[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW THE FINANCIAL
STABILITY IMPROVEMENT ACT
DISCUSSION DRAFT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 17, 2009
__________
Serial No. 111-36
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Printed for the use of the Committee on Agriculture
agriculture.house.gov
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COMMITTEE ON AGRICULTURE
COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania, FRANK D. LUCAS, Oklahoma, Ranking
Vice Chairman Minority Member
MIKE McINTYRE, North Carolina BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa JERRY MORAN, Kansas
JOE BACA, California TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California SAM GRAVES, Missouri
DAVID SCOTT, Georgia MIKE ROGERS, Alabama
JIM MARSHALL, Georgia STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South RANDY NEUGEBAUER, Texas
Dakota K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas JEFF FORTENBERRY, Nebraska
JIM COSTA, California JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER, BILL CASSIDY, Louisiana
Pennsylvania CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho
______
Professional Staff
Robert L. Larew, Chief of Staff
Andrew W. Baker, Chief Counsel
April Slayton, Communications Director
Nicole Scott, Minority Staff Director
(ii)
C O N T E N T S
----------
Page
Boccieri, Hon. John A., a Representative in Congress from Ohio,
prepared statement............................................. 4
Cuellar, Hon. Henry, a Representative in Congress from Texas,
prepared statement............................................. 4
Latta, Hon. Robert E., a Representative in Congress from Ohio,
prepared statement............................................. 5
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma,
opening statement.............................................. 3
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 1
Witnesses
Gensler, Hon. Gary, Chairman, Commodity Futures Trading
Commission, Washington, D.C.................................... 6
Prepared statement........................................... 7
Walter, Hon. Elisse B., Commissioner, U.S. Securities and
Exchange Commission, Washington, D.C........................... 11
Prepared statement........................................... 12
Strom, Hon. Leland A., Chairman and CEO, Farm Credit
Administration, McLean, VA..................................... 16
Prepared statement........................................... 18
HEARING TO REVIEW THE FINANCIAL
STABILITY IMPROVEMENT ACT
DISCUSSION DRAFT
----------
TUESDAY, NOVEMBER 17, 2009
House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 11:00 a.m., in Room
1300 of the Longworth House Office Building, Hon. Collin C.
Peterson [Chairman of the Committee] presiding.
Members present: Representatives Peterson, Holden,
McIntyre, Boswell, Baca, Scott, Marshall, Herseth Sandlin,
Cuellar, Costa, Ellsworth, Walz, Schrader, Dahlkemper, Massa,
Bright, Markey, Kratovil, Schauer, Kissell, Boccieri, Murphy,
Pomeroy, Minnick, Lucas, Moran, Johnson, Rogers, Conaway,
Fortenberry, Schmidt, Smith, Roe, Luetkemeyer, Cassidy, and
Lummis.
Staff present: Tyler Jameson, John Konya, Scott Kuschmider,
Robert L. Larew, Clark Ogilvie, James Ryder, Rebekah Solem,
Tamara Hinton, Kevin Kramp, Josh Mathis, Nicole Scott, Jamie
Mitchell, and Sangina Wright.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE
IN CONGRESS FROM MINNESOTA
The Chairman. The Committee will come to order. This
hearing of the Committee on Agriculture to review the Financial
Stability Improvement Act discussion draft will come to order.
Good morning and welcome to today's hearing.
Late last month the House Financial Services Committee
released draft legislation to address systemic risk to our
nation's financial sector, as well as to monitor financial
institutions considered too big to fail. This legislation was
based on a proposal put forth by the Treasury Department
earlier this year, and we are reviewing this legislation today
given its implications and impact upon derivative markets and
the Farm Credit System, both of which belong to this
Committee's jurisdiction.
The Financial Services draft creates a Financial Services
Oversight Council made up of several agencies including the
CFTC, which would be given powers to identify certain financial
players and activities that could pose a systemic risk to the
economy, and, therefore, should be subject to heightened
standards, but beyond that the Council's authority is very
limited. The real power is being divested to the Federal
Reserve. The Federal Reserve would become the super-regulator
under the draft legislation. To the extent a financial entity
or activity is identified by the Council of deserving
heightened credential standards, the Federal Reserve can impose
whatever standards it sees fit over that entity or activity.
Even if the entity or activity is regulated by another member
of the Council, the Fed can impose its own regulatory standard
despite the agency's objections or expertise. For example, such
a setup would allow the Federal Reserve to impose its
regulatory review upon clearing entities like derivatives
clearing organizations and clearing agencies despite having no
experience as the primary regulator of these entities.
Why are we even thinking about giving more power and
authority to the Fed? It is one of the most unaccountable parts
of Federal Government. Its governance is influenced more on the
wishes of major banks than the American people. It refused to
police mortgage underwriting or impose suitability standards on
mortgage lenders. Its lax regulatory oversight contributed
greatly to the economic crisis last year.
I am skeptical of the idea of a systemic regulator in
general, and very much opposed to having the Fed play a leading
role as this draft proposes. As I have said before, no one
regulator, agency, board or entity is smart enough to measure a
true rise in the value of assets imposed to the creation of the
public, nor should any one regulator be given so much
independent power over our economy. Given the Federal Reserve's
cozy relationship for many decades with many of the too-big-to-
fail institutions that fall under their regulatory power it
makes me wonder whether anything would really change.
The proposed draft also contains provisions affecting the
Farm Credit Administration which is of concern to this
Committee and rural America. Under the draft, farm credit
institutions would fall into a loan retention provision aimed
at making sure creditors maintain some skin in the game when
making lending choices. While this may be appropriate for some
lenders, putting Farm Credit under this umbrella would have
unintended effects on rural America and the people that depend
on the Farm Credit loans. We had a ten percent risk protection
for Farm Credit-backed securities, but Congress removed it
because it was preventing a viable secondary market for
agriculture organisms. The repeal was accompanied by a strong
underwriting security appraisal and repayment statutory
standards, which have prevented any investor from credit losses
in Farm Credit-backed securities since then.
Farm country has experienced some credit stress, since the
1980s crisis we have been diligent in our oversight and have
made changes that have resulted in a more stable, reliable
financing network for rural America. As we speak, the Financial
Services Committee is marking up this proposed legislation. We
are monitoring this legislation closely and we expect it will
change in many ways before the Committee's work is done. If the
legislation's impact on those areas in our Committee's
jurisdictions are not addressed, we will be back here again.
So once again, I welcome today's witnesses. I look forward
to their input on how this legislation can be made stronger.
And at this time I would like to recognize my friend and
colleague the Ranking Member from Oklahoma, Mr. Lucas, for any
statement he would like to make.
OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN
CONGRESS FROM OKLAHOMA
Mr. Lucas. Thank you, Mr. Chairman, and thank you for
holding this hearing today.
As you know, I also sit on the Financial Services
Committee, the Committee that wrote the legislation we are to
consider today, and the House Agriculture Committee at the
conclusion of today's hearing will have had as many hearings as
the House Financial Services Committee had on the discussion
draft before it moved into markup. This bill, if nothing else,
certainly needs more consideration not less, and I congratulate
you on moving with haste to expose the shortcomings.
As we proclaimed in this Committee more than once, it
wasn't the futures markets that caused the financial meltdown
that this country experienced a little over a year ago. Why is
there a rush to change how futures markets are regulated? If we
take any pride in the integrity of the futures market then
certainly the CFTC can, yet it seems as though the CFTC is all
ready to rollback what many consider to be safe and sound core
principles based on its regulatory regime. But what is the risk
that we are trying to regulate out of existence? I will agree
there may be some issues that can be addressed in the OTC
markets and that, perhaps, different regulatory approaches in
that trading space can be beneficial. The legislation we review
today is not impressing just the less regulated or unregulated
OTC market but also the robustly regulated futures market.
Even if one can make a persuasive argument that the futures
markets need more regulation, and if someone can I don't think
I have really heard it yet, no one can credibly argue that the
Federal Reserve Board ought to be the primary regulator. In
fact, I would argue that it isn't and shouldn't be a market
regulator at all. It is a central bank and the maker of
monetary policy. It can be a bank regulator. It is not and
should not be the regulator of day-to-day market activities,
especially in markets that have no or very little resemblance
to the market or banking industry.
The CFTC has done a remarkably competent job in regulating
America's futures markets. Yes, everyone can point to a
frustration or two. We still have convergence problems in some
agricultural commodity contracts. We are still waiting on the
joint rulemaking for a single stock futures portfolio margin.
We can always argue whether financial risk should be afforded a
hedge exemption, or whether certain foreign entities should be
allowed to operate under staff issued no-action letters. These
issues, however, are evidence that the regulatory scheme and
the regulators are effective and competent. These issues aren't
a cause for a regulatory overhaul. Why this Congress would be
so interested in throwing the baby out with the bath water is
beyond me, but that is exactly what Chairman Frank's discussion
draft does. It takes competent regulators and an effective
regulatory system and subordinates them to a potential entity
that hasn't shown the ability to be effective and efficiently
use the power that it has, or that it has any particular
expertise in this specialized, nuanced market. On this same
theme the legislation sucks in the Farm Credit Administration.
I didn't say the legislation sucks. I said it sucked in the
Farm Credit Administration and the System institutions with no
understanding of the issues of financial risk that were
resolved in the 1980s. The System has shown its own insurance
fund and existing joint and civil liability among institutions
can protect against risky behavior. In short, the Farm Credit
System does not belong in this bill.
Mr. Chairman, I again thank you for holding this hearing. I
thank you for allowing us to bring more attention to this piece
of legislation that needs to withstand more critical thought,
more critical scrutiny before it potentially progresses. Thank
you, sir.
The Chairman. I thank the gentleman for his statement and
other Members will have the opportunity to enter their opening
statements for the record.
[The prepared statements of Messers. Boccieri, Cuellar, and
Latta follow:]
Prepared Statement of Hon. John A. Boccieri, a Representative in
Congress from Ohio
I want to thank Chairman Peterson for holding this hearing today.
While I believe that the taxpayers on Main Street should never again
pay for the greed on Wall Street, we must ensure that any new
regulations do not have unintended consequences on the CFTC's ability
to do its job. More importantly, we must protect the Farm Credit System
from unnecessary regulations that could threaten its ability to provide
affordable sources of credit to our farmers. It is clear the
legislation is a work in progress but I must express reservations about
potential unintended effects on the Farm Credit System. As Mr. Strom's
testimony indicates, the Farm Credit System is a unique financial
market and I am committed to ensuring that the farmers in the 16th
District of Ohio, who put food on my table and milk in my refrigerator,
have access to the reliable credit they have come to expect from the
Farm Credit System. I plan to work with Chairmen Peterson and Frank to
ensure the Farm Credit System is protected from unnecessary reforms
that have the potential to harm the robust and dependable lending
system that our nation's farmers depend on.
______
Prepared Statement of Hon. Henry Cuellar, a Representative in Congress
from Texas
Thank you Chairman Peterson and Ranking Member Lucas for holding
today's hearing of the House Committee on Agriculture on the Financial
Stability Improvement Act. I am pleased that we can engage in a healthy
debate on the legislation at hand, and offer our expertise as it
pertains to the agriculture community.
As we have seen in the last year, troubles in our financial markets
are capable of having long-lasting, wide-reaching affects on all
Americans. I believe strongly in strengthening the markets, by giving
agencies such as the CFTC and FDIC the proper means to identify and
monitor entities that might pose a systemic risk to the economy.
Transparency and accountability are paramount to fixing our markets;
however, placing new regulations on entities, such as Farm Credit, that
have displayed strength throughout the financial crisis may only serve
to limit their effectiveness.
Over the most recent years, including the current crisis, Farm
Credit has weathered tough economic times. However, due to strong
leadership in Farm Credit, and on this Committee, the System was able
to continue serving agriculture as a reliable provider of credit. To
this day, Farm Credit remains strong and producers in the 28th
Congressional District of Texas rely on the Farm Credit System. For
this, I ask that we carefully review the impact this legislation will
have on a trusted, effective entity.
In the current form of this legislation, the Consumer Financial
Protection Agency Act will create a new Federal agency, tasked with
overseeing all credit services to consumers. In fact, under the bill,
Farm Credit System institutions are treated no differently than
unregulated finance companies rather than the highly regulated set of
federally chartered institutions that they are. With this legislation,
we risk taking a part of the market that is functioning effectively,
and imposing it through new rules and regulations needlessly.
As I have said earlier, agriculture is going through difficult
times. In my area alone, we are seeing record droughts, followed by
devastating floods that leave producers in Texas on the brink of
bankruptcy. The work done on this Committee has been crucial to
ensuring that the Farm Credit System remains strong, and available to
our farmers and ranchers.
Again, I thank; the Chairman and the Ranking Member for holding
this hearing. As a native of south Texas, I understand the relationship
that Farm Credit has with our producers. Regulatory reform is crucial,
but we must be careful to not over reach, and harm agencies that have
acted responsibly for our communities. I look forward to the testimony
today, and our continued work in this Committee on this important
issue.
______
Prepared Statement of Hon. Robert E. Latta, a Representative in
Congress from Ohio
Good morning, Chairman Peterson and Ranking Member Lucas.
Today, we are holding a hearing to review the Financial Stability
Improvement Act discussion draft. I would like to welcome the Chairman
of the Commodity Futures Trading Commission, the Chairwoman of the
Securities and Exchange Commission and the Chairman and Chief Executive
Officer of the Farm Credit Administration. I look forward to all three
of your testimony and insight today into this legislation.
I have heard the concerns of my constituents and from the vast
amount of agriculture groups on this issue. Unfortunately, this
proposed plan furthers government regulation into our private citizen's
lives by giving the Federal Reserve the authority on systemic risk and
financial stability, and gives the Federal Deposit Insurance
Corporation (FDIC) the authority to help ``systematically significant''
institutions rather than allow them to go into bankruptcy which is more
efficient and does not expose our taxpayers to such financial loss.
This legislation will be detrimental to our national debt and to the
taxpayers as it creates further government bureaucracy by creating a
permanent ``bailout fund'' to be controlled by the FDIC and gives
tremendous authority to unelected government bureaucrats with the
creation of a Financial Services Oversight Council. Companies and
corporations who are deemed ``too big to fail'' will not be allowed to
do so and will be able to access the ``bailout fund,'' which will be
funded at the taxpayers' expense. In a July 20, 2009 Bloomberg article,
Neil Barofsky the Special Inspector General for TARP stated, ``U.S.
taxpayers may be on the hook for as much as $23.7 trillion to bolster
the economy and bailout financial companies . . .'' American
International Group (AIG) is a prime example of this. The taxpayers
through the Federal Reserve and the Treasury have spent over $135
billion to keep AIG intact.
In addition, the language under this legislation reaches into the
Agriculture Committee's jurisdiction and assesses Farm Credit
Institutions to cover the cost of troubled financial institutions under
their jurisdiction. I believe Farm Credit Institutions were not the
cause of the current financial crisis and should not be penalized for
the bad practices of the ones who were. Furthermore, the language under
this legislation puts the Farm Credit System in the hands of the rules
written by the Securities and Exchange Commission as opposed to the
Farm Credit Administration. This provision will remove this Committee's
jurisdiction on oversight of the underwriting and risk retention
requirements for agricultural loans that are securitized by the Farm
Credit System and Farmer Mac.
House Republicans, meanwhile, have come up with strong solutions to
help our troubled financial sector. We have found a way to bring fiscal
responsibility to our Federal Government and to the men and women on
Wall Street. The solutions we have brought forth will bring an end to
the reckless bailouts; it will look to restore fiscal responsibility
and all the while protecting the taxpayers. One of our Founding
Father's Thomas Jefferson once said ``A wise and frugal government,
which shall leave men free to regulate their own pursuits of industry
and improvement, and shall not take from the mouth of labor the bread
it has earned--this is the sum of good government.''
Thank you and I look forward to working with my colleagues on the
House Committee on Agriculture to make certain that this Committee
takes jurisdiction on these issues under this legislation to ensure it
protects our American farmers and the lending systems they use. Our
financial crisis and economic woes should not be resolved by further
government intervention and bureaucracy, especially on our American
farmers who produce the safest, most economically viable food in the
world.
The Chairman. I would like to welcome the witnesses, the
Honorable Gary Gensler, the Chairman of the CFTC, back to the
Committee. The Honorable Elisse Walter, the Commissioner with
the Securities and Exchange Commission, welcome to the
Committee, and the Honorable Leland Strom, the Chairman and CEO
of the Farm Credit Administration. We appreciate you being with
us today and, Chairman Gensler, we will start with you.
STATEMENT OF HON. GARY GENSLER, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION,
WASHINGTON, D.C.
Mr. Gensler. Thank you, Chairman Peterson, Ranking Member
Lucas, and Members of the Committee. Thank you for inviting me
to testify today on financial reform proposals that might
intersect with the Commodity Futures Trading Commission's
oversight of markets.
I am also pleased to testify on behalf of the full
Commission on this significant date in our nation's history. On
this date actually in 1800, Congress held its first session in
Washington, D.C. in the partially completed Capitol Building.
Last year's financial crisis taught us that large financial
institutions were not only too big to fail, but also had become
so interconnected that one firm's failure could affect the
entire system. To address these risks the Administration
proposed to fill the gaps in our financial regulatory structure
and most importantly, in the over-the-counter derivatives
marketplace. This Committee passed historic legislation to
introduce comprehensive regulation that would lower risk and
lessen some of the interconnectedness of these large financial
institutions through the over-the-counter market. To further
promote transparency and lower risk, I hope that by working
together we will be able to add requirements that all standard
contracts are brought to transparent trading venues, and if
there are exceptions from clearing that we keep those narrowed
to corporate end-users. Now, beyond the over-the-counter
derivatives marketplace the Administration also focused on two
features that are in the bill that you have asked me to testify
on, one establishing comprehensive, consolidated supervision of
financial firms and two, establishing a resolution regime, a
way to wind down large financial firms so that if they are on
the brink of failure they don't spill out into the economy.
Consolidated supervision, if I might just quickly note,
that right now there is no effective Federal regulation that
exists for holding companies of broad financial firms. This is
what the Administration is trying to address. Through the 1956
Bank Holding Company Act, the Federal Reserve is the holding
company regulator but it has to have a bank in the system. The
two changes the Administration has talked about are making sure
that the next AIG would have effective consolidated
supervision, and that the supervision would be clear at the
holding company level.
Second, is resolution authority. Resolution authority is
something that the Federal Deposit Insurance Corporation
currently has for banks. If the bank is near failing, they can
step in, replace management and actually ``haircut'' contracts
and modify contracts. This was not the case with AIG to the
cost of $180 billion of U.S. taxpayers' money last year. So
under current law there was no way to step in as a receiver and
modify the contracts with the counterparties, and thus we read
in today's newspapers there were no haircuts through AIG. So
that is what the Administration is trying to address so that
not 100 cents on the dollar is paid through these institutions,
and that the FDIC would have resolution authority including
both the entire bank holding company, but also these major
financial firms that could pose risk to the system.
You have asked me how these reforms would affect the
Commodities Exchange Act and the CFTC and let me say clearly
they do affect the regulation of the futures markets and they
affect them directly. First, under the proposal certain
financial companies would be designated as identified financial
holding companies and become subject to the heightened
credential standards of the Federal Reserve Board. And though
it may have been unintended, this appears to include securities
in futures exchanges such as the New York Stock Exchange, the
Chicago Mercantile Exchange, NASDAQ, all of which in some ways
are regulated by the CFTC, and often jointly with the
Securities Exchange Commission.
Second, the financial reform proposals establish a
Financial Services Oversight Council that would not only
designate holding companies for this heightened regulation, but
also would designate activities or practices for similar
oversight. And as many market activities that the SEC and CFTC
oversee today are central to the economy or central to the
financial system [I mean that is what we do really at the
behest of the American public] this has potential of setting up
multiple regulators, the Council, the Federal Reserve, the SEC
and CFTC all intertwined in overseeing the markets that we
currently oversee.
Third, financial reform proposals authorize the Federal
Reserve to effectively regulate futures and securities
clearinghouses, including setting standards and reviewing and
approving clearinghouse rules. This also could result in dual
regulation of clearinghouses.
I thank you for inviting me to testify today. I hope that
my full testimony could be entered into the record, and I look
forward to your questions.
[The prepared statement of Mr. Gensler follows:]
Prepared Statement of Hon. Gary Gensler, Chairman, Commodity Futures
Trading Commission, Washington, D.C.
Good morning Chairman Peterson, Ranking Member Lucas and Members of
the Committee. Thank you for inviting me to testify today about
financial regulatory reform. This Committee has recently moved historic
legislation to comprehensively regulate over-the-counter (OTC)
derivatives. Today, you requested that I address other aspects of
reform. Specifically, I will address how those proposals might
intersect with the Commodity Futures Trading Commission's (CFTC)
oversight of markets. I am pleased to testify on behalf of the
Commodity Futures Trading Commission (CFTC).
This morning's hearing falls on the anniversary of a significant
date in our nation's history. On November 17th, 1800, the United States
Congress held its first session in Washington, D.C. in the partially
completed Capitol Building. More than 2 centuries ago, this body
convened to address a great many challenges facing a young nation. We
now face a new set of challenges as the nation continues to recover
from last year's failure of the financial system and the financial
regulatory system. We must work to ensure that we do not again face a
similar crisis.
Last year's financial crisis taught us that American and global
financial institutions had not only become what some called too big to
fail, but also too interconnected to fail. Institutions have become so
large and so intertwined with each other and the rest of the financial
system that the government was forced to make untenable decisions last
year. Effective regulatory reform requires mechanisms to handle firms
whose failure could threaten the integrity of the entire financial
system.
To address these risks, the Administration has proposed that we
fill gaps in our financial regulatory structure, and most importantly,
over-the-counter derivatives. I commend this Committee, as well as the
House Financial Services Committee, for taking historic action last
month to, for the first time, introduce regulation to the OTC markets.
OTC derivatives reform is just one important piece of the
Administration's broader financial reform proposals, which address many
of the lessons learned from last year's crisis. You have asked me to
focus my testimony today on this issue as well as two other critical
features to lower the risk to the American public presented by large
financial institutions. The Administration has outlined two fundamental
goals: establishing comprehensive, consolidated supervision of
financial firms and establishing a resolution regime to wind down
large, complex financial institutions that are on the brink of failure.
Over-the-Counter Derivatives
I believe that comprehensive OTC derivatives reform is a critical
component of addressing the risks posed by large financial
institutions. These institutions have become interconnected with
literally thousands of counterparties located in every sector of our
economy and in every state in our nation. The historic legislation
passed by this Committee and the Financial Services Committee does this
by comprehensively regulating the dealers, by requiring standard
contracts to be traded on transparent trading venues and by moving the
standard transactions off the books of financial institutions and into
regulated clearinghouses. This would remove the transactions, once
arranged, from the balance sheets of large financial firms, limiting
the effect that one firm's failure could have on the system.
Building upon these critical features of the bill, I am hopeful
that we can clarify exceptions such that all standard contracts are
brought to transparent trade execution facilities even if Congress were
to allow for exceptions from clearing requirements. Further, I am
hopeful any exceptions from clearing would be narrowly limited to
corporate end-users.
Consolidated Supervision
Another gap in our financial regulatory system relates to
consolidated comprehensive supervision and regulation of major
financial firms that could pose a risk to the financial system. Under
the Bank Holding Company Act, passed in the 1950s, the Federal Reserve
has supervisory authority over a bank holding company, but no effective
Federal regulation exists for complex financial institutions that do
not have a bank subsidiary. This left ineffective or even no Federal
oversight of investment banking holding companies, insurance holding
companies and other financial conglomerates. Also, even in the context
of bank holding companies, the coordination and authority of the
Federal Reserve, as the holding company regulator, in relation to other
regulators overseeing particular subsidiaries needs to be enhanced.
The Administration and Congressional proposals address these issues
by creating an overall prudential regulatory scheme for complex
financial firms. This would ensure that one regulator, working in
coordination with other regulators, could set capital, liquidity, risk
management and other prudential standards for major financial firms.
This would include setting standards for subsidiaries that otherwise
are not subject to prudential regulation, as well as working with the
primary regulators of subsidiaries that are currently regulated.
Resolution Authority
Another lesson of the financial crisis is that the Federal
Government needs more flexible tools to wind down major financial firms
without causing significant harm to the financial system as a whole or
the economy. A successful financial regulatory system must provide for
the orderly resolution of complex financial firms in a manner that
mitigates the risk that one institution's collapse could cause the
failure of other institutions. As the experience with Lehman Brothers
showed, resolving such firms through the bankruptcy process can cause
significant economic disruption and displacement. Results may differ
from one jurisdiction to another, and the process may be cumbersome and
unresponsive to the need to resolve an institution rapidly in the
public interest.
Under current law, the Federal Deposit Insurance Corporation (FDIC)
has the ability to step in and put a bank into receivership when it is
about to fail. This allows them to step in as management, to modify
contracts and to oversee the orderly resolution of the banks to best
lower costs to taxpayers. The government, however, was limited in its
ability to use similar resolution authorities at the holding company
level or for financial institutions that were not banks. Such
limitation was starkly evident when even $180 billion of our taxpayer
dollars sent to AIG did not enable the government to modify contracts
with AIG's counterparties or with their senior executives for
compensation. In the case of AIG, counterparties were not required to
take a haircut and many senior executives argued that their contracts
should remain unaltered. Thus, the Administration and Congressional
proposals seek to broaden the FDIC's resolution authority to include
both the entire holding company of a bank as well as major financial
firms that could pose a risk to the entire financial system.
Implications for CFTC--Regulation
In inviting me to testify here today, you have asked us to address
how broader financial reform proposals interplay with the Commodity
Exchange Act and the Commission's existing authorities. In that regard,
I will outline three areas on which this Committee may want to focus as
it further considers these proposals.
Inclusion of Exchanges and Clearinghouses under Consolidated
Supervision
Under the proposed regime of consolidated comprehensive
supervision, certain financial companies would be designated as
``identified financial holding companies.'' The companies could become
subject to heightened prudential standards set by the Federal Reserve
Board. The Federal Reserve would be required by statute to set
standards for such companies in the following areas: risk-based capital
requirements; leverage limits; liquidity requirements; concentration
requirements; prompt corrective action; resolution plans; and overall
risk management.
The Federal Reserve Board's prudential supervision also would
extend to the identified financial holding company's affiliates and
subsidiaries. This would include intermediaries registered with the
CFTC, such as futures commission merchants (FCMs), commodity pool
operators (CPOs) or other intermediaries. The statute authorizes the
Federal Reserve to prescribe heightened prudential standards for such
subsidiaries. If the regulatory agency declines to implement the
recommended standards, the statute authorizes the Federal Reserve to
directly implement the heightened prudential standards.
While seeking to address the gaps and inconsistencies that exist in
the current regulatory structure of complex, consolidated financial
firms, the proposals also may have unintentionally encompassed robustly
regulated markets such as securities and futures exchanges. While it
does not appear that the intent of the legislation is to capture these
entities, exchange companies nevertheless may be included as they are
organized under holding companies and may meet a broad definition of
financial company. As these holding companies and their subsidiaries,
such as the New York Stock Exchange or the Chicago Mercantile Exchange,
are currently comprehensively regulated by the Securities and Exchange
Commission (SEC) and the CFTC, Congress may wish to clarify if they
should be included in the Federal Reserve's prudential supervisory
authority over holding companies.
Supervision of Financial Activities
The Administration and Congressional proposals include a new
financial Services Oversight Council, which would include the heads of
various Federal regulators. While the responsibilities and authorities
of such a Council vary amongst the proposals, one of the proposed
duties is to designate identified financial holding companies that
would be subject to heightened prudential standards. In addition, some
proposals recommend that the Council also identify activities or
practices that the Council or the Federal Reserve would be authorized
to subject to heightened prudential standards.
Such financial activity or practice could apply to a broad range of
market activities, many of which are currently regulated by the SEC and
the CFTC. If the SEC or the CFTC declined to implement the Federal
Reserve's recommended standard, the Federal Reserve would have
authority to directly implement its own recommendations.
Much of what the CFTC and SEC currently oversee in the financial
markets could be determined by the Council to be systemically relevant.
Thus, proposals to have a Council and the Federal Reserve involved as
just described has the potential of setting up multiple regulators
overseeing markets and market functions in the United States. While it
is important to enhance the oversight of markets by both the SEC and
CFTC, I think Congress would want to closely consider whether it's best
to set up multiple regulators for some functions.
Regulation of Payment and Clearing Systems
Administration and Congressional proposals also address oversight
of payment and clearing systems. Currently, clearing organizations for
futures and securities are overseen by the market regulators: the CFTC
and the SEC. With respect to wholesale inter-bank payment and
settlement systems, the Federal Reserve relies on a patchwork of
authorities, largely derived from its role as a banking supervisor to
help oversee them. There is no explicit statutory basis, however, for
the Federal Reserve's oversight of these payment and settlement
systems, and there is no uniform regulatory structure. It is important
for reform to address such gaps in the regulatory structure.
Under the historic derivatives legislation passed by this
Committee, important enhancements to the CFTC's oversight of clearing
organizations were included, both for futures and OTC derivatives.
These provisions clarify the Commission's ability to regulate
clearinghouses, write rules and oversee the setting of margin to
protect the financial integrity of clearinghouses. The bill also
strengthened the core principles to bring them up to international
standards. I believe that these are all important enhancements so that
the CFTC can robustly regulate risk management and other aspects of
futures and OTC clearinghouses.
The broader financial reform proposals importantly address a gap in
oversight of payment systems by giving statutory authority to the
Federal Reserve to oversee inter-bank payment systems. The proposals,
however, go further by also authorizing the Federal Reserve to
effectively regulate securities, futures and derivatives
clearinghouses. The Federal Reserve would be able to set standards and
review and approve rules to address risk management policies and
procedures, margin and collateral requirements, counterparty default
policies and procedures, timely clearing and settlement of
transactions, capital and financial resource requirements.
In addition to prescribing standards, the Federal Reserve would
have the authority to directly participate in examinations, make
recommendations for enforcement and implement those recommendations in
certain circumstances. Thus, the proposals may effectively set up a
system of dual regulation of clearinghouses between the market
regulators on the one hand and the Federal Reserve on the other.
Ever since President Roosevelt called for the regulation of the
commodities and securities markets in the early 1930s, the CFTC (and
its predecessor) and the SEC have each regulated the clearing functions
for the exchanges under their respective jurisdiction. This well-
established practice of having the agency which regulates an exchange
or trade execution facility also regulate the clearinghouses for that
market should continue as we extend regulations to cover the OTC
derivatives market. Market regulation of clearing, customer protection,
segregation rules, trading venues and other components are so closely
intertwined that Congress has for decades had them regulated by single
regulators--either the CFTC or the SEC. Furthermore, Congress has
stated expressly that the purpose of the Commodity Exchange Act is to
ensure the financial integrity of all transactions subject to the
CFTC's jurisdiction and the avoidance of systemic risk.
Additional Items
In addition to the three areas that I have outlined above, since I
last testified before this Commission, the CFTC and the SEC announced
20 joint recommendations to tailor our regulations in the best interest
of the American public. I look forward to working with this Committee
and Congress on a number of these proposals that will require changes
in statute. One important proposal is to establish a more efficient
process for the SEC and CFTC product approval, including an ability to
resolve any differences by referring such instances to the full
Commissions and, if necessary, a Federal court of appeals. While the
various regulatory reform proposals designate the Council as the
arbitrator of an interagency dispute involving products, among other
things, I believe that our joint recommendation is a preferred
approach.
Last, one aspect of the proposed resolution authority may cause an
unintended consequence when applied to a financial company that is a
member of a derivatives or securities clearing organization. The
resolution authority provisions provide for the suspension of contract
obligations for entities under receivership. This means that
obligations of clearing members would be suspended until 5 p.m. on the
business day after a receiver is appointed. Suspending a clearing
member's obligations, even for a day, would preclude a derivatives or
securities clearing organization from liquidating a clearing member's
contracts during that time. Collateral that might have been sufficient
to fund an immediate close-out might then be inadequate to cover the
losses of a delayed close-out, particularly in the case of a financial
institution whose failure has system wide effects.
Closing
One year ago, the financial system failed the American public. The
financial regulatory system failed the American public. We must now do
all we can to ensure that it does not happen again. While a year has
passed and the system appears to have stabilized, we cannot relent in
our mission to vigorously address weaknesses and gaps in our regulatory
structure. On the 209th anniversary of the first session of Congress in
the new Capitol building, we have a profound responsibility to address
the causes of the last crisis and work to prevent the next one.
I thank you for inviting me to testify today. I look forward to
working with you in the coming months to implement comprehensive reform
of our financial regulatory system. I will be happy to answer any
questions you may have.
The Chairman. Thank you very much.
Ms. Walter.
STATEMENT OF HON. ELISSE B. WALTER, COMMISSIONER, U.S.
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.
Ms. Walter. Thank you, Mr. Chairman. Chairman Peterson,
Ranking Member Lucas, and Members of the Committee, I am
pleased to have the opportunity to testify today concerning the
discussion draft of the Financial Stability Improvement Act.
This legislation currently being marked up by the House
Financial Services Committee would make significant changes to
the regulation and resolution of the large interconnected
financial firms. There are many lessons we can learn from the
recent financial crisis. In particular, these events
demonstrated the need to watch for, warn about and eliminate
conditions that could lead to a market seizure or a cascade of
failures that put the entire financial system at risk. While
traditional financial oversight and regulation can help prevent
systemic risks, this regulatory structure failed to identify
and address systemic risks that developed over recent years.
The current structure was hampered by regulatory gaps that
permitted regulatory arbitrage and failed to ensure adequate
transparency.
Given the shortcomings of the current regulatory structure,
I believe that there is a need to establish a framework for
macro-prudential oversight that looks across markets and avoids
the silos that exist today. Within that framework, I believe a
hybrid approach consisting of a powerful council of regulators
and a single systemic risk regulator is most appropriate. Such
a structure would best ensure clear accountability for systemic
risk, enable a strong and nimble response should adverse
circumstances arise, benefit from broad and differing
perspectives and minimize unintended consequences.
In establishing and implementing such an approach, however,
policymakers should fully consider its limitations and risks.
No one can perfectly forecast future events and free markets
can be faster and more informed than regulators, thus even an
improved system will not identify every risk and fashion
perfect solutions before financial crises develop. Moreover, in
crafting a more stable system, policymakers might
unintentionally foster a system that is unfair or unworkable.
This can occur over time. For example, focusing on system risk
could slowly weaken other important protections or lead to
over-regulation. It can also take place quickly. For example,
in times of crisis regulators might feel compelled to change
rules or pick winners and losers.
To minimize these adverse consequences, I recommend that
the discussion draft be strengthened and clarified in several
key areas to ensure that it does not unintentionally sacrifice
other important market protections, or create new regulatory
arbitrage opportunities or competitive advantages that could
foster rather than reduce systemic risk. My written testimony
provides specifics. I would like to briefly emphasize a few key
points.
First, to help ensure more robust risk management policies
while minimizing competitive imbalances and unintended
consequences, Congress should vest greater prudential risk
management policymaking power with the Financial Services
Oversight Council. Vesting such power in the Council would
assure that these policies benefit from the input and
experience of multidisciplinary experts with authority over and
experience in dealing with various types of financial
institutions. More than any single regulator, the Council would
be able and should be empowered to make informed, balanced
macro-prudential policy decisions.
Second, the discussion draft should ensure that the
systemic risk rules do not undercut necessary consumer and
investor protections. The best approach to the application of
new systemic risk powers is to ensure that any new framework be
appropriately tailored to systemic risks, additive to existing
and future rules and protections, and work through an open and
transparent process to avoid unintended consequences.
Third, the discussion draft should ensure that existing
clearing agency requirements are not eliminated and existing
capital standards are not lowered. And, finally, the discussion
draft language regarding the identification and regulation of
systemically important activities is very broad and could apply
to many small institutions that do not themselves pose any
systemic risk. Congress should consider defining the term
activities and ensure once again that it is the Council which
is charged with identifying those activities and developing
processes to address them. Functional regulators could then
implement these policies through traditional, transparent
rulemaking processes with the Federal Reserve Board serving as
a second set of eyes. In conclusion, I believe that we can do a
great deal to protect against systemic risk by filling gaps in
our regulatory system, reducing regulatory arbitrage by
ensuring that similar products are regulated similarly, and
ensuring that a new macro-prudential oversight regime is able
to raise standards for entities that might be systemically
important.
Thank you again for the opportunity to present my views. I
look forward to working with the Committee and the Congress as
you consider these issues, and I would be pleased to answer any
questions.
[The prepared statement of Ms. Walter follows:]
Prepared Statement of Hon. Elisse B. Walter, Commissioner, U.S.
Securities and Exchange Commission, Washington, D.C.
Chairman Peterson, Ranking Member Lucas and Members of the
Committee:
I am pleased to have the opportunity to testify concerning the
Discussion Draft of the Financial Stability Improvement Act (Discussion
Draft).\1\ This legislation, currently being marked-up by the House
Financial Services Committee,\2\ would make significant changes to the
regulation and resolution of large, interconnected financial firms
whose disorderly failure might put the financial system at risk.
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\1\ This testimony is delivered on my own behalf, as a Commissioner
of the Securities and Exchange Commission. The full Commission has not
voted on this testimony, but Chairman Schapiro endorses this testimony.
\2\ Because this legislation is being currently marked-up, this
testimony relates to the circulated Discussion Draft. We recognize that
the bill is changing and some of these issues may still be addressed by
the Committee.
---------------------------------------------------------------------------
Lessons from the Recent Financial Crisis
There are many lessons we can learn from the recent financial
crisis and events of last fall. In particular, these events
demonstrated the need to watch for, warn about, and eliminate
conditions that could cause a sudden shock to lead to a market seizure
or cascade of failures that put the entire financial system at risk.
While traditional financial oversight and regulation can help prevent
systemic risks from developing, it is clear that this regulatory
structure failed to identify and address systemic risks that were
developing over recent years. The current structure was hampered by
regulatory gaps that permitted regulatory arbitrage and failed to
ensure adequate transparency. This contributed to excessive risk-taking
by market participants, insufficient oversight by regulators, and
uninformed decisions by investors.
Given the shortcomings of the current regulatory structure, I
believe there is a need to establish a framework for macro-prudential
oversight that looks across markets and avoids the silos that exist
today. Within that framework, I believe a hybrid approach consisting of
a single systemic risk regulator and a powerful council of regulators
is most appropriate. Such an approach would provide the best structure
to ensure clear accountability for systemic risk, enable a strong,
nimble response should adverse circumstances arise, and benefit from
the broad and differing perspectives needed to best identify developing
risks and minimize unintended consequences.
The Discussion Draft is the latest in a series of significant
legislative proposals designed to reform the financial system by
filling regulatory gaps, improving investor and consumer protection and
updating our financial regulatory apparatus to improve our ability to
identify and reduce systemic risk. The Discussion Draft would enable
regulators to raise capital requirements and impose heightened
prudential standards on large, interconnected firms, and unwind--in an
orderly fashion--those that have failed. It also would establish a
council of regulators to identify certain large interconnected firms
that require additional oversight, provide significant new information
to the Federal Reserve Board, and empower the Federal Reserve Board to
impose a host of additional requirements on institutions and activities
deemed systemically important.
Strengthening the Discussion Draft
Given the recent financial crisis and the weaknesses in our
financial regulatory framework that it helped identify, new
comprehensive oversight over systemically important institutions and
activities is needed, and the Discussion Draft is an important step
toward achieving that goal.
In establishing (and implementing) such an approach, however,
policymakers should fully consider its limitations and risks. Because
no one--not even a systemic risk regulator or council--can perfectly
forecast future events, and free markets can be faster and more
informed than regulators, even an improved system will not identify
every risk and fashion perfect solutions before financial crises
develop. Moreover, there are also risks that, in an effort to craft a
more stable system, policymakers might unintentionally foster a system
that is unfair or unworkable. This can occur over time: for example,
focusing on ``systemic risk'' could slowly weaken other important
protections or lead to over-regulation. It can also take place quickly:
for example, in times of crisis, regulators might feel compelled to
change rules or pick winners and losers.
To minimize these risks, we recommend that the Discussion Draft be
strengthened and clarified in several key areas to ensure that it does
not unintentionally sacrifice other important market protections or
create new regulatory arbitrage opportunities or competitive advantages
that could foster--rather than reduce--systemic risk. To address these
issues, Congress should consider the following:
1. Strengthen the Council to Improve Risk Management Rules and Reduce
Moral Hazard.
Policies and standards designed to address systemic risk should
benefit from the perspectives of multiple regulators with different
expertise, experience and missions, be formulated with an understanding
of their direct and indirect impacts on other parts of the markets, and
be tailored so that they do not inadvertently favor large institutions
relative to small institutions (thereby unintentionally fueling,
instead of reducing, systemic risk). To help ensure more robust risk
management policies that fully consider and minimize any competitive
imbalances and unintended consequences that might flow as a result of
certain large institutions being ``systemically important,'' Congress
should vest greater prudential risk management policymaking power with
the Financial Services Oversight Council (``Council''). Vesting such
power in the Council would assure that these policies benefit from the
input and experience of multi-disciplinary experts with authority over,
and experience in dealing with, various types of financial
institutions.
In particular, the Council should have the tools needed to identify
emerging risks, be able to establish more stringent standards for
leverage and risk-based capital for systemically important
institutions, and be empowered to serve as a ready mechanism for
identifying emerging risks and minimizing the regulatory arbitrage that
can lead to a regulatory race to the bottom. This authority could
include the ability to direct functional regulators to promulgate rules
or review potentially systemic risks or the risks posed by systemically
important institutions.
The Council should have authority to identify institutions,
practices, and markets that create potential systemic risks and set or
recommend standards for liquidity, capital, and other risk management
practices at systemically important institutions. The Federal Reserve
Board could be responsible for monitoring risks at particular
institutions and ensuring that these standards are implemented. This
hybrid approach can help minimize systemic risk in a number of ways:
The Council would ensure that different perspectives are
brought to bear in identifying risks that an individual
regulator might miss or consider too small to warrant
attention. These perspectives also would improve the quality of
systemic risk requirements by increasing the likelihood that
second-order consequences are identified and considered.
The financial regulators on the Council would have
experience regulating different types of institutions
(including smaller institutions) and different products, so
that the Council would be more likely than any single regulator
to ensure that risk-based capital and leverage requirements do
not unintentionally foster systemic risk by advantaging the
largest institutions.
The Council would include multiple agencies, thereby
significantly reducing potential conflicts of interest (e.g.,
conflicts with other regulatory missions).
The Council also would monitor the development of financial
institutions to prevent the creation of institutions that are either
``too-big-to-fail'' or ``too-big-to-succeed.'' We must remain vigilant
against the risks posed by institutions whose businesses are so large
and diverse that they have become, for all intents and purposes,
unmanageable. Given the potential ongoing oversight role of any
individual systemic risk regulator, it is important to have another
level of impartial analysis take place through a multi-member Council.
Accordingly, the Council is vital to ensure that our desire to minimize
short-term systemic risk does not inadvertently undermine our system's
long-term health. To ensure the independence of the Council, Congress
should also consider requiring it to have an independent Chair and
permanent staff.
Although the Discussion Draft strengthens the Council in a number
of important ways, a real risk remains that market participants will
favor large interconnected firms, particularly those identified as
systemically important, over smaller firms of equivalent
creditworthiness, because of the belief that the government will step
in and support such an institution, its bondholders, or counterparties
in times of crisis. Although the Discussion Draft seeks to address this
imbalance through heightened prudential standards and a new resolution
regime, the new requirements are not set forth with sufficient
specificity to determine whether they will adequately address the
risks. Similarly, the new resolution regime does not clearly set forth
how bondholders or counterparties will be treated. If bondholders or
counterparties believe they can get a better deal under the new
resolution regime, they may be more willing to lend to these
institutions even if, relatively speaking, they are less credit worthy
than other, smaller institutions. This would lower the cost of capital
for larger interconnected institutions, increasing their size and
potentially creating more systemic risk.
2. Ensure That New Systemic Risk Rules Do Not Undercut Needed Consumer
and Investor Protections.
Although the Discussion Draft states that new rules can only
supersede existing conflicting less stringent regulatory requirements
to the extent of the inconsistency, Congress should make clear that
needed investor and consumer protections remain fully in place. The
best approach to the application of new systemic risk powers is to
ensure that any new systemic risk framework be appropriately tailored
to such risks, additive to existing and future rules and protections,
and works through an open and transparent process to avoid unintended
consequences.
3. Ensure that Existing Clearing Agency Requirements Are Not
Eliminated.
A new systemic risk regulator should act as a second set of eyes
over all systemically important entities (such as systemically
important securities clearing agencies and other clearinghouses for
financial products), participate in examinations, review risk
management practices, and evaluate whether the existing functional
regulation is sufficiently protective. However, Subtitle E of the
Discussion Draft as currently formulated could fundamentally undermine
the existing regulation and oversight of clearing agencies that are
crucial to the overall competitiveness of U.S. securities markets. As
currently drafted, Subtitle E would provide the Federal Reserve Board
with the authority ``by regulation or order'' to ``prescribe or issue
risk management standards governing the operations of identified
financial market utilities and the conduct of identified activities by
financial institutions.'' This language would include clearing agencies
and a host of other entities that might be subject to other regulatory
requirements, and could be exercised subject only to ``consultation''
with the Council and existing supervisory entities.
In addition to potentially being a wholesale change in the way such
institutions are regulated and supervised, it is unclear how these new
standards would interact with existing risk management requirements or
other important policy goals. For example, under existing laws,
securities clearing agencies must provide fair access to and cannot
discriminate among market participants seeking to become members of the
clearinghouse. This requirement fosters competition and addresses
potential conflicts of interest, but is not clearly protected under the
language in Subtitle E. Although there may be a benefit to Congress
empowering a regulator to act as a second set of eyes to reduce risks
over certain institutions, this authority should not automatically
override other important policy goals like transparency and fair
competition that promote investor protection and the competitiveness of
U.S. securities markets.
To ensure that the supervision of these entities and concerns about
systemic risk are appropriately balanced, these standards (as with
others) could be established by the Council, implemented by the
functional regulator, and designed to supplement but not supersede
existing regulation and protections. The Council should coordinate with
the Federal Reserve Board and functional regulators to eliminate
regulatory gaps in a manner that reduces duplicative requirements. To
the extent a conflict exists between the Federal Reserve and the
functional regulator regarding the standards to be applied, the Council
should resolve the conflict so that all regulatory goals are achieved,
including safety and soundness.
4. Ensure That Existing Capital Requirements Are Not Lowered.
Although the Discussion Draft calls for heightened prudential
standards for identified financial holding companies, the language
should be clarified to ensure that these standards are heightened in a
meaningful sense to reduce the risk to the system appropriately and
ensure that counterparties do not favor large institutions because they
are ``too big to fail''--fueling greater size and risk at the expense
of smaller more nimble competitors. The Discussion Draft currently
defines heightened prudential standards as higher than for a normal
financial holding company. It is not clear that this standard is higher
than would apply today for a particular regulated entity. Accordingly,
the Discussion Draft should be clarified to ensure that these new
authorities cannot lower any standard that would otherwise apply to a
company, including standards set by functional regulators.
For example, the Discussion Draft could permit the Federal Reserve
Board to impose bank-like capital requirements on a broker-dealer
subsidiary of a Bank Holding Company (BHC). Such a requirement could
(1) lower capital requirements for a broker-dealer in a BHC--
potentially putting customer accounts at risk in the case of failure;
and (2) provide a competitive advantage for broker-dealers within a BHC
relative to broker-dealers outside a BHC. This could have the effect of
increasing systemic risk by permitting the big to get bigger.
Therefore, the Discussion Draft should be clarified that Federal
Reserve Board (or any other entity) cannot lower or reduce capital and
other requirements for a regulated entity. This will better protect
customers and investors and ensure that broker-dealers and other
companies that are within large institutions do not receive an
additional competitive advantage relative to smaller, less systemically
risky, entities.
5. Revise Approach for Identifying and Regulating Systemic
``Activities''.
The Discussion Draft permits the regulation of systemically
important ``activities'' and establishes multiple mechanisms for doing
so (see subtitles B and E). This language is very broad and could apply
to many small institutions that do not themselves pose any systemic
risk. To minimize confusion, reduce the potentially unlimited reach of
this grant of authority, and give affected parties due process,
Congress should:
Ensure that the Council identifies systemically important
``activities'' and develops policies to address them. Where the
affected entities are already subject to a regulatory regime,
the Council could direct the functional regulators to implement
these policies, with the Federal Reserve Board as a ``second
set of eyes'' over already regulated entities. This will ensure
that the regulation of activities is not unchecked, and that
transparent, traditional rulemaking requirements (including
public notice and comment) are followed; and
Consider defining what the term ``activities'' means in this
context to provide more guidance to regulators and reduce the
likelihood that this authority will expand over time.
6. Protect Independent Accounting Standards.
I am pleased that the Discussion Draft does not alter existing
protections that ensure the independence of accounting standard
setting, but would like to raise the issue in anticipation of possible
amendments on the topic. Investors must have transparent, unbiased and
comparable information about the companies in which they choose to
invest. Providing investors with this information, to assist them in
allocating capital to its most efficient use, is essential to the
health of our capital markets. High quality, consistent accounting
standards provide the framework for investors to make the comparisons
of investment opportunities and perform the analysis necessary to make
informed investment decisions.
Some have argued that prudential regulators should have a greater
role in the setting of accounting standards or that accounting
standards should be tied to ``systemic risk.'' This would be a grave
mistake. Accounting standards are measurement and disclosure tools that
convey information about financial performance and condition, tools for
investors and investor protection--not for institution protection. To
continue to be useful, accounting standards should endeavor be the same
across the markets and market participants, just as they should be
consistently applied over time. As noted above, one key anchor in this
process to guard against systemic risk must be a requirement that
standards be raised, not lowered. Establishing a new process that would
permit regulators to weaken accounting standards, reduce disclosure or
allow the basis by which economic performance is measured to fluctuate
with the economic environment, could provide a new avenue for
particular institutions to lobby for--and potentially receive--special
treatment.
Conclusion
While remaining vigilant to the inherent tensions and risks, I
believe that we can do a great deal to protect against systemic risk by
(1) filling gaps in our regulatory system; (2) reducing regulatory
arbitrage by ensuring that similar products are regulated similarly;
and (3) ensuring that a new macro-prudential oversight regime have the
ability to raise standards for entities that might be systemically
important.
Thank you again for the opportunity to present my views. I look
forward to working with the Committee and the Congress as it considers
these issues and I would be pleased to answer any questions.
The Chairman. Thank you very much, Commissioner.
Mr. Strom.
STATEMENT OF HON. LELAND A. STROM, CHAIRMAN AND CEO, FARM
CREDIT ADMINISTRATION, McLEAN, VA
Mr. Strom. Chairman Peterson, Ranking Member Lucas, and
Members of the Committee, I am Leland A. Strom, Chairman and
CEO of the Farm Credit Administration, and I thank you also for
this opportunity to testify in front of you today.
I serve on the FCA Board with my colleagues, Nancy Pellett
and Kenneth Spearman. FCA is an independent, arms-length agency
responsible for examining and regulating the institutions of
the Farm Credit System, including the Federal Agricultural
Mortgage Corporation. The FCS is a network of borrower-owned,
financial institutions that provide credit to farmers,
ranchers, rural residents, agriculture and rural utility
cooperatives, and other eligible borrowers. Mr. Chairman, this
is a very timely and important hearing today regarding the
Financial Stability Improvement Act discussion draft.
FCA supports Congressional efforts to strengthen regulation
and supervision of financial markets, as every American has
been affected by the crisis in our global financial system. I
want to emphasize that the System institutions remain safe and
sound and did not contribute to the recent financial crisis.
This was because the Agriculture Committee's oversight and the
significant reforms made to the Farm Credit Administration and
the System as a result of the agricultural credit crisis of the
1980s. This included restructuring FCA as an independent, arms-
length regulator with formal enforcement powers, providing
borrower rights to System borrowers, and establishing the Farm
Credit System Insurance Corporation to protect System investors
and resolve failed System institutions.
The draft legislation is a comprehensive proposal designed
to strengthen regulation and supervision of financial markets
and some of the largest, most complex financial institutions.
As proposed, the legislation does not directly amend the Farm
Credit Act. However, a close reading reveals potential conflict
with the Farm Credit Act as it relates to the credit risk
retention requirements for securitizations. In addition, the
discussion draft could create uncertainty in the definition of
a financial company and other parts that potentially include
Farm Credit System institutions in the regulatory structure or
activities authorized.
Over the past weekend, my staff had productive discussions
with key policy officials at the Treasury. They informed FCA
that it was not their intention to include FCS institutions.
Further, they committed to work quickly to develop clarifying
language to ensure that this intent is carried out in the
proposal and does not create a jurisdictional conflict. In our
discussions, we expressed concerns in three areas which they
agreed to remedy.
First, the Financial Services Oversight Council, composed
of all Federal financial institutions regulatory agencies
except the Farm Credit Administration and our Insurance
Corporation, is established to monitor and address systemic
risk to the financial stability of the United States. The far-
reaching authority and regulatory activities of this Council
extend broadly to any financial company, as defined.
Institutions of the System would appear to meet that
definition. However, Treasury has drafted a proposed amendment
to the financial company definition to clarify that the
authorities of the Oversight Council do not extend to Farm
Credit System institutions, including Farmer Mac, or impact the
authorities of FCA.
Second, subtitle F of the draft legislation would require
creditors and those that securitize loans to retain ten percent
of the credit risk on any loan that is transferred, sold,
conveyed or securitized. This new requirement would directly
apply to the securitization activities of Farmer Mac and
perhaps to other activities of System institutions. It is
important to note that in 1996, Congress repealed a similar ten
percent retention requirement for loans sold to Farmer Mac.
Clarifying that language is necessary to ensure enforcement of
the credit risk retention requirements would not fall to
another agency, and that FCA retains jurisdictional authority
in these matters.
Third, subtitle G of the draft legislation would provide
the FDIC enhanced resolution authority for financial companies
that pose systemic risks to the financial stability of the
United States. Although the draft seems to imply that this
authority does not cover System institutions, this should be
clarified. A related issue is confusion over the authority of
the FDIC to assess System banks and associations that already
pay premiums to the Farm Credit System Insurance Corporation in
order to cover the costs of resolving large interconnected
financial companies that fail. Treasury, again, has drafted a
proposed amendment to exclude all FCS institutions from the
definition of financial company used for enhanced resolution
and assessment authorities.
Mr. Chairman, thank you again for this opportunity to
participate in today's hearing. I look forward to commenting
further on the draft legislation, including any revised
proposals, and working with this Committee and Treasury on this
matter. As new standards evolve for other financial
institutions, you may require changes in the regulatory
oversight of the Farm Credit System and Farmer Mac. As
appropriate, the Farm Credit Administration is prepared to
discuss with this Committee suggestions for enhancing FCA and
Insurance Corporation statutory authorities. This concludes my
statement, and I will be happy to answer your questions.
[The prepared statement of Mr. Strom follows:]
Prepared Statement of Hon. Leland A. Strom, Chairman and CEO, Farm
Credit Administration, McLean, VA
Mr. Chairman, Members of the Committee, I am Leland A. Strom,
Chairman and Chief Executive Officer of the Farm Credit Administration
(FCA or Agency). On behalf of my colleagues on the FCA Board, Nancy
Pellett of Iowa, and Kenneth Spearman of Florida, and the dedicated men
and women of the Agency, I want to thank the Committee for this
important and timely hearing regarding the Financial Stability
Improvement Act Discussion Draft (FSIA).
The FSIA is a comprehensive proposal designed to strengthen
regulation and supervision of financial markets and some of the
largest, most complex financial institutions. The FSIA establishes a
regulatory framework to monitor and oversee the stability of the
financial system and address stability threats. As proposed, the
legislation does not directly amend the Farm Credit Act of 1971, as
amended, (Farm Credit Act), which provides the primary statutory
authority for the establishment and regulation of institutions of the
Farm Credit System (FCS or System), including the Federal Agricultural
Mortgage Corporation (Farmer Mac). However, a close reading of the FSIA
reveals direct conflict with the Farm Credit Act as it relates to the
requirement for credit risk retention in the context of
securitizations. In addition, the FSIA creates uncertainty in the
definition of a financial company and other parts that potentially
include FCS institutions in the regulatory structure and activities
authorized by the FSIA.
Over the past weekend, my staff had productive discussions with key
policy officials at the Treasury. They told us that it was not
Treasury's intent to cover FCS institutions in the FSIA. They committed
to work with my staff over the next several days to develop clarifying
language for the FSIA to insure that their intent is carried out and to
ensure the FSIA does not create a jurisdictional conflict. I look
forward to working with the Committee and Treasury on addressing these
matters. The Agency's more complete description and analysis of the
FSIA is included later in my testimony.
Mission of the Farm Credit Administration
FCA is an independent agency responsible for examining and
regulating the banks, associations, and related entities in the FCS,
including Farmer Mac. The FCS finances almost 39 percent of all U.S.
farm business debt, providing credit to more than 450,000 eligible
agricultural borrowers through a nationwide framework of five banks and
90 local retail associations. In addition, the System finances
cooperatives, agribusinesses, rural utilities, and rural residents. The
System also has a special mission to develop programs and make special
efforts to serve young, beginning, and small (YBS) farmers and
ranchers.
As directed by Congress, FCA's mission is to ensure a safe, sound,
and dependable source of credit and related services for agriculture
and rural America. The Agency accomplishes its mission in two important
ways.
First, FCA ensures that FCS institutions, including Farmer Mac,
operate in a safe and sound manner and comply with applicable law and
regulations. Our examinations and oversight strategies focus on an
institution's financial condition and any material existing or
potential risk. We evaluate the ability of management and board to
direct operations in each institution. We also evaluate each
institution's compliance with laws and regulations to serve all
eligible borrowers, including YBS farmers and ranchers. If a System
institution violates a law or regulation or operates in an unsafe or
unsound manner, we use our supervisory and enforcement authorities to
ensure appropriate corrective action.
Second, FCA develops policies and regulations that govern how
System institutions conduct their business and interact with customers.
FCA's policy and regulation development focuses on protecting System
safety and soundness, implementing the Farm Credit Act, providing
minimum requirements for lending, related services, investments, and
capital, and ensuring adequate financial disclosure and governance. In
addition, FCA has adopted regulations to implement statutory borrower
rights provisions, including actions for restructuring a distressed
agricultural loan before initiating foreclosure, and other borrower
protection rules. The policy development program includes approval of
corporate charter changes, System debt issuance, and other financial
and operational matters.
As the arms-length regulator of the FCS, the Agency will continue
to focus on ensuring that the System remains safe and sound by
promulgating regulations, providing appropriate guidance and
maintaining strong and proactive examination and supervisory programs.
Farm Credit System
The FCS is a government-sponsored enterprise (GSE) created by
Congress in 1916 to provide American agriculture with a dependable
source of credit. The FCS is a nationwide network of cooperatively
organized banks and associations that are owned and controlled by their
borrowers, serving all 50 states and the Commonwealth of Puerto Rico.
The System provides credit and other services to agricultural producers
and farmer-owned agricultural and aquatic cooperatives. It also makes
loans for agricultural processing and marketing activities, rural
housing, farm-related businesses, rural utilities, and foreign and
domestic companies involved in international agricultural trade.
Despite the unprecedented instability in the U.S. and global
financial markets and a recessionary world economy, the overall
condition and performance of the System remains fundamentally safe and
sound. As of September 30, 2009, total FCS assets were $215 billion and
loans exceeded $162 billion.
While supporting significantly higher provisions for loan losses of
$733 million, the System maintained positive profitability with net
income of $2.02 billion for the first 9 months of 2009, compared to
$2.37 billion for the same period in 2008. Improved net interest
margins and spreads contributed to this earnings performance, and were
primarily caused by better conditions in the debt markets and the lower
interest rate environment.
Total capital grew 8.1 percent, or $2.2 billion, to $29.3 billion
at September 30, well above the 0.5 percent and 0.4 percent growth in
loans and total assets, respectively. Capital as a percentage of total
assets grew from 12.7 percent at December 31, 2008, to 13.6 percent at
September 30, 2009. Capital increased primarily due to net income
earned and retained, and a decrease in accumulated other comprehensive
loss, but this may be impacted by year-end patronage programs.
Asset quality overall remained acceptable at September 30, 2009,
with 94.8 percent of the loan portfolio classified ``acceptable'' and
``other assets especially mentioned,'' down from 97.1 percent at year
end 2008. Asset quality in stressed agricultural sectors remains under
pressure, and further deterioration in System credit quality is
expected.
In the first 9 months of 2009, nonaccrual loans increased $1.9
billion to $4.1 billion, and now represent 2.78 percent of the loan
portfolio, compared to 1.52 percent at year end 2008. However, the
System's capital and loss reserves provide sufficient overall risk-
bearing capacity. The nonperforming assets to risk funds ratio was 14.7
percent at September 30, 2009, and the adverse assets to risk funds
ratio was 28.2 percent.
Farm Credit System Insurance Corporation
The Farm Credit System Insurance Corporation (FCSIC or Corporation)
was established by the Agricultural Credit Act of 1987. The Corporation
insures the timely payment of principal and interest on System-wide
consolidated joint and several debt obligations issued to investors.
FCSIC holds the Farm Credit Insurance Fund (Insurance Fund) and
collects annual insurance premiums from System banks and associations.
At September 30, 2009, the Insurance Fund totaled $3.2 billion and
System-wide debt securities were $177.1 billion. The Corporation also
serves as conservator or receiver of any System bank or association
placed into conservatorship or receivership by the FCA Board.
Similarly, it is empowered to provide assistance to System banks and
direct lender associations suffering financial difficulties subject to
a cost-test limitation. As a result, the Corporation protects investors
in System-wide debt securities.
Federal Agricultural Mortgage Corporation
Congress established Farmer Mac in 1988 to provide secondary market
arrangements for agricultural mortgage and rural home loans. Farmer Mac
creates and guarantees securities and other secondary market products
that are backed by mortgages on farms and rural homes, including
certain USDA guaranteed loans. The 2008 Farm Bill expanded Farmer Mac's
program authorities by allowing it to purchase and guarantee securities
backed by eligible rural utility loans made by cooperative lenders.
Through a separate office required by statute (Office of Secondary
Market Oversight), the Agency examines, regulates, and monitors Farmer
Mac's operations.
Farmer Mac is a separate GSE devoted to agriculture and rural
America. By statute, in extreme circumstances Farmer Mac may issue
obligations to the U.S. Treasury Department, not to exceed $1.5
billion, to fulfill the guarantee obligations of Farmer Mac Guaranteed
Securities. The Insurance Fund does not back Farmer Mac's securities,
and the System is not liable for any Farmer Mac obligations.
Total program business of loans, guarantees and commitments as of
September 30, 2009, stood at $10.8 billion. Farmer Mac's net income for
the 9 months ended September 30, 2009 was $76.8 million, and its
capital surplus over the statutory minimum was $126 million, up from
$100 million as of June 30, 2009.
Farmer Mac's nonperforming assets decreased to $84.8 million, or
1.94 percent of the portfolio, as of September 30, 2009. Its 90 day
delinquencies were $59.4 million, or 1.36 percent of the portfolio. The
reduced levels of nonperforming assets and delinquencies as of
September 30, 2009 from earlier dates in the year reflect sales of
acquired property previously owned.
Farmer Mac was also impacted last year by the financial system
stress. Losses on certain investments required Farmer Mac to raise
additional capital during the Fall of 2008 and management changes were
made by its Board of Directors. Farmer Mac continues to restructure its
balance sheet and further strengthen its operations and risk bearing
capacity to focus on fulfilling its mission.
Examination Programs for FCS Banks and Associations
The Agency's highest priority is to maintain appropriate risk-based
oversight and examination programs. FCA's programs have worked well
over the years and have contributed to the present overall safe and
sound condition of the System, but we must continue to evolve and
prepare for the increasingly complex nature of financing agriculture
and rural America. We are hiring more examiners and increasing onsite
presence and oversight of FCS institutions in response to the changing
and more risky environment we face today.
We evaluate each institution's risk profile on a regular basis. The
Financial Institution Rating System (FIRS) is the primary risk
categorization and rating tool used by examiners to indicate the safety
and soundness of an institution.
FCA Actions to Mitigate Risk
To address the heightened risk environment facing the System, we
have told FCS boards and management that solid portfolio management and
underwriting are paramount in these uncertain times and have emphasized
the importance of portfolio stress testing. The Agency's examiners are
increasing onsite presence and placing special emphasis on testing and
evaluating:
Internal audit and credit review programs to ensure they are
adequate and timely reflect each institution's risks;
Portfolio management and stress testing functions to ensure
they are appropriate for the institution;
Large loans held by multiple institutions to ensure
underwriting, servicing, and independent credit decisions are
made by purchasing FCS institutions and that representations
and warranties of the FCS originating lender are appropriate;
Adequacy of the Allowance for Loan Losses and loan loss
provisions;
Capital adequacy and capital management; and
Adequacy and quality of liquidity at System banks.
Working With Financially Stressed Borrowers
Agriculture involves significant inherent risks and volatility
because of many factors, including adverse weather, changes in
government programs, international trade issues, fluctuations in
commodity prices, and crop and livestock diseases. The significant
risks in agriculture can sometimes make it difficult for borrowers to
repay loans. The System (under provisions of the Farm Credit Act)
provides borrowers certain rights when they apply for loans and when
they have difficulty repaying loans. For example, the Act requires FCS
institutions to consider restructuring a distressed agricultural loan
before initiating foreclosure. It also provides borrowers an
opportunity to seek review of certain credit and restructuring
decisions. If a borrower's loan goes through foreclosure, the Farm
Credit Act and implementing regulations provide borrowers that qualify
the opportunity to buy back their property at the appraised fair market
value or make an offer to buy the property back at less than this
value.
FCA enforces the borrower rights provisions of the Farm Credit Act
and examines institutions to make sure that they are complying with
these provisions. It also receives and reviews complaints from
borrowers regarding their rights as borrowers. Through these efforts,
FCA ensures compliance with the law and helps FCS institutions continue
to provide sound and constructive credit and related services to
eligible farmers and ranchers.
Recent Deterioration in the Economic Environment
The United States is slowly recovering from a severe global
recession. The economic downturn began in late 2007; it worsened in
2008 from significant financial market instability; then it extended
into 2009 with increased unemployment, lost consumer confidence, and
continued housing sector weaknesses. The government responded to this
crisis with significant programs to stabilize the financial markets and
stimulate economic growth.
The confluence of economic and financial and market events resulted
in the System facing funding challenges in the Agency debt markets,
particularly for term debt. Due to the strong condition of the FCS and
its status as a GSE, it was able to issue short-term debt securities,
even though the issuance of longer-term debt became much more
difficult. The financial environment also negatively impacted the
System's cost of funding, as spreads relative to Treasuries increased
significantly. Early in 2009, the System faced increased costs and
limited liquidity access for term debt funding (5 years maturity or
greater). For instance, the spread to comparable Treasuries for 2 year
FCS debt peaked at 230 basis points compared to typical levels before
the financial market crisis, ranging from 20 to 30 basis points.
However, as the year progressed, there was steady improvement in market
access for term financing and generally low interest rates overall,
despite relatively wider spreads to Treasury. More recently, the
improved economic and financial market conditions have afforded the
System good access to funding across the yield curve with narrower
spreads. The access to a wider range of debt securities helped support
net interest income and profitability and allowed some improvements in
pricing options for System borrowers.
During this period of extreme market volatility, many non-System
banks and financial institutions were able to access funds through
various programs created or expanded by the U.S. Government in response
to the financial crisis. The System does not have access to these
programs or to any other U.S. Government backed liquidity credit line.
While this situation has not prevented the System from obtaining funds,
continued volatility within the GSE debt market makes the outlook for
the availability and pricing of future funding less certain. This is an
area meriting close monitoring by the FCS, its regulator, and Congress.
At present, financial market turmoil, prolonged economic
weaknesses, and deterioration in the agricultural economy pose
significant management challenges for borrowers, FCS institutions, and
FCA. High unemployment and the domestic and global recession have
caused demand for U.S. farm products to falter and lowered commodity
prices, thereby weakening the agricultural economy. After setting a
record in 2008, net cash farm income is forecast to drop by 30 percent
to a forecasted $66.2 billion in 2009. The 10 year average is $71.2
billion.
System borrowers face increased risk from volatile commodity
prices, soft farm product demand, higher input prices, and uncertain
weather conditions. The specific sectors showing the most stress are
hogs, dairy, forestry, ethanol, and poultry. Those sectors represent
21.8 percent of the System's portfolio. The cattle sector is also
experiencing some stress.
In addition to volatile commodity prices, agricultural producers
have had to endure much more volatile input costs, although costs are
down from records set in 2008. Squeezed profit margins have seriously
undermined incomes and thus repayment capacity for major farm commodity
groups. While many agricultural producers entered this economic
downturn with a relatively strong financial condition, the downturn has
reduced their financial strength and equity positions.
Increased unemployment has also adversely impacted many rural
communities. Continued job loss is a potential ongoing risk for these
communities and may become an issue for the large number of System
borrowers who depend on off-farm income to pay their loans. The housing
slump has significantly reduced demand for lumber and nursery products,
leading to reduced income, lost jobs, and increased stress in these
industries.
The potentially slow economic recovery and lagging prospects for
employment growth as well as an uncertain housing recovery suggest that
2010 may likely be another difficult year for many agricultural
producers. These uncertainties will present challenges to lenders and
regulators alike.
The System's capital position and solid financial condition will
help it weather these difficult times. Also importantly, as increased
stress is beginning to surface in FCS portfolios, we recognize that
System senior management is well experienced and seasoned. Many gained
experience during the agricultural credit crisis of the 1980s, and we
believe appropriate actions, in general, are being taken by FCS boards
and management.
Experience Gained From 1980's Agricultural Credit Crisis
Through the oversight and leadership of the House and Senate
Agriculture Committees, many important reforms were made to the Farm
Credit Administration and the FCS as a result of the agricultural
credit crisis of the 1980's. This included restructuring FCA as an
independent arm's-length regulator with formal enforcement powers,
providing borrowers rights to System borrowers with distressed loans,
and establishing the Insurance Fund to protect System investors.
Then, over the ensuing 2 decades, the System restored its financial
health and the trust of its borrowers. With its new authority as an
arm's length regulator, FCA was able to ensure that System institutions
adhered to safety and soundness standards. And the Insurance Fund also
helped restore investor confidence.
Both the System and FCA learned much during the crisis of the
1980s, and those lessons helped build a much stronger Farm Credit
System, as well as a stronger regulator. Mr. Chairman, I want to
emphasize that System institutions were not involved in and did not
contribute to the financial crisis that our nation experienced during
the past 2 years.
Comments Regarding the Financial Stability Improvement Act
The FSIA is a comprehensive proposal designed to strengthen
regulation and supervision of financial markets and some of the
largest, most complex financial institutions. A key feature of the
proposal is the establishment of a new Financial Services Oversight
Council (FSOC) that would bring together representatives of nearly all
Federal financial regulatory agencies to monitor and oversee the
stability of the financial system and address stability threats. Among
its many other detailed provisions, the draft also addresses prudential
regulation of financial companies and activities for financial
stability; merges the Office of Thrift Supervision into the Office of
the Comptroller of the Currency; improves regulation for bank holding
companies and depository institutions; addresses payment, clearing, and
settlement supervision; creates new standards for asset-backed
securities and imposes credit risk retention requirements; enhances
regulatory resolution authority; and enhances powers for financial
crisis management.
Support for Congressional Efforts
The FCA supports Congressional efforts to address the root causes
and systemic failures that resulted in the catastrophic meltdown in the
financial industry and marketplace last year. The Committee on
Financial Services' FSIA legislation under review seeks to provide a
mechanism for the oversight, control, and resolution of any financial
company or U.S. financial marketplace activity that could pose a
systemic risk to financial stability or the economy. The focus is to
eliminate gaps in the supervision, regulation, identification, and
control of risks in the U.S. financial markets and the largest,
interconnected, and complex financial firms present to financial
stability or the economy. The overall objective is to ensure the
regulatory structure protects the economy and financial system as a
whole. The proposal is far reaching, complex, modifies many existing
laws, and affects numerous financial marketplace participants.
The objectives of the Committee draft are commendable, and we
support the efforts of Congress to improve the financial regulatory
structure. Whether through legislative changes, new regulatory
activities, or a combination of both, there must be robust supervision
and regulation of financial firms and market practices that pose
threats to the financial stability of the country or the economy.
Farm Credit System Not a Contributor to the Economic Downturn or
Financial Market Destabilization
The Farm Credit Act of 1971, as amended, (Farm Credit Act) and
sound regulations adopted by the FCA address the fundamental safety and
soundness requirements for the FCS and Farmer Mac. Under FCA's
examination and oversight, the System and Farmer Mac did not engage in
lending practices and market activities that contributed to the
economic downturn and financial market turmoil. However, the FCA,
System, and Farmer Mac had to manage through the spillover impacts on
the agricultural economy, the lending environment, the funding
challenges, and unintended impacts from government stabilization
programs to ensure that credit and related services remained available
to agricultural producers and rural areas.
From Farmer Mac's creation, Congress included strong statutory
underwriting, security appraisal, and repayment standards for qualified
loans, with Farmer Mac's activities regulated and supervised by the
FCA. In addition to statutory minimum requirements, Farmer Mac was
required to develop sound underwriting standards for loans to qualify
for its programs. To date, these standards and regulations have
prevented any investor credit losses in Farmer Mac securities.
For direct lender institutions of the cooperative Farm Credit
System, regulations are in place for sound and constructive loans,
including loan underwriting requirements, loan security appraisal
standards, and repayment capacity requirements. Regulatory requirements
are also in place for eligibility and scope of financing, lending and
leasing limits, and regulatory capital. Additionally, requirements were
put in place 20 years ago to provide for borrower rights that require
clear disclosures and certain safeguards for borrowers when loans are
made, as well as when their loans become distressed. Regulatory
requirements and risk-based examinations have ensured the System
continues to serve eligible borrowers in a safe and sound manner
despite the prolonged economic recession and destabilized financial
markets.
Under the jurisdiction of the Agriculture Committee, the FCA
continues to effectively address FCS and Farmer Mac systemic, credit,
and operational risk issues to ensure continued credit availability for
agriculture and rural areas. Importantly, the FCA has the statutory
authority to examine, regulate, and oversee the System and Farmer Mac,
including strong enforcement authorities and the ability to appoint a
conservator or receiver. Enforcement actions can result in written
agreements; orders to cease and desist; civil money penalties; and
orders of removal, suspension, or prohibition. When appointed by FCA,
the Insurance Corporation has the statutory responsibility to serve as
receiver or conservator for the orderly wind down of System
institutions.
Scope of the FSOC Established by the FSIA
The draft legislation would subject all financial companies that
may pose significant risks to the financial system to the framework for
consolidated supervision that currently applies to bank holding
companies (BHC). Large, interconnected banks, non-bank financial
companies, and industrial lending companies would be subjected to
comprehensive supervisory oversight applied to BHC. Large,
interconnected financial companies are actively engaged in the
financial markets for profit purposes. They tend to amass a material
volume of complex financial transactions and obligations with other
financial companies. Such firms frequently trade in various securities,
financial instruments, and derivatives. At times, they may take highly
leveraged speculative positions in the financial marketplace. As a
result, large, interconnected financial companies are at the core of
the financial markets and relied on by market participants for the
intermediation of various financial transactions. Considering their
central role in the marketplace, these companies can pose systemic risk
due to their size, level of activity, interconnectivity and business
practices.
The draft legislation would create the FSOC, with voting membership
consisting of Federal financial regulatory agencies, to reinforce
regulatory systemic risk oversight of large, interconnected financial
companies. The FSOC would have exclusive and broad authority to
identify any financial company where a material financial distress
could pose a threat to financial stability or the economy or financial
activity that could pose such a threat. Criteria for identifying
systemically significant financial companies include the nature of the
financial assets, liabilities, off-balance sheet exposures, and
transactions with other companies as well as its importance as a source
of credit and liquidity. While the nature, scope, and mix of the
company's activities are important considerations, the FSOC would have
the discretion to consider other factors it deems appropriate.
Once the FSOC identifies a financial company as posing a systemic
risk, it would be treated as a BHC and the Board of Governors of the
Federal Reserve System (Board) would be required to impose heightened
prudential standards. These standards include risk-based capital
requirements, leverage limits, liquidity requirements, concentration
limits, prompt corrective action requirements, resolution plans, and
overall risk management requirements. After notice, the Board may also
require the identified financial company to reduce its asset size and
scope of business activities. For a subsidiary depository institution
of an identified financial company, the Board would be authorized to
recommend heightened prudential regulation to the primary financial
regulatory agency for such subsidiary. The Board would have backup
authority to impose its recommendation if the primary financial
regulatory agency failed to impose the prudential standards.
To ensure the bankruptcy of a large interconnected financial
company does not destabilize the financial markets or the economy, the
proposed legislation provides for the orderly resolution of such firms
by the Federal Deposit Insurance Corporation (FDIC). An identified
financial company would be subject to the enhanced resolution process
based on a recommendation by the Board and FDIC or the Security and
Exchange Commission (SEC) and certain determinations by the Secretary
of the Treasury. The FDIC would then be authorized to wind down an
identified company's operation in a manner that ensures market critical
obligations are honored and shareholders and creditors bear the brunt
of any resulting losses. The FDIC would also be able to draw on the
Treasury any amount needed for the resolution of such financial firms
and recoup the expenditures from assessments on the financial services
industry through the ex post creation of the systemic resolution fund.
Risk-based assessments would be made on all financial companies with
more than $10 billion in consolidated assets on a graduated basis, with
credit given for fees paid to deposit insurance, investor protection,
or insurance company funds.
In summary, the FSIA would grant the FSOC broad far-reaching powers
over financial companies. These powers would include the authority to
gather information and identify a financial company as posing a
systemic risk to financial stability or the economy. Upon identifying a
financial company, the FSOC would empower the Board to require
heightened prudential standards and subject the identified company to
enhanced resolution authorities. The FSOC and Board also would have
broad authority to identify financial activities and practices that
pose risks to financial stability and the economy. Once an activity or
practice is identified, the Board would be required to recommend
prudential standards to the primary financial regulatory agencies.
Effect of the Legislation on Farm Credit System Institutions
As proposed, the legislation does not directly amend the Farm
Credit Act, which provides the primary statutory authority for the
establishment and regulation of institutions of the System, including
Farmer Mac. The draft does not indicate an intention to affect the
System or include FCA. Moreover, its scope seems to be directed at
systemic financial marketplace issues and very large, interconnected
financial companies that pose systemic risk to the entire financial
system and the nation's economy as a whole. However, a close reading of
the draft reveals direct conflict with the Farm Credit Act as it
relates to the requirement for credit risk retention in the context of
securitizations. In addition, the draft creates uncertainty for the
potential inclusion of the System in the regulatory structure or
activities authorized. Three specific areas are noted.
First, the FSOC, composed of all Federal financial institutions
regulatory agencies except the FCA and FCSIC, is established to monitor
and address systemic risk to the financial stability of the United
States. The significant and far reaching authority and regulatory
activities of the FSOC extend broadly to any ``financial company'' as
defined. It is not clear what the many implications may be of simply
meeting the basic definition of ``financial company.'' Nevertheless, as
written, institutions of the System would appear to meet that
definition, as they are companies or entities engaged in financial
activities.\1\ Therefore, the FSOC would have regulatory authority
without inclusion of the FCA, the FCS's primary regulator, or
consultation with the Agriculture Committees responsible for overseeing
agricultural credit and related services delivered through the System.
Similarly, any potential action by the FSOC to identify a System
institution as systemically significant and treat it as a BHC would be
impractical given the System's unique structure and public policy
purpose. Given the FCA already analyzes, regulates, examines and
oversees potential systemic risks of the System, the FSOC appears to
create a conflicting regulatory framework if it applied to the System.
The end result is regulatory uncertainty and confusion for the
cooperative System that lends to farmers, ranchers, and others as
authorized by the Farm Credit Act.
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\1\ Section 4(k)(4) of the BHC Act considers lending, guaranteeing
against loss, or issuing instruments representing interest in pools of
assets as activities that are financial in nature.
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Subtitle F of the draft legislation, through the Securities and
Exchange Commission, would require creditors and those that securitize
loans to retain ten percent of the credit risk on any loan that is
transferred, sold, conveyed, or securitized. This new requirement would
be directly applicable to the securitization activities of Farmer Mac
and perhaps to other activities of System institutions when they extend
credit within the System or with external lenders. It is important to
note that in 1996, Congress repealed a similar ten percent retention
requirement that existed in title VIII of the Farm Credit Act for loans
sold to Farmer Mac. Farmer Mac has minimum statutory loan underwriting
requirements outlined in 12 U.S.C. 2279aa-8 and definitions applying to
qualified loans in 12 U.S.C. 2279aa. Separately, the FCA repealed
regulations that required lead lenders to retain ten percent of the
credit risk in loan participations they sold to other lenders. As
written, since the FCA is not a named Federal financial regulator on
the FSOC, enforcement of the credit risk retention requirements would
fall to the Securities and Exchange Commission, as outlined in
1502(e)(2), creating further conflicts.
Third, subtitle G of the draft legislation would provide the FDIC
enhanced resolution authority for large, interconnected financial
companies that pose systemic risks to the financial stability of the
United States. Although the structure and text of subtitle G seems to
imply that it does not cover the System (which is not a large,
interconnected company that could pose systemic financial risks), this
matter is not absolutely clear. A related issue is confusion over the
authority of the FDIC to assess System banks and associations to cover
the costs of dealing with failed financial institutions that already
pay premiums to FCSIC.
Conclusion
Thank you for the opportunity to participate in today's hearing. I
look forward to commenting further on the FSIA, including any revised
proposals, and working with the Committee on this legislation. As you
consider credit issues in agriculture, I stand ready to work with this
Committee on enhancements to the Farm Credit Act to ensure our
regulatory, enforcement, and resolution authorities keep pace with best
practices.
The Chairman. Thank you very much, Mr. Strom, and I thank
all of the witnesses for being with us today.
You know, we had Mr. Parkinson from the Federal Reserve
here a little while ago, a year ago, and we asked him about
their experience, in this regard. He testified that the Federal
Reserve has never been a primary regulator for any of the
central counterparty and clearing service. You guys, Mr.
Gensler and Ms. Walter, do you have any idea of where the--how
they came up with this idea that the Federal Reserve is better
equipped to do this, given the fact that they don't, they have
never done this before? Do you have any insight for me?
Mr. Gensler. I think since President Roosevelt came to
Congress in the 1930s, and Congress responded and set up the
Securities and Exchange Commission, our predecessor was setup
under the Commodities and Exchange Act in 1936, that
clearinghouses and exchanges have been overseen respectively
either by the SEC or the CFTC. They are so intertwined with
customer protection rules, segregation rules, product
development, that this is the best place, and that is where
they have been now for 75 years.
The clearinghouses and the exchanges are systemically
relevant. They are relevant to the broader economy and the
success of all Americans, so I think that they are getting
caught up in this view because they are systemically relevant.
But I think much of what the CFTC and the SEC does is
systemically relevant and is appropriately regulated by the
market regulators.
The Chairman. Well, these, some of these guys were involved
in unwinding the Lehman situation and so forth, and they
survived that whole situation and didn't have any defaults that
I am aware of.
Mr. Gensler. I believe the clearinghouse is a significantly
lower risk to the system and that is why this Committee
incorporated that in the over-the-counter derivatives bill that
requires many transactions in the central clearing. You are
correct, Mr. Chairman, that in the bankruptcy of Lehman
Brothers, over a weekend, the particular transactions that
Lehman had with the clearinghouses were allowed to be moved.
Under the Commodity Exchange Act currently there are provisions
for portability to move the transactions from one futures
commission merchant to another and that was done successfully.
Similarly in Refco, when Refco failed 4 or 5 years earlier, it
happened similarly, and I would also note that currently in
statute we have authority to actually step in as a receiver of
the clearinghouse if there was such a problem with the
clearinghouse itself.
The Chairman. Well, apparently this draft legislation would
give the Fed the power to override what you are doing, right,
the way I read it?
Mr. Gensler. That is correct. The various proposals have a
Council. The Council can set various standards, but ultimately
the Federal Reserve could, if the CFTC or the SEC did not
follow the Federal Reserve guidance, have full examination
authority, enforcement authority, ability to set rules and
orders for clearinghouses.
The Chairman. What under the draft, what ability would you
have to challenge or appeal a decision made by the Fed? I mean,
can the Council override the Fed actions or could you challenge
them in court?
Mr. Gensler. Not as I understand the draft legislation, but
maybe others have a different read of it.
The Chairman. So we are going to take somebody who has no
experience and put them in charge is apparently what they are
doing, is what it sounds like to me, so I won't make you answer
that.
Mr. Strom, does the Farm Credit agency or Act, excuse me,
the Farm Credit Act provide for a way to shut down a Farm
Credit institution that gets into financial difficulty?
Mr. Strom. Mr. Chairman, the revisions of the Farm Credit
Act in 1987 did put in strong enforcement powers for the
agency, and there are mechanisms involving the agency and the
Insurance Corporation for the resolution, under which the
Insurance Corporation can be designated as either a receiver or
conservator of a Farm Credit institution at the direction of
the Farm Credit Administration. So yes, there are wind-down
provisions.
The Chairman. And you would use that?
Mr. Strom. We can use that.
The Chairman. Have you used it?
Mr. Strom. No, we have not had to use it. We have had no
System failures in the last 20 years that have had to utilize
that.
The Chairman. Now, I guess in your testimony you were
saying the Treasury added some language to try to fix some of
these problems, is that what you said?
Mr. Strom. Mr. Chairman, yes, there were three primary
areas that we were concerned about. The definition area--as of
late yesterday they had responded that, in their view of the
language of the bill, there was never an intent to include the
Farm Credit System institutions. So, they have said that they
would put an exclusion in the bill, under the terms of
definition of a financial company to exclude Farm Credit System
institutions. They also agreed, or mentioned, that they would
put in exclusion language in the area of the resolution issue
that would have put FDIC in charge of resolutions. But, we
still are not certain where we stand with them on the credit
retention issue.
The Chairman. But they are not writing the bill.
Mr. Strom. I agree 100 percent and that is why.
The Chairman. Well, how is this going to work? Have they
got somebody over on the Financial Services Committee that is
going to offer these amendments or how is that going to work?
Mr. Strom. They have told us that they have had contact
with the Financial Services Committee to offer these amendments
to the bill.
The Chairman. And do you, I am a little over time but do
you have the authority, anymore, to put in this ten percent
requirement if you wanted to, or did we take that away in 1996?
Mr. Strom. That was taken away in 1996.
The Chairman. You can't do that even if you wanted to?
Mr. Strom. That is correct. I was pretty certain that we
can't go back and do it because that was put in the law to take
that out back in 1996, so it is in the statute.
The Chairman. Thank you.
The gentleman from Oklahoma.
Mr. Lucas. Thank you, Mr. Chairman, and to continue a point
that you brought up initially, in a market emergency, of
course, I think we would all agree that one of the most
important things is for everyone to know who is in charge.
And under present law, Chairman Gensler, clearly CFTC has
very robust emergency powers and Title I, as we are discussing
here, seems to give substantial emergency powers including
futures clearing to the Federal Reserve. Could you take us
through a scenario as you envision the bill now if there is a
market and a problem occurs your people would be the first to
recognize it because you are the primary regulator, from that
point on as you envision the legislation describe for me the
scenario. Would you begin to respond? Would you report to the
Fed? Would you report to the Council? How do you envision this
bill working if you have a problem within a particular market?
Mr. Gensler. Well, I think that it would probably evolve
over time. What the bill envisions is that there would be
effectively dual regulation or even multiple regulators because
you would have a Council, you would have the Federal Reserve,
and then you would have the market regulator, in this case the
CFTC that would have some oversight or involvement with the
clearinghouse that you mentioned. I think if we saw it, we
would still do what our expert staff does already. We would
work with the clearinghouses and exchanges on whatever that
issue was. If it has to do with risk management, with the
support of this Committee, the derivatives bill that you passed
out of this Committee enhanced some of our ability in those
circumstances to write rules. But, foremost, we would rely on
the clearinghouse to write rules but if they didn't, we could
write rules under the legislation you passed out of this
Committee. But under this proposed legislation, if that wasn't
satisfactory to the Council or was not satisfactory to the
Federal Reserve, they could step in and write their own rules.
Mr. Lucas. So you would be reporting to the Council as you
were proceeding after CFTC determined there was a problem, you
would begin to assess the situation, you would prepare to take
action, you would be reporting to the Council. I assume you
would be reporting to the Council what CFTC would envision as
the action to take for remediation. The way this bill is
drafted they would review those proposed movements or actions,
conceivably. The way the bill is put together, if they
determine that the CFTC's remedy was inappropriate or didn't
match what they perceived to be appropriate, then as you
envision the bill, the draft legislation, they could then
immediately override CFTC?
Mr. Gensler. Well, I think just as it is now, we do a lot
of consultation with our fellow regulators. I think that
consultation is a positive thing and I would assume with or
without a draft bill, we would consult with other regulators.
But what the draft proposal also does is say that Council
regulators may recommend, and if the CFTC or SEC does not
follow that recommendation, we have to then publicly say why we
didn't follow the recommendation, and then the Federal Reserve
could step in and set their own rules of the road.
Mr. Lucas. I think you see where I am going. I am trying to
work through my own mind the consequences of a problem,
conceivably something like a phased liquidation of trading
positions over a number of days, not something that is beyond
the realm of what you would in a potential scenario. If the Fed
determined on a Saturday night that that wasn't fast enough or
didn't meet the overall scheme of things and they ordered an
immediate liquidation or dramatic move, I am just trying to
work through my own mind before we get to that scenario if this
draft proposal would become law, what the consequences would be
to the market and the economy?
Mr. Gensler. I think, sir, that it would evolve, but the
legislative language is very broad, and if the Federal Reserve
or the Council sought more heightened prudential standards,
they would have broad enforcement authority. I think you are
correct on that.
Mr. Lucas. So ultimately the Fed would be the 12 ton
regulatory gorilla at the end of the line.
Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
The gentleman from Pennsylvania, Mr. Holden.
Mr. Holden. Thank you, Mr. Chairman.
Mr. Strom, following up on your conversation with the
Chairman about Farmer Mac, how in the Farm Credit Act of 1987
we had the ten percent hold-back provision put in and then we
repealed it in 1996. Can you elaborate on why we repealed it,
what damage it was causing or restrictions it was causing?
Mr. Strom. Congressman, Farmer Mac was established in 1988
to be a secondary market for agriculture real estate mortgages.
That was a ten percent first-loss retention that Farmer Mac had
to retain, and they found that a very unworkable situation. It
was a struggle for them to add volume with that retention piece
in there. And so I think because Congress recognized, and this
Committee recognized, that that was repealed. It opened the
door for them to do more business with stronger regulatory
standards also included; so that we, as the regulator in our
oversight of Farmer Mac, would make sure and enforce those
strong regulatory standards. They have been able to emerge now
as an almost $11 billion entity in that secondary market.
Mr. Holden. Thank you. Also, Mr. Strom, you mentioned your
concerns about the Farm Credit System Insurance Corporation
with the Financial Service Committee's draft. Can you tell us
about the status of the Insurance Corporation? What are its
assets and what are you concerned about with the other
Committee's draft?
Mr. Strom. The Insurance Corporation was established as
part of the 1987 amendments to the Farm Credit Act, and it is
currently fully funded with over $3 billion in the insurance
fund to give backstop, to insure timely payment of System debt
obligations, so it is currently fully funded. The confusion in
this new draft legislation is that it has put in place on it
charging premiums on banks or other financial companies in
excess of $10 billion to fund the FDIC oversight and resolution
authority. We already have that in the Farm Credit System in
this Insurance Corporation and, hence, System institutions, and
there are a number of them including the five banks of the Farm
Credit System, that are in excess of $10 billion in size, which
would be paying additional premiums on top of the premiums they
already pay to their own insurance fund. So we see it as a kind
of piling on for them, and it really clouds the authority of
the resolution authority if the FDIC is placed in ahead of our
own Insurance Corporation.
Mr. Holden. Any idea what the proposed premiums would be?
Mr. Strom. No, I am not aware of levels of proposed
premiums.
Mr. Holden. Thank you.
I yield back, Mr. Chairman.
The Chairman. What are the current fees of the bank, your
bank is paying?
Mr. Strom. We have authority in the Insurance Corporation
to charge up to a 20 basis point premium on System institutions
to insure that the fund stays at the two percent secured base
of outstanding debt of Farm Credit System institutions. This is
approximately $160-$170 billion at this time, and so the fund
at $3.2 billion is now fully funded. Let me reiterate that this
Committee took the action with the Congress last year in the
farm bill to raise our level of premium assessment. There was a
cap of 15 basis points. You raised it to 20 basis points,
working with us, so that we can ensure flexibility. Now, we
will adjust that premium level as time goes on to ensure that
it stays at the full secure base.
The Chairman. So when you hit the maximum then you suspend
the assessment?
Mr. Strom. Yes, the Insurance Corporation has the
flexibility, the Board of the Insurance Corporation has the
flexibility to establish those premiums.
The Chairman. Now, there is no premiums?
Mr. Strom. Well, right now we are looking at the fact that
we will probably be making the decision in the coming months
because we collect the premiums in arrears. So, as they come in
we will be addressing that situation.
The Chairman. Okay.
The gentleman from Kansas, Mr. Moran.
Mr. Moran. Mr. Chairman, thank you.
Let me follow onto Mr. Holden, the gentleman from
Pennsylvania, his question. You talked about, Mr. Strom, you
talked about the double premium charges. Can you outline the
benefits that come from the additional premiums that you would
be paying? What would be the Farm Credit System benefit for
what it is paying in additional premiums?
Mr. Strom. Congressman, I think this is all part of the
wise decision of this Committee back in the 1980s at the height
of the agricultural crisis. This Committee set many pieces in
place for the Farm Credit System and the success of FCA as a
regulator today. The insurance fund was put in place. It is now
fully funded. That serves as a backstop. That is a positive
aspect for any System investor that looks at investing in
System debt obligations to know with assurance that this Farm
Credit System is safe and sound. The Insurance Corporation and
the fund that was established there is one integral piece of
that.
Mr. Moran. So no additional soundness and security comes
from paying additional premiums to this additional fund for the
Farm Credit System, is that correct?
Mr. Strom. At this time, the statute says that the fund
should be kept at the two percent secure base and, as the
Insurance Corporation, our job is to make sure it gets there
and stays there.
Mr. Moran. The requiring of additional retention, the ten
percent securitized debt on your books, does that cause
interest rates to increase and have the consequence of
constricting credit?
Mr. Strom. Well, I think in the general context of this
entire piece of legislation with the layering effect of
additional oversight, if there are premiums charged by FDIC for
their fund and for the resolution authorities, and if it were
applied to Farm Credit System institutions, certainly there
would be additional costs that would be passed on. You have
staffing cost for the regulation on top of this. We fully
understand, as a regulator, the importance of safe and sound
regulation. We understand the intent of this bill, but this
Committee, back to the earlier question about the Treasury's
involvement, the Agriculture Committee has done the right
things in the last 20 years with the Farm Credit System. We
believe that in working with Treasury, ultimately, it will be
this Committee's decision. We understand the jurisdiction issue
here and your work with the Financial Service Committee is to
resolve this issue.
Mr. Moran. Unless I misunderstood, I am going to suggest
that your answer to me to both my questions about increasing
premiums and additional set-aside for securitized debt means
increased interest rates and less credit availability.
Mr. Strom. Yes.
Mr. Moran. Thank you.
Let me ask a question of the Chairman, Mr. Gensler, and of
the Commissioner. I was reading your testimony, Mr. Gensler. In
the last paragraph before you close, it deals with
clearinghouse obligations and the appointment of a receiver. I
understand that clearinghouses are not subject to a stay under
current law. Would such a stay, I am not sure what you are
saying in your testimony. Does that stay concern you and
shouldn't we have clear language that allows a receiver to
continue to perform clearing activities that is feasible and
exercise all the rights to liquidate in that setting?
Mr. Gensler. I thank you for asking because I wasn't able
to say it in my oral testimony, but clearinghouses reduce risk
immediately upon a default that one of their clearing members
make and can close out, liquidate the position, and that is
fundamental and that has been true for decades, a very
important feature. I think it is probably unintended but what
is in the various proposals would be that the FDIC can step in
and stay for up to a day and a half until 5:00 p.m. the next
day these provisions--I think that we should work with this
Committee and, hopefully, with Congress to clarify, because
that would actually raise risk of clearinghouses rather than
lowering risk of the clearinghouse.
Mr. Moran. Thank you. Let me ask a final question on this
on the topic of clearinghouses. In our bill that this House
Agriculture Committee passed out several weeks ago, we
prohibited the Fed from providing assistance through the, at
the window, excuse me for stuttering, and it appears to me that
this language prohibits clearinghouses from accessing the
discount window as well. So my question is, is that a prudent
thing to do to bar access to the window?
Mr. Gensler. I think that clearinghouses should be robustly
regulated by the market regulators, and that the clearinghouses
should have in place roads to access liquidity from the central
bank. A discount window is actually a routine feature that
banks currently have that they can access. In current law in
extreme circumstances, extraordinary circumstances and I think
it is under 13.3 of the Federal Reserve Act, with super
majority vote of the Fed and so forth, they could lend to a
clearinghouse. It has never happened but that is more an
extraordinary circumstance. I don't believe that you would want
to have a routine lending facility to these clearinghouses.
Mr. Moran. Thank you, Mr. Chairman.
Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
The gentleman from North Carolina, Mr. McIntyre.
Mr. McIntyre. Thank you, Mr. Chairman. Thanks to all of you
for being with us today.
Farm Credit, as we know, is already regulated to a higher
degree than most financial institutions, as it is regulated at
the Farm Credit Administration. If this bill were to be put in
place it would greatly reduce the effectiveness of Farm Credit
and their ability to serve farmers and rural communities. Mr.
Strom, I have had the pleasure, as you may know, of working
with Cape Fear Farm Credit located in southeastern North
Carolina, and I have seen first-hand the good work that they do
in our rural communities. We have seen that virtually every
other financial institution in the country seems to have had a
direct line to the Treasury as a backstop to their lending
activity, and some even for capital in recent months. In your
opinion, does the Farm Credit System have a backstop at the
Treasury or at the Federal Reserve?
Mr. Strom. Congressman, the answer is no, the Farm Credit
System does not have that immediate backstop to either. As we
saw last fall a year ago, as the financial crisis unfolded, one
of the issues that the Farm Credit System faced was on the
funding side of its operations. I mean it is authorized to
issue consolidated debt obligations through its funding
operations up in New Jersey. As investors worldwide backed
away, we saw the cost of the debt obligations issued by the
System skyrocket, and those costs eventually were borne by the
System institutions and eventually by the borrowers because of
the dislocations in the market, which was an unintended
consequence for this GSE, the Farm Credit System. Those costs
of funding have come down. It is now able to issue a little
longer term debt because at some point the System couldn't
issue anything beyond 5 year debt, and that, again, was a
difficult situation. My thought is that if there was eventually
some sort of a crisis situation, the Farm Credit System might
need to have some avenue for that because, again, they do not
currently have that backstop.
Mr. McIntyre. Could you explain briefly for the Committee
what the role of the Farm Credit System Insurance Corporation
is and what it does? How does that compare with the FDIC, for
instance?
Mr. Strom. The Insurance Corporation insures the timely
repayment of the debt obligations of the Farm Credit System, so
investors look at that as an insurance for the timely payment
of these debt obligations. The Insurance Corporation also has
the conservatorship or receivership authorities if a System
institution is failing. It would be placed under the Insurance
Corporation to resolve those issues, going forward. So, that is
the current basic authority of the Insurance Corporation.
Mr. Moran. Thank you.
Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
The gentleman from Texas, Mr. Conaway.
Mr. Conaway. Mr. Chairman, thank you very much. Witnesses,
thank you.
Mr. Gensler, as I have listened to your testimony I was
trying to parse through the sensitiveness to your being an
Administration person backing what their play is, but did I
hear you say that this new proposed multi-tiered, both your
organization and the regulatory scheme over certain activities,
is better than the current focused regulatory scheme that the
SEC and the CFTC bring to the table?
Mr. Gensler. Congressman, what I am saying is that in
response to this Committee's request to testify, this bill has
some aspects that I think we do have to address, gaps in the
system. There should be some consolidated supervision,
stronger, consolidated supervision than what we had with AIG,
for instance, which had ineffective oversight, and some better
resolution authority to resolve these things. However, it does
also setup, and I don't think this is necessary, to achieve
those first two goals, I don't think the other things are
necessary that is sets up a multi-tiered or a multiple
regulator oversight of activities. I don't think you need to
bring these activities in.
Mr. Conaway. Okay.
Mr. Gensler. You could just oversee entities, and I think
on clearing the SEC and CFTC have done this for about 75 years.
Mr. Conaway. Okay.
Mr. Gensler. And it is intertwined with the rest of what we
do overseeing markets.
Mr. Conaway. All right, thank you.
The Financial Services Oversight Council, is that the right
name? At first blush, some uninformed reader might think that
this is some super regulatory basis deal for everything the
Federal, all the Federal services as opposed to perhaps
financial services, but we will let Barney worry about that.
Put in place this Financial Services Oversight Council in the
early 1990s and any of the three want to take a shot at this,
how would this Council have dealt with Fannie and Freddie, and
AIG as two examples of pieces of the wreck this past year that
most of us agree were contributed? How would this Council have
identified it and prevented those issues from getting to where
they were, given the information available in the early 2000s
about the wreck that Fannie and Freddie were proposing and all
that? How would it work?
Ms. Walter. Well, what the bill contemplates, Congressman,
is that the Council would first identify systemically important
institutions so let us take it as a given.
Mr. Conaway. The Council is made up of existing players in
the arena right now?
Ms. Walter. Yes, it is.
Mr. Conaway. Okay.
Ms. Walter. And it brings together a variety of expertise
including Chairman Gensler and representation from the SEC,
representation from the bank regulators.
Mr. Conaway. Wait, wait, wait, I understand how, what it is
made up of and all of those players were in the regulatory
arena throughout this time-frame. How would it work? I mean who
brings it to the table? Listen, focus on Fannie and Freddie.
How does it work to prevent that wreck?
Ms. Walter. One can assume that they would have been
identified as systemically important, and then the idea is that
they could recommend, the Council could recommend heightened
regulatory standards.
Mr. Conaway. Okay, well, I don't mean to be abrupt but we
have to find this out, they were identified from 2000 on,
multiple attempts to reign them in. So this Council then,
rather than driving legislation that might address all these
things, we are going to invest in this Council all of the
authority and power necessary to do what Congress couldn't do
in reigning in Fannie and Freddie, and what lawyers at the
Administration could not do when it dealt with AIG, is that how
we work?
Ms. Walter. I think that is a fair statement. With the
knowledge that we have gained in the crisis, hopefully, whoever
makes those decision will do a better job than has been done in
that past.
Mr. Conaway. Okay and all of those folks will be political
appointees for the most part across the Council. How do we
protect the Council from untoward influence by Members of
Congress who apparently worked their magic from 2000 to 2008 to
protect Fannie and Freddie from causing the wreck they caused?
How does it work?
Ms. Walter. The Council as constituted under the bill would
be headed by an existing regulator. Our recommendation would be
that the Council have an independent chair and permanent staff
so that the Council would have its own independent wherewithal.
Mr. Conaway. Well, I thank the witnesses. I appreciate
that. It sounds like it is a great works program for a new
regulatory entity, and I have grave concerns that this is going
to help us deal with some of the things we dealt with.
Mr. Chairman, thank you. Thank you, witnesses. I again
apologize for being abrupt but he is very high and handy with
the gavel at 5 minutes so I yield back.
The Chairman. I thank the gentleman.
The gentleman from Iowa, Mr. Boswell.
Mr. Boswell. Thank you, Mr. Chairman, for having this
hearing. Some of these things that have been covered were just
to be sure of the facts. I realize you had the discussion with
the Chairman about Farmer Mac and what happened in 1996, but I
would like to ask the question as it continues, what was the
affect of the ten percent credit risk retention on the
availability of credit to farmers for one, and number two, what
do you think adding this requirement to Farmer Mac would have
today on producers, anybody?
Mr. Strom. Congressman, in my view the ten percent first-
loss position, prior to that 1996 repeal, made it really an
untenable situation for Farmer Mac to engage in the market and
actually effectively operate as a securitization for these
agriculture real estate mortgages. So, with the repeal of that
and not having to hold back that ten percent on their books, it
allowed them with, again, the strong regulatory standards that
were put in place for the regulator to make sure that Farmer
Mac does the proper underwriting, all of the things that need
to be done in this. It has worked for Farmer Mac, going
forward. They have been effective in the marketplace without
that, and so putting this back in place puts them, in our
minds, back to that pre-1996 situation.
Mr. Boswell. So you think that answer is what is needed
today, what you have just said, that is needed?
Mr. Strom. I would say what is needed is the current status
where, we as a regulator, have the authority over them from a
safety and soundness aspect. They have no retention requirement
and they work effectively. We are eager--we are willing to work
with this.
Mr. Boswell. Okay, not to cause you to repeat, but just in
your own words, what do you think from your perspective
realizing the credit crunch out there for the producers today,
and assuming you understand it very well and some of us up here
too, what do we need to do to advance the ability to Farmer Mac
to do its job?
Mr. Strom. Well, we are more than willing to work with this
Committee to look at new ideas and new strategies for
additional opportunities for them to access the marketplace.
There may be authorities out there for them to do or changes
that should be put in place, but we are more than willing to
work with the Committee to look at those, going forward. I
think this piece of the legislation is we understand that this
Committee should retain the jurisdiction over this.
Mr. Boswell. I understand that and I appreciate your
willingness, but I just wondered if you happened to have a
suggestion. I will give you a moment or two to talk to your
people sitting behind you if you want to. I think this is a
pretty important matter.
Mr. Strom. Congressman, again, I think there is the
possibility. I can't come to any thing specific at this point,
but I think there are a number of opportunities and authorities
that Farmer Mac, and we as the regulator could look at to help
Farmer Mac expand their business opportunity to serve America
in agriculture and the rural segment that is so vitally
important.
Mr. Boswell. Okay, we appreciate your taking the question
and your willingness to work with us, and maybe a little more
discussion later with you, I guess. Last fall, almost every
financial institution was experiencing severe difficulty
obtaining funds from the money markets. Most commercial banks
relied on the Federal Reserve to provide them liquidity. What
was the experience of the Farm Credit System at that time, and
are there changes that this Committee needs to be thinking
about to ensure that the System can continue to access funding
during a time of severe liquidity crisis?
Mr. Strom. I am sorry, Congressman, I was still trying to
think of an idea for Farmer Mac so I apologize for the nature
of the question. If I could I would like to expand one moment
on Farmer Mac. I thought your question was directed to the
other members at the table here. In the 2008 Farm Bill, Farmer
Mac was granted expanded authorities in rural utility lending
authorizations and that was an example of how they have gotten
into more rural lending, and they have been pretty effective in
that. So, that is one example that was granted to them, and
they have expanded into that arena. There may be others similar
to that.
Mr. Boswell. Well, the time has run out so I will get the
staff to contact you to get you to answer this question a
little more specifically, and I am assuming you would want to
do that?
Mr. Strom. I would be happy to.
Mr. Boswell. I yield back.
The Chairman. I thank the gentleman.
The gentleman from Nebraska, Mr. Fortenberry.
Mr. Fortenberry. Thank you, Mr. Chairman.
I think many of the institutions that we have deemed too
big to fail are actually too big to succeed, and I agree with
the movement toward the aggressively addressing this whole
issue of systemic risk. With that said, however, Commissioner
Walter, I want to, I would like you to further unpack one of
your statements here, which is particularly provocative and has
implications and points of contention in trying to
appropriately address systemic risk without disadvantaging
smaller institutions who actually are counterbalanced to
systemic risk. With this concentration of assets into fewer and
fewer hands in this country, clearly there is a significant
problem here, and yet the intended effect of trying to disburse
that risk might disproportionately affect smaller institutions
as you are applying in this sentence. Do you suggest that
policies and standards should be formulated with an
understanding that their direct and indirect impacts on other
parts of the market be tailored so that they do not
inadvertently favor large institutions relative to small ones,
thereby unintentionally fueling instead of reducing systemic
risk? Can you unpack that further, please?
Ms. Walter. I would be happy to. I do believe that this is
a grave concern and that application of systemic risk
requirements have to be looked at carefully from that
perspective. I believe it is the intent of the bill that we are
looking at to impose more onerous, more stringent requirements
on the larger, systemically important institutions. But, it
would be good to clarify that and to make sure that a couple of
things are true, one to clarify that that is the case and to
make those requirements additive to requirements that would
otherwise be applicable and, in fact, it should be a burden to
be a systemically important institution, not a benefit.
The other thing that I believe should be done is to clarify
that it would not affect existing standards because many
standards could be interpreted, prudential standards could be
interpreted as falling within the legislation when, in fact,
they might actually loosen standards. One good example,
perhaps, would be imposing bank-based capital on a registered
broker dealer. If you did that, you would in effect be giving
that bank-related broker dealer an advantage because it would
lower their capital standards. So existing standards should be
preserved and it should be clear that these systemic
requirements are in addition to, additive to existing
standards.
Mr. Fortenberry. So you are favoring leaving this
regulatory structure as we have it in place and have a super
structure that would look at systemic risk?
Ms. Walter. Correct, we think that the experiences of the
recent past suggest that there is a need for back row
prudential oversight that really expands across markets and
eliminates silos, but there is not a need to eliminate existing
regulations.
Mr. Fortenberry. Well, here we talk about, you talk about
establishing more stringent standards for leverage and risk-
based capital for systemically important institutions. So,
would you foresee a different set of standards for what would
be defined as a systemically important institution and how
would that be structured?
Ms. Walter. I would foresee additional standards being
applied to systemically important institutions so the standards
in effect would be stricter. What we have suggested is that the
ability to apply those standards be granted to the multi-member
Council rather than to any single regulator.
Mr. Fortenberry. And this would serve as a roving
institution, if you will, that looks at this problem of
systemic risk?
Ms. Walter. It would serve as an extra backstop for which
the Federal Reserve Board could serve as a set of eyes and ears
participating in exams along with primary regulators.
Mr. Fortenberry. Well, did you write this sentence, that
the last part of this sentence ``and be empowered to serve as a
ready mechanism for identifying emerging risk and minimizing
the regulatory arbitrage that can lead to the regulatory race
to the bottom?'' That is very well said for whoever wrote that.
Ms. Walter. I will not claim personal authorship. I will
claim institutional authorship.
Mr. Fortenberry. That is all I have, Mr. Chairman, thank
you.
The Chairman. I thank the gentleman.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman, and I want to say at
the outset that I do think that more than anything else this is
going to boil down to a jurisdictional fight. I serve both on
the Financial Services Committee and the Agriculture Committee,
and it is my hope that the Agricultural Committee will
certainly fight for our jurisdiction, particularly in view of
the Farm Credit issue which I think is most important. I might
add that I did bring up some of these concerns in Financial
Services when we were marking up both the consumer protection
bill and the systemic risk.
But let me ask you, Mr. Strom, I think either today or
tomorrow in our Financial Services Committee they are going to
vote to what we call an assessment level that is based more on
our risk profile rather than just size, as an effort to
determine what level of assessment fee for the resolution trust
fund. So if Farm Credit is required to contribute do you feel
that the Financial Services Oversight Council will have
sufficient expertise in your operations to set your assessments
at the appropriate level?
Mr. Strom. Congressman, no, I don't believe that they will
have the ability or expertise. As you all know, and I come from
an agricultural background, the agricultural industry is a very
complex, very risky, very volatile industry. As a Farm Credit
System lender into that and as the regulator of those System
institutions, we understand the volatile nature and the
difficulties in this industry. So, as we deal with institutions
within the Farm Credit System, and we do stress testing of our
own System institutions, we look at the risk inherent in the
System institutions and we act accordingly. I believe that this
draft legislation and the establishment of a Council that would
oversee our operations only clouds the direct line of authority
that we would have as a regulator over our System institutions.
Mr. Scott. Should be there a representative of Farm Credit
on this Council?
Mr. Strom. Should there be a representative on the Council?
Mr. Scott. On the Council.
Mr. Strom. If there was no other avenue to be excluded from
this draft legislation, I believe that the Farm Credit System
and the Farm Credit Administration should have a seat. We
currently are the only ones excluded in the draft legislation
from membership on this Council.
Mr. Scott. Now, my good friend, Congressman Brad Sherman
mentioned to me that, he serves on Financial Services as well,
and he mentioned that either today or tomorrow he will offer an
amendment to increase the asset base for companies subject to
the assessment for the resolution trust fund, resolution fund,
from the current $10 billion up to $75 billion. So my question
to you would be if we adopt, in Financial Services, that
amendment to raise it up to $75 billion, would that alleviate
Farm Credit's institutions from being assessed or do you have
banks larger than $75 billion?
Mr. Strom. Congressman, currently there are no banks in the
Farm Credit System larger than $75 billion. There are a couple
that are approaching that level, in excess of $50 billion,
close to $60 billion, so there is the potential that they could
eventually grow to that level and be assessed. But, then again,
I think rather than the issue of assessment, it is the issue of
the resolution authority also within that subtitle G of the
draft legislation that, really in our mind, complicates the
line of authority and the regulatory jurisdiction of who is
really calling the shots in these situations.
Mr. Scott. Thank you very much, Mr. Chairman, I yield back.
The Chairman. The gentleman had a--if I could ask does
anybody know if you have this two percent target for your
insurance thing, does anybody know with the FDIC have they got
an equivalent target date, when they are determining their fee?
Does anybody know how that works? I know they are broke right
now, but they are supposed--I was just wondering how that two
percent compared to what the FDIC is doing. Nobody knows. Okay,
we will figure that out.
The gentleman from Louisiana, Mr. Cassidy.
Mr. Cassidy. Thank you, Mr. Chairman.
I enjoyed reading your testimony and I always come here
with humility because you know so much more than me. I am
struck, speaking to Mr. Gensler and Ms. Walter, that both of
you expressed concerns that there is going to be overlapping
regulatory activity. In fact, when I speak to my bankers back
home about all of this, they all say we are going to have more
than one regulator and we already have one in our office
everyday and now they are going to be in every other day--
excuse me--every other day, now they are going to be in
everyday. And although, Ms. Walter, in one part of your
testimony you expressed this kind of belief in the Council with
the over-regulator, if you will, later on you speak about, on
page nine, the proposal may setup effectively a dual system of
regulation between market regulators and the Federal Reserve,
expressing some sort of concern about dual regulation. I am
concerned about that because--if I can gather my papers--I have
a Washington Post article which is referring to the primary
article from Bloomberg speaking about how during this meltdown
allegedly AIG was getting pressured by the Federal Reserve not
to file documents with the SEC that would divulge the deal's
details. It almost seems that we have the model that we are
prescribing we have a Council, in this case SEC, and they were
trumped by the over-regulator, in this case the Federal Reserve
which limited the SEC's ability to perform their function. I
guess I am calling into question the entire model. Should there
be this over-regulator or should there just be a Council of
fractious, puny equals with the chairmanship rotating much
perhaps as we do with the Joint Chiefs of Staff. Where we
actually, with that friction, make sure that everybody does
their job, as opposed to the over-regulator, according to
Bloomberg, which actually trumps your ability to do your job.
Do you follow what I am saying?
Ms. Walter. Yes, I do, Congressman. I would say that first
of all we do see a need for someone to address the systemic
risk issues and address it across the markets, and that is why
we have supported the idea of a very strong Council. We would
like the power to be vested in that multi-member body rather
than any single agency. We do think that as a group, more than
one agency thinks better than one agency solely or as the
Chairman said in his opening statement, no one regulator is
smart enough. There is also the problem of a potential conflict
between that single regulator's special mission and the overall
issues. So that is one change we would suggest to the
discussion draft at some point, the reason we are supportive of
a Council is at some point someone needs to make the final
decision. I think the notion of having a rotating chairmanship
is one that deserves some attention. We have also suggested
consideration of having a separate, independent chairman and
permanent staff rather than having the staff detailed from the
Federal Reserve Board and the Treasury.
Mr. Cassidy. But again, would that person with their
separate staff be able to trump or again allegedly pressure
institutions not to file documents with other members of the
regulatory Council?
Ms. Walter. Well, of course, I can't speak to any
particular circumstance and the idea would be that that
institution would have the ability to set standards and in
setting those standards, implement those standards. In our view
this should fall to the functional regulators, the expert
regulators that we have today as well as you of course.
Mr. Cassidy. Just because I am about to run out of time,
Mr. Gensler, you very nicely, in your testimony and also your
written testimony, speak about the problem of dual regulation.
I am really getting a sense that in our Council again, it may
not want the over-regulator, the one person that can trump
everybody else because it cannot just think of the banks and
the institutions. How do I please this person? How do I please
that person?
Mr. Gensler. I think, Congressman, you have hit upon the
core question for Congress in this. We want to strengthen our
regulation and fill the gaps and that is why this Committee
passed historic, over-the-counter regulation, to fill an
important gap. There are some gaps even in consolidated
supervision that certain holding companies need stronger,
perfected regulation. I think we have been well-served for 75
years in this nation having independent market regulation, and
at times there might be a tension between market regulation
protecting investors, protecting the integrity of the market,
policing against fraud manipulation, and there may be a tension
between that and the profitability of financial institutions
where a prudential regulator is overseeing that. So I think it
is actually a healthy thing for the American public to have
independent market regulation of the Securities and Exchange
Commission and the Commodity Futures Trading Commission, and
not be subordinate to other regulators.
Mr. Cassidy. Okay, with that I yield back.
The Chairman. I thank the gentleman.
The gentleman from Georgia, Mr. Marshall.
Mr. Marshall. Thank you, Mr. Chairman, and thank you all
for testifying and for what you do for us.
Mr. Strom, in the 7 odd years that I have been here, I
can't tell you how often I have been visited by Farm Credit
System folks asking that we expand in different ways their
ability to make loans. And with regard to this proposed
exception to FSOC jurisdiction, I find myself sort of wondering
to what extent are we going to hear more and more of this as
the years progress if the FSOC is doing things like requiring
that ten percent be retained by different institutions that
otherwise would pass that exposure along. And if it is
acknowledged that the effect of this is, if you cause retention
anyway the effect of this is to increase the cost of credit.
You know, I can see as the years progress, more and more
requests to expand FCS ability to lend because FCS is just
going to be able to do it cheaper, and so there are going to be
a lot of people out there who would prefer to borrow from FCS
then from local community banks. And we are constantly met with
that kind of tension here on the Agriculture Committee,
complaints about competition with credit unions, competition
with local community banks. Would you make a comment about
that, generally?
Mr. Strom. Congressman, as the regulator of the Farm Credit
System, our job is to ensure the safety and soundness of these
institutions and that they work within the framework of the
statute. We develop regulations around that. As we look at the
changing agricultural industry and the issues in rural America,
we are constantly addressing how the changes in the industry
and the needs of rural America affect what Farm Credit can or
should be doing. And we understand the importance of the
strength of the rural banking system within these communities,
and that they should be working side-by-side to serve these
rural communities. We are happy to continue to work as a
regulator of the System institutions with this Committee to
look at how this changing industry is affecting the
availability of credit in rural America, especially at a very
stressful time right now. I mean we are seeing some of those.
Mr. Marshall. Are you agreeing with my point here that if
there is a separate regulator, separate regime, costs are
higher in the rest of the market than they are in the Farm
Credit System? There is going to be continual pressure on
Congress to expand the availability to Farm Credit System
credit.
Mr. Strom. Congressman, that could be, realizing again the
System institutions already pay a premium into an insurance
fund on their own which is a cost that they bear. They also are
at the mercy of the debt markets to be able to issue debt.
Mr. Marshall. Yes, and do you know what percent roughly you
occupy in lending across the United States? Are you one
percent, less than one percent, two percent?
Mr. Strom. The Farm Credit System has about 39 percent of
the agricultural debt market in the U.S.
Mr. Marshall. That is not what I am referring to. I am
talking about the overall credit markets in the United States.
Mr. Strom. Oh, the overall credit markets.
Mr. Marshall. In all the credit markets in the United
States, I would imagine you are small.
Mr. Strom. I would imagine the System is very small, and in
the context of whether the Farm Credit System is a systemic
risk to the entire economy? No.
Mr. Marshall. It could be a risk to the farm economy.
Mr. Strom. It could be a risk to the farm economy, yes.
Mr. Marshall. All right, the other thing that I just
observed is that one of the arguments for expanding Farm Credit
System's lending authority, makes me at least uneasy and
probably other Members, is that it was very difficult to
persuade community banks, small independent banks, you name it
to join in extending credit for ethanol facilities that were
being built across the country, and the argument was that they
won't take this exposure. We will take this exposure. This is
good for the rural economy. They are not willing to step up
when we need them to step up, and, consequently, you need to
expand our lending authority. And one of the thoughts I had was
that well, part of the reason why they might not be willing to
do this is they are worried about the exposure. How are you all
doing with your ethanol facilities?
Mr. Strom. The System at its peak had about $3 billion
extended to the ethanol industry in the U.S. and, yes, there
have been significant challenges within that industry as we
have seen the various effects of the volatile markets of last
year, including corn and crude oil prices. The System is
managing through that. We have four System institutions to put
up provisions for losses to cover any exposure on these, but at
this point, the System is handling those exposures well.
Mr. Marshall. Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
The gentleman from California, Mr. Costa.
Mr. Costa. Thank you very much, Mr. Chairman, for holding
this timely hearing.
As has been stated by a number of my colleagues, and
certainly by the three witnesses who were all concerned about
the current impact that this economic recession has distressed
our entire nation, obviously the focus for many of us who
represent rural America is the added challenges that we face in
parts of the country where we are dependent, primarily, on an
agricultural economy. The issuance of credit, the availability
of credit is dependent upon numerous factors in the economy. In
my area we have a third consecutive dry year and the drought
crisis with the regulatory impacts on the Federal level that is
making a difficult situation worse. So as I talk to my farmers
and ranchers and, of course, we have the meltdown in the dairy
industry that is across the country, I am trying to figure out
from the standpoint of Farm Credit, and the work that you do
here, the impacts. I know we have had stories in each of our
constituencies, but I kind of come from the old school of if it
is not broke, what is there to fix. I would like you to comment
as it relates to the proposed legislation what do you think,
Mr. Strom, is broke here that needs to be fixed? And I would
also like to ask Ms. Walter, again, the same question.
Mr. Strom. Congressman, I would say that within the context
of the Farm Credit System, and we as the regulator, I don't
think there is anything broken within the Farm Credit System.
This Committee 20 years ago put the proper pieces in place, and
let me just reference the strong borrower rights provisions
that were put in the 1987 Act. I mean they are a leader in
consumer protections as we term borrower rights in these very
stressful times, and so that has been a very positive aspect. I
reminded System institutions to employ those borrower rights
provisions as they work with distressed borrowers during this
difficult time. But I think this legislation clearly has
implications that in our mind clouds the jurisdictional lines,
the authorities, and really who is in charge. And, again, I
don't think we fit in the regulatory scope of this new Council
and, therefore, should not be part of it.
Mr. Costa. Could you fit in it?
Mr. Strom. Pardon?
Mr. Costa. Could you fit in it?
Mr. Strom. Again, I think that the agricultural system and
FCA as the regulator are so unique, we are under the
jurisdiction of the people that know this industry.
Mr. Costa. No, I know. I work with them everyday in my
district.
Mr. Strom. Yes.
Mr. Costa. They serve on their boards. They farm, they
understand the unique challenges that farmers, ranchers and
dairymen have faced. Ms. Walter, do you want to comment?
Ms. Walter. I believe that with respect to the financial
services industry, the financial crisis has shown us that there
are gaps in our regulatory system which need to be filled.
Mr. Costa. How is that applicable to the Farm Credit
System?
Ms. Walter. I am not saying that it is and I do not have
expertise with respect to the Farm Credit System. I don't take
a position with respect to the coverage of this legislation to
that System.
Mr. Costa. All right, so you are not sure whether it is
applicable or not then.
Ms. Walter. Correct.
Mr. Costa. Mr. Gensler.
Mr. Gensler. Aside from the Farm Credit System, I think the
financial system as a whole failed the American public.
Mr. Costa. No, I would concur with that.
Mr. Gensler. All right, so we and the regulatory system
failed and that is why this Committee reported out a
historically important bill on derivatives and it has worked to
enhance other regulation, but I don't have any point on Farm
Credit.
Mr. Costa. Then you are not required to comment, okay, very
good.
Mr. Gensler. Yes, sir.
Mr. Costa. In my last minutes then I would like, since that
is a good transition, a segue between the derivative inference
that Chairman Peterson and this Committee worked upon, would
the Chairman avail himself to a colloquy? Because of those
efforts that this Committee pursued with the Financial Services
Committee, what, seemingly, so far seems to be a collaboration
although it is not a done deal. Is it the Chairman's intent to
indicate to the Financial Services Committee, that Chairman,
our concerns about the impact on the Farm Credit System and how
the law of unintended consequences could impact the Farm Credit
System?
The Chairman. Well, this discussion started 3 months ago.
We brought it up with Chairman Frank and at that time we got
the indication that this would be resolved and there was
supposed to be a letter. I don't think it happened. Obviously,
this draft is not resolved yet. Mr. Strom indicated the
Treasury now has some amendments to this. I think there is no
question that we are going to get the Farm Credit situation
resolved in a manner that is acceptable to this Committee
before this bill comes to the floor.
Mr. Costa. Well, I appreciate the Chairman's good work as
he has demonstrated in the past for the farm bill and this year
with the derivatives legislation. I would just note, as the
Chairman pursues a course that we want to protect the Farm
Credit System in this country. If there is some sort of a
response or support by the Committee in terms of the impacts, I
think it would be bipartisan support to submit such a concern
to the Financial Services Committee, as to the impact of this
proposed legislation.
The Chairman. Yes, in regard to Farmer Mac that became an
issue here in the last couple of weeks, and Chairman Frank is
sending me a letter indicating that that is our jurisdiction,
whatever we decide to do with Farmer Mac is our business, so I
think it is going to get resolved. You know, you have people,
staff people that drafted this systemic risk thing that have a
typical no clue of what we are doing in farm country and they
just didn't understand, basically, what happened. So I am at
this point pretty comfortable we are going to get this
resolved, but we haven't gotten it done yet.
Mr. Costa. Well, thank you very much, Mr. Chairman, for
holding this hearing and for making sure that people in farm
country understand that we want to protect the Farm Credit
System as we know it. Obviously these are difficult times, and
I certainly want to support the Chairman in his efforts.
The Chairman. I thank the gentleman.
The gentlelady from Pennsylvania, Mrs. Dahlkemper.
Mrs. Dahlkemper. Thank you, Mr. Chairman. Thank you for
holding this hearing. I want to thank the witnesses as well.
Many of the questions that I had have been asked
previously, and so I don't want to go over them again. I just
have one question for Mr. Strom. What have your conversations
with the Treasury Department been about? Could you expand on
that a little bit regarding these proposals and what is their
view as to whether this should be applied to the Farm Credit
System?
Mr. Strom. Congresswoman, our discussions with Treasury
began last Thursday, and actually I think as a result of this
Committee holding this hearing they were interested in
discussing our concerns with us. So, in discussions with them
we raised our three main concerns, the area of the definitions
of financial companies, and we believe that even though the
System is not specifically mentioned, they are included.
Second, the conflict on the retention issue with Farmer Mac,
and, third, on the resolution authorities. Their response to us
as late as last evening was that they would be willing to have
put in the bill with the Financial Services Committee, wording
that would exclude the Farm Credit System from financial
company definition, and exclude the Farm Credit System
institutions and the regulator from the resolution issue and
FDIC. Now, they indicated that they were proposing language to
us on the retention issue regarding Farmer Mac. We have not
come to a comfort level on that yet, so discussions were, as
late as last night, still ongoing. But, again, I understand
that anything that happens with Treasury is going to be brought
to this Committee so you understand what those discussions are.
But, they indicated that Treasury would be working with the
Financial Service Committee to get these amendments put in the
draft.
Mrs. Dahlkemper. So they are in ongoing conversations as of
last night.
Mr. Strom. Yes, let me also add that we want to make sure
that the Agriculture Committee is involved in the resolution of
any of this retention issue regarding Farmer Mac.
Mrs. Dahlkemper. Well, that is great. Good to hear that.
Thank you very much.
The Chairman. I thank the lady.
The gentleman from North Dakota, Mr. Pomeroy.
Mr. Pomeroy. Mr. Chairman, I have been in a Ways and Means
hearing and I will catch up on your summary. Thank you. I yield
back.
The Chairman. The gentleman from New York, Mr. Murphy.
Mr. Murphy. Thank you, Mr. Chairman. All my questions have
been answered. I think we have worn out the subject here.
The Chairman. Well, I thank the panel for being with us and
for your patience and your answers, and somebody on the staff
or somebody can figure out what the percentages that FDIC pays
versus what Farm Credit pays and what level they are trying to
hit. Is it two percent of assets or what is it that they are
trying to do so we can, and so I can, get a better
understanding of what the relationship is between those two. So
with that, the Committee on Agriculture will stand adjourned
subject to the call of the chair.
[Whereupon, at 12:40 p.m., the Committee was adjourned.]