SBC Hearing on The Financial Stability Oversight Council Annual Report to Congress
Senate Banking Committee
The Financial Stability Oversight Council Annual Report to Congress
Tuesday, May 10, 2022
- The hearing focused on LIBOR, stablecoins, Russia, crypto, risks to the financial system, home financing, racial equity, and inflation.
- Yellen reiterated that cybersecurity threats and climate-change are of top concern to the U.S. financial system.
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown commended Secretary Yellen for continuing to implement sanctions against Russia. He said in the coming months the U.S. must expand efforts to help Ukraine. He then discussed how financial stability within our financial institutions allow Americans to trust their money. He went on to say that Americans are still living with the impact of the 2008 financial crisis. Brown discussed the importance of the Financial Stability Oversight Council (FSOC) and how it works to protect working families in America. He concluded saying the U.S. must build and maintain a resilient financial system with strong safeguards in place so that financial institutions can withstand economic shock.
Ranking Member Patrick J. Toomey (R-Pa.)
In his opening statement, Toomey discussed his concerns that FSOC is becoming politicized, criticizing particularly the Council’s increased involvement on global warming issues. He said at a time of skyrocketing energy prices we do not need financial regulators making it more expensive for Americans to fill up their gas tanks or heat their homes. He added that FSOC should enhance coordination across regulators on existing threats to the financial system. He concluded by discussing stablecoins and the benefits they may offer to the U.S. economy.
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 improve the resilience of the Treasury market and is coordinating with the Interagency Working Group on Treasury Market Surveillance (IAWG). She added that the Council is also working to ensure that financial institutions better understand their climate-related financial risks.
Question & Answer
Sen. Thom Tillis (R-N.C.) asked about the implementation of Economic Continuity and Stability Act. Yellen said the legislation has been helpful and expressed her appreciation for Congress passing the law. She said Treasury is currently in a transition phase and that banks are now moving off LIBOR with a clear end date and making good progress in transitioning.
Toomey asked if Congress needs to pass legislation governing the regulation of stablecoins. Yellen said yes and urged the legislation to be bipartisan. Brown asked why it is critical for FSOC member agencies to be united on a strong regulatory structure for stablecoins. Yellen said it is important for the agencies to agree on the kind of structure that is needed so that stablecoins do not create financial stability risks.
Sen. Mark Warner (D-Va.), Chris Van Hollen (D-Md.), and Steve Daines (R-Mont.) asked what drove the FSOC to increase sanctions on Russia. Yellen said the sanctions that have been implemented thus far have had a severe impact on Russia’s economy, in addition, Russian firms that have been sanctioned have found it impossible to access the goods they need to operate. Sen. Mike Rounds (R-S.D.) asked if Treasury will let the General License 9A exemptions expire on May 25th and allow Russia to default. Yellen said the Treasury is actively examining this and working to determine what the consequences may result with allowing the licenses to expire.
Sen. Catherine Cortez Masto (D-Nev.) asked if there are financial risks because professional investors and high net worth individuals hold almost 2/3 of the bitcoin supply. Yellen said she was not sure if the holdings by professional investors and high net worth individuals alone pose a financial risk unless those investors are leveraged in a way that a decline in the value of the assets can trigger financial distress.
Risks to the Financial System
Toomey asked if the FSOC would agree that risks to the financial system come in two categories: physical risks associated with severe weather risks and transition risks associated with the transitioning away from fossil fuels. Yellen said those are the two main risks but are not the only ones. Toomey followed up by asking if there has been a major financial institution that has failed from a single weather event in recent history. Yellen said no, adding that climate-change is an increasing risk to our financial system. Sens. Tina Smith (D-Minn.) and Jon Tester (D-Mont.) asked how financial regulators are addressing climate-change. Yellen stated that financial institutions should be considering all risks that may emerge over a longtime period, adding that both public and private sector actors should be looking at long term risks and having access to the information they need to evaluate those risks. She also said it is important to provide the investor with the information they need to make an educated investment. Daines asked if climate change poses a greater threat to the financial system than cyber risks. Yellen responded yes. Sen. Jon Ossoff (D-Ga.) asked if the National Credit Union Administration (NCUA) should examine credit union service providers for cyber risks and require mandatory reporting of cyber incidents to help protect credit unions and their customers from cyber risks. Yellen said the NCUA lacks the ability examine various risks when it comes to service providers which is certainly a gap that needs to be filled. Brown asked about the need for financial institutions to have sufficient capital liquidity and other safeguards to protect against economic shock. Yellen stated that it is critically important and that Dodd-Frank has played an important role in making sure banks have sufficient liquidity to withstand economic shock.
Cortez Masto asked about the risk associated with the increase of nonbank mortgage companies providing residential home financing. Yellen said nonbank mortgage companies are dependent on short run financing and if there is volatility in the markets, there can be some risks. Smith asked what Congress should expect to see in the coming months as it relates to rising home prices. Yellen said there is a shortage of homes and the U.S. has been under building homes since 2008 which has led to insufficient inventory. She added that the rise in housing prices will hopefully begin to level off within the not too distance future. Sen. Raphael Warnock (D-Ga.) asked about the impact student debt is having on young professionals making a down payment for their first home. Yellen said student debt has been a substantial burden for young people looking to buy a home.
Sen. Bill Hagerty (R-Tenn.) asked what specifically Treasury is doing in an effort achieve racial equity in IRS enforcement. Yellen said the goal is to make sure there is nothing unintentional in techniques of enforcement used by the IRS that could result in unintentional discrimination.
Sen. Kyrsten Sinema (D-Ariz.) asked what analysts within the financial industry are seeing in the market that are causing them to adjust their inflation forecast. Yellen said many analysts think inflation has peaked and likely to come down due to the federal reserve addressing inflation.
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