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Senate Finance Committee on the President’s 2024 Budget

Senate Committee on Finance

The President’s Fiscal Year 2024 Budget with Treasury Secretary Janet L. Yellen

Thursday, March 16, 2023

Topline

  • Senators on both sides of the aisle asked Yellen about the government’s response to the Silicon Valley Bank failure.
  • Democrats warned of the economic fallout that would occur if Congress fails to raise the debt ceiling.
  • Republicans criticized the OECD agreement.

Witnesses

  • The Honorable Janet L. Yellen, Secretary, United States Department of the Treasury

Opening Statements

Chairman Ron Wyden (D-Ore.)

In his opening statement, Wyden stressed the importance of Congress ensuring there are no questions about the credit of the United States. He explained this means paying the bills and taking a default off the table. Wyden said if Republicans were to extend the Trump tax law, they would have to cut everything else, noting it’s no mystery why House Republicans haven’t put a budget on paper.  Wyden said President Biden’s budget will help working families and reduce the deficit and called for addressing the unfairness of America’s two-tiered tax system. Wyden concluded by noting his serious concerns about the Biden Administration’s approach to implementing the portion of the Inflation Reduction Act that deals with resourcing critical minerals. He noted how free trade agreements can’t be unilaterally decided by the Executive Branch.

Ranking Member Mike Crapo (R-Idaho.)

In his opening statement, Crapo discussed the importance of learning more about what initiated the run on Silicon Valley Bank (SVB), the impact of the Federal Reserve holding interest rates low for too long, and what steps were or were not taken by banking regulators. He said he is concerned about the precedent of guaranteeing all deposits and market expectations moving forward, noting moral hazard, and issues like inflation, are not easily contained. Crapo said inflation played a key role in SVB’s failure, as rising interest rates and mismanaged interest rate risk led to a liquidity crisis.

Crapo alleged the Federal Reserve is forced to compensate for the Biden Administration’s spending through interest rate hikes. He added President Biden’s budget demonstrates the Administration has not learned from its mistakes. Crapo said The Tax Cuts and Jobs Act (TCJA) led to one of the strongest economies in decades. He warned foreign countries threaten to impose extraterritorial taxes on U.S. companies under the global minimum tax, at the Treasury’s invitation. Crapo urged the Administration to recommit to working with Republicans to stabilize the economy.

 Testimony

Janet Yellen, Secretary, Department of the Treasury

In her testimony, Yellen discussed the recent decisive and forceful actions the government took to stabilize and strengthen public confidence in our financial system. She said the Treasury worked with the Federal Reserve and FDIC to protect all depositors of the two failed banks, noting that on Monday morning, customers were able to access all of the money in their deposit accounts. Yellen explained shareholders and debtholders are not being protected by the government, and no taxpayer money is being used or put at risk by this action. She clarified the Deposit Insurance Fund is funded by fees on banks. Yellen pledged that the American banking system is sound and promised that Americans can feel confident that their deposits will be there when they need them.

Yellen discussed the historic economic recovery of the past two years, noting the unemployment rate is near historic lows, and the U.S. has seen the strongest two years of business creation in history.  She acknowledged the need to bring down inflation, and pledged the Biden Administration will continue to expand supply and provide cost relief in areas like energy and healthcare. Yellen said fiscal discipline remains a central priority in the budget, noting the Administration proposed a minimum income tax of 25% on taxpayers with wealth in excess of $100 million and an increase of the corporate tax rate to 28% from the current 21%. Yellen concluded she hopes Congress will implement the United States’ part of the global minimum tax deal.

Question & Answer

Silicon Valley Bank

Crapo asked if Yellen would agree that SVB had a liquidity risk issue. Yellen said there was a run on the bank, which had a high reliance on insured deposits. She added the massive withdrawal of deposits led to liquidity problems.

Crapo asked if we are facing liquidity risk. Yellen said there was a liquidity risk in the SVB situation, but the downfall of the bank was that it couldn’t meet depositors’ withdrawal requests. Crapo said he attributes that to recent interest rate hikes. Yellen said her understanding is that the bank had to sell assets that it expected to hold to maturity in order to meet liquidity needs. Given the interest rate increases, those assets had lost market value.

Sen. Warner (D-Va.) commended Yellen, the Fed, and the FDIC for moving aggressively and taking bold, necessary action on SVB. He added there were bad actors in the venture capital community who spurred the run on SVB “by virtually crying fire in a crowded theater” and rushing all of the deposits out.

Warner said SVB will go down as the first internet-driven run in history and asked Yellen for her thoughts. Yellen said if a bank has an overwhelming run spurred by social media, and is seeing deposits flee at that pace, the bank will be put in danger of failing. She said the government intervened because they recognized there could be contagion. She added SVB had a very high ratio of uninsured depositors.

Warner said there needs to be some responsibility for forcing the run on SVB and using technology to accelerate it.

Sen. James Lankford (R-Okla.) asked if the deposits in every community bank in Oklahoma, regardless of their size, will now be fully insured. He also asked if they will get the same treatment as SVB and Signature Bank. Yellen said a bank only gets that treatment if the majority of the FDIC board, a supermajority of the Fed board, and she and the President determine that the failure to protect uninsured depositors would create systemic risk and significant financial consequences.

Lankford noted SVB had a large number of Chinese investors, including companies directly connected to the CCP. He asked if those individual companies and investors will be made whole based on assessments in his banks in Oklahoma. Yellen said uninsured investors will be made whole, which could include foreign depositors, noting she doesn’t believe there’s any legal basis to discriminate among the uninsured.

Sen. Marsha Blackburn (R-Tenn.) asked if Yellen saw the government’s response to SVB’s collapse as a step to nationalizing the banking system. Yellen said absolutely not.

Sen. Bob Menendez (D-N.J.) asked if the situation at SVB posed systemic risks. Yellen said SVB had a very high portion of uninsured deposits which made it vulnerable to runs.

Sen. Tim Scott (R-S.C.) said SVB failed because of its management and board. He added a lax regulatory environment contributed to the failure of SVB, noting the San Francisco Fed was asleep at the wheel.

Sen. Maggie Hassan (D-N.H.) asked how the Treasury is evaluating the effectiveness of its recent actions, and what specific benchmarks the Department is using to monitor its response to SVB’s failure. Yellen said the Treasury is looking at indicators of stress in the banking system, warning we could see credit become more expensive and less available. She explained there are a variety of statistics to look at to judge whether banks are tightening credit and related statistics on the cost of borrowing.

Bank Regulations

Sen. Sherrod Brown (D-Ohio) said bank failures are a painful reminder of the importance of strong safeguards. He noted bank lobbyists took aggressive measures to weaken standards and were successful under the Trump Administration with S. 2155. He then called for a full review of bank failures and for the strengthening of guardrails to ensure a situation like SVB doesn’t happen again.

Sen. Elizabeth Warren (D-Mass.) said the recent bank failures were the direct result of policymakers’ decisions over the last five years, beginning with the 2018 law signed by President Trump to weaken the regulations put in place after the financial crisis to ensure big banks never again crashed our economy. She explained enhanced liquidity requirements that ensure banks have enough cash on hand to meet their obligations, capital requirements that better position banks to absorb losses, and regular resolution plans to help guide regulators safely through winding down banks were all weakened in 2018.

Warren asked if Yellen agreed with President Biden that the U.S. needs to strengthen its banking rules.

Yellen called for analyzing what happened and reexamining rules and supervision.

Warren said stress tests are critical tools in the regulatory toolbox, and asked if regular, rigorous, well-designed stress tests can help bank regulators spot problems lurking in bank’s balance sheets and business models. She also asked if stress tests can expose managers who are not adept at managing risk. Yellen said yes to both questions.

Warren asked if regulators can require banks to clean up the problems long before they trigger a run on the bank if regulators spot problems early on through stress tests. Yellen said yes, but explained supervisory stress tests focus on capital and not liquidity. She said liquidity played an important role in SVB’s failure.

Sen. Thom Tillis (R-N.C.) said people are using S. 2155 as a red herring for a supervisory lapse.

Scott lamented that instead of taking accountability for their failures, regulators are now saying they plan to increase regulations on the rest of the banking industry.

Sen. Maria Cantwell (D-Wash.) said she is a big supporter of the Glass-Steagall Act and asked about relooking at Glass-Steagall. She asked if the same situation would have occurred the way it did if we had not gotten rid of Glass-Steagall. Yellen said there will be plenty of time to consider whether regulatory or supervisory changes are necessary, but for now, she would like to see confidence restored.

Debt Ceiling

Crapo asked if Yellen would commit to negotiating with Republicans to try and find some aspects of fiscal restraint to put into the debt ceiling discussions. Yellen said the President indicated that he considers it critically important to have a sustainable and responsible fiscal path, noting his budget includes a number of plans to grow the economy while also cutting deficits. She said Biden is prepared to negotiate with Republicans but warned it can’t be a condition for raising the debt ceiling. She said the debt ceiling must be raised, and threatening an economic catastrophe isn’t an acceptable plan.

Brown said a default is the definition of a self-inflicted blow to the economy.

Sen. Bob Menendez (D-N.J.) asked, in light of the events unfolding over the past week, how damaging a debt default would be to the banking sector, particularly regional banks. Yellen said it would be completely devastating and beyond contemplation.

Menendez asked if it’s fair to say that if Congress fails to raise the debt ceiling well before the risk of default, we could end up seeing more runs on banks. Yellen said yes, explaining the debt ceiling showdown has provoked concern in financial markets.

Menendez said it is dangerous to put the U.S. dollar’s status as the universal reserve currency at risk.

Organisation for Economic Co-Operation & Development Agreement

Crapo said he is very much opposed to the Organisation for Economic Co-operation and Development (OECD) agreement.

Tillis said he has concerns with the exceptions in the OECD’s agreement with respect to China.

Sen. Todd Young (R-Ind.) expressed his displeasure with the way the Administration handled OECD Pillar Two, noting it would uniquely disadvantage American workers and job-creating businesses by providing trading partners with a political blessing to tax the U.S. activity of U.S. companies. He said this would directly undercut our American sovereignty and asked Yellen to go back and renegotiate a better deal for American workers.

Sen. Steve Daines (R-Mont.) asked Yellen why she supports the OECD framework that will allow China to tax American companies on their American operations if they fall below the minimum threshold. Yellen noted the framework also allows the U.S. to impose a top-up tax to allow those revenues to end up in the U.S. Treasury instead of in a foreign country.

Tax Cuts and Jobs Act

Young asked which tax rates and other provisions from the TCJA scheduled after 2025 must be extended in order not to violate President Biden’s pledge not to increase taxes on anyone earning less than $400,000 a year. Yellen said there are a lot of complicated provisions and committed to provide Young with a list.

Daines noted that while 95% of the businesses in the U.S. are pass-throughs, the President’s budget was silent on a 20% tax increase coming for these businesses in 2026. He said he plans to reintroduce his Main Street Tax Certainty Act to protect these businesses from this shadow tax hike and make this important deduction permanent.

Daines asked if Yellen will commit to making the 199-A deduction from the Tax Cuts and Jobs Act permanent. Yellen said all she can say is the President has pledged not to raise taxes on individuals or small businesses making under $400,000.

Inflation Reduction Act

Wyden asked what would happen to the agency’s ability to ensure that wealthy tax cheats pay their fair share if Republicans had their way and repealed the IRS funding in the IRA. Yellen said it would allow the wealthy and large corporations to skip out on taxes they legally owe and make life harder for middle class families to get the kind of service they deserve from the IRS. She added it would increase the tax gap and add over $114 billion to the deficit.

Sen. John Thune (R-S.D.) asked when the plan for the $80 billion in IRS funding from the IRA will be made public? Yellen said in the coming weeks.

Sen. Catherine Cortez Masto (D-Nev.) asked Yellen to share anything regarding the process for revising Treasury’s guidance to meet the intent of Congress to ensure people can access tax credits in a timely way. Yellen said there is no higher priority at the Treasury, adding the Department committed to open the first phase of applications for the credit in the 3rd quarter of this year, and will provide guidance for accepting applications.

Default Prevention Act

Wyden discussed the Default Prevention Act passed by House Ways and Means Republicans, which he described as a plan to prioritize payments by the Treasury after it runs out of stop-gap funding to Wall Street, creditors, and China.

Wyden asked if the federal government has the technical capacity to prioritize some payments ahead of others. Yellen said the government makes millions of payments each day, adding our systems are built to make all of our payments on time, not to pick and choose payments. She said Treasury Secretaries of both parties have rejected the risky idea of prioritization. Yellen said she can’t give any assurances about the technical feasibility of this radical plan, noting raising the debt ceiling is essential. She said prioritization is effectively a default by another name.

Brown asked Yellen to comment on debt prioritization and Republican’s plan to prioritize payments to Wall Street and China. Yellen said prioritization is default by another name, stressing the need to pay all of our bills. She noted this is what undermines our strong credit rating, calling it a recipe for economic catastrophe to pay some bills and not all of them.

Inflation

Sen. Chuck Grassley (R-Iowa) asked Yellen if she still viewed inflation-driven interest rate hikes as a “plus for society?” Yellen said she considers high inflation the number one economic problem that we must all address, adding it’s President Biden’s top priority.

Sen. Ron Johnson (R-Wisc.) asked if Yellen agreed that deficit spending is one of the main causes of inflation. Yellen said no, citing the economic collapse that was caused by the pandemic.

SAFE Banking/Crypto

Sen. Michael Bennet (D-Colo.) noted banks refuse to provide cannabis businesses with services because of federal laws and regulations, adding this endangers the lives and livelihoods of Colorado business owners.

Bennet noted Signature Bank, which failed, drew a fifth of its deposits from crypto. He added crypto is notoriously unstable, yet banks can’t do anything with marijuana.

He asked Yellen what questions come to mind after seeing a bank fail after relying on an unstable product for 20% of its deposits. Yellen said marijuana is against federal law, which is an unfortunate barrier to appropriate banking services to the industry. She said the Treasury is looking for solutions, and called for the examination of regulatory supervision so banks can avoid these problems.

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.