Canadian banking regulators have pmdently enforced more
stringent capital requirements including a 7 percent minimum oCfier 1 capital and 10
percent minimum of total capital. Additionally, there is an Assets-to-Capital Multiple
maximum of20 (or leverage ratio).
What lessons have you learned from observing the acti.ons that Canadian regulators have
taken regarding the usc of more stringent capital requirements than those required under
Basel II?
3) Canada bas an independent consumer protection agency, called the Consumer Financial
Agency of Canada. Do you believe that this agency's mission and independence has
helped the Canadi:m financial markets remain stable and well capitalized, even under the
cunent economic conditions?
4) Throughout the past year, many witnesses before the Senate Banking Committee have
argued that the widespread practice of securitizing mongages helped propagate bad
undcn:vriting practices and contributed to the toxic nature of many, if not all, investments
in subprime mortgages. The Canadian mortgage market only has approximately 5
percent of outstanding morigagcs categorized as 'subprime.' Additionally, according to
the Bank of Canada, 68 percent of mortgages remain on the balance sheet of the lender
and most residential mortgage financing is funded through deposits. Do you think that
banks \vho keep major portions of their residential real estate lending "on the books" are
Jess likely to engage in the financing of 'subprime' mortgage lending?

Responsive Documents - CREW: Federal Reserve Board of Governors: Regarding Efforts To Influence Financial Regulatory Reform: 6/27/2011 Board of Gov. Fed Reserve Response 6-27-2011

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....

FECERAL RESERVE SYSTEM

ADDRESS OFFICIAL CORRESPONDENCE

June 27, 2011

Mr. Adam Rappaport

financial regulatory reforms proposed by President Obama

a group of reform bills passed by the House Financial

legislation proposed by Senate Banking, Housing, and Urban

new legislation proposed by Chairman Dodd on March 15,

Jooe 15, 2009

Ms. A. Patricia White

'liniwi ~mtrs tcwu.sc of ]Zrprc.srnratiurn

BARNEY FRANK. MA. CHAIRMAN

212.9 l\apburn Jjoune

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,Jnne 29, 2009

SPENCER BACHUS, AL, RANKING MEMBER

Honorable Ben S. Bernanke

Would it be necessary to insulate the Fed's traditional independence in

Should the Fed relinquish any roles and why?

Honorable Ben S. Bernanke

Honorable Ben S. Bernanke

The Committee on Financial Services endeavors to make its facilities accessible to

Subcommittee on Domestic Monetary

1lnite.d ;5tate.s !~ousc of fuprrnrntatintS

SPENCER BACHUS, Al, RANKING MEMBER

2129 l\apburtt ~oust \f)ffice ]SuHl:ling

July 13, 2009

Dear Chairman Bernanke:

The Financial Services Committee Subcommittee on Domestic Monetary Policy &

Should federal banking agencies retain a role in consumer protection? If so,

If the Federal Reserve retains a role in consumer protection, how could it

effectively balance consumer protection, systemic risk regulation and

Honorable Ben S. Bernanke

Honorable Ben S. Bernanke

The Committee on Financial Services endeavors to make its facilities accessible to

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COMMITTEE ON BANKING,. HOUSING,

July 17, 2009

The Honorable Daniel K. Tarullo

How should a systemic risk regulatory authority be structured? Should there be a

July 17, 2009

In addition, the Committee asks you to discuss:

how resolution of systemically important financial companies should be funded; and

l.lnitet1 .Statcg Houge of l\cprcscntatiurn

SPENCF.H UACHUS. AL fli\NKII'H) :vH:~.mcn:

Q::ommlttrr on Jimmcial ~cruiccn

1.U;mllingron, DQ.: 20111

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The Committee on Financial Services will hold a hearing on the "Regulatory

The Honorable Ben S. Bemanke

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