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HFSC Annual Report of the Financial Stability Oversight Council (FSOC) Hearing

House Financial Services Committee

The Annual Report of the Financial Stability Oversight Council

Thursday, May 12, 2022

Topline

  • The hearing focused largely on stablecoins, inflation, climate-change, deposit insurance, and cybersecurity.
  • Yellen asked Congress to pass legislation to regulate digital assets, adding that they are potentially useful innovations.

Witnesses

Opening Statements
Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters discussed the 2008 financial crises and the Financial Stability Oversight Council (FSOC) role in carrying out the various obligations of Dodd-Frank. She urged Secretary Yellen to guard against threats to financial institutions. She said big tech and shadow banks are causing significant changes in our economy and that it is important to maintain a strong economy, particularly for communities of color. She concluded by saying the housing market needs more support and that the Biden Administration and Congress must do more to increase the nation’s supply of affordable housing.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said it is not the job of FSOC to impose partisan policies. He stated that FSOC should focus on the challenges imposed by Russia’s invasion of Ukraine and the consequences of the global economy, the impact China’s lockdown will have on the broader economy, the importance of protecting the financial system from bad actors, and the performance of domestic markets. He discussed inflation and said wages are not keeping up with the current cost of living. He concluded by discussing stablecoins and the volatility within the market. He said stablecoins deserve time to be understood before they are labeled as risks.

Representative Ed Perlmutter (D-Colo.)

In his opening statement, Perlmutter said Congress must ensure that the financial system serves as a source of strength as the nation seeks to address climate-change.

Testimony
The Honorable Janet L. Yellen, Secretary, Department of the Treasury

In her testimony, Yellen discussed the vulnerabilities in the nonbank financial sector and provided an update on the Council’s activities since the Council’s 2021 annual report publication. She said the Council is working to support improving the resilience of the Treasury market and is coordinating with the Interagency Working Group on Treasury Market Surveillance (IAWG), adding that the Council is also working to ensure that financial institutions better understand their climate-related financial risks.

Question & Answer

Stablecoins

Waters asked what FSOC is doing to ensure that cryptocurrencies, including stablecoins, do not impose a threat to our financial system. Yellen stated the Council is ensuring responsible development of digital assets and that FSOC is charged with producing a report that investigates financial stability risks, which will address the stablecoin risks. She asked Congress to produce a comprehensive bipartisan bill to regulate digital assets, adding that they are potentially useful innovations. McHenry asked how limiting stablecoin issuances to only banks promotes innovation. Yellen said creating a framework that is appropriate to the risks that stablecoins present provides the type of regulatory certainty that issuers of stablecoins need to thrive. McHenry asked if stablecoins are only issued by banks, and if so, does that minimize potential risks. Yellen said similar to money market funds, stablecoins have been a source of instability within the financial system. McHenry concluded his questioning asking if it is possible to have 1-1 backing of stablecoins without stablecoins having to be domiciled within a bank. Yellen stated that the President’s working group contemplated different alternatives and unanimously recommended the establishment of a bank framework for regulating stablecoins is a flexible framework in which payment system risks can be addressed. Rep. Jim A. Himes (D-Conn.) asked where systemic risks may develop in the future as it relates to cryptocurrency. Yellen said the FSOC is analyzing potential financial stability risks of digital assets at large. She added that stablecoins have not currently reached the point of financial stability concerns, and she could not say at this point that stablecoins are a threat to financial stability. Rep. Stephen F. Lynch (D-Mass.) asked if stablecoins could survive a Central Bank of Digital Currency (CBDC) issued by the Federal Reserve. Yellen stated that having a CBDC may diminish the proliferation of stablecoins but that it depends on how the CBDC is designed. Rep. Ritchie Torres (D-N.Y.) asked if a stablecoin issuer should be regulated differently from a traditional bank. Yellen said banks that issue stablecoins pose different risks and should be regulated slightly different. Rep. Tom Emmer (R-Minn.) asked if FSOC takes direction from the White House on deeming what institutions are a systemic risk. Yellen said no. Emmer then asked if FSOC has officially designated digital assets or stablecoins activities as systemic risks. Yellen said no.

Inflation

McHenry asked what FSOC is doing to tackle inflation. Yellen said addressing inflation is a top priority the Administration’s and discussed the Federal Reserve’s role in addressing inflation. Reps. Ann Wagner (R-Mo), Roger Williams (R-Texas), and Sylvia Garcia (D-Texas) asked if excessive government spending is the root cause of inflation. Yellen said there are many contributors to inflation, including supply chain shortages and the war in Ukraine. Wagner followed up by asking what the Administration and FSOC is doing to address high gas prices. Yellen said releasing oil from the strategic oil reserve and unblocking supply chains. Rep. Pete Sessions (R-Texas) asked is the success of the economy an art or a science. Yellen said both. Torres asked how high the risk of stagflation is. Yellen said inflation is high and the Federal Reserve is in the process of bringing that down. She added that the labor market is strong and household balance sheets are in good shape. Rep. Bill Huizenga (R-Mich.) asked what the future expectations of the U.S. economy are. Yellen said inflation is a serious concern and that the U.S. is not the only country experiencing inflation. Reps. Madeleine Dean (D-Pa.) and Al Green (D-Texas) asked how different the recovery from the pandemic has been in contrast to the recovery from the 2008 financial crises. Yellen said the American Rescue Plan deserves substantial credit being that unemployment is low, Americans have confidence in the job market, individuals are seeing increased opportunities in the job market, wages are increasing, conviction rates and child poverty are decreasing, and there is a strong labor market.

Climate-Change

Rep. Bill Posey (R-Fla.) asked if FSOC scenarios for assessing climate risk will provide information on the potential adverse impacts of regulatory decisions based on inaccurate information. Yellen said it is important for financial institutions to have adequate liquidity to address economic shocks. Huizenga asked if there was coordination between FSOC and the Securities Exchange Commission (SEC) as it relates to the SEC’s staff bulletin No. 121. Yellen said she was not familiar with the regulation. Rep. Andy Barr (R-Ky.) asked what evidence FSOC has found that banks, lenders, or insurers have ever misjudged weather risks so much that it would result in systemic risks. Yellen said it is not just a matter of weather risks but also transition risks. Rep. Rashida Tlaib (D-Mich) asked how better climate-risk scenarios modeling will change the behavior of financial institutions. Yellen said it will allow financial institutions to better understand the risks and ensure that they are managing risks properly.

Deposit Insurance  

Rep. Blaine Luetkemeyer (R-Mo.) asked if removing deposit insurance as an enforcement action against depository institutions is a good idea. Yellen said deposit insurance plays a critical role in the banking system and is important to financial stability. 

Cybersecurity

Rep. French Hill (R-Ark.) asked about the threat of cybersecurity to the financial system. Yellen stated that cybersecurity is one of the key threats to the financial sector. Rep. Barry Loudermilk (R-Ga.) asked if FSOC member agencies are open to new cybersecurity innovations. Yellen said innovation is important and a benefit to the U.S. economy. She also said innovation is important for growth and well-being.

 

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